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Brand Name Drug Pricing 101

October 9, 2018
by Scott Langdon, RPh

Brand drugs are very expensive and without insurance most of them are unaffordable to the average consumer.  A one month supply of a drug can cost as much as a car payment, mortgage payment, or rent payment.  In some cases even more.  The price of generic drugs can vary tremendously from pharmacy to pharmacy. Unfortunately, the same is not true for brand drugs.  You will not find a significant price variation from one place to another.  Thus, if one pharmacy has a price of $400 for a brand drug you are not going to find a deep discount pharmacy selling the same medication for a half to a third of the price. Through diligence you might be able to find up to a 10% variation.  Depending on the cost of the brand drug this could be somewhat significant.

There are two important terms to learn when it comes to brand name pricing:
AWP: Average Wholesale Price
WAC: Wholesale Acquisition Cost

AWP is a misnomer because it is definitely not the average wholesale price of a drug. In fact, this number is higher than a consumer should pay for a drug. However, as we shall see later when we discuss “WAC” it is relevant to the cost of the drug.  By contrast, AWP for generic drugs is basically a fictitious number pulled out of the clear blue sky. That is a topic for a future article.

The WAC for every brand name drug is 83.33% less than AWP.  So if a drug’s AWP is $100, the WAC would be $83.33.  By definition, WAC is the cost the wholesaler pays for the drug from the manufacturer. It can be looked at as the the wholesaler cost, but the wholesaler gets rebates and discounts on the brand drugs they purchase.  Therefore we can say their cost is actually lower than WAC.  The best analogy related to brand drug pricing would be new automobile pricing. AWP would be similar to the MSRP of a vehicle. No one pays list price for a vehicle just as no one would pay AWP for a brand drug. WAC would be similar to dealer invoice. Dealer invoice may well be the cost the dealer pays for the vehicle, but as we all know dealers get hold backs, hidden rebates, and sales bonuses.  Drug wholesalers also get these sort of front end and back end rebates and bonuses.  The only difference is a brand drug’s AWP and WAC are proportionally related by an exact amount whereas the percentage difference between a dealer’s invoice and MSRP will vary from vehicle model to vehicle model.

Brand Drug Automobile
AWP MSRP
WAC Dealer Invoice

To determine a fair price for a brand name drug we need to know how much a pharmacy pays for the drug.  By fair, I mean within the range of the reasonable market value of the drug.  Whether or not the price on an expensive brand drug is “fair” is up to debate and beyond the scope of this article.  With cars, the dealer invoice is not a big secret. Places like Edmunds, True Car, and a host of others can provide you dealer invoice for free. You could probably walk into a dealership and ask them for a copy of their dealer invoice on a particular car and they would be happy to oblige. A pharmacy, on the other hand, may be reluctant to show you their actual invoices. Pharmacies will likely pay anywhere from WAC to WAC-6% for a drug.  Although contracts between pharmacies and wholesalers can be complicated, to simplify we can say bigger volume pharmacies and big chains pay less for brands than smaller volume pharmacies and independent pharmacies. Although an independent may pay more for a brand drug than a chain pharmacy, you might have better luck negotiating a cash price with an independent. Chain personnel usually aren’t allowed to adjust the price as they for the most part aren’t given access to actual cost of the drug.  You can only “negotiate” a price if you are paying cash for the entire cost of the drug.  If you have insurance, the price has already been negotiated between the PBM and the pharmacy.

Depending on the cost of the medication, a fair price is usually between $8 to $30 higher than the actual cost. Compared to other sectors, pharmacies make an extremely low profit margin from brand name drugs.   A majority of brand name drugs purchased through pharmacies are with insurance.  The contracts pharmacies have with these insurance companies will give them anywhere from negative reimbursement (cost of drug is more than what the insurance company pays the pharmacy) to a few dollars.  Next time you fork over a $45 copay for your brand drug you can be assured the neither you or the pharmacy are the big winners in this transaction.

So who is winning with brand drugs? The answer is simple. It’s the drug companies. Unchecked for decades, their prices have outpaced inflation three to tenfold. Large corporations like Ford Motor Company can lower their costs by assembling vehicles in Mexico.  As a consumer in today’s economy that is becoming more and more global, however,  you are not allowed to procure your medication for a lower cost from another country such as Canada. Is this fair that large corporations can save money but consumers can’t?  Once again the question of fairness is up to debate and beyond the scope of this article.  While technically illegal and perhaps raises the odds of receiving a counterfeit medication, it’s the only sensible financial option for many Americans.

The above in a nutshell covers the basics of brand name drug pricing.  There are many other topics such as how drug companies determine pricing, rebates drug companies give PBM’s, and copay cards available to the public to help with costs of medications.   Hopefully I will address some of these topics in a future article.

Scott Langdon, RPh

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