GLOSSARY OF DRUG PRICING TERMS

Glossary Item of The Month…

Abbreviated New Drug Application (ANDA)

The submission of data and other materials to the FDA to support review, and potential approval, of a generic drug product(s). Products approved for use within the U.S. market will be assigned a six-digit number known as the ANDA number.

Actual Acquisition Cost (AAC)

The purchase price of a drug paid by a provider net of all discounts, rebates, chargebacks, or other adjustments to the price of the drug, not including professional dispensing fees.

Affiliated Pharmacies

Pharmacies officially owned, attached, or connected to a Pharmacy Benefit Manager (PBM) or Managed Care Organization (MCO), often given preferred status to dispense selected medications (i.e. specialty prescriptions).

Average Manufacturer Price (AMP)

The average price paid by wholesalers for drugs distributed to the retail class of trade, net of customary prompt pays discounts. Note, AMP is statutorily defined, and its calculation is based on actual sales transactions.

Average Sales Price (ASP)

For single source (brand) products - The average sales price is the volume-weighted average of the manufacturers' average sales prices for all National Drug Codes assigned to the drug or biological product.

For multisource (generic) products - The average sales price for all drug products included within the same multiple source drug billing and payment code is the volume-weighted average of the manufacturers' average sales prices for those drug products.

Average Wholesale Price (AWP)

A prescription drug pricing benchmark that estimates the average price paid by a retailer to buy a prescription drug product from a pharmacy wholesaler. Note, AWP is not a true representation of the actual market price to acquire prescription drug products.

Best Price

The lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity within the United States, excluding— (I) any prices charged on or after October 1, 1992, to the Indian Health Service, the Department of Veterans Affairs, a State home receiving funds under section 1741 of title 38, United States Code[229] , the Department of Defense, the Public Health Service, or a covered entity described in subsection (a)(5)(B) (including inpatient prices charged to hospitals described in section 340B(a)(4)(L) of the Public Health Service Act[230]); (II) any prices charged under the Federal Supply Schedule of the General Services Administration; (III) any prices used under a State pharmaceutical assistance program; (IV) any depot prices and single award contract prices, as defined by the Secretary, of any agency of the Federal Government; (V) the prices negotiated from drug manufacturers for covered discount card drugs under an endorsed discount card program under section 1860D-31; and (VI) any prices charged which are negotiated by a prescription drug plan under part D of title XVIII, by an MA-PD plan under part C of such title with respect to covered part D drugs or by a qualified retiree prescription drug plan (as defined in section 1860D-22(a)(2)) with respect to such drugs on behalf of individuals entitled to benefits under part A or enrolled under part B of such title, or any discounts provided by manufacturers under the Medicare coverage gap discount program under section 1860D–14A.

Biologic License Application (BLA)

A submission of data and other information to the FDA by firms seeking to sell biologic products (defined within the Public Health Services Act to cover a wide range of products such as vaccines, blood and blood components, gene therapies and other products). Approved products will be assigned license numbers like ANDAs and NDAs.

Biosimilar

A biosimilar is a biologic medication that is very similar (i.e., no clinically meaningful differences) to an already approved biologic medication, called the reference product.

Bona Fide Service Fee

A payment from a manufacturer to a third party that reflects the fair market value for specific, genuine services provided to the manufacturer. These are services that the manufacturer would otherwise handle itself or through another contract if the service agreement did not exist. The fee must not be transferred, directly or indirectly, to any clients or customers of the service provider, regardless of whether the provider owns the drug. Types of these fees include those for distribution services, inventory management, product stocking, and services like administrative support, patient care programs, and medication compliance or education initiatives.

Brand Effective Rate (BER)

The relative rate of the full cost (reimbursement plus copay) of all brand drugs over a certain time frame as a percentage of the total weighted average AWP for those same brand drugs over the same time frame.

Capitated Rate Payments

A payment arrangement for health care service that pays a set amount for each enrolled person assigned to them, per period, whether or not that person seeks care. Also known as capitation payments.(aka capitation payments or capitated rates).

Chargemaster

The list of all the individual items and services maintained by a hospital for which the hospital has established a charge (see 45 CFR § 180.20)

Compound

The pharmaceutical preparation of a prescription product by a licensed pharmacist to meet the unique needs of an individual patient (either human or animal) when a commercially available drug does not meet those needs.

Consumer Price Index-Urban (CPI-U)

A measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Contract Pharmacies

Pharmacies who Covered Entities within the 340B make agreements with to dispense drugs purchased through the program on their behalf.

Cost of Dispensing (COD)

The calculated amount of pharmacy costs incurred to ensure that possession of an appropriately covered outpatient drug is transferred to a Medicaid beneficiary. As per 42 CFR § 447.502, pharmacy costs included in this calculated amount include, but are not limited to, reasonable costs associated with a pharmacist's time in checking the computer for information about an individual's coverage, performing drug utilization review and preferred drug list review activities, measurement or mixing of the covered outpatient drug, filling the container, beneficiary counseling, physically providing the completed prescription to the Medicaid beneficiary, delivery, special packaging, and overhead associated with maintaining the facility and equipment necessary to operate the pharmacy.

Covered Entities

Covered entities are specified healthcare organizations able to purchase drugs at a significant discount within the 340B program created as part of the Veterans Health Care Act of 1992. Covered Entities include: Disproportionate share hospitals (DSHs), children’s hospitals and cancer hospitals exempt from the Medicare prospective payment system, sole community hospitals, rural referral centers, critical access hospitals (CAHs), federally qualified health centers (FQHCs), state-operated AIDS drug assistance programs, the Ryan White Comprehensive AIDS Resources Emergency (CARE) Act clinics and programs, tuberculosis clinics, black lung clinics, Title X family planning clinics, sexually transmitted disease clinics, hemophilia treatment centers, urban Indian clinics, and native Hawaiian health centers.

Current Procedural Terminology (CPT®)

Also known as Level I HCPCS, CPT codes are a set of numeric codes used to identify medical procedures and services (foundationally the first level of healthcare coding). The American Medical Association (AMA) maintains and updates the CPT codes annually.

Differential Generic Pricing

The observed difference in pricing of the same generic prescription drug between two different pharmacy providers.

Direct And Indirect Remuneration (DIR)

A term used in Medicare Part D to identify price concessions that impact gross prescription drug costs not captured at the point of sale. They include but are not necessarily limited to discounts, chargebacks or rebates, cash discounts, free goods contingent on a purchase agreement, upfront payments, coupons, goods in kind, free or reduced-price services, grants, or other price concessions or similar benefits from manufacturers, pharmacies, or similar entity.

Direct Price (DP)

Although the majority of medications produced by drug manufacturers are purchased by drug wholesalers, non-wholesalers can make purchases directly from the manufacturer. The direct price is intended to capture the pricing behavior of non-wholesalers (such as providers). The availability of direct price information is highly variable, and potentially subject to the editorial policies of the entity publishing the price.

Durable Medical Equipment (DME)

Devices that can withstand repeated use and whose use is primarily and customarily to serve a medical purpose.

Effective Rate Contracts

A contract where the full cost (reimbursement plus copay) of all drugs over a certain time frame must equal a certain percentage discount to a reference price, such as AWP. Usually, the effective rate varies by the type of drug (i.e. brand vs. generic).

Federal Rebate

The amount reimbursed for qualifying prescription drug claims within Medicaid by drug manufacturers who participate in the Medicaid Drug Rebate Program (MDRP).

Fee-for-Service (FFS)

Medical and/or pharmacy claims where the state pays providers directly for the delivered healthcare service.

Formulary

For outpatient drugs - A list of covered products (e.g. prescription drugs) by a drug plan or another insurance plan offering prescription drug benefits

Within the hospital setting - a list of medications available for use at a hospital or health-system. This list includes the dosage forms, strengths and package sizes of each of the medications on it.

Generic Effective Rate (GER)

The relative rate of the full cost (reimbursement plus copay) of all generic drugs over a certain time frame as a percentage of the total weighted average AWP for those same generic drugs over the same time frame. Note, reimbursement within certain prescription drug networks may be based upon a GER contract.

Gross Cost

The entire acquisition cost of a product or service. In prescription drugs, this is often the transactional price paid for the drug at the point-of-sale.

Gross-to-Net Bubble

The “gross-to-net bubble” measures the dollar gap between drug manufacturers' gross sales at brand-name drug list prices and their sales at net prices after rebates and other reductions. The term “bubble” characterizes the speed and size of growth in the total dollar value of manufacturers’ gross-to-net reductions. The phrase originates from Drug Channels, which conveniently inventories the latest bubble analyses at grosstonetbubble.com.

Healthcare Common Procedure Coding System (HCPCS)

Previously called the Health Care Financing Administration (HCFA) Common Procedure Coding System, is a set of standardized codes used to represent medical services, supplies, products and procedures that is divided into two main subsystems - Level I and Level II. To read more background information, including history of HCPCS, see AAPC.

Interchangeable

Refers to a designation given to certain generic or biosimilar medications that are approved to be substituted for a brand-name drug without needing prior approval from the prescribing healthcare provider. Note interchangeability may be governed by both state and federal statutes

J-codes (HCHPCS Level II Subset)

A subset of Level II HCPCS codes that begin with the letter J used for used to report non-orally administered medication and chemotherapy drugs.

Managed Care Organizations (MCOs)

Managed Care is a health care delivery system organized to manage cost, utilization, and quality. Medicaid MCOs provide for the delivery of Medicaid health benefits and additional services through contracted arrangements between themselves and state Medicaid agencies and accept a set per member per month (capitation) payment for these services.

Margin Over Acquisition Cost

The amount of reimbursement provided by a health insurance carrier for a prescription drug relative to the acquisition cost for the prescription drug based upon its national drug code. In this report, for brand name medications this was calculated based upon the NADAC for the NDC or 96% of the WAC cost for the NDC if a NADAC was unavailable.

Margin Over NADAC

The amount of reimbursement provided by a health insurance carrier for a prescription drug relative to the NADAC based cost for the prescription drug based upon its national drug code (NDC).

Maximum Allowable Cost (MAC)

A payer or pharmacy benefit manager (PBM)-generated list of products that includes the upper limit that the payer will reimburse for a prescription drug product.

Maximum Fair Price (MFP)

The negotiated price for a drug that is set by the Centers for Medicare & Medicaid Services (CMS) for prescription drugs in the Medicare Drug Price Negotiation Program. As of 2024, there are 10 products with MFPs which are set to take effect in 2026.

MCO-to-PBM Spread

The spread difference between the capitation revenue paid to the MCO for pharmacy services and the pharmacy claims costs paid to its PBMs.

Medicaid Drug Rebate Program (MDRP)

A program that includes Centers for Medicare & Medicaid Services (CMS), state Medicaid agencies, and participating drug manufacturers that helps to offset the Federal and state costs of most outpatient prescription drugs dispensed to Medicaid patients via a prescription drug rebate.

Medical Loss Ratio (MLR)

A measure of the percentage of premium dollars that a health plan spends on healthcare costs versus administrative costs.

Morphine Milligram Equivalent (MME)

A value assigned to prescription opioid drugs to represent their relative potency to the reference opioid morphine.

National Average Drug Acquisition Cost (NADAC)

A national prescription drug pricing benchmark that is reflective of the invoice prices paid by retail community pharmacies to acquire prescription and over-the-counter covered outpatient drugs.

National Drug Codes (NDCs)

A unique, three-part segmented number published by the Food and Drug Administration (FDA) used to identify for drugs within the US Drug Supply chain.

National Provider Identifier (NPI)

A unique identification number for healthcare providers.

Net Cost

The realized cost of a good or service after the gross cost is reduced by any benefits gained from acquiring the good or service. In prescription drugs, this is the cost of the drug after accounting for any rebates or other price concessions associated with the purchase of the drug.

New Molecular Entities

Certain drugs are classified as new molecular entities (NME) for the purposes of FDA review. These products often contain active ingredients not previously approved, either as a single ingredient drug or as part of a combination product. Note that NME designation is distinct from the FDA’s designation of new chemical entities (NCE).

Operating Leverage

The degree to which revenue growth translates to net income growth.

Parent Organization

Within Medicare, CMS considered a parent organization to be the legal entity that owns a controlling interest in a contracting organization (i.e., all current Medicare Advantage, Prescription Drug Plan, PACE organizations, etc.). Refer to the most recent CMS Annual Verification of Parent Organization and Legal Entity Name memo for more information.

Payer Network

The list of designated pharmacies available from which beneficiaries may obtain medications.

PBM-to-Pharmacy Spread

The difference between the payments made by a pharmacy benefit manager (PBM) to the pharmacy for a prescription and the charge to the payer for the same claim.

Per Member Per Month (PMPM)

The dollar amount paid to a provider of healthcare service each month for each person for whom the provider is responsible for providing services.

Preferred Drug List (PDL)

The list of specific medications within a prescription drug benefit that a payer has indicated are preferred relative to other medications in their therapeutic classification based upon their clinical significance and overall efficiencies.

Prior Authorization (PA)

The act of seeking approval for certain medical and prescription drug plans from the health insurance carrier before they are paid for.

Professional Dispensing Fee (PDF)

Pharmacy costs associated with ensuring that the possession of the appropriate outpatient drug is transferred to a Medicaid beneficiary. These costs include, but are not limited to, the following: Costs associated with checking the computer about an individual’s coverage Performing Drug Utilization Review and Preferred Drug List Review activities Measurement or mixing of the Drug filling the container Beneficiary counseling Physically providing the completed prescription to the Medicaid beneficiary Delivery, special packaging and overhead associated with maintaining the facility and Equipment necessary to operate the pharmacy.

Reinsurance

A risk management tool used by insurers to spread risk, such as those associated with very high claim costs, from one organization to another. In healthcare, it usually involves a party outside of the one directly responsible for claim costs (i.e., employer, health plan) agreeing to pay some or all of the responsible party’s claim costs once a certain dollar threshold has been reached. As a result, reinsurance is sometimes referred to as “insurance for insurance companies”.

Risk Evaluation and Mitigation Strategy (REMS)

A formal plan that focuses on preventing, monitoring, and managing serious risks associated with certain drugs

Sensitivity Analysis

A review to determine how different values affect a particular dependent variable under a given set of assumptions.

Single Preferred Drug List (SPDL)

A preferred drug list (PDL) that uniformly applies to all programs, such as the various managed care organizations, within a state Medicaid program.

Specialty Drug

A term of convenience used within prescription drug benefit contracting. Generally, a specialty medication is a high-cost prescription medication used to treat rare, complex, or chronic health conditions which may have additional requirements regarding storage, distribution and/or administration.

Spread Pricing

The difference between the payments made by a pharmacy benefit manager (PBM) to the pharmacy for a prescription and the charge to the payer for the same claim.

Supplemental Rebates

A contractual relationship between a Medicaid program and a drug manufacturer or other intermediary that generates additional rebates above beyond those mandated under the Medicaid Drug Rebate Program (MDRP).

Therapeutic Category

A group of drugs used in the management of a same or similar disease state.

True Up

A process to resolve any differences between a contractual reimbursement rate in a given agreement and the actual experienced reimbursement provided.

Unit Rebate Amount (URA)

The amount of money owed by a drug manufacturer to state Medicaid agencies per unit of drug dispensed.

Wholesale Acquisition Cost (WAC)

The list price paid by a wholesaler, distributor and other direct accounts for drugs purchased from the wholesaler's supplier.

340B Claims

Pharmacies claims purchased at significant discounts under the program created by the Veterans Health Care Act of 1992 (i.e. 340B program). The law provides access to purchase drugs at reduced prices for certain healthcare entities called Covered Entities.