As medical costs continue to increase in the U.S., healthcare providers face an ongoing challenge when it comes to drug pricing. The rising costs of medications are pushing healthcare professionals to become more conscious of large-scale financial trends and how to make prescription decisions that benefit both them and their patients.
As a provider, it's important to understand the ASP of drugs, how it affects drug pricing, how it can be beneficial for patients, and its potential limitations.
What is ASP drug pricing?
ASP stands for average sales price. It is the average price that a manufacturer sells drugs after accounting for any credits, chargebacks, discounts, and rebates applied throughout the sales process. The ASP calculation is based on data from a manufacturer's sales reports, including details on total units sold and overall revenue earned from each drug. As part of governmental regulations, Medicare must review and validate the ASP.
What are the differences between ASP, AWP, and WAC?
The differences between ASP, average wholesale price (AWP), and wholesale acquisition cost (WAC) are fairly straightforward.
- ASP provides healthcare providers with a reliable, government-regulated tool that helps them determine how much they should pay for prescription drugs.
- AWP is the average price that wholesalers sell drugs to pharmacies, physicians, and other customers. Unlike ASP, AWP is not regulated by the government and does not consider rebates or discounts involved in selling prescription drugs. As such, wholesalers and manufacturers can manipulate the AWP, inflating it by a huge percentage.
- WAC is the price that manufacturers sell drugs to wholesalers. It is based on the drug's cost in bulk, and it does not include reductions such as discounts and rebates.
How to calculate ASP reimbursement
ASP is calculated by dividing the manufacturer’s total revenue from drugs sold to U.S. purchasers by the total number of units sold in a given calendar quarter.
Medicare reimburses providers at a rate of the ASP plus an additional 6% fee. The 6% add-on payment covers the expenses providers incur in administering the drug, such as shipping fees, patient monitoring, education about the drug, and storage costs.
How ASP drug pricing has benefited patients
ASP drug pricing serves as a cost-control mechanism that allows for more affordable healthcare to patients. This comes down to buying and selling more generic drugs.
Providers are incentivized to prescribe generic over brand-name drugs
The two-quarter lag between when a manufacturer sells drugs and when they receive payment from the sale means that the healthcare provider directly absorbs any price increases for six months. This is until Medicare updates the ASP reimbursement rate.
During this period, providers purchase drugs at the risk of inadequate drug reimbursement. The best way to minimize this risk is to prescribe generic drugs that have a lower cost and are less likely to have a significant price increase. While generic drugs may still increase in price during the two-quarter lag, it won't be nearly as much as most brand-name drugs. Inadequate reimbursement will be far lower.
When providers purchase generic drugs it benefits patients, too — they will also get a price break. Generic drugs tend to be 80% to 85% lower in price than their brand-name counterparts. Patients can access life-saving medications without breaking the bank.
Inflation and the challenges of relying on ASP alone for drug pricing
Under the Medicare Part D Program, Medicare's reimbursement to providers is based solely on the 106% of the ASP formula. This provision means that the federal government can't limit drug price increases under Parts B and D. As a result, consumers are not protected from dramatic drug price increases, which can often exceed inflation.
For instance, between 2019 and 2020, half of all the drugs covered by Medicare had price increases exceeding the inflation rate, which was at 1%. A third of the Medicare-covered drugs saw a price increase of more than 7.5%. An analysis by the HHS Office of Inspector General showed that ASP increases exceeded inflation for 50 of the 64 drugs included in the study.
This data shows that reliance on ASP alone makes it challenging to control drug prices and protect consumers from price surges. Since the federal government can’t directly intervene in drug pricing, manufacturers can set prices as they deem fit. The lack of price control leaves patients at the mercy of drug manufacturers, who can charge whatever price they want for their products.
What’s changed in drug pricing with the Inflation Adjustment Act of 2022?
The Inflation Reduction Act, passed in August 2022, has been a game-changer for drug pricing. Most notably, it requires manufacturers to provide rebates to Medicare if price increases of their prescription drugs are higher than the inflation rate.
Under the new provision, changes in prices for Part B drugs will be measured based on the ASP, while the average manufacturer price will apply to Part D drugs. If the price increases exceed inflation, manufacturers will pay the difference to Medicare in the form of rebates. The rebate amount goes towards the Medicare Supplementary Medical Insurance trust fund and helps cover administrative costs and drug coverage for beneficiaries.
The provision will control runaway drug prices, providing relief to Medicare beneficiaries and providers who previously had to risk going into bad debt due to inadequate reimbursement.
Understanding the implications of ASP drug pricing
ASP healthcare drug pricing has incentivized providers to purchase generic drugs, which ultimately benefits patients. However, relying on ASP alone makes it difficult to control drug prices. Fortunately, the Inflation Reduction Act of 2022 has provided an important safety net for patients and providers. Understanding the implications of this change can help you know how to adjust your prescription drug pricing accordingly. Doing so will help you cut costs and make healthcare more affordable for all.