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GLOSSARY OF KEY TERMSFor professionals in the pharmaceutical industry, understanding the language, acronyms and key players in its unique supply chain can be a challenge. This glossary will provide a high-level overview of key terms that every pharmaceutical executive should know.
What is the 340B program?
The 340B program is a government initiative that helps certain healthcare providers, like hospitals and clinics, buy prescription drugs at discounted prices. This program is aimed at increasing access to affordable medications for patients, especially those who are underserved or low-income.
“Covered Entities” within the program typically include but are not entirely limited to: disproportionate share hospitals (DSHs), cancer or children’s hospitals exempt from the Medicare prospective payment system, sole community hospitals, rural referral centers, and critical access hospitals.
This 340B discount for covered entities is directly incorporated into a pharma manufacturer\'s selling price, as opposed to being issued as a traditional rebate. Most often, covered entities purchase the drugs from a wholesaler at the discounted price and, in turn, the wholesaler issues a chargeback to the manufacturer to recoup the discount given.
What are the requirements for pharma manufacturers to participate in 340B?
For pharmaceutical manufacturers, this means entering a Pharmaceutical Pricing Agreement (PPA) with the U.S. Department of Health and Human Services (HHS) Secretary, agreeing to discounts on covered outpatient drugs to covered entities within the program, ensuring drugs are covered by Medicaid and Medicare Part B, and submitting Public Health Service (PHS) quarterly calculations to the Health Resources and Services Administration (HRSA).
Additionally, all pharmaceutical manufacturers participating in the Medicaid Drug Rebate Program (MDRP) are required to obtain a Pharmaceutical Pricing Agreement as a prerequisite.
Source:
Health Resources & Services Administration. 340B Drug Pricing Program
What is a 340B ceiling price?
The 340B ceiling price is the highest price that pharmaceutical manufacturers are permitted to charge to covered entities participating in the Public Health Service's 340B drug pricing program. The 340B ceiling price is equal to the quarterly Average Manufacturer Price (AMP) two quarters prior (i.e. 3Q 2023 AMP derives the 1Q 2024 340B ceiling price) minus the total Medicaid Unit Rebate Amount (URA). The value is rounded to six decimal places. Since the AMP and URA are calculated at the unit level, the per unit PHS price is lastly multiplied by the units per package – which is what the wholesalers would be selling to the covered entities at.
How do pharma manufacturers calculate a 340B ceiling price for new drugs?
Pharma manufacturers are obligated to estimate the 340B ceiling price for a new covered outpatient drug when it first becomes available for sale. This estimate is based on the wholesale acquisition cost (WAC) minus the appropriate rebate percentage until the drug's actual AMP is determined, which should happen no later than the 4th quarter after the drug's initial sale. Manufacturers must then calculate the actual 340B ceiling price and, if an overcharge is identified, refund or credit the covered entity the difference within 120 days of determining the overcharge.
Source:
Code of Federal Regulations. Subpart B—340B Ceiling Price
Knowledge Ecology International. Glossary of pharmacy and drug price terms
What is a 3PL?
A Third-Party Logistics company (3PL) is an organization that manages warehousing and shipping operations for pharmaceutical manufacturers or wholesale distributors. 3PLs are commonly leveraged by drug manufacturers to handle the distribution of their finished drugs. 3PLs typically offer order to cash services in addition to distribution services. Utilizing a 3PL allows manufacturers to operate virtually, resulting in lower investment into brick-and-mortar facilities and often expediting the time it takes to get products into the market. Additionally, as any company grows and needs more inventory space, a pharmaceutical manufacturer does not need to spend additional funds to expand the shipping operation. Another benefit of a 3PL is leveraging buying power to lower overall cost of shipping. Given the volume of shipping a typical 3PL handles, they can negotiate lower shipping terms more successfully than single pharma companies can on their own.
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What are 5i drugs?
5i drugs pertain to specialty and/or physician-administered drugs that are administered in one of the following non-oral ways:
- Injection
- Instillation
- Infusion
- Implantation
- Inhalation
When performing Government Pricing calculations, pharmaceutical manufacturers may need to handle 5i drugs differently when calculating the Average Manufacturer Price (AMP). Depending upon the proportion of sales that go through retail community pharmacies, they may be required to include certain payments, rebates, and discounts related to 5i drugs from their AMP calculations that would typically be excluded for non-5i drugs. These drugs are often not distributed through traditional retail community pharmacies, which can lead to limited data available for performing AMP calculations.
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What is the Actual Acquisition Cost (AAC) in pharma?
The AAC is the final amount paid by a pharmacy for a drug.
A drug's ACC includes discounts, rebates, chargebacks, and various price adjustments, but excludes any associated dispensing fees.
AAC is used as a benchmark for drug reimbursement rates, most often associated with the Medicaid program.
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Knowledge Ecology International.Glossary of pharmacy and drug price terms
What is an Admin Fee in pharma?
Admin fees refer to charges and payments made by pharmaceutical manufacturers to Pharmacy Benefit Managers (PBMs), wholesalers, GPOs, or other entities.
Admin fees imposed on manufacturers can vary greatly depending on the entity that is charging the fee as well as what the fee is defined as representing. The fees are ultimately meant to cover various administrative costs that PBMs, wholesalers, and GPOs incur and are typically charged as a percentage of sales. There is much debate around what these fees actually represent and furthermore, how they should be treated with regard to Government Pricing calculations. Admin fees will ultimately fall into one of two categories when it comes to treatment for Government Pricing calculations.
They’ll either be treated as a Bonafide Service Fee or a Non-Bonafide Rebate. The former would be excluded from GP calculations and would not have an impact on any of the calculated values. The latter would be considered a discount and would be included in GP calculations, which would impact the calculated values.
To be classified as a Bonafide Service Fee, the specific fee must satisfy all criteria in each part of the “Four Part Test”. The four criteria are as follows:
- The fee paid must be for a bona fide, an itemized service that is performed on behalf of the manufacturer.
- The manufacturer would otherwise perform or contract for the service in the absence of the service arrangement.
- The fee must represent Fair Market Value for the services rendered.
- The fee must not be passed on (in whole or in part) to a client or customer of any entity.
If the fee does not satisfy any one or more of the criteria above, it may be considered a Non-Bonafide Rebate and included as a discount.
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How does the Affordable Care Act (ACA) impact pharma manufacturers?
The Affordable Care Act, also colloquially referred to as Obamacare, is a U.S. federal law passed on March 23, 2010 aimed at providing additional healthcare coverage to Americans. The Affordable Care Act (ACA) impacted pharma manufacturers in multiple ways.
One of the two major provisions introduced a new fee requirement for pharma manufacturers that sell large dollar amounts of branded prescription drugs to the government. The fee, often referred to as the Branded Prescription Drug Fee or Brand Tax, is quite different from other government fees that pharma manufacturers might be used to paying, as it is structured similarly to paying a tax and is administered by the IRS. Drug manufacturers who receive a fee calculation should receive a preliminary notice in the mail in early March if there is a fee to be paid. The final fee is owed by the end of September of that year. It’s important to note that this fee notice is delayed by a substantial period. For example, a fee for 2023 is based off the sales from 2021 (two calendar years ago).For additional details regarding the Branded Prescription Drug Fee calculation and details, see our blog,Branded Prescription Drug Fee Payment Deadline Approaching.
The second major provision created the Coverage Gap Discount Program. This resulted in manufacturers owing rebates on Medicare Part D coverage when patients hit the “donut hole” or coverage gap. This change resulted in manufacturers taking on significant financial responsibility for subsidizing patient costs when the Medicaid Part D program stopped paying during the gap. This program still exists today but is set to be substantially redesigned in 2025 as a result of the Inflation Reduction Act. More information on the redesigned program can be read on our blog, “Inflation Reduction Act Likely to Have a Negative Impact on Drug Manufacturers.”
Other provisions in the ACA resulted in increased minimum Medicaid rates, from 11% to 13% for generic drugs and 15.1% to 23.1% for branded drugs, extended Medicaid coverage to patients receiving drugs from MCOs, and the expansion of covered entity eligibility for the 340B program.
Source:
Prescription Analytics. Branded Prescription Drug Fee – Payment Deadline Approaching
What is an Alternate Rebate Formula in pharma?
The Alternate Rebate Formula is used to calculate the total Medicaid Unit Rebate Amount (URA) for line extension drugs (based on a previously approved molecule), which have different compliance requirements. The alternate rebate is only applicable to Line Extension drugs and Innovator/Single Source Drugs in the Medicaid Drug Rebate Program (MDRP). In essence, if a manufacturer receives an approval for a certain drug strength, say a 2.0MG and later receives an approval for a 4.0MG on the same drug, the 4.0MG would be considered a line extension, while the 2.0MG would be considered the original drug. The 4.0 is then subject to the alternate rebate formula. The alternate rebate formula is designed to inflict inflation penalties to line extensions when they exist on the original drug(s). Otherwise, it’s possible that on a brand product, a manufacturer could introduce a second strength of a product, aligned with commonly prescribed dosage(s), and launch that drug at a much higher price to avoid substantial inflation penalties that would have otherwise been incurred on the original drug.
How do I calculate an Alternate Rebate Formula for a line extension drug?
To determine an Alternate URA, add the Base URA to the result of multiplying the quarterly Average Manufacturer Price (AMP) of the line extension drug by the highest additional rebate amount, calculated as a percentage of the AMP.
Source:
Medicaid.gov. Unit Rebate Amount (URA) Calculation for Line Extension Drugs with example
What is the Average Manufacturers Price or AMP in pharma?
The Average Manufacturer’s Price, or AMP as it’s more commonly referred within the pharmaceutical industry, is the average price at which manufactures sell prescription drugs to retail pharmacies, including wholesalers and other large purchasers. The AMP value is important as it’s used to derive Medicaid Unit Rebate Amounts (URAs) and PHS/340B pricing, which can significantly impact a manufacturer’s profitability within government programs. Evolving regulatory and compliance standards, such as the 2024 AMP Cap Removal provision, further magnify the critical need for manufacturers to take care in calculating and monitoring their AMP values before submitting to CMS on a monthly and quarterly basis to avoid revenue leakage through high calculated URA values.
How do I calculate AMP in pharma?
The AMP calculation must follow CMS guidelines, including smoothing methodologies for sales transactions and discount data. It involves meticulously assigning Class of Trade (COT) to each line of data to determine what should be included (or excluded) from the AMP calculation. AMP is designed to calculate the weighted average retail price of a drug using actual transactional sales and discount data along with a guide of what is included vs excluded.
Pharma manufacturers should establish a clear Standard Operating Procedure (SOP) for calculating their AMP. They should consistently apply these standards to monthly and quarterly calculations to comply with CMS guidelines and be ready for potential audits.Inaccurate, incomplete, or missed calculations can result in substantial penalties including fines and/or termination from government program participation.
For additional details related to the AMP value and common reasons why they fluctuate, read our white paper, “Top 3 Reasons Your AMP Changed
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Prescription Analytics. Key Terms in Pharmaceutical Government Pricing,
What is an ANDA drug?
An ANDA, short for Abbreviated New Drug Application, is a term in the pharma industry describing the FDA's approval process for certain drugs. ANDA drugs are generic versions of existing, commercially available drugs. In contrast, NDA drugs (New Drug Application) usually denote the brand-name versions of approved drugs.
How are ANDA drugs treated differently than NDA drugs?
Drugs approved via the ANDA process, commonly referred to as ANDA drugs, have different compliance obligations and financial prerequisites in comparison to their branded, NDA counterparts. For example, ANDA and NDA drugs have different statutory rebate amounts (the base Unit Rebate amount is 13% for an ANDA vs. 23.1% for an NDA) within the Medicaid Drug Rebate Program, as well as different reporting requirements when it comes to various Government programs. NDA drugs must report their lowest price (Best Price) to any single entity during a quarter. This can often have a significant impact on the Unit Rebate Amount depending on the discount given. NDA drugs may be required to be offered to the Veterans Affairs Federal Supply Schedule, while ANDA drugs are not. Furthermore, NDA drugs require specific contracts such as the Coverage Gap Discount Program to be eligible for coverage on Medicare.
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What is an API in pharma?
An Active Pharmaceutical Ingredient or API is the essential component of both over the counter (OTC) and prescription medications responsible for producing their intended therapeutic effects. APIs are produced by processing chemical compounds and are commonly categorized as either natural or synthetic. Natural APIs are chemicals or compounds found organically in nature and are used to make biologic drugs. For example, the API for Humira is Remicade and Rituxan, which are both natural. In contrast, the synthetic API for Aspirin is diphenhydramine.
APIs are subject to safety and quality standards that vary by country.
The largest percentage of APIs for the U.S. market come from manufacturing facilities in the United States, European Union, India, and China.
Source:
Verywell Health. What is an Active Pharmaceutical Ingredient (API)?
BYJU’s Exam Prep. Active Pharmaceutical Ingredients [API]
U.S. Food and Drug Administration.Safeguarding Pharmaceutical Supply Chains in a Global Economy
What is ASP in pharma?
As it pertains to Government Pricing, the ASP (Average Sales Price) is a calculated value mandatory for all manufacturers to report regarding drugs covered by Medicare Part B, which focuses on physician-administered and injectable pharmaceutical products.
Medicare uses ASP values to establish reimbursement rates for healthcare providers administering medications covered under Medicare Part B.
The Medicare Part B ASP calculation is required to be reported to CMS on a quarterly basis. The calculation itself is similar to AMP as it ultimately calculates the average price that a manufacturer sells to its customers net of all eligible discounts. The main difference between ASP and AMP is that different customers, or classes of trade, are eligible and ineligible for each calculation and program, along with the difference in cadence of reporting requirements.
ASP follows inclusion/exclusion criteria more closely aligned with the AMP Best Price calculation. One example of this is that sales and discounts to facilities such as Inpatient Hospitals would be included in the calculation for ASP, but not for AMP.
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Prescription Analytics. Key Terms in Pharmaceutical Government Pricing
What is an authorized generic drug?
The term “authorized generic” (AG) drug typically refers to an FDA-approved brand-name medication that is sold without the brand name displayed on its label but is still covered under the same NDA as the branded drug.
An authorized generic can be marketed by either the brand-name drug manufacturer or another company with the brand company's consent. Occasionally, despite being identical to the brand-name product, a company may opt to offer the authorized generic at a lower price compared to the brand-name drug. Manufacturers nearing the end of their patents may consider this strategy to avoid the risk of market share loss with other drug companies entering the generic market.
Authorized generics often follow the same rules for government price reporting as their branded counterparts, including, but not limited to, higher base rebates, inflation penalties that follow a Baseline AMP established in the first full quarter after launch and mandatory rebates/coverage on a Coverage Gap Discount Program to be eligible for Medicare Part D.
While AGs are marketed in the same fashion as a typical generic or ANDA drug, when it comes to Government programs, they are still subject to the typical NDA drug rules and requirements. The main program where this can have an impact is Medicaid. Although AGs are marketed and often priced similar to other generics, they are still subject to the higher Medicaid Unit Rebate Amount as an NDA – 23.1% orAMP less Best Price, whichever is greater. AG’s drugs will be required to be listed on a Coverage Gap Discount Program agreement to be eligible for Medicare Part D. These drugs may also be required to be offered to the VA and placed on the Federal Supply Schedule. When compared to ANDA drugs there could be greater rebate liability and increased government requirements.
Source:
U.S. Food and Drug Administration. List of Authorized Generic Drugs
What is AWP in pharma?
AWP (Average Wholesale Price) was intended to represent the typical cost that a pharmacy pays when purchasing a drug from a pharmaceutical wholesaler. SWP (Suggested Wholesale Price) is often used interchangeably with AWP.
AWP was historically used in the determination of pharmacy reimbursement rates. AWP is established based upon pricing compendia assigning a default value (typically 20% above WAC) or drug manufacturer’s establishing their own price. AWP has been the subject of litigation over the course of many years as the suits claimed manufacturers were inflating AWP for higher reimbursement rates. Today, many programs and PBMs have moved away from using AWP as the sole basis for reimbursement.
As manufacturers and individual pricing compendia/databanks establish this pricing, this serves as merely a 'suggested price' in today’s landscape since most wholesalers offer medications to pharmacies at rates well below the SWP or according to contract pricing agreements directly negotiated between pharmacies and manufacturers.
Source:
Prescription Analytics.Key Terms in Pharmaceutical Government Pricing
What is a Baseline AMP?
A Baseline AMP is the AMP (Average Manufacturer’s Price) by which all future AMP values will be measured against for inflation penalty eligibility. If a manufacturer raises prices for a pharmaceutical drug above its Baseline AMP, and faster than the rate of inflation, that drug may be subject to fines called inflation penalties. Effective January 1, 2024, there will be no cap on the amount of inflation penaltiesmanufacturers may be subject to, making monitoring of price changes critical for profitability.
When are Baseline AMPs established for Brand vs. Generic pharmaceutical drugs?
The baseline AMP for a branded (NDA) drug is the AMP recorded during the initial full quarter following its launch. For generic (ANDA) drugs, the Baseline AMPs are set following the fifth full-quarter AMP value after launch.
Once the baseline AMP is established, all subsequent quarterly AMP calculations are compared to the baseline AMP and the corresponding Consumer Price Index (CPI) value, with the baseline CPI representing the CPI for the month preceding the baseline quarter for branded drugs and the last month of the quarter for generic drugs. This comparison helps assess if the AMP is rising at a rate faster than the CPI.
Baseline AMP values will then live with the specific ANDA or NDA for the lifetime of that drug, regardless of manufacturer. All future launches of the same drug/strength under that FDA Application will be required to use the Baseline AMP established by the original manufacturer. If a company is looking to purchase a drug from another manufacturer and sell it under their own label, it is important to assess the impact that the baseline AMP could have on the rebates they will pay.
Source:
Prescription Analytics. 2024 AMP Cap Removal – What Pharma Manufacturers Need to Know
What is a Baseline CPI in pharma?
When the Baseline AMP is established for a drug, the Baseline CPI (Consumer Price Index) is also established. Baseline CPI then becomes an input within a formula to monitor the drug’s price changes as it relates to the Consumer Price Index and the drug’s price over time, specifically as it relates to increases faster than the rate of inflation.
Baseline CPIs are established in conjunction with the Baseline AMP and vary depending on whether the drug is an NDA or ANDA drug. For an NDA, the Baseline CPI is established as the CPI for the month prior to the NDA’s Baseline Quarter (IE: if the Baseline Quarter is 4Q23, the baseline CPI would be the September 2023 CPI). Baseline CPI’s for ANDA drugs are established as the CPI for the last month of the Baseline Quarter (IE: if the Baseline Quarter is 4Q23, the baseline CPI would be the December 2023 CPI).
The CPI values that are used for Medicaid purposes are the Consumer Price Index for All Urban Consumers, which is released by the U.S. Bureau of Labor Statistics monthly.
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