Common Pharmacy Reimbursement Terms: What They Mean

Common Pharmacy Reimbursement Terms to Calculate Insurance Payments

female pharmacist using computer
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Researching a recent article called Medicare Beneficiary and Drug Compounding: What's Covered? reminded me of how complicated calculating pharmacy reimbursements for prescriptions drugs is. I also remembered that any time I write about pharmacy benefits managers, Medicare or Medicaid, I need to refresh my understanding of key terms and values used to set insurance payments to pharmacies.

This prompted me to pull together this list of brief definitions that highlight how each value gets determined and which programs and insurers rely on them when deciding what to pay for beneficiaries' medications.

Pharmacy Reimbursement Terms: Average Manufacturer Price to Federal Upper Limit

The following Pharmacy Benefit Management, Medicare and Medicaid Reimbursement terms are listed in alphabetical order, covering just a few terms. Please note that the list is also about as far from a comprehensive glossary of insurance terms as it is possible to be.

Average Manufacturer Price (AMP)

AMP is the basis for prescription drug payments to pharmacies under Medicaid. The Centers for Medicare & Medicaid Services defines this as what wholesalers pay drugmakers, and it is not exactly a true average of payments for drug products. The agency applies weighting factors to the raw dollar values reported each federal fiscal quarter based on the category and route of administration, then plugs the weighted values into a formula to calculate the federal upper limit (see below). FUL is the actual number for Medicaid payments.

Average Sale Price (ASP)

The CMS uses​ ASP as the main number to calculate reimbursements for drugs billed under Medicare Part B. Each quarter, every drugmaker licensed by the U.S. Food and Drug Administration must report to CMS the average price it charges for each product it sells to wholesalers, hospitals , and pharmacies.

The ASP differs from the AMP primarily by being slightly higher. That difference stems from the facts that ASPs are not adjusted for product type or purchaser.

Average Wholesale Price (AWP)

PBMs and health insurance companies overwhelmingly rely on AWP to calculate drug product reimbursement rates. It is practically identical to AMP because pharmaceutical manufacturers use the same criteria for reporting the values. The average of what wholesalers pay for products often differs from the AMP, though, as discussed below. Thompson Reuters compiles and publishes AWPs annually in the Red Book.

Dispensing Fees

Dispensing fees get added to product reimbursement rates to cover a pharmacy's costs of doing business and providing patient care and counseling. The National Association of Chain Drugstores lists those costs as including staff salaries, mortgage or rent payments, packaging drug products, providing printed information to patients and meeting one-one with patients. Dispensing fees, which vary by type of product and are either negotiated with private insurers or set by government health programs, should also permit a small profit for the pharmacy. That is not always the case and is becoming increasingly untrue under Medicaid as states look for savings in the program that often constitutes the single largest budget item.

Federal Upper Limit (FUL)

CMS calculates the FUL for most medications dispensed to a Medicaid beneficiary by multiplying the product's AMP by 175%. A provision of the Patient Protection and Affordable Care Act, or Obamacare, limited FUL reimbursement rates to brand name prescription drugs and generic prescription drugs available from more than one manufacturer. Significantly, states do not have to pay FUL reimbursements in all instances. A formula called maximum allowable cost, or MAC, can be applied for generic prescription drug products.

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