Despite continuous calls to lower prescription drug prices, 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 prices down.
Why do drug prices keep going up for patients? If you follow how most PBM and employer contracts, which dictate the price you pay for your prescriptions through your benefits, are written, you’ll discover that the prices are based on a benchmark: Average Wholesale Price (AWP). But what if we tell you a better, more reliable price index is available? It's called National Average Drug Acquisition Cost (NADAC). This article covers everything 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.
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. These discounts are applied to buckets of claims that can be easily manipulated, allowing traditional PBMs to fluctuate prices by moving drugs into different buckets to generate margin opportunities.
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 by CMS, which means that it can be used to represent the patients’ well-being and pharmacy benefits in a better way than AWP.
Comparing AWP & NADAC
If you put AWP side-by-side with NADAC, you can clearly see that the former hasn't done much to reduce drug pricing or increase rebates and reimbursements for patients. Referring to the Generic Drug Price Index for 2015 to 2020, AWP unit prices remained stagnant (technically, they've risen by ~1% over the same period).
On the other hand, drug prices based on NADAC significantly decreased by more than 50% over the five years. This clearly highlights the opportunity to use NADAC as the benchmark for PBM contracts.
While traditional PBMs continue using Average Wholesale Prices to generate contracts that don’t benefit the average American, we at Capital Rx strive to change how prescription drugs are priced for patients. Our study with 3 Axis Advisors clearly showed that billions of dollars can be shaved off prescription drug costs if NADAC were used, but AWP remains the dominant price index in the market.
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.