Steph’s Note: In case you haven’t noticed (because you know, you’re busy with surviving pharmacy life), there’s been a whole lot of hub bub in the news about PBM reform and drug pricing. As pharmacists, it’s important to at least have a basic understanding of what the issue is. So if you’re like I was as a pharmacy student and saying to yourself, “What’s a PBM?”, this post is definitely for you. And if you’re thinking, “I’m not going into pharmacy administration, I don’t need to know how pricing works,” two thoughts… First, as someone who was adamant that I would never be a pharmacist, you never know what you’re never going to do! Second, isn’t it useful to understand how healthcare works so you can see the forest and not just the trees?

Here to give you the run down on drug pricing and pharmacy financial metrics is Rachel Hauf, PharmD. She recently made her tl;dr debut with this post on preparing for a pharmacy career. (If you missed it, check it out. She included a TON of actionable advice.) Alright, Rachel, please set us straight on all this pricing hullaballoo!

You’ve probably heard of various drug pricing terms like “AWP,” “AMP,” and “WAC” and wondered: how much do drugs actually cost? Unfortunately, drug pricing is a nebulous affair. Some might even say it’s a little WAC(k)…

I’m of the opinion that pharmacy finance is way more complicated than it needs to be. That’s why I’m going to make it as simple as possible for you. This is tl;dr after all!

Financial Metrics in Pharmacy

There are two key categories of pharmacy financial metrics we will be looking at: reimbursement metrics and acquisition metrics. Conveniently enough, they are exactly what they sound like.

Reimbursement metrics are on the dispense side of the equation, meaning that we use these metrics to calculate reimbursement. This includes Average Wholesale Price (AWP) and Average Sales Price (ASP). We will be covering the definitions of all these terms shortly, so just bear with me in the meantime.

Many discounts are based on ASP plus a certain percentage. Most commonly, discounts are calculated as a percentage off of the Wholesale Acquisition Cost (WAC).

Acquisition metrics are on the purchasing side and are used to calculate acquisition costs. Actual Acquisition Cost (AAC) and Off-Invoice Deductions are examples of acquisition metrics. Now, let’s define some key reimbursement and acquisition metrics.

Hybrid Metrics: Acquisition and Reimbursement Metrics

Wholesale Acquisition Cost (WAC)
- The manufacturer’s list price for the drug to direct purchasers (wholesalers, pharmacy, etc). This number does not include discounts or rebates. WAC can actually be used for both acquisition and reimbursement calculations.

Reimbursement Metrics

Average Wholesale Price (AWP)
- The pure price set by industry for a specific drug. Does not include discounts, rebates, etc. Commonly found in pharmacy contracts.
- This number is highly inflated. Nobody ever actually ends up paying this price.
Average Sales Price (ASP)
- A retail price set by industry for a specific drug, similar to AWP. Commonly found in medical contracts.
- This is how all traditional Medicare is paid (e.g., ASP + 6%).
Usual and Customary (U&C) Price
- The average cash price paid at a pharmacy for a drug. Self-reported by pharmacy and averaged by PBMs.
National Average Drug Acquisition Cost (NADAC)
- The average invoice prices for retail pharmacy outpatient drugs compiled from a monthly nationwide survey. So NADAC tells you the average price that all retail pharmacies pay for prescription drugs. Every month, a new file is posted to reflect findings from the previous month’s survey results. NADAC provides more transparency into drug spending and pricing, since it’s what retail pharmacies are actually paying for drugs.
Predictive Acquisition Cost (PAC)
- Proprietary metric that estimates drug price by factoring in various purchasing metrics.
Performance Rebates
- Rebate to pharmacy based on various performance metrics, such as quality benchmarks.
Generic Effective Rate (GER)
- A contractual rate established by PBMs to determine reimbursement on generic drugs based on the drug’s AWP. When a reimbursement is higher than the contracted GER, PBMs will adjust the reimbursement retroactively.
Average Manufacturer Price (AMP)
- The price a manufacturer charges a direct purchaser after discounts.

Acquisition Metrics

Actual Acquisition Cost (AAC)
- A pharmacy’s acquisition cost for a drug based on actual pharmacy invoices. Specific to each pharmacy.
Off-invoice Deduction (OID)
- Deduction offered by a manufacturer or wholesaler that is given as a percentage off the invoice value.
Purchase Rebate
- This rebate is based on the volume of product purchased. Generally, there are different “tiers” of purchasing volume. The higher the volume you purchase, the higher “tier” you are at, and the higher rebate you get.

Drug Pricing: Key Stakeholders

Now that we understand the reimbursement and acquisition metrics and some basic terminology, let’s identify our key stakeholders in the drug pricing arena.

Manufacturers– well, manufacture– drugs in a process that involves sourcing or producing ingredients, combining these ingredients to create the dosage form, and packaging the final product. Wholesalers, also called distributors, purchase brand and generic drugs from manufacturers at WAC minus a small percentage. They also charge manufacturers for handling and distribution of the drugs. The largest pharmaceutical wholesalers in the United States include McKesson Corporation, AmerisourceBergen, and Cardinal Health. In fact, over 90% of drug distribution in the nation is handled by these three wholesalers.

Pharmacies end up paying their AAC to purchase a drug from the wholesaler or directly from the manufacturer. They may get additional discounts, OIDs, and rebates from the manufacturer or through their Group Purchasing Organization (GPO).

Insurance companies use Pharmacy Benefit Managers (PBMs) to maintain formularies, negotiate discounts from manufacturers, and contract with pharmacies. The names we know and love, including CVS Caremark, Express Scripts, and OptumRx, account for nearly 80% of the market share.

Manufacturers may offer rebates to PBMs to obtain “preferred” status on the formulary so their drug gets more usage (that doesn’t sound shady at all, right?). Patients then pay a portion of the drug price in the form of a copay, and PBMs reimburse the pharmacy for the remaining balance. In some cases, PBMs take back money from the pharmacy.

For example, let’s say a pharmacy makes a profit of $12 on a specific script for lisinopril; however, the contracted GER is $10. The PBM would then take $2 as a clawback. This is an oversimplified example, but you get the idea.

Here’s a more detailed diagram showing the relationships between the key stakeholders we discussed previously:

Another clawback you may have heard of are direct and indirect remuneration (DIR) fees. These were fees charged by PBMs after the point-of-sale based on various performance metrics, similar to the Medicare Star Ratings system issued for health plans. Unfortunately, these fees are a major issue for specialty pharmacies.

A large portion of a pharmacy’s rating may be based on patient adherence to medications for common chronic diseases: diabetes, hypertension, and hypercholesterolemia. Now consider HIV clinic pharmacies or a pharmacy integrated with an oncology infusion center. These specialty pharmacies care for a very specific patient population, and their priority is to address a specialty disease state - not your everyday chronic ailments. It’s like being graded based on an answer key for an entirely different exam.

It’s hard to see these fees as anything but predatory, especially when you consider that in approximately the past 10 years, DIR fees increased by 107,400%. The good news is, as of January 1st, 2024, DIR fees may not be assessed retroactively– all fees must be included at the point-of-sale price. This is at least a move in the right direction in terms of transparency.

To combat the lack of transparency regarding drug pricing, two relatively newer reimbursement metrics, NADAC and PAC, have fallen under the spotlight. AWP remains the standard by which claims are adjudicated and reimbursement and contract pricing are determined, but it is far from perfect. It certainly does not represent a true average. The search for a new benchmark has not been an easy one.

NADAC and PAC are likely the closest current options we have for truly accurate drug pricing measures. While NADAC is essentially an average of every pharmacy’s AAC that relies on survey participation, PAC utilizes a predictive analysis system in conjunction with a variety of factors that contribute to drug costs. Nevertheless, both models have their flaws.

NADAC requires voluntary participation and honest reporting from retail pharmacies. Likewise, PAC cannot identify and factor in the unadulterated drug acquisition cost. So continues the quest for an optimal benchmark.

The tl;dr of Drug Pricing

Drug pricing is complicated, and although progress has been made, it still lacks transparency and true accuracy based on the pricing benchmarks we currently use. Pricing is further complicated by the various key stakeholders involved: the manufacturer, wholesaler, health plan, PBM, pharmacy, and patient. Can you see now why PBM reform is a hot topic as well as drug pricing reform? Can you also see what it’s taking so long to figure out a solution? It’s not exactly straight forward. But we have to keep trying, right?!?!

An Introduction to Basic Financial Metrics in Pharmacy and Drug Pricing