Learn the Lingo
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Every quarter, pharmaceutical manufacturers confront a dizzying array of price reporting obligations. Participation in the
Medicare, Medicaid, Veterans Administration (VA), and Public Health Service (PHS) programs requires manufacturers to collect,
organize, distill and manipulate vast quantities of information, and to generate from that data reportable figures that can
have an enormous impact on the company's bottom line. It is critical that these figures be correct, not only to help ensure
the integrity of these public programs, but because submission of false data to a federal agency is a prosecutable criminal
offense, and the civil penalties and exposure can be staggering.
This article describes the four major federal drug pricing regimes, identifies the most common mistakes that companies make
in calculating and reporting drug prices under these programs, and offers a series of recommendations that can help companies
reduce their risk in these complex and high-stakes areas. It explains why companies should review their pricing policies,
and flag some key issues that should be encompassed in such reviews.
Drug Pricing Formulas
There are four principal figures that need to be calculated and reported every quarter. The first, which governs reimbursement
for Medicare Part B drugs, is the Average Sales Price (ASP). First made mandatory in 2004, the ASP is the successor to the
flawed Average Wholesale Price reimbursement formula. ASP as a price reporting formula is unique in a number of ways, not
the least of which is its statutory prescription for estimating lagged payments—that is, making estimates in the reporting
quarter of charge-backs, rebates, and other adjustments that will not take effect until future quarters.
The second key pricing reporting figure is Average Manufacturer's Price (AMP), which plays an important role in the calculation
of Medicaid rebates. AMP is the average price paid to the manufacturer for covered drugs distributed to the retail pharmacy
class of trade. AMP is also used in setting the discounted price at which PHS entities buy drugs.
The third figure is the Best Price, or the lowest price at which the manufacturer sells a drug in any pricing structure (other
than sales to certain government programs), taking into account all price concessions. Along with AMP, the Best Price is integral
in setting the amount manufacturers pay in Medicaid rebates. It is important to note that Best Price is not an average—it
only takes one sale to one customer to set a Best Price.
The fourth figure, for VA price-setting purposes, is the Non-Federal Average Manufacturer's Price (non-FAMP). Unlike the
ASP and AMP, the non-FAMP is intended to capture the average price to the wholesale—not retail—class of trade. As the name
suggests, sales to federal programs are also exempt from the non-FAMP calculation. The non-FAMP is used in determining pricing
offered under the Federal Supply Schedule (FSS), a program through which the government purchases products for its own use.
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