Glossary of Pharmacy-related Terms

115 Waiver: A popular tool used by States to reform their Medicaid programs by allowing States to them Federal matching dollars for services not normally covered under Medicaid or for typical Medicaid services furnished to populations that are not ordinarily eligible for Medicaid. Under Title XIX of the Social Security Act, each State designs and administers its own Medicaid program, setting eligibility and coverage standards within broad Federal guidelines. Section 1115 of the Social Security Act authorizes the waiver of most Federal Medicaid requirements for up to five years or more in order to establish any experimental, pilot, or demonstration project which, in the judgment of the Secretary, is likely to assist in promoting the objectives of Medicaid. States have used this mechanism in the past to establish innovative programs such as the statewide Arizona Health Care Cost Containment System (AHCCCS).  More recently, it has been used by States like Illinois , Florida , Wisconsin , Indiana , South Carolina , and Maryland to extend the Medicaid prescription drug benefit to State residents who would otherwise be ineligible for Medicaid benefits.

340B Ceiling Price: The maximum price that manufacturers can charge covered entities participating in the 340B Drug Pricing Program. The 340B discount is calculated using the Medicaid rebate formula and is deducted from the manufacturer's selling price rather than paid as a rebate. Compared to a drug's AMP, covered entities receive a minimum discount of 15.1% for brand name drugs and 11% for generic and over-the-counter drugs and are entitled to an additional discount if the price of the drug has increased faster than the rate of inflation. Covered entities are free to negotiate discounts that are lower than the maximum allowable statutory price.

340B Prime Vendor Program: The 340B law requires the Department of Health and Human Services (DHHS) to create a "prime vendor" program for the entities in the 340B Drug Pricing Program. The prime vendor handles price negotiation and drug distribution responsibilities for those entities that choose to join the prime vendor. A covered entity does not have to join the prime vendor program in order to participate in the 340B Program, although the government encourages entities to join. HealthCare Purchasing Partners International (HPPI) is the current prime vendor. Since the prime vendor has the potential to control a large volume of pharmaceuticals, it can negotiate favorable prices and develop a national distribution system that would not be possible for covered entities to obtain individually.

Actual Acquisition Cost (AAC): The net cost of a drug paid by a pharmacy. It varies with the size of container purchased (e.g., ten bottles of 100 tablets typically costs more than one bottle of 1,000 tablets) and the source of purchase (manufacturer or wholesaler). A drug's ACC includes discounts, rebates, chargebacks and other adjustments to the price of the drug but excludes dispensing fees.

Average Manufacturer Price (AMP): The average price paid to a manufacturer by wholesalers for drugs distributed to retail pharmacies. AMP was a benchmark created by Congress in 1990 in calculating Medicaid rebates and is not publicly available. FSS and 340B prices, as well as prices associated with direct sales to HMOs and hospitals, are excluded from AMP under the rebate program. The Congressional Budget Office estimates AMP to be about 20 percent less than AWP for more than 200 drug products frequently purchased by Medicaid recipients.

Average Sales Price (ASP): A new system created by Federal and State government prosecutors in settlements with pharmaceutical manufacturers TAP and Bayer to ensure more accurate price reporting. ASP is the weighted average of all non-Federal sales to wholesalers and is net of chargebacks, discounts, rebates, and other benefits tied to the purchase of the drug product, whether it is paid to the wholesaler or the retailer.

Average Wholesale Price (AWP):  A national average of list prices charged by wholesalers to pharmacies. AWP is sometimes referred to as a "sticker price" because it is not the actual price that larger purchasers normally pay. For example, in a study of prices paid by retail pharmacies in eleven States, the average acquisition price was 18.3 percent below AWP. Discounts for HMOs and other large purchasers can be even greater. AWP information is publicly available.

Big 4: The four largest purchasers of pharmaceuticals within the Federal government: Department of Veterans Affairs (VA), Department of Defense (DOD), Public Health Service (PHS), and Coast Guard. These four Federal agencies have the right to purchase their pharmaceuticals from the Federal Supply Schedule (FSS) like every other Federal agency. However, the Big 4 often get pricing below FSS on brand name drugs because these drugs are subject to a maximum statutory price called the Federal Ceiling Price.

Bundled Sales: The packaging of drugs of different types, where the total price for the package is less than the purchase price of the drugs if purchased separately.

Centers for Medicare & Medicaid Services (CMS):  Formerly known as the Health Care Financing Administration (HCFA), the Centers for Medicare & Medicaid Services are organized around three centers to clearly reflect the agency's major lines of business.  The Center for Medicare Management focuses on management of the traditional fee-for-service Medicare program. This includes development of payment policy and management of the Medicare fee-for-service contractors.  The Center for Beneficiary Choices focuses on providing beneficiaries with information on Medicare, Medicare Select, Medicare+Choice and Medigap options. It also includes management of the Medicare+Choice plans, consumer research and demonstrations, and grievance and appeals functions.  The Center for Medicaid and State Operations focuses on programs administered by states. This includes Medicaid, the State Children's Health Insurance Program (SCHIP), insurance regulation functions, survey and certification, and the Clinical Laboratory Improvements Act (CLIA).

Coinsurance: The percent of the Medicare-approved amount that a Medicare beneficiary has to pay in addition to the deductible for Part A and/or Part B. In the Original Medicare Plan, the coinsurance payment is a percentage of the cost of the service (for example, 20%).  In this example, coinsurance for a $100 x-ray would be $20.

Contracted Pharmacy: An arrangement through which a covered entity may contract with an outside pharmacy to provide comprehensive pharmacy services utilizing medications purchased under 340B.

Copayment: In some Medicare health plans, this is the amount a Medicare beneficiary must pay for each medical service they receive. In the Medicare program, a copayment is usually a set amount a beneficiary pays for a service, for example, $5 or $10 for a doctor visit.

Corporate Integrity Agreement (CIA):  An agreement between the Office of the Inspector General of the Department of Health and Human Services and a health care provider or other entity as part of a settlement for alleged civil wrongdoing relating to Federal health laws. The government may enter into a CIA with an entity instead of seeking to exclude the entity from Medicare, Medicaid, and other Federal health care programs. Each CIA is unique to the entity, but a typical CIA will last for five years and will require the entity to implement procedures to comply with Federal health care laws, often including developing a compliance plan and hiring a compliance officer. Several pharmaceutical manufacturers have entered into CIAs in connection with, among other issues, their determination of AWP and Medicaid best price.

Covered Entities: The statutory name for facilities and programs eligible to purchase discounted drugs through the 340B Drug Pricing Program. Covered entities include certain disproportionate share hospitals owned by, or under contract with, State or local governments and 11 categories of facilities or programs funded by Federal grant dollars, including federally qualified health centers, AIDS drug assistance programs, hemophilia treatment centers, and family planning clinics.

Deductible: The amount a Medicare beneficiary must pay before Medicare begins to pay. There is a deductible for each benefit period for Part A and each year for Part B.  These amounts can change every year.

Dispensing Fee:  Represents the charge for the professional services provided by the pharmacist when dispensing a prescription (including overhead expenses and profit). Medicaid and most direct pay insured prescription programs use dispensing fees to establish pharmacy payment for prescriptions. Dispensing fees do not include any payment for the drugs being dispensed. 

Disproportionate Share Adjustment:  An additional Medicare payment to hospitals which treat a high percentage of low-income patients. The factors used to calculate this adjustment are the sum of the ratios of Medicare Part A Supplemental Security Income (SSI) patient days to total Medicare patient days, and Medicaid patient days to total patient days in the hospital.  In order to qualify for the 340B Program, a hospital must have a disproportionate share adjustment greater than 11.75%.

Disproportionate Share Hospital (DSH):   A hospital with a disproportionately large share of low-income patients.  Under Medicaid, States augment payment to these hospitals.  Medicare inpatient hospital payments are also adjusted for this added burden.

DSH Payment: Additional payments in the Medicaid and Medicare programs that, along with local tax appropriations, help hospitals finance care to low income and uninsured patients.

Dual Eligibles: Persons who are entitled to Medicare (Part A and/or Part B) and who are also eligible for some form of Medicaid benefit.

Federal Ceiling Price (FCP): The maximum price manufacturers can charge for FSS-listed brand name drugs to the Big 4 (VA, DOD, PHS, and the Coast Guard) even if the FSS price is higher. FCP must be at least 24 percent below the non-Federal average manufacturer price. FCP prices are not publicly available.

Federal Supply Schedule (FSS): The collection of multiple award contracts used by Federal agencies, U.S. territories, Indian tribes and other specified entities to purchase supplies and services from outside vendors. FSS prices for the pharmaceutical schedule are negotiated by the VA and are based on the prices that manufacturers charge their "most-favored" non-Federal customers under comparable terms and conditions. Because terms and conditions can vary by drug and vendor, the most-favored customer price may not be the lowest price in the market. FSS prices are publicly available.

Formulary: A preferred list of drug products that typically limits the number of drugs available within a therapeutic class for purposes of drug purchasing, dispensing and/or reimbursement. A government body, third-party insurer or health plan, or an institution may compile a formulary. Some institutions or health plans develop closed (i.e. restricted) formularies where only those drug products listed can be dispensed in that institution or reimbursed by the health plan. Other formularies may have no restrictions (open formulary) or may have certain restrictions such as higher patient cost-sharing requirements for off-formulary drugs.

Health Care Purchasing Partners International (HPPI):  The organization currently awarded the contract by the Office of Pharmacy Affairs to serve as the prime vendor for the 340B Program.  HPPI, which was awarded the contract in September 2004, hopes to negotiate discounts for 340B covered entities below the 340B ceiling price on a wide range of brand name and generic drug products.  HPPI, which is based in Irving , Texas , is owned by VHA Inc., a national health care cooperative, and the University HealthSystem Consortium (UHC), an alliance of academic medical centers.

Health Resources and Services Administration (HRSA): HRSA is an agency within the Department of Health and Human Services.  Its mission is to improve and expand access to quality health care for all.  HRSA assures the availability of quality health care to low income, uninsured, isolated, vulnerable and special needs populations and meets their unique health care needs.  HRSA is organized into several Offices and five Bureaus (the Healthcare Systems Bureau, the Bureau of Primary Health Care, the Bureau of Health Professions, the HIV/AIDS Bureau, and the Maternal and Child Health Bureau).

In-House Pharmacy: Pharmacy services which are housed within a covered entity's facility.  The pharmacy must be part of the legal organization of the covered entity.

Manufacturer:  For purposes of the 340B Program, manufacturer includes all entities engaged in (1) the production, preparation, propagation, compounding, conversion, or processing of prescription drug products, either directly or indirectly by extraction from substances of natural origin, or independently by means of chemical synthesis, or by a combination of extraction and chemical synthesis, or (2) the packaging, repackaging, labeling, relabeling, or distribution of prescription drug products.  A manufacturer must hold legal title to or possession of the NDC number for the covered outpatient drug. Such term does not include a wholesale distributor of drugs or a retail pharmacy licensed under State law.  "Manufacturer" also includes an entity, described in (1) or (2) above, that sells outpatient drugs to covered entities, whether or not the manufacturer participates in the Medicaid rebate program.

Medicaid: A joint Federal and State program that helps with medical costs for some people with low incomes and limited resources. Medicaid programs vary by State, but most health care costs are covered if a beneficiary qualifies. The name of the program varies by State but is commonly referred to as the medical assistance program.

Medicaid Best Price: The lowest price paid to a manufacturer for a brand name drug, taking into account rebates, chargebacks, discounts or other pricing adjustments, excluding nominal prices. Best price is a variable used in the Medicaid rebate statute to calculate manufacturer rebates owed to State Medicaid agencies. Prices charged to certain governmental purchasers are statutorily excluded from best price including prices charged to the VA, DOD, Indian tribes, FSS, State pharmacy assistance programs, Medicaid, and 340B covered entities. Best price data is not publicly available.

Medicaid Rebate Net Price: The effective price paid for covered outpatient drugs by State Medicaid programs taking into account the manufacturer rebates received by States. The basic rebate for brand name drugs is the greatest of 15.1 percent of the AMP, or the difference between AMP and Medicaid best price. Rebates for generic drugs are 11 percent of the AMP. Manufacturers must pay a supplemental rebate on brand name drugs for which the AMP increases faster than the rate of inflation based on the consumer price index. Information on rebate amounts is publicly available; AMP and best price are not.

Medicare: The Federal health insurance program for people 65 years of age and older; certain younger people with disabilities; and people with End-Stage Renal Disease (those with permanent kidney failure who need dialysis or a transplant), sometimes called ESRD.

Medicare Part A:   The part of Medicare that covers hospice care, home health care, skilled nursing facilities, and inpatient hospital stays.

Medicare Part B:  The part of Medicare that covers doctors' services, outpatient hospital care, and other medical services that Part A doesn't cover such as physical and occupational therapy. Other examples include X-rays, medical equipment or limited ambulance service.

Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) :  The most sweeping amendments to the Medicare program made by Congress since the start of the program featuring the creation of a new outpatient drug benefit, revitalization of the Medicare managed care program, payment methodology changes for virtually every Medicare provider, contracting and appeals reform, and establishment of health savings accounts.

National Drug Code (NDC) :  The NDC is the identifying drug number maintained by the Food and Drug Administration.  Manufacturers that have executed Pharmaceutical Pricing Agreements (PPA) report quarterly information to the Office of Pharmacy Affairs by NDC number including labeler code, product code, and package size code.

Network Central Fill :  A pharmacy distribution system in which a network member's in-house pharmacy fills prescriptions for the patients of the other network members.   Please note that if drugs purchased under 340B are used, approval as a 340B Alternative Method Demonstration project might be required.

Non-Federal Average Manufacturer Price (Non-FAMP) :   The average price paid to a manufacturer by wholesalers for drugs distributed to non-Federal purchasers. The Big 4 are entitled under Federal law to discounts on brand name drugs of at least 24 percent off of Non-FAMP. Non-FAMP is not publicly available.

Office of Pharmacy Affairs:  The Office of Pharmacy Affairs is the component within HRSA that administers the 340B Drug Pricing Program.  OPA is located within the Division of Health Center Development in HRSA's Bureau of Primary Health Care.

Patient:  An individual is considered a patient of a 340B covered entity (with the exception of State operated or funded AIDS drug assistance programs) only if:  (1) the covered entity has established a relationship with the individual, which includes maintaining records of the individual's health care; (2) the individual receives health care services from a health care professional who is either employed by the covered entity or provides health care under contractual or other arrangements (e.g., referral for consultation) such that responsibility for the individual's care remains with the covered entity; (3) the individual receives a health care service or range of services for which grant funding or federally-qualified health center look-alike status has been provided. (Disproportionate share hospitals are exempt from this requirement.)

Pharmaceutical Pricing Agreement (PPA):  The agreement required for manufacturers who have executed a Medicaid Rebate Agreement with CMS and voluntary for those who do not have a current Medicaid Rebate Agreement.  The PPA must be signed by a corporate officer of the company (e.g., President, Chief Executive Officer, or General Counsel – signatures by VP or Director of Sales or Marketing will not be accepted).  A PPA remains in effect until terminated by either the manufacturer or the Secretary of HHS.  It is not automatically terminated if a manufacturer terminates its Medicaid Rebate Agreement.

Pharmacy Affairs Branch :  Previous name of The Office of Pharmacy Affairs.

Pharmacy Benefit Manager (PBM) :  An organization that provides administrative services in processing and analyzing prescription claims for pharmacy benefit and coverage programs. PBM services can include: contracting with a network of pharmacies; establishing payment levels for provider pharmacies; negotiating rebate arrangements; developing and managing formularies, preferred drug lists, and prior authorization programs; maintaining patient compliance programs; performing drug utilization review; and operating disease management programs. Many PBMs also operate mail order pharmacies or have arrangements to include prescription availability through mail order pharmacies.

Pharmacy Plus Waivers : A program developed earlier this year by the Department of Health and Human Services to make it easier for States to expand prescription drug coverage to Medicare beneficiaries using 1115 waivers. By developing an 1115 application "template," HHS intends for the program to allow States to expand Medicaid coverage for prescription drugs to Medicare beneficiaries. Under the Pharmacy Plus program, Medicare beneficiaries and other individuals with family incomes up to 200 percent of the Federal poverty level would be eligible for drug coverage. The pharmacy waiver template states that budget neutrality will be maintained by savings generated from better access to pharmacy coverage, improved service delivery or medication management, and improved cost-management techniques in pharmacy administration.

Premium: The monthly payment for health care coverage to Medicare, an insurance company or a health care plan.

Section 1927 of the Social Security Act :  The legislation that requires a manufacturer to enter into and have in effect a rebate agreement with Medicaid in order to receive payment for certain covered outpatient drugs.

Section 602 of the Public Health Service Act :  Section 340B of the Public Health Service Act was established under Section 602 of the Veterans Health Care Act of 1992.  As a result, 340B and 602 are often used interchangeably.

VA National Contract Price : The price VA has obtained though competitive bids from manufacturers for select drugs in exchange for their inclusion on the VA formulary. Because the VA is entitled to FCP prices under Federal statute, VA national contract prices are even lower than FCP prices and are often the lowest prices in the nation. These prices are publicly available.

Wholesale Acquisition Cost (WAC) :  The price paid by a wholesaler for drugs purchased from the wholesaler's supplier, typically the manufacturer of the drug. On financial statements, the total of these amounts equals the wholesaler's cost of goods sold. Publicly disclosed or listed WAC amounts may not reflect all available discounts.

Wholesaler :  A company that serves as a bridge between a drug manufacturer and a covered entity.  This means any entity (including a pharmacy or chain of pharmacies) to which the labeler sells the covered outpatient drug, but that does not relabel or repackage the covered outpatient drug.

(This glossary is based, in part, using “Drug Pricing Glossary and Other Key Terms,” prepared by Powers, Pyles, Sutter & Verville PC, and is used with their permission.  Parts of this glossary also include definitions obtained from the Centers for Medicare & Medicaid Services and the Office of Pharmacy Affairs.)