Everyone knows that hospitals have a “list” price that only a very few totally powerless uninsured patients pay (and in California that hospitals are bizarrely required to report that price to the state). Then there’s an actual amount that Medicare pays them, which is a real “price”, and then there’s the amount that they actually get from insurers. All figured out by market power, and all being challenged by the transparency movement.

Now Barbara Martinez, continuing her swath through the nether reaches of the drug business in the WSJ, has figured out that AWP (avg wholesale price) which is the fictional equivalent of hospital “list” price for the pharmacy business, is actually a real number. Or rather not a real number, but a fake number with real implications. Real in that that several insurers and health plans are actually paying a discount from AWP for their drugs. So that when McKesson (the biggest wholesaler) told First Databank, the dominant price reporter, that it was putting up AWP by 5%, effectively it was increasing the amount the pharmacies got paid for the drugs they sold. (FDB apparently was supposed to be surveying all the wholesalers but was actually just taking McKesson’s pricing).

This increase happened in 2002. Now eventually some of those payers figured out that their prices had increased for no good reason, and went after the pharma manufacturers. But they weren’t getting the increase—that was sticking with the pharmacy. McKesson, the wholesaler which sells all manner of stuff to pharmacies, was happy enough to make its customers happy, and point it out to them when their wholesaling contracts came up for renewal. So the result was that after chasing down a null result at the pharma manufacturers, the payers went after First Databank, which today fessed up to doing a not-too-thorough job on finding out just what AWP actually really was, and agreed to give up publishing about it at all  in 2 years.

Here’s what Martinez writes about one “victim”

Mark Erlich, executive secretary-treasurer of the New England Regional Council of Carpenters, is one of the plaintiffs settling the case with First DataBank. He expects the settlement will save about $400,000 a year for his union’s health fund, which covers 22,000 people and spent $10 million on prescription drugs last year. Mr. Erlich calls the earlier rise in First DataBank’s published prices "a rip-off of consumers across the country." It affects the union, he says, because its contract with the company managing its pharmacy benefits specifies that the drug prices the union pays will be based on First DataBank’s AWP benchmarks.

Now I bet you a nickel that the “company managing its pharmacy benefits”  was a PBM, which meant that it also owned its own mail-order pharmacy, and so it too was benefiting from the increase in AWP. I’m also not too sure that even now Mr Erlich the chippy realizes that, but it’s the PBM he ought to be flipping mad with.

But here’s the real point. Why the hell is an end payer agreeing to pay a discount from a notional price that it allows someone else to control in the first place? And even more so, why is the middle man, that is after all being paid to allegedly lower its drug costs, allowing its client to be reamed in that way. This is the equivalent of boasting that you “got it on sale” without noting that the company was marking up the pre-sale price. Why wouldn’t you figure out what it cost at Costco (or the equivalent cheapest outlet) and see what your market power could get you in comparison. After all that’s how real market pricing works.

Well you don’t have to be too suspicious to think that the PBMs did fine out of this little arrangement—presumably because it allowed them to mark up the cost of the drugs they were selling at mail order—and that the more they can obscure both the true costs of the drugs that they allegedly get at such a discount and also their own incredible profitability, the better for them. And so long as they have clients dumb enough to not question what they’re buying and the way they’re buying it, what do you expect to happen?

But if the University of Michigan can figure it out, should the rest of corporate America be so far behind?