Monday, November 12, 2007

Judge Saris on Fictitious AWPs

I got so busy last week with the CVS-WAG lawsuit, the AMP lawsuit, and a senior executive departure from a big wholesaler that I forgot to blog about the latest AWP legal news!

In case you missed it, Judge Patti Saris recently entered damages in the Average Wholesale Price (AWP) litigation against Astra-Zeneca and Bristol Myers Squibb. Both companies plan to appeal. Good coverage in Pharmalot: Foxes In The Chicken Coop Pay Big Fines.

I think the prospects for more AWP litigation are very high, especially after reading her latest decision. I also believe that Judge Saris' comments will effectively end the consideration of alternate "list price" pharmacy reimbursement models such as Wholesale Acquisition Cost (WAC).

I discussed her original ruling last June in Comments on the AWP Decision, so the damages are just an incremental piece of bad news for the AWP benchmark. In the new decision, Judge Saris wrote:
  • “The overwhelming evidence at trial established that AWPs are fictitious and are rarely, if ever, prices paid by doctors for PADs or by pharmacies for [self administered drugs or SADs].”

  • “I conclude that defendants’ conduct was both knowing and willful because they knew that Medicare beneficiaries, and thus their insurers, were locked by statute into paying 20 percent of grossly inflated AWPs, which bore no relation to any average of wholesale prices in the marketplace.”
Whoa! Pretty strong anti-AWP sentiment.

I wonder how much longer AWP will remain as the primary benchmark for Part D plans. Per the report cited in Part D + AMP = Trouble, the average pharmacy payment from Part D insurers = AWP-15% + $2.10.

What about WAC?

Some people have suggested that Wholesale Acquisition Cost (WAC) could replace AWP as a pricing benchmark. WAC is the manufacturer's list price to drug to wholesalers or direct purchasers, excluding any discounts. NACDS has proposed WAC-based reimbursement for brand drugs in June 2005 Congressional testimony, a position the association reiterated in its February 2007 comments about AMP to CMS.

However, WAC is not a computed transactional price like AMP and therefore is subject to the exact same criticisms and problems of AWP. In fact, the First DataBank AWP case revolves around an alleged increase in the mathematical relationship between WAC and AWP.

Obligatory AMP reference

And don’t forget that the AWP litigation bandwagon is just getting started. Iowa was the latest state to hop onboard and sue pharmaceutical companies over drug prices:

“Iowa Attorney General Tom Miller announced Tuesday [Oct. 9] that the state has filed a lawsuit against 78 pharmaceutical companies, alleging the companies inflated drug prices for Medicaid patients, costing the state millions of dollars over several years…Miller said pharmacists also ended up benefiting financially from the inflated prices for Medicaid drugs in the scheme.”

Wait a minute! What did he say about pharmacies? Pharmacies benefited financially from AWP reimbursement under Medicaid?!?

Looks like I just discovered another reason to ban AMP!


Thanks to Pharmalot for the wholesale graphic. He gave me a really good discount off list...


  1. You will have to forgive the rant, but I sent the following to one of my colleagues last week:

    “I want bring a class action against GM or Toyota for the same reason. ‘The overwhelming evidence established that MSRPs are fictitious and are rarely, if ever, prices paid by government agencies, flees customers, or individual consumers.’

    Or, how about Lays potato chips for printing a SRP on the bag? It’s the same argument.”

    Since when are manufacturers in any industry prohibited from setting and publishing a reference price for their goods? Why are pharmaceutical manufacturers being hammered on pricing for products which the government pays for? Why are durable medical equipment manufacturers, physicians, construction companies, and auto manufacturers, all of which sell billions of dollars in products and services to the state and federal government, not held to the same standard?

  2. Dr. Fein,

    You it sound as if all pharmaceuticals are reimbursed at AWP-15%. Not true. That is the standard for BRAND NAME items. Generics are reimbursed based on each insurance company's MAC list or at AWP less 30% or more depending on the contract. In Texas the Texas Vendor Drug program has agressively discounted generics to a level that is close to AMP and has done so for the last few years. Once again it is time for everyone to quit playing the shell game. Gross profits(margins) for third party BRAND NAME items are close to 10-11%. Therefore, in the product mix generics must have a higher level of gross profit to allow the end distributor(pharmacy) to operate. Why is it that our industry is the only industry out there where the word "profit" is a dirty word? Hey by the way I would love to report my pfofits were up at the levels of Humana and CareMark. I, also, would love to have an annual salary like rhw CEO's at CareMark, Express Scripts and United Health.

    Even the Judge dosn't have it right when making the statement that Medicare beneficiary's are paying 20% of AWP. Retail hasn't been reimbursed at AWP for 35 years. Yeah , I agree get rid of AWP. But, also get rid of "dispensing fees" and base the total reimbursement to retail pharmacy on a model based on percentage gross profit model which allows for a reasonable net profit. This a capitalistic society isn't it??

  3. PBMguru,

    This particular case dealt primarily with physician-administered drugs. Reimbursements to physicians by the government or third-party payers were based on the AWP, which was allegedly understood by payers to be an estimate of actual acquisition cost. Patients were required by Medicare to make a 20% co-payment based on the AWP. (Yes, some physicians waived this co-payment, but some did not.)

    Your analogy is not correct because financial flows and physical distribution are linked in the automobile channel, whereas they are separate for drugs. You also have:
    (a) the ability choose your car based on price, features, benefits, etc.;
    (b) the ability to negotiate the price of your car;
    (c) the ability to comparison shop among car dealers; and
    (d) good data on actual dealer costs from Consumers Reports et al.

    Using your analogy, imagine that you decide to finance the purchase of your first car, which has an MRSP of $20,000. You decide to put 20% down ($4,000) and your parents agree to pay the balance of 80% ($16,000). In my example, you can’t choose your own car, negotiate the price, comparison shop, or know anything about the actual dealer cost.

    The car manufacturer then offers an unseen discount that makes the dealer’s cost only $12,000. You and your parents still pay $20,000, giving the dealer an $8,000 mark-up.

    The dealer could have waived your down-payment and just accepted the full $16K from your parents, leaving a still-respectable $4,000 mark-up. The dealer could also have decided to charge your parents the difference between your $4,000 down-payment and the dealer’s cost plus a “reasonable” profit margin.

    Here in the real world, the competitive market ensures that car dealers can’t really operate this way. In fact, car dealers’ mark-up on new car sales have dropped from 19% to 4% since the advent of the Internet.

    Check the blog on Wednesday – your analogy gave me a good idea for explaining the PBM business model!


  4. Adam,

    I was making a rather simple analogy not just to the auto industry, but to any industry which publishes some type of reference price. I did read the decision, and I think it is a stretch for the judge to say payers “understood” AWP to be a reflection of the acquisition cost. You and I are in the same business as the payers. We all know the pricing strategies (and the games) of the manufacturers, distributors, PBM’s, managed care organizations, and retailers.

    I think the government payers are sore losers because of their inability to keep up with the constantly changing market. For example, Missouri Medicaid to this day still pays brand claims at AWP-10.8% +$8.04 and maintains a very generous MAC list. This pricing is a result of poor management of the state Medicaid program.

    I think the decision is a intended to make an example of the AZ and BMS. I haven’t looked, but I would bet that the judge is either a.) up for re-election in her district, or b.) jockeying for an appointed promotion which could result from the upcoming presidential elections. And, yes, I think the decision is politically motivated.

  5. No idea about Judge Saris' political motivations, although U.S. District Judges are appointed, not elected (at least according to Wikipedia)

    To anonymous: Good point. Just look at the variation in Medicaid program reimbursements, per the CMS site: Medicaid Prescription Reimbursement Information By State. Not every state has a MAC, some use the same formula for generics vs. brands, etc.


  6. The list from CMS with regard to reimbursement should be verified with each individual state. In Texas the Vendor Drug Program adopted an estimated acquisition cost method and the AWP-15% does not really apply to the majority of brand drugs. Once again, is the fault of retail pharamcy that the states do not adapt to the marketplace. What a pharmacy spends to purchase today was not the case ten years ago and will not be the case two years from now.

    That is why the old reimbusement formulas which include a dispensing fee factor need to be revamped and reflect a true retail/service methodology. What other business works on a set selling( dispensing) fee regardless of product or service cost.


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