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03/21/2016

Drug pricing - The Basics

Whether a pharmacist practices in retail, hospital or industry, buying and dispensing medication to patients will be important. Both processes are transactions which involves drug pricing. Drug pricing is therefore important, because without its consideration, patients may not be able to afford their medication and pharmacies may close.

In order to stay profitable, pharmacy managers must pay special attention to several methods of drug pricing. Herein, I will walk through the three main methods of drug pricing – the AWP, WAC and AMP. First, the Average Wholesale Price (AWP), represents a benchmark price wholesalers charge to pharmacies. AWP is also a price insurers consider when negotiating how much they pay per drug to pharmacies. Second, the Wholesale Acquisition Cost (WAC), is the price wholesalers pay to the manufacturer for individual drugs. The profit a wholesaler makes on and individual drug is represented by the difference between AWP minus WAC. Third, is the Average Manufacturer Price, AMP, the net price wholesalers pay to manufacturers for all purchased drugs. The AMP may therefore be even lower than WAC because it factors in potential deals that wholesalers may receive from manufacturers.

Since the AWP is typically the “sticker price” of a drug, it is not the price typically paid by a pharmacy. Therefore, the AWP less a percentage is considered the price paid by a pharmacy.  The pharmacy, in turn, is reimbursed by an insurer on a percentage off the AWP (e.g., AWP-16%).   The pharmacy will buy drugs from wholesalers at a discounted AWP and reimbursed by the insurer at AWP minus a percentage. Subtracting the price paid from the amount reimbursed by the insurer would represent the pharmacy’s profit margin.

The wholesaler does not sell drugs to pharmacies at AWP. Instead, the wholesaler will sell to the pharmacies at WAC or AMP plus a negotiated percentage. This benefits the wholesaler by attracting more pharmacies to purchase drugs from them. Each pharmacy manager knows that they get paid at AWP minus a percentage. They therefore want to purchase at a price lower than the reimbursement rate of AWP-%. The wholesaler selling at WAC or AMP – prices which typically lower than the discounted - will attract more pharmacies than those selling at a discounted. At the end of the day, this arrangement is beneficial for both the wholesaler and independent pharmacy. The wholesaler gets a competitive edge and the independent sell drugs at competitive prices while remaining profitable.

 

Robert Bond

P2 Pharmacy Student

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