On April 6, 2009, CMS released a memo dated April 3, 2009 finally implementing an independent pharmaceutical pricing plan. As most of you are likely aware, CMS began requiring the inclusion of prescription drugs in MSAs effective January 1, 2006 upon the implementation of Medicare Part D, however never provided any guidance as to how to actually price the drugs. Effective June 1, 2009, only 3 ½ years later, the industry has finally been told to utilize average wholesale pricing (AWP) in the calculation of prescription drugs in MSAs, the effect and implementation of which is outrageous.

Average wholesale price is a term referring to commercially published lists of the average price at which wholesalers report that they sell drugs to their various customers. The Red Book, published by Thomson Medical Economics, is one example of such a list with pricing information based on data obtained from manufacturers, distributors, and other suppliers. Note that there is more than one published list of AWP and not all manufactures provide all publishers with their proprietary information, yet CMS has not included in its memo which list it may be utilizing nor how to reconcile pricing differences among them. Given the additional fact that there are several NDCs for the same drugs, which are listed in the AWP CMS is using is vital information.

While the term average wholesale price is intended to indicate just that, an average price, in practice it is just a figure reported by commercial publishers of drug pricing data and has little bearing in the reality of pharmaceutical sales. AWP is like a “sticker” price on a car – it is a drug pricing benchmark for payers throughout the health care industry but no one actually ever pays it. Drug pricing is typically based on AWP minus some negotiated discounted percentage and the more buying power the buyer has, the lower the price will ultimately be. In the context of CMS’s latest policy change, this is a huge expense to the insurance industry as this will require carriers to fund amounts greater than any obligation they would have under state law on an open claim paying for drugs at their negotiated rates. CMS is effectively taking away the ability to settle insurance claims, which may be its end game. So long as all insurance claims remain open, Medicare will always be secondary and never have to concern itself with any of its MSP monitoring or recovery efforts.

Criticism and disputes concerning AWP pricing is nothing new or unknown to the public. In 2002, a class action lawsuit  was filed in Massachusetts involving 23 pharmaceutical companies charging AWP for certain physician administered drugs treating cancer and serious illnesses, essentially holding serious ill individuals hostage at the high AWP price if they wanted to pursue certain drug treatments. To date more than half the defendants have settled for more than $225 million, an industry acknowledgement that the practice, if not unlawful, was at least unethical. Even the United States government ceases use of AWP in Medicare reimbursement rates when it passed the MMA in 2003, implementing instead reimbursements based upon a competitive acquisition program or an average sales price (42 USC 1395u(c)), both of which methods the statute actually goes on to define, unlike AWP.

Issues with regard to Rx memo are great. Not only is CMS holding WC insurers to a greater obligation than that which they have under state law, it is failing to address state law in certain states. Most notably, states such as California have workers’ compensation fee schedule pricing for pharmaceutical drugs. How does CMS justify implementing a unilateral application of AWP nationwide when certain states’ laws dictates otherwise? Clearly the constitution and states’ rights were not a consideration in the writing of this latest memorandum, which is not surprising as it is not the first time. In May 2008 CMS implemented a policy depriving female workers’ compensation beneficiaries out of an average of 2 years of medical benefits by disregarding years of statistical data concerning race and gender collected by the CDC in the compilation of the widely recognized and accepted life expectancy tables and implementing a unilateral use of Table 1 in determining life expectancy used for purposes of calculating a WCMSA.

Other notable points of interest from the memo are the idea that CMS will now provide what the MSA industry refers to as “counter offers” should it feel that the Rx was not provided in error and do so at brand name pricing regardless of generic availability. Additionally any existing submissions that are deemed “closed” for whatever reason and reopened after June 1, 2009 will be done so under the new pricing so many proposals will met with un-appealable CMS pricing over the next several months. Finally although somewhat silent to the specific use of donut holes, DURs and arbitrary limits to the number of years funded due to tolerances or manufacturer recommended use durations, CMS did note that it will not use or recognize any other pricing, discounting, or calculation methods when determining the adequacy of the prescription drug amounts in WCMSA proposals, so essentially CMS wants insurance carriers to fund 100% of claimant desired post-settlement Rx at above acquisition costs and preferably at brand name cost, with no regard to the carriers’ actual legal obligations under state workers’ compensation law or its obligations to protect only Medicare’s interests under the MSP statute. 

This new arbitrary policy is further evidence that perhaps it is time for the industry to take a stand and handle its MSP compliance absent the oversight of CMS. Without an appeal process, it is impossible to get CMS to acknowledge, let alone change, any of its policies that are overreaching. Many of its policies even fail to protect Medicare in its attempt to “simplify” procedures for its contractors. As many carriers and attorneys are to this day still confused as to the difference between complying with the MSP and obtaining CMS approval of a WCMSA, the answer to this problem may lie in educating the industry to ignore the CMS protocols and deal with the MSP privately. The CMS policies are not the law, only the MSP statute itself is and that simply states that Medicare may not make payment where there is a primary payer. Although granted deference by the courts, agency interpretation of the law it is charged to implement would carry no weight once proven to be unlawful in and of itself.

So look for yet another significant increase in the size of MSAs in general to begin immediately. More irritatingly, be cautions of situations where you purposely do not include Rx in your MSA and CMS holds a different opinion as they have stated in the memo that not only will it counter with the Rx allocation amount that they see fit, it will be doing so at brand name prices. Additionally drugs priced as a generic that CMS decides does not have an AWP will be re-priced as a brand name as well. Given that there is no mention of which AWP list CMS will use let alone the NDCs included on that list, it is almost certain that we will be seeing a lot of “re-pricing” for months to come. And although the memo is silent to the fact, we are fairly certain that its Rx allocation determinations will not be appealable.

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