The high cost of prescription drugs is a very real problem in the United States. The average American spends approximately $1,300 per year on prescription drugs, more than residents of any other country in the world. And for some new medications, it seems the sky’s the limit when it comes to cost.
For people in marginalized and traditionally underserved communities, in which chronic medical conditions such as diabetes, obesity, and respiratory diseases are more widespread, the problem can be the difference between life and death.
When access to affordable medications is limited by finances, people fail to stay on their medications, often resulting in sickness and worsening of health conditions that only further drain finances and create tremendous stress for families and caregivers.
There is no single reason why drug prices are so high in the U.S., so there won’t be a single solution to solve the problem. I believe that one detriment to affordable drug pricing — price instability — could be addressed with greater action and influence from government and regulatory bodies.
Drug prices often fluctuate because of the U.S.’s complex system of pharmaceutical companies setting list prices then offering and removing rebates and discounts, and insurers and employers changing out-of-pocket costs for consumers. Anyone who has filled a prescription at the same cost for three months and then seen the price spike by 25% or more the next month has seen the effects of drug pricing instability, even if they don’t know why it happened.
Although painful and annoying for many Americans, price instability affects lower-income individuals and underserved populations even more, to the point where many skip doses or don’t fill prescriptions when prices go up.
Average wholesale price vs. national average drug acquisition cost
Much of the country’s commercial drug pricing system relies on the average wholesale price (AWP) as the point of reference for cost. Average wholesale price is based on wholesale pricing data that private companies collect from drug manufacturers. This average price doesn’t include rebates or discounts, and it is typically marked up to account for margins for drug wholesalers that sell to retail pharmacies.
The average wholesale price is like the manufacturer’s suggested retail price which, as anyone who has ever bought a car knows, doesn’t necessarily reflect its purchase price.
The net effect of using the average wholesale price is that drug costs are inflated and can fluctuate greatly from one month to the next. When insurers, employers, and government agencies buy drugs, they’re paying these inflated, unstable prices. Using the average wholesale price also lacks transparency into how prices are set. There are reasons why industry insiders joke that AWP stands for “Ain’t What’s Paid.”
Use of the average wholesale price for setting retail drug prices has been under scrutiny for more than a decade. In 2011, an investigation by the U.S. Department of Health and Human Services found that average wholesale pricing was forcing states to overspend in their Medicaid programs.
An alternative to average wholesale pricing that would lead to better stability and transparency already exists. In the wake of the 2011 HHS investigation, the Centers for Medicare and Medicaid Services developed a pricing method known as the national average drug acquisition cost (NADAC). CMS generates this benchmark through a random, voluntary survey each month of about 2,500 retail pharmacies across the nation, both chain and independently owned. The purpose of determining the national average drug acquisition cost is to give state Medicaid programs accurate information to set their own pricing on prescription drugs, a far better alternative than setting pricing based on the inflated, secretive average wholesale price.
The national average drug acquisition cost provides a specific cost estimate for each prescription medicine based on what pharmacies pay to acquire it. Actual invoice prices are used and do not reflect any off-invoice rebates or discounts.
To measure the potential for cost savings to Medicaid programs, my company, Capital Rx, commissioned a 2021 study with 3 Axis Advisors, a research firm specializing in the drug supply chain. The study estimated a potential annual saving of $937 million.
Overcoming resistance to change
Despite the potential for saving money by using national average drug acquisition costs, the prescription drug industry continues to resist changes to benchmark drug pricing. Many pharmacy benefit managers, which manage prescription drug benefits for health plans and employers, influence pricing in a way that clouds the actual ingredient cost of the medication, with markups and incentives baked into the price. Average wholesale pricing perpetuates the distance between the true cost of drugs and what purchasers pay for them.
One challenge to greater adoption of the national average drug acquisition cost is getting stronger participation in the monthly CMS pricing survey among all pharmacies contacted. Researchers at Georgetown University argue that a lack of participation by large chain pharmacies, which tend to pay less for drugs from wholesalers, skews the NADAC survey higher. Benchmark pricing for Medicaid programs thus would be lower if survey participation became mandatory.
By generating consistent and transparent pricing data, the national average drug acquisition cost enables the entirety of the health care ecosystem — medical providers, pharmacists, employers, health plans, government agencies, and patients — to have greater visibility into anticipated prescription medication costs. Removing the instability and variability that accompanies the average wholesale price would reduce out-of-pocket costs and ensure greater accessibility to medications for all.
Advancing the national average drug acquisition cost model
I believe that after a decade in use, the national average drug acquisition cost’s time has come as the standard benchmark for establishing the retail price of prescription drugs.
Most state Medicaid programs have switched to NADAC. It has helped states trim costs and ensure that more Medicaid recipients would have access to the medications they need. In fact, legislation in Tennessee, which goes into effect on Jan. 1, 2023, requires PBMs to use a drug pricing methodology that’s not inflated. The national average drug acquisition cost qualifies as one of the methods that can be used.
It’s now time for these discussions to reach Washington. CMS should consider making national average drug acquisition cost reporting a requirement of all retail pharmacies that accept payment from Medicare and Medicaid patients. And Congress should take the significant and necessary action to enforce NADAC pricing as the standard by which drug pricing is set.
These steps aren’t all that’s required to bring prescription drug costs down, but they’ll help establish greater pricing stability and transparency for all Americans, especially those least able to pay for their medications.
Matthew Gibbs is a pharmacist and president of Capital Rx, a pharmacy benefit manager for employers and pharmacy benefit administrator for health plans.
First Opinion newsletter: If you enjoy reading opinion and perspective essays, get a roundup of each week’s First Opinions delivered to your inbox every Sunday. Sign up here.