Pharma: How Costs are Calculated

Non-Number Numbers:

Indeed, the complex and multifaceted calculations involved in determining pharmaceutical costs can be overwhelming.

Why is this important?

If you recall my previous article, "Cost of Medical Supplies and Pharmaceuticals," you may have noticed some questionable practices regarding supply costs. Just as a magician astounds us by pulling a card from a deck or performing a mind-boggling trick, similar mystifying practices are occurring with healthcare industry costs.

I am sharing the four types of mathematical formulas used to determine pharmaceutical costs. YES FOUR.

Pharmaceutical drug costs:

In the context of pharmaceutical drug costs, "non-number numbers" often refer to various pricing benchmarks and metrics that aren't straightforward prices but are used to determine or influence the cost of drugs. Here are a few key examples:

1. Average Wholesale Price (AWP): This benchmark is used for pricing and reimbursement of prescription drugs. It's often referred to as a "sticker price" and is typically higher than the actual price paid by pharmacies.
2. National Average Drug Acquisition Cost (NADAC): This represents the average price retail pharmacies pay to acquire drugs from wholesalers. It's used as a reference point for Medicaid reimbursement.
3. Non-Federal Average Manufacturer Price (non-FAMP): This is the average price paid by wholesalers for drugs distributed to non-federal purchasers, accounting for rebates and discounts3.
4. Maximum Fair Price (MFP): Under recent legislation like the Inflation Reduction Act, this is a negotiated price for certain high-cost drugs covered by Medicare. It sets an upper limit on what Medicare will pay for these drugs.

These metrics help create a more transparent and regulated pricing environment, aiming to balance fair compensation for manufacturers with affordability for consumers and payers. Aiming and doing are two different things.

So, here is my conspiracy theory:

Healthcare vendors are raising prices, and intermediaries negotiating resale prices artificially inflate unit costs. Those claiming to offer discounts on resale are, in reality, not providing any substantial savings, resulting in consumers, healthcare organizations, and retail pharmacies continuing to sell products at elevated prices. Is this sounding familiar?

It seems that manufacturers, consolidated spend/contract managers, pharmacy benefit managers (PBMs), and retailers are collaborating to escalate costs from the acquisition of raw materials to the point of dispensing. Upon scrutinizing rebates, administrative fees, and book pricing, it becomes evident that all parties are involved in this process.

How else can we explain the record profits of numerous companies operating in this market?

Story Time:

My wife was picking up her prescription, and the lady in front of her was picking up the same drug as her. The lady's cost for a 60-day refill was $1,200.00. She had to use her credit card to pay for it, stating, "I have to have my medication." Shockingly, a drug that makes her life comfortable is that expensive.

The bottom Line:

The runaway train is moving at speeds requiring a math PhD to understand its origin. It's conceivable to grasp drug shortages, but the manufacturing process, even with the availability of raw materials, should not lead to increased costs, as the market currently suggests.

Products directly impacting the healthcare market should not be subjected to mere "Supply and Demand" calculations. We are dealing with medications for humans, not consumer goods like cars and cell phones.

The healthcare industry must no longer ignore such business practices; it's time to take a firm stand and demand all vendors to "STOP!"

Whew! I am glad I got that off my chest.

Think about it,

Tim