AH105 - The Perfect Storm Driving the Future of Drug Pricing, With Josh Golden

Pharmacy benefit managers (PBMs) hold a tremendous amount of control over the US healthcare system. As a result, the contracts that govern the relationship between employers and PBMs are often notoriously complex and confusing. This puts plan sponsors in a difficult position, trudging through massive contracts, comprising hundreds of pages, often filled with acronym and obscure pricing benchmarks. Particularly in traditional PBM contracts, these massive contracts present a serious risk: hidden costs and fees.

In this episode of the Astonishing Healthcare podcast, Josh Golden (SVP, Strategy) returned to discuss the history of drug pricing benchmarks, the mechanics of spread-pricing, his experience navigating these labyrinthian contracts, and why the industry as a whole is moving toward change and transparency.

Why the US Healthcare System Still Relies on AWP

No discussion about PBM contracts is complete without discussing Average Wholesale Price (AWP).  

AWP was originally intended to serve as a standardized starting point for drug pricing, much like the MSRP on a car. But, as Josh points out, nobody pays the MSRP when buying a car. In fact, AWP is no longer tethered to the real-world cost of medications.

Manufacturers set AWP arbitrarily. That’s part of the reason it’s colloquially known in the industry as “Ain’t What’s Paid.” As a result, the published price often increases month over month, even when the actual acquisition cost of the drug drops. This arbitrary nature makes AWP highly susceptible to manipulation.

At a certain point though, plan sponsors caught on. They noticed their costs were rising rapidly, even as generic drug prices became more competitive. Their investigations eventually culminated in a series of class action lawsuits against major supply chain intermediaries, including publishers and wholesalers.

"It all culminated throughout the early 2000s in a series of class action lawsuits,” Josh explained. “The most significant of these went to court and they started the trial process. It ended up settling out of court for $350 million."

Despite this massive settlement and widespread acknowledgment that AWP is a flawed metric, it persists in PBM contracts. Why? Because it preserves the legacy economics and profit margins that some traditional PBMs still cling to.  

Maximum Allowable Cost and the Spread Pricing Problem

While AWP dominates brand-name drug pricing, the Maximum Allowable Cost (MAC) list governs generic medications. PBMs created MAC lists years ago, arguing that the discounts off AWP for generics were too volatile to use for retail pharmacy reimbursement.

Initially, capping the cost of generic drugs seemed like a logical way to protect plan sponsors. Unfortunately, traditional PBMs soon turned MAC lists into a tool for hidden profit, deploying one MAC list to reimburse the retail pharmacy and an entirely different one to bill the employer.

This practice, known as price arbitrage or spread pricing, occurs at the claim and member level. Josh illustrated this with an example of two identical patients walking into the exact same pharmacy.

"When two people from the same PBM walk into the same pharmacy on the same day, one right behind the other in line getting the same drug at the same quantity...twin one might be charged one price and twin two might be charged a price that is one and a half, two times, three times that amount. The only difference is which MAC lists happened to be deployed for administration of that claim."

NADAC and the Shift Toward Cost-Plus Healthcare

Frustration with indices like AWP and MAC has led to the adoption of more reliable benchmarks. The National Average Drug Acquisition Cost (NADAC) emerged around 2011 as a direct response to the government's investigation into AWP manipulation.

Unlike AWP, NADAC relies on survey data collected from retail pharmacies nationwide, reflecting the average cost that pharmacies pay to put drugs on their shelves. Medicaid programs quickly adopted NADAC, and the commercial market is slowly following suit. This eliminates the massive, hidden margins embedded in traditional contracts. And while NADAC is not a perfect index, it is the only available index that is publicly accessible and auditable.

Josh elaborated, “Let's be honest, to track and monitor the true actual acquisition costs across, you know, 62,000 pharmacies, dozens and dozens and dozens of chains, independents, it would be operationally impossible to do so. NADAC gets us virtually all the way there with a reliable average. It's still tethered to reality, but it doesn't require the unimaginable lift that would be required for the true acquisition cost adjudication.”

Four Forces Driving Healthcare Pricing Reform

The pharmacy benefits landscape is currently experiencing a perfect storm of disruption. According to Golden, four massive trade winds are thrusting the industry away from legacy pricing models and toward transparency and cost-plus economics:

• State Regulation: While Congress recently stepped in with a swath of PBM reforms, state legislators have been leading the way. Many states are now mandating NADAC-based reimbursement for pharmacies and actively prohibiting spread pricing models tied to older benchmarks.

• Retail Economic Breaking Point: Independent pharmacies and large chains alike are losing money on a significant portion of the claims they dispense. The volatility of MAC pricing has forced many to close their doors, creating dangerous pharmacy deserts in rural and inner-city neighborhoods.

• Cash Pay Offers: Direct-to-consumer cash prices are exposing the flaws in benefit plan pricing. Innovators like Mark Cuban Cost Plus Drugs and initiatives like direct offers from pharmaceutical manufacturers allow patients to see the true cost of medications. Patients are now comparing these low cash prices to the inflated rates charged through their benefit plans.

• Class Action Lawsuits: A new wave of legal action is targeting the massive gap between AWP-based pricing and actual acquisition costs. These lawsuits frequently reference NADAC as a common sense benchmark to expose alternative reality pricing.

The Real Cost Driver in Pharmacy Benefits

What has astonished Josh the most about this topic? Unit cost may not even be the most significant driver of healthcare spending.

"That's not even the thing that's moving the needle right now on cost,” he said. “We haven't even tiptoed into the world of drug mix, the world of the thousand tiny decisions that the PBM makes on behalf of the plan sponsor and the patient every day."

Managing these decisions is the next great frontier for organizations seeking to gain control over their healthcare spend. You can watch PMPM vs Clinical Guarantees: A Pharmacist and an Actuary Explain How to Create Predictability Around Pharmacy Spend for more detail on drug mix and what drives future pharmacy spend, but to bring healthcare costs under control, employers must demand clear, transparent contracts and pricing from their partners - especially their PBMs.

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