Friday, June 22, 2007

Comments on the AWP Decision

Judge Saris issued her ruling on the AWP lawsuit yesterday, finding that AstraZeneca, Schering-Plough, and Bristol-Myers Squibb engaged in deceptive and unfair practices. Read Ed Silverman’s coverage on Pharmalot in Drugmakers Lose AWP Lawsuit (with a great graphic) or in Ruling on Drug Pricing Faults Three Companies from the Wall Street Journal.

The decision, which is written in unexpectedly clear English, is available online here. Here are a few initial observations along with some questions for you to ponder:

Yes, Virginia, reimbursement drives behavior. Read pages 7 to 38 in the Findings of Fact, which succinctly summarizes the origin and usage of AWP (average wholesale price) for outpatient drug treatments. It provides a nice primer on how distributors and (especially) doctors responded to the various incentives within the AWP system. Another childhood illusion shattered.

Don't ignore the pharmacy supply chain's impact on sales. Some pharma executives have argued to me that the pharmacy supply chain -- their outbound distribution channels -- have no impact on sales. As a counterpoint, read about the (presumably discontinued) strategies of manufacturers that “marketed the spread” as a way to grow product revenues. Industry growth is coming from single-source large molecule drugs, so the pharmacy supply chain's incentives will become more (not less) important over the next ten years.

CMS is the government pit bull today. AWP faded away for Medicare Part B when the government switched to an ASP (average sales price) model. Be sure to read Judge Saris’ description of the OIG’s role as “the government pit bull” in pushing CMS -- then called HCFA -- for a change in reimbursement methodology (pages 28-24). Ironically, CMS is more aggressive than OIG today.

Did we save money? Total spending for Part B drugs went down for the first time (ever?) last year and many physicians are getting out of the business. Yet I note that product sales did not decline for the biotech companies with products reimbursed under Part B. Did care shift to inpatient settings? Are patients getting products reimbursed under Part D at a retail pharmacy and “brown bagging” the product to a provider? No one really knows.

Third-party payors were (are?) “stuck” on AWP. Judge Saris chastises third-party payors (TPPs) for not adopting cost-plus reimbursement models. On page 38, she writes that third-party payors “…were not proactive in adjusting to cost data once Medicare did the legwork for them in devising more reasonable drug pricing and service fees. Medicare provided the TPPs with cover, by insulating them from protests by the network of providers.” Note that Judge Saris is also handling the First Databank case that I covered here two weeks ago.

And this makes me ask...

Will TPPs remain "stuck?" On Tuesday, I argued that list minus pricing models will be under pressure throughout the industry, especially as more evidence of large spreads on generic dispensing come to light. Will TPPs be “stuck” on reimbursement models this time, or will they take a more serious look at AMP after this ruling?

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