In the pharmaceutical industry, average wholesale price refers to the typical amount of money wholesalers charge pharmacies, hospitals, and health plans for prescription drugs. Often referred to as AWP, the average wholesale price is considered a yardstick by which drug prices are measured. The Red Book®, a medical economics journal, states that average wholesale prices are based on information submitted from manufacturers, distributors, and other drug suppliers.
The average wholesale price of a medication is determined by several factors. The strength of a given drug plays a vital role in a manufacturer's establishment of cost. The dosage form — pills, capsules, liquid, injection, etc. — is also considered. Other issues, such as the size of packaging, may also figure into the final cost.
Insurance companies, Medicare, Medicaid, and other managed care groups utilize a drug's average wholesale price when figuring payments to pharmacies and hospitals. Based on the data provided by the pharmaceutical industry, an insurance organization will reimburse the distributor for all or a portion of the total amount. In some instances, the remaining cost — which is sometimes altered for the profit of the pharmacy or hospital — may be passed on to the consumer.
Average wholesale price has been likened to the auto industry's practice of list price and sticker price. In the world of car sales, list prices and sticker prices indicate the amount of money car manufacturers want their vehicles to sell for. Since auto retailers are commonly open to bargaining — not to mention factors like trade-in vehicle discounts — the cost usually ends up differing significantly from the sticker price.
There is a considerable amount of controversy surrounding the determination of average wholesale prices. Since the average wholesale price is reported by the pharmaceutical industry, the data is considered by some to be a faulty indication of drug prices on the current market. There are no specific laws dictating how average wholesale price should be determined.
Fluctuating average wholesale prices are reflected in the prescription drug industry's profits. Every year, the industry's drug costs expand by billions of dollars. Critics argue that this inflation causes a sort of snowball effect throughout the entire healthcare system. The cost may be passed from an insurance company — who may raise premiums, co-payments, or deny payment altogether — directly to the customer. As a result, businesses find it more and more prohibitive to offer health insurance when premiums are so high, forcing people to go without insurance or to turn to government assistance.