New drops in prescription drug costs means NADAC is cool (again)

The CLIFF NOTES

As a non-profit, we at 46brooklyn have made it our goal to provide insights into U.S. drug pricing data available in the public domain based on the figures we’re able to gather and evaluate over the course of the year. Today’s report covers the drug pricing activity over the month of April 2024, with insights coming from our updated Brand Drug List Price Change Box Score, NADAC Drug Pricing Dashboard, and NADAC Change Packed Bubble Chart.

Last month’s report, which covered March, was light on the number of brand drug price changes, but delivered some unappreciated (and maybe unwelcomed) generic cost increases. If you forgot what last month’s report said, don’t worry, you didn’t miss much. Despite all the congressional attention on drug prices, one would assume that the ongoing details would garner good interest, but alas, last month’s drug price changes didn’t exactly go Scottie Scheffler-level viral.

This month; however, drug pricing details appear to be as hot as the Dallas Mavericks. Your resident drug pricing nerds are ecstatic at the development that national average drug acquisition cost (NADAC) is apparently cool again, as we have received a flood of interest on the latest happenings with drug acquisition costs and our beloved CMS pricing benchmark in advance of us putting this report together. For those unfamiliar, there were some MAJOR drug pricing changes reflected in the public NADAC files that has put much of the pharmacy marketplace in a tizzy.

While we’re generally used to the ebbs and flows of interest in our monthly reports across the year, they generally follow a predictable interest pattern (January, July, and December being some of the big price change months at 46brooklyn). So we were a little surprised to get pinged by a number of organizations over what happened with NADAC in April, but in seeing the numbers with our own eyes, we totally understand why. In recognition of the increased attention, this report will be a little bit longer on the NADAC side than most of our monthly reports, so we hope you enjoy our diving under the hood of our nation’s drug pricing plumbing over the month of April. (Yeah, we’re not doing front-loaded spoilers this month; you’ll have to read the whole thing to get all the context we think is necessary for this month – sorry, not sorry).

So if you’re really interested in the drug pricing trends over the month of April, grab your sunglasses and bask in the light of drug pricing transparency (to the extent we can provide it).

What we saw from brand-name medications last month

1. A small number of brand drug list price changes

There were a total of 72 brand-name medications that saw wholesale acquisition cost (WAC) price increases in April and two list price decreases, which is all featured and contextualized in our Brand Drug List Price Change Box Score.

List price changes ranged from -63.8% to +28% and impacted $490 million in prior year gross Medicaid expenditures (PYME). As a reminder, March saw brand changes impacting over $527 million in PYME, so this roughly equal to last month. Keep in mind when reviewing brand price increases in Medicaid that they are largely held in check thanks to the Medicaid Drug Rebate Program (MDRP), which includes rebate penalties for drug price increases that occur faster than the rate of inflation (more on that later).

Over half of the PYME value for this month comes for the list pricing changes on Focalin XR, which took a 63.8% decrease. Focalin XR had over $180 million PYME (roughly 40% of the entire month’s activity). Focalin XR is a particularly interesting drug in Medicaid, because it is a medication that has a generic alternative (and has had generics in the market for over 10 years). However, because of the distortions and peculiarities of the MDRP, it is possible for brand drugs to be relatively cheap for Medicaid programs, even relative to the generic alternative. The generic Focalin XR has a typical WAC price that is roughly half of the brand Focalin XR price (even after this price change), and a NADAC that is roughly 90% less (more on Focalin XR later in this report). What this means is that the rebates and discounts that were shaved off the list price of the brand version of Focalin XR (at least before this list price cut) are so significant that they make the net price even lower than the cost of the generic – at least for Medicaid programs, which receive the “best price” for medicines.

2. Brand price trends over time

In comparison to the month of April in prior years, this month is about average, although April doesn’t really seem to have a trend for brand name drugs. April 2023 saw 47 net brand price increases (‘net’ meaning combined increases and decreases), or roughly half the amount observed this year. In comparison, April 2022 saw 71 net brand price increases (or roughly the same as this year’s April figure). However, that’s just the number of price changes, and doesn’t tell us much about how significant (or insignificant) they were.

Figure 1
Source: Elsevier Gold Standard Drug Database, CMS State Drug Utilization Data, 46brooklyn Research

When further examining our brand drug box score visualization, there was no real movement on the median price change measure, which stayed at 4.9% (Figure 1). As a reminder, this is calculated based upon just brand drugs taking a price change (i.e., zeros are not included in our median measure). As can be seen in Stat Box #4 in our Brand Drug List Price Change Box Score, the weighted average list price increase of all brand drugs stayed at a historically low 0.8% for the year (Figure 1). By both annual measures, these are still among the lowest data points we’ve tracked in over a decade of brand drug list price changes.

As we said in our March report, this is a signal that the individual drugs that saw price changes in April are not that impactful (not affecting the yearly average impact of price changes) relative to the drug prices that have already occurred throughout the year (which were basically all driven by the January price changes).

3. Brand drug list price changes worth taking note of in April

We identify specific brand drugs worth taking note of in a couple different ways. Primarily, we look for medications with a lot of prior year gross Medicaid expenditures (PYME). We next look for drugs with large pricing changes (+/- 10%). And finally, we look for drugs that are interesting for us either because we’ve previously written on them, they’ve recently been in the news, or because we find them of unique clinical value. This month, when looking for these drugs in the brand arena, we found many worth mentioning (these are gross expenditures; actual net costs are likely much lower, and by many counts, actually falling):

• Focalin XR (dexmethylphenidate) is a medication used to treat Attention Deficit Hyperactivity Disorder (ADHD). You may have seen this drug in the news recently due to shortage challenges among generic versions. This brand medication took a 63.8% decrease in its list price in April (the largest decrease of the month). Undoubtedly, this medication is likely feeling the effects of the AMP-cap removal related to Medicaid rebates. For the unfamiliar, by virtue of Medicaid getting the ‘best prices’ for medicines, sometimes the math that makes up the mandatory rebate calculations can be so severe, that a drug company could owe Medicaid programs more than the actual full list price of the drug; public policy used to prevent drug companies from having to pay Medicaid programs extra money on top of offering the drug for free, but the Biden administration recently changed this. As a brand with a generic alternative, its market share in the broader U.S. market is almost certainly insignificant and so the use of the brand in Medicaid likely represents most of the overall sales and utilization of the product. Well, since launching in 2005, the medication more than quintupled (i.e., 5x) in list price before taking this price decrease. As can be seen in Figure 2 (below), when we graph the WAC changes of the drug over time relative to the CPI-U trend, the decrease in April 2024 is enough to effectively bring the WAC price increases that occurred historically almost directly back in line with the CPI-U trend over the years from 2005 to present.

Figure 2
Source: Elsevier Gold Standard Drug Database, US Inflation Calculator, 46brooklyn Research

*2024 CPI-U is an estimate

We find examples like these fascinating. On the one hand, one can hardly blame Medicaid programs for seeking out and using medications that are effectively free to the program (or drugs that may even be profitable for them [i.e., pay Medicaid for the privilege of dispensing them given removal of the AMP-cap that had previously at least held rebate obligations to a net zero for the drug company]). For Medicaid programs, it’s essentially a free drug, and with the removal of the AMP-cap, it’s better than that – it’s a money tree.

At the same time, does it really make sense to demand a product be produced and dispensed at a loss? We certainly don’t think it is reasonable to expect pharmacies to be reimbursed below the costs of the drug they dispense (to say nothing of their overhead costs) and so why do we ask the same of drug manufacturers to give away drugs and added dollars beyond that to the Medicaid program? While that is something beyond the scope of today’s report, we should appreciate that perhaps the policy change related to AMP-cap removal is having the desired effect. Despite there being a CPI-penalty for Medicaid rebates for decades, drug manufacturers continued to increase their prices faster than the rate of inflation, presumably shifting costs onto Medicare and commercial markets while giving cheaper drugs to Medicaid. Think of it as purposely exceeding the speed limit knowing that even if you have to pay a fine from a ticket, it was still worth it in the end due to the value obtained from getting where you wanted to be when you wanted to get there (Ed Silverman at STAT News alluded to this in April with the 486% list price increase of Triesence).

While we and others have written about the knock-on effects of MDRP to other markets, it seems pretty clear to us that the CPI penalty in MDRP was established to disincentivize drug manufacturers from increasing drug costs too fast. However, as our brand box score shows, brand price increases over the years have consistently averaged more than the 2% (i.e., the CPI-U goal). If the CPI-U penalty wasn’t working to convince manufacturers to slow drug price increases, then perhaps the AMP-cap removal is succeeding in a subset of highly rebated drugs where other efforts failed; at least as demonstrated by Focalin XR’s trend.

• Diclegis (doxylamine with pyridoxine) is a medication used to treat nausea and vomiting from pregnancy. It saw a 40.1% decrease in list price last month. The active ingredients of Diclegis are available over-the-counter (OTC) as a low-dose sleeping aid and vitamin B6 supplement, which has led to some historic criticisms of its price as it asks for hundreds of dollars per month supply (on a WAC basis) for what would seemingly otherwise be cheap drugs (i.e., OTCs). Much like Focalin XR, we suspect that the price decrease is likely a function of the AMP-cap removal in Medicaid. Medicaid covers roughly 40% of all pregnant women in this country, making Medicaid a key potential market for Diclegis. Like Focalin XR, Diclegis has a generic available, and yet, roughly $10 million annually are spent by Medicaid programs on the brand. There isn’t much analysis to add to what we already conducted for Focalin XR except to highlight that it is surprising that these medications waited for effectively one full quarter to elapse in 2024 before taking their price decreases (as opposed to all the drugs that took price decreases in January). Perhaps the manufacturers wanted to see if Medicaid would actively pursue the use of their drugs at massive discounts. Or maybe these manufacturers should be making more investments in understanding the implications of public policy to their portfolios. ¯_(ツ)_/¯

• Mavenclad (cladribine) is a medication used to treat relapsing forms of multiple sclerosis. It took a 5.9% increase, impacting approximately $37 million in PYME. At the end of last year, the Phase 4 CLARIFY-MS study found that Mavenclad improved physical and mental health aspects of quality of life in people with highly active relapsing multiple sclerosis (a relatively difficult to treat population of MS patients).

• Xylocaine-MPF Solution (lidocaine) is a medication used to for local or regional anesthesia. It took a 28% increase, impacting a small $363K in PYME. Note that although this medication was associated with the highest percent increase of the month, the relatively small underlying cost (i.e., $15) means that on a dollar perspective, this increase is not relatively worth all that much money.

Bear in mind that as you read these brand drug numbers, they are the prices before drugmaker rebates are accounted for, which as we know are growing significantly over time and are at their largest amounts in the Medicaid and 340B programs. While these list prices are bloated and intended to be negotiated, for those who are underinsured, uninsured, or in high-deductible health plans, these “fake” list prices become very real.

And while the brand price story was interesting this month, arguably the main event for this month is what is going on with generic NADAC prices.

What we saw from generic medications last month

4. An favorable, unweighted price change picture

Each month, we start our evaluation of generic drug price changes by looking at how many generic drugs went up and down in the latest month’s survey of retail pharmacy acquisition costs (based on National Average Drug Acquisition Cost, NADAC), and compare that to the prior month. And despite the renewed attention to NADAC, we see no reason to change our starting point for this month’s NADAC evaluation.

Basically, the quick way to read Figure 3 below is to look for orange bars that are taller than blue bars to the left of the line, and exactly the opposite to the right of the dotted line. That would indicate a good month – more generic drugs going down in price compared to the prior month, and less drug prices going up.

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Figure 3
Source: Data.Medicaid.gov, 46brooklyn Research

As can be seen in Figure 3, a lot more drugs decreased this month compared to last month. For every generic drug that had a increased in cost in April, approximately two decreased in cost (much bigger orange bars). This is an early signal that chances are this month’s NADAC will be large deflation (because a lot of drugs deflating mean they’re more likely to be meaningful drugs that deflated).

But as usual, we take this unweighted price change analysis with a grain of salt. To really make heads or tails of all of these pricing changes, we need to add a weight to these changes. If a $10 drug becomes a $1 drug but no one takes it, it may not matter as much as a $10 commonly-prescribed drug going up to a $11 drug, which is what our next section seeks to investigate.

 5. Weighted Medicaid generic drug costs come in at $489 million deflation

While you can track each drug’s NADAC over time at our NADAC Drug Pricing Dashboard, the purpose of our NADAC Change Packed Bubble Chart is to apply utilization (drug mix) to each month’s NADAC price changes to better assess the impact. We use Medicaid’s Q4 2022 and Q1-Q3 2023 drug mix from CMS to arrive at an estimate of the total dollar impact of the latest NADAC pricing update. As a reminder, we’re choosing the last full-year picture available in order to remove variances in drug mix from this equation (and focus just on the role that NADAC price changes have over time). This helps quantify what should be the real effect of those price changes above from a payer’s perspective (in our case Medicaid; individual results will vary). Said differently, if a drug that is hardly ever utilized takes a 50% decrease, it doesn’t matter as much if a drug everyone takes increases by 5% (the inverse of this is what we observed at the start of the year with the brand name insulin price decreases [see our prior report]).

The green bubbles on the right of the Bubble Chart viz (screenshot below in Figure 4) are the generic drugs that experienced a price decline (i.e. got cheaper) in the latest NADAC survey, while the yellow/orange/red bubbles on the left are those drugs that experienced a price increase. The size of each bubble represents the dollar impact of the drug on state Medicaid programs, based on their utilization of the drugs in the most recent trailing 12-month period (i.e. bigger bubbles represent more spending). Stated differently, we simply multiply the latest survey price changes by aggregate drug utilization in Medicaid over the past full year, add up all the bubbles, and get the total inflation/deflation impact of the survey changes.

Figure 4
Source: Data.Medicaid.gov, 46brooklyn Research

Overall, in April, there was just over $13 million worth of inflationary drugs (effectively none), but that was majorly offset by just over $500 million of deflationary generic drugs, netting out to approximately $489 million of generic drug cost deflation for Medicaid. Compare to last month, which was inflationary (by $73 million), this means a lot of heavily utilized generic drugs for the U.S. got way less expensive in April (particularly relative to March).

While this shows that many drugs were experiencing a decrease, we know that last month’s NADAC price change was an increase, so the question we next ask is how different is this month relative to year-over-year (YoY) trending?

6. Year-over-year generic oral solid deflation increased %

Ever since June 2020, we have been tracking YoY generic deflation for all generic drugs that have a NADAC price. We once again weight all price changes using Medicaid’s drug utilization data. This month, deflation on oral solid generics and all generics decreased to 20.3% and 10.1%, respectively (Figure 5). If you are a purchaser of generic drugs (based on the actual costs of drugs; not AWP), an increase in this metric is ideal, as it means costs are declining. Businesses generally enjoy it when their input costs go down. Historically, NADAC deflation numbers have been much higher then they’ve been recently; however, this month represents a return to times of big NADAC deflation (Figure 5).

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Figure 5
Source: Data.Medicaid.gov, 46brooklyn Research

A closer observation of the figure above shows that while NADAC had been sliding below 10% YoY for the last several months (see the orange and blue lines below the blue dash line in the center), this month it has jumped back up to 10%+ deflation. Now, CMS has instituted methodology changes to NADAC for April 2024, which in general, aim to ensure that drugs with lesser utilization in the retail channel are being adequately tracked for prices (for more on this issue, see our August 2019 report). So while we normally would dive into some of the interesting specific drug price changes (both increases and decrease), this month we’re diverging from our typical script to look at NADAC on a broader month-over-month basis, given the significance of last month’s historic reductions.

7. March-to-April NADAC changes

As we alluded to, now would be the time that we generally compare specific generic drugs with the largest increases or decreases month-to-month. However, because of what is going on in this month, it doesn’t make sense to try to point out which 20%+ decrease was the most significant (because there were so many of them), but rather to try to unpack a little more broadly what materially changed between March and April, given the significance of NADAC’s sizable weighted reduction demonstrated in Figure 4. While we were aware of the new methodology changes instituted that would change NADAC’s calculus, we also learned after seeing the numbers roll in that a new, large pharmacy organization had begun submitting data to the NADAC survey, which had a material impact on its yielded values (more on that later). So for these reasons, analyzing the nature of NADAC’s changes is crucial.

To first assess the impact of the methodology changes and the new pharmacy prices submitted to NADAC, we started by imaging the March-to-April changes as a kind of Venn diagram, where on the one side are drugs that have a NADAC value in April 2024 that did not have a NADAC value in March 2024 (either because they’re a first-time-reported NADAC drug or it’s a drug that hasn’t had a NADAC published in awhile), and the other side of the ledger are drugs that we can directly make comparisons between March and April NADACs. While there isn’t really any anticipated overlap in the Venn diagram we’ve constructed, we think that bucketing the products in this way can help us better unpack what happened with NADAC in April.

7(a). First-time NADACs in April

First, we began by looking at the drugs that for the first time have a NADAC price in April 2024. Fortunately, CMS publishes a list of drug products that are first-time NADAC products, along with the rationale for why the drugs are getting a NADAC this month as opposed to prior months. As can be seen below (Figure 6), the majority of drugs that were given a NADAC for the first time in April 2024 were a result of this month being the first time enough observations existed for a NADAC to be established (Note, the other rationales for why there was a first-time NADAC in April were drugs being a new-to-market product (either new brand or first-time generic) or a new drug on the covered outpatient drug (COD) file in Medicaid).

Figure 6
Source: Data.Medicaid.gov, 46brooklyn Research

So, whether related to new pharmacy participants to the NADAC survey in the month of April or as a result of the changes in NADAC methodology, April had a good amount of medicines that went from being “non-NADAC drugs” (i.e. drugs that previously didn’t have enough acquisition cost data points from retail pharmacies to be included in the NADAC price list) to becoming new, “first-time NADAC drugs” (i.e. drugs that now finally have enough data points from retail pharmacies to meet inclusion standards necessary to create a usable price point). This invites the question, how does April 2024 compare to other months? Well, in comparison to other months, April 2024 had a lot more new NADACs. Like a lot more NADACs…(Figure 7).

Figure 7
Source: Data.Medicaid.gov, 46brooklyn Research

In the interest of contextualizing Figure 7, in Figure 8, we present the count of new, first-time NADACs, based upon product name as opposed to NDC (so we don’t count a bunch of the same generics multiple times). Even so, April stands apart from past months in regards to the amount of new stuff NADAC is giving us insights into this month (in comparison to prior months).

Figure 8
Source: Data.Medicaid.gov, 46brooklyn Research

While the findings above are kind of wild (i.e., we can further appreciate why there is so much interest in NADAC in April), to understand the value of these new drugs in April, we undertook an analysis to compare their April NADAC prices to the typical rates Medicaid is paying for the drugs using CMS State Drug Utilization Data. As presented below in Figure 8, we can see that relative to most other drugs, which typically pay somewhere in the neighborhood of NADAC + $7 to NADAC + $12 (we’ll go more into this later), these drugs had a much higher threshold for payment relative to the assumed NADAC cost (Figure 9). To be clear, it may not be fully appropriate to compare an acquisition price today (i.e., April 2024 NADAC) to a Medicaid payment rate from a year ago (technically, an annualized 2023 Medicaid payment rate), but Figure 9 is the best comparison we can make with the data on hand (i.e., only so much of the black box of drug pricing can be exposed at any one time).

Figure 9
Source: Data.Medicaid.gov, 46brooklyn Research

It turns out, where there is mystery, there is margin. These previously “hidden” non-NADAC drugs – most of which are generics that have been on the market for some time – have pretty high costs to the Medicaid program relative to their known prices here in April 2024 (regardless of whether the drug is being paid for in Medicaid fee-for-service or managed care programs). Said differently, if April 2024 was not such an outlier in terms of new data on drug acquisition cost values, Medicaid would likely have spent less on these drugs than what it did. Said differently, if more months looked like April (in terms of new NADAC counts) then we suspect there wouldn’t have been as big of a gap on these drugs between their historic payment rate and their acquisition cost.

While will have much more on this issue at a later date, we’d like to reiterate these findings in more plain speak.

NADAC is a reflection of voluntarily submitted drug acquisition cost data from retail pharmacies across the country. As a result, the data contained within the NADAC files will be a representation of the drugs that are purchased by those submitting pharmacies and the prices with which they acquire them for. Prior to April, we know that while NADAC covered an overwhelming majority of medications that are taken by consumers, there are a sliver of drugs that haven’t had data points, likely because not enough of those products were being purchased and dispensed within the retail pharmacy channel (i.e., they are low utilization products or they are products that are being shifted outside the retail channel to health systems, mail/specialty pharmacy, or other niche classes of trade). Now that the NADAC methodology is doing a better job of collecting those missing data points from “non-NADAC drugs,” we can now examine the prices being charged to Medicaid relative to their underlying cost. And while the Medicaid utilization data previously showed that the average markup per claim on NADAC drugs was less than $15 per prescription, the newly revealed data points for non-NADAC drugs shows states being charged markups anywhere from $123.87 to $513.26 per prescription.

Maybe drug pricing transparency can be a healthy disinfectant for right-sizing the costs of pharmacy benefits? (snarky tone intended, but you already knew that).

7(b). Forgotten NADACs

The other side of the “no March NADAC exists but April NADAC does exist” coin are the drugs that NADAC has forgotten about. These are drugs that had a NADAC at some point in the past, but for whatever reason, NADAC forgot about them (i.e., CMS didn’t receive sufficient survey insights to publish a NADAC about them in subsequent months). Arguably these drugs are the drugs that the April 2024 methodology change was designed to better catch. Of the NDCs with a NADAC in April 2024, we count more than 3,000 NDCs representing approximately 1,000 products (based upon active ingredient, dosage form and strength) that had a NADAC sometime in the past, but for whatever reason had no NADAC value in March 2024. To evaluate the value of these “awakened” returned-to-the-fold drugs, we re-create Figure 9 for this subset of April NADAC values. While not associated with as significant mark-ups, Figure 10 (below) demonstrates again that where there is mystery, there is potential margin.

Figure 10
Source: Data.Medicaid.gov, 46brooklyn Research

The average number of days that elapsed between the prior NADAC published on a prior month’s survey and the NADAC published in the April 2024 survey was 489 days (or more than a year of not knowing what the market dynamics for the drug’s price actually was). Because the products are of all types (brands and generics, tablets, capsules, liquids, injections, etc.) and various lengths between NADAC observations (i.e., some had a NADAC published as recently as February 2024 whereas others were as far back as 2015), we decided to measure the ‘value’ of NADAC for these drugs on a change-per-day basis. To do this, we calculated the delta in NADAC between the last published date and April 2024, divided by the number of days elapsed between the two dates. We got a value of -$0.008 per day on average (or a fraction of a penny per day in unknown contextualized acquisition price decrease). And while that is an undeniably small number, consider that the elapsed time between NADAC’s availability for this subset of drugs is over a year (489 days = 1.33 years). So roughly, if we multiply all the units for these unknown drugs within Medicaid (on an annualized basis; we’ll actually increase it to 1.33 years to match) by our relatively small number, we get a sense for what the value of unknown NADACs are per year (because the elapsed time approximates one year). We get roughly $10 million in loss of NADAC value (or roughly 2% of this month’s NADAC deflation; at $489 million). The significance of this number in a program that spends billions annually may approximate a rounding error, but it is not lost upon us that it is highly likely that even beyond the markup issues identified above, Medicaid would have spent less on the actual acquisition costs of these drugs historically if these drugs would have had a NADAC all along. Food for thought.

7(c). March-to-April drug comparisons

The remainder of the April NADACs are products that we can make direct comparisons between their March NADAC pricing and their April NADAC pricing. To begin this analysis, we again decided to bucket our NADAC values between the two months to make a comparison. Because the typical Medicaid reimbursement values pharmacy labor at anywhere between $10 and $12 a prescription (based upon the average Medicaid cost of dispensing surveys and set dispensing fees), we decided to use $11 as a semi-informed cut-off to measure NADAC value changes between March and April 2024. To do this, we took annualized Medicaid utilization (Q1 to Q3 2023; the most recently available data to annualize) to calculate the average value of NADAC per prescription based upon the average units per prescription dispensed within Medicaid multiplied by either the March 2024 NADAC value or the April 2024 NADAC value. We then simply grouped NDCs based upon whether March and April were in agreement on the calculated average NADAC value relative to this $11 threshold. As can be seen in Figure 11, of the roughly 35,000 generic NDCs (we are limiting this analysis to just generic drugs) where we can make a March-to-April comparison, the majority (74%) are for products where both the March and April calculated NADAC values are $11 or less (while not directly observable in Figure 11, there were 35 NDCs where March valued the drug at less than or equal to $11 that April increased the generic price above the $11 threshold).

Figure 11
Source: Data.Medicaid.gov, 46brooklyn Research

We like Figure 11 because through the context of average cost per prescription, we can see that for the majority of drugs, March and April 2024 both agree that the NADAC value of the drug was arguably less important than the anticipated pharmacy dispensing fee. This is because the NADAC value was equal to or below the dispensing fee. As we will explore later in this report, NADAC is not intended to be the full reimbursement for a prescription drug, rather it is meant to be a component of the cost of a medication (the other component being the pharmacy professional dispensing fee; which again, we approximate at $11). With this new quadrant view developed, we can begin to make comparisons between March & April NADACs based upon the buckets above (Figure 12).

Figure 12
Source: Data.Medicaid.gov, 46brooklyn Research

Based upon Figure 12, we can appreciate why the NADAC trend was what it was YoY and month-over-month from the earlier Figures 4 & 5. For the majority of drugs where both March and April identify the NADAC cost is less than or equal to $11 per prescription, the delta between the months is $0.51 (which is a 16% decline to be clear, but only because the March NADAC value for these drugs was a low $3.17 per prescription). For the drugs where March had the NADAC value above $11 but April made them below $11, the average delta was $2.98 per prescription (or a 23% decrease). For the few where March has them below $11 per prescription but April raised them above $11, the delta was $1.50 (or a 15% increase); however, that was more than off-set by the claims where both March and April agree the NADAC is above $11 (where the delta was $6.71, or a 15% delta). Still with us?

We should appreciate that the majority of generic drugs fall into the buckets where either both March and April agree that the NADAC value was at or below $11 or both agree the value was above $11 (Figure 11). Interestingly, the percentage decrease across both, as measured by their NADAC change from March to April, is approximately a 15% decline each. However, despite NADAC measuring the change the same, the significance to the overall anticipated claim is arguably not.

What do we mean?

If we accept that NADAC is just a part of the anticipated component of a prescription’s cost to a plan sponsor (in this case, Medicaid programs), then we should really be contextualizing the value of these changes based upon NADAC + $11. If we do this, then the scale of NADAC changes is potentially quite different across these two buckets (the high and low value NADAC drugs). Rather than compare the $3.17 in average March 2024 cost to the $2.66 in April (for the cheap stuff), we should compare the price at $14.17 in March (i.e., $3.17 + $11) to the value in April at $13.66. If we evaluated NADAC changes through this lens, then the price delta month-over-month is not a 15% decline for this group, but rather a 4% decline (roughly a quarter of what we previously identified). If we did the same thing for the upper range, we’d compare $55.44 in March (rather than the $44.44) to $48.73 in April (rather than the $37.73). Interestingly, for the upper range, the price delta is still approximately equal to the already identified 15%.

Ultimately, we should recognize that most generic drugs are cheap, and drug costs appropriately contextualized would demonstrate that the NADAC price decreases from March to April are perhaps not as significant as initially believed. Yes, the majority of drugs got $0.50 cheaper, but the majority of drugs were already cheap (below $5) in costs, so what are we really saving money on?

Ultimately, this brings us to the final point we want to make in this report – why all the attention to a little NADAC deflation? Or said differently, why are pharmacy groups not celebrating their input costs going down (like most any other business would, particularly in the age of inflation that we’ve been living with over the last year)?

8. Making sense of NADAC

In order to make sense of the crazy world of drug pricing that NADAC helps contextualize, recall what NADAC is and what it measures. NADAC is a measure of the cost to acquire drugs from wholesalers based upon a survey of actual invoices between pharmacies and wholesalers.

It is important to recognize that pharmacies acquire medications from wholesalers via contracts which generally requires that a pharmacy select one wholesaler as their primary vendor (in what is known as a prime vendor agreement). When selecting a wholesaler, pharmacies generally contract in one of two ways. Either they seek to maximize off-invoice discounts (OIDs) - i.e., money they can earn for meeting certain metrics, such as volume of generic purchases – or they do not. Those that are in arrangements that are intended to maximize OIDs generally require that their initial purchase price will be higher than those whose contract does not, but those OID-heavy contracts may have more upside opportunity (i.e., ability to achieve a lower net price if all OID is obtained). From our experience, large wholesalers generally prefer the OID model, as it supports their cash flow desires and helps discourage pharmacies from shopping the market in a more traditional way.

OIDs present an interesting complication in the generic purchasing space, as they potentially increase the initial cost of goods and tie up more cash flow in inventory than would otherwise be required. It can also result in cross-subsidization, where pharmacies incur higher costs on a subset of drugs in order to secure lower costs on another subset (rather than getting say a reasonable cost on both).

NADAC does not do a sufficient job capturing OIDs, and so it is potentially very sensitive to the type of wholesaler arrangements engaged in by the pharmacies it surveys. If the pharmacies that are typically responding to NADAC surveys are generally engaged in one type of contracting, and then a large group of pharmacies that engage in a different type of wholesale contracting come along, then NADAC may potentially ying-yang between the two realities of drug purchasing. However, although we know of the limitation of NADAC in regards to OIDs, it remains one of the most viable benchmarks because even if it is “off the mark,” the impact that being off by a few percentage points up or down is generally of little impact. This is because NADAC is generally a small number (as most drugs dispensed are generics, and most generic drugs are cheap).

To demonstrate this point, consider the following: The average NADAC cost per prescription (based upon SDUD) in April 2024 is $25.39 (this average is calculated by taking the NADAC per unit for each NDC and multiplying it by the number of units dispensed for the drug in SDUD on an annualized basis [Q1 to Q3 2023 is the data source that is annualized] and then dividing that amount by the annualized number of Medicaid prescriptions). This means that if NADAC had a 5% error rate (an amount generally considered acceptable), then the value of the error would be worth about $1.25 (either up or down). However, this number is itself a little deceptive because it reflects the NADAC of both brands and generics. The average NADAC per brand prescription (based upon April 2024) metrics is $439.15, whereas the average NADAC per generic prescription is $8.20. Because generics outnumber brand prescriptions about 9-to-1, average NADAC cost is much closer to $8 (generic level) than $400 (brand level). So thinking about what NADAC inaccuracies potentially represent in the generic market with OIDs, which are generally earned against generic purchases, a 5% error rate for NADAC would equate to just $0.41. Interestingly, and perhaps coincidentally, this $0.41 decrease is roughly equal to the NADAC delta we measured between drugs that both March and April already averaged to $11 or less. You can’t even buy gum for $0.50 nowadays, so you can see why, despite its limitations, we’re generally ok with NADAC as a measure of drug costs.

We go through this background as it is a good refresher for what NADAC is and isn’t in a way that is disconnected from the results of this month’s NADAC deflation. From the point of view of any traditional business, a business generally does not want to overpay its supplier. Rather, it wants to keep input costs low to maximize cash in the business (rather than waiting for credits on purchases at a later date). So while most factories would celebrate lower input costs (i.e., raw material costs), why does pharmacy not universally rejoice when the input costs of pharmacy (i.e., generic drug costs) go down? Or said differently, why does pharmacy seek to hide its net drug purchase from its invoice with OID to begin with?

Well, it is likely a function of the fact that most payers do not rely upon pharmacies to set its own drug prices nor do most payers reimburse pharmacies in a cost-plus manner. Rather, pharmacy pricing is traditionally secured through a discount to an inflated drug list price which incentivizes efforts to raise – not lower – drug prices in order to make more money. Said differently, if you’re going to be paid at an 85% discount to AWP for generic drugs, then you’d rather AWP be $1,000 than $100, as you’ll make more money. This is why we like to call AWP, “always what’s profitable.”

To be clear, NADAC, as a measure of drug costs, can be used as part of a formula to reimburse pharmacies for the drugs they dispense, but cannot reasonably be used to calculate the total value of what is dispensed).

What do we mean by this?

Again, if we look at the drugs that had a NADAC price point at an NDC basis within SDUD, Medicaid programs (both FFS and MCO) spend an average of $25 billion on those drugs per year (again, Q1 to Q3 2023 annualized to reach this figure; the most recently available SDUD). The NADAC value of these purchases (based upon the units dispensed times the April NADAC) is worth roughly $14 billion annualized (or about half). This is true for both the FFS programs and the MCO programs. What this means is that any program would likely save money if they reimbursed just NADAC, but it would arguably never be appropriate to reimburse just NADAC, as the business of pharmacy incurs costs beyond buying the drug. Pharmacies, in order to continue to operate, need to receive reimbursement that covers the rent, utilities, staff, and other overhead associated with safely dispensing a drug to a patient. To pay a drug at NADAC, and NADAC alone, would be like trying to buy a car based upon the cost of the bolts used to assemble it. It wouldn’t work (or at least whatever cars were sold would quickly become the last cars sold, as the manufacturers and suppliers would go out of business). This is why state reimbursement formulas for their FFS programs generally use NADAC plus a dispensing fee of $10 to $12 to pay for drugs. The added $10 to $12 recognizes the overhead costs associated with running a pharmacy and servicing the patient (i.e., recognizing the cost beyond the drug price). And based upon what we know, most drug claims are generics, most generics are cheap, and as a result, the dispensing fee component is arguably more important to the concept of cost-plus than the NADAC (at least from a total dollar point of view).

The reality is that most pharmacies are not reimbursed in a cost-plus (i.e., NADAC plus a fee) way. Rather, their generic drugs are traditionally reimbursed by PBMs at subjective MAC rates – MAC rates that often utilize NADAC as one of the benchmarks for setting the payment. But in our experience, PBMs do not include a corresponding dispensing fee of $10+. And so pharmacies are potentially very challenged when NADAC takes big decrease, because most of their reimbursement is not rationally connected to their business operations, which explains the saber-rattling we’ve been hearing from pharmacies about the recent NADAC cuts.

Consider the following: if we look at the value of NDCs on a NADAC basis in April 2024 to their historic price point five years ago, in April 2019 (i.e., before any COVID supply chain disruptions), what we see is that the average cost per generic prescription, on a NADAC basis, has declined by approximately 45% (Figure 13). To be clear, in the figure below we are comparing only NDCs that have a NADAC value published in both April 2019 and April 2024.

Figure 13
Source: Data.Medicaid.gov, 46brooklyn Research

Look at Figure 13 from the following point of view: if I guaranteed that you as a pharmacy would make a 30% margin on your generic drug costs year-over-year, what Figure 13 demonstrates is that while you would have made approximately $11.54 per script in April 2019, that same 30% margin, on that same group of generic drugs, is now worth only $6.33 per claim (a decrease of 45%). To really drive home the point, we put together a Sankey diagram to show the flow of prescriptions from 2019 to 2024 based upon various buckets of the average NADAC value per prescription. As can be seen in Figure 14, drugs got collectively cheaper over time regardless of whether they started as an expensive generic (i.e., costing more than $250 per prescription), or cheap (costing less than $5 per prescription).

Figure 14
Source: Data.Medicaid.gov, 46brooklyn Research

In a way, these observation drive home the key point of NADAC, it is just a part of the drug pricing picture. If your business model is predicated on trying to deceive others on what the price of your drug is, we postulate that such a business strategy is not likely to produce good long-term returns. There is too much interest in drug prices to be reasonably successful at price deception. There are a dozen different ways to contextualize a single drug’s price based just on the industry-recognized benchmarks that exist (to say nothing of the potentially thousands of different MAC lists a single PBM may maintain to contextualize drug costs in ways beyond what even drug reference prices can produce). Furthermore, we know that over time, drugs will go from brand (or biologic) to generic (or biosimilar) and be associated with ever-decreasing prices (even if NADAC doesn’t deflate as much YoY, it’ll still be a steady march downward). Ultimately, this means that even if you secure for your pharmacy business a lucrative 30% margin by being deceptive on drug costs, your revenues every year will likely decline, which means that even if you dispense more and more medications year-over-year, you’ll be asked to dispense those drugs with ever fewer resources (i.e., fewer pharmacy hours to do more work). Unless the paradigm fundamentally changes, April’s NADAC results show us that the game is up, so to speak. It is likely not a winning business strategy to continue to try to get paid for drugs via a leverage discount that will not recognize the other parts of pharmacy business that increase in cost (such as salaries) despite drug costs going down.

As Congress evaluates changes to the pharmacy benefits ecosystem, among those debated changes are improving upon the NADAC survey. Possible changes include mandatory reporting and doing a better job capturing specialty drug costs. April 2024’s NADAC data is great appetizer of the possibilities that can be unlocked by a more thorough understanding of actual drug acquisition costs.

Some of us at 46brooklyn have previously investigated the value of potential changes to NADAC, such as mandatory reporting, in our team’s consulting work over at 3 Axis Advisors. We can’t help but notice that if you accept the learnings from Figure 13 above (i.e., the April 2019 to April 2024 price changes) that the 45% decline amount is almost a mirror representation of what this past month’s NADAC deflation was, if scaled back to the 2019 reality. Said differently, the 3 Axis mandatory NADAC study found savings of roughly $937 million annual savings to Medicaid with mandatory NADAC. This month’s NADAC deflation (i.e., in 2024, three years removed from the 3 Axis study) found $489 million in deflation. If we up-scale the $489 million by 45% (to approximate the gap in time between the 3 Axis study and this 46brooklyn report), you get an anticipated value of $709 million (or a directional validation of the previously identified $937 million estimate).

Whether it’s a better understanding of the real costs of medicines relative to the rates payers are being charged, a more accurate right-sizing of payments to pharmacies, or an opportunity for pharmacies to uncover how their wholesalers may be disadvantaging or advantaging them relative to other customers, in our experience, we have learned time and time again that more data is better than less.

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Yeah, the big changes to NADAC are a pretty big deal. So much so, that 46brooklyn CEO Antonio Ciaccia joined Capital Rx CEO AJ Loiacono for a deep-dive discussion on the recent learnings in a podcast that was released earlier today. Give it a listen here.

Check out this concise discussion on the role of PBMs and some of the controversies within the industry, as Ciaccia joins Curtis Jackson at Spectrum News for a journey into the Ohio drug pricing canon.