It is an elevated drug price that is rarely what is actually paid……………So why use it?
What is the average wholesale price (AWP)?
In the United States, the average wholesale price (AWP) is a pharmaceutical term that describes the average price paid by a retailer to buy a drug from the wholesaler. The AWP benchmark has been used for over four decades to determine pricing and reimbursement of prescription drugs to third parties such as the government and private payers. However, the AWP is not a true representation of actual market prices for either generic or brand drug products, and is usually inflated about 20 percent. AWP has often been compared to the “list price” or “sticker price”, meaning it is an elevated drug price that is rarely what is actually paid.
AWP is not a government-regulated figure, does not include buyer volume discounts or rebates often involved in prescription drug sales, and is subject to fraudulent manipulation by manufacturers or even wholesalers. As such, the AWP, while used throughout the industry, is a controversial pricing benchmark.1,2
How is AWP determined?
The AWP may be determined by several different methods.
- The drug manufacturer may report the AWP to the individual publisher of drug pricing data, such as Medi-Span or First Data Bank.
- The AWP may also be calculated by the publisher based upon a mark-up specified by the manufacturer that is applied to the wholesale acquisition cost (WAC) or direct price (DIRP).
- The wholesale acquisition cost (WAC) is the manufacturer’s list price of the drug when sold to the wholesaler, while the DIRP is the manufacturer’s list price when sold to non-wholesalers. Pharmacies typically buy their drugs from wholesalers (such as AmeriSource Bergen, Cardinal Health, or McKesson. WAC is the most common benchmark used today by pharmacies to buy drugs from wholesalers.
- Typically a 20% mark-up is applied to the manufacturer-supplied WAC or DIRP, which results in the AWP figure.3
The publishers then in turn sell these published AWPs to government, private insurance, and other buyers of prescription drugs, who use these data tables to determine reimbursement and retail prices. Because AWP is a component of the formulas used to determine reimbursement, elevated AWP numbers can drastically increase the dollar amount that government, private insurance programs, and consumers with coinsurance must pay.1
How does the pharmacy make a profit?
Pharmacies typically buy drugs from a wholesaler and then sell them to the public. Many patients have coinsurance or copayments, where they only pay for a portion of their prescription cost. The insurance company then pays the rest of the cost (the reimbursement) to the pharmacy. Insurance companies include:
- prescription benefit managers (PBMs) like Express Scripts, CVS Health, or OptumRx
- health maintenance organizations (HMO) like Kaiser Permanente or United Healthcare
- government programs, such as Medicaid, Medicare Part B or D, or Medicare Advantage (Part C).4
In addition, the pharmacy receives a dispensing fee to cover the cost for filling the prescription. The fees can vary widely, and are typically set per prescription.1,2
Reimbursements from insurance companies may be based on AWPs. However, pharmacies purchase drugs based on the WAC. The difference between the WAC (what the pharmacy actually paid for the drug) and the reimbursement from insurance (based on AWP) is known as the spread, and equates to the profit that the pharmacy receives.5
Market pricing on brand drugs tends to be roughly 15% less than the AWP. However, the relation of AWP to generic pricing is not clear. Older generics tend to have a large spread between the AWP and WAC, which in turn gives a large spread and higher profit margins for the pharmacy or other provider of the drug. Many payers, such as PBMS or HMOs, will determine a maximum allowable cost (MAC) pricing on multi-source generics to avoid being overcharged. Establishment of a MAC allows payers to pay the same price for a drug, no matter who manufacturers it. Newer generic products, compared to older generics, may not have as favorable of a spread, thus the need for MAC.4,5
Different pricing benchmarks other than AWP may be used for reimbursement; for example, different pricing may be used for office-based drugs, drugs for government-funded programs such as Medicaid, and for private-pay insurance.6 However, uniformity and transparency of pricing benchmarks should be a goal for the industry.
Drug pricing fraud
Collusion between AWP publishers and wholesalers to artificially inflate the AWP (a 25% markup instead of a 20% markup), and in turn increase the spread, has lead to court cases in the U.S.
In these cases from 2009, it was alleged that increasing the spread benefited the wholesaler because customers (pharmacies and large institutions) were more likely to buy from them than a competing wholesaler where the spread was not as desirable. The publisher of AWPs profited because pharmacies were more likely to buy the pricing lists from the publisher that noted the higher AWPs used in calculating the spread, than to buy them from other publishers with lower AWPs. In September 2009, the listed AWP from most brands was reduced by 5%, from 25% to 20% (AWP = 1.2 x WAC).
However, due to this pricing fraud, many payers, including government payers, are no longer using AWP for pricing, and are switching to other more transparent pricing benchmarks, such as WAC or AMP (average manufacturers price). The AMP, which was established as part of OBRA in 1990, is the average price a wholesaler pays to purchase drug products from the pharmaceutical manufacturer after any rebate or discount is included. The AMP is a better estimate the actual cost of the drug that will eventually be stocked in the pharmacy. However, AWP may still be found in use in the U.S. because it has been the standard for decades.4