Drug Pricing Part 2: Generic Drug Pricing

When it comes to drug pricing, generic products have a different set of terms and processes than branded drugs. This article will define key terms in generic drug pricing, while also detailing the process in which payers, PBMs, and pharmacies end up setting rates on generic drugs.

This is the second article in a series on drug pricing and reimbursement. The first article in this series covered common drug pricing terms, key stakeholders involved in the pharmacy supply chain, and pricing for branded drug products. This article aims to answer the question, “how does generic drug pricing work?” defining key terms such as multi-source drugs, maximum allowable costs (i.e. MAC rates), dispensing fees, and more. In addition, you'll find information on how MAC rates are set, biosimilar pricing, specialty pharmacy pricing, and pharmacy generic drug programs.

Key Terms for Generic Drug Pricing

Generic Drug

A copy of an approved brand name drug which contains the same active ingredient, and is the same in terms of strength, route of administration, dosage form, safety, and quality. It may be manufactured and marketed after the brand name drug loses patent protection and competition can come onto market (commonly referred to as loss of exclusivity). In general, a generic medication will work in the same way as the brand drug and provide the same clinical benefit.

Multiple Source (Multi-Source) Drugs

A drug manufactured by more than one company or source. A multi-source drug is available as both a brand product and as a generic equivalent of the brand.

Maximum Allowable Cost (MAC)

The unit price at which a pharmacy benefit manager (PBM) or payer will pay a pharmacy for a generic drug and branded drugs that have generic versions available (multi-source drugs).

MAC List

A list made by a payer or PBM that includes the MAC the plan will pay for specific products. Payers and PBMs are free to pick and choose which products get included on their MAC lists, which leads to MAC list variation across plans and PBMs.

Dispensing Fee

The amount charged by a pharmacy for the dispensing or fulfillment of a prescription order or refill. This does not include any payment for the drugs being dispensed.

MAC Rates Explained Further

A branded drug will carry a certain average wholesale price (AWP). If this branded drug has generic versions available, the AWP for the generic drugs will be lower than the brand AWP. And the wholesale acquisition cost (WAC) for generics will be even lower than the generic AWP.

With a wide range of pricing between brand and generic versions of a drug, payers and PBMs will have a set rate that they will pay for any version of the drug (i.e. the MAC). MAC rates are usually set by strength. The MAC rate is meant to prevent a situation where a pharmacy dispenses the highest cost generic version of a drug while only paying pennies to acquire it. As a result, pharmacies can collect a profit from payments made by payers and PBMs, and payers pay a reasonable amount to pharmacies while avoiding the situation of having to pay for the generic version of the drug with the highest cost.

Generic products may not always receive a MAC rate right away. Usually, a payer/PBM will assign a MAC price for a product once it becomes generically available and there are 2 to 3 generics launched. This gives the party assigning the MAC price the ability to look at the pricing for the earlier generic products hitting the market and use that price before assigning a MAC price once more generic products enter the market.

For these generic drugs that do not receive a MAC price, the reimbursement follows a similar process to brand drug pricing as was explained in IPD’s brand drug pricing article, though discounts for these products will be steeper than those for a branded product.

Making the MAC List

As mentioned above, a MAC list itself is a list of drugs with the highest price that a payer or PBM will pay for them. MAC lists are proprietary, so the prices on them are not generally available to the public, though there are some publicly available MAC lists through state Medicaid programs.

The party that negotiates the pharmacy network is usually responsible for assembling a MAC list, so this will determine whether a payer, PBM, or another stakeholder sets the MAC List for any given plan. Also, payers and PBMs may have multiple MAC Lists with different price rates. The difference in pricing across MAC lists is often based on the formulary that a MAC list is assigned to. So, an open formulary with relatively low restrictions may have less aggressive MAC pricing while a three-tier formulary may have middle-range MAC pricing and a closed formulary may have the most aggressive MAC pricing.

Additionally, contracts between the payer, pharmacy, and PBM may have several MAC rates depending on the amount of drug in the prescription. So, a 30-day prescription, 90-day prescription, and 90-day mail-order prescription for a drug could all have different MAC rates.

When it comes to calculating the prescription cost of a generic drug, the reimbursement formula is the MAC price of the drug plus the dispensing fee. Like MAC rates, dispensing fees also vary depending on the payer or PBM.

Generic Drug Pricing in Practice

We have covered key terms and the basic process for generic drug pricing; now we will take a look at the rates and prices for an actual drug. A good example is Lipitor 20 mg, a multi-source product.

Lipitor (atorvastatin)

The AWP for brand Lipitor 20 mg is around $19.

The AWP for atorvastatin (generic Lipitor) ranges from $5 to $10.

The WAC for atorvastatin falls in the $0.10 to $0.40 range.

While generic manufacturers typically do not shift the AWP for their products, they will often lower WAC rates over time due to increased competition. Payers and PBMs with Lipitor in their MAC list will set a consistent price through a MAC rate so that they will pay the same amount to pharmacies regardless of which version of Lipitor 20 mg is being used (brand or generic).

Since MAC rates are set by product strength, the four different strengths of Lipitor will have a different MAC rate assigned to it. If the MAC price for Lipitor 20 mg is $0.20 per tablet, then the cost for 30 tablets (one month’s supply) will be $6. We will cover the specifics behind the reimbursement of generic drug products in a later article on coding and reimbursement.

Other Topics in Generic Drug Pricing

Biosimilar Pricing

Biosimilars are analogous to generics, but in today's world, biosimilars are treated similar to brand drugs. Oftentimes, biosimilars are adjudicated and reimbursed as if they were brand drugs, but, in the future, we could see some biosimilars with MAC prices. Take Humira for example: If 9 Humira biosimilars are approved, we could see payers or PBMs set a MAC rate across all Humira biosimilars.

Specialty Pharmacy Pricing

In some cases, specialty pharmacies have their own pricing for generic drugs. In the past, PBMs sometimes did not implement MAC pricing on generics and specialty pharmacy products as a way to make some additional money. That's less likely now that payers have become aware of this issue, but it's always good for payers contracted with a PBM to make sure they’re getting MAC pricing within their specialty pharmacy network.

Pharmacy Generic Programs

Across the country, pharmacies have started to use their own special rates on generic drugs; for example, Walmart has its $4 generic list. Payers always like to look at the prescription profile for their members and their customers. As these generic programs pop up, some of the pharmacies have stopped adjudicating these $4 prescriptions through PBMs and just dispense them directly to the customer. This hurts payers because they lose information on whether their patients and members were compliant on therapy.

Understanding the Basics of Generic Drug Pricing

In the complex world of generic drug pricing, understanding the various terms, stakeholders, and pricing processes is essential to formulating a winning strategy.

To learn more about how IPD Analytics helps payers, providers, and suppliers navigate the pharmacy value chain, take a look at our Payer and Provider Insights and CODESOURxCE solution.