Monday, November 24, 2008

The Future of AWP: Ask Again Later

Last week’s legal developments don’t make the future of Average Wholesale Price (AWP) much clearer, despite my use of a magic 8-ball.

McKesson Corp (MCK) settled its pending class action suit for $351 million and set aside a further $143 million reserve for certain future claims. See McKesson Agrees To Settlement In Pricing Suits.

Meanwhile, NACDS and FMI filed another brief in opposition to the controversial proposed First Databank settlement, although they overstate their arguments in a few places. Expect this battle to heat up over the next month as we get closer to the hearing about First Databank’s settlement.

McKesson: Without a Doubt

McKesson’s trial was scheduled to begin in December. You can view a presentation of selected evidence in the Plaintiffs’ Illustrative Exhibits in Support of Motion for Class Certification, which includes apparently damaging emails involving some familiar companies. Just keep in mind that this information was cherry-picked by the plaintiffs, so it is presented out of context and therefore may not be reliable.

Naturally, the settlement terms include “an express denial of liability of any kind.” (Read McKesson’s official statement.) The lead lawyer from the firm that filed the class action actually wrote a blog post about the settlement with his spin.

The settlement gives us some insight into litigation calculus. Conceptually, the settlement amount should be less than the sum of:
  • future legal costs, plus
  • the expected loss, where the expected loss = Probability of Losing * Total Damages.

If we assume $20 million in future legal costs and take the plaintiff’s original estimated damages of $5 billion, then the $351 million settlement implies a 6% probability of losing the case. Put another way, McKesson settled even though the numbers suggest a more than 90% chance of winning.

First DataBank: Cannot Predict Now

Read AWP: Dead Parrot or Just Resting? for my detailed overview about First Databank’s plans to unilaterally roll back the AWP for all drugs to 1.20 and discontinue publishing the Blue Book AWP data. This post is still valid because the next phase is a fairness hearing scheduled for mid-December.

Pharmacy groups object to the First DataBank settlement because a roll-back would translate into lost dollars for pharmacies that get reimbursed based on AWP. The National Association of Chain Drug Stores and the Food Marketing Institute recently filed a new brief and economic report opposing the amended June settlement.

Dr. Mosteller’s economic report (starting on page 21) highlights many issues that I have covered in my blog over that past few years, such as the reality that reimbursement relationships will be restructured to maintain dollar-based economic arrangements regardless of the benchmark. See PBMs and AMP (November 2007) or my original comments on the AWP settlement (October 2006).

Ask Again Later

The latest legal brief from NACDS and FMI perhaps overstates the Life Without AWP (LWAWP) issue when it says “no one has any idea as to what type of pricing benchmark will succeed it.” What, don’t they read Drug Channels?!? I’ve spent the past three years talking about a few likely candidates, including Wholesale Acquisition Cost (WAC), Average Manufacturer Price (AMP), and cost plus (a la Wal-Mart).

One final thought that has been nagging at me. Pharmacies were apparently not involved in the alleged decision to increase the WAC-to-AWP mark-up from 1.20 to 1.25. But didn’t pharmacies benefit from the allegedly inflated AWPs? I can’t seem to find any motions offering to refund any “overpayments.” I’ll keep looking…


Thanks to the concerned readers who inquired about the lack of posts last week. Alas, I was swamped with (paid) work, including a day testifying as an expert to a jury. I can’t write more about my expert testimony except to say that I had a lot of fun. You may rely on it.


  1. Thanks for the update. Wow, seems a bit twisted. You mentioned refund of overpayment. Yeah, like that will happen. Pharmacies seem to be "golden" in these instances. Seems a little suspicious that they "were not involved" when they clearly benefitted.

    Hard to imagine that a Economist would rather do "paid" work that focus on "free" work!

    Happy Thanksgiving. Thanks for keeping us updated!

  2. It doesn't make it right, but pharmacies benefited only briefly because PBM's quickly understood what was happening and adjusted their payments to pharmacies through contracts and mac rates.

  3. You asked the question: But didn’t pharmacies benefit from the allegedly inflated AWPs?... The answer is to be found in the initial submission to the court by NCPA expert Ed Heckman...only briefly. PBMs quickly adjusted payments to pharmacies to confiscate any additional margin that existed with AWP inflation. Look to the PBMs which base pricing to their clients on AWP for those entities which may have benefited unfairly from the change. PBMs use devices such as MAC (Maximum Allowable Cost) and confiscatory AWP minus pricing to minimize payment to pharmacies.
    It would surprise me greatly to see the PBMs leap to address the severe dislocation a universal AWP rollback will hoist on the backs of pharmacies. More likely they will use this threat to pharmacy survival to leverage even more concessions with their take-it-or-leave-it non-negotiation stance. Do the math of a non-addressable 4% loss of operating margin across the retail market segment, a 90 day or less grace period to address it, and the wild card of a non-responsive oligarchy of contractors. Makes the CVS/Caremark deal look like a masterstroke to establish a virtual monopoly on their merged revenue book of business, doesn’t it?

  4. A helpful client offers the following website for asking your AWP questions:

    Ask the Magic 8-Ball


    P.S. As always, thanks for the comments. I don't have enough data to draw a firm conclusion about whether pharmacies did or did not benefit for any amount of time.

  5. Adam:

    Your reference to the McKesson settlement is a bit confusing. After much publicity and a Bloomberg release describing an anticpated settlement, RICO claims, $15 billion in damages, etc., Judge Saris dismissed this lawsuit that claimed unlawful price-fixing on August 29, 2008. She ruled that the plaintiffs, led by the New England Carpenters Health Benefits Fund, failed to allege any anticompetitive effects and granted McKesson's motion to dismiss.

    Was that lawsuit ammended and re-filed? Is this what is being settled in your current comments? Please advise. Thanks.

  6. "Lionel,"

    Some information about the McKesson litigation that was just settled is available on the plaintiff's McKesson Class Action Litigation Website.