How Much “Spread” in AWP Pricing Is Unlawful?

n How Much “Spread” in AWP Pricing Is Unlawful?
A colorful ruling by federal U.S. District Court Judge Patti B.
Saris (Boston) dated June 21, 2007, proclaimed that some
pharmaceutical manufacturers had been “unscrupulously taking
advantage of the flawed AWP (average wholesale price)
system . . . by establishing secret mega-spreads far beyond
the standard industry markup,” describing this behavior as
“unethical and oppressive.”1 The case involved self- and physician-
administered medications that “represent a tiny percentage
of the thousands of pharmaceutical products available in the
United States market.” Although manufacturers sold these
medications to physicians and other providers for much less
than AWP, plaintiffs, including third-party payers and patients
who pay either coinsurance or full price for medications, paid
for these drugs using AWP-based formulas. The resulting
“spread” between the actual acquisition cost and reimbursed
amount was so profitable for physicians that, the judge noted
anecdotally, one doctor had a plaque that read, “This is the house
that leucovorin built.”
After 20 days of trial and almost 40 witnesses, the judge
concurred with plaintiffs that the drug companies took advantage
of no oversight of self-reported AWP values and that “the
published AWPs for defendants’ drugs are fictitious because
they do not reflect the true average sales price (ASP) to providers,
like doctors and pharmacists” (page 3). The judge noted in the
decision, “I use the term ‘spread’ and ‘markup’ interchangeably”
(page 3). She ordered AstraZeneca to pay damages of
$4.45 million to non-Medicare third-party payers and Bristol-
Myers Squibb (BMS) to pay damages of $183,000 for the period
from December 1997 to December 2003. The judge ruled that
Johnson & Johnson (J&J) did not violate the law because its
spreads “never substantially exceeded the range of what was
generally expected.” Table 1 in the decision shows “percentage
markup” (spread) of 40.7% for Zoladex (AstraZeneca) in 1995
and 149.7% in 2001; among 5 BMS drugs, the markup was
27.0% for Taxol in 1997 and 128.7% in 2002; 1 drug from J&J,
Remicade, had a spread of 32.1% in 1999 and 31.9% in 2001;
1 drug from Schering-Plough, Proventil, had a spread of 53.4%
in 1993 and 28.6% in 2001; and 1 drug from Warrick
(Schering), albuterol sulfate, had a spread of 186.8% in 1995
and 651.4% in 2002.
The Class 2 claims are from third-party payers in
Massachusetts that reimburse Medicare beneficiaries for their
statutory 20% coinsurance under Medigap or supplemental
insurance. Class 3 claims included (1) all other third-party
payers, (2) consumers who make coinsurance payments, and
(3) consumers without insurance “for these drugs in Massachusetts
and who pay for the drugs based on AWP.”
This decision in In Re Pharmaceutical Industry Average Wholesale
Price Litigation refers to “perverse incentives” created by the
Medicare system in basing provider reimbursement on AWP,
unscrupulous behavior of “many pharmaceutical companies” in
Commentary
taking advantage of a “flawed AWP system” by acting “unfairly
and deceptively by causing the publication of false and inflated
average wholesale prices.” The ruling admonished third-party
payers as “stuck” paying inflated prices since few have moved
away from the AWP benchmark despite likely cost savings and
despite Medicare’s lead in redefining the payment benchmark
for Part B. The ruling hypothesizes that payers’ inaction is due
both to concern that providers will leave the network and that
patients will be referred to more expensive hospital settings for
drug administration.
The ruling by Judge Saris highlights the difference between
the plain meaning of AWP and the manner in which AWP has
been used in the marketplace and even refers to AWP as “ain’t
what’s paid.” Some managed care pharmacists have used this
term for AWP for 10 years or more, particularly when referring
to generic drugs and multiple-source brand drugs where the
actual net purchase price bears no resemblance to AWP. Judge
Saris found that while single-source drugs without generic
competition bore a predictable relationship to acquisition costs,
once these drugs faced generic competition, the “manufacturer
could manipulate the spread—the difference between the actual
selling price and the AWP-based reimbursement—to make the
drugs more attractive to a physician,” and “could then ‘market
the spread’ to the physician to increase sales and market share.”
Yet, even the invalid nature of AWP for single-source brand
drugs became more clear to all by front-page news in October
2006 when it was disclosed that AWP is not based on a survey
of the average of prices listed by various wholesalers.2
So how much “spread” is too much? An interesting aspect of
the decision in In Re Pharmaceutical Industry Average Wholesale
Price Litigation is the method by which the spread between
actual purchase and AWP was determined to be too much.
A health care economist used the pricing history of single-source
drugs that did not face competition to calculate the margin over
his estimate of the ASP to health care providers that would be
necessary to ensure a reasonable profit and cover administrative
fees. A 30% margin was proclaimed to be the “threshold yardstick
spread” and was also referred to in the ruling as the “speed
limit” for single-source drugs during their period of exclusivity
and for the first 6 months following generic launch. This economist
concluded that the manufacturer is liable whenever the
“speed limit” is exceeded. With respect to certain BMS products
(Taxol, Vepesid injectable, Cytoxan injectable, Blenoxane, and
Rubex) and one AstraZeneca product (Zoladex), Judge Saris
found that AWPs “grossly exceeded actual physician acquisition
costs” and that they “grossly exceeded the standard industry
markup.” She also found that the two companies marketed
“these mega-spreads between physician’s acquisition costs and
the AWP reimbursement benchmark in order to induce doctors
to buy . . . based on the drugs’ profitability.” In general, the
ruling assigned damages based on spreads above the economist’s
“speed limit” and requested additional analysis from the health
516 Journal of Managed Care Pharmacy JMCP July/August 2007 Vol. 13, No.6 www.amcp.org
economist to calculate specific economic damages for Class 2
plaintiffs.
Price manipulation claims are not new to the pharmaceutical
industry.3 Almost exactly 4 years earlier, AstraZeneca announced
on June 20, 2003, that it would pay $354.9 million and enter a
5-year corporate integrity agreement (CIA) to settle a federal
inquiry into illegal sales and marketing of the prostate cancer
treatment Zoladex.4 At the time, this was the second-largest
settlement in history for improper sales and marketing by a
pharmaceutical company. AstraZeneca pleaded guilty in federal
district court to violating the Prescription Drug Marketing Act’s
provisions forbidding the sale of drug samples and related
promotional practices. According to the U.S. Department
of Justice, the company (1) had its employees provide thousands
of free Zoladex samples to physicians, knowing that the doctors
would prescribe the samples to patients and then bill Medicare
and Medicaid for them; (2) offered free samples, unrestricted
educational grants, business assistance, travel, entertainment,
consulting services and honoraria to doctors in exchange for
their prescriptions of Zoladex; (3) offered steep discounts to
physicians for Zoladex without reflecting those discounts in
AWP reported to Medicare and Medicaid, thus inflating
the prices and increasing physicians’ reimbursements; and
(4) misreported and underpaid Medicaid rebates for Zoladex to
the states under the Medicaid Rebate Program. The $355 million
fine was distributed as $64 million for a criminal fine, $266
million to settle civil allegations, and $25 million to settle claims
of overcharging Medicaid. The company had set aside $350
million in late 2002 to cover the anticipated settlement costs.
The speed bump imposed by the ruling in In Re Pharmaceutical
Industry Average Wholesale Price Litigation in manipulation of
the difference between the true purchase price and AWP puts
current “speeders” on notice, and simultaneously provides
a benchmark for establishing liability and for calculating
damages with respect to past acts that are the subject of pending
lawsuits. It is unclear for how much longer third-party payers
will remain “stuck,” yet they, too, have been put on notice. There
is little doubt that, based on previous decisions, including the
so-called First DataBank decision in New England Carpenters v.
First DataBank,5 AWP has a short life expectancy since it is now
more clearly “Ain’t What’s Prudent.”

Labels: How Much “Spread” in AWP Pricing Is Unlawful?

posted by Robert Heard at 2:35 PM