Average Wholesale Price (AWP) as a Pricing Benchmark

Average Wholesale Price (AWP) is a benchmark that has been used for over 40 years for pricing and reimbursement of prescription drugs for both government and private payers. Initially, the AWP was intended to represent the average price that wholesalers used to sell medications to providers, such as physicians, pharmacies, and other customers. However, the AWP is not a true representation of actual market prices for either generic or brand drug products. AWP has often been compared to the “list price” or “sticker price”, meaning it is an elevated drug price that is rarely what is actually paid. AWP is not a government-regulated figure, does not include buyer volume discounts or rebates often involved in prescription drug sales, and is subject to fradulent manipulation by manufacturers or even wholesalers. As such, the AWP, while used throughout the industry, is a controversial pricing benchmark.1,2

The AWP may be determined by several different methods. The drug manufacturer may report the AWP to the individual publisher of drug pricing data, such as Medi-Span. 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) or direct price (DIRP). The 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. Typically a 20% mark-up is applied to the manufacturer-supplied WAC or DIRP, which results in the AWP figure.3

The publishers then in turn sell these published AWPs to government, private insurance, and other buyers of prescription drugs, who use these data tables to determine reimbursement and retail prices. 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.1

Pharmacies typically buy drugs from a wholesaler and then sell them to the public. Many patients have coinsurance or copayments, where they only pay for a portion of their prescription cost. The insurance company then pays the rest of the cost (the reimbursement) to the pharmacy. Insurance companies include prescription benefit manager (PBM), health maintenance organization (HMO) or government programs, such as Medicaid or Medicare Part B or D.4 In addition, the pharmacy receives a dispensing fee for filling the prescription. Fees are typically set between $3 to $5 per prescription, but may vary by state.1,2

Reimbursements are based on AWPs. However, pharmacies purchase drugs based on the WAC. The difference between the WAC (what the pharmacy actually paid for the drug) and the reimbursement from insurance (based on AWP) is known as the spread, and equates to the profit that the pharmacy receives.5

Market pricing on brand drugs tend to be about 16.6 percent less than the AWP. However, the relation of AWP to generic pricing is not clear. Older generics tend to have a large spread between the AWP and WAC, which in turn gives a large spread, and higher profit margins for the pharmacy or other provider of the drug. Many payers, such as PBMS or HMOs, will determine a maximum allowable cost (MAC) pricing on generics to avoid being overcharged. Newer generic products, compared to older generics, may not have as favorable of a spread, thus the need for MAC.4,5

Collusion between AWP publishers and wholesalers to artificially inflate the AWP, and in turn increase the spread, has lead to court cases in the U.S. In these cases, it was alleged that increasing the spread benefited the wholesaler because customers (pharmacies and large institutions) were more likely to buy from them than a competing wholesaler where the spread was not as desirable. The publisher of AWPs profited because pharmacies were more likely to buy the pricing lists from the publisher that noted the higher AWPs used in calculating the spread, than to buy them from other publishers with lower AWPs. Due to this pricing fraud, many payers, including government payers, are no longer using AWP for pricing, and are switching to other more transparent pricing benchmarks, such as WAC or AMP (average manufacturers price). However, AWP may still be found in use in the U.S. because it has been the standard for decades.4

References:

  1. Gecarelli GM. Average Wholesale Price for Prescription Drugs: Is There a More Appropriate Mechanism? National Health Policy Forum. Issue Brief. No. 775. June 7, 2002. Accessed May 25, 2012.
    http://www.nhpf.org/library/issue-briefs/IB775_AWP_6-7-02.pdf
  2. Gencarelli GM. One Pill, Many Prices: Variation in Prescription Drug Prices in Selected Government Programs. National Health Policy Forum. Issue Brief No. 807. August 29, 2005. Accessed May 25, 2012.
    http://www.nhpf.org/library/issue-briefs/IB807_DrugPricing_08-29-05.pdf
  3. Thomson Reuters MicroMedex. Website. AWP Policy. Accessed May 28, 2012
    http://www.micromedex.com/products/redbook/awp/awp_policy.pdf
  4. New York City Public Employees Union DC-37 Website. Newsroom. Drug Pricing Case Settlement. Frequently Asked Qustions About Average Wholesale Price (AWP). Accessed May 28, 2012.
    http://www.dc37.net/news/headlines/drugpricingcase.html
  5. GLG Research. Website. GLG Industry Dictionary. Definition: Average Wholesale Prices. Accessed May 25, 2012.
    http://www.glgresearch.com/Dictionary/HC-AWP--Average-Wholesale-Prices.html

Last updated: 2014-05-04 by Leigh Anderson, PharmD.

Hide
(web3)