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.

3 Axis AdvisorsJune 25, 2024WAC, NADAC, PBM, Specialty, Spread pricing, Pharmacy, AWP, Suboxone, Aubagio, Medicaid, MAC, Commercial, Mark Cuban

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.

Understanding pharmacy reimbursement trends in Oregon

Oregonians, like many Americans, currently experience hardships due to high healthcare costs. A 2021 survey of Oregon adult residents found that 55% encountered cost-related barriers to getting healthcare, including cutting medication in half, skipping doses, or not filling a prescription due to cost. It is well documented that the United States spends enormous sums on healthcare. And while the common perception may be that “you get what you pay for” in regard to health outcomes, the data does not support that perception with regards to U.S. healthcare. The reasons for the low performance are undoubtedly multi-factorial, but an area of increasing interest is disparities of care, which arise based on social characteristics of a population. Indeed, one of the primary goals of the Centers for Disease Control and Prevention (CDC) is to achieve health equity by eliminating health disparities and achieving optimal health for all Americans.

While prescription drugs represent just one component of healthcare costs and utilization, they provide one of the most transparent ways to contextualize potential healthcare inequality. This is because the reimbursement structure of prescription drugs is inherently unequal. There are more than a dozen pricing benchmarks that could be utilized from a typical drug reference file to determine a drug’s price. Such benchmarks might be “objective” in that they could be sourced from a drug reference file directly, but rarely does that objectivity translate into a consistent price at the pharmacy counter for any particular drug. The options for how to pay for drugs become nearly limitless when you consider that each payer for prescription drugs potentially pays for the same product and service in a different way despite the same reliance on the same pricing benchmarks. When there are many prices for a product, there is effectively no price for that product.

The disparities in pharmacy pricing and the inequality of payment experienced across provider types resulted in 3 Axis Advisors being commissioned by the Oregon State Pharmacy Association (OSPA) to review reimbursement trends between payers and retail pharmacies between 2019 and 2021. The primary request was to identify if there may be the existence of differential pricing in payment or PBM-to-pharmacy spread pricing among Oregon Medicaid retail pharmacy networks, which could compromise the sustainability of some providers and create barriers to care for many Oregonians.

We ended up uncovering so much more.

Deserving of better: How American seniors are paying for misaligned incentives within Medicare Part D

Millions of America’s elderly rely on the Medicare Part D program to afford prescription medications. Because adherence to prescription medications is a primary determinant of treatment success, Medicare Part D represents one of the most critical programs to the overall health of the elderly in this country. However, despite the availability of a prescription drug benefit, many Medicare beneficiaries still struggle to afford prescription drugs. The Centers for Medicare and Medicaid Services (CMS) reports a growing disparity between gross Part D drug costs, calculated based on costs of drugs at the pharmacy counter, and net Part D drug costs, which account for all Direct and Indirect Remuneration (DIR). The growing divergence between gross and net spending in Medicare Part D has significant implications for the Part D program. This is because the majority of a Medicare enrollee’s cost share is determined from gross, and not net, drug spending. Medicare is not the first program to struggle with prescription drug costs. Medicaid, another federal program overseen by CMS, has adopted a relatively new model for paying for prescription drugs – one that aligns program costs to surveyed benchmarks meant to approximate the prices paid by pharmacies to purchase medications. The most common benchmark utilized by state Medicaid programs is National Average Drug Acquisition Cost (NADAC), which is typically used as the basis for both the state’s cost exposure and the pharmacy’s reimbursement for the drug’s ingredient cost. Because NADAC is meant to cover just the cost of the drug itself, it is then coupled with a professional dispensing fee that is meant to cover the cost of the service and overhead incurred by pharmacy providers. Amidst growing complaints from providers and patients regarding the inflated and unpredictable prices for prescription drugs within the program, 3 Axis Advisors explored how application of the bedrock of Medicaid’s drug pricing design into Medicare might alleviate ballooning costs within the program.

3 Axis AdvisorsMarch 7, 2022Medicare Part D, NADAC, AWP, DIR, PBM, Pharmacy, Clawbacks, Medicaid

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.

3 Axis AdvisorsMay 11, 2021PBM, MAC, Pharmacy, NADAC, Capital Rx, PDPRA, drug pricing, AAC

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.

3 Axis AdvisorsApril 14, 2020PBM, MAC, Pharmacy, NADAC

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