An OIG report issued Monday found that only a few state Medicaid programs have made plans to replace a widely-used but fraud-ridden pricing system for pharmacy reimbursement that will be discontinued this coming September in response to a consumer lawsuit by members of the Prescription Access Litigation (PAL) coalition.

The price that a health plan pays for a prescription filled at a pharmacy is based on a list price provided by drug manufacturers. However, despite being called the ‘Average Wholesale Price’ or AWP, these prices are neither average nor wholesale. They are pure fiction. But unlike a consumer haggling over a fictitious sticker price on a new car, health plans and Medicaid programs cannot haggle over the 20,000 prices for the different doses and sizes of drugs that are prescribed.

In response, a few states are pioneering some innovative new policies designed to pay something closer to the actual cost of the drug paid by the pharmacy, and CMS is looking into how to help with this process by sharing the results of a nationwide survey of pharmacy costs and drug prices.

But the OIG report warns that many state Medicaid programs need to make some quick decisions before First DataBank stops publishing AWP prices in Sept 2011.

Bottom line:

  • — 3 State Medicaid programs plan to switch to Average Acquisition Cost (AAC), a price that is calculated and adjusted based on average actual costs paid by randomly audited pharmacies to manufacturer or wholesalers. These states would follow the model of Alabama, which pioneered this new pricing system last September, followed closely by Oregon this past January. Idaho is next on deck.
  • — 20 states have not developed plans as of the February 2011 interview by OIG
  • — 10 states plan to continue using AWP price listings
  • — 12 states plan to switch to [the equally vulnerable and fictitious] wholesale acquisition cost (WAC) benchmark, which “like AWP, is not based on actual sales transactions.”
Importantly, 44 of 51 States (including D.C.) wanted CMS to establish a single national benchmark for pharmacy reimbursement. And CMS has started to work toward this, awarding a contract to launch a nationwide survey of pharmacy drug costs last week, and announcing plans to compare state approaches to paying pharmacies.

Why should a state adopt a new policy on drug prices?

The report notes that the AWP benchmark not only “fails to account for prompt pay or other discounts, rebates, and reductions” but that “as a basis for drug reimbursement” AWP “is fundamentally flawed.”

And the history of private and public sector litigation and OIG investigations show how pricing fraud under the AWP price benchmark has cost our health care system billions of dollars over the last decade. Class action lawsuits by PAL coalition members have exposed the highly fraudulent nature of industry reported prices like AWP. One lawsuit revealed that more than 28 drug makers had fraudulently inflated the AWP for many drugs that doctors purchase directly and administer in their offices. In this scheme, doctors purchased the drug for significantly less than they received from Medicare in reimbursement, which also incentivized doctors to prescribe the drugs most profitable to them.

And the PAL-member lawsuit filed against the drug wholesaler McKesson Corporation and the publishers First DataBank and MediSpan exposed how these defendants had colluded to inflate the benchmark price for hundreds of drugs starting in July of 2001, costing consumers and health plans $7 billion by mid-2005. McKesson settled the litigation by the private sector for $350 million, and later settled with the State of Connecticut for $15 million. Claims by the federal government and the rest of the states are still pending.

The Report by OIG and the lessons learned from private litigation on behalf of consumers show that drug pricing policies must be better designed to protect public and private sector health plans from fraud. At a minimum, the Average Acquisition Cost (AAC) models by Oregon, Alabama, and Idaho are a good start.

— Wells Wilkinson, Director Prescription Access Litigation