Generic Prescription Drug Program Case Study

Generic Prescription Drug Program

As a pharmaceutical benefit manager, I have a variety of pricing strategies at my disposal, to determine the amount charged to employers for prescription drugs. This paper will briefly assess each of these strategies. Despite these tools, as Jones (2003) notes,

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The primary goal of any pharmacy benefit plan-including the generic drug program should not be simply to lower the cost of prescription drugs. Placing too much emphasis on controlling costs alone will likely lead to higher medical costs, poor patient outcomes and a pharmacy benefit that provides little true value. Only by focusing on the complete array of components that comprise an effective generic drug program can employers and plan sponsors ensure that they secure both the affordable cost and quality programs that both they and their employees need and deserve (p. 18).

As such, a combination of these strategies is recommended to provide the most value to the employer, the patient, the pharmacy, and the pharmaceutical industry.

Pricing Strategies:

Pharmaceutical benefit managers utilize several strategies to determine the price that an employer is charged for prescription drugs. These pricing strategies fall into six primary categories: wholesale acquisition cost (WAC), maximum allowable cost (MAC), average wholesale price (AWP), administrative fees, dispensing fees, and rebates. Each of these categories affects the employer’s cost in a different way and can vary greatly.

The WAC strategy is calculated by a national data company, according to Jones (2003). This company averages several wholesaler purchase prices to determine the WAC for each prescription drug. Similarly, the AWP is determined using wholesaler figures, this time the average price that is being charged for a drug. The AWP price can change weekly or daily and is dependent on a variety of factors, including: the exclusivity of the drug, costs for research and development, competitive climate, market demand, and the manufacturer’s desire to capture market share (McClurg, 2009). These two pricing strategies are in contrast to MAC pricing which is set by the prescription benefits manager and can be used to hide costs to the employer. MAC pricing is not necessarily based on wholesaler costs or pricing. In addition to this pricing structure, additional fees may also be charged that affects the pricing of prescription benefit plans.

Administrative fees are often charged on a per claim basis, as a means of recapturing costs associated with basic reporting, utilization reviews and account management. According to Jones (2003), this fee can be as much as $0.70 per claim. A dispensing fee may also be charged and paid to the pharmacy filling the prescription. Rebates often too can be figured into a pricing structure. if, as a pharmaceutical benefit manager I have acquired a significant rebate for a particular drug that will be used frequently with a new employer, then it may be advantageous to pass this along as a savings to secure the benefit plan. As a pharmaceutical benefit manager, I would recommend using a combination of these pricing strategies to determine what to charge employers for prescription drugs.

Recommended Pricing Strategies:

As a pharmaceutical benefit manager, I have several primary stakeholders to whom I am responsible. These include: my organization, the employer as my client, the employees of the client as plan participants, the pharmacists dispensing the medications, and the pharmaceutical manufacturers and/or distributors. My job is to develop a plan that is profitable for my organization. I must also develop a plan that is cost-effective for the employer. The employees of the client must find the plan valuable and beneficial in the maintenance of their healthcare. The pharmacists must be compensated fairly for their time, and the pharmaceutical manufacturers and/or distributors must be able to make a profit in an increasingly competitive, rapidly changing industry. Developing a pricing strategy to meet these competing stakeholder needs is challenging and will require looking at each employer’s unique pharmaceutical needs to determine the best pricing plan possible.

The MAC pricing strategy meets the needs of my organization, in that it limits our costs and therefore enhances profitability; however, for this type of strategy to meet the needs of both the employer and their employees, AWP needs to be utilized to determine the MAC values. This can be used for both generic and branded pharmaceuticals. In fact, most states, as of 2009, use AWP to determine their MAC values.

For brand drugs with no generic equivalent, reimbursement varies from state to state, but it is usually based on AWP minus 5% to 15%. This formula recognizes that the AWP,

published in the Red Book, is usually higher than the actual cost a pharmacy pays to acquire a pharmaceutical. When a generic pharmaceutical is available, pharmacists often reimbursed AWP minus 10% to 25% for the generic (“Maximum allowable cost,” 2009).

Given this accepted governmental standard of determining MAC, this strategy is likely to provide a competitive and valuable plan for my client. This can then be enhanced by looking at each individual employer to determine if rebate contracts for certain pharmaceuticals can help further offset costs to the employer and provide even more benefits to the employees, while also helping the pharmaceutical companies garner more market share.

Although it may be tempting to hide administrative and dispensing fees within other portions of the pricing strategy, to make the client think they are getting a better deal than they really are, in the long-run, this will become evident and the client will likely feel like they’ve been taken advantage of. An unhappy client often equates to a lost client and lost referral business. For this reason, the pricing strategy I recommend would include denotation of reasonable administrative and dispensing fees, along with an explanation to the client about how other pharmaceutical benefit managers may try to hide these fees, so they can compare apples to apples.


Jones, J.D. (2003). “Developing an effective generic prescription drug program.” Benefits Quarterly, 19(1), p. 14-18.

Maximum allowable cost. (17 Feb 2009). Retrieved February 24, 2011, from

McClurg, J. (Jan 2009). “Understanding the Rx financial trail: Who pays what, when, where, and why.” Employee Benefit News, 23(1). p. 41-42.

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