Guest Article

(From the April 6, 2009 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

AWP Settlement and the Implications for the Healthcare Industry

On March 30, the U.S. District Court for the District of Massachusetts entered a Final Order and Judgment approving a long-awaited class action settlement that involved two major publishers of drug pricing information. Alleged to have inflated the Average Wholesale Prices (AWP) for hundreds of brand-name drugs, the publishers agreed to roll-back the AWP on all drugs to a uniform 120 percent of the Wholesale Acquisition Cost. The settlement will affect all organizations (e.g., insurers, employers and health plans) that contract with a third party for pharmacy benefit services.

The Allegations and Settlement

The lawsuits alleged that one of the major publishers of drug pricing information (along with a drug manufacturer) fraudulently colluded to increase the published AWP of over 400 brand drugs (affecting 1,442 individual National Drug Codes) by 5 percent from late 2001 to 2005. The suits also alleged that a second publisher negligently published the same inflated AWP information.

As a pricing benchmark, the AWP is the basis on which most single-source drugs are contractually reimbursed. Pharmacy benefit managers (PBMs) and drugstores typically purchase drugs on the basis of the Wholesale Acquisition Cost (WAC), and then in turn sell them to third party providers (e.g., insurance companies, union health and welfare benefit plans, employer sponsors of self-insured welfare benefit plans, etc.) and individual members on the basis of AWP. The differential, called the "spread," is earned by the PBM.

Despite its name, the AWP is not an average of prices charged by wholesalers to providers. Rather, it is based upon the WAC, which is the price that wholesalers pay to purchase the drug from the manufacturer. The WAC is marked-up by a fixed factor -- typically 1.20 -- to generate the AWP. Neither the determination of WAC nor the determination of AWP is subject to regulatory review.

Under the settlement, for the 400 brand name drugs involved in the suit, the publishers will roll-back the markup between the WAC and AWP from 1.25 to 1.20 on Saturday, September 26, 2009 (i.e., the date that is 180 days after the entry of the Final Order and Judgment). At the same time, independently of the settlement, the publishers have decided to apply the same 1.20 mark-up factor to all other National Drug Codes whose AWP is based upon a mark-up from WAC in excess of 1.20. The result of the rollback will be to reduce the AWP (and the PBM's spread) on all of those drugs.

Separate from the settlement, the publishers have decided to discontinue altogether the publishing of AWP information within two years after the rollback -- although they will reportedly continue to publish other drug pricing information (e.g., WAC, direct price, etc.).

The Lone Class Member Objection

For the most part, class members are happy with the outcome. However, one class member -- a health insurance company -- criticized the settlement, claiming that the rollback of AWP will be of little or no value to the third party providers who actually purchased drugs based on the inflated AWP, because the PBMs are expected to revise their contracts to maintain the economic parity that existed prior to the rollback. In rejecting this criticism and approving the proposed settlement, the court highlighted the following reasons:

Non-Class Member Objections

Many industry groups representing the retail drugstore industry objected to AWP rollback, claiming it would unfairly affect them. Their main concern was over the publishers' voluntary decision to roll-back the AWP on thousands of additional National Drug Codes. The industry groups argued that this constituted a "collusive end-run" around the court's concerns. The groups submitted an amicus curiae brief stating that, at a margin of 2.8 percent, many retail drugstores "cannot absorb a 4-5 percent reduction in reimbursement for brand name pharmaceuticals, approximately 80 percent of prescription sales." In rejecting this criticism and approving the proposed settlement, the court explained in its opinion that:

Implications

The two drug pricing publishers will reduce the AWP of thousands of National Drug Codes to a uniform 1.20 of WAC effective Saturday, September 26, 2009. The reduction will apply not only to the 400 brand name drugs involved in the lawsuits, but also to several hundred other drugs that have markups beyond 1.20 of WAC. While this may potentially result in a savings to self-insured plan sponsors and other third-party providers who negotiated the purchase of drugs based on AWP, the PBMs with whom these contracts are drawn are expected to move quickly to adjust contracts to maintain the economic parity that existed prior to the settlement.

In anticipation of the resolution of these lawsuits, most PBM contracts that were written within the past two years have included language allowing the PBM to unilaterally adjust the financial terms of the contract in the event of the settlement of the lawsuits in order to maintain the "relative economics" between the parties. Most PBM contacts are for a three-year period -- therefore, contracts that were written more than two years ago likely will not contain language that specifically addresses the potential settlement of these class actions. However, other provisions may allow the PBM to revise the contract's financial terms. If the contract's financial terms are not adjusted, the AWP rollback will effectively yield a 4 percent cost reduction to the plan sponsor and covered members for the hundreds of brand drugs that are affected by the lower AWPs.

Plan sponsors whose PBM has contacted them to revise the contract's financial terms are advised to seek the advice of their consultant, broker or legal counsel. The plan sponsor would be well advised to have an independent third party review the proposed revised financial terms -- and the impact they will have on the pharmacy claims costs (from both the sponsor and member point-of-view) -- before agreeing to any change in terms. A careful third-party review will ensure that the plans sponsor's best interests, as well as the PBM's, are considered in determining how to maintain the "relative economics" of the contract.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2009, Deloitte.