What Is Average Wholesale Price (AWP) in Pharmacy?

Average Wholesale Price (AWP) is a pricing benchmark for prescription drugs within the pharmacy and healthcare sectors. It influences how medications are priced and reimbursed, impacting the financial aspects of healthcare. Understanding AWP helps comprehend drug costs and their influencing mechanisms. This benchmark helps define the financial landscape for pharmacies, insurers, and patients alike.

Understanding Average Wholesale Price (AWP)

Average Wholesale Price (AWP) is a published list price for prescription drugs, often called a “sticker price” or “suggested retail price.” It represents the average price at which wholesalers theoretically sell drugs to pharmacies and other healthcare providers. However, it is important to understand that AWP is generally not the actual price pharmacies pay to acquire medications. Rather, it functions as a theoretical or reported price, which does not directly reflect real-world transaction data or actual market prices.

AWP data is compiled and published by commercial vendors specializing in drug pricing information, such as Medi-Span and First DataBank. These publishers gather pricing information primarily based on data reported to them by drug manufacturers. While intended to convey general pricing information, published AWPs can be higher than actual market prices, sometimes by a significant margin. This practice has led to its characterization as an inflated benchmark that does not fully account for discounts, rebates, or other price reductions available in the market.

The historical role of AWP has been as a widely accepted reference point for drug pricing and reimbursement across the industry. It provides a standardized figure that various stakeholders can use as a starting point for financial calculations. Despite its name, AWP is distinct from the actual acquisition cost, which is the true price pharmacies pay wholesalers for drugs after all discounts are applied.

AWP’s Role in Pharmacy Reimbursement

Pharmacy Benefit Managers (PBMs) and health insurance companies frequently utilize Average Wholesale Price (AWP) as a primary basis for determining how much they will reimburse pharmacies for dispensed medications. This reimbursement calculation commonly follows a formula expressed as “AWP minus X%,” where X represents a negotiated discount percentage. For instance, a health plan might agree to pay a pharmacy AWP minus a specific percentage for brand-name drugs.

The goal for pharmacies is to acquire drugs at a cost lower than the negotiated reimbursement rate to ensure profitability on each prescription. The accuracy of AWP values in a pharmacy’s dispensing system is important, as incorrect or outdated data can lead to under-reimbursement and lost revenue for the pharmacy.

Pharmacies may also use AWP as a reference point when setting prices for uninsured patients, although this is less common than using it for insurance-based reimbursements. For cash-paying customers, pharmacies typically charge a “Usual & Customary” (U&C) price, which is their standard retail cash price. While AWP can inform this price, it does not represent the actual acquisition cost for the pharmacy in these cash transactions. The functional role of AWP is primarily within the complex reimbursement models that govern how pharmacies are paid by third-party payers.

AWP in the Broader Drug Pricing Landscape

Average Wholesale Price (AWP) exists within a larger ecosystem of drug pricing benchmarks, each serving a distinct purpose in the pharmaceutical supply chain. One such benchmark is the Wholesale Acquisition Cost (WAC), which represents the manufacturer’s list price for a drug when sold to wholesalers or direct purchasers. WAC is generally considered a more direct reflection of the manufacturer’s initial pricing than AWP, as it is the price before any discounts or rebates are applied. AWP is often calculated by adding a markup to the WAC, typically around 20%, though this is a suggested price and can vary.

Another important metric is the National Average Drug Acquisition Cost (NADAC), which provides a more transparent view of what pharmacies actually pay for drugs. NADAC is derived from a survey of actual invoice prices submitted voluntarily by retail pharmacies to the Centers for Medicare and Medicaid Services (CMS). It was developed to offer a more accurate and publicly available measure of acquisition costs compared to AWP, which has faced criticism for being an inflated figure that does not reflect true market prices. NADAC data is updated weekly and is primarily used by Medicaid programs for reimbursement calculations.

The Usual & Customary (U&C) Price is the cash price a pharmacy typically charges its uninsured customers. This price reflects the amount an individual without prescription drug coverage would pay directly at the pharmacy. It is the price charged to the general public, and pharmacies must include applicable discounts, such as promotional or loyalty program discounts, when reporting their U&C price for claims. These multiple pricing benchmarks exist because different stakeholders in the drug supply chain require various reference points for their specific financial and operational needs, ranging from manufacturer sales to wholesale transactions, pharmacy acquisitions, and patient out-of-pocket costs.