September 26 rollback of wholesale drug prices approaching fast

September 4, 2009

With the settlement of the class-action lawsuit brought against First DataBank and McKesson by third-party payors accusing the companies of conspiring to inflate average wholesale prices (AWP) of hundreds of drugs, AWP values will roll back from 1.25 to 1.20 times the drugs' wholesale acquisition cost (WAC).

Key Points

In the aftermath of a class-action lawsuit brought against First DataBank (FDB) and McKesson Corporation by a third-party payor class accusing the two companies of conspiring to inflate the average wholesale price (AWP) of hundreds of drugs, there will be a rollback of AWP values from 1.25 to 1.20 times the wholesale acquisition cost (WAC) of such drugs.

This represents one part of the settlement that was struck between the litigation parties, but its effect on existing drug pricing contracts between network pharmacies and pharmacy benefit managers (PBMs) will be far-reaching.

Among them, FDB will also take steps to apply the 1.20 factor to all other National Drug Codes whose AWP is based on a markup factor greater than 1.20.

Finally, FDB has stated that it will discontinue publication of AWP information within two years of the September 26, 2009 rollback. Although FDB is likely to continue to publish other metrics, a search for a replacement value of AWP is being considered to sustain a benchmark by which drug pricing can be fairly measured.

On its face, the effect of the rollback will be a cost savings to parties that offer prescription drug benefits. Nevertheless, PBMs acting on behalf of payors may make immediate contract adjustments with network pharmacies in order to continue the economic structure of existing contracts that may be disrupted by the rollback as a consequence of the FDB settlement.

Parties have been anticipating the AWP rollback and if they have been diligent in preparing contract language that allows for unilateral adjustments to financial terms in the case of an FDB settlement, then the savings to third-party payors may not be realized to any significant extent. If the contract language did not contemplate any settlement due to the contract's age or the lack of diligence, there may still be other provisions that could help modify financial terms. If there aren't any such options, then network pharmacies will effectively incur a reimbursement reduction to their disadvantage unless economic neutrality is achieved independent of the contract terms.

Now that the September 26, 2009 deadline for the AWP rollback is fast approaching, the clock will also begin to tick on the two-year phase-out period of AWP.

There has been considerable debate over which metric will be used as its replacement, and there is understandable disagreement over what value will be economically feasible for all stakeholders involved. Values such as average sales price and average manufacturer price are examples of replacement metrics that have been the subject of debate, among others.

Separately, in the wake of the FDB litigation settlement, a new class-action lawsuit has been filed by third-party payors. This time, retail pharmacies are the direct target of the allegedly hyperinflated AWP spread.

On June 5, 2009, Skilstaf, Inc. et al brought a class action lawsuit against nine major retail chains in the Northern District of California federal court, once again on behalf of third-party payors. The payor class is alleging that the defendant pharmacies conspired with FDB and McKesson Corporation to fraudulently inflate the WAC to AWP spread and to cause submission of false claims for the prescription drugs, thereby inuring the benefit of an unjust enrichment. Several of the defendants are also facing a separate RICO complaint by the plaintiff class as a result of the alleged engagement in a fraudulent and anticompetitive scheme to inflate the WAC to AWP spread.

Although the Skilstaf case is in its infancy at this stage with many procedural hurdles to address, all pharmacies should be vigilant in watching for the outcome of this case, since a favorable settlement to the plaintiff class could have a dramatic adverse financial impact throughout the entire retail pharmacy sector.

PBMs and pharmacies are encouraged to consult their legal advisors both with respect to the rollback of AWP on September 26, 2009, and the possible adverse financial consequences of the newly filed Skilstaf case.

Ned Milenkovich, PharmD, JD, is a member of McDonald Hopkins LLC, where he chairs the Drug & Pharmacy Industry Practice Group. He is also a member of the Illinois State Board of Pharmacy. He can be reached at 312-642-1480 or at nmilenkovich@mcdonaldhopkins.com
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