CMS' Rx Pricing Methodology Presents Host of Concerns
On April 3, 2009, CMS released a memorandum announcing that, commencing June 1, 2009, the agency will begin independently pricing prescription drugs costs included in all MSAs.  CMS will rely on Average Wholesale Price (AWP) data, and CMS “will not use or recognize any other pricing, discounting, or calculation methods when determining the adequacy of the prescription drug amounts in WCMSA proposals.”  Prior to the memorandum, CMS didn’t use any method for pricing drugs, nor did CMS even review vendor projections for drugs to determine reasonableness.

This announcement raises a host of concerns regarding the impact on MSAs.
Concerns

1. Much of the industry has moved away from AWP pricing as AWPs have become somewhat arcane and defunct, and sometimes inflated illegally.

AWPs are intended to typify the average price that customers (physicians, pharmacies, etc.) pay wholesalers for drugs.  Manufacturers periodically publish their AWPs to publishers of drug pricing data, who in turn sell the data to government agencies and private insurance companies.  While the intent of AWPs is understood, in reality, the prices are nothing more than a "sticker price" on which negotiations are based.

Customers generally pay the AWP minus a percentage.  State Medicaid agencies' discounts range from 5% to 15%.  Discounts for insurance companies and other customers also vary widely.  There are no formulas for AWPs defined by laws or regulations, nor are AWPs required to be updated at regular schedules.  In short, the self-reported nature of AWPs, with the considerable discounts negotiated by customers and the lack of regulation concerning calculation of AWPs results in AWPs not portraying valid market prices for drugs.(1)

Because they do not represent valid market prices, AWPs have been the focus of a flurry of litigation and scrutiny.  Over the past several years, a multitude of lawsuits have targeted drug manufacturers and publishers of drug pricing data alleging that AWPs have been arbitrarily inflated.  From the way many contracts were written, the higher the AWP, the higher the payment from the payer and claimant, resulting in more profit to drug manufacturers.  In many instances, settlements involved defendants paying funds back to insurance companies, government entities, and consumers who paid co-pays and other out-of-pocket expenses for prescription drugs.  In some settlements, data companies agreed to stop publishing AWPs.(2)

2. There are better, more accurate ways to project drug costs.

Basing drug payments on AWPs has clearly resulted in many problems, and several solutions have been presented.  One option, proposed by the House Energy and Commerce Committee, would require drug manufacturers to report the average sales price (ASP) of each drug, which would provide the true cost of a drug (after the effect of rebates, charge backs, and other discounts to customers).  According to a report published by the OIG, ASPs can be lower than AWPs by 26 to 68 percent.  In the sample drugs included in the report, the median ASP was 49 percent lower than the median AWP.(3)  In a different report, the OIG states that its findings "clearly demonstrate the inflated nature of reported average wholesale prices" which have resulted in overpayments.(4)

Furthermore, many claimants will obtain their drugs from mail order pharmacies, which will result in even more savings from AWPs.

3. Using the AWP does not account for patent expirations or generic alternative substitutions.

The AWP pricing methodology does not account for price reductions that result from patent expirations, or the significant savings possible by substituting generic drugs for brand name drugs.  As published in our February 2007 blog entry, a study by CMS found that Medicare beneficiaries can save approximately 59 percent by switching to generic medications.

4. It is likely that CMS will simply take the current drug usage, price at AWP and extrapolate out over the claimant’s life expectancy without accounting for drugs being titrated or removed over time.

Rarely does a claimant use a drug for life.  In fact, many times they are completely taken off of prescriptions because the drugs are no longer effective or are no longer warranted, or alternative pain therapies are utilized.  This is not to mention that many drugs would have hazardous effects with long term use.

5. AWP pricing does not account for the fact that different states use different fee schedule pricing for drugs, which may result in over- or under-pricing projections. For those states where the state drug fee schedule is less than AWP, pricing at AWP may be illegal.

Most states use fee-schedule pricing for drugs, not AWPs.  Therefore, pricing drugs costs using AWPs could result in inaccurate projections.  In cases where the fee schedule is less than the AWP, resulting in the MSA projections yielding higher costs than the state's fee schedule, legal implications could arise.  Also, many carriers pay less than fee schedule prices for prescriptions due to negotiated contracts or other drug sources.  Requiring AWP pricing in these situations also has legal implications.

6. The memorandum states that if an MSA does not include projections for drugs but CMS “deems that the WCMSA warranted the need for prescription drugs for the treatment of the WC related injury,” CMS will utilize the AWP pricing methodology for brand name drugs.  How CMS will deem the appropriateness of drugs, especially for cases where members do not use prescriptions, is alarmingly unclear.

Protocols has submitted numerous cases to CMS for approval that have not projected any prescription drugs because they are not being used and are not warranted.  Nevertheless, CMS has withheld its determination until an “amount” is given to them for drugs; “$0.00” is not a number in CMS' eyes.  We are concerned that CMS will arbitrarily add drug projections that are not warranted.
What Protocols is Doing

Protocols is currently conducting an analysis to determine the financial impact of AWP pricing in MSAs.  We will release the results of the analysis as soon as possible.  In the meantime, please feel free to contact Robert Sagrillo or Henry Kohnlein at 1.800.660.7573 with questions.


Sources
 (1) Gencarelli, Dawn M. "Average Wholesale Price for Prescription Drugs: Is There a More Appropriate Pricing Mechanism?"  National Health Policy Forum.  June 2002.

(2) Paul, Reid. "What AWP suit means: Get ready for its demise."  Drug Topics.  November 2006.

(3) Department of Health & Human Services, Office of Inspector General.  "Medicaid Drug Price Comparison: Average Sales Price to Average Wholesale Price."  June 2005.

(4) Department of Health & Human Services, Office of Inspector General.  "Medicaid's Use of Revised Average Wholesale Prices."  September 2001.
Copyright Protocols LLC. 4/8/2009. All rights reserved.

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