Three Letters Lead to Millions in Drug Overpayments: AWP

Congressional committees, state legislatures, and think tanks are furiously working on figuring out why drug prices are so high in the U.S and what to do about it.? Drug manufacturers point the finger at PBMs (pharmacy benefits managers); PBMs blame the prices set by drug manufacturers; others blame government regulation, health insurers, or pharmacies.?

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????????????????? A lot of attention is directed at insulin prices, costs for newly discovered cancer drugs, and weight loss drugs such as Ozempic.? Often ignored are the more widespread and systemic drug pricing abuses that take place every day on common, widely used, generic drugs.? Perhaps people assume that all generics are already cheap and/or the price inflation on such products doesn’t amount to much money.? ?

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????????????????? Generic drugs account for almost 90% of all drug prescriptions.? About $100 billion per year is spent on generic drugs by employers, health insurers and workers’ compensation carriers.? Although Medicare and other federal/state programs have cost controls in place for generic drugs, Medicare ?accounts for only about 30% of drug spending.? Most? generic prescription drugs are paid for by employers, private health insurers, workers’ compensation carriers, employee and union healthcare trusts, self-insured companies, and by cash paying consumers.? For payers other than Medicare, a major problem with generics is the ongoing use of an archaic pricing system based on “average wholesale price” (AWP).

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????????????????? Historically, AWP was a figure determined and reported by drug manufacturers to ?industry compendia such as Red Book or Medi-Span.? These compendia recorded the amount reported by the manufacturers as their suggested AWP, with no verification, validation, or other process to determine whether the figures reported as AWP had any basis is fact.? Initially, the reported AWPs were somewhat related to actual wholesale prices, but over time, the entire process degenerated into the bizarre.? The gap between real wholesale prices and reported AWPs became so outrageous that AWP was attacked in state and federal courts as deceptive and ?and ultimately dumped by Medicare.? Figures reported as AWPs can be up to 150-fold higher than actual wholesale prices.? For example, consider these bills submitted for generic drugs sent to a self-insured employer in a Pennsylvania workers’ compensation case:

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Generic Drug??????????????????? Brand Name????????????????????? Published AWP???????????????RealAWP (NADAC)

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Cyclobenzaprine????????? Flexeril????????????????? ?????????????????????????? $207.16?????????????????????????????????? $.66

Tramadol??????????? ?????????? Ultram????????????????? ????????????????????????????$55.44?????????????????????????????????? $1.98

Pregabalin?????????????????????Lyrica?? ??????????????????????????????????????????? $535.29????????????????????????????????$3.30

Ondansetron ????????????????Zofran? ??????????????????????????????????????????? $1,226.52???????????????????????????? $3.32

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????????????????? The gap between real prices and AWP is so large and so well known that the joke in the industry is that AWP stands for “ain’t what’s paid” – reported AWPs have nothing at all to do with the amount paid by pharmacies to acquire drugs at wholesale.

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????????????????? Although widely rejected as inflated, unrealistic or down-right fraudulent, manufacturer reported AWPs remain the norm in non-Medicare programs.? Red Book and Medi-Span reported AWPs are still widely used as the basis for drug pricing by PBMs.

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????????????????? PBMs are intermediaries between prescription drug dispensing pharmacies and the companies that will ultimately be responsible for paying for the drugs. ??PBMs enter into contracts with payers that provide the payers with specified “discounts”.?? The PBM determines the amount that will be paid to the dispensing pharmacy and the amount that will be charged to the payer.?

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????????????????? Typically, a PBM starts by looking at the Red Book/Medi-Span AWP and then “discounts” the compendium price and charges that discounted price to the payer. ?The discounts can be as much as 20% to 80% - tricking clients into believing that they are getting great prices and allowing the PBM to advertise and boast that they are responsible for massive reductions in drug spending.

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????????????????? Discounted prices in a vacuum are meaningless.? Discounts must be considered in the context of what they were taken against.? For example, if a store slaps a tag on a shirt that says “MSRP $500”, and then “our price - $10”, the discount may look attractive but could be meaningless or misleading if the retailer actually purchased the shirt from a wholesaler for $2.? Putting an artificially inflated starting price on an item and then negotiation down by a huge margin is a classic trick used in middle eastern shuks, ?and unfortunately, also the gimmick used by PBMs in the US.

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????????????????? PBMs are quick to brag that they “save” payers enormous amounts of money by negotiating discounts with dispensing pharmacies, but never reveal the spread between what it cost them to acquire the drug at wholesale and what it charged to the ultimate payer.? Of course, they also withhold data on how much of the money paid by the ultimate payer was funneled back to the dispensing pharmacy.? PBM contracts are legendarily complex and stuffed with non-disclosure clauses that make it difficult to follow the flow of money through the system or accurately gauge the amount that is sidetracked to the PBM.

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????????????????? The cure for AWP abuse is quite simple, and already in use by Medicare.? Just stop allowing prices to be based on, or discounts to be declared against, compendium AWPs.? Instead, use real numbers that truly reflect actual wholesale prices paid by pharmacies.

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????????????????? Most payers choose their PBMs but pay precious little attention to the issue of AWP.? Once they see a 25% to ?80% discount, they are thrilled and stop reading, missing the fact that the discounts are taken against absolutely meaningless hyper-infalted prices and that after the discounts, they could still wind up paying up to 10 times more than if they used no PBM at all.

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????????????????? It is also simple to judge how badly a company is being ripped off by a PBM despite large percentage discounts.? A schedule, calculated and reported by the US Government’s CMS, called NADAC (National Average Direct Acquisition Cost) ?is available for free. ?The protocol for calculating NADAC is publicly disclosed, transparent, and objective.? Anyone can check on the actual AWP by looking up a drug by its assigned NDC number at? ndclist.com . ??NADAC is a good gauge of what the PBM likely paid to acquire the drug at wholesale.? The client can then compare the price it paid through the PBM after the discount to the NADAC to get a good idea of the extent of the rip off.

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????????????????? Recently, some PBMs have started to offer transparent models that are based on their acquisition costs (close to or at NADAC), plus a fixed administrative fee.? Some pharmacies are also getting into direct, transparent vending on a cost-plus model.? (See, for example, Mark Cuban’s Cost Plus program - costplusdrugs.com ).

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????????????????? Reform through legislation, regulation and litigation are possible, but it would be much easier, cheaper and quicker for companies to use a little common sense, read their contracts carefully, and start switching away from PBMs that rip them off.?

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????????????????? Rather than overcoming political obstacles and fighting lobbyists to get sweeping PBM and drug pricing reform, insurers and employers can simply solve the AWP-related problems by refusing to use compendia AWP and insisting instead on use of NADAC.? This can be done in the selection and contracting process when considering or renewing a PBM contract.? If a company can’t get out of an existing contract, use of compendia AWP can also be fought in the courts.? For example, in Pennsylvania, a recent challenge to use of Red Book AWP succeeded, and Red Book AWP was barred from further use in that state’s workers’ compensation system.

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????????????????? It may be sexier to hold hearings and fight media wars aimed at a few drugs of current interest, but an easier, quicker, more wide-ranging, and more direct approach when it comes to generic drugs is for insurers, employers, and other payers to refuse to enter into contracts with PBMs that are based on ?discounts to inflated compendia AWPs.? ?

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Cliff Goldstein, Esq., formerly the CEO and a Senior Litigator at Chartwell Law, has 35 years of experience in litigating complex workers' compensation cases.? He now concentrates solely on addressing excessive pricing, fraudulent practices, abuse, and waste regarding drugs used in workers' compensation cases.? He can be reached at 215 588 4901 and [email protected]

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This article does not provide legal advice.? All cases are unique and if appropriate, should be discussed with an attorney of the client’s choosing.? This article is intended only to stimulate discussion, and its contents are not a substitute for independent research and legal consultation before taking or refraining from any action.? This article is merely an expression of opinions of the author.? This article does not create or imply an attorney client relationship.? Do not take or refrain from taking any action based on this article and be sure to consult with an attorney of your choice about the risks of taking or refraining from any actions.? The prices and other numbers in this article are examples taken from websites at the time the article was written. Actual prices and other data will be different and change frequently, and the figures presented are only examples.? Not all PBMs work under the same standards, formulae, and terms, and PBM? contracts vary. ?Prices for drugs should be examined based on the type of drug, NDC number, provider, billing entity, prescriber, NADAC or other schedules, and other factors, and payments should be made in accordance with the then-current law.? The law in this area is in a state of flux with cases pending appeal. ??Some drugs do not have NADACs.? Some drug bills to comp payors are for non-prescription medications, raising a series of additional issues to address.? No particular pharmacy, PBM, billing company, or doctor? is accused herein of any wrongdoing.? This article is based on a small sample of limited data that may not be representative of the industry as a whole.? This article does not represent the opinions of any company or law firm and is the copyrighted property of the author.? It may not be reproduced in whole or in part without the permission of the author.? Cliff Goldstein is licensed to practice law in Pennsylvania and maintains an office in Merion Station, PA.? For more information, please contact Cliff Goldstein at [email protected] .?

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