EPISODE 12

Hello and welcome back to the 46 Brooklyn podcast. I'm your host, Ben Link, the president of 46 Brooklyn Research, but I'm also a pharmacist. Fed up with fake artificially inflated drug prices. On our last episode, we had our reminder remedial course, shall we say, for what we think we know about drug prices in the U.S. We spend some time to retell the story of what drug reference prices can inform us about, about why we pay for things the way we do today.

Now we're going to transition from a conversation about these price points and what they're referring to, to try to use that information to get a better understanding for how we spend our money. Within the drug supply space, our goal remains what it has been from day one, which is to try to introduce these core concepts of the U.S. drug supply chain to foster this better understanding of the data that is available at 46brooklyn.com And our drug pricing system as a whole. As with any educational endeavor, I am attempting to present the information in as logical manner as I can to hopefully ease understanding. But I need to continue to recognize and acknowledge that everyone learns differently. To that end, if you have questions or comments regarding the podcast, please reach out to us at our website.

So now that drug pricing 101 is well and truly behind us, what did we say we're going to do next? Well, we said in our last episode that we wanted to talk more about what drug reference prices might tell us about the price of drugs today. What a crazy sentence that is. So to start back up, that's what we'll do. We'll talk about the drug pricing, news and notes at the start of 2023. To me, the most obvious place to start with is to look at the drugs that took a price increase at the beginning of 2023. Ultimately, if you pay attention and are a listener of this podcast, you probably know that there's a lot of media attention and scrutiny towards what those manufacturers do with their prices at the start of the year.

The challenge, of course, is to decide how we're going to talk about that many drug prices. If you're not familiar with the drug price change box score at 46 Brooklyn dot com, you may not realize that at the start of 2023 in January, there were nearly 1000 drugs that took a price increase.

Now, if we take a step back and we look at that dashboard, right, we know that over the last 12 years there has never been more price increases in the month of January than occurred this year. So we know we have our work cut out for us. How are we going to talk about a thousand things we cannot. So the question becomes, what do we want to focus on? For this podcast, we're going to try to focus on what is, quote unquote, the most impactful price increases, whatever that means. But I would encourage you to again, go to 46 Brooklyn Ecom and experience the dashboard for yourself just because these are the price increases I've chosen to talk about.

Does it mean they mean a hill of beans to you? Right. If these aren't drugs you take or drugs your program is managing it. Does it matter to you? So what might we categorize objectively as the most impactful drug prices? To summarize here on this podcast, well, the easiest answer we might gravitate towards is which one took the biggest, right? Biggest which percentage increase at the start of 2023 in January was greater than all the rest. If that's our measure, we would draw our attention to Omni Peak, specifically the oral solution, which increased 25% on its whack price from last year. That is a lot. That is more than the current year over year inflation rate. CPI tells us right where you would expect a 6% increase given the way that other products in the system are changing over time. But omni pay went 25%. That's a lot more right then.

Well, I think in fairness to the product, right, we should recognize that the Omni take oral solution, not the injectable we have to differentiate came out in 2018, has actually never taken a price increase on a whack basis since that time. So this year, the fact that it took a 25% increase might jump off the page to us. But if we consider what its price behavior has been over the last many years since 2018, we'd recognize that that increase actually isn't as abnormal as it might seem. Right. A 20 $18 in 2023 is worth more because of the effects of compounding inflation over time. If we just look at 20 $18 versus 20 $23 at 20 $18 is roughly 20% more, i.e. 120 $18 is worth a dollar. 20 in 2023. So this product, which is never taken a price increase that we, you know, call out for taking a 25% increase in 2023 is actually not that out of line with where inflation would put it if it would have just pegged its price to inflation. Yes. 25% is not 20%, but it's almost there. Almost. Right. So, you know, if we're being honest as a pharmacist, army pay isn't all that interesting of a drug.

It's a drug that we take before we get medical images, like if we want to scan the gut to see what's going on in there. So maybe omni Peak and this product that took out 25% increase at the start of the year is what I would categorize as the most interesting drug. So how might we go about identifying the interesting drugs, if not by just their year over year price increases, especially if they're more or less in line with inflation.

So the next way we might look for interesting drugs is to try to size up the impact the price increase will likely have on the market. We'd look for where are we spending the most money on drugs today? That also happened to just take a price increase year over year. Under such a set of circumstances, the top drugs we'd identify where for medications we might recognize, especially if you're a fan of this podcast, the top drugs would be HUMIRA, a medication for rheumatic and other disease, which took an 8% price increase year over year victory, a medication use for HIV that took a 5.9% increase in Trulicity, a medication used for diabetes that took a 5% increase. Each of these products has hundreds of millions of dollars in drug spend last year. And so if they're taking a price increase this year and all else is equal, the same amount of utilization occurs year over year, these price increases will be impactful. So the people who are exposed to those price increases. Right. And that becomes the next set of challenge when we try to contextualize impact of these price increases on our brand box score. While these prices might knowingly have offset rebates which reduce retrospective price concessions, which reduce the price to the end payer, we know that our dashboard, the brand box score, is measuring whack. This pricing benchmark we're familiar with from our prior episodes. Right? And to some members of the supply chain. It's a real price. Whack is defined in federal statute to mean something, to mean this list price behavior between the drug manufacturer and the wholesaler.

So anyone who buys in relation to that price is going to have a cash flow impact due to these increases, meaning that wholesalers who buy in relation to this whack price, even if they get some discounts after the fact, their prices are going to go up. They're going to have more cash tied up in buying this, even if they later recognize a discount.

Same thing with pharmacy providers as well. They will likely see increased acquisition costs of these drugs. Yes, Others might get the impact of an 8% price increase netted out due to a 9% growth in rebates or what have you. I'm talking about PBMs and or health plans.

But the impact of these price increases are not zero. So this transition as well, to perhaps talk about the next way we might go about identifying price increases that are meaningful. We know that there's a new guy in town, gal in town that's going to get new rebates, rebates that weren't previously conceived of in the system. Somebody else is going to start getting retrospective price increases to a degree that they weren't before. I'm talking about, of course, Medicare as part of the Inflation Reduction Act or the IRA. Drug companies are going to be required to pay Medicare retrospective rebates when the price of their drug increases faster than the rate of inflation, specifically the new inflation rebate. That's going to happen. First is for Medicare Part B drugs, which they identify as single source drugs and biologic products and certain bio-similar products beginning in January of this year, 2023, the Federal Government intends to invoice drug manufacturers for 2023 and 2024. Part B Inflationary rebates under the IRA no later than 2025. Again, for those unfamiliar with the rebate system, rebates are recognized retrospectively. We tie up money value cash flow in this retrospective recognition of value, meaning that Medicare knows it's entitled to these rebates, but it's not going to recognize them for likely a year or two.

The rebates that they're going to get are going to be deposited into the Medicare trust fund to help again sustain it. It should hopefully maybe be there for us when I get to the retirement age, when you get to the retirement age. But Medicare recognized something that many people fail to do. And our retrospective price world, which is that beginning in April of this year, April 20, 23, right around the corner, people with Medicare can actually begin to see lower out-of-pocket costs for these drugs that have increased faster in the rate of inflation. Why? Because Medicare recognize that if it's going to get this thing of value, this idea that it's going to get a rebate, they don't want or shall we say we don't want to expose patients to more than their fair share of cost. Right. Recall when we talked about ASP in the earlier podcast, we recognized that it's really only applies to Medicare Part B drugs, where we say payment is ASP plus 6%. Well, we didn't necessarily talk about is that patients, Medicare, people that have A and B not advantage plan when they get part B drugs, B as in boy, they pay a 20% cost share for that.

So here is Medicare saying we know that this inflated price is actually going to come back to us, but we don't want necessarily your cost share to be inflated because of the formula we use to determine that. So in an essence, we could say that they're sharing the value of these rebates, even perhaps before they recognize them. So what are we doing specifically assay for the impacted drugs and biological products? The beneficiary co-insurance will be 20% of the inflation adjusted payment amount, which will be less than what it would be otherwise for the reasons we just talked about. Right. So, all of this is to say, if we were to focus on which drugs might be most impactful to Medicare, Medicare Part B, under this idea that now we know they're getting this rebate, the one that would jump out to us is passive. This is the drug in Medicare Part B that had the biggest drug spend that is on this list of drugs that increased faster than the rate of inflation, that patients are going to get additional support or a lower payment than they would otherwise have gotten. But for this rebate program being spun up, Medicare Part B spent $154 million on this drug in 2021, which was up from $63 million in the year before. And all of this is a good way to transition to talking about one of the fundamental pieces of policy that the IRA tried to recognize in regards to drug prices. Right. Inflation rebates were not a new concept in federal policy. Right. Medicare aid has been getting inflation rebates for years. The Medicare drug rebate program is conceived as this idea that Medicaid isn't necessarily going to negotiate drug prices with manufacturers.

But we're going to set a formula to determine what kind of retrospective value they're going to give to the drug supply chain. We tried to set incentives around that. Through the formula we used. We said, manufacturers, you're more or less free to do whatever you want with price, but know that if your price increases faster than the rate of inflation, that extra value is going to come back to us through our Medicaid rebate formula. It used to be that there was no cap on the amount of value that could come back as part of the Affordable Care Act. In the finalization of the covered outpatient drug release. At a cap, we said, Hey, if it ever gets to the point where the formula says is, you're actually going to pay us for the privilege of dispensing your medication, your return $110 of value for something that only cost us 100, I will make ten bucks. That wasn't going to make sense anymore. So we put a cap and say, Hey, it can't be better than free. Well, that cap is going away in 2024. So what do we know? We know that for decades. Look at our brand box score that we talked about right at the start of this. If you go and look at that, what does that tell you in terms of average increases by manufacturers over time?

It used to be 10% price increases. It's been more like five either way. The compounding effect of those price increases relative to inflation that has historically been at 2% are very out of line right up until this year, any drug manufacturer who took the average price increase of 5% or whatever have you was likely accruing a penalty with Medicaid. Right. And they've been accruing that penalty for many years up until the point where it was effectively, shall we say, free to the Medicaid program. Now, that cap is going away now, you can actually have to potentially give value back to them above and beyond what you yourself get. And so is it any wonder we see programs or companies like the insulin manufacturers announcing big price cuts. I don't think we can interpret those price cuts as just the fact that this is going away, that this cap is going away. Because, again, it used to be that there was no cap and manufacturers still used to charge lots of money above inflation. I think specifically with the insulin. Right. We should recognize that these companies are very connected. They know that competition is coming.

They know that there are groups out there like California, like Civica, that are trying to manufacture their own insulin. They probably have their suppliers telling them, hey, somebody is trying to compete with you on the vials that you're going to buy or the ingredients you want to purchase.

Are prices going up If you don't have a consolidated market anymore, it might not make sense to give Medicaid free value back when you had a captured market. Yeah, maybe you have Medicaid gets the free drug, but somebody else will pay more for the fact that Medicaid got the best price right. So the overall thing to impart on us, right is our brand boxscore content. It can contextualize individual price increases over time. And that information can help us understand what some of the impact of policy is likely to be, which enables us to talk about the last dashboard I want to talk about today, which is the brand Launch Price Contextualizer, or it's a new dashboard or relaunched dashboard this year. Right. Oftentimes the thing that get the most attention in drug pricing world is the brand name medications. And so we've had a way for a couple of years at 46 Brooklyn to measure the impact of year over year price increases. But that was creating a blind spot. We weren't measuring prices that came to market and never took a price increase. There were products that launched at $1,000,000 that have never taken a price increase and we're effectively saying those prices don't matter because they're not contextualized within the brand of box score. So we built the contextualizer there to try and answer the question of how is the change in paradigm going with new products year over year?

Taking a step back. Right. We should recognize that we almost expect prices to be increased year over year. We are asking the system to produce the latest and greatest. We have incentives to produce orphan drugs, right? So all else being ignored. If it takes $1,000,000,000 to develop a drug therapy because of the cost of phase three clinical trials or whatever have you. Right. If there's going to be 100 million people taking my medication like, say, statins and cardiovascular meds. Right. That billion dollar investment gets spread over a lot more potential customers, a lot lower price points. Then when I'm incentivized to design a product that might only treat 10,000 people on a good year right? Zolgensma The first million dollar drug is for spinal muscular atrophy. It isn't intended to treat, say, more than a couple thousand people every year. So of course, spreading that billion dollar investment over that product is going to be more expensive. And what we try to do with a drug brand launch price contextualize are was to understand not only, hey, is this trend occurring year over year like, say we might expect, but try to give ways to say so what? Right. The dashboard has tools where you can say, okay, I want to look at just the launch price. I want to appreciate that, you know, if I am an employer, if I'm an individual, I will likely not be in a position to buy $1,000,000 drug therapy.

That's not the way our supply chain works. If I'm an employer, let's say, has $1,000,000 in annual drug spend, and you offer one of my patients a $2 million drug, my drug spend might triple my overnight because one person took something. I didn't grow my business. I don't have triple the profits to support that. So that's one way that the brand launch price contextualize our can look at price. But ultimately it's kind of like a game of roulette, right? There are plenty of employers, plenty of people that will never need that therapy, thank goodness. Right. We'll never need never know it. It's like spinal muscular atrophy. So how else might we contextualize brand launch price as well? We can ask the question, so what? After this product launch, how impactful was it to the overall drug spend?

The tool enables you to say, Hey, tell me what the launch price behavior is at a whack basis, or tell me what it's like. If I take that whack price for a month and I distribute it based upon, say, the number of prescriptions given to it in the year after it launch, it doesn't make sense to do in the year at launch because there are products that come to market at the end of the year, products that come in the beginning of the year.

They won't get the same shake at least one year after launch, gives them the full 365 days to get market share. What you'll see is universally there is no product that is the most expensive on its list. Price basis and then on its post launch year basis, right? There is no product that we would say, Hey, this thing that costs lots and lots of money on a surface, this million or even $3 million drugs like we have with them, Gen-X, you know, none of these drugs show themselves as being that impactful the year after they launch.

If instead of the way we obtain benefits, we say had more shared resources. Right? If it wasn't just individuals or individual groups buying these, we might be better collectively positioned to mitigate these risks. It's easier, shall we say, to ask a program like Medicaid, which is what the data in the dashboard is largely relying upon to, say, expose the risk across all of the lives on a basis that is not the same as on an individual prescription basis. What do I mean by that?

Take 2019, for example. Does Genzyme I don't mean to keep picking on it. You know, if you're a listener of the podcast, go ahead and write us that nasty email drug manufacturer. But so Genzyme of the first million dollar therapy, it looks pretty impactful in the year it's launched, right? But if you re filter it and say what mattered based on what Medicaid or Medicare bought in 2020, the year after 2019 rate, the drug that comes is TRIKAFTA a drug for cystic fibrosis. It's a $20,000 a month treatment. But unlike Zolgensma, which is this, give it to them once and never again. We're going to give this cystic fibrosis patient the same drug every year, every month for the rest of their life. And the math tells us that that's far more impactful to these programs than ones to these 1000 doses of these Zolgensma script, because getting a recurring prescription means that it's not $1,000,000 once per patients, it's 20,012 months in a year for every many years you're in the program. And so that's the difference of context, right? That's the difference of how one answer about what drug prices are and are meaningful differs from what are a different way of asking or looking at. The problem is going to tell us. Which brings us back to the IRA.

The question is when you told the system that there is now going to be more constraints on your ability to take price increases year over year, assuming that inflation gets under control? Right. Right now, inflationary rebates have lost a little bit of their sting. If the average manufacturer was taking a 5% increase in inflation is six. Right. That's below the the penalty level. And so in some ways, manufacturers are might be more encouraged to take price increases right now because inflation is high. This is your last chance. So we say, or hopefully might be your last chance to juice the system with a price increase. But if the goal of policy is to take that piece away, the question becomes what next? And the answer might be increasing the launch price behavior, right? It might be, Hey, I don't have this tool anymore to extract value for me or my shareholders because I'm a publicly traded drug manufacturer. So now I need to set my price high and try and ride it for my exclusivity and patent period. And again, I would argue that that's not different than the incentive that we tried to create in the beginning. Right. What does history tell us? History tells us that we had a system of brand name dominance and we developed new policy through the Hatch-Waxman Act to try and encourage competition, right, to try and get price savings. The idea, the construct of our social system right now is, hey, you may extract value, you may have exclusive patent protected monopolistic power for a couple of years, but at some point you're going to have to give us that value and use the extraction that you had to develop. The next, latest and greatest thing by design. That tells us that the price of the next thing is likely going to be more expensive than the price the last. There's not as many high cholesterol medications. We’re talking about cures now. We're talking about curing diabetes, curing hemophilia. We want to cure these things. And that's going to be more expensive because it's not going to be a $20,000 therapy for 12 months for the rest of your life. Right. These gene therapy things are one time treatments. So ultimately, we need to appreciate that if we want the system to produce what we're asking you to, the incentive is are very important. And right now the incentives of the system are less and less around year over year price increases and more and more about what your launch price is, at least from 50,000 feet.

So I want to thank you all for letting me wax poetic here at the end about what our dashboards might tell you about brand prices year over year at launch and encourage you to join us next time when we begin to explore what some of our generic dashboards can tell us about drug pricing in the system.

the 46 Brooklyn podcast would like to thank McGohan Brabenderfor the use of their facilities in recording our podcast. We'd also like to thank Ben at Journeyman Productions for assistance with our

music and sound.

As a reminder to our listeners, if you're curious about any of the materials discussed on today's episode. Additional information can always be found on 46brooklyn.com

EPISODE 11

Hello and welcome back to the 46brooklyn Podcast. I am your host, Ben Link, the president of 46brooklyn Research, but I’m also a pharmacist fed up with fake artificially inflated drug prices.

It has been a minute since we last had an episode of our Podcast, so it is probably appropriate to start with some reminders. Last year, we launched the Podcast and dove into some, but not all, of the drug reference prices available in the U.S.. We talked about the use of those reference prices within our work at 46brooklyn and ultimately got around to briefly discussing how drug benefits get financed in the commercial space. We called our first series, Drug Pricing 101 with the idea that we needed to introduce the core concepts of the U.S. drug supply chain to hopefully foster a better understanding of the data available at 46brooklyn.com and our drug pricing system as a whole. As with any educational endeavor, I have attempted to present the information in a logical manner to hopefully ease understanding; however, I want to recognize and acknowledge that everyone learns differently. To that end, if you have questions or comments regarding the Podcast, please reach out to us on our website.

So where do we go from Drug Pricing 101? Well, we had said in our last episode that we wanted to talk more specifically about drug prices. So to start back up, that is what we will do. We will talk about the drug prices news / notes at the start of 2023. To me, the most obvious place to start is with the drug’s that took a price increase at the start of the year. That always gets so much attention in drug pricing circles. The challenge, of course, is how to talk about the nearly 1,000 drugs that took a price increase in January 2023? Well we should start by taking a moment to appreciate that according to the Brand Drug List Price Change Box Score, over the last 12 years, there have never been more price increases in January then occurred this year. So we have our work kind of cut out for us. Knowing we cannot talk about them all, let’s focus on the ones that have taken the largest price increases as well as those whose price increases are likely to impact the most dollars (within the U.S. healthcare system). The biggest percentage change at the start of the year was for the product Omnipaque, specifically the oral solution, which increased over 25% from last year to this year.  In fairness to the product, Omnipaque Oral solution came out in 2018, and has never had a price increase since that time. So in this year of inflation, the fact that it took a 25% increase may not be all that surprising. In fact, if we considered what a 2018 dollar is worth in 2023 (with the effects of compound interest) the price change is almost, almost in line with what we’d expect. A 2018 dollar is worth about $1.20 in 2023, so increasing the 2018 price by 25% is almost in line with inflation. Almost.

Now Omnipaque isn’t all that interesting of a drug. It’s used before we take medical images, like scans of the intestines, to help us see what is going on. So let’s focus on some of the more interesting drugs, like those that are likely to have the biggest impact. The top drugs, in terms of their likely price increase impact to the market, are Humira, a medication for rhematic and other disease, took an 8% increase, Biktarvy, a medication used for HIV, took a 5.9% increase, and Trulicity, a medication used in diabetes, took a 5% increase. Each of these products has hundreds of millions of dollars in drug spend each year. And while their price increase might be off-set by retrospective rebates, we know that we are measuring WAC with our dashboard, so at least to some members of the supply chain it’s a real price increase. Wholesalers are going to see their list buying price go up, and pharmacy providers will as well. If others get netted out to where these price increases don’t necessarily matter (i.e., PBMs or Health plans), the impact of these price increases is not 0. Which transitions us well to talk about some of the drug that Medicare is going to get new rebates on. As part of the Inflation Reduction Act (IRA), drug companies are going to be required to pay rebates to Medicare when prescription drug prices increase faster than the rate of inflation for certain drugs furnished to people with Medicare. This new inflation rebate applies to Medicare Part B rebatable drugs, which are single source drugs and biological products, including certain biosimilar biological products, beginning January 1, 2023. The federal government intends to invoice drug manufacturers for 2023 and 2024 Part B inflation rebates no later than fall 2025. The rebates will be deposited into the Medicare Trust Fund. In addition, beginning April 1, 2023, people with Medicare may see lower out-of-pocket costs for certain Part B drugs and biologicals with prices that have increased faster than the rate of inflation. In a way, sharing the value of these rebates to lower cost of care for patients directly (not something we always see as rebate dollars can often be used to lower premiums – see our prior works on money from sick people). For impacted drugs and biologicals, the beneficiary coinsurance will be 20% of the inflation-adjusted payment amount, which will be less than what the beneficiary would pay in coinsurance otherwise. Under the view point of Medicare Part B the biggest drug is Padcev, a drug on CMS’ list of price increases which will result in these lower copays for seniors. Medicare Part B spent $154 million on this drug, up from $63 million the year before.

So what about inflation? We know the idea of inflation rebate in Medicare comes from what happened in Medicaid. We developed a formula to get price concessions in Medicaid.

The last dashboard to talk about is our new Brand Launch Price Contextualize. Here we measure what new products are, juicing the system.

As always, I want to thank you for listening to this episode and I hope you’ll tune in to the next.

I want to thank you for listening today and hope you’ll tune in to our next episode. The 46 Brooklyn podcast would like to thank McGohan Brabenderfor the use of their facilities in recording our podcast. We'd also like to thank Ben at Journeyman Productions for assistance with our

music and sound.

As a reminder to our listeners, if you're curious about any of the materials discussed on today's episode. Additional information can always be found on 46brooklyn.com

EPISODE 10

Hello and welcome back to the 46brooklyn Podcast. I am your host, Ben Link, the president of 46brooklyn Research, but I’m also a pharmacist fed up with fake artificially inflated drug prices.

On the last episode of our podcast, we used the drug pricing benchmarks we’ve previously talked about to evaluate the cost of a drug through our US drug supply chain; from the manufacturer to the health plan. This was possible thanks to transparency offered into the drug pricing of albendazole by the Mark Cuban Cost Plus Drug Company. And what we saw could reasonably be described as pricing dysfunction - where because we cannot agree on what price even is, the price we were experiencing from albendazole was much higher than it would be if we took a cost-plus approach to paying for drugs throughout the supply chain. Furthermore, we saw that when the supply chain was presented a low cost-plus option, i.e.albendazole from this new source, it didn’t move to use it. Ultimately, because even following the price of a drug from start to finish wasn’t enough to see why the supply chain is acting the way it is, we reached the topic of today’s episode, which is exploring how financing for prescription drug benefits in the United States is handled.

But before we dive in, let me provide some reminders about this Podcast. The goal of the 46Brooklyn podcast is to introduce the core concepts of the U.S. drug supply chain to hopefully foster a better understanding of the data available at 46brooklyn.comand our drug pricing system as a whole. As with any educational endeavor, I have attempted to present the information in a logical manner to hopefully ease understanding; however, I want to recognize and acknowledge that everyone learns differently. To that end, if you have questions or comments regarding these materials, please reach out to us on our website.  

So with the boiler plate out of the way, let’s get into today’s topic by reviewing what we already know. If you’ve listened to this podcast before, you would have heard me make reference to the fact that people get drug benefits in a variety of ways in this country. This is because the United States does not have what is known as a universal payer healthcare system. Rather, people can get access to benefits through their employer in what is known as employer sponsor health plans, when they reach a certain age, through the Medicare program, or through qualifying for assistance to get health care through programs like Medicaid. Additionally, people may buy health coverage directly through the health care marketplace established by the Affordable Care Act. While these represent the most common ways people get access to healthcare, there are still other ways people may get access to healthcare coverage, such as workers’ compensation coverage. We cannot reasonably talk about all of these sources of drug coverage on today’s episode. Rather, we’re going to focus in on the most common way people get any healthcare coverage – the employer sponsored health plan. On later episodes, it’ll almost certainly make sense for us to revisit how Medicare and Medicaid are financed, but we simply don’t have the time to get into them today, because they’re pretty different from the way employer sponsored health plan works.

So, how do employer sponsored health plans work to provide prescription drug benefits to all of us? Well, first it starts by us getting a job that offers health insurance. Note that it isn’t a requirement that companies necessarily do that, depending upon their size – but if they want to hire the best talent, they’ll almost certainly want to offer health insurance. Again, according to the stats, this is how most of us in the United States are going to actually get health insurance. According to research conducted at the federal level, within the Bureau of Labor and Statistics (or BLS), 71% of private industry employers offered healthcare benefits in 2021.

Mechanically, how we actually get insurance with our employer can vary job-to-job. Some employers require you to work on the job for a certain length of time before getting access to the healthcare benefit. In general, employers can make employees wait up to 90 days before their ability to access the healthcare benefit begins – again if they even offer healthcare as a benefit to begin with. Alternatively, other employers will give you access to healthcare on day 1.

Either way, once the benefit is available to employees, the benefit structure may also be highly variable from company to company. This is for a multitude of reasons. First, is the type of plans the company is offering. Some companies only have 1 option; others will give you a choice – you can pick a health maintenance organization (HMO), preferred provider organization (PPO), point­of­service (POS) plan, and high­deductible health plan with a savings option (HDHP/SO) and/or an exclusive provider organization (EPO) plan. Of course, very few of us are well positioned to select our own plan. For example, in a study conducted by the government on how Medicare beneficiaries select their plans, which isn’t exactly equivalent to employer sponsor health plans but it’s close enough for the point I want to make, when Medicare beneficiaries select they’re plan, about half the time, they select a plan that costs them more money than it needs to. Meaning if they’d have shopped better, they could have saved more moneyor obtained coverage with a better overall value proposition. It’s kind of like when the IRS tells us, “we know how much you owe us in taxes, but why don’t you fill out the forms and see if you get it right.” Why is that the way we’re buying health insurance?

But I digress…. Note that even when the same plan option exists, such as a HMO between employer 1 and employer 2, the amount of money a person may pay within an HMO may be highly variable. This is because each HMO may offer different premium, deductible, and cost sharing from one-to-the-next. What this ultimately means, is that even when an employer offers health insurance, it may still be out of reach / unaffordable for their employees to actually buy into the plan or plans being offered.  According to the BLS, only 54% of employees are actually participating in the benefit. Just over half of us are using what is effectively our only protection against possible medical debt, which might send us into bankruptcy.

Before we can understand why all of this variability exists, we need to take a step back and review how employers are making the healthcare selections for their employees. It starts with a decision to be fully insured, self-fund, or level-fund the plan. Each describes the amount of financial risk the company will take on in providing healthcare to its employees and can help explain why they may offer some of the various types of health plans we previously discussed. So let’s start with what I hope is the easiest to understand, but want to recognize up front is not the most common way to benefits are funded. Insurance is always about hedging financial risks, whether it’s your house, your car, or your health plan. You are trying to manage those incredible risks that you could come across in life. For an employer, especially those of a smaller size, there is a need to pool employees’ experience, diseases, and care they need with that of many other employers. These types of employers pay a health plan to assume the financial risk associated with their members. They do this with a form of a premium they pay (above and beyond premium amounts individuals may also be asked to pay), as part of a fully-funded benefits program. In other words, the employer is shifting its financial risk to the healthcare group via a premium payment, just like we do with our monthly car insurance payment. Generally speaking, the employer in these arrangements is giving up its ability to choose plan benefit design. The health plan that is providing the benefit will perform assessments, quantify risk, and design the healthcare benefit that they want based upon what the employer’s premium dollars are buying. What this means, is that if the employer pays more in premium, they may get better benefits for their employees. But that also ties up more of their money, meaning they may not have money to pay higher salaries, hire more employees, or provide other benefits like dental or vision.

But this is not the most common way employers choose to sponsor their health benefits. According to Kaiser Family Foundation (KFF), 67% of us workers are covered by employers that are choosing to self-fund their insurance. These employersare taking on the financial risk themselves to provide health insurance by not paying the premium to have the health plan do everything and design a benefit plan. We can begin to hopefully see, once we understand how employers are financing healthcare behind the scenes, some of the incentives they might make in selecting plan design parameters. For example, if you’re self-insuring the plan, you may choose plan design features that shift more of the cost of healthcare onto employees / beneficiaries as a way to reduce the business’ financial risks. Hence why one of the things that is often brought up during public union disputes with their employer is sacrifices made in terms of salary to secure better benefits. Those pots of employer money are effectively the same pot of money on the business side of thing when they are self-fudning.

The last way that businesses finance healthcare is through a mixture of the prior two, with elements of self-funding and full insurance. How does this work? Well, in level-funding a plan,the employer is going to be self-funded for most of their business, but will buy a special policy for what we call catastrophic claims. That is, they’ll shift their financial liability for claims that end up costing more than a $1 million (or as is starting to become the norm, $2 million) of expenses have been incurred on the claim. Basically, each employee’s file has a running tally of healthcare expenditures, and once it reaches the threshold of the policy (i.e., that million dollars) the employer is no longer self-funding those claims, but rather the insurance agency that the employer bought is now funding the claims. Certain changes in benefits may be required in order to have such a policy, and so the employer is giving up a little freedom in benefit design to pursue these policies. But they make sense when some drugs alone carry a $2 million price tag (looking at you Zolgensma).

If all of this information sounds complicated, I assure you it is. Employers are generally speaking, not experts in healthcare. Even the smartest in their field, like I dunno SpaceX, a company filled with literal rocket scientists, likely isn’t managing these healthcare decisions by themselves. Rather they hire companies, consultants often referred to as benefit brokers, to help them make healthcare coverage decisions, including running the numbers on whether it makes sense to be fully-insured or self-insured. These benefit brokers are likely a topic for another day, so for now let’s just remain aware of their existence as we explore health plan designs.

So, let’s review. First, an employer has to decide whether healthcare is a benefit it even wants to offer or not. Assuming they do, the next step likely involves hiring a benefit broker who helps the employer make a decision on how it is going to finance the provision of healthcare. I probably should have mentioned it earlier, but note that sometimes an employer might want to be fully self-insured, for example, but cannot because either state rules say they’re not large enough to be self-insured, or the various healthcare plans won’t work with them on a self-insured basis.

Anyway, now that they have figured out how the financing of healthcare will be handled by them, it’s time to choose an overall structure for healthcare benefits. Will it be a HMO or a PPO? Will it have copayments or coinsurance? How large of a deductible will the plan require? What kind of premiums will members have to pay? If all of these terms sound confusing, I’d remind our listeners that we have a glossary of healthcare terms on our website, 46brooklyn.com. We don’t have time in today’s conversation to review premiums or deductibles, as I want to talk about the overall plan structure. So let’s do that.

One of the plans an employer may select is known as an HMO. A Health Maintenance Organization (HMO) plan is one of the cheapest types of health insurance. It has low premiums and deductibles, and generally fixed copays for doctor visits. HMOs require patients to choose doctors within their network. When you sign up for the plan, you’ll select a primary care physician (PCP), whom you’ll see for regular checkups. In selecting this person, you are creating a sort of gatekeeper for managing your care. They’ll need to give you a referral before you can see a specialist, like an oncologist or physical therapist. Because of the control the PCP offers, HMOs can control healthcare costs by networking with doctors whom they create incentives or otherwise analyze as being cost-effective. The financial risk is managed through the PCP relationship with the HMO from the employer’s perspective.

An alternative plan design to the HMO that an employer may select is a Point of Service (or POS) plan. This type of plan design also requires that you get a referral from your primary care physician (PCP) before seeing a specialist. But for slightly higher premiums than an HMO, this plan also covers out-of-network doctors. Of course, the use of out-of-network doctors will shift additional costs onto the employee, generally to the order of how much more those out-of-network costs are than the in-network rate.

However, more plan designs exist than just HMOs and POS. In an Exclusive Provider Organization (or EPO), you as an employee are only covered for in-network care, but the networks are generally larger than for HMOs. What does this mean in practice? Well, what if you are in an HMO and you’re traveling in another state for vacation. You like to take vacation when you can, right? Well, your vacation gets ruined because you cut yourself deep enough to need stitches doing something you probably were too old to do at this point in your life. Well, you have a limited network with the HMO, and your primary care physician isn’t there to refer you, so you’re stuck with an out-of-network charge that you’re fully responsible for. It’s possible that with the expanded network of the EPO, you may still have someone here that could provide stitches in network (i.e., at a lower cost). Note that EPOs may or may not require referrals from a primary care physician; that was just part of my example. Because of the broader network, employers are reducing some of their best cost control mechanisms and so premiums are generally higher than HMOs.

Can you believe that I still have two more benefit designs to talk about? Well, I do. In contrast to what we’ve discussed thus far, an employer may design a benefit as a Preferred Provider Organization (PPO). This type of benefit generally has pricier premiums than an HMO or POS. Why? Well, this plan allows you to see specialists and out-of-network doctors without a referral. Copays and coinsurance for in-network doctors are generally low in a PPO as a way to incentivize their use.

The last type of health plan is known as a High Deductible Health Plan (HDHP). In a HDHP, we’re trading lower premiums for higher out-of-pocket costs. Employers often pair HDHPs with a Health Savings Account (HSA), which they may help fund to cover some of these higher costs. With HSAs, you may deposit pre-tax dollars in your account to cover healthcareexpenses, saving you about 30%.

With all these various ways of providing health insurance benefits, what do we know about what employers are doing in the real world? Well KFF comes to the rescue once again with data. Overall, generally speaking 75%, of all employers are offering only one type of plan. Which when you consider that most of them are taking financial risks in offering benefits by being self-insured, it makes sense that most are giving their workforces only one choice, as it best helps them control their risks. Of course, for consumers, one choice of anything sucks – hence perhaps why so many of us are unhappy with insurance in this country. When it comes to the types of plans offered, overwhelmingly we are getting access to PPOs – as they represent 54% of the plans offered, when firms are only offering one type of benefit. The next most common plan design offering is HDHP at 26%, followed by POS at 14%, and HMOs at 5%. I think it is fair to say, that in reading the tea leaves, we can assume that this means that PPOs and HDHPs offer the greatest cost controls to employers. In turn, this also probably means they result in the most liability / cost risk to consumers of healthcare (i.e., the rest of us). Sadly, I think that is all the time we have for today’s conversation. On the next episode, we’ll review some of the early drug pricing trend data for the first quarter of the year that is 2022.

As always, I want to thank you for listening to this episode and I hope you’ll tune in to the next.

I want to thank you for listening today and hope you’ll tune in to our next episode.

Thank you to McGohan.

EPISODE 9

Hello and welcome back to the 46brooklyn Podcast. I am your host, Ben Link, the president of 46brooklyn Research, but I’m also a pharmacist fed up with fake artificially inflated drug prices.

The last episode of our podcast ended with me posing several questions related to our drug supply chain. As you will recall over the life of this podcast series to date, we have identified that while we have a lot of different drug reference prices available to us within the United States, they tend to focus on the extreme ends of the supply chain. Namely, we have a great many different type of pricing benchmarks that contextualize the prices manufacturers set for their drugs and the pricespharmacies endure to acquire those drugs. And so, as I ended the last episode, I asked, how much do we really understand about the middle, particularly given that we know wholesalers and other entities exist in the middle of the supply chain who themselves need a profit to sustain their business.

Well on today’s episode of the 46brooklyn Podcast, we’re picking up where we left off last time and exploring what is, in my understanding, the best medication example I can find of how drug pricing – and the various benchmarks we’ve spent so much time talking about on this podcast – play out from start to finish. Meaning, we can follow the pricing behavior on from the manufacturer all the way to the patient and health plan thanks to everything we’ve thus far talked about and discussed. But also, we’re able to do this in no small part thanks to the transparency offered by the Mark Cuban Cost Plus Drug Company when they launched their albendazole product back in early 2021. To that end, I need to identify that I have, through my work with 3 Axis Advisors, been a paid consultant and data analyst with the Mark Cuban Cost Plus Drug Company, but today’s episode is based completely on information available in the public domain and in no way related to that prior work.

So as a reminder, the goal of the 46brooklyn podcast is to introduce the core concepts of the U.S. drug supply chain to hopefully foster a better understanding of the data available at 46brooklyn.com and our drug pricing system as a whole. As with any educational endeavor, I have attempted to present the information in a logical manner to hopefully ease understanding; however, I want to recognize and acknowledge that everyone learns differently. To that end, if you have a questions or comments regarding these materials, please reach out to us on our website.  

So with the boiler plate out of the way, let’s dive into today’s episode with some background on albendazole and the Mark Cuban Cost Plus Drug Company.  

Albendazole is an anti-parasitic drug used to treat hookworminfections. Fortunately for those of us up North, like my home state of Ohio, we don’t often reach for the albendazole tablets, but hook worm infections are more common in some of the southern states in the U.S., with albendazole representing an important drug in the treatment paradigm for those infections. That said, historically speaking, albendazole has been quite expensive, regardless of the pricing benchmark you’re staring at. Originally approved back in 1996 under the brand name Albenza, the average cost per prescription was as high as $700 per prescription, even with insurance according to a Consumer Reports article published in 2017. Which when you consider that you normally need a total of three cycles of medication, the total cost to cure a hookworm infection with albendazole approached$2,100. Is it, therefore, any wonder that people thought there might be an affordability problem?

Of course, all of this can enhance our understanding of how the end result of inaccessible, unaffordable medications potentially impacts us all. If the person who needs albendazole now cannot afford to complete their cycle of medication, then if you or I need a treatment later on we might encounter resistance to treatment, even if we could afford albendazole.

So against that back drop, along comes the Mark Cuban Cost Plus Drug Company, who according to their original design was a generic drug company which would produce albendazole and offer it for a fraction of the cost that existing market players were offering. They did this via professed transparency. An article in Forbes from Joshua Cohen published February 2021 stated “Cuban’s company has declared that it will let all stakeholders know what it costs to manufacture, distribute, and market its drugs. According to the website, there will be no hidden costs, no middlemen, no rebates that are only available to health insurers or pharmacy benefit managers. ‘Everybody gets the same low price for every drug we make.’“ The article goes on to share their secret sauce for how they’re going to deliver on these values, as it states, “the company will either buy directly from third party suppliers, or manufacture its own products and sell at a steep discount with just a 15% mark-up” to the cost to produce.  

Prior to continuing on with today’s episode, it’s worth taking a moment to pause and unpack their secret sauce a little bit. While we’ve talked previously on the podcast during our Drug Pricing 101 series on how drugs get categorized into brand and generic,we need to quickly revisit those concepts to understand what the Cost Plus Drug Company is telling us here.

When we talked about brand and generic drugs, we identified that those are largely terms of convenience, and contracts without an obvious federal definition that would support a universally accepted definition of “brand” and “generic.” This is because the FDA, which oversees U.S. drug approval, does so via licensure applications by drug manufacturers, grants exclusivity designations that are made according to pre-established criteria, and ultimately manufacturers receive patent protections secured through the U.S. patent office. And none of these items individually, or even in pre-set combinations, can be universally translated into a clean definition of “brand” and “generic”. Generally speaking, a brand is a product without market competition (i.e., one-of-one option), that has patents protecting it against copycats, and an exclusivity period protecting it from a “generic” competitor. However, even that designation breaks down relatively quickly as you see companies launch “authorized generic” versions, for example. These authorized generics are nothing more than the “brand” manufacturer taking their drug and making their own “generic” version (so although there are now two forms of some of the Hepatitis C drugs manufactured by Gilead for example, one marketed under a brand name and the other marketed under a generic name; they’re all made by the same manufacturer and so there isn’t really ‘generic’ competition, which is what I think we’re generally looking for when we say “generic”).

So in examining the Cost Plus Drug Company statement on how they’re going to produce generic drug savings, we should focus on the end of their statement from the previously mentioned Forbes article, namely the “the company will either buy directly from third party suppliers, or manufacture its own products.” You see, a company doesn’t have to just manufacture a product to bring it to market. Sure, that is one way to do it, and there are plenty of companies that do it that way, but there are a lot of companies who, for lack of a better word, are piggy backing off the work of others through a process known as relabeling. Relabeling a product, which differs from repackaging a product (a separate topic for another day), is in essence, and leaving out a great many details, nothing more than Company A paying another Company B to stop their production for a moment, switch out the labels on the assembly line, re-start production with the end result being the product being made by Company B ending up in bottle making it appear to made by Company A.

If this concept sounds a little foreign, it shouldn’t when you consider name-brand vs. store-brand items at our oft-used grocery store analogy. When Kroger sells you Kroger’s Corn Flakes in the cereal aisle, it generally does so right next to the box of name brand Kellogg’s Corn Flakes. However, there is a chance, and we can’t know if it applies to our specific hypothetical here, that both products were actually made in the same place just with the end product being put into different boxes. All we’re saying is that exact same concept of name-brand vs. store-brand grocery items happens with drugs and can be extended into the generic drug marketplace. Those who have followed 46brooklyn for longer than our Podcast has been around should hopefully recognize this concept, as we have an entire drug market share dashboard available online. That dashboard is our attempt to try and follow the trial of FDA license applications to the actual source of the product, and uses Medicaid drug utilization data to assess proportional representation of the manufacturer diversity for each generic drug.

So returning back to the albendazole example at the Mark Cuban Cost Plus Drug Company, we can see that it appears to be a true generic drug because it is licensed by the FDA under what is known as an abbreviated new drug application (or ANDA), which is essentially FDA-speak for a generic drug. You can look up the license number from its labeling, which is publicly listed as ANDA# 211117. However, this license isn’t actually tied to the Mark Cuban Cost Plus Drug Company as the primary sponsor – rather it’s tied to Edenbridge Pharmaceuticals, which happens to have their own version of albendazole, under a different NDC from the Mark Cuban Company. In addition toapparently selling to the Mark Cuban Cost Plus Drug Company, the ANDA license can be tied to Golden State Medical Supply.That is to say, both Cuban and Golden State share the same ANDA license as Edenbridge, and only Edenbridge seems to be in a position to actually manufacture the product, from what we can tell after doing some online research of these companies.

Which brings us back to the purpose of today’s Podcast. When Mark Cuban and his Drug Company CEO Alex Oshmyanskylaunched albendazole, they identified their cost to produce as $13 per pill. Taking a 15% mark-up meant that their WAC price that they were willing to sell it to the market at was $15 per pill. Which, when compared to either Edenbridge or Golden State or any of the other manufacturers of albendazole at the time was several multiples lower than the going rate. Unfortunately, WAC isn’t a public pricing benchmark and is instead available through a number of drug compendia sources like Elsevier and Wolters Kluwer, so due to licensing restrictions, I cannot tell you exactly how much lower it was outside of saying it was many multipleslower.

So how on Earth could this be? How could this version of albendazole be so much cheaper than others? Well, I’d start by pointing out that it’s really no less improbable than what we know already exists in other markets such as our previously explored cereal example. Kroger’s Corn Flakes are generally sold cheaper than other name brand options as a means to potentially entice us to purchase the alternative version of the product. The same concept can reasonably be applied to drugs. But we can explore what that concept means a little bit better thanks to the radical transparency offered by Mark Cuban Cost Plus Drug Company.

If WAC represents a manufacturer cost for a drug, and we know a manufacturer, generally speaking, doesn’t directly sell to a pharmacy or a patient, but rather to a wholesaler, then what do we know about wholesaler costs of albendazole? Well if we look to the national average drug acquisition cost (NADAC), the last reported NADAC price before Mark Cuban Cost Plus albendazole launched was reported to be $132.09 per pill in December 2020. NADAC, as a reminder represents the national average invoice acquisition cost of albendazole by retail pharmacies across the country in the U.S.. At a price of $132.09, we see that pharmacies were being charged a price 10x higher than its cost to manufacture!

So let’s take a step back and unpack this albendazole learning a little bit further.

Here comes a charismatic, eccentric billionaire with no prior drug industry experience, who likely didn’t develop any fancy new technology for how to manufacture albendazole (because they appear to be relying upon others to actually make it), andwas delivering it at a cost significantly less than anyone else was doing at the time. Is he really that much more savvy of a business negotiator that he could negotiate better prices than any of the large wholesalers of drugs like Cardinal, McKesson, or anyone else likely could at the time? Recall that these are some of the largest companies in the world, with McKesson ranking #5 on the Fortune 500 list. With no intended offense to Mr. Cuban, I cannot believe that he was a better negotiator than these existing players.

Rather, it appears he took the old Amazon approach of “your margin is my opportunity” and worked to cut out everyone else’s margin including the wholesaler, who in this instance, for this drug at least, appeared to be making over $100 per pill in marginbecause, again, taking it on its surface, we have to believe these wholesalers were able to secure albendazole at a cost similar to what Mark Cuban could negotiate. However, rather than selling it at a fixed 15% mark-up like Cuban did, NADAC suggeststhey did so at significantly higher margin for themselves when selling to their pharmacy customers.

So when I was earlier identifying that our pricing benchmarks tell us a lot about the prices for drugs, but don’t tell us anythingabout the prices in the middle, albendazole is a perfect example to support that earlier statement. Because for no other drug in this country, that I am aware of, can we readily produce this same kind of analysis as to what the wholesaler mark-up would appear to be. And this is concerning when we consider that the majority, i.e., 90% of all drugs in this country, are generic drugs potentially subject to this same kind of pricing arbitrage between wholesalers and pharmacies. You and I generally don’t buy ourdrugs from wholesalers; we buy from pharmacies. But if this behavior is rampant within the generic drug space, we may all be paying significantly more than we need to be to get our medicines.

So let’s keep going and see if our knowledge of drug pricing benchmarks can tell us anything more. Well, the next entity afterthe drug’s wholesaler is the pharmacy – who is looking to sell their drug to patients. As we’ve discussed, the pharmacy rarely does so in a way that is on a cash-only basis to the patient. Rather, they’re making their sale to the patient and the patient’s insurer, which is generally represented as the pharmacy benefit manager (PBM). If we could compare aggregate pharmacy reimbursements to the NADAC at the time, we’d get a sense for how much profit a pharmacy was making off the sale of albendazole. Well according to my data sources, which come from a variety of pharmacies across the country, in December 2020, the average pharmacy was paid $76 per pill for Albendazole. $62 of that was collected from the patient’s insurance and $14 per pill was collected from the patient via a copayment. What does this tell us? Well simply that the typical pharmacy at the point of sale appears to have provided the service of filling albendazole at a loss. If the average NADAC cost per pill for pharmacy was $130ish dollars in December 2020 and the pharmacy was being paid $76, they did so at a loss. In attempting to explain this, with most things in pharmacy, it comes down to contracts. One of the things we’ve acknowledged when discussing pharmacy costs, but haven’t explored to a great deal yet, is that pharmacies, generally speaking, secure some off-invoice discounts for their products from their primary wholesaler contract. It’s possible that the margin we previously attributed completely to the wholesaler comes back in some way, shape, or form to the pharmacy via an off-invoice price concession or rebate. We’ve been pretty transparent in our work with NADAC to-date that despite its immense value, it also has its shortcomings, and it should be improved if it is going to be increasingly relied upon to pay for and analyze the prices of drugs. But given its current shortcomings, this is one possible explanation. Another is that the PBM simply paid the pharmacy below its cost of goods. While a semi-foreign concept to a lot of businesses, it is an increasingly common paradigm within pharmacy. My own work with 3 Axis Advisors, for example, identified that from 2016 to 2019 in the Massachusetts Medicaid managed care program, pharmacies saw the percentage of claims reimbursed below their cost grow from 8% to 26%. So from less than 1 in 10 to more than 1 in 4. Ultimately, we don’t have sufficient pricing benchmarks to explore the middle here further, but suffice it to say, filling an albendazole script in late 2020 / early 2021 carried a degree of risk to a pharmacy. If they didn’t get their rebates or price concessions from their wholesalers, or were unable to buy sufficiently better from the market like the NADAC price suggests they would need to, they likely lost or squeaked by on dispensing these treatments to patients.

Which finally brings us to the last group in our supply chain to explore with albendazole: the health plans. How much did people’s insurance get charged to deliver albendazole as a benefit of their drug coverage? Well, we can explore this within the public pricing data of the largest health programs in this country – Medicare and Medicaid. According to Medicare’s Part D dashboard available on the CMS website, which summarizes data for all of 2020 (and not just December), the average cost per prescription in Medicare for albendazole was….Approximately $130 per pill (or $1,666 per prescription – even higher than our earlier estimate of $700).

Relative to what the average pharmacy was being paid, the PBM appears to have made a margin of over $50 per Rx, putting it in line with the earlier identified wholesaler margin, especially if we assume the wholesaler provided an off-invoice discount sufficient to make the pharmacy whole (i.e. $60 of their supposed margin went back to the pharmacy so that its payment rate would match its net cost of $130 in NADAC minus the $60). Medicare from the outside looking at it’s cost might identify this as a reasonable charge, given the stated NADAC for the drug at the end of 2020, but the reality suggests that they were significantly overcharged (even before considering retrospective pharmacy price concessions Medicare likely got on these claims through DIR fees). To confirm this finding, if we look at Q4 2020 Medicaid managed care claims data, the average cost per pill across each Medicaid program was approximately $100 per pill. Again, relative to what the average pharmacy was likely getting reimbursed, the PBMs in the large federal health programs were likely making a hefty margin off the cost per pill of $30 to $50 per pill.

So let’s review what learnings our study of albendazole offers us. On the one hand, it appears possible to deliver albendazole at a very affordable price. If Mark Cuban can do it, you or I could likely do it too (despite what misgivings we have about ourselves).

However, just making that price available doesn’t necessarily change anything. You need look no further than at the utilization of Mark Cuban’s NDC. A year after its launch in 2021, we don’t see much if any utilization of Mark Cuban’s product within Medicaid or other claims data sources. While the launch of his product seemed to help push the NADAC of albendazole down to a low of $13.94 per pill in October 2021, exceeding even his offered price concession, it has climbed back up to $26.85 in January 2022.

So why didn’t the supply chain adapt? Why didn’t all the wholesalers and pharmacies flock to the Cuban’s new lowest price option? Why didn’t PBMs and insurers steer patients to the product or forbid coverage of the more expensive versions through an NDC exclusion? Well we need look no further thanthe incentive structure of our current system. If you’re the pharmacy, losing money on dispensing albendazole, you look to the Mark Cuban product as a life-preserver, right? If I’m the pharmacy here is a way to deliver the required product to the patient at a huge margin for the pharmacy. But if the insurer won’t cover the product, who can the pharmacy sell it to, as most of the pharmacy’s customers have insurance and want to use it for the purchase of their medicine? And the insurers and wholesalers don’t seem to have the incentive to want to cover or promote utilization of the Mark Cuban Cost Plus Drug, becauseit messes with (reads erodes) their bottom line. Inevitably this leads to the growth of online cash-only pharmacies – those who completely detach from the insurer-driven marketplace. We’ve talked about Blueberry Pharmacy before on the 46brooklyn site, and just a few miles from Columbus, we’ve got Freedom Pharmacy, but now even the Cost Plus Drug Company has an online, cash-only, no-insurance-taken pharmacy with 100+ drug offerings with more being added almost on a month-by-month basis at this point. However, this time around, the Cuban company isn’t launching or filling those products under the generic drug company arm of their business. There have been nonewly assigned NDCs, relabeled or otherwise, to the Mark Cuban Cost Plus Drug Company within the FDA NDC lookup tool, despite having so many options available through its online pharmacy. So what gives? Well, even Medicaid falls victim to their own program design. Mark Cuban Cost Plus Drug Company doesn’t participate in the Medicaid Drug Rebate Program (MDRP), so it doesn’t meet the definition of “covered outpatient drug” and why we likely don’t see utilization in Medicaid even in 2021 for their product. It would violate the federal covered outpatient drug rule for a state to cover this drug, despite the fact that their current costs – NADAC or via MCOs – suggests they would save money if they could simply get access to Cuban’s albendazole.

So I want to end the episode by thanking albendazole for teaching us about the brokenness of drug pricing in this country. In no small part thanks to your transparency, we were able to unpack a great deal of the mess while still recognizing we have a long way to go in fully understanding the machinations of the machine that is healthcare. To that end, our next episode will explore how prescription drug benefits are financed in this country. Where it makes sense to do so, I’ll try and draw comparisons to other international approaches to financing drugs so that we can see how others address some of the dysfunction that the U.S. system creates, in its current framework.

As always, I want to thank you for listening to this episode and I hope you’ll tune in to the next.

I want to thank you for listening today and hope you’ll tune in to our next episode.

Thank you to McGohan.

EPISODE 8

Hello and welcome back to the 46brooklyn Podcast. I am your host, Ben Link, the president of 46brooklyn Research, but I’m also a pharmacist fed up with fake artificially inflated drug prices. Today’s episode is number 8 for the Podcast, and one less focused on drug pricing benchmarks, but rather is going to be a discussion on how an understanding of the pricing benchmarks we’ve already talked about on prior episodes in our Drug Pricing 101 series can yield to a broader understanding of what is going on with prescription drug prices, particularly through data analysis using those pricing benchmarks as a guiding source of information.

If you’ve been following along with our Podcast episodes to date, we have explored many, but not all, of the various drug pricing benchmarks used in the U.S. supply chain. And while there are others out there we could talk about, such as 340B ceiling prices or the Federal Supply Service Price (FSS), I figured it was appropriate at this point to move away from conversations on drug pricing benchmarks and instead focus on how those drug pricing benchmarks actually play out when analyzing prescription drug data. We will likely return to our Drug Pricing 101 series at a later date for perhaps a 102 level series to explore some of those missing price reference points, but I want to advance the conversation a little, and now seemed as good a time as any to review a little bit how we at 46Brooklyn got where we are today.

So as a reminder, the goal of the 46Brooklyn podcast is to introduce the core concepts of the U.S. drug supply chain to hopefully foster a better understanding of the data available at 46brooklyn.com but to also provide enough foundational knowledge that listeners can be better equipped to contextualize other drug pricing research or better yet, pursue their own research pursuits. As with any educational endeavor, I have attempted to present the information in a logical manner to hopefully ease understanding; however, I want to recognize and acknowledge that everyone learns differently. To that end, if you have a questions or comments regarding these materials, please reach out to us on our website.  

Ok, with this episode’s intro out of the way, let’s talk about how we can take what we’ve learned about drug pricing benchmarks and begin to apply it to drug data analytics. As mentioned just a moment ago, this is in essence how 46brooklyn got its start.

You see, the very first piece ever published at 46brooklyn.com was an exploration of two key datasets which we continue to rely upon to this day. And both of them are datasets we’ve already mentioned on this Podcast. The first is the National Average Drug Acquisition Cost (or NADAC) database and the second is Medicaid’s State Drug Utilization Database (or SDUD). We’ve briefly talked about these before, and if you need a refresher, there is always the glossary of terms on 46brooklyn.com, but for today’s Podcast it’s probably best to give a little reminder about these datasets as a proper understanding of why they are critical to the conversation I’d like to have today.

That said, recall that NADAC is a representation of what it costs a pharmacy to acquire specific medications from wholesalers of prescription drugs. It is arguably the best representation of a drug’s actual acquisition cost, because it is based not on a manufacturer’s reported prices but rather on a survey of pharmacy invoices from wholesalers. What’s more is that most state Medicaid programs in some way, shape or form, have effectively told the Federal government through their state plan amendments that they believe NADAC to be the most appropriate representation of a drug’s actual acquisition cost in terms of complying with federal rules on drug reimbursement.

However, if you have followed along with drug pricing discussions over the years, a lot of attention is given to the prices manufacturers set for drugs rather than the price at the pharmacy. Heck, we even began our Drug Pricing 101 series with a focus on manufacturer-set prices. Nonetheless, it is important to note that there are a lot of intermediaries in the drug supply chain, and each of those intermediaries today makes a profit off of the drug’s price in some way, shape or form. We’ve reviewed these relationships before on the podcast, but profits on drugs are made by the manufacturer as a function of list price, but also the drug wholesaler, the pharmacy, and the entity providing drug insurance (whether that is the health plan or pharmacy benefit manager (PBM)). So while NADAC does have its limitations, which we discussed in episode _, it is arguably the ‘best’ pricing benchmark if our goal is to understand the price of a drug at the point right before it reaches the person actually taking the drug. Hence our frequent reliance upon it.

Said differently, while the manufacturer may set a price for a drug, and therefore a ceiling, for the drug’s price a la MSRP, the supply chain will act on and around that price to make their money. And ultimately, patients can only take a medication that they can afford. Which meansNADAC gives us insight into a patient’s price experience before it actually reaches them, a kind of floor to what the pharmacy could theoretically offer the price at, absent any loss leader or other business strategy for the medication.

The next database, SDUD, provides us with valuable insights into two key metrics – one is what medications people are ultimately consuming (and to what degree they’re consuming them) and two, what is the cost to the system, in this case Medicaid as the insurer, to distribute those medications to people. Exploring the first item further, a manufacturer’s list price for a drug, or even a NADAC price, is inconsequential if no one ultimately takes it. You or I or anyone else could create a drug company tomorrow and set a $10 million price tag for a drug, whether it represented a novel therapeutic or a simple copy of an existing drug, all in the hopes to quickly retire to Barbados in just a few short years. But if we can’t demonstrate a need for the drug, or convince anyone to take it, and none of what we made ends up getting used, the $10 million price tag we set is effectively nothing more than a headline.

And with that understanding / recap, we’re now in the perfect spot to explore just why SDUD is so critical to our understanding of U.S. drug prices. SDUD helps us understand what one of the largest purchasers of drugs in this country, namely Medicaid, which covers in excess of 70 million people in the U.S. (or greater than 25% of the population), is using drug-wise, on an aggregate basis across all 50 states. And unlike other data sources, such as those available from Medicare, Medicaid provides the data aggregated to a national drug code (NDC) level. This benefit cannot be understated. Ultimately drugs are priced, and used, at a NDC level and so being able to tie a drug’s price to actual utilization is critical to our monthly efforts at 46brooklyn to examine ‘weighted average’ price trends.

What do I mean by this? Well simply identifying whether a drug’s price across any of the numerous benchmarks is going up or down actually doesn’t tell us a whole heck of a lot, as we were just exploring with our hypothetical $10 million drug example. But a more real example of this phenomenon can also be provided. Consider for a moment brand name medications with generic alternatives. Again, we’ve reviewed the idea of brands and generics before, but if you need to refresh yourself on those topics, feel free to use our glossary at 46brooklyn.com.

Anyway, these brand drugs that have generic alternatives routinely have price changes years and years after there is effectively no utilization for their products. There is little utilization for thembecause almost everyone is now using the generic instead of the brand. Take some real-lifeexamples in January of 2022. Which would you think was a more significant event, from the experience of Medicaid: Micardis, a medication used to control blood pressure, taking a 35% decrease in its WAC price at the start of 2022, or Humira, a medication used to treat semi-rare inflammatory conditions like extreme arthritis, taking a 7.4% price increase? Just looking at the degree of price changes, and knowing nothing about the drugs beyond that, a lot more people have high blood pressure than relatively rare inflammatory conditions, almost certainly leads you to say the Micardis event was more significant. How many of us would benefit if the drug we were taking, say insulin for example, was overnight 35% cheaper? And if you took that stance, I cannot necessarily blame you with the information you had at hand, but that wouldn’t stop me from arguing with you that you were wrong.

I’d begin such a counter-argument by pointing out that Micardis is a brand medication with a generic alternative, and effectively no utilization in Medicaid last year (less than $1 million across the country reported in SDUD). So while its pricing movement was more extreme, it isn’t going to benefit very many people. Contrast that to Humira, which is arguably the best-sellingbrand name medication in the last decade, with no generic alternative available. Last year SDUD tells us that unlike Micardis, Medicaid programs spent at least $3 billion before rebates in delivering Humira to patients. With that context, I strongly believe that you’d come around to my point of view that while Humira’s pricing movement was less extreme than Micardis, it is the more significant event from a holistic perspective.

So that is the utilization angle of SDUD and an overview of the value it can add to our discussions around drug prices, but what about the pricing data within SDUD? Well, also reported within SDUD, at the NDC-level, is the aggregate payment experience of the Medicaid program to deliver those drugs to patients. And while much of the Medicaid program is actually financed in what is known as a capitated arrangement, meaning [define capitated rate]. What this means is that the individual transactions may not accurately represent how much actually Medicaid paid for those drugs, the data is nonetheless useful for numerous reasons. The first is that the reason for the capitated arrangement in many Medicaid programs across the country is a direct result of those programs partnering with Managed Care Organization (MCOs) in anattempt to effectively bring commercial, “market-based” solutions to the management of their programs, including prescription drugs. And so, the reported prices by the MCOs are, at least on some level, a proxy to commercial drug prices more broadly, certainly more broadly than state-run programs. Additionally, the reported prices are used to determine future capitated rates. Sowhile Medicaid agencies may not recognize the cost directly for each reported transaction, the bill ultimately comes due in some way shape or from. And because the data is reported at the NDC-level within SDUD, it becomes possible to marry the NADAC pricing behavior of the drugs, which again represents the pharmacy’s cost of goods sold, to the payment experience of the Medicaid program (or its cost of delivering benefits) for those same drugs.

What we saw, way back in 2018 when 46brookyn published its first piece was significant gaps between what Medicaid was ‘paying’ for drugs and what those drugs actually costs to pharmacies. For example, in that initial report is an image of imatinib mesylate, generic Gleevec, which at the time had a NADAC cost per pill of roughly $80; however, Ohio Medicaid was paying $273 per pill within its MCOs, whereas Washington was paying $108 per pill (roughly half the cost). Same drug, heck probably even some of the same pharmacy chains in each state, very different pricing experience. In an Axios piece released in August 2018 highlighting the launch of our website and dashboard, Bob Herman opined, “These datasets are the clearest examples yet that show specifically how some states are getting bad deals on prescription drugs — and how middlemen like pharmacy benefit managers manipulate the current drug pricing system for their own gains.”

With a bit of our guidance, Robert Langreth and a team of reporters at Bloomberg explored the odd disconnects between these datasets as well in their September 2018 expose, The Secret Drug Pricing System Middlemen Use to Rake in Millions.

These gaps between the surveyed cost of the drug and what state Medicaid programs were being “charged” for those drugs inevitably led to the next ‘finding’ related to using drug pricing benchmarks. The data we were exploring at 46brooklyn began to be married by others to actual pharmacy reimbursement data, and not just the data reported to state Medicaid programs. Once that was done, it was quickly discovered that the payment data within SDUD as reported to Medicaid was also not reflective of what pharmacies were being paid. Rather, pharmacies in the aggregate were being paid significantly less than what Medicaid programs were being charged for the drugs delivered to their patients. Which of course means, what was SDUD actually telling us about drug prices?

And it was in seeking to answer that question that the exploration of SDUD and NADAC data would ultimately reveal and provide key insights into what at the time was known as the traditional PBM pricing model, but that we now more than likely refer to as ‘spread pricing’. And while we don’t have time to go into all of the learnings about the spread pricing model today, the rest of that history is well documented within the Side Effects series of the Columbus Dispatch which you can still find online (and a link is available on our website to the series within the written version of this Podcast). If you haven’t seen any of the multi-year work that was done by Dispatch reporters, Marty Schladen, Cathy Candisky, Lucas Sullivan, and Darrel Rowland, we highly recommend it. In 2019, the National Institute of Healthcare Management Foundation awarded the Dispatch the highly-coveted Print Journalism Award for their industry-altering reporting that beat out the biggest names in media like the New York Times and Washington Post for exposing what was previously unknown to most: that there’s much more to what’s cooked into prescription drug costs than meets the eye.

Through it all, we quickly began to understand some of the gaps in our understanding of drug prices that were resulting from too close a focus on the extreme ends of the supply chain – namely the manufacturer set price, or the pharmacy acquisition price. And even today, despite more than 100 of articles within the Dispatchs Side Effects series and some excellent additional reporting from the Dayton Daily News and the Ohio Capital Journal, there is still an incredible gap in understanding of the middle of the proverbial drug pricing pie. For example, within the aggregate Medicaid data available at MACPAC, a non-partisan group which helps monitor the Medicaid program, we could see that despite spending $70 billion per year on drugs, a number that correlates with what we see within SDUD data, the Medicaid program is getting billions of dollars in drug rebates each year (roughly equivalent to 60% of the upfront drug costs back in the form of a rebate).

Again, all of this highlights the great deal of money prescription drug programs are making between paying the pharmacy and what they’re recognizing in the net.

Ultimately, what we need to appreciate is that all of our understanding about what we think we know about drug prices in this country is really not possible without transparency around pricing data. And looking at our history at 46brooklyn, and generally speaking of course, the focus of drug pricing transparency has been directed towards the extreme ends of the supply chain – the drug manufacturer’s price and the pharmacy’s acquisition price – at the detriment of understanding the prices in the middle. We have countless ways of determining a drug manufacturer’s price, such as WAC, AMP, ASP, all prices we’ve talked about before. Similarly, we have countless ways of understanding a pharmacy’s price, such as their U&C, the PBM’s MAC, or even NADAC. However, how many benchmarks do we have that explore wholesaler mark-ups? How many do we have that explore pharmacy mark-ups, or a clinic’s mark-up, or heck, even the surgery mark-up on the drug’s used to control blood flow or knock you out for your procedure? How much do we know on average rebate payments by drug at the NDC level?What do we know about 340b discounts, rebate aggregator mark-ups, or other GPO impacts on price? Despite all the windows we’ve been able to look through with the great variety of dashboards on our website, What about transaction fees, referral fees, and all the tax implications of all of this money shifting across the drug channel? I’d argue, we have access to very limitedpublicly-available information on what’s happening in the middle of the transaction, which hinders a broader understanding of what is really going on with drug prices.

So on our next episode, we’ll continue to the conversation by exploring arguably the best and most transparent insight we have into what the ‘middle’ really represents. We will do this by exploring an albeit limited example with the drug albendazole using our pricing benchmarks, as well as what the much-discussed Mark Cuban Cost Plus Drug Company taught us regarding albendazole’s price. This limited example will hopefully help us understand just how much of the ‘middle’ we’re currently missing.

I want to thank you for listening today and hope you’ll tune in to our next episode.

Thank you to McGohan.

Listen to the entire series right on this site, read along to the transcript or follow the links below to listen on your favorite podcast app.

What is the price of a drug? This simple question is surprisingly nuanced in the United States due to a variety of drug reference prices (or pricing benchmarks) which our system relies upon every day to price drugs. In our 1st season of the 46brooklyn Podcast, we explore these various pricing benchmarks in the hope that an increased understanding of the fundamentals of what is the price can lead to more refined discussions on drug pricing.

Episode 1

Hello and welcome to the inaugural episode of the 46brooklyn Podcast. I am your host, Ben Link, the president of 46brooklyn Research, but I’m also a pharmacist fed up with fake, artificially inflated drug prices.  Given that this is our first episode, it is probably best for me to give a little bit of background information about who we are and what we do and why we’re here. 

If you have never heard of 46brooklyn, 46brooklyn is an Ohio non-profit whose purpose is to improve the accessibility and usability of drug pricing data. 46brooklyn accomplishes this goal by publishing visualizations and articles on a website, 46brooklyn.com. However, those of us at 46brooklyn have come to realize that details regarding the fundamental concepts of the US drug supply chain are lacking and potentially hindering conversations around drug pricing information. As a result, I am launching our Podcast with a series called Drug Pricing 101 which will introduce the core concepts of the U.S. drug supply chain to hopefully foster a better understanding of the data available at 46brooklyn.com. 

As with any educational endeavor, I have attempted to present the information in a logical manner to hopefully ease understanding; however, I want to recognize and acknowledge that everyone learns differently. To that end, if you have a questions or comments regarding these materials, please reach out to us on our website.  

Alright with that introduction out of the way, let’s get started and acknowledge that before we can begin really talking about the US drug supply chain we need to define what the US drug supply chain is and identify why you or I or anyone should even care about it. 

Simply put, the drug supply chain is the process by which people use, pay for, and manage medications. Within the United States, medications come in two broad types, prescription and over-the-counter. A prescription medication, often identified with the symbol ℞, is a product that requires an order for use from a medical practitioner (i.e., doctor, nurse practitioner, pharmacist) for a person to obtain and use the product. In contrast, an over-the-counter, or OTC, can be obtained without a prescription with instructions for use available on the packaging. OTCs are products available at grocery stores or gas stations and treat things like fever, allergies, or sore throats.  The reason for the distinction between Rx and OTC medications is generally the potential for medication misuse. With prescription medications being either more harmful or abuseable if used inappropriately or without medical advice. 

So with those definitions out of the way, lets talk about why we care about prescription drugs and the supply chain that delivers them to us. At its most basic, we care about the drug supply chain because without prescription drugs people would die. This is not an understatement or an exaggeration, but a simple fact. 100 years ago, prior to the existence of the prescription drug insulin, people with Type 1 diabetes died within months or even weeks of developing the disease.  The development of insulin changed all that. This is, in part, why insulin prices receive so much attention-people need insulin to survive. 

The next reason I’d offer for why we should care about the drug supply chain, is that without prescription drugs people would have a worse quality of life. To give an example here, I’d mention the advent of medications used to treat Parkinson’s. We do not have a cure for Parkinson’s, which is a disease that involves uncontrolled shaking, but we have developed medications to control the shaking. Prior to the development of these medications, people with the disease were often unable to perform daily tasks such as getting dressed or walking. Now medications can help manage the symptoms of Parkinson’s (i.e., shaking), enabling them to live more fulfilling lives. 

And outside of those two qualitative measures for why we should care about drug pricing, we have a lot of data that supports why we should care about drug prices. In research published in 2019, the US government found that a majority of americans use prescription drugs with nearly 7 in 10 adults aged 40 to 79 using at least one prescription medication within the last 30 days. Similarly, research by the Kaiser Family Foundation found that a majority, meaning 79%, of americans say that the cost of prescription medications are too high and 3 in 10 saying that they haven’t taken their medications as prescribed due to cost. The situation is such that at least prior to the pandemic, research also by Kaiser in January 2020 showed that 1 in 5 americans said that lowering drug cost should be the top health priority in Congress. 

And if those stats are not enough to convince you, I have one more set of statistics to offer. In 2019, according to the money counters within the US government, it was determined that US healthcare spending totaled $3.8 trillion dollars. Of that almost $4 trillion, a number too large for any of us to really comprehend, 10% - or $369.7 billion was spent on prescription drug costs. Furthermore, the finance folks within the federal government also told us that in 2019, the total spending on prescription drugs by Medicare and Medicaid was $268 billion, which equates to 72% of that $369.7 billion total drug spending. Said differently, if you are someone who takes no medications, has no concern for the health or well being for your neighbor, and might otherwise be disinterested in the drug supply chain you need to care about it because a lot of your tax dollars are being spent on drugs – this is money that might otherwise be used to build bridges, or create better jobs. And all of this healthcare spending is occurring in an environment where we know that relative to other countries, the US is paying more for healthcare to get worse outcomes. A recent GAO report showed that compared to the other countries of Canada, Australia and France, the US pays top dollar for the same product. This is a topic, we have, as a matter of fact, have first-hand experience with, having explored the difference in costs for the same drugs in Australia and the United States. As with all of our research, this study is available for free on 46brooklyn.com. 

But sometimes these aggregate numbers can make understanding the real impact a little difficult so let us return to insulin prices, and the long-acting insulin called Lantus (or insulin glargine if you want to use its generic name). 

Our website would inform you that the average cost a pharmacy pays to acquire a box of Lantus pens is $408.15. GoodRx would inform you a pharmacy would be willing to sell you that box for $336.15. Either way, several hundreds of dollars per month or more for a drug that you need to live if you’re a diabetic. If we compare that to the price within the Canadian healthcare system, we see that the price for a box of Lantus pens is $92.85 CAD which equals $75.66 US greenbacks. In Australia, a box of insulin glargine pens, marketed under the name Optisulin or Semglee, would cost their government $144.69 AUD dollareedoos, or $112.31 AUD. Either way, the US is paying triple or quadruple the price. 

Ultimately, the purpose of Drug Pricing 101 is to put together the foundation of knowledge that will help us have informed conversations with our family, friends, and elected leaders on exactly why payers in the United States pay so much for the drugs its members consume.  In our next episode, we will dive into doing just that by looking more closely at the participants of the US drug supply chain beyond just the patients, doctors and pharmacist you might immediately think of when we say drug supply chain.

I want to thank you for listening today and hope you’ll tune in to our next episode. 

Episode 2

Hello and welcome back to the 46brooklyn Podcast. I am your host, Ben Link, the president of 46brooklyn Research, but I’m also a pharmacist fed up with fake, artificially inflated drug prices.  Today’s episode is the second one in our ongoing Drug Pricing 101 series. 

As a reminder, the goal of our Drug Pricing 101 series is to introduce the core concepts of the U.S. prescription drug supply chain to hopefully foster a better baseline understanding of the data available at 46brooklyn.com and the system as a whole. As with any educational endeavor, I have attempted to present the information in a logical manner to hopefully ease digestion; however, I want to recognize and acknowledge that everyone learns differently. To that end, if you have a questions or comments regarding these materials, please reach out to us on our website. Your comments and questions will only make our content better.   

Alright with the introduction out of the way, let’s pick up where we left off last time. As a reminder, in our last episode, we identified what the term U.S. drug supply chain actually means and why you or I or anyone should care about it. Long story short, even if you don’t take any prescription medications your tax dollars are still footing the bill for the fake, inflated drug prices that are so pervasive here in the U.S.. But to understand why our drug prices have gotten so out of whack with other countries, we need to first understand how the system works, and that starts with the drug supply chain participants. As we alluded to previously, there are actually a lot of participants within the drug supply chain beyond just the patient and pharmacy that you might not immediately think of. In fact, there are so many that we will be spending the next several episodes introducing the most significant players and talking about their impact on drug prices. To start, I thought it would make the most sense to discuss what I will call direct drug supply chain participants, and I want to use the term direct because these participants are ones that at some point in time physically touch the medications we care so much about. So on this episode we are going to introduce the roles of patients, pharmacies, and drug wholesalers, before spending the majority of our time detailing drug manufacturers. 

Let’s start with a quick high level overview and then we’ll back-track to review each entity a little closer. The first input into our supply chain is with a drug being made by a drug manufacturer. After a drug manufacturer makes their drug, they sell their drug. While many years ago, it was not uncommon for pharmacies to purchase drugs directly from the manufacturers themselves, today an overwhelming majority of medications produced by manufacturers are sold to wholesalers. Drug wholesalers are middlemen that purchase drugs from a variety of manufacturers. They do this because it allows pharmacies, the next entity in our direct drug supply chain overview, to buy the drugs they need from a single source (and via a single contract) rather than having to spend a lot of time sourcing drugs from the dozens of drug manufacturers they might otherwise have to purchase drugs from. If you think about it, this is not too dissimilar from a grocery store like Kroger letting you buy both Kraft Macaroni & Cheese and General Mills Cereal. Rather than us as consumers purchasing the products directly from their sources, we can purchase both – and thousands of other products – all from one entity, dramatically increasing the efficiency of our purchasing. This is a lot like how drug wholesalers function for medicines. 

The final direct step in our drug supply chain is the pharmacy, which sells the drugs they’ve purchased from wholesalers (primarily) to patients (and also the patient’s insurance if they have drug coverage). So to simplify, a drug is made by the drug manufacturer, sold to a drug wholesaler who then lets a pharmacy buy drugs to ultimately sell to patients. To be clear, because clarity is often lacking from current drug pricing conversations, this is just an overview, and there may be some relationships where this dynamic is not exactly as described – such as a pharmacy buying directly from a manufacturer and cutting out the wholesaler. But this is meant to be an overview and what I’ve described is overwhelmingly true in the majority of cases. 

Now that we understand generally how the drug supply chain moves physical drugs throughout its system, I think it only makes sense that we start the deeper conversation with drug manufacturers, as they represent the first input into the supply chain as they are actually producing the drug. When it comes to producing a drug, a manufacturer is purchasing the ingredients to make their drugs from multiple sources, combining those components into a finished product, and selling that product into the drug channel. It is worth noting that a drug manufacturer has several components to the cost they incur to produce a drug. If they are a brand name medication, meaning a medication protected by patents and no direct substitute, they spent a considerable amount of time and money (current estimates are over a billion dollars) to develop a single drug. These are studies that, first in a laboratory setting, identify what substance might actually work to treat a disease, but also clinical studies where researchers test out giving the drug to patients before they even know for certain whether they’ll work.

The alternative to brand name drugs is generics which are copies of previously patent protected drugs. Generic drugs also have research costs, but they are considerably less because they get to rely upon the clinical study work the brand name medications already conducted. In addition to these research and development costs, which a drug manufacturer needs to recoup through sales of their drug, a drug product, whether it is brand or generic, is composed of both active and inactive ingredients that the drug manufacturer has to purchase in order to get a product to market (and must recoup as part of the sale of their drug). 

So after a drug manufacturer has developed a product, and after they have prepared a finished product capable of being shipped and sold, they need to sell that product into the drug supply chain. Like any other business, they are going to calculate their input costs to produce the drug (R&D, component costs, etc), identify the margin they’d like to make, and bring the drug to market in a way to hopefully make themselves – and those who took the risk in investing in the drug’s development – a profit on the drug. Bear in mind that not all of these investments result in brining profitable drugs to market, and thus, it is also true that drugmakers likely factor these unsuccessful investments and losses into the costs of the products that do end up making it to market.

Taking a step back, in a traditional market that is not prescription drugs, a manufacturer would be able to generate profit by establishing a manufacturer suggested retail price (or MSRP) that is above their costs to produce a product. The MSRP is a suggested price that retailers might decide to use, without pressure from the manufacturer. This price is largely established by the manufacturer to indirectly control retail prices and maintain brand equity. The price itself already may have a sizable markup calculated into the price structure, so retailers have flexibility to decrease or increase the price. However, to bring a drug to market today, there are actually a multitude of prices that get established for a drug, beyond just the typical MSRP. This multitude of prices complicates the conversation on drug pricing and can make drawing comparisons to other markets challenging, or even impossible. This is because some of the most important prices for a drug, depending upon your perspective within the drug supply chain, might ultimately have nothing to do with a price established by the drug manufacturer.  

Before we dive into the specific prices controlled by the drug manufacturer, I want to be sure that you understand when we discuss drug prices in this country, we often intermix the actual prices being discussed. When you step back and think about it, it is kind of odd that there are so many different price points for a drug given that it is generally a pretty simple transaction at the end of the day – producer to wholesaler; wholesaler to retailer; retailer to customer. But despite the general simplicity of the transaction, a given drug in this country typically has at least 9 different “prices” that might actually be being discussed when the public is discussing drug prices, each of them potentially very relevant or irrelevant, depending on the context of the specific drug pricing conversation. This begs the question, why so many drug prices? Well the number of price points is not driven by the complexity of the transaction… The transaction itself is no more complicated than any other good or commodity. rather its driven by the fact that in the U.S., drugs are largely paid for with “other peoples money.” We alluded to this in the prior episode – more than 70% of drugs are paid for by a federal or state program. And then a large chunk of the rest are paid for by employers, who normally don’t even have visibility into each individual transaction. This creates loads of different “willingness to pay” for drugs depending on the information and ability to pay of the payer. So all of these different prices have evolved to exploit all of these different willingnesses to pay.

To try and help, we have established a glossary of key pharmacy terms which we will build up during the course of these podcasts on our website at 46brooklyn.com, but don’t be surprised if you find this all a little confusing at first and need to go back to our website to get comfortable with the idea of drug prices, or distinguish one drug price from the next. 

Alright let’s begin talking about the drug manufacturer price. Arguably the most accurate price a drug manufacturer sets, if our goal in discussing drug prices is to know the true cost to the drug supply chain, is its average sales price (or ASP). This is because ASP is defined by federal law and is the calculation of the weighted average manufacturer’s sales price for a drug for all purchasers, net of price adjustments. So this means that a drug manufacturer goes through its books, looks at the sales it actually makes after adjusting for whatever discounts they may be offering to whomever they’re selling the drug, accounts for the volumes of those purchases, and reports that price as the average sales price. Said differently, ASP reflects how the drug manufacturer is selling their drug to everyone who might purchase their drug, weighting the number by the volume of their purchases, and after adjusting the price for any adjustments or discounts to their price they’re offering. 

To be transparent, there are certain types of sales exempt from the ASP calculation, but generally they’re considered nominal sales, meaning they’re small enough to not really matter anyway if we were to include them (hopefully, that is the idea anyway). 

So there is price #1 that a drug manufacturer sets. But ASP is largely meaningless to the price you or I pay at the pharmacy counter, nor is it representative of the price our insurance company may pay for a drug, nor is it what a pharmacy may pay for a drug. The only time ASP is generally used in practice is when determining the price paid for drugs purchased by Medicare inside hospital systems. Not drugs you get and take away from a hospital, but drugs actually given to you within the confines of the hospital. When Medicare is making these purchases, they’re generally paying at ASP + 6% (or 106% ASP) for the drugs administered. This makes sense in that ASP would be the lowest price available, and the government wants to get a good deal; however, they’re also recognizing that a margin would need to be added on top of that low sales price in order to actually have hospital staff dispense and administer the drug (or even a building for the drug to be dispensed within). However, this Medicare example also offers us the first glimpse into what incentives can be created when setting drug reimbursements. Because margin in these instances is a fixed percentage based off of the price of the drug, it may weirdly encourage higher drug costs because 6% of a $1,000,000 drug is more money than 6% of a $1,000 drug (even if the same amount of hospital resources are needed for both drugs). This may explain some of the growth in prescription drug launch prices over the years, but we offer this only as a teaser to future conversations and to contextualize the role of ASP prices today. 

The next price to discuss is actually quite similar to ASP, and that price is average manufacturer price (or AMP). AMP is also a price established in federal law and is also a calculation based upon actual sales the drug manufacturer is making. The difference between ASP and AMP is that AMP is the average price paid to the manufacturer by wholesalers in the US for drugs distributed to retail pharmacies after discounts. So here, the AMP is a more specific cost than ASP, as it is just wholesaler purchases (rather than a weighting for all purchases across all drug manufacturer clients) and only those subset of purchases that wholesalers are making to sell to their retail pharmacy customers. Also unlike ASP,  AMP does not include all potential discounts the drug manufacturer is offering the wholesalers (i.e. it doesn’t include in its calculation the customary prompt pay discounts wholesalers extend to retail pharmacies). If the distinction between ASP and AMP isn’t all that clear, that is ok, but hopefully it gives you a sense for how even knowing what we might call the true net price of a drug can get complicated as it depends upon what your assumptions regarding net price are when you’re having a conversation around drug pricing. AMP’s role in current drug pricing is similar to ASP’s role. Unlike ASP, AMP is pretty much exclusively used by Medicaid, not Medicare, to calculate the rebates drug manufacturers need to pay for purchases Medicaid is making on drugs. Note that this is not a payment for services rendered (such as Medicare reimbursing hospitals for the drugs administered to patients) but rather a rebate that Medicaid is collecting after the fact for purchases already made to offset their costs. Said differently, Medicaid already paid the pharmacy for the drug and is looking to get a rebate off that purchase just like you may buy a vacuum and send your receipt in the mail to get a rebate from the manufacturer. However, in the aggregate, Medicaid obtains nearly 60% of all of their drug expenditures back via rebates through this AMP calculation. Kind of a big deal when you consider Medicaid is a $70+ billion purchaser of drugs annually. And an important consideration to keep in mind when discussing drug purchases, the price the manufacturer is selling to the market needs to be sufficient to cover the cost of these AMP-based rebates. 

The last price a drug manufacturer sets that we will talk about today is called wholesale acquisition cost (or WAC). WAC is an estimate of the drug manufacturer’s price for a drug to wholesalers or other direct purchasers not including any discounts or rebates from that purchase. So if you’re thinking about starting a drug wholesaler, and creating a business buying drugs from multiple drug manufacturers, a WAC price might represent what you’d consider an MSRP for that business. This is the price you might expect to pay for a given drug, absent any discounts you might be able to negotiate with those drug manufacturers. Note that WAC is also defined in federal law, so there are some rules in how this information gets reported. But as you can see, if you pay for a drug at a WAC price, you already know that the drug is actually already marked up (sometimes quite a bit), because it is not considering discounts to its price, which can be a lot of money. 

At the end of the day, none of these prices are as important to determining what you or I pay at the pharmacy as the next price to discuss, which is Average Wholesale Price (or AWP). But sadly, the conversation around AWP is going to take us longer than the time we have allotted for this episode. For now, understand that unlike the prices we’ve reviewed so far, AWP is a price that has no basis in federal law. That inherently makes it a fake price, because there is no oversight of it and more importantly, no robust legal standards that hold its setting accountable. Additionally, AWP is reported to be an estimate of the price retail pharmacies pay for drugs from wholesalers; however, as we’ve learned in this episode, it is important to understand the context of drug pricing benchmarks. When we talked about ASP, we understood that it was a price net of all discounts, but applicable across all sales of a drug. When we talked about AMP, we understood it was a price for wholesalers based upon their sales to retail pharmacies but doesn’t account for some of the most common drug discounts. And when we talked about WAC, we understood it to be an estimate of wholesale price absent any known discounts. As we’ve arrived at AWP, we have no basis to contextualize its price because there is no statutory definition for it – meaning that it can be anything – and if you’ll indulge me in a family guy reference, this means it could even be a boat. 

So on the next episode, we will tackle the complexity that is AWP, which, despite its lack of objectivity relative to the other pricing benchmarks discussed in this episode, in many ways is the backbone of all pharmacy transactions. As before, I thank you for listening and I hope you’ll tune into our next episode.

Episode 3

Hello and welcome back to the 46brooklyn Podcast. I am your host, Ben Link, president of 46brooklyn Research and a pharmacist fed up with fake artificially inflated drug prices. Today’s episode is the third one in our ongoing Drug Pricing 101 series. 

As a reminder, the goal of our Drug Pricing 101 series is to introduce the core concepts of the U.S. drug supply chain to hopefully foster a better understanding of the data available at 46brooklyn.com and the system as a whole. As with any educational endeavor, I have attempted to present the information in a logical manner to hopefully ease understanding; however, I want to recognize and acknowledge that everyone learns differently. To that end, if you have a questions or comments regarding these materials, please reach out to us on our website. Your comments and questions will only make our content better.   

On our last episode, we started the conversation around the drug supply chain by looking at its direct primary participants from the lens of the actual drug product, which as a reminder we defined as the drug manufacturer, the drug wholesaler, the pharmacy, and the patient. We then identified that when it comes to having a conversation around drug pricing, context is everything because any given drug in the United States has at least 9 different pricing points that we may be talking about when we say “drug pricing.” We then spent a considerable amount of time talking about drug prices set by the drug manufacturer including Average Sales Price (ASP), Average Manufacturer Price (AMP) and Wholesale Acquisition Cost (WAC). And while we were able to identify a role that each of those prices play in our drug supply chain, the role of each is relatively small and not really impactful to the price that people or insurers pay for prescription drugs. Rather, the majority of the costs we pay can in some way shape or form be traced back to a pricing benchmark known as Average Wholesale Price (or AWP). Note that despite its name, AWP is not an average of anything and does not reflect actual wholesale transaction prices in anyway shape or form (as will become clear as we continue our conversation). For this reason, drug pricing nerds like myself often refer to AWP as aint what’s paid. But again, while it may be true that AWP ain’t what’s directly paid, as we will learn it is also sadly true that AWP is the foundation underlying the fake, inflated prices we pay for drugs in this country.

To begin our conversation around AWP, I think its important to recall that at some level, federal regulations define how ASP, AMP and WAC are calculated by drug manufacturers. And while we may know that a WAC price set by a drug manufacturer has little basis in reality, because it doesn’t include any rebates or other discounts we know drug manufacturers are giving, we still have another fake, non-real price we’re relying upon when we pay for prescription drugs, and that is AWP. 

Before we dive into why that is the case, let us take a moment and define how AWP is calculated today and review the history of AWP. 

As a pricing benchmark, AWP may be determined in one of several different methods (again there is no standard that defines how this is done): 

• The drug manufacturer may report the AWP to the individual publisher of drug pricing data, known as a drug reference file or drug compendia source. There are several sources for published AWPs. At 46brooklyn, several of our dashboards rely upon Elsevier’s Gold Standard Drug Database, which is just one of the available compendia sources.

• The AWP may also be calculated by the publisher based upon a mark-up specified by the manufacturer that is applied to the wholesale acquisition cost (WAC), a price we’ve already discussed or, or direct price (DIRP).

Recall that Pharmacies typically buy their drugs from wholesalers (such as AmeriSource Bergen, Cardinal Health, or McKesson). The wholesale acquisition cost (WAC) is the manufacturer’s list price of the drug when sold to the wholesaler, while the DIRP is the manufacturer’s list price when sold to non-wholesalers. WAC is the most common benchmark used today by pharmacies to buy drugs from wholesalers.

• Today, typically a 20% mark-up is applied to the manufacturer-supplied WAC or DIRP, which results in the AWP figure.

And the origins of AWP can be traced all the way back to Medicaid. The California Medicaid program to be precise; developed AWP during the 1960s as a way to standardize drug reimbursement. Historically, data was collected from drug wholesalers to inform AWP; however, AWP evolved over time into a value calculated based upon information supplied by drug manufacturers. Said differently, we have had a problem for a long time, since at least the 1960s, in determining what a fair price is to pay for drugs and AWP was one of our first attempts at standardizing drug payments. 

Over time, many other groups such as commercial insurers and other state Medicaid programs followed California’s lead and began relying upon AWP as a basis of pharmacy drug reimbursements. It got to the point that, at least prior to 1984, most state programs used 100% of AWP as the basis for drug acquisition costs according to a government report. Why 1984? Well that was the year that an Office of the Inspector General report found that on average, pharmacies were buying drugs 15% or more below AWP. A few years later, in 1989, the findings of that report would be confirmed. To be fair here, these reports were largely the first insights offered into the fake relationship between AWP and pharmacy prices. It is easy for us now, in hindsight to see, how a pricing benchmark like WAC – which is already a fake sticker price, is at least a better benchmark then AWP, which is a fake markup to to a fake price. 

In 1989, CMS issued a revision to the State Medicaid Manual which pointed out that a preponderance of evidence demonstrated that AWP overstated prices that pharmacies actually paid for drugs by as much as 10 to 20 percent. The Manual issuance further provided that, absent valid documentation to the contrary, it would not be acceptable for a State to make reimbursements using AWP without a significant discount.

In 1997, OIG issued separate reports on the actual acquisition cost of brand name and generic drugs. The 1997 reports were based on comparisons of 18,973 invoice prices for brand name products and 9,075 invoice prices for generic products. The reports showed average discounts of 18.30 percent below AWP and 42.45 percent below AWP, respectively.

These are important benchmarks dates because they begin to demonstrate one of the key takeaways I think you should have when we talk about AWP, and that is over time, AWP becomes a worse and worse predictor of actual drug costs. And yet, despite these reports highlighting the growing disconnect between AWP and actual drug costs, AWP continued to be the basis of how drugs were and continue to be paid for in this country. This is because the publishers of the drug pricing information (i.e. drug compendia) sell these published AWPs to government, private insurance, and other buyers of prescription drugs, who use these data tables to determine reimbursement rates for pharmacy providers and in turn patient copayments. Because AWP is a component of the formulas used to determine reimbursement, elevated AWP numbers can drastically increase the dollar amount that government, private insurance programs, and consumers with coinsurance must pay for drugs. 

However, that provides a good transition into the next historical moment associated with AWP, and that is a 2006 lawsuit between payers for prescription drugs as plaintiffs and the drug compendia and wholesalers as defendants. It doesn’t take a mastermind to figure out that if everyone is making money off this artificial pricing benchmark due to it being the basis of contracts determining reimbursement, then if the AWP number grows, the members of the drug supply chain (pharmacies, wholesalers, etc.) stand to make more money. And that is exactly what was alleged when McKesson, the largest drug wholesaler, was accused ofconspiring with drug publishing company First DataBank (FDB) to fraudulently inflate the widely used Average Wholesale Price (AWP) figures. 

The suit alleged that McKesson and FDB increased the AWP spread between WAC and AWP from 20 to 25 percent beginning in 2001, allowing retail clients to reap larger profits at the expense of consumers and third-party payers, such as insurance companies. By 2004, nearly every common prescription drug enjoyed a 25 percent spread between the two benchmarks. As part of the settlement, the insurance companies, retailers, and others admitted their reliance upon AWP to calculate the purchase price, payments and co-payments of the most common prescription medication. FDB, for its part, agreed to stop publishing AWP in 2011 as part of the settlement. In addition, many brand manufacturers stopped reporting AWP. Rather they (drug manufacturers and/or the drug compendia sources) report something called suggested wholesale price (SWP), which is functionally equivalent to AWP. If a manufacturer doesn’t report an AWP or SWP, as is again the case with brands fairly often, then the value will be calculated by the drug compendia which slaps a 20% markup on top of the WAC. If there is not WAC price, then they will multiply yet another pricing benchmark – Direct Price (DP) by 1.2. That calculation for SWP should seem familiar because it is what it is/was for AWP. 

So why the reliance on AWP for pricing drugs? That is the multi-billion dollar question. After these lawsuits, many drug pricing pundits at the time predicted it would be the death of AWP. Additional lawsuits were filed and successful in clawing back money related to AWP shenanigans and yet the majority of plan sponsor contracts today continue to rely upon AWP to pay for drugs. 

To be clear, a contract between an insurer and a pharmacy benefit manager (PBM), whom the insurer relies upon to process claims and will be discussed when we talk about indirect drug supply chain participants, establish how much the insurer will pay for prescription drugs filled for the plan’s members (and in turn, how much those members will pay to get those drugs). Within those contracts, the agreed to payment rate is overwhelmingly based upon a discount to AWP even though we are decades removed from the knowledge that AWP is a fake pricing benchmark that becomes even more fake over time and more then a decade removed from the late 2000s lawsuits regarding AWP manipulation, which resulted in those same insurers overpaying for drugs. To be clear, there are some organizations that have moved to other pricing benchmarks than AWP but they are the minority, not the majority. 

In our next episode, we will move away from drug pricing benchmarks related to the drug manufacturer and begin to explore drug pricing benchmarks associated with the wholesalers and pharmacies. As before, I thank you for listening and I hope you’ll tune into our next episode.

Episode 4

Hello and welcome back to the 46brooklyn Podcast. I am your host, Ben Link, the president of 46brooklyn Research, but I’m also a pharmacist fed up with fake artificially inflated drug prices. Today’s episode is the fourth one in our ongoing Drug Pricing 101 series. 

As a reminder, the goal of our Drug Pricing 101 series is to introduce the core concepts of the U.S. drug supply chain to hopefully foster a better understanding of the data available at 46brooklyn.com and the system as a whole. As with any educational endeavor, I have attempted to present the information in a logical manner to hopefully ease understanding; however, I want to recognize and acknowledge that everyone learns differently. To that end, if you have a questions or comments regarding these materials, please reach out to us on our website. Your comments and questions will only make our content better.   

On our last episode, we wrapped up the conversation started a couple of episodes ago on drug prices set by the drug manufacturer by discussing average wholesale price, or AWP. AWP is arguably the most important drug price we have thus far discussed due to its omnipresence in drug supply chain contracts, which is why it took us a whole episode to talk about this one price. The two key points from the prior episode were (1) AWP is such an important price point because it is the pricing benchmark that is generally relied upon in contracts which ultimately determine what is paid for prescription drugs; and (2) AWP is a broken pricing benchmark in that it is not reflective of an average of any price including the actual price of drugs. In this episode, we are going to move away from talking about prices set by drug manufacturers and begin to discuss prices set by the next entity in the drug supply chain – wholesalers.

To begin our conversation today, recall that a drug wholesaler is a company that purchases drugs from many different drug manufacturers to make it more convenient for pharmacies to purchase the drugs they need for their patients. Without a wholesaler, a pharmacy would have to contract with each drug manufacturer directly, which not only would be more burdensome but potentially cause significant delays to get drugs in stock. You may not realize it, but it is not uncommon for pharmacies to receive a new order of purchased drugs into their pharmacy multiple times per week, sometimes even daily. When a pharmacy gets these drugs in stock, it is generally doing so via a purchase from a drug wholesaler, though there are exceptions where the pharmacy purchases directly from a manufacturer (but those types of purchases are rarer and rarer).

There are several mechanisms by which a pharmacy can purchase drugs from a wholesaler. The first is by shopping the market – that is going to each wholesaler’s website (the nation’s largest being McKesson, Cardinal and Amerisource Bergen, though in a given region there can be others), creating a profile, and browsing inventory prices to see who is offering the best deal for the drugs they need. While this might be the incentive the market wants to create to encourage low drug prices, it is a fairly laborious process for a pharmacy to do, as accessing drug pricing information line by line across multiple platforms is going to take time and be prone to errors, particularly if you need to purchase a large amount of inventory, which may be the case given that there are nearly 200,000 unique products that may be available for purchase. Note I’m getting that number based upon the number of national drug codes or NDCs currently available here in the U.S.

So while it is certainly an option for pharmacies to shop around, pharmacies generally do not shop the market of wholesalers on a daily basis, and even if they do, they’re not seeking price comparisons on every drug they aim to purchase. In addition to time concerns, pharmacies can actually be contractually restricted from shopping for all of their inventory. That is because pharmacies typically contract directly with one wholesaler as their primary wholesaler and maybe one or two more as secondary wholesalers. When a pharmacy signs a primary wholesaler contract, it agrees to terms that include an obligation to purchase the majority (often greater than 90% of its total purchases) from that primary wholesaler which in turn locks them out of shopping the market more broadly (via secondary wholesale contracts or just the broader market as initially discussed). This is because if they fail to meet their obligation under their contract to purchase most of their drugs from their primary wholesaler they’ll lose whatever brand discount or generic rebate guarantees they’ve negotiated which can dramatically impact their bottom line. These time, contract and economic constraints exist whether pharmacies negotiate these contracts with wholesalers directly or through buying groups such as group purchasing organizations or GPOs. 

The benefit of the primary wholesaler relationship, from the pharmacy’s perspective at least, is that primary wholesalers typically will have a more complete catalogue of products than many of the secondary wholesalers, and will often have a more rapid turnaround when orders are placed. But perhaps the biggest benefit a pharmacy can receive through its primary wholesaler are obtaining pricing concessions beyond what is available from the wholesaler’s typical or base pricing catalogue (i.e. that shopping we discussed initially) both directly and indirectly. First, pharmacies generally need the negotiated pricing concessions in order to purchase drugs in such a way that they’ll be able to take a person’s prescription drug insurance and the rates paid for via those mechanisms. The rationale for this is something we will discuss in more detail on a later podcast but suffice it to say for now, insurers which are paying the bills know that pharmacies are getting these discounts and may alter their payment based upon that knowledge.. Recall that when we talked about WAC, that is wholesale acquisition cost, that pricing point is federally defined to exclude, typical discounts that wholesalers offer like prompt pay or rebates. This means that after a pharmacy makes their purchases, at some point down the line, the wholesaler will return additional money back to the pharmacy in the form of a cash rebate or credit against future purchases. So WAC, despite its name, is not best categorized as a true wholesaler price, which is why we categorized it as a drug manufacturer price. Additionally, drug manufacturers are often the ones actually reporting their WACs to drug reference files. 

All of this brings us to the pricing points we want to talk about today, and that are those prices which represent actual pharmacy purchases from wholesalers and so reflect actual wholesale prices. The most utilized price in this regard is National Average Drug Acquisition Cost or NADAC. NADAC is a pricing benchmark published by the Centers for Medicare and Medicaid Services (CMS) based upon the work of their subcontractor Myers & Stauffer, a professional accounting firm specializing in healthcare. To derive NADAC, pharmacies are voluntarily surveyed to provide copies of their invoices from wholesalers. Once obtained, these invoices are reviewed, aggregated, and analyzed to publish a NADAC price point for each individual drug at an NDC level that is covered by Medicaid in accordance with the Social Security Act’s definition of “covered outpatient drug.” This is an important distinction in that that definition of a drug does not represent all of the 200,000 plus drugs we mentioned exist on the market, and while it does cover something like 95% of all drugs dispensed in Medicaid, the costliest medications are not covered by CMS’ NADAC survey methods and so do not have a NADAC price. 

One of the advantages of NADAC in relation to WAC is that because it is a survey of actual invoice prices from wholesalers, any direct price concessions are reflected in its calculation. So when I previously was discussing some of the advantages of the primary wholesale relationship to pharmacies, one of those is getting purchased drugs at a lower price than they might otherwise get. This has advantages from a business standpoint as lowering your purchase price of a good as a pharmacy (or any supplier) can have beneficial effects to cash flow as you have less money tied up in inventory within your business. The only price concessions not reflected in NADAC’s publication from wholesalers would be any off-invoice discounts pharmacies receive from their wholesalers (like rebates). The lack of pricing information for all drugs and the lack of off-invoice discounts are not the only limitations with NADAC though. NADAC, as stated, is a voluntary survey meaning pharmacies are free to respond to the survey or not. This discourages some of the largest purchasers of drugs, such as the national chains, from reporting pricing to the survey. This is because they will likely only reduce the amount of money they make from drug purchases for payers that pay based upon NADAC rates. For example, consider for a moment that you are an executive in CVS, Walgreens or Rite Aid – the largest retail pharmacy chains in the country. If you respond to this survey, your pricing data becomes intermingled with all the independent and small chain pharmacies who are almost certainly purchasing drugs at a higher cost than you are because they do not have the volume of sales you do, and thus the degree of wholesaler discounts. To be even more specific, these large pharmacy chains often have special relationships with their primary wholesaler, like CVS and Cardinal forming RedOak, which pretty clearly stated was done by CVS to leverage their buying power to get greater price concessions from their wholesaler based upon public financial filings. By not responding to the survey as one of these large chains, the survey depends upon their competitor’s higher cost drug invoices to set NADAC and so you create more revenue for your national pharmacy chain from payers, like Medicaid programs, that may use NADAC as the basis for reimbursing your pharmacies. Said differently, there is no incentive for you to respond to the NADAC survey, as it can only undercut your reimbursements. This is why some state Medicaid groups do not rely upon NADAC but rather conduct their own, sometimes mandatory, survey of pharmacies in their state to identify drug costs. A 2021 report by 3 Axis, which I myself am also a part of, found that the difference to Medicaid based upon NADAC-based pricing or Alabama’s AAC price, which is a mandatory survey of drug prices in their state, would result in $10 billion in savings over 10 years based upon Alabama’s AAC being that much lower than NADAC. At the time of this recording, our own home state Ohio, as part of its Medicaid PBM overhaul, is also moving to a mandatory AAC survey as well.

This is a good opportunity to quickly discuss at least part of the goal we collectively have with pharmacy pricing from a healthcare policy standpoint. On the one hand, we collectively generally want to get drugs as cheaply and therefore affordably as possible. This means that we want to create a system that incentivizes efficiency as that efficiency will lead to cost savings. Generally speaking, a system is efficient when it manages its inventory, which in our case is drugs, and turns through inventory fast. By this we mean the goal is to not have a drug sit on the shelf undispensed for an extended period of time. Not only does a drug potentially risk losing efficacy over time if it sits on the shelf so long that the drug expires, but we also know that drugs generally speaking are getting cheaper over time. The data that 46brooklyn tracks shows that generic drugs pretty consistently get cheaper month over month based upon their acquisition cost, and data from other sources like Drug Channels show that in after tabulating rebates and other drugmaker price concessions, brand medications are getting cheaper over time as well. This means that the shorter the duration from time of purchase to dispensing the medication means we can capture as much drug deflation as possible when dispensing. However, this incentive left unchecked would lead us to have pharmacies with barren shelves because taken to its logical extreme, the most efficient pharmacy would have no drugs in inventory, would purchase everything it needs for next day delivery, and then sell it to you on the following day. This brings us to another goal of health policy as it relates to drugs and that is having a full service pharmacy. Ideally, most people want the opportunity to go to a pharmacy and have their prescription filled same day (or same hour for that matter). Said differently, can you imagine if you or your child went to the pharmacy after getting diagnosed with an infection or pain and were told you need to keep suffering for a day or two until the pharmacy got the product in stock? That is almost certainly not what we want, so to enable a pharmacy to dispense drugs same day, the pharmacy must have inventory on its shelf to do this. But this creates a little conflict with our first goal, as on any given day there will be some drugs out of the hundred thousand plus options that do not get dispensed. So we have to balance these two semi-conflicting goals against each other to create the pharmacy system we want. And over time, I’d argue that is what we’ve done as we’ve moved some systems away from some of the artificial pricing mechanisms and toward a system of reimbursement predicated on actual acquisition cost (AAC). That said, we still have a lot of work to do. 

In our next episode, we will discuss the last direct drug supply chain pricing component and talk about drug prices as set by pharmacies, the last person to touch the drug before it goes to patient. We will then move on to talk about drug pricing set by non-direct drug supply chain entities like pharmacy benefit managers (PBMs). But until then, I want to thank you for listening, encourage you to please send in any feedback or questions on these episodes, and I hope you’ll tune into our next episode.

Episode 5

Hello and welcome back to the 46brooklyn Podcast. I am your host, Ben Link, the president of 46brooklyn Research, but I’m also a pharmacist fed up with fake artificially inflated drug prices. Today’s episode is the fifth one in our ongoing Drug Pricing 101 series. 

As a reminder, the goal of our Drug Pricing 101 series is to introduce the core concepts of the U.S. drug supply chain to hopefully foster a better understanding of the data available at 46brooklyn.com. As with any educational endeavor, I have attempted to present the information in a logical manner to hopefully ease understanding; however, I want to recognize and acknowledge that everyone learns differently. To that end, if you have questions or comments regarding these materials, please reach out to us on our website. Your comments and questions will only make our content better.   

In our last episode we discussed wholesaler-set drug prices derived from actual wholesaler invoices to their pharmacy customers – so essentially what pharmacies pay to acquire medications they dispense to their patients – what you might also call their cost of goods sold. The most common benchmark to track those wholesaler invoices today is National Average Drug Acquisition Cost (NADAC). While NADAC provides tremendous insights on the prices of medications, it is not without its limitations. It relies upon voluntarily submitted invoice costs from pharmacies, and it does not have a good way of tracking off-invoice discounts pharmacies likely receive. With that in mind, we also recognized that some states have their own approach to getting at actual acquisition cost (or AAC) values and conduct their own, sometimes mandatory surveys of AAC in their state. In either case, these prices represent some of the most “real” prices we’ve thus far discussed on this podcast series as they have a basis in facts that cannot be readily or easily disputed (i.e., what the invoice actually says the pharmacy paid). 

Thus far the episodes of the Drug Pricing 101 series have discussed manufacturer set prices of ASP, AMP, WAC, AWP, and DIRP as well as wholesaler derived prices of NADAC and AAC. Even though there are many more ways to quantify a drug’s price, for sanity’s sake, in this series we set out to cover 9 of what we felt were the most relevant from a general public perspective. Of the 9 pricing benchmarks we originally set out to discuss, we have two left which brings us to the price point to be discussed today. We are going to move on from prices set by wholesalers within the direct drug supply chain and move to the final direct participant- the pharmacy. 

Recall that a pharmacy generally has a contract with a single wholesaler, known as the primary wholesaler, to purchase drugs. As part of this contracting pharmacies are able to obtain discounts as well as rebates on their drug purchases – such as for volume guarantees or simply paying their wholesaler bills in a timely manner. It is also more convenient for a pharmacy to contract with a wholesaler to buy the variety of goods they need in one place rather than having to shop at each drug manufacturer directly – just like we shop at a grocery store rather than going to Nichols to buy our bread and then over to Kraft to buy our cheese. Pharmacies are of course buying products with the goal of selling those products to consumers, or patients. Consumers, who generally speaking, usually have some form of insurance. This is little different from other forms of consumerism as the customer is generally not the individual and some insurance group. Said differently, most of us likely don’t have insurance to help purchase our Nichols bread from our earlier example. 

To add some data here, GoodRx conducted a survey in February 2021 to assess the degree to which people in the US have prescription drug coverage and whom was the source of that insurance should it exist. According to their survey, 13% of Americans in 2021 lacked prescription drug insurance, a number relatively small in relation to the rest of the market (i.e. 87% with prescription drug insurance). Of that larger market, 46% were getting their insurance through their employer, 12% through Medicare, 11% through Medicaid, 6% through the health insurance marketplace, in other words they were buying the plan directly, and 12% identified some other form of drug insurance coverage. Their survey also identified that three-quarters of the people surveyed took at least one prescription medication and most of them rely on insurance to help cover the cost. I share the results of this survey because it helps reaffirm some of the points we’ve already made on prior episodes of this Podcast. Namely, a lot of people are taking medications and that a lot of medications are being paid for in some way, shape or form with “other people’s money” – whether that is an employer helping cover the costs or a federal program like Medicare or Medicaid. This in turn means, that from the pharmacy’s perspective, their customers are overwhelming individual people, for sure, but also those people’s insurance who are paying for the drug alongside that individual consumer. So how does a pharmacy sell medications into this system? 

Well, in essence there are two forms of customers. Those without insurance and those with insurance. For those without insurance, they buy whatever medications they can on a cash-basis. By cash basis I mean, whatever the pharmacy charges for the drug. This price point is known as the pharmacy’s usual & customary (U&C). Note that this represents a new drug pricing point for drugs in our U.S. healthcare system. For that patient, at that pharmacy, that U&C cost is a real price and a price point that may be highly variable pharmacy-to-pharmacy or even day-to-day. And while I want to spend the majority of our time today discussing the U&C price point, we need to quickly finish up the conversation around the pharmacy’s other customers – patients with insurance. 

For these patients, the pharmacy’s contract with their insurance company’s pharmacy benefit manager (PBM) will determine what the cost is to the patient and the amount the insurance company or PBM pays for the drug. And while it sounds somewhat simple on its surface there are some important details to review, hopefully without getting too technical, because it’s never as simple as it seems on its surface. Recall from what we just reviewed that most people have drug insurance as a benefit. Meaning that the majority of the pharmacy’s customers are people with insurance. In order for anyone to get use out of that insurance drug benefit they must be able to use their insurance at a pharmacy. This in turn means that the insurers must negotiate with pharmacies to take their insurance. In order to do so, they negotiate a contract through the insurance company’s PBM with a payment rate, often called the network rate. Within that network rate is generally a provision that says something along the lines of the pharmacy agrees to be paid either what the insurer is willing to pay, that network rate, or what the pharmacy bills, whichever is less. The price the pharmacy bills is the price point we’re interested in talking about today because it is the usual and customary or U&C price point we’ve already identified which again represents one of the most direct ways  pharmacy contribution to a drug’s pricing structure – again semi-apart of what the manufacturer or wholesaler set prices represent. At the very least, there is nothing stopping them from making their U&C much higher then any of the prices set by the system before them.  

As a brief aside, it should be noted that prescription drug insurance did not always work the way it does today. Meaning, today through the power of the internet, we can bill pharmacy claims in real time and with the assistance of technology. When prescription drug insurance was first a thing, those solutions did not exist. Rather a patient with insurance would submit their receipt from the pharmacy to their insurer and get a check cut back to them for whatever they paid at the pharmacy counter. In other words, the pharmacy’s U&C price used to be effectively the only price that mattered. As systems evolved, that changed. By contracting with pharmacies to form a network, an agreement could be reached in regard to what the discount the health plan might be able to secure based upon the volume of customers they might bring to that pharmacy. And that, I would argue, is the origin for this comparison between a pharmacy’s U&C price and the offered payment rate. 

Anyways, with that aside out of the way let us return to U&C. It is important to note that unlike ASP, AMP, WAC or any of the other prices we’ve identified that have some definition in federal rules there is no uniform definition of U&C. Instead, third-party payor contracts and state Medicaid statutes define U&C, which is usually the lowest net price a cash patient would have paid at the pharmacy on the day that the prescription was dispensed inclusive of all applicable discounts. This definition may be a little odd when you consider other pricing benchmarks like the pharmacy’s submitted ingredient cost or gross amount due – but those price points are conversations for another day. 

To be clear, this general definition that I am relying upon for U&C may not be precisely true depending upon which state you’re in and which program you’re talking about. Additionally, there have been several lawsuits around U&C – where whistleblowers have alleged pharmacies have violated the practices of U&C resulting in payers paying more. I mention these legal cases as they can add some legal precedent to a definition of U&C which, again, may vary depending upon where you find yourself (i.e. which state or which program). Suffice it to say, this U&C price the pharmacy is setting is arguably another fake price akin to drugmaker’s AWP, muddying the waters of drug pricing in this country. I make the comparison for two reasons (1) A pharmacy’s U&C is the pricing component of note that matters within the contract, which ultimately determines what prescription drugs cost, just like a drugmaker’s AWP; and (2) U&C has no regulatory definition and therefore is subject to the same kind of games just like AWP.  

However, and this is an important distinction, the role of U&C is small in the aggregate because the majority of claims are not paying out at a pharmacies U&C cost. I am unable to find a public data source to cite to demonstrate this to you, but I can tell you that in my professional career in reviewing pharmacy transactions both from the pharmacy’s or the health plan’s perspective, generally speaking less than 10% of claims are paying at U&C – an overwhelmingly small amount.  

Rather, the majority of payments are predicated off of the terms of the network contract. So why spend all this time talking about U&C? Well it wouldn’t be the first time on this podcast that we spent a long time talking about a price point with perhaps little impact but that is not the case here. Rather, because we now understand U&C’s role within the contract, we can actually apply what we’ve learned thus far about drug pricing to review what would happen within a system if pharmacies were to lower their U&C costs. A question I’ve gotten many times in my career is – why are pharmacy’s U&C so high? And the simple answer is because of the incentives within our drug supply chain.  

As we just reviewed, a pharmacy’s reimbursement from a PBM or insurer us predicated off the lesser of what the pharmacy’s contract with the PBM says will be paid or what the pharmacy charges as their U&C or cash price. As a business, a pharmacy would likely want to secure the maximum profits available from their largest customer base – people with insurance. Therefore, it follows that as a business a pharmacy wants to set high U&C rates to ensure that it is getting paid whatever the network rate is and not undercutting itself by failing to make money it might otherwise make if it had set a higher U&C. Pharmacies must balance this against the 13% or so of individuals who will be buying the drugs at cash because those patients do not have insurance. However, pharmacies generally speaking do not know, despite having a contract, what any individual claim for any individual’s insurance will pay. As a result, they are largely in the dark on what incentives the system is sending them in seeking out maximum profits. We can actually see this in claims data. Work by myself and the team at 3 Axis Advisors investigated this issue directly within the Massachusetts Medicaid program. Within that analysis, all prescription claims within the Massachusetts Medicaid program at pharmacies that were generic, in an oral solid dosage form and had a NADAC value were analyzed from 2016 to 2019. Each payment made on those claims was compared to the NADAC cost value of the claim to derive a margin over NADAC for those claims. So essentially, what margin did pharmacies capture over a generalized average of pharmacy invoice acquisition costs? NADAC was selected because, as we discussed last time, it would represent with a reasonable degree of certainty what those pharmacies actually paid for on their invoices to buy their drugs. This identified that the range of margin available to pharmacy on these claims was $735 below the NADAC cost (meaning the pharmacy lost nearly $1,000 dispensing that claim) to $4,883.84 above the NADAC cost (meaning for filling one claim, at one pharmacy, on one day they made enough money to likely make payroll for the entire week). If a pharmacy sees within its data that it can lose a thousand of dollars on a claim or make thousands on other claims, without any real way of identifying which is which, the only incentive they effectively have is to set high drug prices through the setting of their U&C. This is the incentive because if you read on in that previously mentioned Massachusetts report, if a pharmacy were to hypothetically re-adjudicate those claims in a cost plus basis, meaning that pharmacies would have set their U&C at the cost they purchased the drug plus a flat ~$10 dispensing fee, which is generally speaking the actual cost to pay all of the component costs of operating a pharmacy, then Massachusetts pharmacies would lose approximately 75% of their margin on those claims. A loss they would not enable them to sustain business operations because. 

And that is the rub right? Because we don’t know, or can’t agree, on what drugs cost in this system we’re effectively left running in circles. A pharmacy, motivated to try and save the system money, is effectively locked out of doing so by the current incentives within the system because under their current contracting they’ll lose a ton of money if they do so. Recall that the pharmacy’s primary customer is people with insurance meaning that they cannot turn a blind eye to the incentives the insurer and their contract with the insurer sets. Said differently, we know, i.e., we’ve just reviewed some of the data ourselves on this Podcast, that there are some claims out there that ,for whatever reason, the network reimbursement rate is set to be really, really high and there are other claims, that for whatever reason, the network reimbursement rate is really, really low. And a pharmacy cannot really know which claim will reimburse well and which will reimburse low because it’s not just a factor of the drug, but also the variety of types of insurance that their customers have, and so it can really only set high U&C prices because as 3 Axis demonstrated, to do otherwise would be the death of their business. 

This is arguably why you’ve perhaps seen the recent growth of cash only pharmacies. Because this allows those pharmacies to go back in time to a point where only their U&C price matters in setting prices for a drug. Of course, that leaves us trusting the altruism of those businesses in setting fair drug prices. And as a pharmacist myself, I probably better acknowledge that while we are consistently rated one of the most trustworthy professions, even that is a system I am not overly comfortable with because we still may not know what the real cost of a drug is. And without knowing the cost we will never understand or appreciate it’s value cause as my friend Antonio Ciaccia likes to say when there are 9 prices for a thing there is actually no price for that thing.  

In our next episode, we will move our discussion away from direct drug supply chain participants and begin talking about the indirect drug supply chain starting with the companies helping facilitate the pharmacy claim transaction, namely pharmacy benefit managers (PBMs). As before, I want to thank you for tuning in to today’s episode, continue to encourage you to send any feedback you have on these to us at 46brooklyn and hope I’ll see you here for our next episode. 

Episode 6

Hello and welcome back to the 46brooklyn Podcast. I am your host, Ben Link, the president of 46brooklyn Research, but I’m also a pharmacist fed up with fake artificially inflated drug prices. Today’s episode is the sixth one in our ongoing Drug Pricing 101 series. 

As a reminder, the goal of our Drug Pricing 101 series is to introduce the core concepts of the U.S. drug supply chain to hopefully foster a better understanding of the data available at 46brooklyn.com. As with any educational endeavor, I have attempted to present the information in a logical manner to hopefully ease understanding; however, I want to recognize and acknowledge that everyone learns differently. To that end, if you have a questions or comments regarding these materials, please reach out to us on our website. Your comments and questions will only make our content better.   

On our last episode we reached the end of the direct drug supply chain participants we have been spending so much time talking about when we discussed the pharmacy’s role in creating and setting prices for drugs. As a reminder, pharmacies set usual & customary (U&C) prices which represent the price for a drug for , people who do not have insurance and would pay cash for their drugs, so it is also known as the pharmacy’s cash price. Pharmacy U&C prices are highly variable and largely irrelevant in today’s system, because most people have insurance, and thus, insurer-derived prices, not pharmacy cash prices, will determine what price most people pay. This is because the current system creates incentives for the business aspect of pharmacy to set prices high to maximize their margin. Which transitions us well into today’s conversation, insurer set prices. 

As a reminder, when we started this Drug Pricing 101 podcast series, we began by talking about the direct drug supply chain participants because they were, hopefully, a little easier to understand. These were organizations that physically touch the medication people take and so we started with the drug manufacturer moved to the wholesaler and then onto the pharmacy. And while that flow of product is hopefully fairly easy to understand we need to begin to introduce non-direct supply chain participants into the conversation in order to continue talking about drug prices in this country. And to start I should probably provide a quick overview of how people get drug insurance in their first place. 

Generally speaking, most people in this country have health insurance, a fact we reviewed on our last episode when we identified that approximately 90% of people have prescription drug insurance. But what is the source of that drug insurance? Well, again speaking in generalities, people typically get their drug insurance coverage from their employer. And to be clear, the employer providing prescription drug insurance is generally speaking doing so as part of a package of other benefits, such as medical coverage – like doctor and hospital visits – but also even the dentist or the eye doctor. That said, there are other sources of insurance such as benefits available to the elderly in this country, most often recognized as Medicare coverage or benefits available to the poor in this country, most often recognized as Medicaid. In addition to these sources of coverage, a person may get coverage for drugs related to a workplace injury not through their employer’s general healthcare coverage but specifically designed or in place for work place related injuries. The list goes on, but this is not the point of this podcast episode. Rather, the point is that given the nature and variability of sources of insurance one might believe that each of these systems is going about delivering prescription drug insurance in a variety of ways. And that is, generally speaking, not the case. Why? Because each potential source of these prescription benefits is contracting with the same organization. Those organizations are known as pharmacy benefit managers (PBMs), though they may go by other names such as pharmacy benefit administrators (PBAs). Either way, their principal function is to help the sources of health insurance (employers, Medicare, Medicaid, etc.) effectuate their drug coverage. They do this by functioning as a type of transaction facilitator, helping sellers of drugs (i.e., pharmacies) connect with purchasers of drugs (i.e., these sources of drug insurance). So, let’s take a moment and unpack that concept a little further. 

We must first start with the basics of any transaction that involves a buyer, a seller, and an intermediary whose role is to facilitate the transaction between the two parties. When it comes to a prescription drug transaction, the payer is “buying” products and services from the pharmacy on behalf of a beneficiary – that is the person who has insurance coverage -, the pharmacy is “selling” these products and services to the payer and the patient, and the PBM is the intermediary that is helping to facilitate this transaction. For successfully facilitating this transaction, the PBM receives a fee. Recall that on episode 4 when we were talking about NADAC pricing (National Average Drug Acquisition Cost), we acknowledged that we want an efficient marketplace because that efficiency will help lower costs, and will hopefully saves everyone money. What I just described, broadly is fundamentally no different from any other market where there is an intermediary facilitating a transaction between a buyer and a seller. When you buy shares of a company’s stock, for example, both you and the seller likely use a stockbroker to help facilitate the transaction, and for their services, both you and the seller pay a fee to your respective brokers. That fee is transparent, and subject to considerable competition within the marketplace. In other words, if the fee is prohibitively high, both you and the seller will quickly look for different brokers to facilitate your transaction. 

The underlying reason why buying and selling shares of a stock is so efficient is because both the buyer and the seller have full visibility into the price of the underlying product (one share of stock). The stock market sets this price, and it changes in real time with changes in supply and demand for the stock. If at the time of purchase, a share is trading at $71.88, both the buyer and seller can see that the stock is priced at $71.88, and both expect to transact right around that level and pay a small flat fee to their broker. Note both the buyer and seller transact around the same transparent price. A prescription drug transaction does not work this way because there is very poor transparency into the price of the product. 

As we have discussed at lengths on this Podcast to date, it very difficult to obtain the drug’s price. There are at least 9 different prices available for the same product at the same time, most of which are not set by a competitive marketplace. There is the Average Wholesale Price (AWP), the Suggested Wholesale Price (SWP), the Wholesale Acquisition Cost (WAC), the Average Manufacturer Price (AMP), Maximum Allowable Cost (MAC), and the National Average Drug Acquisition Cost (NADAC) – to name a few which we ourselves have reviewed on this Podcast. This creates a situation where the buyer and seller could pay different prices for the same product within a given transaction, with the difference between the two accruing to the intermediary. In the financial world, this is called an “arbitrage.” Arbitrage is “the purchase and sale of an asset to profit from an imbalance in the price… (that) exists as a result of market inefficiencies and would therefore not exist if markets were perfectly efficient.” 

So, we start to see how our overview of the PBM is already starting to crack under what analogies we might use to understand their function. PBMs are transaction facilitators helping pharmacies sell their medicines to health plans looking to purchase drugs for their covered enrollees. But because there is not an agreed to market clearing, transparent price for drugs in this country, PBMs are also price setters because they control the last pricing benchmark, we plan on discussing in our drug pricing 101 series and that is a price known as maximum allowable cost (MAC). 

Well, what is MAC? Well according to the Academy of Managed Care Pharmacy [AMCP], a trade group who represents PBMs, “Maximum Allowable Cost (MAC) pricing is a payment model contractually agreed to in the marketplace.” They go on to say that MAC ensures that patients and those purchasing health insurance benefits get the lowest price on generic drugs. There are some key points to unpack here in AMCP’s definition of generic drug. First, is to recognize that they are more or less confirming the point we’ve made on prior Podcasts, that drug prices in this country come down to contract language. We’ve reviewed this a little bit before but recall that when a pharmacy is selling a medication, it is generally doing so to a person with insurance and that person’s insurance via the PBM will have terms which state that the payment will be the lesser of the pharmacy’s submitted charge and the payment rate, or fee schedule, the plan, in this case via the PBM is offering. We now know that the fee schedule is being predicated off of a MAC rate for generic drugs which in turns means that most drugs in the system are paid for at the MAC rate given that roughly 90% of all drugs dispensed in this country are generic. 

So how is a MAC rate set? Well according to AMCP again, “MAC pricing is designed to promote competitive pricing for pharmacies as an incentive to purchase the least costly generic drugs available in the market, regardless of the manufacturer’s list price. Different manufacturers will charge different amounts for equally interchangeable generic drugs. If a pharmacy purchases the higher‐priced product, it may not make as much profit or, in limited instances, may lose money on that specific purchase. Alternatively, if they purchase generic drugs at a more favorable price available in the marketplace, they will be more likely to make a profit.” Turning to one PBM’s definition of how MAC is set, and I quote here, “CVS Health regularly assesses aggregated information (not specific to any particular pharmacy) from drug wholesalers and third-party sources, including publicly available lists such as those published by Medicaid, CMS and pharmacy feedback, to determine market pricing for generic drugs to establish our MAC pricing. Given the complex and dynamic nature of market pricing for generic drugs, the MAC will change throughout the year. We believe our MAC prices reflect current marketplace pricing and our best understanding of the marketplace and product availability.”

Taking some liberty in interpreting what they’re saying, it boils down to this – we know that there are many price points available for a given drug and we are going to perform some data analysis to create our best guess of what that pricing actually looks like. Note that each PBM has free reign, absent specific state laws, to determine what drugs to pick to put on its MAC list and how those MAC list prices are arrived at. According to the National Community Pharmacists  Association (NCPA), PBMs use their MAC pricing list as a revenue stream. NCPA states, “Because of this lack of clarity, many PBMs use their MAC lists to generate significant revenue. Typically, they utilize an aggressively low MAC price list to reimburse their contracted pharmacies and a different, higher list of prices when they sell to their clients or plan sponsors.” 

I’d note that this potential issue exists largely because we cannot agree to what a drug’s price actually is. Is it AWP – as is the basis of most contracts? Is it NADAC – as is the basis of most pharmacies invoice costs? Is it U&C – the price the pharmacy would like to make? Or is it MAC – the price the PBM would like to pay? 

Today, none of those pricing benchmarks may actually matter within our drug pricing debate because ultimately what you or anyone pays for prescription drugs is based on what the contract of your insurer via your PBM says you pay for prescription drugs. And that may mean anything, because PBM contracts are notoriously complex, riddled with conflicting definitions and terms and ultimately leave a lot of latitude for the PBM to determine what you ultimately pay – at least in the words of contracting experts like Linda Cahn. If you think about it, this is why there is perhaps why there is so much disparity in experience when it comes to drug pricing. The contract governing your price experience for drugs may be very different from someone else’s, causing you to say drugs are very affordable and me to say drug pricing is very unaffordable, even if we’re talking about the same drug, dispensed at the same pharmacy, on the same day. The analogy my friend Antonio Ciaccia likes to use is picture yourself at the grocery store, buying milk. You go to check out and lo and behold the person in front of you is also buying milk – what are the odds. Well you notice that their milk at check out is $4 per gallon. A pretty reasonable price for milk, at least in line with what you’ve paid for milk last month. But as you go to check out, your milk checks out at $25 per gallon! As ridiculous as that sounds, it happens all the time with prescription drugs. The person in line at the pharmacy may pick up the same drug as your about to but your price experience may be very different. 

Ultimately, if there was one market clearing price for drugs that we could all agree upon, then the malleable price setting function that exists within the system today goes away, as it is less valuable. A plan sponsor could just pay that price directly without a transaction facilitator. It might not be as timely or efficient, but they wouldn’t need to rely on contract maneuvering to try and get a fair price for drugs. If there was one market clearing price for drugs, we also potentially have a more efficient marketplace where the PBM’s transaction facilitator role is more clear cut. PBM contract terms would not play as big of a role in determining cost because cost would be known, and hopefully market driven. 

Believe it or not, that brings us to the end of our Drug Pricing 101 series. We set out with a goal to review drug pricing benchmarks which we did by starting with the manufacturer and ending with the insurer. Along the way we explored some of the incentives the various drug price points create or are responding to. To be clear, there are more drug pricing benchmarks we could discuss, such as drug prices within the 340B program or when administered in a provider setting but those concepts are best kept for another series. Rather, we’re going to take what we’ve learned with our 9 pricing benchmarks and begin to unpack how that knowledge helps shape our current understanding of drug prices in this country. Before we launch our next series, our next episode is going to be a Q&A where we tackle some of the drug pricing questions this Podcast has generated. This is your final call, so to speak, to send in questions for that Podcast. On that episode I’ll be joined by some of the other team members at 46brooklyn, so I promise you won’t want to miss it. 

As always, I want to end the episode by thanking you all for listening in and hope you’ll join us for our next episode.

EPISODE 7

Q & A with Antonio Ciacia