Capital Rx
Despite continuous calls to lower prescription drug prices for patients and pharmacy costs for employer plan sponsors, it seems that they only increase month after month and year after year. On any given day, you’re bound to see news stories centered on legislation and policies enacted to bring drug prices down.
Why do drug prices keep going up for patients when net prices have been going down for years? If you follow how most pharmacy benefit manager (PBM) contracts with employers are written, which dictate the price you pay for your prescriptions through your benefits, you’ll discover that the prices are based on a benchmark: Average Wholesale Price (AWP). But what if we tell you a better price index is available?
It's called National Average Drug Acquisition Cost (NADAC), and this article covers what you need to know about NADAC and how it differs from AWP.
What is Average Wholesale Price (AWP)?
AWP is an artificial number that is generally highly inflated from the manufacturer’s price. It can be thought of as the “list price” or “sticker price” of a drug, similar to the MSRP of a car at the dealership – nobody ever pays the list price.
AWP Enables Gameplay, Including Spread Pricing
Traditional PBM contracts are written around validating false guarantees based on an average discount off an AWP list price measured over the course of a year. It's an oversimplification, but these discounts are applied to buckets of claims that can be easily adjusted, allowing traditional PBMs to fluctuate prices by moving drugs into different buckets to generate margin opportunities, at the expense of the plan.
We can compare the prescription drug market to shopping at a grocery store where every aisle has a different discount applied to the items on their shelves, but you don’t get to see the prices of the items until you check out, items can move between aisles at any time, and the prices change for each customer in the store. Can you imagine buying groceries with only a long document describing the different costs instead of actual prices?
- There are no listed prices until you check out: annual effective rates
- Items move between aisles at any time: drug re-classification
- Prices change for each customer: multiple MAC lists
- “Pay-to-play” for putting products on the shelves: pharma rebates
What Is National Average Drug Acquisition Cost (NADAC)?
NADAC was jointly developed by the Centers for Medicare and Medicaid Services (CMS), and it calculates the average price that pharmacies pay for prescription drugs. This average price value is used as a standard for the supply and demand of prescription drugs, and it involves the use of invoice prices paid by retailers rather than a fabricated and inflated value that does no good for patients. Moreover, NADAC can be accessed through a public website, which means that PBMs should have no trouble referencing it.
NADAC provides more transparency and insight into drug spending and pricing, making it the obvious choice for PBM contracts. Moreover, it is updated on a weekly basis, which means that it can be used to represent prevailing supply chain economics in a better way than AWP. Continuing the grocery store analogy, with NADAC, every claim has a set price, so milk is milk, and you know the cost before you check out. It's not hidden behind a fictitious price.
Comparing AWP & NADAC
in 2020, we compared these benchmarks to see which one was more reflective of actual generic drug price behavior in the market.
To this day, if you put AWP side-by-side with NADAC, you can clearly see that the former hasn't done much to reduce drug pricing and reimbursements for patients. Referring to the Generic Drug Price Index for 2015 to 2024, AWP unit prices remained stagnant (technically, they're flat).
On the other hand, drug prices based on NADAC significantly decreased by more than 50% over the six years. This clearly highlights the opportunity to use NADAC as the benchmark for PBM contracts. Additionally, we did a study with 3 Axis Advisors, which clearly showed that billions of dollars could be shaved off prescription drug costs if NADAC were used, yet AWP remains the dominant price index in the market.
While traditional PBMs continue using Average Wholesale Prices to generate contracts that don’t benefit the average American, we at Capital Rx strive to advance the industry. We're not only in favor of using a more representative index for how prescription drugs are priced for patients, we're building the electronic claim processing infrastructure we need to deliver the level of care we deserve at the same time.
You can get in touch with us to learn more about NADAC and how we use it in our Single-Ledger Model™, which brings full visibility into drug prices and eliminates arbitrary price variability.