PBM Bear Thesis Update: The AWP Alternatives Will Soon Be Here


The Center for Medicare and Medicaid Services’ (CMS) final rule replacing average wholesale price (AWP) as a basis for reimbursing pharmacies for generic drugs dispensed to Medicaid beneficiaries will be published this August. The rule will be effective as early as this September, but no later than December of 2014. Our best guess is that the rule takes effect in either January or June of 2014

To process Medicaid prescriptions, pharmacies nationwide will have to include the AWP alternatives (average manufacturer price or ‘AMP’; and/or national average drug acquisition cost or ‘NADAC’) in their information systems – thus making AMP and NADAC available for commercial (e.g. employer-sponsored) drug benefit contracts

AWP bears no consistent relationship to pharmacies’ costs of acquiring generics; two government studies cited herein show that AWP-based reimbursement tends to exceed true acquisition cost by roughly 400 pct. AMP and NADAC both are closely related to true acquisition costs; these same studies show AMP-based pharmacy reimbursement exceeds true acquisition cost by only about 35 pct

We’re convinced commercial plan sponsors will insist on AMP or NADAC as reimbursement benchmarks once these are available in pharmacy information systems, that this will reduce generic dispensing margins throughout the drug trades (PBMs, retail, wholesale), and that PBMs will be most negatively affected

A common counter-thesis is that PBMs will simply shift to the new benchmark but price at a level that maintains to total gross margin. We believe this is unlikely for several reasons, primary among these being the tendency of AMP or NADAC to eliminate much of what makes newly launched generics so particularly profitable

Because AWP is not tied to acquisition costs, as acquisition costs fall in the first months and quarters following the new generic’s launch, pharmacy margins rise (the AWP-based reimbursement remains constant, even while the cost of the generic to pharmacies is falling). AMP and NADAC are tied to acquisition costs, thus as the cost of a generic to pharmacies falls (as it tends to do dramatically early in the new generic’s life), the AMP or NADAC based pharmacy payment also falls, narrowing the opportunity for outsized generic margins in the months and quarters following launch of a new generic

For our full research notes, please visit our published research site

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