There has been a lot of buzz lately about NADAC drug pricing. But what is NADAC? How is it different from the more typical measures used for drug pricing? And, importantly, is it better?
Spoiler alert: For pass-through PBMs, who are already operating transparently, NADAC’s value must be evaluated on its ability to drive savings. We find that, as part of a greater pricing logic, it has potential - but today NADAC pricing is not meaningfully different to the status quo for transparent, pass-through PBMs.
Read on to understand why this is and what needs to be true to make it worth adding another layer of complexity to the drug pricing equation.
A major advantage of NADAC in today’s ecosystem is combatting the creation of “spread” revenue by a PBM. Because NADAC prices are publicly available, if a PBM uses NADAC pricing to pay the pharmacy, the payer can confirm that they are being invoiced for the NADAC amount - not more.
This would make it harder for traditional, “spread” PBMs to hide money.
The Big 3 PBMS all operate on a spread model. So if the Big 3 PBMs adopted NADAC, it would usher in a new era of transparency. But they haven’t. They don’t want to because it would hurt their bottom line - a lot.
But for PBMs who have fully transparent, 100% pass-through models, what the PBM pays the pharmacy is by definition the same amount that the PBM will invoice to the plan sponsor.
WithMe Health is an example of this. As we are already fully transparent and 100% pass-through, our clients know exactly what we pay and what we earn.
So for us, the heart of the question about NADAC’s value comes down to this: Would NADAC offer our plan sponsors and members savings?
In this article, we boil it all down to the basics. We’re going to look at how drug pricing is determined on a transactional level by first understanding how “lower of” rationale is used and then look into the bigger question: Lower of what, and does NADAC make a difference?
How much a PBM pays a pharmacy is determined by the contract between the PBM and the pharmacy network. This price is the basis for what the member pays (copay) and what the plan pays. For pass-through PBMs, this amount is traditionally the output of a “lower of” algorithm.
Almost universally, to determine what price to pay for a drug, the PBM’s system will look across three pricing lists: Average Wholesale Price (AWP) minus X% discount plus a dispensing fee, Maximum Allowable Cost (MAC) plus dispensing fee, and Usual & Customary (U&C) fee. It will then select the lower of these three to be the base cost.
The drug supply chain has five important transactions. Manufacturer to wholesaler, wholesaler to pharmacy, pharmacy to patient, pharmacy to PBM, and PBM to payer.
The most common drug pricing methods come from various relationships in the supply chain- and their data is produced through different methodologies. These differences are important to understanding how these metrics work together and where there is room for improvement.
Some come from small sample surveys submitted to private companies. Some are the output of contracting. Some reflect actual transactions.
It’s complex, so let’s break it down.
In the “lower of” algorithm, the most common reference price bases are AWP-minus, MAC, and U&C. Although less common, we’ll add NADAC to the list, so we can understand how it fits into the bigger picture.
What transaction does the price represent? Pharmacy to patient. This is the cost of the drug to a consumer without insurance on the day of purchase.
How is the price determined? Individual pharmacies determine this based on their cash pricing strategy
How is this data collected? Pharmacies report this to contracted PBMs when they submit a claim for processing.
Who can see this price? The pharmacy, the PBM, and the payer if their PBM contract allows for it to be seen
How often is it updated? Pharmacies will update the U&C usually if there is a change in the price from the wholesaler
What drugs does it apply to? All drugs dispensed by pharmacies, including retail, mail order, and specialty, where the patient is paying cash
Who uses it? The patient pays the U&C in cash to the pharmacy. The PBM maintains visibility into this claim but does not pay out on it, nor do they invoice the pharmacy.
How is it usually applied? As is - U&C
What transaction does the price represent? PBM to pharmacy. MAC is the maximum price per unit cost for multi-source generic medications across a specific drug name, strength, and dosage form. MAC is set by a PBM in their contract with a pharmacy network as the maximum price the PBM will reimburse the pharmacy for a given generic.
How is the price determined? This price is set as part of the contract between a PBM and a pharmacy. MAC is typically based on multiple pricing benchmarks, including AWP, WAC (wholesale acquisition cost), and NADAC.
How is this data collected? It exists within the contract between the PBM and the pharmacy but is not aggregated
Who can see this price? PBMs and pharmacies with whom they are contracted
How often is it updated? Unpredictable and oftentimes poorly communicated
What drugs does it apply to? Multi-source generics
Who uses it? When applied, PBMs use this to reimburse pharmacies and to invoice payers
How is it usually applied? Per unit MAC cost * total quantity + dispensing fee
What transaction does the price represent? Manufacturer to wholesaler. This is the suggested retail price, determined by the manufacturer - not including purchasing rebates or other volume discounts (it is often compared to the “sticker price” on a car).
How is the price determined? Formerly, manufacturers would inform publishers of these prices. Manufacturers continue to do so regularly for generics but infrequently for branded drugs (as a result of lawsuits). When a publisher does not have a manufacturer-provided AWP, they use a formula to determine one: Wholesale Acquisition Cost (WAC) * 1.2 = AWP. WAC is the manufacturer’s list price to wholesalers and direct purchasers, not including discounts and rebates. The 20% markup on WAC is the proxy for AWP.
How is this data collected? Medi-Span and First Data Bank aggregate this data based on manufacturer surveys and calculated proxies
Who can see this price? Subscribers to Medi-Span and First Data Bank drug pricing data
How often is it updated? Pricing is updated at the discretion of the manufacturer on an individual drug level (usually quarterly, semi-annually, or annually). Changes can occur weekly on the files from the publisher of pricing data.
What drugs does it apply to? All drugs
Who uses it? Pharmacies use AWP-minus as the basis for purchasing from wholesalers. PBMs can use AWP- minus as the basis for reimbursing pharmacies, unless another pricing methodology is mandated (infrequent but an example is West Virginia, which requires NADAC methodology be used for this). And AWP-minus can be the basis for invoicing payers for brand drugs and non-MAC generics. In each example, the minus (discount off the AWP price) is set differently, affecting the potential margins for each of these transactions.
How is it usually applied? In PBM pricing arrangements, AWP - X% discount rate + dispensing fee. X% discount rate is determined by the PBM and is usually in the 12-17% range. The dispensing fee varies based on the pharmacy chain and type.
What transaction does the price represent? PBM to pharmacy. These are the prices that surveyed pharmacies report paying to wholesalers.
How is the price determined? The price reflects actual invoices from transactions between community retail pharmacies and wholesalers
How is this data collected? A private firm surveys a small sampling of independent and chain “retail community pharmacies” for data on actual transactions
Who can see this price? It is publicly available
How often is it updated? Weekly
What drugs does it apply to? Medications sold by retail community pharmacies who complete the survey. There are currently ~24k drugs covered by NADAC prices, or ~10% of the FDA approved drug codes. Not included: drugs sold exclusively through pharmacies that deliver through the mail, primarily affecting specialty drugs.
Who uses it? A pharmacy can use this for purchasing from a wholesaler. If contracted to do so, a PBM can use this to reimburse the pharmacy and as the basis for invoicing the payer.
How is it usually applied? NADAC + dispensing fee
At WithMe, our “lower of” logic looks across U&C, MAC, and AWP-minus to determine the price that we will pay to the pharmacy and for which we will invoice the plan sponsor. What does it look like when we compare our “lower of” pricing to NADAC?
We looked at several common non-specialty and specialty drugs to make this comparison. Here are just a few examples.
The drugs illustrated below reflect WithMe Health’s standard retail rates and dispensing fees.
Rates: We used September 2022 data for NADAC rates and for WithMe Health’s retail rates for a national pharmacy contract.
Dispensing Fees: Dispensing fees play a role in the final price and they are meaningfully lower in the standard “lower of” calculation than they are in NADAC.
This is because – unlike U&C, AWP or MAC – NADAC is a “cost plus” drug pricing method. The NADAC dispensing fees account for the ingredient cost plus the vial, labor, label and other charges where relevant, such as the bag. As such, NADAC dispensing fees vary a lot across both regions and pharmacies. For our NADAC calculation, we used an average of the published dispensing fees in West Virginia (the only state where NADAC is currently regulated) which was $10.49. For WithMe claims, we used our average dispensing fee of $0.60.
More detail: If you're interested, there is a drug pricing comparison table with more detail at bottom.
Sometimes our “lower of” price is lower than NADAC–but not by a lot. Sometimes NADAC is lower than our “lower of”–but, again, not by a lot.
Given the variation in how the different drug pricing bases are created, reported, and updated, we believe applying the “lower of” logic is essential. It leverages the strengths of each approach, but not the weaknesses.
Should NADAC be added to the traditional “lower of” menu?
Maybe. In an already complicated ecosystem, we don’t want to add complexity for complexity’s sake. The NADAC drug list is still limited. Our analysis was bigger than what’s in the charts above but, in its entirety, it told the same story. Adding NADAC to the mix would, in aggregate, have an almost negligible impact on our drug prices. But if this changes - if it evolves so that it can really make a difference in costs - then we’re on board.
1. William A. Davis, Mintz, Leving, Cohn, Ferris, Glovsky, and Popeo, “AWP (Average Wholesale Price) And Industry’s Search for a Viable Replacement Pricing Benchmark”
2. US Pharmacist, “Understanding Drug Pricing”
3. Drugs.com, “Average Wholesale Price (AWP) as a Pricing Benchmark”
5. Academy of Managed Care Pharmacy, “Drug Payment Methodologies”
7. John D. Cook Consulting, “National Drug Code”
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