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Understanding Drug Pricing from Divergent Perspectives: State of Washington Prescription Drug Pricing Analysis

Rising prescription drug costs presents a unique challenge for many Americans. But while we have spent considerable public-facing time providing research and data analytics insights on the flow of dollars within Medicaid and Medicare over the years, the truth is that the commercial sector is where most of us get their prescription drug coverage.

In this study, we conducted a study of the pharmacy benefits and reimbursement trends within the state of Washington. For the first time ever within our publicly available research work, we have the opportunity to not just analyze drug pricing trends from the perspective of pharmacy providers who buy and sell medications to patients, but also from commercial plan sponsors, who provide the majority of individuals with their access to prescription drug insurance.

In our analysis of more than nine million prescription drug claims from both small retail pharmacies and commercial employers in the state of Washington from 2020 to 2023, we found that pharmacies and plan sponsors have relatively divergent perspectives on the rate of change of prescription drug prices within the state of Washington.

Our report identifies that drug pricing is a complicated endeavor subject to many potential competing incentives. It has become evident that meaningful reforms to the landscape of drug pricing are improbable as long as the process remains enshrouded in secrecy, hindering comprehensive and transparent evaluation. The phenomenon whereby the same medication, dispensed on the same day, for the same health plan can have potentially variable costs underscores the systemic dysfunction that pervades the current framework of U.S. drug pricing. In such an environment of variable costs, the outcomes are predictably unpredictable – undermining the efficacy of relying solely on competitive financial forces to rectify the prevailing cost disparities that our report highlights.

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Unravelling the Drug Pricing Blame Game

Prior to the COVID-19 pandemic, few healthcare issues received as much attention and public discourse as prescription drug prices. The attention paid to the costs of pharmaceuticals is understandable when one considers that, in many ways, medicines are arguably the backbone of the U.S. healthcare delivery system. Whether a person is seeking treatment for a simple infection or complex diseases like cancer or multiple sclerosis, prescription drugs are the primary tools employed by our nation’s healthcare professionals to address illness.

However, informed debate over drug prices is challenging because the nature of drug prices requires layers of context. That said, the common understanding of the American public appears to be that the pricing practices of drug manufacturers are primarily to blame for high drug costs.

While there is certainly truth to the notion that drug manufacturers are key contributors to the prices paid for medicines, in our latest drug pricing report our study of 32.6 million retail pharmacy claims from independent, small chain, and mid-size chain pharmacies over a 12-month period between January 1, 2020 and December 31, 2020 we found that a great deal more context is needed to understand drug prices at the pharmacy counter.

More specifically, in our analysis, we find that the overwhelming majority of the prices paid at the pharmacy counter are based on price points established by the drug supply chain intermediaries known as pharmacy benefit managers (PBMs).

For expensive brand medications, the data demonstrates that PBMs establish variable payment rates based upon differentiating the discounts offered to manufacturer price points. For generic medications, the most routinely utilized of all drug therapies, we observed that proprietary PBM prices (i.e., maximum allowable cost, or MAC) were used for setting the majority of all prescription costs and that like their brand counterparts, generic drug prices were highly variable and disconnected from the manufacturer or pharmacy established price for the medication.

This study unpacks how drug prices are set at the pharmacy counter – and how those point-of-sale prices impact pharmacy providers, plan sponsors, and patients.

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Issue brief: The billions in prescription drug savings from enhancements to NADAC

There are numerous drug pricing benchmarks which can be used to price prescription drugs. Recent legislative proposals aim to change the way the most widely used drug pricing benchmark in Medicaid is determined by enhancing pharmacy requirements to report prescription drug prices. The purpose of this issue brief is to determine to what extent changes in CMS’ National Average Drug Acquisition Cost (NADAC) methodology would result in savings to Medicaid, and other programs who rely upon NADAC as a mechanism to approximate drug ingredient costs.

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Assessing the responsiveness of Maximum Allowable Cost (MAC) prices to generic drug inflation

The disconnect between PBM-set MAC reimbursement rates and pharmacy acquisition costs for generic drugs introduces economic uncertainty into how the U.S. drug supply chain will respond to the COVID-19 driven shock. MAC rates must keep track with drug price inflation to ensure that pharmacies remain viable and have proper incentive to dispense impacted medications to patients.

The purpose of this research brief is to determine to what extent PBM MAC prices, which form the basis of drug ingredient costs paid to their network pharmacies for generic drugs, have been responsive to large price increases on generic drugs.

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