Soon after the publication of AWP by Red Book, their competitor, the American Druggist Blue Book, also began publishing AWPs. Perhaps unsurprisingly, as more and more health plans began offering prescription drug insurance, AWP became the dominant benchmark in terms of directing how drug prices were paid from the 1970s onwards. It was the case that during the 1960s, it was uncommon to have prescription drug coverage (approximately 4% had it), but that it increased over time with nearly all employers eventually offering health coverage including prescription drug benefit coverage as part of their offerings.
At the same time, it was knowable quite early on that AWP wasn’t that reliable of a drug pricing benchmark (if the goal of the benchmark is to understand the acquisition cost of the drug being sold; which it may or may not be depending upon your perspective). As early as 1974, the U.S. Department of Health, Education and Welfare put into the federal notice a warning that “Red Book data, Blue Book data (i.e. AWP) and other standard prices…were frequently in excess of actual acquisition cost.” In 1984, the Health & Human Services Office of Inspector General identified that most pharmacies purchased drugs 15.9% below AWP, with some being as much as 42% lower than the drug’s AWP. As HHS OIG stated at the time, “‘Average Wholesale Prices’ (AWPs) reported in the Red and Blue Book compendia were, for the drugs studied, in excess of actual acquisition prices.” In 1992, HHS OIG went so far as to identify that, “[T]here is no single discount rate which can be applied to AWP to provide a reasonably consistent estimate of physician’s acquisition cost.” And yet, AWP-based pricing continued into the 1990s and early 2000s.
At the start of the twenty-first century, the drug compendia First Databank (who had acquired the Blue Book from the American Druggist) and the wholesaler McKesson were alleged to have engaged in a scheme to raise AWP prices (we say this because they eventually settled the resulting lawsuits and expressly denied liability of any kind). This alleged activity, once discovered, was a cataclysmic event at the time. One could say the strata of our drug pricing history bears its own dramatic “K‑Pg boundary” from the mid‑2000s, when plaintiffs unearthed evidence that publishers and manufacturers had quietly widened the markup from WAC to AWP (Can you tell we watched Jurassic Park more recently than our beloved Star Wars?). If you were someone who paid for prescription drugs in reference to AWP (which to be clear was effectively everyone), this AWP-markup increased the price of medicines and undermined credibility in the benchmark and system as a whole. As the Wall Street Journal put it at the time, “The term [average wholesale price] is a misnomer because it no longer represents a price paid to wholesalers and is not an average of anything.” (Note, we’re not sure it EVER actually did represent a price paid to a wholesaler, but we digress)
In 2009, a federal court oversaw the resulting settlements of this AWP-based lawsuit, which included FDB’s decision to roll back the spread for hundreds of brand drugs back to a uniform 1.20 × WAC and to retrofit thousands of other National Drug Codes (NDCs) to the same ratio. The ruling reminded the market that AWP was never an “average” at all — merely a multiplier — yet even this carefully chiseled correction did not erase the benchmark; it simply reset the fossil clock.
In 2009, Adam Fein published a blog post questioning what the world would look like after AWP went boom. At some point after these lawsuits, legislative investigations into AWP appear to have dried up – maybe under the belief that AWP did in fact go boom. And who can blame anyone for trusting that the coast was clear? At the time, it was believed AWP distortions would be a thing of the past, largely due to the immense size of the settlements and just the obviousness of AWP’s flaws. For example, in her March 2009 order and opinion in the seminal AWP case, Judge Patti Saris’ blunt assessment of AWP’s true essence would lead many to believe that the jig was up for good when she stated, “AWP has been exposed as a faux inflated price unrelated to actual drug prices. Reliance on AWP is a trap for unwary and unsophisticated TPP purchasers and results in consumers paying unwarranted co-payments. Not only do FDB and Medi-Span have the right to make these changes, but in my view, after eight years of this MDL, rolling back AWPs or phasing them out as a pricing benchmark is in the public interest and to the benefit of the class.”
As a brief aside, it may be helpful (or at least it comes up in conversations we have) to think of AWP in the same line as LIBOR (London Inter-Bank Offered Rate) in finance and real estate. LIBOR represented the average interest rate major banks claimed they would charge each other for short-term loans. As discussed with AWP above, this isn’t that different from AWP which represents this price “designed to show the average price retailers throughout the country are paying to the wholesaler for a particular item” - see Figure 2 above. If AWP is this reference price used for prescription drug reimbursement, particularly in the insurance space, and LIBOR served as this global benchmark of interest rates for which major banks borrow from one another, then the parallel is that both act(-ed) as anchor points for transactions even though neither necessarily reflect true market conditions (said differently, both are numbers that thousands of transactions depend(ed) on to determine what should be paid or charged). Of course, much like AWP was found to potentially be inflated, LIBOR was discovered to not always reflect actual transaction prices and rather was ‘estimates’ submitted by banks. Banks which stood to benefit from tweaking their submissions to LIBOR can speak to the potential value that can be gained from perverse incentives to influence or manipulate the underlying benchmark used in complicated financial transactions (be they real estate or prescription drug benefits). In other words, AWP in healthcare and LIBOR in finance show how convenient but opaque reference benchmarks can dominate markets, yet become vulnerable to distortion and exploitation.
But in a tale as old as time, the drug channel took its licks in the litigation fallout and eventually found ways to facilitate similar yields with slightly modified financial logistics. Today, we know that AWP didn’t actually go extinct, and that most contracts today continue to “control” drug prices with AWP-based terms.
Fast‑forward to the present day, where three private‑label drug manufacturer “species” have emerged from the PBM ecosystem: CVS Health’s Cordavis, Cigna/Evernorth’s Quallent, and UnitedHealth/Optum’s Nuvaila. As we highlighted in this summer’s report, these three companies represent what we know to be the strongest environment in existence to control both the front-end and tail-end of a pharmacy transaction, as the same parent company owns the manufacturer/labeler that sets the list price, the PBM who negotiates the end payment to the provider, and the pharmacy that pays to put the drug on its shelf and receives that end PBM payment.
So, if AWP is ultimately the primary pricing benchmark with which drug prices are negotiated by PBMs — and PBM-affiliated companies have the power to set the AWPs of their own drug products — we now have an unprecedented opportunity to evaluate the pricing of these products and to see what they can teach us about drug pricing in the modern era. Further, we can examine what the behaviors of companies who claim to be universally and solely working to lower drug prices may actually reveal about their underlying biology.
Quallent’s AWP fossil record: “That’s the great thing about bones. They never run away.”
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