What does the pricing and distribution model of a Ford F-150 and a specialty infusion drug have in common?

For starters, both are high-value+high-cost products, but consumers rarely purchase these products directly from the manufacturer.  Across both industries, it’s common for another organization (i.e. a middleman) to negotiate purchasing agreements and subsequently distribute these products to a retail provider (i.e. your local dealership or hospital outpatient/physician office). And yet, car buying remains more straightforward than understanding the complicated series of events that determine the pricing and reimbursement of a drug across the distribution chain.

And if it’s that difficult to understand drug pricing and reimbursement, how can we say we’re being transparent about drug pricing?

Buy and Bill

Let’s first establish how drug distribution & reimbursement works in the buy-and-bill setting.  So, after a provider (hospital outpatient or physician group) acquires a drug, what happens next?

Note: there may be many variations of this distribution flow and this is intended to be illustrative

Under this model, drugs pass through several players before reaching the patient through the following flow:

  • A middleman (wholesaler) buys the drug from the drug manufacturer at a wholesale price through a contract with the manufacturer
  • The hospital or physician's office purchases the drug from the wholesaler at a discount per the terms of their contract (typically some amount less than the cost of buying from the manufacturer directly).
  • After providers administer the drugs to their patients, the corresponding claims are sent to the patient’s insurance for reimbursement according to each specific payer/provider contract. Drug manufacturers may additionally issue rebates to payers to help cover the costs of the drugs they produce.
  • Patients pay their provider any applicable copayment or coinsurance based on their claim and the terms of their plan, in addition to monthly premiums paid to their insurance.
  • See? Simple.

Let’s bring this same scenario back to Truck World. Imagine Ford is trying to understand the pricing impact of their newest truck. They know the dealership's cost to purchase the truck from them, but they also want to know the margin a dealership is making per truck. In Truck World, this information is easier to access.  But in the drug world, gleaning this information is a complicated, winding road that is clouded with poor visibility.

That is until recently, when CMS passed the Transparency in Coverage (TiC) Final Rule for payers and the Hospital Price Transparency Rule for hospitals. These mandate the publishing of commercial and Medicare Advantage negotiated rates for all hospital-administered drugs (typically medical benefit drugs with a HCPCS JCode).  

While legislation on Part D drugs is currently delayed, those requirements may come as soon as 2024.

We can now glean visibility to a provider’s cost and reimbursement using net cost recovery.

Price transparency laws pave the way to understanding the cost and reimbursement of a drug once it’s purchased, administered, and billed in the provider setting. Now that we understand the flow of buying-billing, we can use Net Cost Recovery (NCR) to understand the reimbursement a provider recovers at the aggregate level (state and payer class) or drill down to the individual cross-section (zip/CBSA, setting of care, and plan product) level. Aka begins to establish the “prices” at play.

We can use price transparency data to map the journey of a drug from acquisition through reimbursement. Using this data, we can piece together the amount each provider paid to purchase the drug, how much the provider billed the payer for delivery of the drug, and how much the provider ultimately “made” on the drug. Meaning, the “price” from every perspective present in the drug’s journey.

NCR in action

Let’s look at an illustrative example of cost, reimbursement, and charge from the perspective of a hospital. As you can see below, understanding the price of a drug means identifying the drug charge, drug reimbursement, and the drug cost.

Drug cost is the acquisition price a healthcare provider pays for a drug, often based on the Average Sale Price (ASP) which is net of discounts and concessions.  Additional discounts received through the GPO / government 340B programs also play a factor into the acquisition price.

Drug reimbursement is the amount a healthcare provider receives based on the contractually agreed upon rate with a payer that enables cost-to-charge and NCR calculations to understand the margin a provider is allocated.  Different mechanisms such as % of charge vs fixed fee schedule differ in the contractual mechanism in which a drug is paid to the provider.

Drug list or charge price is the rate a healthcare provider sets in their charge description master (CDM) which can be per unit or set to the packaged dose.  This highly referential data set interfaces with pharmacy information systems to set the list or charge price for each drug, package, and dose combination by HCPCS code.

Many complexities can drive drug reimbursement discrepancies for the same drug.

Factors such as:

  • Pricing discounts (Statutory, GPO and 340B program)
  • Cost to the provider (ASP)
  • Package size and quantity (NDC codes)
  • Payer class (Commercial, Medicare, Medicaid, etc.)
  • Insurance plan type (HMO, PPO, Exchange, etc.)
  • Site of care (Hospital Outpatient vs Clinic)
  • Structure of the negotiated contract reimbursement provisions (percent of charge, fee schedule, etc.)

With reimbursement data, we can get visibility into drug cost-to-charge ratios and NCR for each provider or physician group and payer-plan combination.  

This allows us to understand the impacts of pricing across the product life cycle. It also allows folks like you and me to lift the veil off healthcare prices. As we have journeyed through the transparency universe, we’ve encountered many ways of interpreting price. Depending on who you are in the healthcare sphere, the price can be completely different.

The passing of TiC and Hospital Price Transparency sheds new light on drug pricing dynamics. It’s now in our collective ability to look at all of the costs/reimbursements/charges, giving us the power to hop in our trucks and say we know the three rates that make up a drug's “reimbursement”... and the benefits of a sweet off-road package for your F-150.

Want to learn more about pharma reimbursement data? Give us a shout.