The Broken Road of AWP

This same scenario can be found repeating itself in pharmaceutical pricing. AWP, or Average Wholesale Price, is the “sticker price” representing the cost of manufacturing pharmaceutical drugs, similar to that of the MSRP on a new car. Let’s look at today’s market to see where the problem begins.  If we assume a brand drug has an AWP of $100, we are led to believe this is the price a pharmaceutical company must be paid to cover all of its cost and required profit. Anything less leaves the manufacturer with a loss which, as we all know, is not sustainable and ultimately would drive the company out of business. However, in today’s market, we see the cost paid for workers’ compensation pharmaceuticals being offered at 20% to 30% discounts and in some cases, that discount can be as high as 60%. We should take a second to do the math. The manufacturer has stated that in order to stay in business, it must receive $100. So, why is the purchase cost discounted by as much as $60 below the alleged cost of production? Additionally, the distribution company’s and the pharmacy’s charges have yet to be added to the bill. SOMETHING IS NOT ADDING UP. Unfortunately, this is worse than the auto example where the consumer doesn’t have a clue.

It doesn’t stop there. A Pharmacy Benefit Management Company (PBM) plays an important role in the distribution of drugs to the injured worker. The PBM accesses a pharmacy network to gain preferred pricing. The PBM then sells its distribution services to a third-party claims administrator (TPA) and typically offers an average discount of, for example, 30% off the AWP. The TPA then goes to the employer whose workers’ compensation program they administer and offers the employer a discount of 20% off AWP.

So, what do we have? Here is an example:

1. 1. Employer receives a bill for a prescription with an AWP of $100 with a discount of 20%, or a payment of $80
   2. The TPA retains 15% of AWP to cover the cost of operation. The $80 pot drops to $65.
   3. The PBM receives the $65 and withholds 15% of the AWP to cover the cost of operations, leaving a balance of $50
   4. A Pharmacy receives the $50 and retains $10, leaving a balance of $40.
   5. The manufacturer receives a payment for the drug in the amount of $40, a shortfall of 60% from the AWP.