Drug Pricing Glossary
Plain-language definitions of the terms behind prescription drug costs — from rebates and PBMs to patent cliffs and biosimilars. 34 terms and counting.
Drug Pricing
Average Cost per ClaimThe average amount Medicare pays per 30-day supply claim for a prescription drug, including both the plan's payment and the beneficiary's out-of-pocket cost.Average Wholesale Price (AWP)A benchmark price for drugs that historically served as the basis for pharmacy reimbursement — often called the "sticker price that nobody pays."Drug Price IncreaseWhen a manufacturer raises the list price (WAC) of an existing drug — a common practice that has driven much of the growth in U.S. drug spending.National Average Drug Acquisition Cost (NADAC)A CMS-published benchmark reflecting the actual average price pharmacies pay to acquire drugs from wholesalers.RebateA discount paid by a drug manufacturer to an insurer or PBM after a sale, reducing the effective price below the list price.Specialty DrugA high-cost medication — typically above $1,000 per month — that treats complex or chronic conditions and often requires special handling, storage, or administration.Wholesale Acquisition Cost (WAC)The manufacturer's list price for a drug sold to wholesalers — often called the "sticker price" before any rebates or discounts.
Insurance & Coverage
Donut Hole (Coverage Gap)A phase in Medicare Part D where patients historically paid a higher share of drug costs after exceeding initial coverage but before reaching catastrophic coverage.FormularyA list of prescription drugs covered by an insurance plan, organized into tiers that determine how much the patient pays for each drug.Formulary TierA category within an insurance formulary that determines how much a patient pays out of pocket for a drug — lower tiers mean lower costs.Medicare Part DThe prescription drug benefit within Medicare, covering outpatient medications for 50+ million Americans aged 65+ and those with disabilities.Out-of-Pocket CostThe amount a patient pays directly for a prescription drug — including copays, coinsurance, and deductible payments.Pharmacy Benefit Manager (PBM)A company that acts as a middleman between drug manufacturers, insurers, and pharmacies — negotiating drug prices, managing formularies, and processing claims.Prior AuthorizationA requirement by an insurer that a patient's doctor must get approval before the plan will cover a specific drug — used to control costs and ensure appropriate use.Step Therapy (Fail First)An insurance requirement that a patient must try and fail on one or more lower-cost drugs before the plan will cover a more expensive medication.
Regulation & Policy
Abbreviated New Drug Application (ANDA)The FDA application pathway for generic drugs, which requires proving bioequivalence to the brand-name drug rather than repeating full clinical trials.FDA ApprovalThe process by which the U.S. Food and Drug Administration evaluates a drug's safety and efficacy through clinical trial data before allowing it to be marketed.Inflation Reduction Act (IRA)A 2022 federal law that, for the first time, allows Medicare to negotiate prices directly with drug manufacturers for select high-cost medications.Medicare Drug NegotiationThe process under the Inflation Reduction Act where CMS negotiates a "maximum fair price" directly with manufacturers for select high-cost Medicare drugs.
Patents & Exclusivity
EvergreeningStrategies drug manufacturers use to extend patent protection beyond the original expiration — including new formulations, delivery methods, or minor modifications.Exclusivity PeriodA period of market protection granted by the FDA (separate from patents) during which generic competitors cannot be approved — even if no patent exists.Patent CliffA sharp drop in a drug's revenue when its patent expires and generic competitors enter the market, often cutting prices by 80% or more.Patent ExpirationThe date when a drug's patent protection ends, allowing generic or biosimilar manufacturers to produce competing versions.
Drug Types
BioequivalenceA regulatory standard proving that a generic drug delivers the same amount of active ingredient to the bloodstream at the same rate as the brand-name drug.Biologic DrugA complex medication derived from living cells — including monoclonal antibodies, vaccines, and cell therapies — that treats serious conditions like cancer and autoimmune diseases.BiosimilarA biologic product that is "highly similar" to an already approved reference biologic, with no clinically meaningful differences in safety, purity, or potency.Generic DrugA medication that contains the same active ingredient, dosage, and form as a brand-name drug, approved after the original's patent expires — typically costing 80-95% less.Interchangeable BiosimilarA biosimilar that meets a higher FDA standard, allowing pharmacists to substitute it for the reference biologic without prescriber approval — like a generic drug swap.Orphan DrugA medication developed to treat a rare disease affecting fewer than 200,000 people in the United States, eligible for special incentives including 7 years of market exclusivity.
Savings Programs
340B Drug Pricing ProgramA federal program requiring drug manufacturers to sell outpatient drugs at significant discounts (25-50% off) to eligible hospitals and clinics serving low-income patients.Copay Card (Copay Coupon)A manufacturer-provided discount card that reduces or eliminates a patient's out-of-pocket copay for a brand-name drug — effectively making the drug free for patients with commercial insurance.Cost Plus PharmacyA pharmacy model that sells generic drugs at acquisition cost plus a fixed markup (typically 15%) and a dispensing fee — bypassing the traditional PBM-driven pricing system.Drug Discount CardA free card or app (like GoodRx) that provides negotiated prescription discounts at retail pharmacies — separate from insurance.Patient Assistance Program (PAP)A manufacturer-sponsored program that provides free or discounted drugs to patients who meet income and insurance eligibility requirements.