AMCP Guide to Pharmaceutical Payment Methods,

2009 Update (Version 2.0)

Academy of Managed Care Pharmacy

Supplement
August 2009
Vol. 15, No. 6-a
Continuing Education Activity

Editor-in-Chief
Frederic R. Curtiss, PhD, RPh, CEBS
830.935.4319, fcurtiss@amcp.org
Associate Editor
Kathleen A. Fairman, MA
602.867.1343, kfairman@amcp.org
Peer Review Administrator
Jennifer A. Booker, 703.317.0725
jmcpreview@amcp.org
Graphic Designer
Margie C. Hunter
703.297.9319, mhunter@amcp.org
Account Manager
Bob Heiman, 856.673.4000
bob.rhmedia@comcast.net
Publisher
Judith A. Cahill, CEBS
Executive Director
Academy of Managed Care Pharmacy
This supplement to the Journal of Managed Care Pharmacy
(ISSN 10834087) is a publication of the Academy of Managed
Care Pharmacy, 100 North Pitt St., Suite 400, Alexandria, VA
22314; 703.683.8416; 703.683.8417 (fax).
Copyright 2009, Academy of Managed Care Pharmacy.
All rights reserved. No part of this publication may be
reproduced or transmitted in any form or by any means,
electronic or mechanical, without written permission from
the Academy of Managed Care Pharmacy.
POSTMASTER: Send address changes to JMCP,
100 North Pitt St., Suite 400, Alexandria, VA 22314.
Supplement Policy Statement
Standards for Supplements to the
Journal of Managed Care Pharmacy
Supplements to the Journal of Managed Care Pharmacy are
intended to support medical education and research in areas
of clinical practice, health care quality improvement, or
efficient administration and delivery of health benefits. The
following standards are applied to all JMCP supplements to
ensure quality and assist readers in evaluating potential
bias and determining alternate explanations for findings
and results.
1.Disclose the principal sources of funding in a manner that
permits easy recognition by the reader.
2.Disclose the existence of all potential conflicts of interest
among supplement contributors, including financial or per-
sonal bias.
3.Describe all drugs by generic name unless the use of
the brand name is necessary to reduce the opportunity for
confusion among readers.
4.Identify any off-label (unapproved) use by drug name and
specific off-label indication.
5.Strive to report subjects of current interest to managed
care pharmacists and other managed care professionals.
6.Seek and publish content that does not duplicate content
in the Journal of Managed Care Pharmacy.
7.Subject all supplements to expert peer review.
This is an update of the October 2007 AMCP Guide to Pharmaceutical Payment Methods1
which was created by the Academy of Managed Care Pharmacy Task Force on
Pharmaceutical Payment Methods in conjunction with the consulting firm of Tag &
Associates, Inc. The update incorporates revisions by Tag & Associates, Inc. (Howard
Tag, JD, and Elan Rubinstein, PharmD, MPH), Alexandria, VA.
Note on references and AMCPs interactive resource library
The references in the text of the Guide and in the list of references contain URL hyper-
links to the source documents that are publicly available. In addition, on the AMCP
Web site is an interactive resource librarya searchable interactive database of articles and
documents that examine drug product payment methods in the United States.2
Pharmacists Accreditation and Credit Designation Statement
The Academy of Managed Care Pharmacy is accredited by the
Accreditation Council for Pharmacy Education (ACPE) as a provider
of continuing pharmacy education. AMCP designates this continuing
education activity for 2.0 contact hours of credit or .20 Continuing
Education Units (CEUs). ACPE Universal Program Number: 233-000-09-028-H01-P.
For questions regarding the accreditation of this activity, please contact the AMCP
Education and Meetings Department at 800.827.2627, ext. 604.
Release Date: August 1, 2009
Expiration Date: August 1, 2011
Type of Activity: Knowledge-Based
Target Audience: Pharmacists
Author Disclosures
Howard Tag, JD, and Elan Rubinstein, PharmD, MPH, provide consulting services
to clients that include professional associations, health plans, purchasers, providers,
pharmaceutical, biological, and medical device manufacturers, and other health care
entities.
About AMCP
AMCP is a national professional association of pharmacists and other health care practi-
tioners who serve society by the application of sound medication management principles
and strategies to improve health care for all. The Academys 5,700-plus members develop
and provide a diversified range of clinical, educational, and business management servic-
es and strategies on behalf of the more than 200 million Americans covered by a managed
care pharmacy benefit. For more information about AMCP, visit www.amcp.org.
Learning Objectives
Upon reading this supplement, readers should be able to:
1. Describe the strengths, weaknesses and future prospects for AWP and
WAC pricing benchmarks.
2. Differentiate the pricing benchmarks ASP and AMP.
3. Explain how the use of the newer benchmarks such as ASP and AMP may
put particular types of providers at competitive disadvantage.
4. Describe common price limits such as FUL, MAC, and reference price.
5. Recognize how prescription drug characteristics (e.g., small molecule,
biotechnology product, self-injectable, DME-supported infusible) affect
access, coverage, third-party payment and patient cost-sharing.
6. Review federal program (including Medicare, Medicaid and 340B), private
sector payer and PBM roles in the payment and management of prescrip-
tion drugs dispensed or administered in different settings (e.g., by com-
munity pharmacies, hospital outpatient, physician office, home health).
7. Discuss the influence of provider incentives in the management of pre-
scription drug utilization and cost.
8. Discuss how provider risk-sharing, pricing transparency, bundling, com-
parative effectiveness, and pharmacogenomics affect physician prescribing,
cost and patient access.
Funding of This Learning Activity
There was no external funding of this learning activity.
Fee Information
There is no fee to participate in this educational activity.
 Table of Contents
AMCP Guide to Pharmaceutical Payment Methods, 2009 Update (Version 2.0)

Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S3
Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S4
Payment Benchmarks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S4
Average Wholesale Price and Wholesale Acquisition Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S4
Average Sales Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S4
Average Manufacturer Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S5
Payers and Payment Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S5
Medicare. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S5
Medicaid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S5
Private Purchasers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S6
How Products, Services, and Payments Flow Through Channels of Distribution. . . . . . . . . . . . . . . . . . . . . . . . . S7
Exhibit 1. Drug Distribution Model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S6
Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S7
Recent Pharmaceutical Payment Milestones. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S7
Table 1. Pharmaceutical Payment Milestones: 2005-2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S8
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .S7
I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S10
Exhibit I-1. Milliman Medical Index Annual Rate of Increase in Costs by Component of Medical Care. . S10
Exhibit I-2. Monthly and Median Costs of Cancer Drugs at the Time
of Approval by the FDA, 1965-2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S11
Exhibit I-3. Example of Pharmaceutical Classes of Trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S11
II. PAYMENT BENCHMARKS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S12
Benchmarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S12
Average Wholesale Price (AWP). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S12
Average Sales Price (ASP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S13
Impact on Provider Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S13
Average Manufacturer Price (AMP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S13
Exhibit II-1. Components of AMP Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S14
Best Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S15
Wholesale Acquisition Cost (WAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S15
Maximum Allowable Cost (MAC) or Maximum Reimbursement Amount (MRA) . . . . . . . . . . . . . . . . . . . S16
Federal Upper Limit (FUL). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S16
Public Health Service (PHS or 340B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S16
Comparison of Benchmark Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S16
Benchmarks and the Goal of Appropriate Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S17
Exhibit II-2. Estimated Prices Paid to Manufacturers, Relative to List Price (AWP),
for Brand-Name Drugs Under Selected Federal Programs, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S16
III. PAYERS AND PAYMENT METHODS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S18
Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .S18
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S18
Medicares Influence on Prescription Drug Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S18
Hospital Outpatient Departments (HOPDs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S18
Physician Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S18
Pharmacy-Dispensed Medicare Part B Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S18
Pharmacy-Dispensed Medicare Part D Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S19
Exhibit III-1. Prescription Drug Coverage Among Medicare Beneficiaries, 2008. . . . . . . . . . . . . . . . . . . . . S19
Medicare Payment to PDPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S19
Exhibit III-2. Standard Medicare Prescription Drug Benefit, 2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S19
Exhibit III-3. Plan Liability Under Risk Corridor Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S20
PDP Report to CMS of Lock-in Price vs. Pass-Through Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S20
Pharmaceutical Manufacturer Price Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S20
Part B vs. Part D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S21
Protected Therapeutic Classes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S21
Least Costly Alternative (LCA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S21
Home Health Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S21
Medicaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S22
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S22
Dual Eligibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S22
 Rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S22
Revising AMP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S23
Deficit Reduction Act of 2005 (DRA) and Subsequent Rulemaking. . . . . . . . . . . . . . . . . . . . . . . . . . . S23
Private Purchasers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S23
Structure of Privately Sponsored Health Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S24
Exhibit III-4. Coverage by Type of Health Insurance, 2006 and 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S23
Benefit Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S24
Use of Formularies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S24
Exhibit III-5. Average Copayments Among Covered Workers
Facing Prescription Drug Copayments, 2000-2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S24
Exhibit III-6. Median Cost-Sharing for a Months Supply of a
Prescription Drug Has Risen Among PDPs, 2006-2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S25
Traditional and Transparent Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S25
Prescription Drug Rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S26
Patient Expenditures for Pharmaceuticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S26
Relationship of Provider to Payment Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S26
Community Pharmacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S27
Providers of Specialty Injectables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S28
Exhibit III-7. Common Cost-Sharing Methods for Specialty Drugs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S27
Exhibit III-8. Average AWP Discount for Specialty Pharmacy Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . S27
Exhibit III-9. Average ASP Markup Percentages for Specialty Pharmacy Products . . . . . . . . . . . . . . . . . . . S28
Hospital Inpatient and Outpatient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S29
Physician Office Drugs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S29
Exhibit III-10. Reimbursement Benchmarks for Physician Office Drugs, 2007 and 2008. . . . . . . . . . . . . S28
Exhibit III-11. ASP-Based Reimbursement in the Physician-Office Setting . . . . . . . . . . . . . . . . . . . . . . . . . S29
Home Health. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S30
Exhibit III-12. Reimbursement Benchmarks Used for Medicaid Specialty
Pharmacy Products, by Distribution Channel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S30
IV. HOW PRODUCTS, SERVICES, AND PAYMENTS FLOW THROUGH CHANNELS OF DISTRIBUTION. . . . . . . S31
Exhibit IV-1. Pharmacy Benefit (Other Than Medicare Prescription Drug Benefit) . . . . . . . . . . . . . . . . . . . . . . S32
Exhibit IV-2. Medicare Prescription Drug Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S33
V. ISSUES AND IMPLICATIONS FOR STAKEHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S35
Actual Transaction Price as the Basis of Drug Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S35
Issue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S35
Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S35
Public Disclosure of Actual Transaction Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S36
Issue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S36
Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S36
Bundling (Combining) Drugs With Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S36
Issue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S36
Exhibit V-1. Payment System AlternativesPatient-Centered Medical Home. . . . . . . . . . . . . . . . . . . . . . . S37
Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S36
Pricing Transparency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S37
Issue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S37
Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S37
Prescription Drug Risk-Adjusted Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S37
Issue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S37
Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S37
Beneficiary Cost Shift. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S38
Issue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S38
Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S38
Use of Comparative-Effectiveness Research Findings to Guide Benefits, Access, and Payment. . . . . . . . . . . S38
Issue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S38
Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S38
Pharmaceutical Manufacturer Acceptance of Risk for Desired Therapeutic Outcomes. . . . . . . . . . . . . . . . . . . S39
Issue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S39
Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S39
Pharmacogenomics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S39
Issue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S39
Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S40
VI. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S41
VII. ACRONYM LIST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S42
VIII. GLOSSARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S44
IX. REFERENCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S53
CONTINUING EDUCATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S58
POSTTEST WORKSHEET. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S59

S2 Supplement to Journal of Managed Care Pharmacy JMCP August 2009 Vol. 15, No. 6-a www.amcp.org
 AMCP Guide to Pharmaceutical Payment Methods,
2009 Update
EXECUTIVE SUMMARY
T
he methods by which the U.S. health care system pays for
prescription drugs have faced increasing scrutiny in recent
years. Two key developments have emerged: (a) congres-
sional enactment of important changes in the basis for payments
for prescription drugs in the Medicare and Medicaid programs;
and (b) a March 2009 decision in a federal class action lawsuit
that alleged fraudulent manipulation of the dominant pricing
benchmark (average wholesale price, AWP), used primarily as the
basis for payment for brand-name prescription drugs.
The debate about prescription drug payment methods centers
on determining the most appropriate basis for calculating how
payers, including patients, government agencies, employers,
and health plans, should pay pharmacies and other providers
for drugs. Historically, payment for prescription drugs has been
based on published prices that do not necessarily reflect the
actual acquisition costs paid by providers, primarily pharmacies,
physicians, and hospitals. This has led policymakers to believe
that Medicare and Medicaid programs have paid more than is
necessary for prescription drugs. Thus, in an effort to reform the
payment system and reduce drug expenditures, policymakers
have made significant changes to the benchmarks used by public
programs to pay for drugs, and in some instances have created
new benchmarks.
Private payers have followed the governments lead and begun
to change their own payment methods and benchmarks. They
can be expected to accelerate the change as a result of the settle-
ment agreement approved in the March 2009 federal court deci-
sion. The settlement will result in the lowering of the AWP for
more than 400 generic and brand-name drugs. In additionand
technically unrelated to the litigation and any appeals that may be
taken2 major price data reporting companies, First DataBank
and Medi-Span, announced their intent to discontinue publica-
tion of AWP within 2 years of September 26, 2009. (At the time
this report was prepared, there have been no similar announce-
ments from Thomson Healthcare for Redbook or from Elsevier
for Gold Standard [ProspectoRx], who are 2 other publishers of
prescription drug prices). Furthermore, several manufacturers
have announced that they will no longer provide either an AWP
or a markup percentage on certain pharmaceuticals.3 Thus, by
2011, the AWP benchmark as we know it will no longer be widely
available for use by public or commercial payers for payment of
pharmaceutical products.
Todays prescription drug payment to pharmacies, physicians,
and other providers is often determined by a formula based on
the AWP benchmark. However, it is unclear how replacement
of the AWP benchmark might affect provider payment for two
reasons: (a) no widely available alternative benchmark has been
selected, and (b) pharmacy benefit manager contracts with
network pharmacies often include language to adjust payment
www.amcp.org Vol. 15, No. 6-a
under any new benchmark to maintain comparable pricing to
the AWP standard.
The U.S. drug purchasing and distribution system is complex
and involves multiple transactions among myriad stakeholders,
including drug manufacturers, distributors, third-party payers,
pharmacies, physicians, and patients. Any change in payment
methods or benchmarks has significant implications for all
stakeholders, affecting the payments and prices to and from each
of these groups. Knowledge of the intricate distribution and pay-
ment systems for prescription drugs is essential to ensure that
payment reform results in desired outcomes including fair and
equitable payment to providers while avoiding unintended con-
sequences such as reduced access to medically necessary drugs.
AMCP recognizes the need to help stakeholders and poli-
cymakers better understand, evaluate and navigate the pro-
found changes occurring in payment for prescription drugs
in the United States. This 2009 update to the AMCP Guide to
Pharmaceutical Payment Methods1 offers a comprehensive exami-
nation of the methods and price benchmarks that have been used
in the public and private sector to pay for pharmaceuticals in the
United States, the changes that have occurred or are likely to
occur in the future, and the forces that are behind these changes.
AMCP has made every effort to make the Guide an unbiased pre-
sentation of information, issues, and implications.
The Guide is presented in 5 main sections including an intro-
duction and the following 4 subject areas:
Payment Benchmarks. Section II explains the drug payment
benchmarks that have come into use over the past 4 decades,
how and when they are used, and how they compare to one
another. The benchmarks discussed in detail are those that have
the greatest overall impact on pharmaceutical payment or are
currently receiving the most scrutiny and discussion, includ-
ing AWP, average sales price (ASP), average manufacturer price
(AMP), wholesale acquisition cost (WAC), maximum allowable
cost (MAC), and the federal upper limit (FUL).
Payers and Payment Methods. Section III describes payment
methods used by payers as well as manufacturers price conces-
sions related to product preference and acquisition across vari-
ous settings of care such as community pharmacy, mail service
pharmacy, physician offices, and hospitals. The payers discussed
in this Guide include public payers such as Medicare, Medicaid,
and the Public Health Services 340B program, and private pay-
ers such as commercial insurers, self-funded plans, Taft-Hartley
plans, and individual patient payments. Also covered are topics
relevant to private health insurance, including benefit design, the
use of formularies by private payers, and the relationship of these
factors to the availability of rebates from drug manufacturers.
How Products, Services, and Payments Flow Through
Channels of Distribution. Section IV provides a detailed
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S3
 Executive Summary
analysis of how drugs are purchased, distributed, and paid for by
various entities within the pharmaceutical supply chain in the
U.S. The purpose of this section is to examine the complexity of
the drug distribution system as well as the multiple direct and
indirect transactions that occur.
Select Issues and Implications for Stakeholders. Section V
explores the immediate and future issues and implications of the
most significant changes to drug payment methods or benchmark
prices that have been proposed or implemented in recent years.
The topics evaluated in this section include the pending switch
to the use of AMP by state Medicaid programs for drug payment;
the ongoing implications of the implementation of ASP under
Medicare Part B, and the implications that both of these changes
may have for private payers in the pharmaceutical marketplace;
pricing transparency; and bundling of provider payment for pre-
scription drugs with payment for other related services
Highlights
The following key issues are discussed in this Guide. Please refer
to the corresponding section in the Guide for a more detailed
discussion of trends in drug pricing and payment.
Payment Benchmarks
Some health plans cover pharmaceuticals under the medical
benefit (e.g., drugs administered in a medical office or clinic set-
ting), while others may cover them under the pharmacy benefit
(e.g., drugs dispensed by a pharmacist). Pharmaceuticals covered
under either the medical benefit and/or the pharmacy benefit
component of a health plan typically have differing payment
methods and price benchmarks.
Average Wholesale Price and Wholesale Acquisition Cost
Historically, AWP was the generally accepted drug payment
benchmark for many payers, primarily because it was readily
available. However, in more recent years AWP became recog-
nized as a sticker price that does not reflect the average whole-
sale price ultimately paid after discounts have been subtracted.
AWP is related to WAC, although not by a standard multiplier.
Historically, the relationship of AWP to WAC has been most
commonly characterized by one of the following equations, as
determined by the manufacturer:
AWP=1.20 x WAC, or
AWP=1.25 x WAC
However, WAC is not an actual acquisition cost for a whole-
saler, because the WAC does not include many of the discounts
and price concessions that are offered by manufacturers. For
sole-source branded pharmaceuticals, WAC more closely approx-
imates the price that pharmacies pay to manufacturers or whole-
salers than does AWP and, for this reason, often serves as the
basis for discounts and rebates negotiated between manufacturers
and private payers (i.e., discounts and rebates are based on WAC)
for both medical and pharmacy benefit drugs. Manipulation of
S4 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
the so-called spread or differential between WAC and AWP
has been the subject of lawsuits against pharmaceutical manu-
facturers alleging gross inflation of AWP for certain physician-
administered drugs.
Recognition of the unreliability of AWP as a benchmark of
real-world prices actually paid by pharmacies and other purchas-
ers, including physicians, has precipitated the search for other
reference prices for payment purposes. The impending demise
of AWP as a basis for payment for pharmaceuticals in the United
States became more certain on March 17, 2009, with the decision
by U.S. District Court Judge Saris on the proposed settlement
in the 2 national class action lawsuits against First DataBank/
McKesson and Medi-Span. This decision will result in the roll-
back of the multiplier used to calculate AWP. The WAC multiplier
of 1.25 (or greater than 1.20) will be reduced to 1.20 for the 1,442
National Drug Code (NDC) numbers referenced in the lawsuit,
effective September 26, 2009, under order of the court in accep-
tance of the proposed settlement. First DataBank announced as
an independent commercial publisher that it would do the fol-
lowing: (a) apply the 1.20 multiplier in calculating AWPs for all
other NDCs whose AWPs were derived using a multiplier greater
than 1.20, and (b) discontinue publication of AWP no later than
2 years following implementation of the recalculated AWPs.
Medi-Span has made a similar announcement.4,5,6 When this
Guide went to press, Thomson Healthcare, publisher of Redbook,
and Elsevier, publisher of Gold Standard (ProspectoRx), had not
announced similar changes.
Unless third-party reimbursement contracts with pharmacies
are renegotiated, the practical results of this settlement and other
changes to be implemented include (a) reduction in pharmacy
gross margin on the affected drug prices paid under AWP-
discount-based third-party contracts, and (b) a proportionate
reduction in beneficiary cost-share amounts that are based on
coinsurance rather than dollar copayments.
Average Sales Price
As a result of the 2003 Medicare Prescription Drug, Improvement,
and Modernization Act (MMA) (Public Law 108-173), ASP
replaced AWP as the basis for payment for most drugs covered
under Medicares medical benefitMedicare Part Bas of
January 1, 2005. Unlike AWP, ASP is based on manufacturer-
reported actual selling price data and includes the majority of
rebates, volume discounts, and other price concessions offered
to all classes of trade (excluded from the calculation of ASP are
all sales that are exempt from best price and sales at nominal
price [see Glossary]).
Because ASP is an average, some providers are able to obtain
pharmaceuticals below this average selling price, while others are
able only to purchase the drugs at a price that is above the aver-
age. Historically, small physician offices and specialty pharmacies
buy at the least favorable prices and are unable to purchase some
drugs at prices at or below the ASP prices or ASP-based payment
Vol. 15, No. 6-a www.amcp.org
 Executive Summary
amounts. Generally, large physician groups and hospitals are able
to negotiate the best discounts and price concessions and are bet-
ter positioned under the ASP payment system.
ASP values are publicly available on the federal governments
Centers for Medicare & Medicaid Services (CMS) Web site, and
private payers are therefore able to use ASP for payment of medi-
cal benefit drugs. Uptake of the ASP benchmark by commercial
sector has been slow but steady. Survey data from approximately
100 payers showed that, by the fall of 2008, about 44% of pri-
vate payers used ASP as their primary payment benchmark for
specialty therapies (accounting for more than half of covered
members), but only 16% of payers depended exclusively on ASP
and 37% had no ASP contracts.7
Average Manufacturer Price
Congress created AMP as part of the Omnibus Budget
Reconciliation Act (OBRA 1990) for the purpose of calculating
rebates to be paid by manufacturers to states for drugs dispensed
to their Medicaid beneficiaries. AMP was defined as the price
available to the retail class of trade and reflected discounts and
other price concessions afforded those entities.
In another effort by the federal government to eliminate AWP
as a payment benchmark, the Deficit Reduction Act of 2005
(DRA) mandated that AMP instead of AWP be used for the cal-
culation of the FUL. FUL is the maximum amount of pharmacy
reimbursement for product costs for certain generic and multiple-
source drugs that the federal government will recognize in calcu-
lating federal matching funds for payment to state Medicaid pro-
grams. Congress mandated that CMS follow a formal rulemaking
process to outline a clear, consistent definition of AMP for manu-
facturers. In July 2007, CMS published a final rule that broadly
defined the retail class of trade, including community pharmacies
as well as mail-order pharmacies, physician offices, outpatient
facilities, and other outlets that sell drugs to the general public.
The rule did not include pharmacy benefit management compa-
nies (PBMs),8 long-term care facilities, or federal drug benefit pro-
grams within the definition of retail class of trade. This broad
definition led to industry dissent and even legal challenges to
AMP use. There is disagreement about the fairness of a single rate
for reimbursement when all of the providers in the class cannot
buy at similar rates; for example, community pharmacies serving
walk-in patients that do not have access to purchase prices and
discounts available to mail-order pharmacies.
The Medicare Improvements for Patients and Providers Act
of 2008 (MIPPA) (Public Law 110-275) delayed the implemen-
tation of new Medicaid payment limits to retail pharmacies
using the AMP for multiple-source (generic and brand) drugs9
and instructed the Secretary of the Department of Health and
Human Services (DHHS) to suspend through September 30,
2009, the planned publication of AMP data submissions on a
public Web site. States may not switch to AMP-based pharmacy
www.amcp.org Vol. 15, No. 6-a
reimbursement prior to this time. It is anticipated that there
will be efforts in the current Congress to either further delay or
otherwise modify the statutory 2005 AMP mandate. In addition,
there is pending litigation in the courts that upon resolution
could affect AMP.
Payers and Payment Methods
Payment to providers for the drugs they administer or dispense
varies depending on the payer and the site of care.
Medicare
Medicares payment for drugs depends on the treatment setting.
Drugs provided in the hospital inpatient setting typically do not
receive separate payment, but instead their costs are accounted
for in the diagnosis related group (DRG)-based prospective pay-
ment made to the hospital. Similarly, drugs used in the hospital
outpatient department for which the cost per day is $60 or less (in
2009) are bundled into ambulatory payment classification (APC)
reimbursement for the procedures with which they are used;
there is no separate payment made for those drugs. Currently,
drugs with a cost per day exceeding this threshold ($60) in the
hospital outpatient department receive separate payment; as of
January 1, 2009, the payment rate for the majority of these drugs
is ASP plus 4%, and drugs with pass-through status will be paid
at ASP plus 6%.10,11
Most drugs administered in physicians offices and thus cov-
ered by Medicares Part B medical benefit also are paid using
the formula ASP plus 6%. The Part B Competitive Acquisition
Program (CAP), through which CAP-electing physicians obtained
Part B drugs administered in their offices through a CMS-
contracted CAP vendor, was postponed by CMS for 2009, effec-
tive December 31, 2008.12
On January 1, 2006, as a result of passage of the MMA,
Medicare also began to pay for outpatient pharmaceuticals
dispensed at the pharmacy under Part D. Part D benefits are
provided through stand-alone prescription drug plans (PDPs)
and Medicare Advantage prescription drug plans (MA-PDs) that
are integrated with a medical plan. These drug plans typically
are offered by PBMs and commercial health plans. Subject to
legislated mandates and to CMS guidelines and approval, each
PDP and MA-PD sets its own premiums, benefit structures, drug
formularies, pharmacy networks, and terms of payment. Thus,
unlike the other components of Medicare where a standard pay-
ment formula typically exists, drug payment to pharmacies and
member cost-share vary by individual plan under Part D.
Medicaid
Currently, every state Medicaid program includes an outpatient
prescription drug benefit (also called a pharmacy benefit). As
of June 30, 2007, 64.1% of Medicaid enrollees nationwide were
enrolled in managed care plans.13 In that year, 20 Medicaid
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S5
 Executive Summary
EXHIBIT 1 Drug Distribution Model
AWP-, WAC- or MAC-based,
Negotiated Payment
ASP-, AWP- or WAC-based,
Negotiated Payment
programs carved-out their pharmacy benefit, in whole or in part,
from these managed care plans.14
Under fee-for-service Medicaid, states usually pay pharmacies
directly for the drugs dispensed to Medicaid beneficiaries, typi-
cally using a rate based on AWP or WAC for brand drugs and
maximum allowable cost (MAC, based on federal and state upper
limits) for multiple-source brand and generic drugs. If the benefi-
ciary is enrolled in a Medicaid managed care plan, the state may
pay the Medicaid managed care plan to cover pharmacy benefits
for beneficiaries, or the state may choose to carve out the phar-
macy benefit and pay for it directly under fee-for-service admin-
istered by the state. Under managed Medicaid without carve-out,
each MCO negotiates with drug manufacturers for rebates and
discounts and manages its own drug formulary. Under carve-
out, the state pays pharmacies for prescription drugs directly and
manages a statewide formulary that may include a preferred drug
list (PDL) and supplemental rebates as well as rebates mandated
by federal statute. Beneficiaries who are eligible for both Medicaid
and Medicare (dual eligibles) receive prescription drug benefits
through the Medicare Part D outpatient drug benefit.
Every state Medicaid program, either directly or through
managed Medicaid organizations, also pays for drugs that are
utilized under the medical benefit (e.g., in the physicians office
and clinic). Drugs covered under the medical benefit are typically
paid for separately based on formulas that vary by state, but are
based on AWP, WAC, or ASP.
S6 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
Private Purchasers
Compared with public payers, there is less transparency in the
payment methods used by private payers to pay for prescrip-
tion drugs. For example, private payers use MAC price lists for
multiple-source drugs; however, prices contained in these MAC
lists, the methodology by which these lists are constructed, and
the frequency with which they are updated, are not publicly dis-
closed. Similar to public payers, private payers use drug formu-
laries to manage beneficiary prescription drug use and the cost
of drugs paid for by the plan. Most formularies have copayment
tiers that correspond to different levels of beneficiary cost shar-
ing. The placement of drugs within copayment tiers is related
to their relative safety, efficacy, and effectiveness as determined
by health plan or PBM pharmacy and therapeutics (P&T) com-
mittees as well as their direct cost, including the price conces-
sions that private payers can obtain from drug manufacturers.15
Generic drugs are commonly placed in the lowest copayment tier.
Private payers also negotiate drug payment rates with pharmacy
providers; historically, these rates have been based on AWP or
WAC, and include MAC pricing for most generic drugs.
As in Medicare DRGs, private payers prefer to bundle payment
for prescription drugs in DRG-based payments or in per-diem
rates in the inpatient hospital setting, while hospital outpatient
drugs are more commonly paid for separately if they exceed a
specified cost threshold. Drugs administered in physician offices
are usually paid for separately based on AWP, WAC, or ASP.
Vol. 15, No. 6-a www.amcp.org
 Executive Summary
How Products, Services, and Payments
Flow Through Channels of Distribution (see Exhibit 1)
Any discussion of drug payment should consider the impact of
channel of pharmaceutical distribution (e.g., hospital, physician,
pharmacy) on both payment method and level.
The majority of drug manufacturers ship drugs directly to
drug wholesalers or distributors, who then distribute the drugs
to their end customers. Manufacturers enter into various forms
of contracting arrangements, including discounts and rebates,
with all of the entities within the pharmaceutical supply chain.
Manufacturers typically offer different contracting arrangements,
depending on customers channel of distribution or class of trade,
which may be administered by wholesalers or distributors or
directly with the manufacturers.
Health plans and PBMs also negotiate with manufacturers
for discounts and rebates, primarily for single-source branded
pharmaceuticals in competitive therapeutic categories, pur-
chased for the individuals enrolled in their plans or under their
management, based on volume, market share, and formulary
placement.
Pharmacies receive payment from the health plan or
PBM for the drugs dispensed to the plan members based on a
reimbursement formula agreed to by the payer (or agent) and
pharmacy. Physicians and other providers also negotiate with
health plans for payments for the drugs they administer directly
to beneficiaries. Drug payment may be bundled in some chan-
nels (e.g., DRGs for hospital inpatient and, depending on circum-
stances, APCs for hospital outpatient), or in other channels (e.g.,
pharmacy and physician office) drugs may be paid on the basis of
individual prescriptions dispensed or administered.
At the pharmacy counter or other point of sale, beneficiaries
with health insurance that includes prescription benefit coverage
will typically pay a cost-share to the pharmacy for the prescrip-
tion drug. The cost-sharing type (e.g., copayment or coinsurance)
and amount are set by the terms of that health plan members
benefit design. If the pharmacy plan is administered by a PBM,
the PBM then bills the members health plan or other payer an
amount based on the payment formula stipulated in its provider
service agreement, minus the beneficiary cost-share amount col-
lected by the pharmacy. Individuals without health insurance
or other coverage for the purchase of their prescription drugs or
www.amcp.org Vol. 15, No. 6-a
without the assistance of negotiated pricing through a discount
card program must pay the pharmacys or other providers
usual and customary (U&C) price to obtain their drugs.
Implications
Current and future drug payment reforms have implications for
multiple stakeholders at all points across the channels of drug dis-
tribution. Issues that have yet to be resolved include: (a) how soon
payers will shift away from AWP to other payment benchmarks;
(b) how ASP has affected access to drugs under the Medicare
Part B benefit; and (c) alternative pricing benchmarks that must
shortly supplant AWP (and/or WAC). The Guide explores each of
these topics, as well as others.
Recent Pharmaceutical Payment Milestones
The timeline (Table 1) summarizes recent events affecting pay-
ment for prescription drugs and provides hyperlinks to obtain
further information.
Conclusion
After 4 decades of use as the basis for payment for pharmaceu-
ticals in the United States, AWP lost favor because it was found
to be subject to manipulation and an unreliable estimate of the
actual purchase price. Federal legislation and related regulations
have resulted in the use of ASP for reimbursement of Medicare
Part B drugs since January 2005, and the use of AMP for calculat-
ing manufacturer rebates to state Medicaid programs since 1991.
The extension of AMP as the basis for pharmacy reimbursement
for multiple-source drugs has been postponed by litigation and
related legislation. Economic and political factors will continue
to drive the search for reliable bases for pharmaceutical payment,
and federal policy seems likely to lead change in the private sec-
tor. We intend this updated Guide to serve as a resource in under-
standing the complexity of pharmaceutical payments and evalu-
ating drug reform proposals and alternate payment methods.
DISCLOSURES
There was no external funding for this research. The contributors, Howard
Tag, JD, and Elan Rubinstein, PharmD, MPH, provide consulting services to
clients that include professional associations, health plans, purchasers, pro-
viders, pharmaceutical, biological, and medical device manufacturers, and
other health care entities.
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S7

TABLE 1 Pharmaceutical Payment Milestones: 2005-2009
Date Description of Milestone Event
January Initiation of Average Sales Price for Medicare CMSs effort to establish a new payment
1, 2005 Part B medications, as a result of the 2003
Medicare Prescription Drug, Improvement,
and Modernization Act (Public Law 108-
173).
January Initiation of Medicare Part D, administered Competitive delivery model without
1, 2006 by stand-alone PDPs and by MA-PDs with
prescription drugs and services delivered
primarily by community pharmacies.
February Deficit Reduction Act of 2005 establishes
8, 2006 AMP as basis of Medicaid FUL calculation,
and requires AMP to be publicly disclosed.
October Wall Street Journal article reporting on
6, 2006 litigation revealed for the first time that
First DataBank took action in 2002 to
increase the markup of AWP from WAC
for certain brand-name drugs.
November U.S. District Court for the District of
14, 2006 Massachusetts, Judge P. Saris, granted
preliminary approval to a settlement in
class action re AWP with First DataBank.
July Deficit Reduction Act of 2005 definition of
6, 2007 retail pharmacy class of trade for AMP
calculation purposes, and of class of trade
to be included in the AMP calculation.
November Judgments against 2 major brand-name
1, 2007 drug manufacturers for grossly inflating
the AWPs of certain expensive physician-
administered drugs (PADs).
July Medicare Improvements for Patients and
2008 Providers Act of 2008 (MIPPA).
December CMSs Medicare Part B drug Competitive
31, 2008 Acquisition Program (CAP) postponed as
of December 31, 2008.
S8 Supplement to Journal of Managed Care Pharmacy
Executive Summary
Key Points
benchmark for prescriptions administered in
physician office, clinic and hospital outpatient
settings.
centralized drug pricing, mandatory
manufacturer rebates or community
pharmacy reimbursement guidelines.
CMSs effort to establish a new payment
benchmark for prescriptions dispensed
through pharmacy channels.
First DataBank increased the markup of
WAC to determine AWP for a large number
of drugs in 2002 from 1.20 to 1.25, costing
payers including consumers billions of
dollars.
AWP was not based on actual surveys of
drug wholesaler prices.
Public disclosure of disconnect between
AWP and actual market prices.
Retail pharmacy class of trade means any
independent pharmacy, chain pharmacy,
mail order pharmacy, or other outlet that
purchases drugs from a manufacturer,
wholesaler, distributor, or other licensed
entity and subsequently sells or provides the
drugs to the general public.
Sales, rebates, discounts, or other price
concessions included in AMP. Includes
several non-retail pharmacy channels (see
references).
Public disclosure of disconnect between
AWP and actual market prices with respect
to particular products; preceded by about 7
years of allegations and settlements between
several pharmaceutical manufacturers and
state and federal prosecutors over inflating
the spread between AWP and actual
acquisition cost for physicians.
With a federal court injunction, results in
delay of (a) expansion of the number of drugs
subject to the FUL amounts, (b) change in
the basis for the calculation of FUL amounts
to AMP, and (c) requirement that CMS share
AMP data with states.
Postponed because of contractual issues with
successful bidder.
No official notice regarding if or when
program may be restarted.
JMCP August 2009 Vol. 15, No. 6-a www.amcp.org
References
http://frwebgate.access.gpo.gov/cgi-
bin/getdoc.cgi?dbname=108_cong_
bills&docid=f:h1enr.txt.pdf.
Medicare Part D Benefit Designs and
Formularies 2006-2009. J Hoadley, for
MedPAC. 12/5/08 http://www.medpac.gov/
transcripts/MedPAC%20Formulary%20
Presentation%20-%20Hoadley%2012-05-
08%20revised.pdf
Deficit Reduction Act of 2005: Implications
for Medicaid. 2/06. Kaiser Commission on
Medicaid and the Uninsured. http://www.
kff.org/medicaid/upload/7465.pdf
Martinez B. How quiet moves by a publisher
sway billions in drug spending. Wall Street
J. October 6, 2006:A1. Available at: http://
www.dc37.net/news/newsreleases/2006/
drugpricing_WallStJ.pdf
Proposed Settlement by Judge Saris in
CIVIL ACTION NO. 05-11148-PBS; New
England Carpenters Benefit Fund et al. vs. First
DataBank-McKesson. Available at: http://
www.prescriptionaccess.org/docs/FDB-
prelim-approval-order2.pdf
Medicaid Drug Pricing Regulation. CMS
Fact Sheet. 7/6/07. http://www.nasmd.org/
issues/docs/AMP%20Reg%20CMS%20
Fact%20Sheet%202007_07_06.pdf and
Section 447.504, Determination of AMP.
http://edocket.access.gpo.gov/cfr_2008/
octqtr/pdf/42cfr447.504.pdf and Retail
Pharmacy class of trade, Federal Register
v72 #136, 7/17/07. http://fdsys.gpo.gov/
fdsys/pkg/FR-2007-07-17/pdf/07-3356.pdf
Memorandum and order by Judge Saris
in: Re MDL 1456 and Civil Action No.
01-12257-PBS. Available at: http://www.
prescriptionaccess.org/docs/AWP_damages_
order_11-2-07.pdf
http://frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=110_cong_public_
laws&docid=f:publ275.110.pdf
http://www.cms.hhs.gov/
CompetitiveAcquisforBios/01_overview.
asp#TopOfPage
 Executive Summary

TABLE 1 Pharmaceutical Payment Milestones: 2005-2009 (continued from previous page)

Date Description of Milestone Event
January Hospital outpatient settings: Payment for
2009 non-pass-through drugs and biologicals
in CY 2009 is made at a single rate of
ASP+4%, which includes payment for
both the acquisition cost and pharmacy
overhead costs associated with the drug
or biological. For pass-through drugs and
biologicals in CY 2009, a single payment
of ASP+6% is made to provide payment
for both the acquisition cost and pharmacy
overhead costs of these pass-through items.
January The American Recovery and Reinvestment
2009 Act of 2009 provides $1.1 billion funding
for comparative effectiveness (CE) research
through the Agency for Healthcare
Research and Quality (AHRQ) and the
National Institutes of Health (NIH), and
establishes the Federal Coordinating
Council for Comparative Effectiveness.
February OIG release of comparison of community
2009 pharmacy reimbursement amounts for
Medicare Part D plans versus Medicaid
in the second half of 2009 for 40 single-
source drugs and 39 multiple-source drugs
with high expenditures.
March U.S. District Court judge approves
17, 2009 settlement between drug price
clearinghouses Medi-Span and First
DataBank (with drug wholesaler
McKesson) and plaintiff health plans
alleging fraudulent increase of AWPs.
July Proposed Rule: Medicare Program:
13, 2009 Payment Policies Under the Physician Fee
Schedule and Other Revisions to Part B for
CY 2010 [CMS-1413-P], CMS proposed
several changes to the Medicare drug
Competitive Acquisition Program (CAP).
September U.S. District Court judge issues final order
26, 2009 and judgment in case of Medi-Span and
First DataBank cases.
October No longer blocked as of this date: (a)
1, 2009 Medicaid implementation of AMP as
FUL payment benchmark, and (b) CMS
publication of AMP data on its Web site.
By First DataBank and Medi-Span voluntarily
September cease publication of AWP no later than
26, 2011 this date.
Key Points
For CY 2009, separate drug payment in
hospital outpatient settings reduced to
ASP+4% for non-pass-through drugs and
biologicals.
For CY 2009, pass-through drug payment
continues at ASP+6%.
Objective is to increase research that
compares treatment modalities.
The hope is that availability of CE research
results will help care givers make best
possible therapeutic choices.
Council is precluded from making coverage
or reimbursement decisions.
Analysis of average unit reimbursement
amount including dispensing fee with
ingredient cost.
Median 0.6% lower Part D reimbursement for
single-source brand drugs.
Medicaid reimbursement exceeded Medicare
Part D reimbursement by 10% or more for
28 of 39 multiple-source drugs and was 17%
higher at the median for the 39 multiple-
source drugs.
Adjust AWPs for approximately 1,400 NDCs to
smaller gross margin (1.20xWAC rather than
1.25xWAC), effective September 26, 2009.
Establish a reasonably accessible data
repository of discoverable material regarding
First DataBank drug price reporting
practices.
First DataBank independent of this court
decision commits to discontinuation of
publication of AWPs within 2 years, on or
before September 26, 2011.
The date of possible reinstatement of the
Medicare CAP for Part B drugs was not
known at the time that this 2009 update
to the AMCP Guide was completed.
Effective date of order.
(see March 17, 2009 above)
TEMPORARY SUSPENSION OF UPDATED
PUBLICLY AVAILABLE AMP DATA.
Notwithstanding clause (v) of section 1927(b)
(3)(D) of the Social Security Act (42 U.S.C.
1396r8(b)(3)(D), the Secretary of Health
and Human Services shall not, prior to
October 1, 2009, make publicly available
any AMP disclosed to the Secretary. (MIPPA,
Public Law 110-275, 7/15/08).
Publication of other manufacturer-provided
suggested pricing benchmarks, such as direct
price and wholesale acquisition cost, are not
affected.
References
http://www.cms.hhs.gov/transmittals/
downloads/R1702CP.pdf
Comparative Effectiveness. J Holzer, G
Anderson. Health Policy Monitor. 2009.
Available at: http://www.hpm.org/en/
Surveys/Johns_Hopkins_Bloomberg_
School_of_Public_Health/13/Comparative_
Effectiveness_Research.html
DHHS Office of Inspector General.
Comparing pharmacy reimbursement:
Medicare Part D to Medicaid. Report no.
OEI-03-07-00350. February 2009. Available
at: http://www.oig.hhs.gov/oei/reports/oei-
03-07-00350.pdf
U.S. District Court. District of
Massachusetts. New England Carpenters
Health Benefits Fund, et al. vs. First Databank,
Inc., and McKesson Corporation; and District
Council 37 Health and Security Plan vs. Medi-
Span. Civil Action No. 05-11148-PBS and
Civil Action No. 07-10988-PBS. Available at:
http://www.firstdatabank.com/Support/awp-
communications.aspx
http://edocket.access.gpo.gov/2009/pdf/
E9-15835.pdf
http://www.firstdatabank.com/download/
pdf/FinalJudgment.pdf
http://frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=110_cong_public_
laws&docid=f:publ275.110.pdf
http://www.firstdatabank.com/downloads/
pricing/awpupdate031709.pdf and http://
www.medispan.com/Common/PDF/
CustomerLetter_April12009_FINAL.pdf

www.amcp.org Vol. 15, No. 6-a August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S9

EXHIBIT I-1 Milliman Medical Index Annual Rate of Increase in Costs by Component of Medical Care a
16
14
Annual Rate of Increase (%)
12
10
8 7.6%
6
0
TOTAL Inpatient
2004
a Averagemedical spending for typical American family of 4 covered by an employer-sponsored PPO program.
Source: 2008 Milliman Medical Index. May 2008.20
P rescription pharmaceuticals are unlike any other segment of
the health care marketplace in the complexity and variation
of how the finished goods are priced to intermediate and
final purchasers in the channels of distribution and ultimately
how much is paid when the product is dispensed or administered
to the patient. In response to a growing need by all stakeholders16
for detailed information on this complex topic, the Academy of
Managed Care Pharmacy (AMCP) has produced this 2009 update
to its 2007 AMCP Guide to Pharmaceutical Payment Methods.1
For many years and until recently, pharmaceutical prices
increased at rates that far exceeded other segments of health care
and propelled increases in pharmaceutical spending.17 However,
IMS Health, a provider of market data to pharmaceutical and
health care industries, reported that 2008 annual U.S. prescrip-
tion dollar sales slowed to an annual increase of 1.3%, with
growth in the number of dispensed prescriptions of 0.9%, and
projected a decline in dollar sales of 1% to 2% in 2009.18,19
IMS projected that the pharmaceutical market would recover
with the economy in future years, but an unprecedented level
of potential patent expirations in 2011 and 2012 will curb sales
growth. In the private sector, the Milliman Medical Index sug-
gests that the pharmacy costs of preferred provider organization
(PPO) health plans have moderated somewhat in recent years (see
Exhibit I-1).
Another concern is the increasing cost of new pharmaceuti-
cal treatments. The following chart shows monthly and median
costs of cancer drugs at the time of approval by the U.S. Food
and Drug Administration (FDA), from 1965 through 2008 (see
Exhibit I-2).21
S10 Supplement to Journal of Managed Care Pharmacy
I. Introduction
10.6%
9.4%
7.1% 6.2%
Outpatient Physician Pharmacy
Component of Medical Care
2005 2006 2007 2008
The federal government has responded to escalated spending
on pharmaceuticals by becoming increasingly involved in pricing
and payment dynamics. The interest of Congress in pharma-
ceutical payment, supported by research and investigations by
its committees and agencies (e.g., Government Accountability
Office [GAO], Congressional Budget Office [CBO], MedPAC,
Congressional Research Service, and the House Committee on
Energy and Commerce) and federal executive agencies, has led
to extraordinary changes in the manner and methods by which
federal programs pay for prescription pharmaceuticals.
The new administration and the 111th Congress (January
2009 through January 2011) are almost certain to consider and
likely enact a wide range of policies that will affect payment
methods for pharmaceuticals and the pharmaceutical industry
directly. Possible actions include:
Accelerate access to affordable follow-on biologic drugs (also
known as biosimilars or generic biologicals) through the
establishment of a regulatory pathway for their approval
administered by the FDA.22
Promote programs that increase consumer access to generic
drugs.
Restrict drug companies from delaying access to generic drugs
by prohibiting brand name manufacturers from reformulat-
ing existing products into new products to restart, extend, or
otherwise prolong their patent protection, a process known as
ever-greening, and prohibiting anticompetitive agreements
and collusion between brand name and generic drug manu-
facturers intended to keep generic drugs off the market.23
Increase the Medicaid drug rebate for brand-name drugs from
JMCP August 2009 Vol. 15, No. 6-a www.amcp.org
 I. Introduction

15.1% to 23.1% of the average manufacturer price (AMP), EXHIBIT I-2 Monthly and Median Costs of
eliminate best price provisions, apply the additional rebate Cancer Drugs at the Time of
to new drug formulations, and allow states to collect rebates Approval by the FDA, 1965-2008
on drugs provided through Medicaid managed care organi-
zations. 25,000
Other changes may also affect pharmaceuticals, such as fund-

Monthly Cost of Treatment (U.S. $)

ing for comparative effectiveness research and dissemination
20,000
of the results, which may result in reduced access and reduced
payments for certain pharmaceuticals in public and private sec-
tor plans. 15,000
In the commercial sector, a purchasers net cost for prescrip-
tion drugs is often a function of class of trade (COT)-based price
concessions to the list price. Pharmaceutical manufacturers may, 10,000
at their discretion, group their customers by COT and offer
certain price concessions to some COTs and not to others. The
5,000
following schematic shows 1 view of COTs. However, each phar-
maceutical manufacturer may categorize its customers differently
(see Exhibit I-3).24 0
This Guide offers a comprehensive overview as well as a 1960 1970 1980 1990 2000 2010
selected focus on details concerning the most important changes Year of FDA Approval
to pharmaceutical payment. The 4 main subject areas are:
Shown are costs for 1 month of cancer treatment for a person who weighs 70 kg or
Payment Benchmarks has a body-surface area of 1.7 m 2 . The line indicates median prices during a 5-year
Payers and Payment Methods period. Prices have been adjusted to 2007 dollars and reflect the total price for the
How Products, Services, and Payments Flow Through drug at the time of approval, including both the amount of Medicare reimbursement
Channels of Distribution and the amount paid by the patient or by a secondary payer. (For details about the
costs of individual drugs, see the Supplementary Appendix, available with the full
Issues and Implications for Stakeholders text of this article at NEJM.org)
AMCP intends this Guide to be an unbiased presentation Reproduced with permission: Bach, PB. Limits on Medicares ability to control ris-
of information, issues, and implications. The Guide is neither ing spending on cancer drugs. N Engl J Med. 2009;360(6):627.21 Supplementary
an expression of AMCP policy, nor does it intend to advocate appendix available at: http://content.nejm.org/cgi/data/NEJMhpr0807774/DC1/1.
any position on behalf of AMCP or its members on any issue Interactive version available at: http://content.nejm.org/content/vol0/issue2009/
images/data/NEJMhpr0807774/DC1/NEJM_Bach_626ig1.shtml.
contained herein.

EXHIBIT I-3 Example of Pharmaceutical Classes of Trade

Manufacturers,
Marketers & Drug Manufacturers & Marketers
Distributors

Wholesalers

Chain Regional
National Wholesalers
Warehouse Wholesalers

Mass Long Government

Chain Food & Drug Independent Mail Order Health Plan Clinic &
Merchant Term Care Hospital Facilities
Pharmacy Pharmacy Pharmacy Pharmacy Pharmacy Drs. Office
Pharmacy Pharmacy & Other

Retail Pharmacy Mail Outpatient Providers Institutional Providers

Pharmacy

Source: Shondelmeyer SW. Changes to AMP and best price: impact on 340B pricing. Presented at: The 4th Annual 340B Coalition Winter Conference; February 1, 2008.25

www.amcp.org Vol. 15, No. 6-a August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S11
 II. Payment Benchmarks
A
crisis of confidence in the reliability of average wholesale
price (AWP) as the appropriate benchmark for calculating
payment for pharmaceuticals came to a head in 2006-
2007 as it became increasingly evident that AWP bore little
resemblance to the actual price paid by the pharmacy providers
for pharmaceuticals. For approximately 40 years, AWP was the
widely used basis for reimbursement of providers for the delivery
of pharmaceuticals to patients.
The disparity between AWP and pharmacy actual acquisition
cost has increased over time. Janet Rehnquist, former Inspector
General of the Department of Health and Human Services, stated,
in 2002 testimony to the Senate Committee on Finance: We esti-
mated that the actual generic drug acquisition cost was a national
average of 65.93% below AWP. Our previous estimate, based on
calendar year 1994 pricing data, showed a discount of 42.45%
below AWP for generic drugs. As a result, this review showed an
increase of 55.31% in the average discount below AWP for generic
drugs from 1994 to 1999.26
While consultants and observers had more recently referred to
AWP as aint whats paid, particularly for generic drugs, and the
federal government had substituted average sales price (ASP) for
AWP when handling provider reimbursement in Medicare Part
B for drugs administered in physician offices, the death knell for
AWP as a basis for pharmaceutical reimbursement did not occur
until Fall 2006.
At that time, the discovery process in a national class action
lawsuit revealed that (a) there was no average in AWP, and (b)
the primary source of AWP had unilaterally adopted a common
margin of 20% (otherwise known as markup of 1.25) between
AWP and wholesale acquisition cost (WAC) for nearly all brand
drugs.27,28 Through the discovery process in the litigation, it
was learned that beginning in 2001, First DataBank (FDB)
and McKesson reached a secret agreement to raise the margin
between WAC and AWP from its standard 20% to 25% for more
than 400 drugs. McKesson communicated their new 25% WAC
to AWP markups to FDB, which then published AWPs with the
new markups.4
Today, every government and private payer is considering or
has already made fundamental changes in its pharmaceutical
reimbursement methods. The federal government has spear-
headed efforts in this area by creating ASP and average manu-
facturer price (AMP), both new pricing benchmarks based on
manufacturer net price. (The implementation of AMP as a pricing
benchmark and posting of AMP to the CMS Web site are on hold
at least through October 1, 2009).29
Over the years, government, providers, manufacturers, and
data publishers have created a wide range of benchmarks and
price references that they and their customers continue to use,
but there often seems to be little agreement on the meaning and
use of much of the terminology. For example, AWP has not been
defined in law other than in recent case law. Other benchmarks,
such as AMP, have been defined in different ways for different
S12 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
purposes, creating small but significant differences in meaning
depending on the user or purpose.
The following section provides a description of benchmarks
that are receiving special attention for public policy reasons.
Benchmarks
Average Wholesale Price
Created in the 1960s, AWP was the first generally accepted stan-
dard pricing benchmark for payment of prescriptions dispensed
through retail channels and of pharmaceuticals administered in
the medical office by the majority of payers because this informa-
tion was readily available from several suppliers.30,31 At that time,
AWP was considered to be an appropriate estimate of the actual
acquisition cost (AAC).
In recent years, AWP has been referred to as essentially a
sticker price and does not directly correspond to any actual
market transaction.32 It is not an average of prices charged by
wholesalers to providers, but is rather a price reported by drug
manufacturers to publishing companies like FDB and Medi-
Span.3,5,6 Pharmacies and other providers have been able to
purchase brand pharmaceuticals at net prices below AWP, and
the pharmacy reimbursement rates reflect some of the difference
between AAC and AWP. For the past 25 years or more, price com-
petition has resulted in ever-larger AWP discounts in provider
service agreements between pharmacy providers and payers
(health plans/PBMs). For example, the average reimbursement
rate for community pharmacies for brand drugs declined from
AWP minus 13.2% plus a dispensing fee of $2.25 per prescrip-
tion in 1998 to AWP minus 16.1% plus a dispensing fee of $1.73
in 2008, and reimbursement to mail order pharmacies for brand
drugs declined from AWP minus 17.1% in 1998 to AWP minus
20.2% in 2008.33
With the advent of ASP as a benchmark for pharmaceuticals
payable under Part B, Medicares use of AWP ended on January 1,
2005, for all but a handful of pharmaceuticals.34 Medicaid soon
followed, with a change in reimbursement for generic pharma-
ceuticals from an AWP-based formula to one that relies on AMP.
However, this change to AMP-based reimbursement has not
been implemented as of the publication date of this update to the
Guide. (see AMP discussion below).
In a recent development of particular significance, a final
Memorandum and Order was issued on March 17, 2009, in the
national class actions against First DataBank, McKesson, and
Medi-Span in U.S. District Court for the District of Massachusetts,
which requires First DataBank and Medi-Span to roll back from
1.25 to 1.20 the wholesale average cost to AWP markup for all
of the 1,442 NDCs affected by the fraudulent scheme no ear-
lier than 6 months following entry of the final judgment.4 In
response to this ruling, First DataBank reiterated its intention
to apply a 1.20 factor in calculating AWPs for all other NDCs
whose AWPs were previously set based on a factor greater than
1.20, and to discontinue publication of AWP no later than 2 years
Vol. 15, No. 6-a www.amcp.org
 II. Payment Benchmarks
following implementation of these changes. Medi-Span has
made a similar announcement. As of press time for this Guide,
Thomson Healthcare, publisher of Redbook; and Elsevier, pub-
lisher of Gold Standard (ProspectoRx), have not announced similar
changes.3,35,36
Average Sales Price
Most drugs covered by Medicare Part B, mainly physician-
administered infusions and injections, are currently reimbursed
at 106% of ASP. As of January 1, 2009, Part B drugs separately
covered in the hospital outpatient setting are paid at 104% of ASP.
ASP is based on the manufacturers actual selling price, which
includes almost all forms of rebates and discounts reported to the
federal governments Centers for Medicare & Medicaid Services
(CMS).
Section 1847A(c) of the Act, as added by the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003, P.L. No. 108-
173, defines ASP as a manufacturers sales of a drug to all purchas-
ers in the United States in a calendar quarter divided by the total
number of units of the drug sold by the manufacturer in that same
quarter. The ASP is net of any price concessions, such as volume dis-
counts, prompt pay discounts, cash discounts, free goods contingent
on purchase requirements, chargebacks, and rebates other than those
obtained through the Medicaid drug rebate program. Sales that are
nominal in amount are exempted from the ASP calculation, as are
sales excluded from the determination of best price in the Medicaid
drug rebate program.37
Following is the formula used by CMS beginning April 1,
2008, to calculate volume-weighted ASP:37
Volume-Weighted ASP
for the Billing Unit of
HCPCS Code
=
Sum of
{ ASP for NDC x Number of
Billing Units in NDC NDCs Sold
Sum of Number of NDCs Sold
There is a lag of 2 calendar quarters between the time when
sales reflected in the ASP occur and the time when these sales are
reported to CMS for ASP calculation and posting. The change in
average sales price, which could be the result of loss of a brands
patent protection and market entry of generic competitors, is thus
not immediately reflected in the posted ASP. As a consequence,
ASP-based reimbursement may be either too high or too low,
until manufacturer-submitted data to CMS reflect this change in
net market price.
For example: The innovator brand of irinotecan lost patent
protection in late February 2008, and by the following month,
generic versions accounted for 86% of sales with an average
price of $40.66. But during March, the innovator brands average
price remained almost 3 times higher than the generic, and the
Q1 2008 Payment Amount (ASP+6%) was $126.31. The impact
of generic price and volume only became apparent in Q4 2008
ASPs.38
ASP has proven to be substantially lower than AWP, the
www.amcp.org Vol. 15, No. 6-a
former benchmark for Part B reimbursement. In a 2005 study, the
Office of Inspector General (OIG) of the Department of Health
and Human Services (DHHS) found that, in the aggregate for all
pharmaceuticals reviewed, ASP is 49% lower than AWP at the
median.39
The Medicare Payment Advisory Commission (MedPAC)
found that, from 2004 to 2005 when the payment rate changed
to 106% of ASP, total claims volume and charges for each medical
specialty reviewed (including pharmaceuticals, pharmaceutical
administration, evaluation and management visits, tests, and
other procedures) increased, but spending on pharmaceuticals
decreased. The decline in expenditures for pharmaceuticals
ranged from 1% for rheumatology to 52% for urology. Overall,
total Part B pharmaceutical spending (considering price and
volume changes) fell from $10.9 billion in 2004 to $10.1 billion
in 2005.40 By 2007, total Part B pharmaceutical spending had
increased to $11 billion.37
Impact on Provider Practices. ASP is a volume-weighted aver-
age.41 A provider whose acquisition cost is above the median
will be adversely affected, while those entities below the median
will benefit. In the MedPAC study noted above,40 most physi-
cians reported that they were able to purchase most of their
oncology pharmaceutical agents at the Medicare payment level.
However, all physicians reported that pharmaceutical profit
margins are slim, and that some products cannot be purchased
at the payment rate. Many physicians also reported that they
have increased efficiencies in their practices in response to lower
pharmaceutical payments.
One concern with ASP-based reimbursement is that it may
undermine manufacturers incentives to compete on price for
} single-source, therapeutically equivalent products. ASP also may
discourage use of less expensive multiple-source products when a
therapeutically equivalent brand is available at a higher ASP. Given
the same 6% markup on all products, the one with the highest
dollar ASP provides the highest provider margin in dollars.
Average Manufacturer Price
Like ASP, average manufacturer price (AMP) represents an effort
by the federal government to step away from AWP to an alter-
nate benchmark price. If legal challenges against it are overcome
and Congress makes no further changes, AMP will become the
benchmark for Medicaid reimbursement for generic pharma-
ceuticals and will be poised to become an important factor in
reimbursement of single-source products in public and private
markets.
In 2003, the AMP approximated 79% of AWP for brand
name drugs with no generic equivalents. The Congressional
Budget Office (CBO) estimated that the acquisition cost to
retail pharmacies averages approximately 4% above the AMP
for brand name drugs without generic equivalents.42 In other
words, the CBO report supports the argument that community
(retail) pharmacies typically purchase brand drugs for prices
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S13

EXHIBIT II-1 Components of AMP Calculation
Included Sales/Discounts
Mail-order pharmacy (including
those operated by a PBM)
Specialty Pharmacy
Home-infusion providers
Sales of drugs reimbursed by third-
party payers (including Medicare
Part D, Medicare Advantage
Prescription Drug [MA-PD] plans,
qualified retiree prescription drug
plans [PDPs], State Childrens
Health Insurance Programs
[SCHIPs], state pharmaceutical
assistance programs [SPAPs],
Medicaid programs, and HMOs/
managed care organization [MCOs]
that do not take possession of or
purchase drugs)
Hospitals where outpatient setting
use can be documented
Home health providers
Physicians
Outpatient facilities (including
clinics, surgical centers, ambulatory Free goods not contingent on any
care centers, dialysis centers, and
mental health centers)
Direct patient sales
Wholesalersa
Retail pharmacies
Manufacturers who act as
wholesalers and do not repackage/
relabel under purchasers NDC,
including private labeling
agreements
Any other price concession to retail
COT
Note: See exclusions in column at right
a Except
for sales that can be documented as being subsequently sold to excluded
entities.
bIncluding Medicaid rebates paid to states under the National Rebate Agreement
and authorized state supplemental rebate agreements.
c See nominal price exception (or exclusion) in the Glossary.
Source: Arnold & Porter Client Advisory. CMS issues final rule implementing
Medicaid provisions of Deficit Reduction Act. July 2007.44
S14 Supplement to Journal of Managed Care Pharmacy
II. Payment Benchmarks
Excluded Sales/Discounts
PBMs
Discounts and rebates to third-
party payers (see list in column at
left)b
Sales and discounts to HMOs/
MCOs that purchase or take
possession of drugs
Hospitals where drug is used in
inpatient setting or site of use
cannot be determined
Long-term care (LTC) facilities,
including nursing home
pharmacies
Hospices (inpatient and outpatient)
Manufacturer coupons redeemed
by consumer or other entity in
which full value of coupon is
passed on to consumer
Voucher programs
Manufacturer drug discount cards
Patient assistance programs
purchase requirement
Nominal prices for specified
entities c
Customary prompt-pay discounts
Returned goods and replacement
products
Veterinarians
Prisons
Sales outside the United States
State, county, and municipalities
Indian Health Service (IHS),
Department of Veterans Affairs
(VA), qualified state home,
Department of Defense (DoD),
Public Health Service (PHS), 340B
entities, Federal Supply Schedule
(FSS), depot prices including
Tricare, and other approved federal
agencies
Bona fide service fees
Wholesalers whose drug is
distributed to the nonretail COT
Wholesalers whose drug is
relabeled under the wholesalers
NDC number
JMCP August 2009
above AMP, an average of AMP plus 4%.
AMP, like ASP, is based on manufacturer reported sales data.
AMP was created in the early 1990s following enactment of
the Omnibus Budget Reconciliation Act of 1990 (OBRA 90) as
the basis for calculation of manufacturer rebates on outpatient
pharmaceuticals dispensed to Medicaid beneficiaries. OBRA 90
required that pharmaceutical manufacturers enter into rebate
agreements with CMS and pay quarterly rebates to the states to
obtain Medicaid coverage and payment. The statutorily man-
dated rebate amounts are calculated based on the AMP, defined
as follows:43
AMP means, with respect to a covered outpatient drug of a manu-
facturer, including those sold under an NDA approved under Section
505(c) of the federal Food, Drug, and Cosmetic Act (FFDCA) for a
calendar quarter, the average price paid to the manufacturer for the
drug in the United States by wholesalers for drugs distributed to the
retail pharmacy class of trade. AMP shall be determined without
regard to customary prompt pay discounts extended to wholesalers.
AMP shall be calculated to include all sales and associated discounts
and other price concessions provided by the manufacturer for drugs
distributed to the retail pharmacy class of trade unless the sale, dis-
count, or other price concession is specifically excluded by statute or
regulation or is provided to an entity specifically excluded by statute
or regulation.
AMP data are treated by the federal government as proprietary
and confidential, but will become public if legal challenges are
overcome.
The Deficit Reduction Act of 2005 (DRA) mandated that AMP
instead of AWP be used for the calculation of the federal upper
limit (FUL), the maximum amount of pharmacy reimburse-
ment for product costs for certain generic and multiple-source
drugs that the federal government will recognize in calculating
federal matching funds for payment to state Medicaid programs.
Congress mandated that CMS follow a formal rulemaking process
to outline a clear, consistent definition of AMP for manufacturers.
In July 2007, CMS published a final rule that broadly defined the
retail class of trade, including community pharmacies as well as
mail-order pharmacies, physician offices, outpatient facilities,
and other outlets that sell drugs to the general public. The rule
did not include PBMs, long-term care facilities, or federal drug
benefit programs within the definition of retail class of trade.
Two changes for Medicaid benchmark prices contained in
the DRA were subsequently put on hold by litigation and legisla-
tion: (a) adoption of AMP as the new reference price for generic
drug reimbursement and requiring the AMP be calculated for
all pharmaceuticalsboth generic and brand name; and (b)
reporting of AMP to the states and public on a monthly basis. As
a result, AMP, which was developed and used only for Medicaid
rebate calculations, would have become an important reference
price for calculation of FULs. The DRA did not change Medicaid
AWP-based reimbursement for brand-name drugs, but states
would have had the option to use AMP.
Vol. 15, No. 6-a www.amcp.org
 II. Payment Benchmarks
Components of AMP, but subject to change, are shown in
Exhibit II-1.
The Medicare Improvements for Patients and Providers Act
of 2008 (MIPPA), enacted July 15, 2008, prohibited CMS from
taking any action, before October 1, 2009, to impose FULs based
on AMPs for multiple-source drugs established under 42 CFR
447.514(b). Thus, under current law, the existing methodology
for calculation of FUL, described below, will continue, at least
through September 30, 2009, for purposes of federal financial
participation.45,46
Under 42 CFR 447.332, CMS is to establish a federal upper limit
amount for a drug when: (a) all formulations of a drug have been
rated as therapeutically equivalent by [FDA], and (b) at least 3
suppliers of the drug are listed in current editions (or updates) of
published compendia of cost information for drugs available for sale
nationally. The Omnibus Budget Reconciliation Act of 1990 (OBRA
90) established new criteria requiring a drug to be included on the
FUL when 3 or more versions of a drug had been rated therapeuti-
cally and pharmaceutically equivalent by FDA, regardless of the rat-
ings of other versions. FDA designates drugs that are therapeutically
equivalent as A-rated.
Federal regulation (42 CFR 447.332) sets the FUL amount at
150% of the published price for the least costly, therapeutically
equivalent product that can be purchased by pharmacists in quanti-
ties of 100 tablets or capsules plus a reasonable dispensing fee. If the
drug is not typically available in quantities of 100 or if the drug is a
liquid, the FUL amount is based on a commonly listed size.
Because economic conditions have increased the pressure on
state Medicaid budgets, the payment reductions enacted in 2005
and suspended through September 2009 are likely to receive
renewed interest by a Congress and administration intent on
lowering health care expenditures.
Best Price
Medicaid best price was created by OBRA 90 and took effect
January 1, 1996, in the calculation of rebates that manufacturers
are required to pay to the states and the federal government for
sales of single-source and multiple-source branded products to
Medicaid beneficiaries.47 Best price therefore applies to brand-
name and not generic drugs, and is defined as the lowest price
available from the manufacturer during the rebate period to any
entity in the United States in any pricing structure (including
capitated payments). Best price includes rebates, discounts
and other price concessions provided by the manufacturer to
any entity unless the sale, discount, or other price concession is
specifically excluded by statute or regulation or is provided to
an entity specifically excluded by status or regulation from the
rebate calculation.47 Among exclusions from best price calcula-
tions are free goods and manufacturer sales at nominal prices
(see Glossary; generally defined as manufacturer sales at less
than 10% of AMP). For Medicaid rebates for brand-name drugs,
best price is applied when the price to a purchaser is less than
www.amcp.org Vol. 15, No. 6-a
the price with the mandatory discount plus any penalties (i.e.,
greater than 15.1% of AMP plus the Consumer Price Index [CPI]
penalty). According to a Congressional Budget Office (CBO)
report published in June 2005, best price for brand-name drugs
approximates 63% of AWP.48
Some providers and health plans have criticized best price as a
barrier to the negotiation of lower prices between manufacturers
and private-sector customers because a manufacturer is reluctant
to create a new best price in the Medicaid market. Opponents
of best price have repeatedly, but thus far unsuccessfully, urged
Congress to repeal or modify the best price provision.49,50 And,
in December 2008, the CBO suggested elimination of the best
price provisions, saying that although many manufacturers offer
large discounts to private purchasers, the best price provision dis-
courages manufacturers from offering discounts larger than the
flat rebate because such discount automatically triggers a larger
rebate to Medicaid.42
Wholesale Acquisition Cost
Wholesale acquisition cost (WAC) is the manufacturers reported
list price for a prescription pharmaceutical for sale to wholesal-
ers.30 Each manufacturer establishes its own WAC by using its
own formula. Price-reporting services, such as FDB and Medi-
Span, publish WAC prices supplied to them by manufacturers
in their pharmaceutical information databases. Pharmaceutical
contracts between manufacturers and private payers typically use
AWP or WAC as the reference price.51
The terms list price, catalog price, wholesale net price, book price,
and direct price are used by some manufacturers as synonyms
for WAC. Almost all single-source pharmaceuticals have a WAC
price, but many generic pharmaceuticals, repackaged pharma-
ceuticals, or house brands do not because there is no legal
requirement to report a WAC.
Like AWP, WAC is a suggested price that often does not rep-
resent what a wholesaler or end provider actually pays for the
pharmaceutical, because WAC does not include manufacturer
incentives such as rebates, volume purchase agreements, and
prompt-payment discounts. However, unlike AWP, WAC is statu-
torily defined in the U.S. Code:
The term wholesale acquisition cost means, with respect to a
pharmaceutical or biological, the manufacturers list price for the
pharmaceutical or biological to wholesalers or direct purchasers
in the United States, not including prompt pay or other discounts,
rebates or reductions in price, for the most recent month for which
the information is available, as reported in wholesale price guides or
other publications of pharmaceutical or biological pricing data.52
WAC is a lower price than AWP because it is applied ear-
lier in the distribution process. Some Medicaid programs use
WAC as an alternative to AWP in their reimbursement formula.
In the FDB system, AWP and WAC are related in a constant
ratio for each manufacturer in which AWP is 1.20 or 1.25 (or
some other factor) times WAC. Because of the proportionate
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S15
 II. Payment Benchmarks

EXHIBIT II-2 Estimated Prices Paid to Manufacturers, Relative to List Price (AWP), for
Brand-Name Drugs Under Selected Federal Programs, 2003

DoD's DoD's Military Treatment Facility AveragePrPrice 41%

VA Average Price 42%

Price Available to the Big Four 49%

Federal Ceiling Price 50%

340B Ceiling Price 51%

Medicaid Net Manufacturer Price 51%

Federal Supply Schedule Price 53%

Best Price 63%

Nonfederal Average Manufacturer Price 79%

Average Manufacturer Price 79%

0 20 40 60 80 100
Percent of List Price (AWP)

Source: CBO. Prices for brand-name drugs under selected federal programs. June 2005.48

relationship between WAC and AWP, entities that establish the
WAC effectively establish the AWP published by FDB and thus
impact payer reimbursement in AWP-based payment systems
that use FDB data. In the private sector, WAC is the basis for
many manufacturer rebate calculations.53
Maximum Allowable Cost or Maximum
Reimbursement Amount
Maximum allowable cost (MAC) is typically a reimburse-
ment limit per individual multiple-source pharmaceutical entity,
strength, and dosage form (e.g., $0.50 per fluoxetine 20mg cap-
sule). MAC price lists are established by health plans and PBMs
for private-sector clients and by many states for multiple-source
pharmaceuticals paid for by their Medicaid and other state-
funded programs. Private sector MACs usually are considered
confidential.
No standardized definition for MAC exists; states and private
payers use a variety of formulae, including WAC-based and FUL-
based approaches, as well as market surveys targeting distributors
and pharmacies.
Federal Upper Limit
FUL is a unit price calculated and published by CMS for
each drug entity, strength, and dosage form. Federal Medicaid
matching funds to states are limited to payments that do not
exceed the FUL in the aggregate for multiple-source drugs, plus a
dispensing fee set by each state.
Public Health Service
Public Health Service (PHS or 340B) is the highest price that a
340B-covered entity could be charged and is equal to the price
that the state Medicaid agency would pay absent any supplemen-
tal discount or rebate. The price could be negotiated lower by
the 340B entity. 340B entities include PHS-funded clinics and
disproportionate-share hospitals (DSHs). Patients of a covered
340B entity, including non-Medicaid patients, may receive drugs
purchased at the 340B discount price. The benefit of this pre-
ferred pricing may be realized by the patient, the payer, the 340B
entity, or shared among the parties. However, covered entities are
not permitted to resell or transfer outpatient drugs purchased at
the 340B discount to individuals who are not patients of the cov-
ered entity.54 As of 2009, there are 13,817 340B covered entities
in the United States, with more joining each year.55 340B prices
for brand-name drugs were reported to average 51% of AWP (see
Exhibit II-2).
Comparison of Benchmark Prices
Exhibit II-2, from a 2005 CBO study, shows how selected

S16 Supplement to Journal of Managed Care Pharmacy JMCP August 2009 Vol. 15, No. 6-a www.amcp.org
 II. Payment Benchmarks
benchmark prices compare with both AWP and each other.
Benchmarks and the Goal of Appropriate Payment
The best benchmark will be defined by its purpose and
accuracy in defining a common value at a given point in the chain
of drug distribution. By these 2 criteria, the best benchmark may
be different for government versus private payers. Some factors
that should be considered when defining benchmarks include
the following:
At what point in the distribution chain is the benchmark
the most accurate determination of the common true price?
For example, a benchmark based on average actual transac-
tion price should accurately reflect the most common selling
price, while a benchmark based on average net acquisition
cost should represent the most common prices for wholesal-
ers or providers as purchasers. How accessible, transparent,
and accurate are the benchmark values for all stakeholders?
AWP and WAC have been used as drug payment bench-
marks because they were readily accessible from Medi-Span,
Redbook, and First DataBank. However, AWP has been
shown to have almost no relevance to the net price of most
generic drugs, and WACs have not been readily accessible
in all cases. Also, these terms cannot be interpreted literally;
www.amcp.org Vol. 15, No. 6-a
that is, AWP does not generally represent the price of a drug
purchased from a wholesaler, and WAC does not generally
represent the actual cost to the wholesaler.56
How will different stakeholders be affected by the change?
For example, if average actual transaction price is used as a
benchmark for calculation of provider compensation, is there
recognition of the cost that is added in the process of transfer-
ring the product from manufacturer to provider, representing
the value added as the product passes through the channels of
distribution?
What are the consequences for other payment methods? For
example, how would use of AMP as a pricing benchmark for
provider reimbursement affect Medicaid rebates and rebate-
discount negotiations between private payers and pharmaceu-
tical manufacturers?
What will be necessary for individual payers to monitor,
modify, and administer the new payment method? For
example, how much will the benchmark vary among smaller
versus larger providers or among various COTs? How can
these variations be monitored and adjusted if desired to best
represent actual price for different types of purchasers? What
administrative burden will be incurred by monitoring the
reasonableness of prices for different types of purchasers?
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S17
 III. Payers and Payment Methods
P
ayment to providers for the prescription drugs that they
administer and dispense varies depending on the payer
and the site of care. Each combination of payer and site of
care may involve a different reimbursement formula. As a result,
providers must be keenly aware of their payer mix, the portion
of total revenue attributable to each type of payer. Payers have
an important economic stake in the treatment setting in which a
particular drug is prescribed or administered.
Medicare
Background
Medicare, established in 1965 as a federal health insurance pro-
gram available to individuals who fall into 1 of 3 specified catego-
ries defined by age, disability, or end-stage renal disease (ESRD),57
has several statutory benefit programs: Part A (hospital insur-
ance), Part B (medical insurance), Part C (Medicare Advantage),
and Part D (prescription drug coverage). Each program has
unique rules governing coverage and payment methods for pre-
scription drugs. In general, the payment method will depend on
the treatment setting.58
Hospital inpatient
Hospital outpatient department (HOPD)
Physician office
Dialysis facility
Ambulatory surgical center (ASC)
Skilled nursing facility
Home (via home health provider)
Home (via retail or mail-order pharmacy)
Medicares Influence on Prescription Drug Payment
Private health insurance pays the largest portion of prescription
drug costs, and available data show that this remains the case
despite introduction of Medicare Part D in 2006. As of 2007,
private health insurance paid 43.6% and public funds (i.e.,
Medicare, Medicaid, and other public funds) paid for 35.5% of
prescription drug sales in retail outlets, while beneficiary out-of-
pocket paid the balance.59
The following provides a brief overview of Medicare payment
in selected treatment settings.60
Hospital Outpatient Departments
Medicare reimburses HOPDs by using the outpatient prospective
payment system (OPPS). Under the OPPS, CMS classifies services
into ambulatory payment classifications (APCs) on the basis of
clinical and cost similarity. All services within an APC maintain
the same payment rate.61
Drugs and radiopharmaceuticals whose cost per day is $60
or less (in 2009) are packaged or bundled into APCs for the
procedures in which they are used, meaning that there is no
separate reimbursement for those drugs. Drugs, which CMS calls
specified covered outpatient drugs (SCODs), and radiopharma-
ceuticals exceeding the $60 threshold receive separate payment
S18 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
through drug-specific APCs. As of January 1, 2009, the payment
amount is ASP plus 4%, significantly below the physician office
payment rate of the ASP plus 6%. Drugs eligible for transitional
pass-through payment are paid at ASP plus 6%.62 CMS may
change these payment rates annually.
Physician Offices
Following passage of the MMA, Congress and CMS reduced
payments for drugs and increased payments for intravenous infu-
sions and other drug administration services. ASP replaced AWP
as the drug reimbursement benchmark. Payment for most physi-
cian office drugs is currently ASP plus 6%. Section II, Payment
Benchmarks, describes how ASP is calculation and reported.
The MMA also created a drug Competitive Acquisition
Program (CAP) as an alternative way for physicians to acquire
physician-administered drugs.12 CAP was postponed by CMS as
of January 1, 2009, because of contractual issues with the suc-
cessful bidders. In the rule Medicare Program: Payment Policies
Under the Physician Fee Schedule and Other Revisions to Part B
for CY 2010, CMS-1413-P, CMS proposed several changes to the
drug CAP, but did not propose a date for restart of this program.
Thus, as of the date this update to the Guide was finalized, it is
not known whether, when, or with what changes the program
may be reinstated.12,63,64
With CAP, Medicare reimbursement was made to the CAP
vendor and not to the physician. The goal of the program was to
increase competition for Part B drugs. It was reasoned that CAP
vendors, which would purchase large quantities of drugs, would
be able to negotiate lower prices with drug manufacturers and
produce Medicare savings. CAP would provide smaller practices,
unable to purchase drugs at the Medicare payment rate, with
another way to acquire drugs for administration in their offices.
Under the CAP, organizations such as wholesalers and spe-
cialty pharmacies submitted bids to Medicare to become des-
ignated vendors for Part B drugs. Each year, physicians chose
whether to purchase and bill for all Part B drugs administered
in their office in the traditional way or to participate in the CAP.
Vendors dispensed drugs to CAP-electing physician offices on
a prescription-by-prescription basis. Medicare paid the vendors
directly, and the vendors billed patients for required copay-
ments.
By law, Medicares first year payment for CAP drugs was based
on the average of vendor bids, but could not exceed ASP plus
6%. The CAP was implemented on July 1, 2006, with BioScrip
(based in Elmsford, NY) as the sole designated vendor. At pro-
gram launch, payment under the CAP contract to BioScrip was
ASP plus 4.4%.65
Pharmacy-Dispensed Medicare Part B Drugs
The vast majority of Part B drugs are administered in a physi-
cians office or HOPD; however, some drugs dispensed by retail
or mail-order pharmacies for self-administration also are part of
Vol. 15, No. 6-a www.amcp.org
 III. Payers and Payment Methods

EXHIBIT III-1 Prescription Drug Coverage Among EXHIBIT III-2 Standard Medicare Prescription
Medicare Beneficiaries, 2008 Drug Benefit, 2009

4.9
Enrollee
Million Plan Pay 15%;
11.2 Pays
10% Medicare Pays 80%
Million 5% $6,154 in
4.0
Million 25% Total Drug
9% Costs
Total in ($4,350 out
Part D Enrollee of pocket)
Pays $3,454 Coverage Gap
Plans: (Doughnut Hole)
26.0 100%
10.2
6.2 Million
Million
Million (58%)
23%
14%
$2,700 in
Total Drug
8.6 Enrollee Costs
Million Pays Plan Pays 75% ($896 out
19% 25% of pocket)

$295 Deductible
Total Number of Beneficaries = 45 Million
$364 Average Annual Premium
Stand-Alone PDP Annual premium amount based on $30.36 national average monthly beneficiary
Dual Eligibles in PDPs premium (CMS, August 2008). Amounts for premium, coverage gap, and cata-
strophic coverage threshold rounded to nearest dollar.
Medicare Advantage Drug Plan
Source: Kaiser Family Foundation. Medicare: A Primer. January 2009.68
Retiree Drug Coveragea
Other Creditable Drug Coverageb
No Drug Coverage
to Part D plans (see Exhibit III-1).67
a IncludesRetiree Drug Subsidy (RDS) coverage; retiree coverage without RDS; and There is no direct Medicare reimbursement for Part D drugs.
FEHBP and TRICARE retiree coverage. Revenue for MA-PDs and PDPs comes from beneficiary premi-
bIncludes Veterans Affairs, Indian Health Service, state pharmacy assistance pro-
ums and cost sharing via copayments or coinsurance, as well
grams, employer plans for active workers, Medigap, multiple sources, and other
sources. as from Medicare subsidy and reinsurance payments. Medicare
Source: Kaiser Family Foundation. Medicare: A Primer. January 2009.68 payments to PDP and MA-PD plans are determined through a
PDP=prescription drug plan. competitive bidding process, and enrollee premiums are also tied
to plan bids.69

the Part B benefit. Examples are immunosuppressives to prevent
organ transplant rejection and some oral cancer drugs. The reim-
bursement rate for retail or mail-order pharmacy-dispensed Part
B drugs is currently ASP plus 6%.66
Pharmacy-Dispensed Medicare Part D Drugs
Part D is administered by private-sector entities, either stand-
alone Prescription Drug Plans (PDPs) or Medicare Advantage
Prescription Drug plans (MA-PDs). These plans compete for
enrollees on the basis of annual premiums, benefit structures,
specific formulary drugs, pharmacy networks, and quality of
services. PDPs and MA-PDs are typically PBMs and commercial
health plans. Approximately 14% of Part D enrollees nationwide
are dual eligibles (i.e., enrolled in both Medicare and Medicaid)
who are automatically enrolled in Part D and randomly assigned
Medicare Payment to PDPs
For 2009, Part D enrollees who are not dual eligibles pay an aver-
age of $364 per year in premiums, which is about 25% of the
expected Medicare Part D benefit expenditures per person (see
Exhibit III-2).
CMS subsidizes the remaining 75% of the cost of standard
coverage for all types of beneficiaries. That average subsidy takes
3 forms:70
Direct subsidy: A monthly prospective payment. This compo-
nent of Medicare Part D spend is estimated at $19.9 billion in
2009.
Individual reinsurance: If a beneficiary exceeds the cata-
strophic threshold, CMS subsidizes 80% of drug spending
above the threshold, and the plan is at risk for the remain-
ing 20%. Medicare establishes risk corridors to limit a
plans overall losses or profits (see Exhibit III-3). By using risk

www.amcp.org Vol. 15, No. 6-a August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S19
 III. Payers and Payment Methods
EXHIBIT III-3 Plan Liability Under
Risk Corridor Provisions
Plan Liability for Costs
Risk Corridor Above and Below Target
2006-2007
Costs below 95% of the target 80% refund
Costs between 95% and 97.5% of the target 75% refund
Costs between 97.5% and 102.5% of the target Full risk
Costs between 102.5% and 105% of the target Risk for 25% of amount
Costs over 105% of the target Risk for 20% of amount
2008-2011
Costs below 90% of the target 80% refund
Costs between 90% and 95% of the target 50% refund
Costs between 95% and 105% of the target Full risk
Costs between 105% and 110% of the target Risk for 50% of amount
Costs over 110% of the target Risk for 20% of amount
Source: OSullivan J. Medicare Part D Prescription Drug Benefit: A Primer. CRS
Report for Congress, RL34280. Updated March 18, 2008.72
corridors, Medicare limits a plans potential loss (or gain) by
financing some of the higher-than-expected costs (or recoup-
ing excessive profits). These corridors are scheduled to widen,
meaning that plans should bear more insurance risk over time.
For 2009, reinsurance subsidizes amounts above beneficiary
cost of $6,153.75, and spend is estimated to be $9.6 billion.
Also, for those plans that enroll low-income beneficiaries,
Medicare pays some of their enrollees cost sharing and pre-
miums.69,71 For 2009, the cost for this subsidy is estimated at
$21.1 billion.
The 2003 Medicare Prescription Drug, Improvement, and
Modernization Act (MMA) (Public Law 108-173) established
risk corridors partly to protect PDPs from higher than expected
costs, but also to recoup excessive payments. Risk corridors were
defined in the statute as specified percentages above and below
a target amount. The target amount is defined as total payments
paid to the plan, taking into account the amount paid by the
CMS and enrollees, based on the standardized bid amount, risk
adjusted, and reduced by total administrative expenses assumed
in the bid. No payment adjustments are made if adjusted allow-
able costs for the plan are at least equal to the first threshold
lower limit of the first risk corridor but not greater than the first
threshold upper limit of the risk corridor for the year (i.e., if the
plans are within the first risk corridor). A portion of any plan
spending above or below these levels is subject to risk adjust-
ment. If adjusted allowable costs exceed the first threshold upper
limit, then payments are increased. If adjusted allowable costs are
below the first threshold lower limit, then payments are reduced.
Adjusted allowable costs are reduced by reinsurance and subsidy
payments (see Exhibit III-3).72
Because PDPs are at partial risk for the drug costs of their
beneficiaries, they are primarily concerned with controlling drug
S20 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
spending within the parameters of appropriate therapeutic use
of these agents. Thus, PDPs may be less motivated or enticed
by manufacturer rebates on products that might increase drug
spending compared with therapeutic alternatives. PDPs are insu-
lated and separated from the medical care cost component. For
the same reason, PDPs also may be less motivated than MA-PDs
by a manufacturer claim justifying a higher-net-priced drug
being offset by reduced utilization of other health care system
resources, such as hospitalization, emergency room or physician
office visits.
CRS reports that while manufacturers do not provide rebates
for generics, rebates for individual branded drugs may be as
high as 20% to 30%.72 The average PDP rebate was 9.6% of total
prescription drug costs in 2007, and was expected to remain
approximately 9.5% for several years.73
In a study published in February 2009, the OIG found that
while Part D and Medicaid pharmacy reimbursement for single
source drugs was similar, Medicaid reimbursement for multiple-
source drugs was 17% higher at the median than in Part D for
39 multiple-source drugs studied. However, the OIG study does
not compare total program expenditures and does not examine
the impact of rebates or post-point-of-sale price concessions. The
OIG concluded that federal upper limits and Medicaid reim-
bursement amounts are still based on published prices, which
previous OIG work has found to result in inflated payments for
multiple-source drugs. In its response, CMS concurred with
these findings and conclusion.74
PDP Report to CMS of Lock-In price Versus Pass-Through
Price. Part D plan sponsors are required to report drug costs
(the negotiated price) to CMS, but current rules allow the Part
D sponsor to report the amount paid to the PBM (the lock-in
price) or, alternatively, to report the amount that the PBM actu-
ally paid to the pharmacy (the pass-through price).75 Under the
lock-in approach, a Part D plan agrees to pay a PBM a set rate for
a particular drug. The PBM then negotiates with pharmacies to
obtain the lowest possible price for the drug, which often is lower
than the amount the PBM receives from the plan.75 As of January
1, 2010, CMS has ruled that while Part D sponsors may continue
to use the lock-in model, they must report as negotiated price
the price actually paid to pharmacies. CMS will then consider as
an administrative cost any difference between the price paid by
the Part D plan sponsor to the PBM, and the price paid by the
PBM to the pharmacy. The negotiated price is used to determine
beneficiary cost-share as well as any CMS reinsurance or risk
corridor payments.75
Pharmaceutical Manufacturer Price Negotiations. The law
creating the Medicare Part D drug benefit specifically prohibited
CMS from negotiating prices directly with manufacturers. Part
D price negotiations with manufacturers are handled by PDPs
and MA-PDs. There have been efforts in Congress to pass leg-
islation which would allow Medicare to negotiate price conces-
sions directly with pharmaceutical manufacturers for Part D, in
Vol. 15, No. 6-a www.amcp.org
 III. Payers and Payment Methods
the belief that greater discounts could be gained. To date, these
efforts have been unsuccessful; however, this issue may be recon-
sidered during the 111th Congress.76
Medicare Part B or Part D. Medicare payment for more than
a dozen categories of pharmaceuticals, including immunosup-
pressive agents used for transplant patients, parenteral nutrition,
intravenous immune globulin (IVIG), and hepatitis C vaccine,
could be made under either Part B or Part D. Whether payments
fall under either Part B or Part D depends on such factors as diag-
nosis, route of administration, location of treatment, and whether
the drug is self-administered. Whether payment is made under
either Part B or Part D determines the payment method used and,
thus how much is paid.77
Protected Therapeutic Classes. Plans are allowed to develop
formularies that exclude certain drugs from coverage, although
they are required to have at least 2 formulary drugs for each ther-
apeutic category. However, pursuant to CMS guidance, plans are
required to include in their drug formularies all or substantially
all drugs in 6 protected classes (six classes of clinical concern:
immunosuppressant for prophylaxis of organ transplant rejec-
tion, antidepressant, antipsychotic, anticonvulsant, antiretro-
viral, and antineoplastic).78 Substantially all does not include
multiple-source brand drugs, extended-release products when
the immediate-release product is included, or dosage forms that
do not provide a unique route of administration (e.g., tablets vs.
capsules). The intent of this policy was to ensure that Medicaid
beneficiaries who use these drugs would not be discouraged from
enrolling in certain Part D plans and would not experience inter-
ruption in therapy. Plans may not implement prior authorization
or step therapy requirements to steer beneficiaries currently
taking a drug to preferred alternatives within these protected
classes,78 but plans may use prior authorization or step therapy
for patients who are new to the drug therapy.
A provision in the Medicare Improvements for Patients and
Providers Act (MIPPA) of 2008, when implemented through
regulations, is expected to result in modifications to the CMS
guidance that established the six classes of clinical concern.
The MIPPA provision requires the Secretary of DHHS to establish
a regulatory process that identifies classes of drugs used to treat
major or life-threatening conditions where access is needed to
multiple drugs in that class because of unique chemical actions
and pharmacological effects, and to require formularies of
Medicare Part D drug plan sponsors to include all drugs in the
classes that are identified unless a particular drug (or drugs) is
excepted through a formal rulemaking process. A survey of Part
D plan administrators conducted in 2008 found an estimated
$511 million in lost rebates associated with the current protected
6 classes for 25.4 million Part D members and an estimated $3.4
billion in additional lost rebates if protections were expanded
to 4 additional drug classes (antihyperlipidemics, proton-pump
inhibitors, antidiabetics, and antihypertensives).79
www.amcp.org Vol. 15, No. 6-a
Least Costly Alternative
Least costly alternative (LCA) is a Medicare payment policy that
originally was created for durable medical equipment (DME) and
has been extended by CMS interpretation to non-DME services,
including drugs and biologicals.80 LCA is essentially a reference
price system. Products deemed to be therapeutic alternatives are
grouped together under an LCA policy statement. The least costly
product, with cost measured as the Medicare reimbursement
rate, becomes the reference price for all products covered by the
LCA policy. All LCA products are covered; however, regardless
of which product is used, the provider is reimbursed as if the
least costly product was used. Most of the drug payment impact
has occurred for a class of prostate cancer treatments known as
GnRH (or LHRH) agonists and for inhaled drugs to treat respira-
tory disease.
LCA is a policy that Medicare applies under its evaluation of
whether a particular service is reasonable and necessary.81 LCA
policy making occurs in a decentralized way through regional
contractors who process claims. As a result, LCA policies are not
uniform throughout the United States.82
In a federal district court decision involving an inhaled drug,
the court held that CMS cannot use LCA to set payment for the
inhaled drug because Medicare payment is established by statute
and LCA runs contrary to the clear and plain language of the
statute.83 Subsequent to the decision, Medicare contractors with-
drew their use of LCA for the inhaled drug but have kept LCA
in place for the GnRH agonists. However, the Medicare Payment
Advisory Commission has concluded that this district court deci-
sion may affect Medicare contractors ability to apply LCA policy
to any drug.84
Home Health Providers
Although Medicare does not separately reimburse for most pre-
scription drugs that could be administered by home health pro-
viders, certain exceptions exist.
Durable Medical Equipment. Medication that is necessary to
the function performed by otherwise-covered DME is also cov-
ered by Medicare and separately reimbursed. Examples include
parenteral nutrition administered by an infusion pump, heparin
administered in a home dialysis system, or albuterol in a nebu-
lizer. Payment for most drugs used in conjunction with DME is
set at ASP plus 6%. Drugs used with infusion equipment are paid
at 95% of the AWP.85
Intravenous Immune Globulin (IVIG). When administered in
the home of a person with primary immune deficiency, IVIG is
covered when the physician determines that home administra-
tion is medically appropriate. However, other indications for
which IVIG is approved by the FDA are not covered. No DME is
required to trigger the benefit. As a practical matter, the benefit
is available only when IVIG is administered by the patient or a
caregiver because no payment is available for home health clinical
services. Reimbursement is paid at ASP plus 6%.86
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S21
 III. Payers and Payment Methods
Injectable Osteoporosis Drugs. These products are covered for
women who have sustained bone fractures who are unable or
unwilling to self-inject. Reimbursement is also paid at ASP plus
6%.86
CMS has determined that Part D sponsors that offer Medicare
Advantage prescription drug plans may provide Part D home
infusion drugs as part of a bundled service, as a mandatory sup-
plemental benefit under Part C. CMSs rationale is that, for Part D
sponsors electing to do this, it will improve benefit coordina-
tion of home infusion therapy between Part C and Part D. This
improved benefit coordination promotes continuity of care and
cost avoidance of more expensive institutional care by facilitating
continuous access to home infusion drugs, as well as the costs of
administration and supplies associated with that therapy.77
Medicaid
Background
Medicaid is a program financed jointly by federal and state gov-
ernments that provides medical and long-term care (LTC) to
many of the nations most vulnerable lower-income individuals,
especially mothers and children, seniors, and individuals with
disabilities. Medicaid programs, which accounted for more than
21% of state spending in 2007, are under pressure nationwide as
a result of reduced state revenues in the face of increased demand
because of reduced availability of employer health insurance cov-
erage and, starting in late 2008, increased layoffs in response to
the worsening economy.87
Eligibility rules for Medicaid vary widely from state to state,
and eligibility is linked to income as well as other factors, such
as family or disability status. Each state decides how to struc-
ture benefits, eligibility, service delivery, and payment rates
within guidelines established by federal law, and subject to
waivers of law.88,89
State spending on Medicaid is matched by the federal govern-
ment. The federal financing shareFederal Medical Assistance
Percentage (FMAP)is determined each year based on each
states average per capita income level, compared with the
national income average. States with a higher per capita income
level are reimbursed a smaller share of their costs. By law, the
FMAP cannot be lower than 50% or higher than 83%. In fiscal
year 2008, the FMAPs varied from 50% to 76.29%, and averaged
56.7%. For children in the State Childrens Health Insurance
Program (SCHIP), the federal government pays an enhanced
FMAP which averages about 70%.90
Every Medicaid program includes an outpatient prescription
drug (OPD) benefit. States pay pharmacy providers directly on a
fee-for-service (FFS) basis unless the beneficiary is enrolled in a
managed care arrangement, in which case the state pays capita-
tion to the managed Medicaid organization for the beneficiarys
care.. State-specific payment formulas including ingredient cost
calculation, whether a MAC list applies, dispensing fee amount,
and beneficiary cost-share amount are accessible on the CMS
Web site.91
S22 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
More than 60% of Medicaid beneficiaries are now enrolled in
some type of managed care program, ranging from traditional
managed care models (such as health maintenance organizations
[HMOs]) to less rigid networks with select providers.92
Dual Eligibles
Medicaid beneficiaries who also qualify for Medicare are known
as dual eligibles. Before enactment of the Medicare prescription
drug benefit, dual eligibles received their outpatient medications
from Medicaid. The MMA changed that process; as of January
1, 2006, dual eligibles receive their prescription drugs primarily
through the Medicare benefit (i.e., through PDPs and MA-PDs).
This change affected approximately 16% of Medicaid beneficia-
ries and 42% of Medicaid prescription drug spending.93 Many of
the affected beneficiaries receive LTC in nursing facilities.94,95,96
Rebates
The actual cost to Medicaid for prescription drugs is reduced by
manufacturers rebates that are paid to the states and shared with
the federal government. In addition to rebates on branded drugs
covered under Medicaid pharmacy benefit programs, the Federal
Deficit Reduction Act of 2005 (DRA) requires all state Medicaid
agencies to collect rebates from drug manufacturers for physician-
administered drugs.97 At this time, rebates extend only to drugs
purchased by states on a FFS basis.
When states purchase drugs through managed care programs,
the managed care organizations (MCOs) are permitted to negoti-
ate their own discounts and rebates, and the federal mandate for
rebate payments does not apply.
Each calendar quarter, for each unit of drug covered by a state
Medicaid FFS program, each manufacturer must pay either a
basic rebate based on a percentage of the AMP or a rebate based
on the best price available to wholesalers and other customers.
The unit rebate amount (URA) is calculated as follows:98
11% of AMP for non-innovator multiple-source (generic)
drugs
a minimum of 15.1% of AMP for brand (innovator brand-
name multiple-source and single-source) drugs in which the
URA is calculated from 2 factors:
1. basic URA defined as the greater of (a) 15.1% of the AMP
or (b) AMP minus best price, plus
2. additional URA defined as the Baseline AMP divided by
the Baseline Consumer Price Index-Urban (CPI-U) and
multiplied by the quarterly CPI-U (i.e., additional URA
applies if the drugs AMP has increased from a baseline
faster than the Consumer Price Index).
Many states have negotiated with manufacturers for supple-
mental rebates over and above the basic and additional rebate
based on the position of products on state prescription drug lists
(PDLs).99
It is anticipated that the 111th Congress will consider a
number of options to generate health care savings, including a
Vol. 15, No. 6-a www.amcp.org
 III. Payers and Payment Methods

proposal to increase the Medicaid drug rebate for brand name EXHIBIT III-4 Coverage by Type of Health
drugs to 22.0%, or greater. The proposal to increase the amount Insurance, 2006 and 2007a
of the minimum Medicaid drug rebate was likely influenced by a
CBO recommendation, based on its finding that the average basic Private Insurance
rebate at the end of 2007 was 23.1% of the AMP.42 67.9%
Any private plan
Community pharmacy reimbursement typically includes both 67.5%a
Employment- 59.7%
drug ingredient cost and dispensing fee components. Following
based 59.3%a
federal guidelines, states reimburse pharmacies for Medicaid 9.1%
prescriptions on the basis of an estimate of the ingredient cost of Direct-purchase
8.9%a
the drug estimated acquisition cost (EAC) plus a dispensing fee
Government Insurance
both of which vary among the states. States determine how they
Any government 27.0%
will calculate EAC. As of March 2007, AWP was the predominant plan 27.8%a
basis of reimbursement to pharmacy providers for drug acquisi- 13.6%
Medicare
tion cost; WAC was used in some way by 11 states, and WAC was 13.8%a
used exclusively by 1 state (Rhode Island).100 12.9%
Medicaid
Costs for single-source drugs are typically reimbursed at a rate 13.2%a
equal to AWP minus approximately 10% to 15% plus a dispensing Military 3.6%
health careb 3.7%
fee. In contrast, generic and multiple-source drugs are typically
paid subject to a maximum allowable cost (MAC), and are subject No Insurance
to FULs applied in the aggregate for a particular drug.100,101 Not covered
15.8%
15.3%a
Revising AMP
2006 2007
Despite rebates paid to Medicaid programs, expenditures for
prescription pharmaceuticals continued to be a major concern The estimates by type of coverage are not mutually exclusive; people can be covered
of the Administration, Congress, and states. The OIG of the by more than one type of health insurance during the year.
a Statistically different at the 90-percent confidence level.
DHHS reported that AWP-based Medicaid pharmaceutical reim- bMilitary health care includes CHAMPUS (Comprehensive Health and Medical
bursements far exceed pharmacies AAC and recommended that Plan for Uniformed Services)/Tricare and CHAMPVA (Civilian Health and Medical
Medicaid should base reimbursement on pricing data that more Program of the Department of Veterans Affairs), as well as care provided by the
Department of Veterans Affairs and the military.
accurately reflect AAC.102 These data were primarily based on
Source: Income, Poverty and Health Insurance Coverage in the U.S.: 2008. U.S.
multiple-source (generic) pharmaceutical pricing. In that report, Census Bureau, August 2008.105
the OIG stated that further evaluation would be needed to deter-
mine the applicability of these data to single-source pharmaceuti-
cal products. In July 2007, CMS published a final rule along with a com-
Deficit Reduction Act of 2005 and Subsequent Rulemaking. ment period to more fully describe the DRA changes.104 The final
In 2005, Congress implemented the OIG recommendations with
rule defines the retail class of trade to include any independent
enactment of the Deficit Reduction Act (DRA).103 The Medicare
pharmacy, chain pharmacy, mail-order pharmacy, or other outlet
Improvements for Patients and Providers Act (MIPPA) of 2008
that purchases drugs from a manufacturer, wholesaler, distribu-
delayed implementation of DRA AMP-related provisions until
tor, or other licensed entity and subsequently sells or provides the
October 2009 (see Section II, Payment Benchmarks, for discus-
sion of AMP). drugs to the general public. Sales to hospitals for inpatient use,
Monthly manufacturer reporting was to begin in March 2007 to LTC facilities, to PBMs, and to federal programs other than
(retroactive to January 1), and release of prices to the public was Medicaid are excluded from the retail class of trade.
to begin later in the year. Before implementation of this new
method, the FUL was determined based on 150% of the lowest Private Purchasers
published price (based on the manufacturers reported price, Private purchasers (also known as payers and plan sponsors)
generally AWP) of all qualified Orange Bookequivalent phar- provide the bulk of health insurance coverage in the United States
maceuticals. The DRA changed that number to 250% of AMP. for people younger than 65 years of age. As of 2007, almost 68%
Even though reimbursement for Medicaid single-source brand of Americans younger than 65 years of age were enrolled in pri-
pharmaceuticals would continue to be AWP based, states would vately sponsored health care insurance, of which approximately
have the option to use AMP when setting Medicaid reimburse- 88% was employer based, and the balance was direct purchased
ment amounts for brand-name drugs. (see Exhibit III-4).105

www.amcp.org Vol. 15, No. 6-a August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S23
 III. Payers and Payment Methods

EXHIBIT III-5 Average Copayments Among Covered Workers

Facing Prescription Drug Copayments, 2000-2008
2000 2001 2002 2003 2004 2005 2006 2007 2008
Average Copayments
First-tier drugs, often called generic $8 $8 $9 $9a $10a $10 $11a $11 $10
Second-tier drugs, often called preferred $15 $16 a $18 a $20a $22a $23a $25a $25 $26
Third-tier drugs, often called nonpreferred $29 $28 $32a $35a $38 a $40a $43a $43 $46 a
Fourth-tier drugs b b b b $59 $74 $59 $71a $75
Average Coinsurance
First-tier drugs, often called generic 18% 18% 18% 18% 18% 19% 19% 21% 21%
Second-tier drugs, often called preferred NSD 23% 24% 23% 25% 27% 26% 26% 25%
Third-tier drugs, often called nonpreferred 28% 33% 40% 34%a 34% 38% 38% 40% 38%
Fourth-tier drugs b b b b 30% 43%a 42% 36% 28%
a Estimateis statically different from estimate for the previous year shown (P<.05).
bFourth-tier drug copayment or coinsurance information was not obtained prior to 2004.
Source: Employer Health Benefits: 2008 Annual Survey. Kaiser Family Foundation and Health Research and Educational Trust. August 2008.106
NSD=Not Sufficient Data.

Structure of Privately Sponsored Health Coverage
A 2008 annual employer survey demonstrated that 2% of covered
workers were enrolled in conventional insurance plans, 20% in
HMOs, 58% in PPOs, 12% in point-of-sale (POS) plans, and 8%
in high-deductible health plans associated with savings options
(HDHP/SOs).106
Employer-sponsored coverage for beneficiaries enrolled in
these plans may be fully insured or self-insured (self funded)
and governed under the Employee Retirement and Income
Security Act (ERISA) of 1974.107,108 In a fully insured plan, the
employer pays a per employee premium to the insurance com-
pany, which is then both responsible and at risk for provision of
health coverage in accordance with policy provisions. In contrast,
the employer acts as its own insurer in a self insured plan, with
final authority for establishing coverage policies, and for paying
providers directly or through a third-party administrator for pro-
vision of health products and services. In 2008, 88% of workers
in firms with 3-199 employees were in fully insured plans, and
89% of workers in firms with 5,000 or more employees were in
self-insured plans.109 Exhibit III-4 shows insurance coverage for
2006 and 2007.
Benefit Design
Private purchasers use benefit design features to affect payment
for all forms of pharmaceuticals. Benefit design can be used to
determine payment levels in several ways:
Under which part of the insurance benefit (e.g., medical, phar-
macy) the drug will be paid and, within these broad catego-
ries, whether it will be carved in or carved out (contracted,
managed, and paid separately) under a sub-benefit (e.g., men-
tal health, or home health).
The type and amount of the patients cost-sharing respon-
sibility and whether it will be a coinsurance percentage,
a copayment dollar amount, or an amount equal to the
charged amount that exceeds a maximum reference price
that the plan will pay.
Whether the benefit will be subject to requirements such as
drug formulary, formulary tiers, prior authorization, drug-spe-
cific coverage policies, maximum dispensed amount (quantity
or days supply), and/or mandatory mail order or other phar-
macy network restrictions.
Whether there is a deductible and/or a maximum annual
payable amount (i.e., stop-loss for the member or for the drug
plan) for the pharmacy benefit, separately from any deductible
or maximum annual payable amount that may apply to other
specific portions of the benefit or to the overall benefit.
Use of Formularies
A formulary is a list of drugs in a pharmacy benefit that are des-
ignated as preferred or nonpreferred by the pharmacy and thera-
peutics (P&T) committee of the health plan or PBM based on
effectiveness, safety, and cost considerations. Many health plans
have tiered formularies, with drugs categorized by copayment or
coinsurance levels, in which nonpreferred drugs may be covered
but with a higher cost-share for members. Member cost-share at
the point of service is a fixed-dollar copayment or a percentage of
drug cost (i.e., coinsurance). These copayment and coinsurance
levels are intended to influence utilization, typically to encourage
a shift from expensive brand-name nonpreferred drugs to less
expensive, therapeutically equivalent generic and therapeutic
alternatives. These member cost-share requirements at the point
of service also help finance the pharmacy benefit.
From health plan and PBM perspectives, formularies are used
as tools to manage care and cost. By placing a drug on its formu-
lary, the PBM or health plan may have increased leverage with the
manufacturer of that drug and with manufacturers of drugs that

S24 Supplement to Journal of Managed Care Pharmacy JMCP August 2009 Vol. 15, No. 6-a www.amcp.org
 III. Payers and Payment Methods

EXHIBIT III-6 Median Cost-Sharing for a Months Supply of a Prescription

Drug Has Risen Among PDPs, 2006-2009
PDPs MA-PDs
2006 2007 2008 2009 2006 2007 2008 2009
Copay
Generic $5 $5 $5 $7 $5 $5 $5 $5
Preferred brand-name drug $28 $28 $30 $38 $27 $29 $30 $30
Nonpreferred brand-name drug $55 $60 $72 $75 $55 $60 $60 $60
Speciality-tier coinsurance 25% 30% 30% 33% 25% 25% 25% 33%
PDP (prescription drug plan), MA-PD (Medicare Advantage-Prescription Drug [plan]). Calculations are weighted by enrollment. 2009 values were calculated using 2008
enrollment. Generic copay values are for all plans that use dollar copays. Copay values for preferred and nonpreferred brand-name drugs are only for plans that use those
tiers. PDPs exclude employer-only groups and plans offered in U.S. territories. MA-PDs exclude demonstration programs, 1876 cost plans, employer-only groups, special
needs plans, and plans offered in U.S. territories. Specialty tiers apply to expensive products and unique drugs and biologics for which enrollees may not appeal for lower
cost sharing.
Source: MedPAC Report to the Congress: Medicare Payment Policy. March 2009.111

may be therapeutically equivalent to it. By creating the ability to
steer utilization toward a particular drug that has clinical equiva-
lence or preference to others in the class, the plan can offer a
drug manufacturer a higher market share in exchange for a lower
purchase price or a higher rebate that also achieves a lower net
price. A formulary with fewer clinically therapeutic alternatives
in a preferred tier or larger patient-based financial incentives will
increase this leverage.
Formularies, formulary tiering, tier-based copayments, and
coinsurance levels are some of the most important benefit design
features in use today to customize payment and determine
patient financial responsibilities for specific drugs.110 Although
drug formularies involve the contracted pharmacies within a
purchasers administration, pharmacies are typically not involved
in decision-making regarding formulary content or copayment
amounts and generally do not share in the economic rewards of
these programs.
Typically, formularies have 3 or 4 cost-share tiers, with generic
drugs often placed in the first tier, preferred brand drugs placed
in a second tier, and nonpreferred brand drugs placed in a third
tier. If the formulary has a fourth tier, it is usually reserved for
expensive injectable and specialty drugs and has the highest cost-
share (i.e., copayment amount or coinsurance percentage).
Patient cost sharing has steadily increased since 2000, primar-
ily for more expensive drugs. Exhibit III-5 shows average patient
copayment amounts in commercial plans.
Beneficiary cost sharing is somewhat different in the Medicare
Part D setting, but generally follows the same pattern as for com-
mercial plans (see Exhibit III-6).
Traditional and Transparent Pricing
In recent years, some PBMs have emphasized transparency in
customer relations, including transparent pricing in their payer
contract offers.112 PBM traditional pricing for retail and mail-order
pharmacy is typically offered on the basis of the AWP benchmark
for single-source branded pharmaceuticals, and proprietary MAC
or MRA for multiple-source pharmaceuticals. Contracts may
guarantee the overall value of the MAC or MRA as a percentage
AWP discount, although this guarantee is difficult to validate
because MAC details typically are not shared with PBM clients.
Some contracts guarantee the AWP-discount value of all multi-
ple-source products, whether or not they are on the MAC list. A
dispensing fee typically applies.
In contrast, PBM transparent pricing for retail and mail-order
pharmacy specifies that the actual PBM payments to pharmacy
providers are passed through to the payer without markup or
alteration. This form of pricing generally does not specify a par-
ticular AWP-discount price that will be charged to the payer for
single-source branded pharmaceuticals, but may guarantee the
overall claims value in terms of an average AWP discount. The
reason for the absence of a specified AWP discount is that PBM
pharmacy network contracts are negotiated individually and may
vary among pharmacy providers, so that the PBM cannot offer
the payer a single pricing formula in advance (but an average
AWP discount paid can be offered after the fact, in a reconcilia-
tion process).
Specialty pharmaceuticals are often priced differently to
payers. Individual specialty pharmaceuticals may be listed in
the contract, priced on an AWP-discount basis that may differ
depending on whether the payer opts for an exclusive provider
arrangement with the specialty pharmacy, or for an open pro-
vider model in which the patient also may obtain specialty phar-
maceuticals from network retail pharmacies. A MAC may apply
for multiple-source products. Specialty pharmaceuticals not
individually priced may be subject to an across-the-board AWP
discounted price. A dispensing fee may apply.
Contracts with pharmacy providers typically include lower
of provisions in which the PBM or plan sponsor pays no more
than what would be paid by a pharmacy customer paying out-of-
pocket without pharmacy benefit coverage. Contractual lower
of provisions may have become more important in recent years
as a result of the community pharmacy generic price war.113

www.amcp.org Vol. 15, No. 6-a August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S25
 III. Payers and Payment Methods
Prescription Drug Rebates
Although health plans and PBMs typically do not take possession
of drugs, drug manufacturers pay rebates directly to them based
on performance with volume, share, formulary placement, and
other contractual terms, generally on a quarterly basis.
The link between drug formulary tiers and manufacturer
rebates is important in understanding the true net program cost
of a drug. Rebates may be based on utilization of a specific drug
by enrollees of a health plan or PBM or based on the market share
of that drug compared with other drugs in a therapeutic class. In
some cases, rebates are based on changes in the share of drugs
rather than the absolute share. Rebates also may be based on
favored inclusion of a drug on a restrictive formulary. The rebate
provides the purchaser (or its contracted intermediary, such as a
PBM or health plan) with an incentive to put the branded drug
on the second (preferred brand) tier rather than the third (non-
preferred) or higher copayment tier. The purchaser also may have
an incentive, negotiated or operational, to limit the number of
other branded products in the same therapeutic class assigned
to the preferred copayment tier to increase the unit rebate for 1
preferred drug.
More generous rebates are often available for branded drugs
that treat conditions for which an alternative therapeutically
equivalent generic or brand-name treatment is available. Large
rebate percentages are less likely to be offered for new drugs per-
ceived to be without therapeutically interchangeable alternatives
and for breakthrough drugs, because manufacturers perceive
no need to negotiate prices to obtain favorable formulary status
for these products. Rebates are also rare for generic drugs or for
multiple-source brand-name drugs when generics have been
available for a long period of time.
The extent to which drug manufacturer rebates are shared
among PBM, health plan, and purchaser is a matter of consider-
able attention and debate. As intermediaries between employers
or health plans and pharmacy providers, PBMs vary in the extent
to which rebates are shared with client purchasers. The amount
shared depends on negotiation of all variables in the contract
between the employer and PBM (or health plan), including vari-
ables such as retail pharmacy network discounts and adminis-
trative fees. For example, an employer may desire to pay a higher
administrative fee and receive more rebates or pay a lower
administrative fee and a lower share of rebates.
Rebates and other price concessions to health plans and PBMs
have no direct impact on payments to contracted pharmacies.
However, in an AMP- or ASP-benchmarked system in which pay-
ment is a markup on 1 of these benchmarks, rebates and other
price reductions that lower the overall reportable selling price
also lower the pharmacys allowable cost and net margin of profit
(assuming that no change occurs in pharmacy acquisition cost
and the dispensing fee remains constant).
S26 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
Patient Expenditures for Pharmaceuticals
For a typical family of 4 covered by an employer-sponsored PPO,
one medical index estimates that a patients out-of-pocket cost-
share for prescription drug costs in 2008 is approximately 27.4%
of total drug costs. According to the index, the actuarial value of
annual pharmacy cost for a family of 4 in this scenario is $2,302
of a total annual medical cost of $15,609 paid by or on behalf of
the typical family.20
While average Medicare beneficiary cost-share for prescriptions
is lower as a result of the Part D benefit, it is remains significant,
particularly for beneficiaries who reach the doughnut hole.114
According to a CBO report, average prices for patented drugs
in other industrialized countries are 35% to 55% lower than in
the United States. However, while an individual can fill a pre-
scription in another country and realize savings reflecting the full
difference in price, the same would not be true for the health care
system as a whole.115
Importation of a prescription drug (or reimportation, if it
is manufactured in the United States) is generally not lawful
for individuals or commercial entities such as pharmacies or
wholesalers. However, P.L. 109-295 (enacted in 2006) allows U.S.
residents to transport up to a 90-day supply of qualified drugs
from Canada to the United States. The U.S. government report-
edly does not consistently stop individuals from purchasing drug
products abroad. Internet sales and personal importation through
physical travel to Canada totaled about $700 million in sales in
2003, or 0.3% of total U.S. prescription sales, and about the same
dollar value of prescription drugs is estimated to have entered the
United States from the rest of the world.116
Because of the price difference, some people without prescrip-
tion drug insurance have used drug importation to reduce their
prescription drug cost. Yet, safety considerations exist. Key find-
ings of the DHHS Task Force on Drug Importation are as follows:
There are significant risks associated with the way individuals
are currently importing drugs; and it would be extraordinarily
difficult and costly for personal importation to be implemented
in a way that ensures the safety and effectiveness of the imported
drugs.117
People without prescription drug insurance or with inad-
equate coverage may be eligible for prescription drug discount
cards, offered by county government, pharmacy benefit man-
agers, community pharmacies, and others. Discount cards typ-
ically are honored only at certain community pharmacies, may
reduce the purchase price of all pharmaceuticals purchased or
only of generics, and may be fee-based or free to those meeting
eligibility criteria.118,119,120
Relationship of Provider to Payment Method
The payment method varies by provider type in the private sec-
tor as it does in the public sector. However, in the private sec-
tor, payment methods are far more variable than in the public
sector. Because payment methods are held in confidence by the
Vol. 15, No. 6-a www.amcp.org
 III. Payers and Payment Methods

contracting parties, little is known publicly about individual EXHIBIT III-7 Common Cost-Sharing Methods
payment arrangements, how these arrangements compare across for Specialty Drugs
provider types, or trends in these arrangements over time.
Community Pharmacy. A community pharmacy is generally 100
5% 4%
paid for the ingredient cost component based on a percentage 26%
25% 32%
discount or markup on a benchmark, typically AWP or WAC, 80
53%
respectively, for single-source brand drugs. For multiple-source

% of Plans
drugs, payment is usually subject to a purchaser-defined MAC 60
price list. A negotiated fee is paid for professional services includ-
ing dispensing. Some purchasers make an additional payment to 40 72% 70% 64%
the community pharmacy for work expended in gaining substitu- 46%
tion with a preferred product when a nonpreferred product was 20
prescribed. Purchasers also may offer payment to community 2% 2%
0
pharmacies for the provision of medication therapy management
Commercial MA-PD Commercial MA-PD
(MTM) or disease management (DM) professional services.
Pharmacy Benefit Medical Benefit
This product-based reimbursement formula in community
pharmacy is expressed as an ingredient cost calculation plus No cost share Flat cost share Tiered cost share
dispensing fee, such as the following:
AWPX%+$x.xx Source: EMD Serono Injectables Digest, 5th Edition. February 2009.121
WAC+X%+$x.xx
MAC+$x.xx (for multiple-source drugs)
A May-June 2008 survey of 223 employers representing about average dispensing fee of $1.73.33
15 million members showed that average community pharmacy Community pharmacy reimbursement also is typically subject
reimbursement for brand drugs was AWP minus 16.1%, plus an to a lower of provision in which the pharmacy provider is not

EXHIBIT III-8 Average AWP Discount for Specialty Pharmacy Products

13.2%
Home Health Care 15.4%
15.6%

13.2%
MDNononcologist 13.4%
Distribution Channels

15.6%

8.7%
MDOncologist 13.4%
13.1%

14.6%
Retail Pharmacy 16.3%
16.4%

15.6%
SPP 17.6%
17.1%

0 5 10 15 20
Average % Off AWP

Medicaid MA-PD Commercial

Source: EMD Serono Injectables Digest, 5th Edition. February 2009.121

www.amcp.org Vol. 15, No. 6-a August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S27
 III. Payers and Payment Methods

EXHIBIT III-9 Average ASP Markup Percentages injectables, as well as beneficiary cost-share responsibility for
for Specialty Pharmacy Products these products, depends on the benefit under which the inject-
able is covered as well as the provider dispensing or administer-
Distribution Commercial MA-PD Medicaid
Channels ing the product. Specialty injectables, including self-administered
% of Plans / Average ASP plus %
and office-administered injectables, may be included in a payers
Home health care 32% / 8.9% 40% / 7.7% 33% / 8.2%
MDnononcologist 46% / 9.4% 57% / 8.2% 38% / 8.5%
pharmacy benefit and/or covered through the medical benefit.
MDoncologist 50% / 10.3% 60% / 8.5% 48% / 8.6% When covered under the pharmacy benefit, injectables are subject
Total 43% / 9.5% 53% / 8.1% 40% / 8.4% to payers drug formularies, as with other pharmaceuticals paid
Source: EMD Serono Injectables Digest, 5th Edition. February 2009.121 through that benefit. Most medical benefits lack the description
of benefits language or capability of claims processing systems to
support product positioning as preferred or nonpreferred, which
paid more than the submitted price or submitted drug cost, the precludes the opportunity to earn meaningful product discounts
submitted U&C price or the contractual amount. from rebates.
Providers of Specialty Injectables. Drug payment for specialty As shown in Exhibit III-7, based on a survey conducted

EXHIBIT III-10 Reimbursement Benchmarks for Physician Office Drugs, 2007 and 2008

Key Findings:
The share of payers that depend primarily on ASP methodology
is approaching equilibrium with the share using AWP Reimbursement Over Time
ASP is used to manage a dominant portion of covered lives

Injectables Index Data Oncology Index Dataa

Fall 2007 Spring 2008 Fall 2008 Summer 2007 Winter 2008 Summer 2008

ASP=35.4%
ASP=36.0% ASP=36.0%
45.8% of ASP=41.0% ASP=41.7%
ASP=44.1% 27.1% of 39.6% of
covered lives 58.8% of 51.5% of
57.3% of covered lives covered lives
covered lives covered lives
covered lives

AWP=57.6% AWP=54.0% AWP=54.0%

47.7% of AWP=51.0% AWP=47.1% 69.3% of 52.5% of AWP=51.5%
covered lives 40.7% of 38.5% of covered lives covered lives 45.0% of
covered lives covered lives covered lives

Other=7.0% Other=8.0% Other=8.8% Other=10.0% Other=10.0%

Other=6.8%
6.5% of covered lives 0.5% of covered lives 4.3% of covered lives 3.4% of covered lives 7.9% of covered lives
3.5% of covered lives

n=99 n=100 n=102 n=100 n=100 n=103

a Responses
pertain only to reimbursement of oncologists treating commercial plan members.
Source: Managed Care Injectables Index, Zitter Group, Fall 2008.126 Reproduced with permission from The Zitter Group.

S28 Supplement to Journal of Managed Care Pharmacy JMCP August 2009 Vol. 15, No. 6-a www.amcp.org
 III. Payers and Payment Methods

EXHIBIT III-11 ASP-Based Reimbursement in the Physician-Office Setting

Key Findings:
Increased adoption of rates above +6% has fueled the transition ASP Reimbursement Over Time
to ASP technology

Injectables Index Data Oncology Index Dataa

Fall 2007 Spring 2008 Fall 2008 Summer 2007 Winter 2008 Winter 2008

ASP ASP ASP ASP ASP ASP

35% 41% 44% 36% 36% 42%
Other Other Other Other Other Other
65% 59% 56% 64% 64% 58%

ASP=35.4% ASP=41.0% ASP=44.1% ASP=36.0% ASP=36.0% ASP=41.7%

45.8% of 58.8% of 57.3% of 27.1% of 39.6% of 51.5% of
covered lives covered lives covered lives covered lives covered lives covered lives
54.2%

48.4%
45.9%

43.8%

41.7%
38.9%
31.1%
25.7%

27.8%
25.0%

27.4%
22.2%

19.4%
15.6%
14.8%

16.7%
17.1%
12.5%
11.6%

8.3%
8.5%

8.2%

4.8%
Other

Other

Other

ASP+18

Other

ASP+18

Other
ASP+6

ASP+12

ASP+18

Other

ASP+6

ASP+10

ASP+12

ASP+6

ASP+10

ASP+12

ASP+6

ASP+12

ASP+6

ASP+12

ASP+6

ASP+12
n=99 n=100 n=102 n=100 n=100 n=100
a Responses
pertain only to reimbursement of oncologists treating commercial plan members.
Source: Managed Care Injectables Index, Zitter Group, Fall 2008.126 Reproduced with permission from The Zitter Group.

during December 2008 of health plans representing commercial, A significant portion of the commercial marketplace has
MA-PD (Medicare Advantage with prescription drug) and man- shifted from AWP-based reimbursement to ASP-based reim-
aged Medicaid lines of business, commercial coverages are split bursement (see Exhibit III-9).
between a flat and a tiered cost-share for specialty drugs under Hospital Inpatient and Outpatient. Because per diem and pro-
the pharmacy benefit, but typically require no cost-share for spe- spective payment are the most frequently used payment methods
cialty drugs under the medical benefit. in these settings, separate payment for drugs in the inpatient hos-
Purchasers contract with several types of specialty injectable pital setting seldom occurs. However, most hospital outpatient
providers. For the medical benefit, providers typically include drugs are reimbursed separately if they exceed a predetermined
office-based physicians, outpatient hospital, and home health cost threshold, which is negotiated between the hospital and the
agencies, while pharmaceutical benefit providers typically include payer.
community, mail-order, and specialty pharmacies. Physician Office Drugs. Unless the physician has entered into
Commercial health plan payment formulas for specialty phar- a capitation arrangement, most physician-administered drugs are
maceuticals typically differ by provider type and by payer, as reimbursed separately. The business failure of several physician
shown in Exhibit III-8. practice management organizations (organizations that own or

www.amcp.org Vol. 15, No. 6-a August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S29
 III. Payers and Payment Methods
EXHIBIT III-12 Reimbursement Benchmarks Used for Medicaid
Specialty Pharmacy Products, by Distribution Channel
Home Health Care 13% 8%
Distribution Channels
MDNononcologist 25% 12%
MDOncologist 26% 13%
Retail Pharmacy
SPP
0 20 40
Cap AWP plus AWP minus
Source: EMD Serono Injectables Digest, 5th Edition. February 2009.121
manage physician practices) in the late 1990s may have been
partly due to drug risk in the face of double-digit cost increases
during this time period.122 Medical group capitation with some
financial risk for the cost of prescriptions administered in the
medical office continues, but is not common.123 A concept pro-
posed by Prometheus Paymentthat of physician-based, sever-
ity-adjusted, evidence-based case ratesmay soon be tested, but
case rates initially will not include prescription drugs.124 Outside
of staff model health plans as of 2003, office-administered drugs
typically were paid on a FFS formula, with AWP as a common
basis and formulas ranging from AWP plus 10% to AWP minus
20%.125
Web-based surveys of payers and of oncologists have shown
significant uptake of the ASP benchmark in the commercial
sector, as shown in the following slides from the Zitter Group.
As of the time of this survey, more than 40% of payers sur-
veyed, representing almost 60% of commercially covered lives,
had adopted the ASP benchmark, most commonly at a 6%
markup. Survey of oncologists provides very similar findings
S30 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
46% 33%
25% 38%
13% 48%
100%
100%
60 80 100
% of Plans
ASP plus
(see Exhibit III-10 and 11).126
For cost control reasons, some private payers require direct
supply of physician office drugs by a specialty distributor under
contract with the payer. In this scenario, the physician does not
buy and bill for the drug, but rather the drug is shipped to the
physician office by the supplier, which then bills the payer at a
contracted price. The physician bills the payer only for the profes-
sional services required to administer the drug.
Home Health. Private purchasers pay home health profes-
sional services on a per diem, per-visit or per episode basis. In
the commercial sector, prescription drugs administered in the
home setting are paid separately to home-infusion pharmacies
on a FFS basis.127 In the Medicare program, infusion therapy
is paid according to the Medicare Durable Medical Equipment
Prosthetic, Orthotics, and Supplies fee schedule. Based on a man-
aged care survey performed in December 2008, the reimburse-
ment for specialty pharmacy products in home health care was
based predominantly on AWP (see Exhibit III-12).121
Vol. 15, No. 6-a www.amcp.org
 IV. How Products, Services, and Payments Flow Through Channels of Distribution
T
he complexity of drug payment can be made more com-
prehensible by diagrams that show the multitude of enti-
ties that are involved in various distribution channels.
The 2 principal models of drug payment and pharmacy benefit
financing in the U.S. health care system in 2009 are:
Pharmacy benefit other than Medicare prescription drug ben-
efit (see Exhibit IV-1); and
Medicare prescription drug benefit (see Exhibit IV-2).
Key stakeholder relationships are highlighted in these sche-
matics. Only the first instance of each stakeholder relationship is
shown. The relationships are described below.
Payer carve-out to PBM. A self-insured and self-admin-
istered private-sector or government purchaser may carve out
pharmacy benefits from the overall health plan and contract
directly with a PBM for their provision. With the exception of
Medicare Part D (see Exhibit IV-2), PBMs generally do not take
financial risk for prescription drug cost and utilization. Drugs
supplied through pharmacies based on a PBM contract are paid
on a negotiated basis, and the contract formula usually centers
on AWP, WAC, MAC or pharmacy U&C price. PBM contractual
elements may include performance guarantees, rebate share, and
administrative services (such as claims adjudication, network
management, drug utilization review, member communication,
and member ID cards).
The Kaiser Family Foundation/Health Research and
Educational Trust (KFF/HRET) survey, based on a representative
sample of large and small U.S. employers, found that, for 2008,
98% of insured workers have prescription drug benefits and
that, with respect to cost sharing, the most common formulary
types are 3-tiered (70% of insured workers) and 2-tiered (15% of
insured workers) formularies. Only 7% of insured workers were
subject to formularies with 4 or more tiers.106
Health plan to payer relationships. Employers may pur-
chase a premium-based (insured) benefits package from a health
plan that includes prescription drug coverage. By doing so, the
payer transfers full financial risk to the health plan for provision
and management of the benefit. Self-insured employers assume
this financial risk themselves and pay health plans or PBMs an
administrative fee for the provision and management of the ben-
efit, which is called an Administrative Services Contract (ASC).
Insurers retain all rebates for their insured business and share
rebates with self-insured customers at an amount negotiated as
part of the ASC agreement.
State Medicaid programs may contract with health plans
(MCOs) for their beneficiaries (managed Medicaid), including
provision of prescription drugs. The drug portion of the pre-
mium may now reflect EAC pricing, and Medicaid adoption of
an AMP benchmark, once that is possible, likely would reduce
this amount. Drug sales for state Medicaid beneficiaries enrolled
in health plans are not subject to statutory rebates.
A self-insured employer may participate in a group purchasing
organization (GPO) that can build preferred relationships with
www.amcp.org Vol. 15, No. 6-a
vendors, including PBMs, mail-order, and specialty pharmacies,
based on price concessions, services, and service guarantees.
The Human Resource Policy Associations Transparency in Drug
Purchasing Solutions (TIPPS) initiative is an example of such an
organization.112,129
Health plan to PBM arrangements. A health plan or third-
party administrator (TPA) may contract with a PBM to provide
pharmacy benefits to beneficiaries. The drug payment basis is
typically a percentage of AWP or WAC for the ingredient cost,
plus a dispensing fee and perhaps other fees, such as an admin-
istrative fee. Agreements may require disclosure of manufacturer
rebates received by the PBM as well as sharing of a portion of the
rebate.
Relationship between PBM and network pharmacies.
PBM provider networks may include several types of pharma-
cies and pharmacist services, including community, mail-order,
health plan (staff and group models), specialty, LTC, and home-
infusion. PBMs may contract directly with pharmacies or through
Pharmacy Services Administrative Organizations (PSAOs), or they
may own these entities outright. According to 1 study, PSAOs
improve contracting efficiency for independent pharmacies, and
allow them to contract with PBMs at discount rates that are com-
parable to those received by larger retail chains. Pharmacies are
paid on a formula basis, typically the lower of a contract price or
the U&C price. The contract price is the sum of the discounted
AWP or WAC plus a dispensing fee, and MAC typically is used for
pricing the ingredient cost for multiple-source drugs. The actual
payment to the pharmacy is the lower of the contract price or
U&C price minus the member cost-share amount.130 In recent
years, specialty drugs have been an increasing concern to payers
because of their high-cost, high-year-over-year trend,131 and the
robust pipeline of biotechnology products in clinical trials that
may show similar cost patterns. Despite payer concerns, a recent
survey suggests payer willingness to compensate (through lower
discounts on AWP) various levels of specialty pharmacy service
above simple dispensing.132 These specialty pharmacy providers
also may receive payment for services from manufacturers now
defined as bona fide service fees.
Manufacturer to PBM relationships. PBMs, health plans
that offer pharmacy benefits, PDPs, and MA-PDs develop drug
formularies and negotiate manufacturer drug price concessions
relative to coverage policy, formulary placement of specific drugs,
beneficiary cost-share, and utilization management procedures.
Manufacturer rebates also typically reflect the plans ability to
achieve volume, market share, and other contracted performance
targets.
Manufacturer to wholesaler relationships. Manufacturers
may sell drugs to pharmacies through drug wholesalers or to
warehouses owned by drug chains. Large pharmacy chains may
self-warehouse, but may be unable to negotiate manufacturer
discounts below WAC for single-source branded drugs. The retail
(community pharmacy) class of trade is typically not offered
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S31
 IV. How Products, Services, and Payments Flow Through Channels of Distribution

EXHIBIT IV-1 Pharmacy Benefit (Other Than Medicare Prescription Drug Benefit)

Chargeback
WAC-based
Drug Manufacturer
(prompt pay, volume, other discounts)
Drugs

Negotiated
Rebate
Drugs
Direct
Contract
G
(Single
Source
Brand) Preferred Direct
Providers Drugs
Formulary Contract Wholesaler
Warehouse
Placement
Drug
Supply
WAC, GPO
Payment Drugs Drugs
Based
Related
Service F H
Related Pharmacy (Community, Mail, HMO, Specialty, LTC, Home Infusion)

AWP, WAC,
AMP, MAC Based) I
Pharmacy Benefit Manager E Point-of-Sale
Transaction Cost-
Drugs
Share
Administrative
D Managed Share of
Services Payment Drug Rebates from
Only Benefits Manufacturer
(ASO)
Claims Share of Medical, Including
Payment Rebates Prescription Drugs
Health Plan, Third Party
From
Manufacturer Administrator K Beneficiary
Premium

Share of
Rebates
C Premium
J
From or ASO Eligibility Assistance
Manufacturer Claims Verification Payments
(Not if Payment
B Premium-based)

Patient
Third Party Payer (Employer, Multiple Employer
Assistance
Trust, Taft Hartley Trust, PERS, Medicaid, CMS)
Program

market share rebates on single-source branded drugs. In testi-
mony before a Congressional committee in 2004, a Wal-Mart
executive stated: For branded drug products, Wal-Mart has little
or no ability to negotiate discounts below the published WAC.
Wal-Mart has no greater leverage for branded drug products than
any other retail class of trade pharmacy provider.133
Pharmacy purchase of drug inventory. Community,
specialty, and other types of pharmacies may purchase drugs
directly from wholesalers, or may join GPOs to generate
increased negotiating leverage by combining purchase volume.
GPOs may offer members owned or affiliated wholesaler-dis-
tributor service arrangements. GPO fees typically are up to 3%

S32 Supplement to Journal of Managed Care Pharmacy JMCP August 2009 Vol. 15, No. 6-a www.amcp.org
 IV. How Products, Services, and Payments Flow Through Channels of Distribution

EXHIBIT IV-2 Medicare Prescription Drug Benefit

Chargeback
WAC-based
Drug Manufacturer
(prompt pay, volume, other discounts)
Drugs

Negotiated Direct
Drugs
Rebate Contract
(Single
Source
Brand) Preferred
Formulary Providers Direct Wholesaler
Drugs
Placement Warehouse Contract

WAC, GPO
Drugs Drugs Based

Pharmacy (Community, Mail, HMO, Specialty, LTC, Home Infusion)

AWP, WAC,
Prescription Drug Plan AMP, MAC Based)
(PDP) or Medicare
Advantage Prescription Point-of-Sale Cost-
Transaction Drugs
Drug Plan (MA-PD) Share

Per Member
M
Premium,
Income Qualified Drug Coverage
Payment, Beneficiary
Reports
Reinsurance Premium
Subsidies &
Reinsurance
payment Eligibility Assistance
L Verification Payments

Patient
CMS Assistance
Program

of product purchase dollars.134 Patient assistance programs assist patients in meeting

Patient purchase of prescription drugs. Beneficiaries pay
a per-prescription cost share as stipulated in the benefit design,
depending on coverage, brand or generic category and formulary
tier of the dispensed drug. The beneficiary may be responsible
for meeting an annual out-of-pocket deductible that may apply to
all health benefits costs and/or may be specific to the pharmacy
benefit. A maximum benefit may apply.33
cost-share. Patient assistance programs (PAPs), sponsored by
manufacturers and administered by service providers, PBMs,
and charitable organizations, are available to help eligible indi-
viduals meet the cost of medications when patients are without
pharmacy benefit coverage and/or meet specific, sponsor-defined
financial criteria. The Partnership for Prescription Assistance
(PPARx, www.pparx.org) is an example of a referral service to

www.amcp.org Vol. 15, No. 6-a August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S33
 IV. How Products, Services, and Payments Flow Through Channels of Distribution
assistance resources. The PPARx estimates that drug manu-
facturer-sponsored PAP programs filled more than 35 million
prescriptions in 2005, with a wholesale value of more than $5.1
billion.135,136
Patient relationship to their health plan. Workers elect-
ing health benefits through a group may be required to pay a por-
tion of the premium cost in addition to any deductibles, copay-
ments, and coinsurance that the benefit design may stipulate.
The employees share of the monthly health insurance premium
is deducted from salary by the employer.
CMS contracts with Part D and MA-PD providers. CMS
pays the Part D provider in 3 ways. The first is a direct risk-
adjusted (according to health and demographic characteristics)
S34 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
premium subsidy, the second is a low-income subsidy, and the
last is a reinsurance subsidy. An annual reconciliation may result
in additional payments to the provider or in payment recouped
by the government. Employers and unions that sponsor retiree
benefits that offer no less than the Medicare drug benefit qualify
for a Retiree Drug Subsidy.69,70
Medicare beneficiary relationships to PDP and MA-PD
providers. Most Part D beneficiaries must pay a monthly pre-
mium to the Part D sponsor. The MMA requires that beneficiary
premiums must reflect 25.5% of the national average standard-
ized bid across all Part D plans.71 Low-income beneficiaries pay
less or no premium, cost-share and deductible.
Vol. 15, No. 6-a www.amcp.org
 V. Issues and Implications for Stakeholders
Actual Transaction Price as the Basis of Drug Payment
Issue
In light of the March 17, 2009, Memorandum and Order referred
to earlier (see Section II, Payment Benchmarks), and both First
DataBanks and Medi-Spans subsequent announcements, it
appears that AWP will no longer be widely published by the end
of 2011. Consequently, payers will replace AWP as the basis for
payment. It is possible that the new benchmark will be a measure
of actual transaction price, at the manufacturer level possibly
based on CMSs leadership in developing ASP and AMP, or at the
provider level based on actual acquisition cost (AAC).
In Medicaid, change to AMP, if implemented according to
the Deficit Reduction Act of 2005, would apply only to multiple-
source drugs. However, AMP is intended to be publicly available
according to the 2005 Act, and could be applied by government
and commercial payers beyond the mandated use specified in
the DRA.
WAC also has been suggested as a possible replacement for
AWP, because it more closely approximates actual transaction
price for single-source-branded products, because it currently
exists in most published pricing references, and because it will
continue to be published for the foreseeable future. However,
WAC has not been a viable option heretofore because many
drugs, particularly multiple-source drugs, do not have published
WAC prices, and because WAC does not approximate actual
transaction price for many single source branded drugs in com-
petitive therapeutic classes and for the vast majority of multiple-
source drugs.137
It is noteworthy that changes to the benchmark for determin-
ing provider reimbursement focus primarily on the manufac-
turers actual selling price rather than on providers AAC for the
product.
Implications
Pharmaceutical manufacturers may reconsider rebates cur-
rently offered for preferred formulary placement and attain-
ment of market share targets, because it may be necessary to
calculate AMP net of such payment. Pharmaceutical manufac-
turers and other stakeholders in the channels of distribution
may reconsider fees paid in light of whether they qualify as
exempt bona fide service fees.
Third-party payers may benefit from replacement of AWP
with an actual transaction price benchmark because the new
benchmark would provide transparency both with respect to
acquisition cost and markup. In addition, such a benchmark
may enable payers to more effectively leverage their market
power in negotiating price concessions with pharmaceutical
manufacturers.
Payment to community, mail-order, and specialty pharmacies
on the basis of an actual transaction price benchmark may
result in reduction in the gross margins of these pharmacies,
www.amcp.org Vol. 15, No. 6-a
the extent of which would depend on the level of markup and
additional fees paid. Without upward adjustment of product
markups or increases in dispensing fees for pharmacy ser-
vices, there may be adverse effects on access as a result of
reduced pharmacy participation in provider networks.
Replacing AWP with ASP has been shown to be an effective
method to significantly reduce drug payments for Medicare.
ASP, however, does not lower the cost of drugs between the
manufacturer and distributor or the manufacturer and pro-
vider; there is some evidence that it may raise the actual cost.
Replacing AWP with AMP in Medicaid may have the same
result. With ASP and AMP, it is the end provider of services,
not the manufacturer, whose gross margin is most affected.
Use of a simple ASP plus some percentage, absent any addi-
tional controls, creates the financial incentive for prescribers to
select a higher-cost, higher-dollar product versus a lower-cost,
lower-dollar product. For example, 6% of a drug with a $500
ASP for a providerpurchaser has a $30 margin, while a thera-
peutic alternative with a $100 ASP has only a $6 margin.
As noted in a recent statement on AWP reform from the
Biotechnology Industry Association (BIO), If changes to
AWP are made, these changes should take into account the
professional services of physicians and other providers that
accompany the administration of covered products, and
offers the following in explanation: Some provider orga-
nizations have presented evidence that their members are
not being adequately reimbursed for their professional ser-
vices and that any differential between AWP and provider
acquisition cost goes to make up this gap.138 In this and in
similar cases, movement from AWP to an actual transaction
price benchmark will necessitate valuation and fair separate
compensation for services related to provider drug handling
and administration. Similarly, use of an actual transaction
price for drug ingredient cost in community and mail-order
pharmacies will precipitate pressure for upward adjustment
of dispensing/administrative fees.
Medicares ASP reimbursement formula has made it difficult
for some providers to recover their full acquisition cost, mainly
those who purchase physician-administered drugs in small
quantities and who therefore do not qualify for or are unable
to earn particular discounts or rebates. This reimbursement
formula also has forced physicians to be more vigilant about
collecting full patient cost sharing. As a result, manufacturers
report increasing demand for coinsurance assistance from
Patient Assistance Programs (PAPs).40,139 In addition, patient
service levels can be affected negatively in some cases where
physicians no longer acquire the medication because of insuf-
ficient reimbursement.
An actual transaction price benchmark could disadvantage
community pharmacies in several ways. First, it may not
reflect pharmacy acquisition cost, such as when including
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S35
 V. Issues and Implications for Stakeholders
wholesaler prompt-pay discounts that may not be passed on
to the purchaser. Smaller community pharmacies may be less
able to obtain the net price concessions available to larger pur-
chasers or other types of purchasers that are more capable of
moving product market share. Also, if the actual transaction
price benchmark is calculated on data that is several months
old, and if this benchmark becomes the basis for current
payment purposes (as is true for ASP), then this may misrep-
resent a current transaction price to the disadvantage of the
purchaser.
MCOs that adopt payment methods benchmarked to an actual
transaction price should carefully consider the immediate and
long-term effects on providers and patients. Careful consider-
ation of how overall provider services and relationships will
change as a result of any drug payment policy changes should
include the impact on access to care and the ability of provid-
ers to supply quality services. For example, if ASP or AMP is
determined to be a better benchmark than AWP, what change
in payment method is appropriate to ensure that providers
are recovering at least their AAC? Total drug payment to ser-
vice providers has 2 principal components: the drug product
and the professional services associated with dispensing or
administering the product. Because providers rely on total
compensation to meet their costs for the product and profes-
sional services, reduction in the reimbursement amount for
one component will likely create pressure to increase the
amount of reimbursement for the second component. How
should total compensation ensure that providers maintain a
reasonable profit?
Pharmaceutical manufacturers must understand that pricing
benchmarks such as WAC are necessary to make the delivery
system work. Similarly, payers require some method or bench-
mark to evaluate competitive offers/bids, to validate contract
terms, adjudicate drug claims, and control, monitor, and track
their trend in pharmacy-benefit spending.
Public Disclosure of an Actual Transaction Price
Issue
Medicare ASPs are publicly available information. If implemented
in accordance with the 2005 DRA, AMP will also become pub-
licly available (AMP is currently confidential).
Implications
AMP would become the new statutory benchmark for Medicaid
reimbursement of multiple-source drugs only. AMP disclosure,
however, would apply to single-source and multiple-source
drugs. As a result, states would have the information needed
to move from AWP to AMP for single-source drug reimburse-
ment, if they so desire.
General availability of routinely updated actual transaction
price benchmarks, such as AMP and ASP, may supplant
list price benchmarks in the private sector, well before
S36 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
publication of AWP ceases.
Public disclosure of actual transaction prices should enable
increased specificity and transparency in the calculation of
private payer rebates. Private-sector MAC price lists often are
established without reliable information about the AACs of
multiple-source brand drugs, so an important implication for
the publication of AMP prices is the potential for use in MAC
pricing.
Multiple-source drug manufacturers are concerned that the
intent of CMS to publish manufacturer-specific AMPs for
generic drugs, rather than a blended AMP for all drugs in the
class, will create a downward price spiral that threatens the
viability of the generics industry. If true, then public disclo-
sure of actual transaction price may result in a narrowing of
the range of net prices offered into the marketplace.
Bundling (Combining) Drugs With Services
Issue
Combining drug reimbursement with related clinical services
transfers the drugs economic responsibility and risk from the
payer to the provider.140 Medicare has used this technique for
managing hospital inpatient (diagnosis-related group [DRG]) and
outpatient (APC) drug spending, other acute care services (e.g.,
skilled nursing facilities [SNFs]), and dialysis services (composite
rate). In the private sector, some medical groups have received
per member per month (PMPM) capitation payments inclusive
of shared financial risk for prescription drugs, and most private
health plans pay for inpatient services using a per diem or DRG
rate that includes drugs.
Packaging has been proposed in other settings (such as pri-
mary care in a medical home setting), across settings (such as
hospital and post-discharge care) and with particular disease
severity refinements to more accurately reflect provider cost and
ability to manage risk. The following shows one view of how
primary care services in the medical home setting might be
packaged (see Exhibit V-1).
Implications
If prescription drug cost and financial risk are packaged
together with clinical pharmacy services and delegated to
the provider together, then it may follow that drug formulary
maintenance and exceptions authority are also delegated to
the at-risk provider. This would provide the at-risk provider
with the responsibility and tools needed to manage that risk.
Public disclosure of actual transaction prices improves payers
ability to package drugs with services because it permits the
payer to negotiate with more confidence regarding providers
costs. Therefore, public disclosure of actual transaction prices
may encourage packaging of prescription drugs with other
health care services. Providers may seek additional compen-
sation for drug-related professional services if there is loss of
revenue on the drug component of payment.
Vol. 15, No. 6-a www.amcp.org
 V. Issues and Implications for Stakeholders

Pricing Transparency EXHIBIT V-1 Payment System Alternatives

Issue Patient-Centered Medical Home
In the private sector, increasing pressure has been placed on
PBMs by many stakeholders including drug plan sponsors, Payment Transitional Ideal Payment
government agencies and consumer organizations, to disclose System Today Payment System System
pricing concessions and rebates. Furthermore, increasing pen- Fees for Fees for Simple
etration of high-deductible Consumer Driven Health Care plans Face-to-Face Face-to-Face Comprehensive
will lead to increased beneficiary price sensitivity and demand Physician Visits Physician Visits Payment to
for greater pharmaceuticals price transparency. Many PBMs have Cover Visits
Fees for Fees for and Calls with
increased pricing transparency to their clients, reportedly includ- Diagnostic Diagnostic Physicians, RN
ing increased pass-through of manufacturer rebates. Testing, etc. Testing, etc. Care Managers,

Implications
At the same time that some payers, most notably Medicare,
are packaging services with drugs, the drive to greater pric-
ing transparency may make it difficult for intermediaries and
No Payment
for MD Phone
Contracts

No Payment
Fees for
MD Phone
Contacts

Fees for
RN Care
Testing, etc.

pharmacies to fund the provision of some drug administra-
tion-related services within the lower net drug price that is
paid.
Pricing transparency may force PBMs to offer, price, and
cost-justify drug-related services previously made available at
no extra charge when they were funded through the margin
between the amount paid to the pharmacy provider and the
amount charged to the drug plan sponsor. New billable ser-
vices likely will evolve to replace the lost revenue.
Some PBMs transparent pricing offers amount to a pass-
through cost to the drug plan sponsor of the PBMs individu-
ally negotiated network pharmacy payments. However, the
PBM may be unwilling to disclose underlying pricing with
these pharmacies, and may be unable in advance to estimate
the weighted average of its pricing in AWP-discounted terms.
Therefore, the payer may perceive this as less transparent than
a contractually specified AWP-discounted pricing formula.
In a recent report, the CBO has observed that the markets
for some health care services are highly concentrated, and
increasing transparency in such markets could lead to higher,
rather than lower, prices. In particular, In health care,
reduced competition might result if more transparent pricing
revealed the prices negotiated between insurers and providers,
especially in concentrated markets.142
Prescription Drug Risk-Adjusted Premium
Issue
Medicare Part D PDPs are at financial risk for some of their ben-
eficiary drug utilization. From the mid-1980s through the 1990s,
some PBMs and PSAOs experimented with risk-based payment
and capitation,143 but little of this remained by the end of the
decade. One disadvantage of PBM capitation was insufficient
data necessary to estimate the cost of the pharmacy benefit.144 A
fundamental problem was the absence of a contract relationship
between PBMs and prescribers to permit PBMs to have some
Bonus/Penalty
Based on Use
of ER, Hospital
for RN Care Managers, Inc.
Managers, etc.
No Penalty for Bonus/Penalty
High Rates of Based on Use
Hospitalization of ER, Hospital
Source: Pay for innovation or pay for standardization? How to best support the
patient-centered medical home. Network for Regional Healthcare Improvement and
Robert Wood Johnson Foundation. February 2009.141
influence over prescribing behavior.
PBM performance ratings can be adversely affected by higher
drug expenditures even if the spending for drugs is associated
with lower costs elsewhere in the health care system.145 An
example of consequences of looking at benefit costs in silos
includes the introduction of the histamine-2 antagonists for ulcer
treatment in the 1970s. These drugs eliminated the need for sur-
gical intervention for many patients but resulted in the transfer of
a medical cost to the pharmacy benefit.
Implications
PDPs, which are at partial risk for their beneficiaries drug
costs, are motivated to control net drug spending. To this
end, PDPs seek to maximize beneficiary selection of gener-
ics and preferred brands. Drug formulary-related manufac-
turer rebates support this PDP objective to the extent that
they contribute to reduction in net drug spending, without
regard to utilization or cost impact to other aspects of the
health benefit.
Primary tools for influencing drug utilization and choice
in PDPs are formulary design, coverage policy, variations
in cost-sharing, and utilization management, such as step
therapy. However, as it is structured, the Part D drug ben-
efit limits the influence of PDPs over prescribing behavior,
patient prescription demand, and patient compliance with

www.amcp.org Vol. 15, No. 6-a August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S37
 V. Issues and Implications for Stakeholders
physician instructions.
Compared with PDPs, MA-PDs may be better able to use these
tools because the same entity that offers the PDP provides
comprehensive health insurance. Second, because MA-PDs
hold financial risk for the total care of the patient, they are
more likely to be receptive to the use of a higher-cost drug if it
produces cost savings elsewhere in the system.
The high and growing fraction of prescription drugs generi-
cally available at relatively low price points reduces PDP
and MA-PD exposure to financial risk, and may encourage
risk-taking. Conversely, market entry of expensive biotech-
nology products, covered under the pharmacy benefit to the
extent that they are self-administrable, will have the opposite
impact.
Beneficiary Cost Shift
Issue
The current trend in benefit design toward consumer-directed
health care (CDHC) increases beneficiary exposure to additional
costs in the form of health care premiums, deductibles, and ben-
eficiary cost-share at the point of service (i.e., copayments and
coinsurance). From the health plan and employer perspective,
CDHC transfers cost to the beneficiary, reducing benefit spend,
and increases beneficiary risk for and sensitivity to health care
prices, possibly reducing trend (i.e., growth in benefit cost over
time).
Implications
Higher beneficiary cost would result in increased cost sensitiv-
ity when using medical benefits, including pharmacy services
and prescription drugs.146,147,148
Pharmacists have demonstrated effectiveness in helping
patients manage their out-of-pocket costs for prescription
drugs and pharmacy services149 Pharmacy providers can
help beneficiaries in CDHC plans reduce out-of-pocket cost
by therapeutic selection of generic and certain higher-value
single-source brand drugs. Increased beneficiary cost-sharing
may increase the need and demand for these services.
If beneficiary cost exposure and access are not equivalent
across treatment settings, care delivery may migrate to settings
that expose the beneficiary to the lowest cost-share. For exam-
ple, while a Medicare beneficiary must contend with deduct-
ible and the doughnut hole in Part D for a covered injectable
drug, a Medicare beneficiary with a Medigap supplement may
have no out-of-pocket cost for the same drug if administered
in a Part B-eligible setting.
In Medicare Part D plans, there likely will be increased demand
for patient assistance programs (PAPs) and lower levels of com-
pliance with prescribed drug regimens among lower-income
beneficiaries who do not qualify for the low-income subsidy
when they enter the doughnut hole of coverage.
S38 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
Use of Comparative-Effectiveness Research
Findings to Guide Benefits, Access, and Payment
Issue
A total of $1.1 billion of the $787 billion economic stimulus bill
approved by Congress in February 2009 (Public Law 111-5, the
American Recovery and Reinvestment Act of 2009 [ARRA]) pro-
vided significant one-time funding for comparative-effectiveness
research to evaluate drugs, medical devices, surgery, and other
treatments. The funding is available through September 30, 2010.
Although the focus of the funding of this research is to be on clin-
ical effectiveness, incorporating evaluation of cost-effectiveness is
not precluded, although the result of any comparative-effective-
ness research is not to be used to mandate coverage, reimburse-
ment, or other policies for any public or private payers. Since
2005 and with a much smaller budget, the Agency for Healthcare
Research and Quality has sponsored comparative-effectiveness
research.150,151 Many state Medicaid programs, private pay-
ers, and provider groups sponsor similar efforts.152 The 111th
Congress is considering several proposals that would establish
an ongoing, long-term program that would foster and coordinate
comparative-effectiveness research and disseminate the findings
associated with the research to all stakeholders (e.g. consumers,
government, payers, providers, and manufacturers).
Implications
Concern exists that despite the report language that accompa-
nied ARRA, comparative-effectiveness research may be used
by insurers or by the government primarily to deny coverage
for more expensive treatments or to ration care.
Comparative effectiveness methods and standards can be
controversial. For example, controversy exists about the valid-
ity of inferring causation about treatments and other health
interventions based on observational data. Another issue is
whether comparative effectiveness should address cost: For
example, is an incremental benefit always worth it? Who
will decide and on what basis and with what input will that
decision be made?153
That the results of comparative-effectiveness research may be
applied in ways which incorporate payment is substantiated in
a June 2009 MedPAC Report to the Congress:84
To help improve the value of Medicare spending, we discuss three
pricing strategies that use information about a drugs clinical effec-
tiveness when paying for it under Part B and Part D:
Reference pricing: Set a drugs payment rate no higher than the
cost of currently available treatments unless evidence shows that
the drug improves beneficiaries outcomes.
Payment for results: Link a drugs payment to beneficiaries out-
comes through risk-sharing agreements with manufacturers.
Bundling: Create payment bundles for groups of clinically associ-
ated products and services.
Note: MedPAC has served in an advisory capacity, but
in 2009 as part Congressional debate regarding health
Vol. 15, No. 6-a www.amcp.org
 V. Issues and Implications for Stakeholders
care, there was a proposal in draft legislation to create an
independent Medicare Advisory Council (IMAC) from the
current MedPAC. IMAC would have authority to make
recommendations to the President, and this change would
transform MedPAC into a policy-making entity.154
Others argue that cost-effectiveness information will instead
lead to improved quality, better outcomes, more efficient, and
less variable delivery of care.
An important challenge in application of comparative-effec-
tiveness research will be the balance of societal and popula-
tion needs versus unique patient circumstances at the point of
care delivery. To some, this suggests the need to consider the
meaning of rationing.155
Challenges include dissemination of this information to
patients, advocacy groups and providers, implementation of
decision support tools at the point of care delivery, and wide-
spread and consistent application of electronic medical records
technology.
The $1.1 billion funding of comparative-effectiveness research
in ARRA (2009) quite likely portends the adoption of a per-
manent and possibly centralized structure in the United States
for establishing priorities and policies, and coordinating these
research activities.
Pharmaceutical Manufacturer Acceptance
of Risk for Desired Therapeutic Outcomes
Issue
Pharmaceutical manufacturers are experimenting with accepting
risk for the therapeutic outcome of their drugs in exchange for
insurance coverage that would otherwise be denied or restricted.
Published reports describe arrangements between private insur-
ers and manufacturers of diabetes and osteoporosis drugs that
place the manufacturer at risk for treatment costs attributed
to failure of the drug to achieve the stated therapeutic goals.
The arrangements are similar to one between a U.S. oncology
drug manufacturer and the United Kingdoms National Health
System.156
Implications
These arrangements reflect the increasing cost sensitivity of
the marketplace and the need for cost to be justified by value
to obtain access for a more expensive drug in a crowded thera-
peutic category. Arrangements like these could become more
common in response to even greater cost pressure throughout
the next decade.
Should risk for desired therapeutic outcomes be considered
a warranty, a type of insurance, providers assumed risk in
prescribing and managing a particular therapeutic course, or a
combination of these?157 For example, which of these might be
the best description of the Medicare never events policy?158
Acceptance of financial risk for therapeutic outcomes presents
extraordinary challenges to pharmaceutical manufacturers.
www.amcp.org Vol. 15, No. 6-a
The success of these programs will depend on resolution of
several issues such as those shown below:
Significant variation in patient response should be expected
over time, particularly for patients with multiple medical
problems, subject to multiple therapeutic interventions,
including the targeted drug therapy for which the manu-
facturer is at risk. In observational data, it may prove dif-
ficult to link specific drug treatment causally to a particular
outcome for a particular chronically ill patient population,
much less for a particular patient.
Assuming economic risk for a health outcome is the equiva-
lent of insuring patient care, albeit for a targeted purpose.
Pharmaceutical manufacturers do not have experience as
insurers, nor is the manufacturer business model set up for
this purpose. Investors in pharmaceutical stocks anticipate
risk in research and development, but do not anticipate risk
related to outcome of therapy.
A manufacturer could hire or contract to obtain neces-
sary risk assessment and management expertise. Doing so
will entail a certain cost. An additional cost is incurred in
underwriting outcome risk, which manufacturers might
retain internally or seek through a third-party insurance
policy. These costs could be financed through increasing
product price or result in lower manufacturer profitability.
It is not clear how state insurance regulators will respond to
manufacturer-sponsored outcome risk arrangements. Will
this be considered insurance subject to capital require-
ments and regulation?
Smaller manufacturers may be financially unable to under-
write outcome risk programs, even if their products are
ideal candidates, leaving them at a competitive disadvan-
tage to larger manufacturers of competing products.
These arrangements may become less about financial risk
and more about market entry and market positioning, in
that nimble manufacturers may be able to use effectiveness
guarantees to create payer preference and market barriers
to equally or more efficacious products. Such guarantees
also could be used on a direct-to-consumer basis by manu-
facturers, in an effort to circumvent a products formulary
status.
These considerations suggest that health outcome risk assump-
tion by pharmaceutical manufacturers will require careful
study before becoming a routine part of the payer-manufac-
turer relationship.
Pharmacogenomics
Issue
A goal of pharmacogenomics is to provide clinicians with tools
to assess risks and benefits associated using available medi-
cines for particular patients to select therapies and treatments
tailored to each patient. In so doing, pharmacogenomics should
enable direct management of individual patient-drug response
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S39
 V. Issues and Implications for Stakeholders
for many conditions. One example is HER2/neu testing of
metastatic breast cancer patients to determine potential respon-
siveness to Herceptin.159 Another is the use of KRAS testing to
determine whether Erbitux or Vectibix would be beneficial in
the treatment of colorectal cancer in particular patients.160
Implications
Although costs will be associated with the performance of
pharmacogenomic tests, drug ingredient and associated costs
also would be saved by avoiding administration of drugs
where tests show particular patients would be poor respond-
ers, and for particular patients for whom particular drugs
would be unsafe.
S40 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
Consistent application of pharmacogenomic tests in appropri-
ate cases would make more likely that patients identified as
good candidates for particular drug therapy would be offered
that therapy, if otherwise clinically indicated.
Todays health information technology infrastructure is not
well suited to support informed use of pharmacogenomic tests
and use of prescription drugs dependent on the outcome of
those tests at the point of care.159
It will be important for payers to develop coverage policies
and tracking systems to link availability and results of par-
ticular pharmacogenomic tests to the utilization of particu-
lar pharmaceuticals for patients meeting specified clinical
conditions.
Vol. 15, No. 6-a www.amcp.org
 VI. Conclusion
P
harmaceutical payment is complex, made more so by fac-
tors such as the historical combination of reimbursement of
pharmacy professional services with payment for pharma-
ceutical products, the number of entities involved in the distribu-
tion of pharmaceuticals, and the more than 10,000 unique drugs
with vastly different prices distributed among the drug categories
of brand, generic, and multi-source. In addition, a complex rela-
tionship exists between the use of pharmaceuticals and of other
medical resources in particular therapies, related to a host of fac-
tors, including site of care delivery, the type of prescriber, method
and amount of payment, benefit design, payer coverage policies,
results of practice guidelines and comparative-effectiveness
reviews, patient medical condition, patient cost-share responsi-
bility, and patient preference.
Today, biologics and injectable drugs that were at one time cov-
ered primarily in the medical benefit often have been transferred
to the pharmacy benefit, and these 2 health benefit categories
have used much different payment methods. Pharmaceuticals
and biotechnology therapeutics, and their associated costs, are
increasingly visible and of concern to public and private third-
www.amcp.org Vol. 15, No. 6-a
party payers. As a result of direct-to-consumer advertising and
increased cost-sharing, they have become increasingly visible and
of concern to patients as well. What may be less evident to both,
representing a major challenge for future development, is these
products value for money.
It is also clear that, after more than 40 years of using AWP
as the primary benchmark for determining pharmaceutical
payment, this benchmark has been manipulated and does not
approximate the actual acquisition cost to the end dispenser of the
drug. The search continues for a replacement for AWP for phar-
maceutical payment that will encourage delivery of high-quality
products and stimulate efficient delivery of pharmacy products
and services without reducing access for patients. Understanding
pharmaceutical payment and the factors that affect payment is an
important step in achieving the aforementioned goals.
AMCP hopes that the information in this Guide will ultimately
prove to be quality data that informs the debate and thus leads
to better decisions. The Academy welcomes your feedback about
this Guide, which can be submitted at: http://www.amcp.org/
amcp.ark?p=1529B561.
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S41

Acronym Definition
AAC actual acquisition cost
AIDS acquired immunodeficiency syndrome
AMCP Academy of Managed Care Pharmacy
AMP average manufacturer price
APC ambulatory payment classification
ASC Administrative Services Contract
ASC ambulatory surgical center
ASO Administrative Services Only
ASP average sales price
AWP average wholesale price
BP best price
CAP (or RxCAP) Competitive Acquisition Program (for
drugs and biologicals)
CARE Comprehensive AIDS Resource Emergency
CBO Congressional Budget Office
CDHC consumer-directed health care
CMP competitive medical plan
CMS Centers for Medicare & Medicaid Services
COT class of trade
CPI-U Consumer Price Index Urban
CPT current procedural terminology
CRS Congressional Research Service
DHHS Department of Health and
Human Services
DME durable medical equipment
DoD Department of Defense
DOJ Department of Justice
DP direct price
DRA Deficit Reduction Act of 2005
DRG diagnosis-related group
DSH disproportionate-share hospital
EAC estimated acquisition cost
EPO exclusive provider organization
ERISA Employee Retirement and
Income Security Act of 1974
ESRD end-stage renal disease
FCP federal ceiling price
FDA Food and Drug Administration
FDB First DataBank
FFS fee for service
FMAP Federal Medical Assistance Percentage
FQHC federally qualified health center
FSS Federal Supply Schedule
FUL federal upper limit
S42 Supplement to Journal of Managed Care Pharmacy JMCP
VII. Acronym List
Acronym Definition
GCN generic code number (6-character,
First DataBank)
GPI generic product identifier
(14-character, Medi-Span)
GPO group purchasing organization
HCPCS Healthcare Common Procedure
Coding System
HDHP/SO high deductible health plan with
savings option
HMO health maintenance organization
HOPD hospital outpatient department
HRSA Health Resources and Services
Administration
IHS Indian Health Service
IPA independent practice association
IVIG intravenous immune globulin
KFF/HRET Kaiser Family Foundation/Health
Research and Educational Trust
LCA least costly alternative
LDL low-density lipoprotein
LTC long-term care
MA-PD Medicare AdvantagePrescription
Drug Plan
MAC maximum allowable cost
MCO managed care organization
MedPAC Medicare Payment Advisory Commission
MMA Medicare Prescription Drug,
Improvement, and Modernization
Act of 2003
NDC national drug code (11-character)
non-FAMP nonfederal average manufacturer price
OBRA 90 Omnibus Budget Reconciliation
Act of 1990
OIG Office of Inspector General
(of the Department of Health
and Human Services)
OPA Office of Pharmacy Affairs
OPD outpatient prescription drug
OPPS outpatient prospective payment system
OTC over-the-counter
P4P pay for performance
PA prior authorization
August 2009 Vol. 15, No. 6-a www.amcp.org
 VII. Acronym List
Acronym Definition
PAB Pharmacy Affairs Branch
PAP patient assistance program
PBM pharmacy benefit manager
PDL Preferred Drug List
PDP prescription drug plan
PERS PERS Public Employees Retirement
System (e.g., California Public Employees
Retirement System [CalPERS])
PHS Public Health Service
PMPM per member per month
PMPY per member per year
POS point of sale or point of service
PPARx Partnership for Prescription Assistance
PPO preferred provider organization
PPS prospective payment system
PSAO Pharmacy Services Administrative
Organization
PSO provider-sponsored organization
RP reference price
www.amcp.org Vol. 15, No. 6-a
Acronym Definition
SCHIP State Childrens Health Insurance Program
SCOD specified covered outpatient drug
SNF skilled nursing facility
SPAP State Pharmaceutical Assistance Program
TIPPS Transparency in Drug Purchasing
Solutions
TMAC therapeutic maximum allowable cost
TPA third-party (claims) administrator
TrOOP true out-of-pocket (Medicare Part D)
U&C usual and customary (price)
UCR usual, customary, and reasonable
URA unit rebate amount
VA Department of Veterans Affairs
(Veterans Administration)
WAC wholesale acquisition cost
WAMP widely available market price
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S43
 VIII. Glossary
340B Ceiling Price See Public Health Service 340B Ceiling
Price.
actual acquisition cost (AAC) Final cost of the pharmaceutical
to the pharmacy or other health care provider after all discounts,
rebates, and other price concessions are taken into account.
administrative services only (ASO) An arrangement in which a
plan hires a third-party to deliver administrative services to the
plan, such as claims processing and billing, but the plan bears
the financial risk for claims. This is common in self-funded (also
known as self-insured) health care plans.
allowed charge Price for a product or service negotiated between
the provider and the health plan or other payer or its intermedi-
ary. The difference between the allowed charge and the providers
usual and customary (U&C) price is the contractual discount.
ambulatory payment classification (APC) Method used by
the Centers for Medicare & Medicaid Services (CMS) to imple-
ment prospective payment for ambulatory procedures. The APC
clusters many different ambulatory procedures into groups for
purposes of payment. Both APCs and diagnosis-related groups
(DRGs) represent groups of patients that are clinically alike and
have roughly the same resource consumption. The APC is used
in a similar fashion to the way in which DRGs are used for pay-
ment for inpatients; however, APCs depend on the procedures
performed, whereas DRGs depend on the diagnoses treated.
authorized generic Drug approved by the FDA that the brand
manufacturer subsequently chooses to market (or have marketed
under sale or license) by generic name. The brand-name drug and
the authorized generic are chemically identical.161
average manufacturer price (AMP) Average price paid to a phar-
maceutical manufacturer by wholesalers for drugs distributed to
retail pharmacies, net of prompt-pay (cash) discounts. AMP
was a benchmark created by Congress in 1990 in calculating
rebates owed Medicaid by pharmaceutical manufacturers. The
Federal Supply Schedule (FSS) and 340B prices, as well as prices
associated with direct sales to health maintenance organiza-
tions (HMOs) and hospitals, are excluded from AMP under the
Medicaid rebate program. In June 2005, the OIG estimated the
median AMP at approximately 77% of the average wholesale price
(AWP) for single-source brand drugs, 72% of AWP for multiple-
source brand drugs, and 30% of AWP for generic drugs. Before
the enactment of the Deficit Reduction Act of 2005 (DRA), AMP
data were used by the Centers for Medicare & Medicaid Services
(CMS) primarily for purposes of the Medicaid drug rebate pro-
gram, and disclosure of AMP data was forbidden except in certain
narrow circumstances. The DRA stipulated that AMPs were to be
made available to state Medicaid programs, that they were to be
used to calculate federal upper limit (FUL) amounts for certain
multiple-source drugs, and that states could use them to help set
S44 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
other reimbursement rates. In July 2007, CMS issued final regula-
tions addressing the AMP provisions of the DRA.
average sales price (ASP) Section 303(c) of the Medicare
Modernization Act (MMA) revised the drug payment method-
ology by creating a new pricing system based on a drugs ASP.
Effective January 2005, Medicare began paying for the vast
majority of Part B covered drugs and biologicals using a drug pay-
ment methodology based on the ASP. In accordance with section
1847A of the Social Security Act (the Act), manufacturers submit
the ASP data for their products to CMS on a quarterly basis.
These data include the manufacturers total sales (in dollars) and
number of units of a drug to all purchasers in the United States in
a calendar quarter (excluding certain sales exempted by statute),
with limited exceptions. The sales price is net of discounts such
as volume discounts, prompt pay discounts, cash discounts, free
goods that are contingent on any purchase requirement, charge-
backs, and rebates (other than rebates under section 1927 of the
Act). CMS updates ASP drug pricing files for Medicare Part B
drugs on a quarterly basis. Medicare Part B drugs and biologicals
not paid on a cost or prospective payment basis are paid based on
the ASP methodology, and payment to providers is 106% of the
ASP, less applicable beneficiary deductible and coinsurance.
average wholesale price (AWP) List prices for drugs reported
by pharmaceutical manufacturers and published in commercial
clearinghouses such as Redbook, Medi-Span, First DataBank, and
Elsevier Gold Standard (ProspectoRx). Each price is specific to the
drug, strength, dose form, package size, and manufacturer or (re)
labeler. Each price is specific to an 11-character national drug
code (NDC) number that is comprised of the first 5 characters
for the manufacturer or labeler, 4 characters for the drug and
strength, and 2 characters for the package size.
benchmark (also: benchmark price) Government and other
payers generally establish their payment for prescription drugs
through formulas that start with a benchmark price. Some bench-
marks are proprietary and not publicly available. For example, a
state may set its Medicaid reimbursement rate at a benchmark
price, such as average wholesale price (AWP) or wholesale acqui-
sition cost (WAC), plus or minus a percentage. Some payment
rates are subject to limits, such as through a maximum allowable
cost (MAC) mechanism.
best price (BP) Lowest price available to any wholesaler, retailer,
provider, health maintenance organization (HMO), nonprofit
entity, or the government. Best price excludes prices to the Indian
Health Service (IHS), Department of Veterans Affairs (VA),
Department of Defense (DoD), Public Health Service (PHS),
340B-covered entities, Federal Supply Schedule (FSS) and state
pharmaceutical assistance programs (SPAPs), depot prices, and
nominal pricing. Best price includes cash discounts, free goods
that are contingent on purchase, volume discounts, and rebates.
Vol. 15, No. 6-a www.amcp.org
 VIII. Glossary
The Deficit Reduction Act 2005 changed the manufacturer price
reporting requirements for AMP and best price effective January
1, 2007, to include the price of the authorized generic.
Big 4 See federal Big 4.
biological product (biologic) Includes a wide range of products
such as vaccines, blood and blood components, allergenics,
somatic cells, gene therapy, tissues, and recombinant therapeu-
tic proteins. Biologics can be composed of sugars, proteins, or
nucleic acids or complex combinations of these substances, or
they may be living entities, such as cells and tissues. Biologics are
isolated from a variety of natural sourceshuman, animal, or
microorganismand may be produced by biotechnology meth-
ods and other cutting-edge technologies. Gene-based and cellular
biologics, for example, often are at the forefront of biomedical
research and may be used to treat a variety of medical conditions
for which no other treatments are available.
bona fide services Fee paid to an entity for an itemized service
performed on behalf of the manufacturer that the manufacturer
would otherwise perform (or contract for) in the absence of the
service arrangement and that is not passed in whole or in part to
a client or customer of an entity, whether or not the entity takes
title to the pharmaceutical.
book price See list price.
bundled (also: packaged, bundling) Packaging of drugs of dif-
ferent types for the purpose of provider payment, sometimes
including provider services. Most commonly, a bundle of services
is combined with drugs at a designated price, as in the case of
ambulatory payment classifications (APCs) or diagnosis-related
groups (DRGs). Alternatively, drug sales to providers from manu-
facturers may determine the net price of individual drugs in
the bundle based on the on the sales volume of all drugs in the
bundle.
capitation Method of payment for health services in which a
health care provider is paid a fixed amount, usually prospectively,
for each person on the providers patient roster, regardless of the
quantity or nature of services actually provided.
carve-out pharmacy benefit Prescription and pharmacy services
insurance coverage that is financially and administratively sepa-
rated from the primary health care plan and typically adminis-
tered under contract by a separate company, such as a pharmacy
benefits manager (PBM). When care is capitated, a carve-out is a
service or package of services not provided within the contract.
Thus, it is carved out from the per member per month (PMPM)
payment rate. A carve-out benefit also may be created when a
provider cannot or will not provide some segment of care or
is unavailable during periods of time when care may still be
needed, such as urgent care.
www.amcp.org Vol. 15, No. 6-a
case rate Flat fee paid for services based on patient characteris-
tics, such as diagnosis. For this fee, the provider covers all of the
services the patient requires for a specific period of time.
catalog price See list price.
Centers for Medicare & Medicaid Services (CMS) Formerly
known as the Health Care Financing Administration (HCFA).
This federal agency is responsible for administering Medicare and
overseeing states administration of Medicaid.
chargeback (also: charge-back) Discounts handled through
wholesalers. Manufacturers negotiate discounted prices with
some purchasers who buy through wholesalers. Wholesalers can
deliver the drugs at discounted prices, inform the manufacturers,
and then request reimbursement from the manufacturers.
class of trade (COT) Under federal law, customers such as buy-
ers of pharmaceuticals that share similar profiles and attributes
may be categorized into a COT to be eligible to receive similar
pricing concessions, such as discounts and special offers. Most
pharmaceutical companies have developed lists of similar cus-
tomers and grouped them into different COTs. A manufacturer
may have broad categories of COTs for most of its products (e.g.,
acute care, nonacute care, retail), but may allow a specific busi-
ness unit to add an additional segment, such as long-term care
(LTC), rather than include that sector in the nonacute COT.162
The business practice of offering various price discounts by COT
was challenged by chain pharmacies in the 1990s. The U.S.
Court of Appeals for the Seventh Circuit decided in July, 1999 (In
re Brand Name Prescription Drugs Antitrust Litigation, No. 99-1167,
186 F.3d at 788),163 that the practice was not anticompetitive, and
price concessions made by drug manufacturers by COT continue
to this day.
coinsurance Percentage of the costs of medical services paid by
the patient, usually at the point of care. This is a characteristic of
indemnity insurance and preferred provider organization (PPO)
plans. The coinsurance amount is often 20% of the cost of medi-
cal services after the deductible is paid.
comparative effectiveness Whereas most randomized controlled
trials (RCT) compare active drug with placebo, comparative-effec-
tiveness research compares clinical outcomes of alternative active
drug therapies for the same condition. It is thought that results
from comparative-effectiveness research may better inform health
care decisions, reduce variability in care delivery, improve quality
of care, improve efficacy, and improve efficiency.
Competitive Acquisition Program (CAP, and prescription
drug CAP) Section 303 (d) of the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (MMA) required
implementation of a CAP for Medicare Part B drugs and biologi-
cals not paid on a cost or prospective payment system basis. CAP
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S45
 VIII. Glossary
is an alternative to the average sales price (ASP) method (buy
and bill) for acquiring certain Part B drugs that are administered
incident to a physicians services. CAP was implemented on July
1, 2006, and was postponed after December 31, 2008.
consumer-driven health plan (CDHP; also consumer-driven
health care [CDHC]) Plans that include health spending accounts
into which employers or individuals may contribute pre-tax dol-
lars to be used for health care purchases. CDHPs are based in
part on the theory that a beneficiary who is in control of their
health care dollars will choose wisely how to spend and will be a
good shopper for value and quality.
Consumer Price IndexUrban (CPI-U) Measure of the average
change over time in prices paid by urban consumers for a market
basket of consumer goods and services. The all-urban consum-
ers group represents about 87% of the total U.S. population. It
is based on the expenditures of almost all residents of urban or
metropolitan areas including professionals, self employed, poor,
unemployed, and retired persons as well as urban wage earners
and clerical workers. Not included in the CPI-U are the spending
patterns of persons living in rural nonmetropolitan areas, farm
families, persons in the Armed Forces, and those in institutions,
such as prisons and mental hospitals.
copayment The cost-share amount charged to an insured mem-
ber for products or medical services, usually at the point of care.
Copayment amounts are typically specified in the description of
health plan member benefits, such as a fixed dollar amount for
each prescription received (e.g., in a 3-tier pharmacy copayment
design, $5 for a generic prescription, $15 for a preferred brand-
name prescription, and $30 for a non-formulary product).
cost-based reimbursement Payment made by a health plan or
payer to health care providers based on the actual costs incurred
in the delivery of care and services to plan beneficiaries. This
method of paying providers is still used by some plans; however,
cost-based reimbursement has largely been replaced by prospec-
tive payment and other payment mechanisms in Medicare and
Medicaid.
cost sharing (also: see copayment, coinsurance) Method of
reimbursement for health care services that holds the patient
responsible for a portion or percentage of the charge, with an
attending strategy to serve as a means of managing utilization;
normally includes an annual deductible amount.
deductible Fixed amount of health care dollars of which a person
must pay 100% before health benefits begin. Plans may include
annual deductibles ranging from a few hundred to a few thou-
sand dollars. Once the deductible is reached, the plan then pays
up to 100% of approved amounts for covered services provided
during the remainder of that benefit year.
S46 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
Diagnosis Related Group (DRG) Used in Medicares prospective
payment system and by other public and private payers. DRGs
classify patients into groups based on the principal diagnosis,
treatments and other relevant criteria. Hospitals are paid the
same amount for each case classified in the same DRG, regardless
of the actual cost of treatment (but with provision for cost-outlier
cases).
direct price (DP) Manufacturers published catalog or list price
for a pharmaceutical product to nonwholesalers. DP may or may
not include standard volume discounts available to nonwhole-
saler customers. Similar to wholesale acquisition cost (WAC),
DP may not represent actual selling prices, because it does not
include important price adjustments, such as prompt pay, or
other discounts, rebates, or reductions.
disproportionate-share hospital (DSH) Hospital with a dispro-
portionately large share of low-income patients. Under Medicaid,
states augment payment to these hospitals. Medicare inpatient
hospital payments are also adjusted for this added burden.
doughnut hole Coverage gap in Medicare Part D prescription
drug coverage, within which beneficiary is responsible for 100%
of prescription drug cost. Coverage resumes when total prescrip-
tion drug expenses reach $5,916.25 (in 2009; indexed to the CPI),
after which Medicare pays 95% of beneficiarys prescription drug
costs through the end of the calendar year.
estimated acquisition cost (EAC) Federal regulations (at 42
CFR 447.512) require, with certain exceptions, that each State
Medicaid agencys reimbursement for covered outpatient drugs
not exceed (in the aggregate) the lower of the estimated acquisi-
tion cost for drugs plus a reasonable dispensing fee or the pro-
viders usual and customary charge to the public for the drugs.
Estimated Acquisition Cost represents state Medicaid agencys
estimate of the price generally paid by pharmacies for a phar-
maceutical. This figure is often meant to represent a calculation
across all pharmacies of the mean or median actual acquisition
cost (AAC). As of March 2007, WAC was used in some way by 11
state Medicaid programs, but AWP was the predominant basis of
pharmacy provider reimbursement for drug acquisition cost.
federal Big 4 The 4 largest purchasers of pharmaceuticals within
the federal government: Department of Veterans Affairs (VA),
Department of Defense (DoD), Public Health Service (PHS), and
Coast Guard. These 4 federal agencies have the right to purchase
their pharmaceuticals from the Federal Supply Schedule (FSS), as
does every other federal agency. However, the Big 4 often obtain
pricing below the FSS on brand-name drugs because these drugs
are subject to a maximum statutory price called the federal ceil-
ing price (FCP).
federal ceiling price (FCP) Maximum price that manu-
facturers can charge for Federal Supply System (FSS)-listed
Vol. 15, No. 6-a www.amcp.org
 VIII. Glossary
brand-name drugs to the Big 4Department of Veterans Affairs
(VA), Department of Defense (DoD), Public Health Service (PHS),
and Coast Guardeven if the FSS price is higher. The FCP must
be at least 24% below the nonfederal average manufacturer price
(non-FAMP). FCP prices are not publicly available.
Federal Supply Schedule (FSS) Collection of multiple-award
contracts used by federal agencies, U.S. territories, Indian tribes,
and other specified entities to purchase supplies and services
from outside vendors. FSS prices for the pharmaceutical schedule
are negotiated by the Department of Veterans Affairs (VA) and
are based on the prices that manufacturers charge their most-
favored nonfederal customers under comparable terms and
conditions. Because terms and conditions can vary by drug and
vendor, the most-favored customer price may not be the lowest
price in the market. FSS prices are publicly available.
federal upper limit (FUL) Price calculated and published by
the Centers for Medicare & Medicaid Services (CMS) as the
maximum amount that a state Medicaid program can pay for a
multiple-source (generic) pharmaceutical. Sometimes called fed-
eral MAC or FED MAC.
formulary List of drugs considered by physicians and pharmacy
staff of a health care organization as preferred for use in treating
patients served by the organization.
open or unrestricted formulary List of preferred drugs that is
not necessarily tied to member cost-share. An open formulary
may have a single copayment or coinsurance amount for all
drugs or, more typically, is associated with 2-tiered copayment
in which there is a copayment (e.g., $5.00) for all generic drugs
and a higher copayment (e.g., $20) for all brand drugs whether
listed on the formulary or not. Therefore, physicians prescrib-
ing from an open formulary are not restricted in the products
they may prescribe.
closed formulary Exclusive lists of covered drugs that limit
prescribers and health plan members to only some of the
commercially available products in each therapeutic class.
Drugs not listed as preferred (i.e., nonformulary drugs) are not
covered by the payer. Patients without prior authorization (PA)
typically pay 100% of the providers charge for non-formulary
drugs.
partially closed/incentive formulary Nonpreferred (i.e.,
nonformulary) drugs have a higher member cost-share, such
as found in multiple-copayment tiers (e.g., 3-tiered copayment
designs). A 4-tiered copayment design may have a generic
drug (tier 1) copayment, preferred drug (tier 2) copayment,
non-preferred drug (tier 3) copayment, and the highest copay-
ment or coinsurance (50%) for cosmetic or other lifestyle
drugs or perhaps a 4th cost-share tier (e.g., 20%) for injectable
or other specialty pharmaceuticals.
www.amcp.org Vol. 15, No. 6-a
generic drug Identical to a brand-name drug in dosage, safety,
strength, how it is taken, quality, performance, and intended
use. Before approving a generic drug product, the FDA requires
many rigorous tests and procedures to ensure that the generic
drug can be substituted for the brand-name drug. The FDA bases
evaluations of substitutability, or therapeutic equivalence, of
generic drugs on scientific evaluations. The FDA Orange Book
provides ratings of equivalence [A-rated] and non-equivalence for
generic substitution. By law, a generic drug product must con-
tain the identical amounts of the same active ingredient(s) as the
brand-name product. Drug products evaluated as therapeutically
equivalent can be expected to have equal effect and no difference
when substituted for the brand-name product.
global price (also: global fee) Total prospectively determined
amount that is paid for a specific set of services, such as obstet-
rical services that encompass prenatal, delivery, and postnatal
care.
group purchasing organization (GPO) Organization that pools
purchasers working together to provide larger potential pur-
chases of particular goods and/or services and therefore lower
unit costs.
health maintenance organization (HMO) Form of health insur-
ance in which its members and/or members employers prepay a
premium for the HMOs health services, which generally include
inpatient and ambulatory care. For the patient, it means reduced
out-of-pocket costs (i.e., no deductible), no paperwork (i.e., insur-
ance forms), and only a small copayment for each office visit to
cover the paperwork handled by the HMO. There are several dif-
ferent types of HMOs.
group model The HMO contracts with a physician group,
which is paid a fixed amount per patient to provide specific
services. The administration of the group practice then decides
how the HMO payments are distributed to each participating
physician. This type of HMO is usually located in a hospital or
clinic setting and may include a pharmacy. These physicians
usually do not have any fee-for-service (FFS) patients.
hybrid model Combination of at least 2 managed care orga-
nizational (MCO) models that are melded into a single health
plan. Because its features do not uniformly fit 1 model, it is
called a hybrid.
independent practice association (IPA) model The IPA con-
tracts with independent physicians who work in their own
private practices and see fee-for-service (FFS) patients as well
as HMO enrollees. Physicians belonging to the IPA may accept
financial risk that the care needed by patients for whom they
are responsible will fall within a pre-established per member
per month (PMPM) budget.
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S47
 VIII. Glossary
network model Network of group practices under the admin-
istration of 1 HMO.
point-of-service (POS) model Sometimes referred to as an
open-ended HMO. The POS model is one in which the
patient can receive care by physicians who are either con-
tracted with the HMO or who are not contracted. Physicians
not contracted with the HMO who see an HMO patient are
paid according to the services performed. Thus, the patient
has an incentive to use contracted providers due to the fuller
coverage offered for contracted care.
staff model All physicians in a staff model HMO are in a
centralized site where all clinical and perhaps inpatient and
pharmacy services are offered. The HMO holds the tightest
management reigns in this setting because none of the physi-
cians traditionally practice on an independent fee-for-service
(FFS) basis. Physicians are more likely to be employees of the
HMO in this setting because they are not in a private or group
practice.
Healthcare Common Procedure Coding System (HCPCS)
Federal coding system for medical procedures. The HCPCS
includes current procedural terminology (CPT) codes (Level I),
national alpha-numeric codes (Level II), and local alpha-numeric
codes (Level III). National codes are developed by the Centers for
Medicare & Medicaid Services (CMS) to supplement CPT codes
and include physical services not included in CPT as well as
nonphysician services such as ambulance, physical therapy, and
durable medical equipment (DME). Local codes are developed by
local Medicare carriers to supplement the national codes. J-codes
are a subset of the HCPCS Level II code set used to identify cer-
tain drugs and other items.
home-infusion pharmacy Pharmacy specializing in supplying
members with home-infusion therapy medications and supplies.
house brand Private-labeled prescription drugs, repackaged for
sale. See repackaged.
inpatient Pertaining to the treatment of patients admitted to a
hospital bed.
intermediary Entity contracted to a purchaser for provision of
products and/or services to beneficiaries or providers, with a pur-
chaser-defined level of authority in the handling of this responsi-
bility and responsibility to the purchaser for performance.
list price Published price that is not an actual transaction price.
Certain pharmaceutical transactions, such as setting payment
rates to pharmacies, may be based on list prices. The average
wholesale price (AWP) and the wholesale acquisition cost (WAC)
are examples of list prices.
long-term care (LTC) Services ordinarily provided in a skilled
S48 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
nursing, intermediate care, personal care, supervisory care, or
elder care facility.
mail-service option Pharmacy benefit specifying that all or cer-
tain drugs, such as maintenance drugs, may be obtained from a
designated mail-service pharmacy, usually provided in a 2- or
3-month supply.
managed care organization (MCO) Generic term applied to
a managed care plan. They also are called health maintenance
organizations (HMOs), preferred provider organizations (PPOs),
and exclusive provider organizations (EPOs), although the MCO
may not conform exactly to any of these formats.
maximum allowable cost (MAC) Cost management program
that sets upper limits on the payment for equivalent drugs avail-
able from multiple manufacturers. MAC is the highest unit price
that will be paid for a drug and is designed to increase generic
dispensing, ensure that the pharmacy dispenses economically,
and control future cost increases by taking advantage of competi-
tive pricing among multiple-source drugs.
Medicaid State-operated and administered program that is
funded jointly by the federal and state governments. Medicaid
provides medical benefits for certain indigent or low-income
persons in need of health and medical care. The program is
authorized by Title XIX of the Social Security Act. Within broad
federal guidelines, states determine the benefits covered, program
eligibility, rates of payment for providers, and methods of admin-
istering the program.
Medicare National program of health insurance operated by the
Centers for Medicare & Medicaid Services (CMS) on behalf of
the federal government since its creation by Title XVIIIHealth
Insurance for the Aged in 1965 as an amendment to the Social
Security Act. Medicare provides health insurance benefits pri-
marily to persons older than 65 years of age and others who are
eligible for Social Security benefits and covers the cost of hos-
pitalization, medical care, prescription drugs, and some related
services.
Part A Insurance program (also called Hospital Insurance
program) that provides basic protection against the costs of
hospital and related posthospital services for individuals aged
65 years or older who are eligible for retirement benefits under
the Social Security or Railroad Retirement System. Part A pays
for inpatient hospital, skilled nursing facility (SNF), and home
health care. The Hospital Insurance program is financed from
a separate trust fund and primarily funded with a payroll tax
levied on employers, employees, and the self-employed.
Part B Medicare component that provides benefits to cover
the costs of physicians professional services, whether
the services are provided in a hospital, physicians office,
extended-care facility, nursing home, or insureds home.
Vol. 15, No. 6-a www.amcp.org
 VIII. Glossary
Part C Previously called Medicare+Choice when it was cre-
ated by the Balanced Budget Act of 1997, it is now called
Medicare Advantage. (See Medicare Advantage.)
Part D The Medicare component that provides benefits to
cover the costs of outpatient prescription drugs (OPDs).
Benefits commenced on January 1, 2006, and are adminis-
tered through private health plans.
Medicare Advantage Previously called Medicare+Choice, legis-
lation in which Medicare expanded the number of eligible private
and public entity risk contractors as part of the Balanced Budget
Act of 1997. Current health maintenance organizations (HMOs)
and competitive medical plans (CMPs) are automatically transi-
tioned to Medicare Advantage but must comply with new rules,
while provider-sponsored organizations (PSOs) also are allowed
to accept Medicare risk. A Medicare Advantage offering phar-
macy benefits is called an MA-PD.
MedPAC The Medicare Payment Advisory Commission
(MedPAC) is an independent Congressional agency established
by the Balanced Budget Act of 1997 (P.L. 105-33) to advise the
U.S. Congress on issues affecting the Medicare program. The
Commissions statutory mandate is broad: In addition to advising
the Congress on payments to private health plans participating
in Medicare and providers in Medicares traditional fee-for-service
program, MedPAC is also tasked with analyzing access to care,
quality of care, and other issues affecting Medicare.164
multiple-source brand Refers to the brand version of a drug
when it is available in both brand-name and generic versions
from a variety of manufacturers.
multiple-source drug Drug available in both brand-name and
generic versions from a variety of manufacturers.
National Drug Code (NDC) Defined officially as a 10-charac-
ter number by the FDA but commonly implemented in claims
administration systems as an 11-character number. The NDC
number is divided into 3 segments: the first 5 characters for the
labeler (which may or may not be the manufacturer), 4 characters
for the drug and strength, and the last 2 characters to describe
the package size.
net price Price, after discounts are deducted, paid at different
levels of the channels of prescription drug distribution (e.g.,
purchaser to provider, provider to wholesaler, and wholesaler to
manufacturer).
net product revenue (for calculation of average sales price)
Sum of a manufacturers volume discounts, prompt-pay discounts,
cash discounts, free goods that are contingent on any purchase
requirement, chargebacks, and rebates (other than rebates under
section 1927 of the Social Security Act) for the most recently
available 12-month period associated with all sales included in
www.amcp.org Vol. 15, No. 6-a
the average sales price (ASP) reporting requirements as stated in
the April 6, 2004, interim final rule. However, the manufacturer
then calculates a percentage by using this summed amount as the
numerator and the corresponding total sales data (i.e., the total
in dollars for the sales subject to the ASP reporting requirement
for the same 12-month period) as the denominator. This results
in a 12-month rolling average price concession percentage of total
price concessions (12-month)/total sales (12-month). This per-
centage is then applied to the total in dollars for the sales subject
to the ASP reporting requirement for the quarter being submitted
to determine the price concession amount for the quarter. The
price concession amount is then applied as a reduction to the
total sales dollar amount, and that result (i.e., total sales [quarter]
minus [price concession percentage x total sales (quarter)]) is the
numerator used in calculating the quarterly ASP for that national
drug code (NDC) (excerpted from CMS-1380-F).165
nominal price and nominal price exception (or exclusion)
Nominal price pertains to manufacturer reporting to CMS of
AMPs for Medicaid rebate purposes and includes any price less
than 10% of the AMP in the same quarter for which the AMP is
computed. The final rule implementing the Deficit Reduction Act
of 2005 (DRA), CMS-2238-FC, limited the nominal price excep-
tion for manufacturer reporting of AMPs to CMS to a smaller list
of purchasers: 340B-eligible entities, intermediate care facilities
for the mentally retarded, and state-owned or state-operated
nursing facilities. [See: Centers for Medicare & Medicaid Services.
Medicaid Drug Rebate Program. Medicaid drug pricing regula-
tion: a summary. July 6, 2007.]
nonfederal average manufacturer price (non-FAMP) Average
price paid to a manufacturer by wholesalers for drugs distributed
to nonfederal purchasers. Under federal law, the Big 4 are entitled
to discounts on brand-name drugs of at least 24% off the non-
FAMP. Non-FAMP is not publicly available.
Omnibus Budget Reconciliation Act of 1990 (OBRA 90)
Medicaid Drug Rebate Program created by the Omnibus
Reconciliation Act of 1990 (OBRA 90) that added Section 1927
to the Social Security Act, effective January 1, 1991. The law
requires that manufacturers enter into an agreement with the
Centers for Medicare & Medicaid Services (CMS) to provide
rebates for their drug products that are paid for by Medicaid.
Manufacturers that do not sign an agreement with CMS are not
eligible for federal Medicaid coverage of their product(s). Except
for statutory limitations, state Medicaid programs must provide
coverage and reimbursement for all covered outpatient drug
products manufactured by companies that have entered into a
rebate agreement with CMS.
Orange Book Approved Drug Products with Therapeutic Equivalence
Evaluations (U.S. Department of Health and Human Services
and Food and Drug Administration), also known as the Orange
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S49
 VIII. Glossary
Book.166 Publication that identifies drug products approved on
the basis of safety and effectiveness by the FDA under the Federal
Food, Drug, and Cosmetic Act. Patent listings can be found in this
online book, which is updated frequently throughout the year, at:
http://www.accessdata.fda.gov/scripts/cder/ob/default.cfm.
own use Term developed in case law that is related to class of
trade (COT) pricing in the pharmaceutical industry. The Non-
Profit Institutions Act (15 U.S.C.A. Section 13c), enacted 2 years
after the Robinson-Patman Act, exempts purchases of their sup-
plies for their own use by hospitals, and charitable institutions not
operated for profit.167 Because of the broad institutional function
of a health maintenance organization (HMO), any sale of drugs to
a member falls within the basic function of the HMO; therefore,
the purchase of drugs by an HMO for dispensing to its members
is for its own use and within the Non-Profit Institutions Act
exemption. Hospitals and health systems that operate ambulatory
care pharmacies that dispense drugs to patients who are not hos-
pital or health system employees or members typically maintain
separate prescription drug inventories so as not to violate the
own use exemption.162
patient assistance program (PAP) Program administered by
a pharmaceutical company or its agent that provides financial
assistance with prescription drug costs. PAPs offer free and dis-
counted prescription drugs to those who qualify.
patient cost-share See cost-share, copayment, and coinsurance.
pay for performance Use of provider payment incentives to
encourage and reinforce the delivery of evidence-based practice
to promote better and more efficient patient outcomes.
payer (also: purchaser, plan sponsor, third-party payer,
insurer) Public or private organization that pays or insures health
or medical expenses on behalf of beneficiaries or recipients who
pay a premium for this coverage in all private and some public
programs. The payer pays medical or pharmacy claims on behalf
of covered individuals, which are called third-party payments.
payment rate With respect to a purchaser-to-provider transac-
tion, net amount paid for the product and/or service rendered.
per diem reimbursement Reimbursement to an institution (usu-
ally a hospital) based on a set rate per day rather than on charges
accrued. Per diem reimbursement can be varied by service (e.g.,
medical/surgical, obstetrics, mental health, intensive care) or can
be uniform regardless of intensity of services.
pharmacy benefit management (PBM) companies Organizations
that manage pharmaceutical benefits for managed care organiza-
tions (MCOs), other medical providers, or employers. PBMs
contract with clients who are interested in optimizing the clini-
cal and economic performance of their pharmacy benefit. PBM
S50 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
activities may include some or all of the following: benefit plan
design, creation/administration of retail and mail service net-
works, claims processing, and managed prescription drug care
services such as drug utilization review, formulary management,
generic dispensing, prior authorization (PA), and disease and
health management.
plan sponsor See payer.
preferred drug list (PDL) Used interchangeably with for-
mulary, a listing of medications that beneficiaries may readily
access through their health plans. Non-PDL medications may not
be accessible, may carry a higher cost-share amount, or may be
accessible only if prior authorization (PA) is obtained.
preferred provider organization (PPO) A PPO plan has a
network of providers that have agreed to contractually speci-
fied reimbursement for covered benefits with the organization
offering the plan; and provides for reimbursement for all covered
benefits regardless of whether the benefits are provided within
the network of providers; and is offered by an organization that is
not licensed or organized under state law as an HMO.
prescription drug plan (PDP) Standalone PDPs provide Medicare
Part D benefits in a traditional fee-for-service (FFS) Medicare pro-
gram and to beneficiaries in Medicare Advantage plans that do
not offer a prescription drug benefit.
price concession Discount or rebate offered with respect to the
purchase of a product or service, conditional upon the purchas-
ers compliance with terms and conditions of the offer.
price transparency Disclosure of price-related information by an
entity to persons or organizations outside of that entity.
prior authorization (PA) Sometimes called prior approval. The
physician or pharmacy must generally request approval from the
health plan through a designated process to obtain coverage for
the beneficiary and reimbursement to the provider.
private insurer See payer.
prompt-pay discount Discount provided for the payment of an
invoice within a designated time, often 10, 30, or 60 days subse-
quent to product delivery.
prospective payment Payment received before care is delivered.
It gives the provider organization a financial incentive to use
fewer resources because they are allowed to keep the difference
between what is prepaid and what is actually used.
provider Any supplier of services (i.e., physician, pharmacist,
case management firm).
provider acquisition cost Estimate of the actual acquisition
cost (AAC) of providers.
Vol. 15, No. 6-a www.amcp.org
 VIII. Glossary
provider purchase price The actual acquisition cost (AAC) of
providers.
Public Health Service (PHS) 340B ceiling price Calculated
by the Office of Pharmacy Affairs (OPA) within the Department
of Health and Human Services (DHHS), maximum price that
manufacturers can charge covered entities participating in the
340B Drug Pricing Program of the PHS. The 340B discount is
calculated by using the Medicaid rebate formula and is deducted
from the manufacturers selling price, rather than paid as a rebate.
Compared with a drugs average manufacturer price (AMP),
covered entities receive a minimum discount of 15.1% for brand-
name drugs and 11% for generic and over-the-counter (OTC)
drugs and are entitled to an additional discount if the price of
the drug has increased faster than the rate of inflation. Covered
entities are free to negotiate discounts that are lower than the
maximum allowable statutory price (i.e., subceiling prices).
published price See list price.
purchaser See payer.
rebate Monetary amount returned to a payer from a prescription
drug manufacturer based on pharmaceutical use by a covered
person or purchases by a provider.
reference price Limits reimbursement for a group of drugs with
similar therapeutic application but different active ingredients to
the price of the lowest-cost drug within the group (the reference
standard). Patients may purchase drugs other than the reference
product, in which case they pay the difference between the retail
price and the Reference Price.
reimbursable (also: reimbursement) Process by which health
care providers receive payment for their services is sometimes
referred to as reimbursement. Because of the nature of the
health care environment, providers are often reimbursed by third
parties who insure and represent patients. A product or service
that a health care provider administers to a patient and for which
necessary approvals have been given becomes reimbursable.
repackaged Prescription drug taken from its original manufac-
turer container and placed into another labeled container for
dispensing.
retail class of trade CMS-2238-FC168 defines the retail phar-
macy class of trade as that sector of the drug marketplace,
similar to the marketplace for other goods and services, that
dispenses drugs to the general public and includes all price
concessions related to such goods and services. Prices of sales
to nursing home pharmacies (long-term care [LTC] pharma-
cies) are to be excluded, but sales and discounts to mail order
pharmacies are to be included.
self-insurance: See administrative services only.
www.amcp.org Vol. 15, No. 6-a
single-source brand Drug under patent protection that is sold
under a brand name and is thus available from only 1 manufac-
turer (or occasionally from other manufacturers under license
from the patent holder). No generic version is available.
site of care Site at which health care services and products are
administered to the patient (e.g., hospital, physician office, phar-
macy, patients home).
specialty pharmacy Pharmacy that dispenses generally low-
volume and high-cost medicinal preparations to patients who
are undergoing intensive therapies for illnesses that are generally
chronic, complex, and potentially life threatening (e.g., rheuma-
toid arthritis, multiple sclerosis, hemophilia). These therapies
often require specialized delivery and administration.
stakeholder A party of interest. With respect to prescription
drugs, stakeholders include but are not limited to purchasers,
group purchasing organizations (GPOs), wholesalers, pharma-
ceutical manufacturers, providers, and patients.
step therapy A health plan or pharmacy benefit manager (PBM)
may require a beneficiary to try 1 drug before the plan will pay
for another drug. A principal purpose of step therapy is to reduce
the average cost for treating a given condition (e.g., hyperten-
sion, heartburn, or depression), requiring beneficiaries to use an
equally effective, lower-cost drug before coverage of a higher-cost,
second-line drug. The health plan or other payer may require evi-
dence of therapeutic failure (e.g., intolerance due to side effects)
before coverage of the second-line drug.
supplemental rebate A Congressional Research Report in
2008 showed that in 2005 (the year prior to implementation of
Medicare Part D and the transfer of dual eligible beneficiaries
from Medicaid to Medicare) 22 states collected a total of $1.3 bil-
lion (federal share $719 million) in Medicaid rebates not required
under federal law.100
therapeutically equivalent product Drug products containing
different chemical entities that should provide similar treatment
effects as well as the same pharmacological action or chemical
effect when administered to patients in therapeutically equivalent
doses. Per the Approved Drug Products With Therapeutic Equivalents
(also known as the Orange Book), drug products are considered to
be therapeutic equivalents only if they are pharmaceutical equiv-
alents and can be expected to have the same clinical effect and
safety profile when administered to patients under the conditions
specified in the labeling. Drug products are considered pharma-
ceutical equivalents if they contain the same active ingredient(s),
are of the same dosage form and route of administration, and are
identical in strength or concentration.
therapeutic maximum allowable cost (TMAC) Managed care
intervention that establishes a defined benefit dollar amount
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S51
 VIII. Glossary
per therapeutic procedure or indication, such as $0.75 per day
of drug therapy for heartburn based on the omeprazole over-
the-counter (OTC) price or $0.50 per day of therapy for allergic
rhinitis based on the market price of loratadine OTC.
third-party administrator (TPA) Organization that provides
administrative services to group benefit plans that may include
premium accounting, claims adjudication and payment, claims
utilization review (e.g., for medical necessity), maintenance of
employee eligibility records, and negotiations with insurers
that provide stop-loss protection for large claims individually
(specific) or collectively (aggregate). TPAs do not themselves
assume insurance risk.
third-party payer (also: third-party carrier) Public or private
organization (such as Blue Cross and Blue Shield, Medicare,
Medicaid, commercial insurer, self-insured employer, Taft-Hartley
Trust, or Multiple Employer Trust) that pays for or underwrites
coverage for health care expenses for an individual or group.
The individual enrollee generally pays a premium for coverage in
all private and some public health insurance programs, and the
organization pays claims on the patients behalf.
traditional community pharmacy Any place under the direct
supervision of a pharmacist where the practice of pharmacy
occurs or where prescription orders are compounded and dis-
pensed other than a hospital pharmacy, limited service phar-
macy, or mail service (mail order) pharmacy.
usual and customary (U&C) price The price for a given drug
or service that a pharmacy or other provider would charge a
cash-paying customer without the benefit of insurance pro-
vided through a payer or intermediary with a contract with
the provider.
usual, customary, and reasonable (UCR) Amount determined
to be reasonable (acceptable) by comparing the U&C charges
S52 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
among providers in a given geographic region. UCR prices are
commonly used by traditional health insurance companies as the
basis for physician reimbursement.
VA national contract price Price obtained by the Department of
Veterans Affairs (VA) through competitive bids from manufactur-
ers for select drugs in exchange for their inclusion on the VA for-
mulary. Because the VA is entitled to federal ceiling prices (FCPs)
under federal statute, VA national contract prices are even lower
than FCP prices and are often the lowest prices in the nation.
volume purchase agreement Manufacturer agreement to sell
prescription pharmaceuticals at a given price that is subject to
additional discounts or rebates conditional on the purchase of a
fixed quantity of product over a defined time period.
wholesale acquisition cost (WAC) Price paid by a wholesaler
for a drug purchased from the wholesalers supplier, typically
the manufacturer of the drug. Publicly disclosed WAC amounts
may not reflect all available discounts, such as prompt-pay (cash)
discounts.
wholesaler Firm involved in logistics function (assembling, sort-
ing, and redistributing) in the channel of distribution for phar-
maceuticals. Wholesalers purchase goods from manufacturers
and redistribute them to purchasers, who may be pharmacies,
physicians, or other types of providers.
widely available market price (WAMP) Price that a prudent
physician or supplier would pay for the drug or biological, taking
into account the discounts, rebates, and other price concessions
routinely made available for such drugs or biologicals. WAMP
would not be a list price that commonly is discounted, but would
be the purchase price net of discounts, rebates, and price conces-
sions routinely available to prudent purchasers.
Vol. 15, No. 6-a www.amcp.org
 IX. References
1. AMCP Task Force on Drug Payment Methodologies: AMCP guide to
pharmaceutical payment methods. J Manag Care Pharm. 2007;13(8 Suppl
C). Available at: http://www.amcp.org/page/PharmaceuticalPayment
MethodsIntro.
2. AMCP Drug Payment Resource Library. Available at: http://www.amcp.
org/page/DrugPaymentResourceLibrary.
3. Thomson Reuters. AWP policy. Revised February 17, 2004. Available at:
www.micromedex.com/products/redbook/awp/AWP_Policy.pdf. Accessed
July 15, 2009.
4. U.S. District Court, District of Massachusetts. New England Carpenters
Health Benefits Fund, et al., plaintiffs, vs. First DataBank, Inc., and
McKesson Corporation, defendants, Civil Action No. 05-11148-PBS; District
Council 37 Health and Security Plan, on behalf of itself and all others simi-
lar situated, plaintiff, vs. Medi-Span, a division of Wolters Kluwer Health,
Inc., defendant, Civil Action No. 07-10988-PBS. Memorandum and Order,
March 17, 2009. Available at: http://www.nacds.org/user-assets/pdfs/gov_
affairs/Issues/FirstDataBank/720_Memo_Order.pdf. Accessed July 15, 2009.
5. First Databank. AWP communications. Update regarding AWP litigation
final order and judgment entered. March 31, 2009. Available at: http://
www.firstdatabank.com/Support/awp-communications.aspx. Accessed July
24, 2009.
6. Medi-Span. Customer letter. Available at: http://www.medispan.com/
Common/PDF/CustomerLetter_April12009_FINAL.pdf. Accessed July 15,
2009.
7. McConnell K, Haren MC. Payers tightening management of specialty ther-
apies. Biotechnol Healthcare. April 2009:35-37. Available at: http://www.nxt-
book.com/nxtbooks/medimedia/bh_200904/#/0. Accessed July 15, 2009.
8. Pharmacy benefit management (PBM) companies provide administrative
services under the pharmacy benefit, such as contracting with a network of
pharmacies including mail service, developing and managing formularies,
establishing payment levels for provider pharmacies, adjudicating pharmacy
claims, operating pharmacy and member call center/help desk, and provid-
ing data reporting.
9. Medicaid Program: Multiple source drug definition. 42CFR Part 447,
Federal Register. March 14, 2008;73(51):13785-88. Available at: http://
edocket.access.gpo.gov/2008/08-1022.htm. Accessed July 18, 2009.
10. Medicare Improvements for Patients and Providers Act of 2008 (MIPPA)
(Public Law 110-275). Available at: http://frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=110_cong_public_laws&docid=f:publ275.110.pdf.
Accessed July 15, 2009.
11. American Society of Clinical Oncology. Hospital outpatient prospec-
tive payment system payment policies for calendar year 2009: Overview
of final rule provisions affecting reimbursement for oncology. Available
at: http://prostateca.asco.org/ASCO/ArticleASCO/Cancer%20Policy%20
and%20Clinical%20Affairs/Policy/MMA%20Regulation%20&%20
Resources/2009%20HOPPS%20Overview%20of%20Final%20Rule.pdf.
Accessed July 15, 2009.
12. DHHS Centers for Medicare & Medicaid Services. Current CAP activity.
Available at: http://www.cms.hhs.gov/CompetitiveAcquisforBios. Accessed
July 15, 2009.
13. Kaiser Family Foundation. United States: Medicaid managed care
enrollees as a percent of state Medicaid enrollees, as of June 30, 2007. State
Health Facts.org. Available at: http://www.statehealthfacts.kff.org/profileind.
jsp?ind=217&cat=4&rgn=1. Accessed July 15, 2009.
14. Garfield R. Carving-out prescription drugs from Medicaid managed
care: a review of the evidence. Pennsylvania Medicaid Policy Center. May
2009. Available at: http://www.pamedicaid.pitt.edu/documents/Carve%20
Out_rp_09.pdf. Accessed July 15, 2009. http://www.communityplans.net/
POLICYSUPPORT/Medicaid/PrescriptionDrugs/tabid/97/Default.aspx
15. The AMCP Format for Formulary Submissions version 2.1. J Manag Care
Pharm. 2005;11(5 Suppl B):i-xvi,1-29,1-6. Available at: http://www.amcp.org/
data/jmcp/formatsupp.pdf.
16. Stakeholders including payers and their consultants and representatives,
vendors in the channels of distribution, health professionals, policymakers,
patient associations, and professional associations.
www.amcp.org Vol. 15, No. 6-a
17. Catlin A, Cowan C, Heffler S, Washington B, and the National Health
Expenditure Accounts Team. National health spending in 2005: the slow-
down continues. Health Aff. 2007;26(1):142-53. Available at: http://content.
healthaffairs.org/cgi/content/full/26/1/142. Accessed July 15, 2009.
18. IMS Health reports U.S. prescription sales grew 1.3 percent in 2008
to $291 billion. March 19, 2009. Available at: http://www.imshealth.com/
portal/site/imshealth/menuitem.a46c6d4df3db4b3d88f611019418c22a/?vg
nextoid=078ce5b87da10210VgnVCM100000ed152ca2RCRD&vgnextchann
el=b5e57900b55a5110VgnVCM10000071812ca2RCRD&vgnextfmt=default.
Accessed July 24, 2009.
19. IMS Health lowers 2009 global pharmaceutical market forecast to
2.53.5 percent growth. April 22, 2009. Available at: http://www.imshealth.
com/portal/site/imshealth/menuitem.a46c6d4df3db4b3d88f611019418c22a/
?vgnextoid=1e61fa8adbec0210VgnVCM100000ed152ca2RCRD&vgnextchan
nel=b5e57900b55a5110VgnVCM10000071812ca2RCRD&vgnextfmt=default.
Accessed July 24, 2009.
20. Milliman Research Report. 2008 Milliman Medical Index. May 2008.
Available at: http://www.milliman.com/expertise/healthcare/products-tools/
mmi/pdfs/milliman-medical-index-2008.pdf. Accessed July 15, 2009.
21. Bach PB. Limits on Medicares ability to control rising spending on can-
cer drugs. N Engl J Med. 2009;360(6):626-33. Available at: http://content.
nejm.org/cgi/reprint/360/6/626.pdf. Accessed July 18, 2009.
22. For example, see oral statement of Pamela Jones Harbour,
Commissioner, Federal Trade Commission, before the Subcommittee
on Health, Committee on Energy and Commerce, of the U.S. House of
Representatives, June 11, 2009. Available at: http://energycommerce.house.
gov/Press_111/20090611/testimony_harbour.pdf. Accessed July 15, 2009.
23. Detailed outline of the Promoting Innovations and Access to Life-
Saving Medicine Act. Available at: http://energycommerce.house.gov/
Press_111/20090311/hr1427_detailedsummary.pdf. Accessed July 18, 2009.
24. Expert Report of S Schondelmeyer, PharmD, PhD, in NACDS and NCPA
vs. DHHS and CMS, November 13, 2007. Available at: www.ncpanet.org/
pdf/amp_ncpanacds-schondelmeyerreport.pdf. Accessed July 15, 2009.
25. Shondelmeyer SW. Changes to AMP and best price: impact on 340B
pricing. Presented at: The 4th Annual 340B Coalition Winter Conference;
February 1, 2008. Available at: http://www.drugdiscountmonitor.
com/2008_winter/Steve_Schondelmeyer_Fri_830_onsite.ppt. Accessed July
15, 2009.
26. See testimony of Janet Rehnquist, Inspector General, Department of
Health and Human Services. Senate Committee on Finance Hearing. March
1, 2002. Available at: http://oig.hhs.gov/testimony/docs/2002/020314fin.pdf.
Accessed July 15, 2009.
27. U.S. District Court, District of Massachusetts. New England Carpenters
Health Benefits Fund, Pirelli Armstrong Retiree Medical Benefits Trust,
Teamsters Health and Welfare Fund of Philadelphia and Vicinity,
Philadelphia Federation Teachers Health and Welfare Fund, and District 37
Health and Security Fund, plaintiffs, vs. First Databank, Inc., and McKesson
Corporation, defendants. Civil Action No: 05-11148-PBS; November 14,
2006. Available at: http://www.prescriptionaccess.org/docs/FDB-prelim-
approval-order2.pdf. Accessed July 15, 2009.
28. Martinez B. How quiet moves by a publisher sway billions in drug
spending. Wall St J. October 6, 2006:A1. Available at: http://www.dc37.net/
news/newsreleases/2006/drugpricing_WallStJ.pdf. Accessed July 15, 2009.
29. Bell D, Stephens R. RxVillage audioconference. NACDS and McDermott,
Will, and Emery. Pharmacy Litigation Trends, 2009. January 16, 2009.
Available in the AMCP Interactive Resource Library at: http://www.amcp.
org/amcp.ark?p=264A8FA5.
30. DHHS Office of Inspector General. Medicaid drug price comparisons:
average manufacturer price to published prices. Report no. OEI-05-05-
00240. June 2005. Available at: http://oig.hhs.gov/oei/reports/oei-05-05-
00240.pdf. Accessed July 25, 2009.
31. Koon M. Industrywide litigation by definition. For The Defense. October
2005. Available at: http://el.shb.com/nl_images/SHBWebsite/PracticeAreas/
Pharma/Pubs/IndustrywideLitigation_2005.pdf. Accessed July 25, 2009.
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S53
 IX. References
32. Congressional Budget Office. Testimony: statement of Douglas Holtz-Eakin,
Director. Payment for prescription drugs under Medicaid. Before the U.S.
Senate Special Committee on Aging; July 20, 2005. Available at: www.cbo.gov/
ftpdoc.cfm?index=6564&type=0&sequence=0. Accessed July 28, 2009.
33. The Pharmacy Benefit Management Institute. Prescription drug benefit cost
and plan design report, 2008-2009 edition. Takeda Pharmaceuticals North
America, Inc. November 2008. Available at: http://www.pbmi.com/2008_
report/pdfs/Revised_Report_20112009.pdf. Accessed July 28, 2009.
34. Medicare Prescription Drug, Improvement, and Modernization Act
of 2003. Available at: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.
cgi?dbname=108_cong_bills&docid=f:h1enr.txt.pdf. Accessed July 15, 2009.
35. AWP Pricing Policy and List. Redbook. Thomson Reuters. Available at:
http://www.micromedex.com/products/redbook/awp. Accessed July 15, 2009.
36. Elsevier Gold Standard ProspectoRx. Available at: http://www.prospectorx.
com/keyElements.htm. Accessed July 15, 2009.
37. DHHS Office of Inspector General. Memorandum report: Comparison
of first-quarter 2008 average sales prices and average manufacturer prices:
impact on Medicare reimbursement for third quarter 2008. Report no.
OEI-03-08-00530. December 23, 2008. Available at: www.oig.hhs.gov/oei/
reports/oei-03-08-00530.pdf. Accessed July 27, 2009.
38. DHHS Office of Inspector General. Medicare payment for irinotecan.
Report no. OEI-03-08-00310. August 2008. Available at: http://www.oig.
hhs.gov/oei/reports/oei-03-08-00310.pdf. Accessed July 27, 2009.
39. DHHS Office of Inspector General. Medicaid drug price comparison:
average sales price to average wholesale price. Report no. OEI-03-05-00200.
June 2005. Available at: http://oig.hhs.gov/oei/reports/oei-03-05-00200.pdf.
Accessed July 27, 2009.
40. MedPAC. Report to the Congress: impact of changes in Medicare pay-
ments for Part B drugs. January 2007. Available at: www.medpac.gov/publi-
cations/congressional_reports/Jan07_PartB_mandated_report.pdf. Accessed
July 25, 2009.
41. DHHS Office of Inspector General. Calculation of volume-weighted aver-
age sales price for Medicare Part B prescription drugs. Report No. OEI-03-
05-00310. February 2006. Available at: http://oig.hhs.gov/oei/reports/oei-03-
05-00310.pdf. Accessed July 24, 2009.
42. Congressional Budget Office. Budget Options, Volume 1, Health Care.
December 2008. Available at: http://www.cbo.gov/ftpdocs/99xx/doc9925/12-
18-HealthOptions.pdf. Accessed July 27, 2009.
43. DHHS Centers for Medicare & Medicaid Services. Determination of
AMP. (Section 447.504):339. Available at: http://edocket.access.gpo.gov/
cfr_2007/octqtr/pdf/42cfr447.504.pdf. Accessed July 27, 2009.
44. Arnold & Porter, LLP. Client Advisory. CMS issues final rule implement-
ing Medicaid provisions of Deficit Reduction Act. July 2007. Available at:
http://www.arnoldporter.com/resources/documents/A&PCA-CMSIssuesFi-
nalRuleImplementingMedicaidProvisionsofDeficitReductionAct_07092007.
pdf. Accessed July 27, 2009.
45. DHHS Centers for Medicare & Medicaid Services. Center for Medicaid
and State Operations. Letter to State Medicaid directors. SMDL 08-008,
November 3, 2008. Available at: http://www.cms.hhs.gov/SMDL/downloads/
SMD110308.pdf. Accessed July 27, 2009.
46. DHHS. Office of Inspector General. Comparison of Medicaid federal
upper limit amounts to average manufacturer price. Report no. OEI-03-05-
00110. June 2005. Available at: www.oig.hhs.gov/oei/reports/oei-03-05-
00110.pdf. Accessed July 24, 2009.
47. Centers for Medicare & Medicaid Services, HHS. Determination of best
price. Section 447.505):341-42. Available at: http://edocket.access.gpo.gov/
cfr_2007/octqtr/pdf/42cfr447.505.pdf. Accessed July 24, 2009.
48. Congressional Budget Office. Prices for brand-name drugs under
selected federal programs. June 2005. Available at: http://www.cbo.gov/
ftpdocs/64xx/doc6481/06-16-PrescriptDrug.pdf. Accessed July 24, 2009.
49. Academy of Managed Care Pharmacy. Best price requirements of the
Medicaid drug rebate program. Available at: http://www.amcp.org/amcp.
ark?p=C08A49C3. Accessed July 15, 2009.
S54 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
50. Families USA. Medicaid savings ideasprescription drugs. June 21,
2005. Available at: http://www.aucd.org/docs/policy/medicaid/medicaid_
savings_ideas_062105.doc. Accessed July 24, 2009.
51. Health Care Financing Administration. Study of pharmaceuti-
cal benefit management. HCFA contract no. 500-97-0399/0097.
PriceWaterhouseCoopers. June 2001. Available at: http://www.cms.hhs.gov/
reports/downloads/cms_2001_4.pdf. Accessed July 31, 2009.
52. Social Security Online. Compilation of Social Security Laws. Use of
average sales price payment methodology. 42 U.S.C. 1395w-3a, Section
303(c)6(B). Available at: http://www.ssa.gov/OP_Home/ssact/title18/1847A.
htm. Accessed July 18, 2009.
53. Testimony of Susan A. Hayes for the Committee on Oversight and
Government Reform, Subcommittee on Federal Workforce. June 24,
2009. Available at: http://federalworkforce.oversight.house.gov/docu-
ments/20090625153735.pdf. Accessed July 31, 2009.
54. DHHS. Health Resources and Services Administration. Frequently asked
questions. Available at: http://answers.hrsa.gov/cgi-bin/hrsa.cfg/php/enduser/
std_alp.php?&p_cv=1.49&p_cats=49&cat_lvl2=0. Accessed July 15, 2009.
55. DHHS. Health Resources and Services Administration. Growth of
Section 340B covered entity sites. 340B Database. April 1, 2009. Available
at: ftp://ftp.hrsa.gov/bphc/pdf/opa/April_charts.pdf. Accessed July 25, 2009.
56. Rubinstein E, Curtiss FR. How much spread in AWP pricing is unlaw-
ful? J Manag Care Pharm. 2007;13(6):515-16. Available at: http://www.amcp.
org/data/jmcp/pages%20515-16.pdf.
57. DHHS Centers for Medicare & Medicaid Services. Program informa-
tion on Medicare, Medicaid, SCHIP, and other programs of the Centers for
Medicare and Medicaid Services. CMS, DHHS; June 2002 edition. Available
at: http://www.cms.hhs.gov/TheChartSeries/downloads/sec2_p.pdf.
Accessed July 25, 2009.
58. Urban Institute and Health Policy Alternatives. Cost containment in
Medicare: A review of what works and what doesnt. AARP Public Policy
Institute. December 2008. Available at: http://assets.aarp.org/rgcenter/
health/2008_18_medicare.pdf. Accessed July 15, 2009.
59. Hartman M, et al. National health spending in 2007: slower drug spend-
ing contributes to lowest rate of overall growth since 1998. Health Aff.
2009;28(1):246-61. Available at: http://content.healthaffairs.org/cgi/content/
abstract/28/1/246. Accessed July 15, 2009.
60. Bach P. Limits on Medicares ability to control rising spending on cancer
drugs. N Engl J Med. 2009;360(6):626-33. Available at: http://content.nejm.
org/cgi/reprint/360/6/626.pdf. Accessed July 15, 2009.
61. MedPAC. Outpatient hospital services payment system. October 2008.
Available at: http://www.medpac.gov/documents/MedPAC_Payment_
Basics_08_OPD.pdf. Accessed July 15, 2009.
62. DHHS Centers for Medicare & Medicaid Services. Final CY 2009 pay-
ment policies for drugs, biologicals and radiopharmaceuticals for hospital
outpatient departments. Fact Sheet. October 30, 2008. Available at: http://
www.cms.hhs.gov/apps/media/press/factsheet.asp?Counter=3336&intNumP
erPage=10&checkDate=&checkKey=&srchType=1&numDays=3500&srchO
pt=0&srchData=&keywordType=All&chkNewsType=6&intPage=&showAl
l=&pYear=&year=&desc=&cboOrder=date. Accessed July 25, 2009.
63. Medicare program: Payment policies under the physician fee sched-
ule and other revisions to part b for CY 2009, Fed Regist. v73 #224:69753,
November 19, 2008. Available at: http://www.gpo.gov/fdsys/pkg/FR-2008-
11-19/pdf/E8-26213.pdf. Accessed July 26, 2009.
64. Medicare program: Payment policies under the physician fee schedule
and other revisions to Part B for CY 2010. CMS-1413-P. July 13, 2009.
Available at: http://edocket.access.gpo.gov/2009/pdf/E9-15835.pdf. Accessed
July 27, 2009.
65. Statement of Richard Friedman, Executive Chairman, BioScrip.
Testimony before the subcommittee on Health, House Committee on Ways
and Means, U.S. House of Representatives; July 13, 2006. Available at:
http://waysandmeans.house.gov/hearings.asp?formmode=view&id=5114.
Accessed July 27, 2009.
Vol. 15, No. 6-a www.amcp.org
 IX. References
66. DHHS Centers for Medicare & Medicaid Services. Medicare Claims
Processing Manual, Chapter 17; December 31, 2008. Available at: http://www.
cms.hhs.gov/manuals/downloads/clm104c17.pdf. Accessed July 15, 2009.
67. Kaiser Family Foundation. Medicare prescription drug benefit fact sheet.
March 2009. Henry J. Kaiser Family Foundation. Available at: http://www.
kff.org/medicare/upload/7044-09.pdf. Accessed July 15, 2009.
68. Kaiser Family Foundation. Medicare: A Primer. January 2009. Available
at: http://www.kff.org/medicare/7615.cfm. Accessed July 18, 2009.
69. MedPAC. Part D payment system. October 2008. Available at: http://
www.medpac.gov/documents/MedPAC_Payment_Basics_08_PartD.pdf.
Accessed July 15, 2009.
70. National Health Policy Forum. The Medicare drug benefit (Part D).
January 15, 2009. Available at: http://www.nhpf.org/library/the-basics/
Basics_MedicarePartD_01-15-09.pdf. Accessed July 25, 2009.
71. Avalere Health. Follow the dollar: understanding drug prices
and beneficiary costs under Medicare Part D. Prepared for National
Pharmaceutical Council; April 2006. Available at: http://d.scribd.com/
docs/2nayr8qp9n3mxe55qg5t.pdf. Accessed July 15, 2009.
72. OSullivan J. Medicare Part D prescription drug benefit: a primer. CRS
Report for Congress, RL34280. Updated March 18, 2008. Available at:
http://aging.senate.gov/crs/medicare12.pdf. Accessed July 25, 2009.
73. The Boards of Trustees, Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds. 2009 annual report of the
boards of trustees of the federal hospital insurance and federal supplemen-
tary medical insurance trust funds. May 2009. Available at: www.cms.hhs.
gov/ReportsTrustFunds/downloads/tr2009.pdf. Accessed July 15, 2009.
74. DHHS Office of Inspector General. Comparing pharmacy reimburse-
ment: Medicare Part D to Medicaid. Report no. OEI-03-07-00350. February
2009. Available at: http://www.oig.hhs.gov/oei/reports/oei-03-07-00350.pdf.
Accessed July 15, 2009.
75. DHHS Centers for Medicare and Medicaid Services. Medicare clarifies
negotiated prices under Part D. January 6, 2009. Available at: http://www.
cms.hhs.gov/apps/media/press/release.asp?Counter=3392&intNumPerPag
e=10&checkDate=&checkKey=2&srchType=2&numDays=0&srchOpt=0
&srchData=part+d&keywordType=All&chkNewsType=1%2C+2%2C+3%2
C+4%2C+5&intPage=&showAll=1&pYear=&year=0&desc=&cboOrder=dat
e. Accessed July 27, 2009.
76. U.S. House of Representatives Committee on Oversight and Government
Reform. Medicare Part D: Drug pricing and manufacturer windfalls. July
2008. Available at: http://oversight.house.gov/documents/20080724101850.
pdf. Accessed July 25, 2009.
77. DHHS Centers for Medicare & Medicaid Services. Pub. 100-18 Medicare
Prescription Drug Benefit Manual, CMS Manual System, Transmittal 2, July
18, 2008. Available at: http://www.cms.hhs.gov/Transmittals/Downloads/
R2PDB.pdf. Accessed July 25, 2009.
78. DHHS Centers for Medicare & Medicaid Services. Pub 100-18. Medicare
prescription drug benefit manual. CMS Manual System. Transmittal 2. July
18, 2008. Available at: http://www.cms.hhs.gov/PrescriptionDrugCovContra/
downloads/R2PDBv2.pdf. Accessed July 24, 2009.
79. Kipp RA, Ko C. Medicare Part D administrator survey: potential cost
impacts resulting from CMS guidance on special protections for six pro-
tected drug classifications and section 176 of the Medicare Improvements
for Patients and Provides Act of 2008 (MIPPA) (P.L. 110-275). October 16,
2008. Available at: http://www.amcp.org/cfr/waSys/f.cfc?method=getLinkAss
et&id=4979E963. Accessed July 26, 2009.
80. DHHS Centers for Medicare & Medicaid Services. Medicare Program
Integrity Manual, Chapter 13, Local Coverage Determinations. Available at:
http://www.cms.hhs.gov/manuals/downloads/pim83c13.pdf. Accessed July
15, 2009.
81. Social Security Online. Exclusions from coverage and Medicare as sec-
ondary payer. 42 U.S.C. 1395y(a)(1)(A). Available at: http://www.ssa.gov/
OP_Home/ssact/title18/1862.htm. Accessed July 25, 2009.
82. Drugs covered in state LCA policy. April 28, 2008. Available at: http://
www.auanet.org/content/practice-resources/reimbursement/lcadrugs.pdf.
Accessed July 27, 2009.
www.amcp.org Vol. 15, No. 6-a
83. Hays vs. Leavitt, Civil Action No. 08-01032(HHK), United States District
Court for the District of Columbia, October 16, 2008. Available at: https://
ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2008cv1032-22. Accessed
July 15, 2009.
84. Medical Payment Advisory Commission. Improving incentives in the
Medicare program. Report to Congress. June 2009. Available at: http://www.
medpac.gov/documents/Jun09_EntireReport.pdf. Accessed July 25, 2009.
85. Medical Payment Advisory Commission. Durable medical equipment
payment system. October 2008. Available at: http://www.medpac.gov/docu-
ments/MedPAC_Payment_Basics_08_DME.pdf. Accessed July 25, 2009.
86. Social Security Online. Social Security Act. Part E: miscellaneous provi-
sions. Definitions of services, institutions, etc. April 9, 2007. 1861(s)(2)(Z);
1861(zz). Available at: http://www.ssa.gov/OP_Home/ssact/title18/1861.htm.
Accessed July 25, 2009.
87. National Governors Association & National Association of State Budget
Officers. The fiscal survey of states. June 2008. Available at: http://www.nga.
org/Files/pdf/FSS0806.PDF. Accessed July 25, 2009.
88. Kaiser Family Foundation. Medicaid: a primer. January 2009. Available
at: http://www.kff.org/medicaid/upload/7334-03.pdf. Accessed July 25,
2009.
89. Centers for Medicare & Medicaid Services. Medicaid state waiv-
er demonstration projects. Available at: http://www.cms.hhs.gov/
MedicaidStWaivProgDemoPGI. Accessed July 25, 2009.
90. Hoffman E. Brief summaries of Medicare and Medicaid as of November
1, 2008. 2008 Statistical Supplement. Health Care Financing Review.
Available at: http://www.cms.hhs.gov/MedicareMedicaidStatSupp/LT/itemde-
tail.asp?filterType=none&filterByDID=-99&sortByDID=1&sortOrder=ascend
ing&itemID=CMS1217947&intNumPerPage=10. Accessed July 15, 2009.
91. DHHS Centers for Medicare & Medicaid Services. Medicaid pre-
scription drug reimbursement information by state quarter ending
March 2009. Available at: http://www.cms.hhs.gov/Reimbursement/20_
StateMedicaidRxReimb.asp#TopOfPage. Accessed July 25, 2009.
92. National Pharmaceutical Council. Pharmaceutical benefits under state
medical assistance programs, 2005-2006. Available at: http://d.scribd.com/
docs/f0pci6f7129v94a9apb.pdf. Accessed July 25, 2009.
93. Kaiser Family Foundation. Kaiser Commission on Medicaid and the
Uninsured. Dual eligibles: Medicaids role in filling Medicares gapsissue
brief. March, 2004. Available at: http://www.kff.org/medicaid/upload/Dual-
Eligibles-Medicaid-s-Role-in-Filling-Medicare-s-Gaps.pdf. Accessed July 25,
2009.
94. DHHS Centers for Medicare & Medicaid Services. Medicare/Medicaid
dual eligibles. Available at: http://www.cms.hhs.gov/DualEligible/01_
Overview.asp#TopOfPage. Accessed July 25, 2009.
95. Kaiser Family Foundation. Kaiser Commission on Medicaid and the
Uninsured. Dual eligibles: Medicaids role for low income Medicare ben-
eficiaries. February 2009. Available at: http://www.kff.org/medicaid/
upload/4091_06.pdf. Accessed July 25, 2009.
96. Kaiser Family Foundation. Kaiser Commission on Medicaid and the
Uninsured. Tracking Medicare health and prescription drug plans. Monthly
report for March 2009. April 2, 2009. Available at: http://www.kff.org/medi-
care/upload/medicaretracking0309.pdf. Accessed July 25, 2009.
97. Dixon D, Wright P. National drug code reporting requirements. EDS
Provider Relations Organization. January 2009. Available at: http://files.
medi-cal.ca.gov/pubsdoco/ndc/pdf/10060_ndc_powerpoint.pdf. Accessed
July 25, 2009.
98. DHHS Centers for Medicare & Medicaid Services. Medicaid drug
rebate program. January 25, 2007. Available at: http://www.cms.hhs.gov/
MedicaidDrugRebateProgram/13_UnitRebateCalc.asp. Accessed July 25, 2009.
99. U.S. Government Accountability Office. Medicaid drug rebate program:
inadequate oversight raises concerns about rebates paid to states. Report No.
GAO-05-102. February 2005. Available at: http://www.gao.gov/new.items/
d05102.pdf. Accessed July 25, 2009.
100. Hearne J. Prescription drug coverage under Medicaid. RL30726. Report
for Congress. Congressional Research Service. February 6, 2008. Available
at: http://aging.senate.gov/crs/medicaid16.pdf. Accessed July 25, 2009.
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S55
 IX. References
101. DHHS Centers for Medicare & Medicaid Services. Medicaid prescrip-
tion reimbursement information by State Quarter ending December
2008. Available at: http://www.cms.hhs.gov/Reimbursement/20_
StateMedicaidRxReimb.asp. Accessed July 25, 2009.
102. DHHS Office of Inspector General. Variation in state Medicaid drug
prices. Report No. OEI-05-02-00681. September, 2004. Available at: http://
oig.hhs.gov/oei/reports/oei-05-02-00681.pdf. Accessed July 25, 2009.
103. Deficit Reduction Act of 2005. February 8, 2006. Available at: http://
frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_public_
laws&docid=f:publ171.109.pdf. Accessed July 28, 2009.
104. DHHS Centers for Medicare & Medicaid Services. Medicaid program:
prescription drugs; final rule. DHHS; July 17, 2007. 42 CFR Part 447; CMS-
2238-FC. Fed Regist. Vol. 72, No. 136. Available at: http://fdsys.gpo.gov/
fdsys/pkg/FR-2007-07-17/pdf/07-3356.pdf. Accessed July 28, 2009.
105. U.S. Census Bureau. Income, poverty and health insurance coverage in
the United States: 2007. August 2008. Available at: http://www.census.gov/
prod/2008pubs/p60-235.pdf. Accessed July 28, 2009.
106. Kaiser Family Foundation and Health Research and Educational Trust.
Employer health benefits: 2008 annual survey. August 2008. Available at:
http://ehbs.kff.org/pdf/7790.pdf. Accessed July 28, 2009.
107. U.S. General Accounting Office. Private health insurance: federal and
state requirements affecting coverage offered by small businesses. September
2003. Report No. GAO-03-1133. Available at: http://www.gao.gov/new.items/
d031133.pdf. Accessed July 28, 2009.
108. Employee Benefit Research Institute. ERISA and health plans. Special
report SR-31. Issue brief #167. November 1995. Available at: http://www.
ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=75. Accessed July
28, 2009.
109. Fronstin P. Capping the tax exclusion for employment-based health
coverage: Implications for employers and workers. Employee Benefit
Research Institute. January 2009. Available at: http://www.ebri.org/pdf/
briefspdf/EBRI_IB_1-2009_TaxCap1.pdf. Accessed July 28, 2009.
110. Jordan H, Barth L, Jureidini S, Wrobel M. Identification and descrip-
tion of industry best practices to manage the costs of prescription drugs. Abt
Associates, Inc.; November 11, 2005. Task Order 100-03-0002. Available
at: http://www.abtassociates.com/reports/ibp_costs_perscription_drugs.pdf.
Accessed July 28, 2009.
111. MedPAC report to the Congress: Medicare payment policy. March
2009. Available at: http://www.medpac.gov/documents/Mar09_EntireReport.
pdf. Accessed July 28, 2009.
112. Pharmaceutical Coalition Meeting - Transparency in Pharmaceutical
Purchasing Solutions (TIPPS). HR Policy Association, November 11, 2008.
Available at: http://www.pharmacoalition.org/docs/PharmaCoalition_
Nov11_MtgBook.pdf. Accessed July 28, 2009.
113. Fein A. Pharmacy profits and Wal-Mart. Drug Channels. January 15,
2009. Available at: http://www.drugchannels.net/2009/01/pharmacy-profits-
and-wal-mart.html. Accessed July 28, 2009.
114. AARP Public Policy Institute. Closing a gap in Medicare drug coverage.
May 2009. Available at: http://www.aarp.org/research/ppi/health-care/rx-
drugs/articles/fs_medicare_gap.html. Accessed July 28, 2009.
115. Congressional Budget Office. Would prescription drug importation
reduce U.S. drug spending? April 29, 2004. Available at: http://www.cbo.gov/
ftpdocs/54xx/doc5406/04-29-PrescriptionDrugs.pdf. Accessed July 28, 2009.
116. Kaiser Family Foundation. Prescription drug trends. September 2008.
Available at: http://www.kff.org/rxdrugs/upload/3057_07.pdf. Accessed July
28, 2009.
117. DHHS Task Force on Drug Importation. Report on prescription drug
importation. December 2004. Available at: http://archive.hhs.gov/import-
taskforce/Report1220.pdf. Accessed July 28, 2009.
118. National Association of Counties. NACo prescription drug discount
card program. May, 2009. Available at: http://www.naco.org/MOTemplate.
cfm?Section=Prescription_Drug_Program&Template=/TaggedPage/
TaggedPageDisplay.cfm&TPLID=72&ContentID=25445. Accessed July 28,
2009.
S56 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
119. How to use the Kent County Rx discount card. Area Agency on Aging
of Western Michigan. Available at: http://www.aaawm.org/Kent%20RX%20
card.shtml. Accessed July 28, 2009.
120. RiteAid Rx savings card. Available at: http://www.riteaid.com/phar-
macy/rx_savings.jsf. Accessed July 28, 2009
121. EMD Serono Injectables Digest, 5th Edition. February 2009. Available
at: https://olr.dwainc.com/2559Digest/powerpoints.aspx?SectionID=4.
Accessed July 28, 2009.
122. Murphy-Barron CM. Provider reimbursement. Milliman Research
Report. March 2002. Available on page 95 of a Milliman report dated
November 9, 2005 at: http://healthcoveragehawaii.org/taskforce/pdfs/
Milliman.Proposal.pdf. Accessed July 31, 2009.
123. ECG Management Consultants. Capitation and risk contracting survey.
American Medical Group Association. Available at: https://commerce.amga.
org/store/getfile.cfm?product_id=1456&file=2008_Capitation_Survey.pdf.
Accessed July 28, 2009.
124. Prometheus: provider payment for high quality care. A white paper. May
2006. Washington, DC: Prometheus Payment, Inc. Available at: http://www.
allhealth.org/BriefingMaterials/PROMETHEUS-ProviderPaymentforHighQual
ityCare-AWhitePaper-ExecutiveSummary-511.pdf. Accessed July 28, 2009.
125. NORC at the University of Chicago and Georgetown University Health
Policy Institute. Physician-administered drugs: distribution and payment
issues in the private sector. MedPAC; August 2003. Available at: http://www.
medpac.gov/publications/contractor_reports/Aug03_DrugsDist(cont)Rpt.pdf.
Accessed July 15, 2009.
126. Managed Care Injectables Index, Zitter Group, Fall 2008. Available at:
http://zitter.com/injectablesindex.html. Accessed July 15, 2009, 2009.
127. National Home Infusion Association. National definition of per diem.
January 2006. Available at: http://www.nhianet.org/resource/hiec/per_diem.
cfm. Accessed July 15, 2009.
128. National Association of Urban-Based HMOs. Medicaid pharmacy
rebate program and Medicaid HMOs. February 2001. Available at: http://
www.mhpa.org/_upload/MEDICAID%20PHARMACY%20REBATE%20
PROGRAM%20AND%20MEDICAID%20MCOs.pdf. Accessed July 28, 2009.
129. Human Resource Policy Association. Pharmaceutical coalitions trans-
parency in pharmaceutical purchasing solutions TIPPS initiative. July
24, 2006. Available at: http://www.hrpolicy.org/memoranda/2006/06-129_
Pharma_1pager.pdf. Accessed July 28, 2009.
130. PricewaterhouseCoopers LLP. Study of pharmaceutical benefit manage-
ment. Health Care Financing Administration; June 2001. Contract No. 500-
97-0399/0097. Available at: http://www.cms.hhs.gov/reports/downloads/
cms_2001_4.pdf. Accessed July 15, 2009.
131. 2009 Segal health plan cost trend survey. The Segal Company. Available
at: http://www.segalco.com/publications/surveysandstudies/2009trendsurve
y.pdf. Accessed July 28, 2009.
132. Baker T. Benefit design and specialty pharmacy: implications for
the managed care marketplace. Presentation at Pharmaceutical Care
Management Association (PCMA) meeting, Chicago, Illinois, April 25, 2006.
Available at: http://pcmanet.org/assets/2008-03-24_Asset_Tom%20Baker.
pdf. Accessed July 18, 2009.
133. Testimony of F Segrave, Vice President, Wal-Mart Pharmacy Division.
Subcommittee on Oversight and Investigation of the Committee on
Energy and Commerce, U.S. House of Representatives; December 7, 2004.
Available at: http://archives.energycommerce.house.gov/reparchives/108/
Hearings/12072004hearing1411/Segrave%20testimony.pdf. Accessed July
15, 2009.
134. Rhea S. Inflation Frustration: Higher prices for raw materials have
begun to hit the cost of health productivity and GPOs are feeling the pres-
sure. Mod Healthcare. September 1, 2008:S1-S5. Available at: http://www.
novationco.com/pressroom/industry_info/modern_healthcare_survey_2008.
pdf. Accessed July 28, 2009.
135. Pharmaceutical Research and Manufacturers Association.
Pharmaceutical Industry Profile 2008. March 2008. Available at: http://
www.phrma.org/files/2008%20Profile.pdf. Accessed July 18, 2009.
Vol. 15, No. 6-a www.amcp.org
 IX. References
136. Hoadley J. The prescription drug safety net: Access to pharma-
ceuticals for the uninsured. National Health Policy Forum. May 8,
2007. Available at: http://www.nhpf.org/library/background-papers/BP_
DrugSafetyNet_05-09-07.pdf. Accessed July 15, 2009.
137. DHHS Office of Inspector General. Medicaid pharmacyactual
acquisition cost of generic prescription drug products. Report No. A-06-
01-00053. March 14, 2002. Available at: http://oig.hhs.gov/oas/reports/
region6/60100053.pdf. Accessed July 28, 2009.
138. Biotechnology Industry Organization. Principles on AWP reform.
Available at: http://bio.org/healthcare/archive/medicare/awp.asp?p=yes.
Accessed July 28, 2009
139. Data on file. Alexandria, VA: Tag & Associates, Inc.
140. RAND Compare. Effects of bundled payment policy options. Available
at: http://www.randcompare.org/analysis/mechanism/bundled_payment.
Accessed July 28, 2009.
141. Network for Regional Healthcare Improvement and Robert Wood
Johnson Foundation. Pay for innovation or pay for standardization? How to
best support the patient-centered medical home. February 2009. Available
at: http://www.nrhi.org/downloads/NRHI-HowtoSupporttheMedicalHome.
pdf. Accessed July 28, 2009.
142. Congressional Budget Office. Increasing transparency in the pricing
of health care services and pharmaceuticals. June 5, 2008. Available at:
http://www.cbo.gov/ftpdocs/92xx/doc9284/06-05-PriceTransparency.pdf.
Accessed July 28, 2009.
143. National Health Policy Forum. Pharmacy benefit managers: a model for
Medicare? Issue brief. Washington, DC: George Washington University; July
9, 2001. No. 765. Available at: http://www.nhpf.org/library/details.cfm/2324.
Accessed April 29, 2009.
144. National Health Policy Forum. The ABCs of PBMs. Issue brief.
Washington, DC: George Washington University; October 27,
1999. Available at: http://www.nhpf.org/library/issue-briefs/IB749_
ABCsofPBMs_10-27-99.pdf. Accessed July 15, 2009.
145. Cook A, Kornfield T, Gold M. The role of PBMs in managing drug
costs: implications for a Medicare drug benefit. Mathematica Policy Research
for the Henry J. Kaiser Family Foundation; January 2000. Available at:
http://www.kff.org/medicare/upload/The-Role-of-PBMs-in-Managing-Drug-
Costs-Implications-for-a-Medicare-Drug-Benefit.pdf. Accessed July 28, 2009.
146. Greene J, Hibbard J, Murray JF, Teutsch SM, Berger ML. The impact
of consumer-directed health plans on prescription drug use. Health Affairs.
2008;27(4):1111-19. Abstract available at: http://content.healthaffairs.org/cgi/
content/abstract/27/4/1111. Accessed July 28, 2009.
147. Sullivan M. Health plan initiatives, trends and research in consumer-
driven care. Blue Cross Blue Shield Association. October 20, 2008. Available
at: http://www.bcbs.com/news/bluetvradio/consumerdriven2008/bcbsa-
final-slides.ppt. Accessed July 28, 2009.
148. Employee Benefit Research Institute. Findings from the 2008
EBRI consumer engagement in health care survey. Issue brief #323.
November 2008. Available at: http://www.ebri.org/publications/ib/index.
cfm?fa=ibDisp&content_id=4110. Accessed July 28, 2009.
149. Stebbins MR, Kaufman DJ, Lipton HL. The PRICE clinic for low-income
elderly: a managed care model for implementing pharmacist-directed servic-
es. J Manag Care Pharm. 2005;11(4):333-41. Available at: http://www.amcp.
org/data/jmcp/contemporary_333_341.pdf.
150. Pear R. U.S. to compare medical treatments. NY Times. February
15, 2009. Available at: http://www.nytimes.com/2009/02/16/health/
policy/16health.html?src=linkedin. Accessed July 28, 2009.
151. DHHS Agency for Healthcare Research and Quality. Fiscal year 2008
annual performance report. Available at: http://www.ahrq.gov/about/cj2009/
AHRQ%20FY2008%20Annual%20Performance%20Report.pdf. Accessed
July 28, 2009.
www.amcp.org Vol. 15, No. 6-a
152. Examples: Oregon Health and Science University Center for Evidence
Based Policy Drug Effectiveness Review Project (DERP). Available at: http://
www.ohsu.edu/ohsuedu/research/policycenter/DERP/participating-organi-
zations.cfm; Institute for Clinical Systems Improvement. Available at: http://
www.icsi.org/about/icsi_members___sponsors; Blue Cross Blue Shield
Technology Evaluation Center. Available at: http://www.bcbs.com/news/
press/facts/tec.html. Accessed July 15, 2009.
153. Garber AM. Comparative effectiveness and the limits of evidence.
Center for Health Policy. Stanford University. Presented at California
Research Bureau. December 18, 2008. Available at: http://www.library.
ca.gov/crb/08/Garber1208.pdf. Accessed July 28, 2009.
154. Executive Office of the President. Office of Management and Budget.
Letter to the Honorable Nancy Pelosi from Peter Orszag. July 17, 2009.
Available at: http://www.whitehouse.gov/omb/assets/legislative_letters/
Pelosi_071709.pdf. Accessed July 24, 2009.
155. Singer P. Why we must ration health care. NY Times. July 15, 2009.
Available at: http://www.nytimes.com/2009/07/19/magazine/19healthcare-t.
html?scp=1&sq=why%20we%20must%20ration%20health&st=cse. Accessed
July 28, 2009.
156. Pollack A. Drug deals tie prices to how well patient do. NY Times.
April 23, 2009. Available at: http://www.nytimes.com/2009/04/23/
business/23cigna.html?_r=1&pagewanted=print. Accessed July 28, 2009.
157. de Brantes F, DAndrea G, Rosenthal MB. Should health care come
with a warranty? Health Affairs. 2009;28(4)w678-87 (published online June
16, 2009). Abstract available at: http://content.healthaffairs.org/cgi/content/
abstract/hlthaff.28.4.w678?ijkey=a7J7Z9oXbmt0Q&keytype=ref&siteid=heal
thaff. Accessed July 28, 2009.
158. California Association of Health Plans. Never events: issue brief.
February 2008. Available at: http://www.calhealthplans.org/documents/
DH03_NeverEventsPoliciesProvidingPmt.pdf. Accessed July 28, 2009.
159. DHHS. Realizing the potential of pharmacogenomics: opportunities
and challenges. Report of the Secretarys Advisory Committee on Genetics,
Health and Society. May 2008. Available at: http://oba.od.nih.gov/oba/
SACGHS/reports/SACGHS_PGx_report.pdf. Accessed July 28, 2009.
160. Some plans take the lead in covering KRAS testing, with handful mak-
ing it part of prior authorization. Specialty Pharmacy News. March 2009.
161. U.S. Federal Trade Commission. Authorized generics: an inter-
im report. June 2009. Available at: http://www.ftc.gov/os/2009/06/
P062105authorizedgenericsreport.pdf. Accessed July 28, 2009.
162. U.S. Federal Trade Commission, Bureau of Competition. Connecticut
Hospital Association (CHA) staff advisory opinion. December 20, 2001.
Available at: http://www.ftc.gov/opa/2001/12/chaadvisopinionletter.shtm.
Accessed July 28, 2009.
163. U.S. Court of Appeals for the Seventh Circuit. In Re Brand Name
Prescription Drugs Antitrust Litigation. No. 99-1167. Argued June 9, 1999.
Decided July 13, 1999. Dec. No. 186 F.3d 781. Available at: http://bulk.
resource.org/courts.gov/c/F3/186/186.F3d.781.99-1167.html. Accessed July
28, 2009.
164. Medicare Payment Advisory Commission. About MedPAC. Available at:
http://www.medpac.gov/about.cfm. Accessed July 28, 2009.
165. Centers for Medicare & Medicaid Services. Medicare program:
manufacturer submission of manufacturers average sales price (ASP)
data for Medicare Part B drugs and biologicals. Final rule. (CMS-1380-F).
Fed Regist. September 16, 2004. Available at: http://www.cms.hhs.gov/
McrPartBDrugAvgSalesPrice/03_regulations.asp. Accessed July 28, 2009.
166. U.S. Food and Drug Administration. Orange Book: approved drug
products with therapeutic equivalence evaluations. Available at: http://www.
accessdata.fda.gov/scripts/cder/ob/default.cfm. Accessed July 28, 2009.
167. U.S. Federal Trade Commission, Bureau of Competition. Henry County
Memorial Hospital staff advisory opinion. April 10, 1997. Available at:
http://www.ftc.gov/bc/adops/henry.shtm. Accessed July 28, 2009.
168. DHHS Centers for Medicare & Medicaid Services. Medicaid program;
prescription drugs 42 CFR Part 447 (CMS-2238-FC). RIN 0938-A020.
Available at: http://www.cms.hhs.gov/MedicaidGenInfo/Downloads/
CMS2238FC.pdf. Accessed July 28, 2009.
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S57
 C O N T I N U I N G E D U C AT I O N

AMCP Guide to Pharmaceutical Payment Methods, 2009 Update (Version 2.0)

Pharmacists Accreditation and Credit Designation Statement

The Academy of Managed Care Pharmacy is accredited by the Accreditation Council for Pharmacy Education
(ACPE) as a provider of continuing pharmacy education. AMCP designates this continuing education activity for
2.0 contact hours of credit or .20 Continuing Education Units (CEUs). ACPE Universal Program Number: 233-
000-09-028-H01-P.

Release Date: August 1, 2009

Expiration Date: August 1, 2011

This is a knowledge-based learning activity.

Target Audience: Pharmacists

For questions regarding the accreditation of this activity, please contact the AMCP Education and Meetings Department at
800.827.2627, ext. 604.

Continuing education credit for this activity is processed through AMCP at www.amcp.org (CE/CME Center) only. No mailed
forms will be accepted.

The posttest worksheet is provided to assist you in marking your answers prior to entering the online CE center for submis-
sion; these pages cannot be submitted for CE credits.

In order to receive CE credit for this activity, you must complete the following forms online:

1. Posttest for this program, AMCP Guide to Pharmaceutical Payment Methods, 2009 Update (Version 2.0) accessible at the
AMCP.org CE/CME Center. You must receive a score of 70%. You will have 2 opportunities to pass the posttest.

2. Activity Evaluation Form

Upon successful completion of this activity, you will automatically receive your CE, statement as proof of completion. Your CE
credits will be archived and tracked for you on the AMCP.org CE/CME Center site. All information is kept confidential.

To complete this continuing pharmacy education activity, go to www.amcp.org

(CE/CME Center) to access the posttest and evaluation.

S58 Supplement to Journal of Managed Care Pharmacy JMCP August 2009 Vol. 15, No. 6-a www.amcp.org
 Posttest Worksheet: AMCP Guide to Pharmaceutical Payment Methods, 2009 Update (Version 2.0)
1. Which of the following is true regarding WAC?
a. The price most commonly paid by community
pharmacies for prescription drugs
b. Will no longer be available after September 2011
c. Includes discounts negotiated by wholesalers with
manufacturers
d. Is related to AWP by a common multiplier for both
brand and generic drugs
e. None of the above
2. The percentage difference between AWP and AAC is the
largest for:
a. Branded drugs
b. Multiple-source brand drugs
c. Multiple-source generic drugs
d. There is not a significant difference between AWP and
AAC for brand, multiple-source brand or multiple-
source generic drugs
3. ASP refers to which of the following:
a. The benchmark price now published by many price
sources to replace AWP
b. Community pharmacy prices for consumers without
insurance
c. Selling price data reported by pharmaceutical
manufacturers including most discounts and rebates
d. Estimated selling price for physician-administered
drugs
e. Prices for hospital outpatient drugs
4. Which of the following best describes the relationship of
ASP and AMP?
a. Under current rules, all prescription drugs will have
AMPs, but ASPs will be publicly available only for
prescription drugs covered through Medicare Part B.
b. Both ASP and AMP represent manufacturers actual
transaction prices.
c. Neither ASP nor AMP include wholesaler or distributor
markups applied to manufacturers actual transaction
prices.
d. Comparison of ASP and AMP for prescription drugs
that have both prices cannot be made at this time,
because AMPs are not publicly available.
e. All of the above.
www.amcp.org Vol. 15, No. 6-a
5. A March 2009 District Court ruling in a national class
action lawsuit against First DataBank and McKesson
required a change in the relationship between AWP and
WAC on drugs covered in the suit to:
a. The average markup on WAC that prescription drug
wholesalers rely on, as determined by an annual
survey of wholesalers
b. The specific markup on WAC that the pharmaceutical
manufacturer recommends
c. A fixed markup of 1.20 times WAC
d. A fixed markup of 1.25 times WAC
e. A fixed markup of either 1.20 or 1.25 times WAC
6. Although currently on hold through the end of September
2009, the Deficit Reduction Act of 2005 required AMP to
be used by state Medicaid programs in the calculation of:
a. The federal upper limit (FUL) on payment for multi-
source drugs only in the pharmacy benefit
b. Payment for brand-name drugs only in the pharmacy
benefit
c. FUL for multi-source drugs and payment for brand-
name drugs in the pharmacy benefit
d. Payment for multi-source and brand-name drugs in the
pharmacy benefit and for drugs administered in the
physicians office
7. Which of the following is true of the basic Medicaid
unit rebate amount (URA)?
a. Flat 15.1% of AMP for generic (multiple-source non-
innovator) drugs
b. Flat 15.1% of AMP for single-source and innovator
multiple-source drugs
c. Flat 15.1% of AMP for all drugs
d. Greater of 15.1% of AMP or AMP minus best price for
single-source and innovator multiple-source drugs
e. The best price reported by manufacturers for all drugs
8. Which of the following sales is excluded from Medicaid
Best Price reporting for pharmaceutical manufacturers?
a. Nonprofit HMOs
b. Any nonprofit entity
c. Mail order pharmacies
d. Long-term care facilities
e. Veterans Affairs
August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S59
 Posttest Worksheet: AMCP Guide to Pharmaceutical Payment Methods, 2009 Update (Version 2.0)
9. According to the Office of Inspector General, the ASP
developed by CMS to replace AWP as the benchmark for
payment of Medicare Part B prescription drug claims, is:
a. About 57% lower than AWP at the median
b. About 49% lower than AWP at the median
c. About 24% lower than AWP at the median
d. About 13% lower than AWP at the median
10. An office-based physician prescribing a prescription drug
covered by Part B to a Medicare beneficiary would enjoy a
higher gross margin in which of the following scenarios,
assuming that the Medicare beneficiary cost-share is col-
lected in full and that no deductible applies:
a. A multisource generic injectable with an ASP of $100
b. A multisource brand injectable with ASP of $200
c. A single source brand injectable with an ASP of $300
d. All of the above yield about the same gross margin to
the physician
11. The Congressional Budget Office found which of the fol-
lowing to have the largest AWP discount for brand-name
drugs in 2003?
a. Federal ceiling price (FCP)
b. 340B ceiling price
c. Best price
d. AMP
e. Department of Defense military treatment facility
average price
12. In the private sector, pharmaceutical manufacturers may
offer prompt pay, formulary and tier placement, therapeu-
tic class market share and other performance-based price
concessions to purchasers. The availability of certain price
concessions to private sector purchasers may be deter-
mined by:
a. The providers class of trade
b. How aggressively the purchaser maximizes the
prescribing and dispensing of preferred products
c. The purchasing power of the group purchasing
organization (GPO) to which the provider belongs
d. Whether the prescription drug has therapeutic
alternatives which prescribers may consider
interchangeable
e. All of the above
S60 Supplement to Journal of Managed Care Pharmacy JMCP August 2009
13. As of January 2009, the Medicare program pays for most
prescription drugs administered in the hospital outpatient
setting that are not bundled into ambulatory payment
classification (APC) on the basis of ASP plus:
a. 2%
b. 3%
c. 4%
d. 5%
e. 6%
14. For a typical family of 4 covered by an employer-spon-
sored PPO, one medical Index estimates that a patients
out-of-pocket cost-share for prescription drugs in 2008
was:
a. Approximately 19%
b. Approximately 27%
c. Approximately 33%
d. Approximately 41%
15. The best estimate by a Medicaid agency of the actual cost
for a drug acquired by a pharmacy and other providers
describes which of the following:
a. EAC
b. ASP
c. WAC
d. MAC
e. AMP
16. The Public Health Service 340B program requires manu-
facturers participating in the Medicaid program to extend
the same pricing, net of mandated Medicaid rebates, to
entities enrolled in the 340B program. Is it permissible
for entities enrolled in the 340B program to negotiate
with pharmaceutical manufacturers for discounts that are
greater than mandated by the 340B program?
a. Yes
b. No
17. Which of the following best describes the Medicare Part
D provision for the Six Classes of Clinical Concern (also
referred to as Protected Classes):
a. Plan sponsors must not deeply discount payment for
these drugs
b. Prevents plan sponsors from applying prior
authorization or step therapy for new or existing users
of these drugs
c. Requires plan sponsors to include all drugs in these 6
classes on drug formularies
d. Includes drugs for asthma and diabetes
e. Permits exclusion of multiple-source brand drugs
Vol. 15, No. 6-a www.amcp.org
 Posttest Worksheet: AMCP Guide to Pharmaceutical Payment Methods, 2009 Update (Version 2.0)

18. Which of the following factors is NOT used to determine
whether a category of pharmaceutical may be paid under
Medicare Part B or Part D for a Medicare beneficiary?
a. Diagnosis
b. Route of administration
c. Location (setting) of treatment
d. Whether the drug is a small molecule or a biological
e. Whether the drug is self-administered
19. The Medicare program pays for drugs infused through
durable medical equipment (DME), such as parenteral
nutrition administered by an infusion pump, on the basis
of which of the following payment formulas in 2009:
a. 95% of AWP
b. ASP+6%
c. ASP+4%
d. WAC+5%
e. Usual and customary charge
20. Which of the following pricing strategies was NOT dis-
cussed in a June 2009 Report to the Congress by the
Medicare Payment Advisory Commission (MedPAC) for
the application of clinical effectiveness information to
improve the value of Medicare spending?
a. Reference pricing: Set a drugs payment rate no higher
than the cost of currently available treatments unless
evidence shows that the drug improves beneficiaries
outcomes
b. Drug formulary: List a drug in tiers of the formulary
in accordance with its value as demonstrated through
clinical effectiveness research
c. Payment for results: Link a drugs payment to
beneficiaries outcomes through risk-sharing
agreements with manufacturers
d. Bundling: Create payment bundles for groups of
clinically associated products and services
e. None of the above

To complete this continuing pharmacy education activity, go to www.amcp.org

(CE/CME Center) to access the posttest and evaluation.

www.amcp.org Vol. 15, No. 6-a August 2009 JMCP Supplement to Journal of Managed Care Pharmacy S61
Supplement