Trucks, drugs, and price transparency

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

For starters, both companies create high-cost products, but consumers rarely purchase these products directly from the manufacturer.  Across both industries, it’s common for a middleman (Distributor or Group Purchasing Organization) to negotiate purchasing agreements and subsequently distribute these products to another organization (your local dealership or hospital), making the final determination of pricing. And yet, car buying remains more straightforward than understanding the complicated series of events that determine a drug’s price. 

And if you can’t truly determine a drug’s price, how can we be transparent about drug pricing? 

Buy and Bill

Within the value chain of pharma, provider-administered drugs are often called “buy-and-bill” drugs. So, after a provider (hospital or physician group) acquires a drug, what happens next? 

Once it’s bought and billed, it can be challenging for the pharmaceutical market access and field reimbursement teams to gain visibility into how their provider customer accounts are performing. They have no idea what the provider is billing payers for the drug they just sold them. While they know how much they sold the drug for, they don’t know the true “price” of the drug. 

To put this into context; imagine Ford is trying to understand the price of their newest truck. They know the dealership's cost to buy the truck from them, but they also need to know how much the end consumer ultimately paid to purchase the truck and joyride it home. In the car world, this information is more readily available. But in the pharma 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 Hospital Price Transparency Rule for providers. These mandate the publishing of commercial and Medicare Advantage negotiated rates for all hospital-administered drugs (Medical benefit drugs with a JCode).  

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

Pharma can now gain visibility to the provider’s true cost and reimbursement using net cost recovery

Price transparency paves the way for understanding the cost and reimbursement of a drug once it’s purchased, administered, and billed in the provider setting. Through net cost recovery (NCR), we can understand the reimbursement a provider recovers at the aggregate level (state, provider setting of care, and payer class) or drill down to the individual cross-section (zip/CBSA, setting of care, and payer plan product) level. 

Pharma companies can use price transparency data to see the full journey of their product from acquisition through reimbursement. Using this data, they 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.

NCR in action

Let’s look at the average cost, reimbursement, and charge for 100mg/4ml of Keytruda (J9271) for a set group of mystery payers+providers across several US markets. 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 Wholesale Acquisition Cost (WAC) or Average Sale Price (ASP) which is net of discounts and concessions.  Both mechanisms can be used to calculate the purchasing price.

‍Drug reimbursement is the amount a healthcare provider receives based on the contractually agreed upon rate between a provider and payer that enables cost-to-charge and NCR calculations to understand the margin a hospital/provider group is making.

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:

• cost to the provider (WAC and ASP)
• package size and quantity (NDC codes)
• payer class (Commercial, Medicare, Medicaid, etc.)
• insurance plan (HMO, PPO, Exchange, etc.)
• site of care (Inpatient vs. outpatient vs clinic)
• structure of the negotiated contract reimbursement provisions (percent of charge, fee schedule, etc.)

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

This allows pharmaceutical market access and commercial teams to strategically understand the impacts of their pricing across the product life cycle. It also allows folks like you and me to lift the veil off healthcare prices. As Turquoise has 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 into drug pricing dynamics. It’s now in our collective ability to look at all of the costs/reimbursements/charges simultaneously,  giving us the power to hop in our trucks and say we know more about a drug's “price”... and the benefits of a sweet off-road package for your F-150.