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What’s happening with AWP?

AWP has long stood for “ain’t what’s paid”, and the old saw has been validated by documents made public during litigation in Boston earlier this year. First DataBank, one of the publishers of Average Wholesale Price data, had been sued by several plaintiffs alleging that First DataBank’s benchmarking process was seriously flawed.

There are two primary issues here. First, FDB published data that was allegedly derived from surveys of drug wholesalers, data that was used to establish the average price that wholesalers paid manufacturers for drugs. It turns out that of the three dominant wholesalers, only one was supplying the data (McKesson). Thus, the published prices were not an “average”, as neither Cardinal Health nor Amerisource Bergen participated in the survey.
As bad as that is, the real issue is the effect of the selection of McKesson as the sole source of drug pricing data. AWP is based on the actual price that McKesson paid for the drug, plus a margin. For years the typical margin was 20%; several years ago McKesson changed the margin to 25% to make it simpler to administer pricing internally. The price increase also earned McKesson points with its customers, retail pharmacies, who saw an immediate increase in profitability – profits on Lipitor immediately jumped three-fold after the 2002 increase.
Thomson’s Red Book, one of the main sources of drug pricing data, has used, and continues to use, a 20% markup in its calculation of AWP.
Under the terms of the settlement, First DataBank has agreed to stop publishing AWP two years from the actual settlement date.
What’s the impact?
Drug prices paid by insurers, employers, and individuals may come down somewhat, but it’s likely manufacturers will see this as an opportunity to raise wholesale prices (the real prices, not the made-up ones). Retail pharmacy chains are already saying they will increase dispensing fees to compensate for lost margin.
OK, that’s all interesting; the window into the mechanics of drug pricing has revealed a picture that is every bit as sordid as most payers long suspected. And watching one of the “perps” suffer the consequences is rather pleasant. But don’t forget there are other sources of drug pricing data including the Red Book and Medi-Span, which have been more popular than FDB with many payers due to different pricing benchmarks.
What does this mean for you?
AWP has been replaced by many buyers with MAC or other pricing benchmarks. Expect this trend to accelerate. The transparency movement has, and will continue to effect payers’ negotiation strategies.
And stop looking at price per pill, and start focusing on cost per member (in group health and Medicare/Medicaid) or cost per claim in workers comp and auto.

One thought on “What’s happening with AWP?”

  1. Walgreens claims they have no interest in protecting the price of drugs — either generic or brand. Their main concern is making sure they receive an adequate “professional fee” for dispensing the drugs. The cost of operating a pharmacy includes the salaries and benefits for the pharmacist and techs, which are fixed per hour the pharmacy is open for business plus the allocated store rent, information systems that support the pharmacy, etc. which are completely fixed. Since Walgreens fills more scrips per day than any other retailer, they have the lowest cost to fill in the industry which outsiders estimate at about $5.00 per scrip (vs $6-$10 for Wal-Mart) and considerably more for supermarkets.
    Walgreens has an agreement with Louisiana Medicaid that will pay it a 5% margin on the drug plus a fixed professional (dispensing) fee of $10 for brands and $15 for generics. So, for a generic that cost $2 for a 30 day supply, they will be paid $17.10 ($2 x 1.05) +$15. For a brand name drug that cost $100, it will be paid $115 ($100 x 1.05) + $10. The arrangement provides an incentive to maximize generic substitution thereby saving cost for the payer. Sounds reasonable to me.

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Joe Paduda is the principal of Health Strategy Associates



A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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