What does a drug cost? AWP, WAC, and other pricing terms

What’s a drug cost, anyway?

Other than “too much,” it’s hard to answer with certainty.

One major cause?
The complex, opaque pricing terms used in the industry.

Let’s break it down:

1. AWP (Average Wholesale Price)
Think of AWP like the “sticker price” on a new car. It’s what’s advertised but rarely what anyone actually pays. Instead, it’s a starting point for negotiations.
• Example: The car might be “listed” at $30,000, but after discounts, rebates, and deals, the actual price could be far lower.
Similarly, AWP is generally WAC (Wholesale Acquisition Cost) × 1.2, making it artificially inflated by 20%.

2. WAC (Wholesale Acquisition Cost)
WAC is akin to the Manufacturer’s Suggested Retail Price (MSRP) you see in retail. It’s the price set by drug manufacturers for wholesalers before any discounts or markups.
• Why it matters: Like MSRP, it’s a helpful reference but not what anyone actually pays after negotiations or rebates are factored in.

3. NADAC (National Average Drug Acquisition Cost)
NADAC is like looking at your neighbor’s grocery bill to compare prices. It reflects the average invoice price pharmacies pay for drugs, based on surveys submitted to the Centers for Medicare & Medicaid Services (CMS).
• The catch? Participation is voluntary, so it’s like asking only a few neighbors. Big retail chains and specialty drugs often don’t report, making NADAC an incomplete snapshot.

4. MAC (Maximum Allowable Cost)
MAC is comparable to a price ceiling in a grocery store for generic brands. It sets the maximum reimbursement PBMs will pay for a particular generic drug.
• The challenge? Different PBMs have different ceilings, and these lists are updated inconsistently. This can cause confusion and make it harder to identify cost-saving opportunities.

5. U&C (Usual and Customary Price)
Think of U&C as the cash price you’d pay for gas at the pump. It’s what customers without insurance or discounts are charged at the pharmacy counter.
• Tip: If your negotiated PBM prices aren’t lower than the U&C, it’s like paying premium prices when discounts should be available.

6. ASP (Average Sales Price)
ASP is like the true market value of a used car—it reflects what the average buyer actually pays after accounting for all discounts and rebates.
• Key use: Medicare Part B uses ASP to reimburse providers for drugs they administer, making it one of the most transparent benchmarks available.

Why does this matter?
Opaque benchmarks inflate costs and how we negotiate matters. Markets only function with a symmetry of information. Next time a PBM contract lands on your desk, you’ll be better equipped to negotiate a fair deal.

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Photo below explaining product and money flows taken from Kevin Schulman’s great work on the topic.