Independent pharmacy owners and operators are able to bill insurance companies for filled prescriptions drugs and other pharmaceutical products through a contractual relationship established directly with a pharmacy benefit management organization and/or through membership in a pharmacy services administration organization (PSAO). In both circumstances, it will serve a pharmacy owner or operator well to understand key benchmarks that impact pricing and reimbursement. Standard reimbursement terminology that appears in managed care agreements and addenda include Average Wholesale Price, Wholesale Acquisition Cost, National Average Drug Acquisition Cost, and Maximum Allowable Cost.
Navigating a pharmacy provider agreement is undoubtedly a complex process and you can take the step as an independent pharmacy owner or operator to become more informed.
Average Wholesale Price & Maximum Allowable Cost
Average Wholesale Price (AWP) is universally established by Medispan and First Databank —entities referred to in a managed care agreement as the Pricing Source. Most often, the Pricing Source is updated at least weekly. Both Medispan and First Databank receive pricing details directly from wholesale distributors and use these to establish AWP. It is important to note that AWP does not represent a set wholesale price. Rather, it is an average number derived from various prices reported by multiple national wholesale distributors. It is rare that a pharmacy owner or operator pays a price for a product that is equivalent to AWP. The reimbursed amount is usually a discounted price. Single-source brands are largely reimbursed on the basis of AWP. Multi-source brands and generic drugs, on the other hand, are reimbursed on the basis of AWP and another pricing benchmark — Maximum Allowable Cost (MAC). MAC price lists are created at the sole discretion of the pharmacy benefit manager or health plan using a variety of pricing sources including Medispan and First Databank. When a National Drug Code (NDC) is on a MAC list, the Discount Off AWP price does not apply. The Discount Off AWP pricing benchmark only applies to NDCs not featured on a MAC price list. While AWP-based reimbursement is still the industry standard, more agreements are proposing WAC and NADAC in their reimbursement methodology.
Wholesale Acquisition Cost (WAC) is a manufacturer supplied list price of the wholesale distributor’s purchase from the manufacturer. According to First Databank, WAC represents an estimate of the manufacturer’s list price of a pharmaceutical drug sold to wholesale distributors or direct purchasers, and does not include discounts or rebates. Additionally, WAC does not represent actual transaction prices. First Databank states on its website that it relies on the manufacturer’s report and does not conduct any analysis of actual transaction prices for the purposes of reporting WAC. WAC is created by the manufacturer or labeler and is usually based on the first point of sale. Similar to the AWP reimbursement structure in contracts, WAC-based reimbursement usually features a discount off the WAC price for brand name medications and non-MAC’ed generic medications. WAC is steeper in price than AWP, so the discounts off WAC are lower than that for AWP-based terms.
A Milliman white paper describes the National Average Drug Acquisition Cost (NADAC) as an estimate of the average drug invoice price paid by independent and chain retail pharmacies. According to the authors, the Centers for Medicare and Medicaid Services (CMS) randomly surveys retail pharmacies on a monthly basis and pharmacies voluntarily respond with actual drug price data. Also, NADAC is an average of voluntarily reported data by pharmacies. Further, when NADAC is used for reimbursement terms, it is always NADAC plus a dispensing fee or cost-plus structure. This pricing is in line with average pharmacy drug costs rather than manufacturer or wholesale distributor prices.
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Patient Cost Share
Where a patient cost share (commonly known as copay) exists, it usually covers either the entire contracted amount due to the pharmacy or a portion of it. The cost share varies with patient benefits. If for instance, a patient has a cost share of $30, this will be paid at point of sale and subtracted from the covered total.
Lesser of Logic
This concept appears in many managed care agreements as standard language. Generally, Lesser of Logic implies that the provider is reimbursed at the lesser of the contracted rate whether AWP-based or MAC; Usual and Customary (U&C) plus dispensing fee; or the submitted ingredient cost plus the dispensing fee.
Direct and Indirect Remuneration Fees
In managed care agreements, Direct and Indirect Remuneration (DIR) fees are often referred to as variable rates, contingent performance fees, and traditional withhold amount, to name a few. On average, a pharmacy owner can expect to pay between $3,000 and $60,000 (or more) annually, depending on claim volume and patient mix. DIR fees can be associated with both preferred and non-preferred agreements. DIR fees may be a) calculated based on a pharmacy’s performance or b) deducted as a set amount with the opportunity to earn a portion of the DIR fee previously assessed at year-end (based on performance). The average payback is usually 1-3% of DIR fees paid. DIR fees may be based on performance in generic dispensing (GDR) and quality metrics (adherence, statin use in diabetics, formulary compliance, 90-day fills etc.), as established by a health plan.
Transaction or Origination Fees
When a pharmacy initiates a claim transaction to be adjudicated by a pharmacy benefit manager, the pharmacy benefit manager will often charge a fee for this process. That fee is known as the transaction or origination fee and can be assessed on any claim adjudication request classified as a normal request, reversal, rejected, eligibility inquiry, resubmission, or other electronic communication from the pharmacy to the pharmacy benefit manager’s electronic systems. Transaction or origination fees vary for each pharmacy benefit manager and are often collected during the remittance process; typically lumped into a single sum on the remittance file. For the pharmacy owner or operator, it is imperative to review the contract, provider manual, or corresponding plan data sheet to understand what the potential transaction fee will be for a specific pharmacy benefit manager or book of business.
First DataBank. (2020). https://www.fdbhealth.com/
Pierce, K. & Sheldon, A. (2018). NADAC-plus: An emerging paradigm in pharmacy pricing. Milliman White Paper. https://www.milliman.com/en/insight/nadac-plus-an-emerging-paradigm-in-pharmacy-pricing
Wolters Kluwer. (2020). https://www.wolterskluwer.com/en/solutions/medi-span