Thursday, October 26, 2006

Additional Comments on the AWP settlement

A number of people have asked me to follow-up on my AWP Ain’t What Matters post with additional comments on the proposed First DataBank AWP settlement. This post provides a few high-level observations but will refrain from a thorough explanation of potential implications.

The $4 Billion Man

The October 6 Wall Street Journal article highlighted a $4 billion per year savings estimate. Anyone interested in this matter should spend some time reading through the underlying report to understand the assumptions behind the headline. (See Impact and Cost Savings of the First DataBank Settlement Agreement.)

In theory, a one-time adjustment to AWP will have a minimal impact as long as contracts can be renegotiated to preserve the original dollar-cost economic arrangements. So pay particular attention to footnote 19 on page 6, which provides Dr. Hartman’s reasons for believing that market participants will not be able to easily reverse the effect of the settlement with renegotiations.

Hartman’s viewpoints contrast with certain public statements, such as CVS’ press release: “In the event AWPs were suddenly reduced in a material way for particular products, obviously we would renegotiate the discount or dispensing fee. Virtually all of our commercial agreements are 'at-will' agreements, which can be renegotiated freely.” (See CVS Corporation Statement Regarding AWP.) Express Scripts was much more circumspect in its 10-Q filing this week, which created this week’s share price volatility.

Look Back in Anger?

We also don’t know the extent of look-back lawsuits against retail pharmacies by entities that are not part of the settlement class.

In reading the First DataBank court documents, I was struck by the fact that the First DataBank AWP settlement excludes all state and federal government payers from the settlement class. But 49 states use “discount from AWP” to compute Estimated Acquisition Cost (EAC) as the basis for pharmacy ingredient reimbursement under Medicaid. The median discount is 12% (range: -5% to -50%). Seven states have generic-specific formulas ranging from -20% to -50%.

Inflated AWP values would have also inflated Medicaid ingredient reimbursements to retail and mail pharmacies. Note that Medicaid rebates from manufacturers to the states are not affected because these rebates are computed based on Average Manufacturer Price and Best Price data.

On one hand, CVS’ comments on the relationship between negotiated discounts and AWP is consistent with the observation that we didn’t see windfall profits for pharmacy chains and PBM mail order in 2002. But reimbursement discounts did not widen for Medicaid EAC calculations. Will states make additional claims against retail pharmacies for Medicaid payments? Does this create financial/legal liability for the retail pharmacy industry?

And here’s a real brain-twister: How does the settlement affect the projected savings from the 2005 Deficit Reduction Act’s switch from AWP to AMP-based formulas? NACDS’ position paper notes that DRA switch reduces payments to community retail pharmacy by $6.3 billion over the next 5 years. (See Implications of Federal Medicaid Generic Drug Payment Reductions For State Policymakers.) If you believe Dr. Hartman’s analyses, about $2.5 billion of these savings will never materialize.

Looks like we’ll be living with the AWP settlement for a long time.

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