As a veteran of the AWP litigation era, I am struck by the recent state efforts to legislate transparency into pharmaceutical pricing. Multiple states have introduced bills that would require pharmaceutical manufacturers to produce information to justify the sales price for their drugs.  But the idea that pharmaceutical manufacturers are unilaterally responsible for the costs borne by citizens of these states ignores the tangled web of policies and processes that makes up drug pricing and reimbursement in the United States. State legislators may want to examine the relatively recent history of state Average Wholesale Price (AWP) litigation, and each of their state’s response to the pricing transparency mandates incorporated into the early AWP case settlements, before moving forward to mandate transparency from just one player in the process.

State Legislative Efforts to Impose Manufacturer Disclosure Requirements

California, Massachusetts, New York, North Carolina, Oregon, and Pennsylvania are among the states considering legislation requiring drug manufacturers to disclose specified information related to the costs of their drugs. The proposals are not uniform as to when disclosure is required, what is to be disclosed, and to whom the information is to be disclosed. For example:

• The North Caroline bill applies to seven specified types of brand medicines, including biologics; the New York, Oregon and California bills apply to drugs with a Wholesale Acquisition Cost of over $10,000/year; and, the Massachusetts bill applies to drugs the Office of Statewide Health Planning & Development labels as “critical” based on vague criteria.
• Most of the bills require the manufacturers to disclose the Wholesale Acquisition Cost (WAC) of the drugs; WAC is defined in federal law. The NC bill requires disclosure of each drug’s “average wholesale cost” but does not define that term. The majority of bills also require the manufacturers to report the drug’s AWP, despite the fact that AWP has never been defined in law and since 2004 most manufacturers have neither calculated nor reported an AWP for their drugs.
• All of the bills require manufacturers to disclose the research and development costs for the drug, but often do not delve into specifics such as whether inclusion of costs associated with predecessor failed drugs may be included. Most bills also require some form of reporting of manufacturing costs, marketing/promotional costs, and profits.
• The North Carolina bill requires the disclosures be filed with the State Insurance Commissioner, although it is not clear what authority that Commissioner has over a non-insurer drug manufacturer. The Pennsylvania bill requires disclosures be made to a newly-established Pharmaceutical Transparency Commission operating under the auspices of the State Insurance Department — that Commission would be made up of government, pharmacy, insurance and consumer representatives; would be funded by manufacturer assessments but include no manufacturer representation; and, would be empowered to determine insurance reimbursement caps for the drugs. The OR bill specifies that the manufacturer reports are to be auditable and publicly posted, while the MA bill exempts the manufacturers’ reports from disclosure under state public records laws.

AWP Cases and Pricing Transparency

By the late 1990s, the majority of insurers reimbursed pharmacies for prescription drugs using the measure of AWP. AWP was not defined in any statute; was recognized in the industry as in essence a marked-up acquisition cost exclusive of any discounts; and had become an industry-recognized measure used by drug manufacturers, wholesalers, repackagers, pharmacies, and public and private insurers. The majority of state Medicaid programs based pharmacy reimbursement on AWP less a certain percentage, 10% on average.

The first AWP cases were brought in the late 1990s by whistleblowers under the federal and state false claims acts (FCA) and were limited to biologic drugs dispensed in a physician’s office or clinic. Generally health care professionals are directly paid by insurers for the costs of these drugs. The whistleblowers alleged manufacturers manipulated a drug’s published AWP as a marketing scheme to incentivize use of that drug by the clinicians or physicians: the higher the published AWP, the higher the payor’s reimbursement rate for that drug.

When contemplating settlement of the early AWP cases, naïve state Medicaid Fraud attorneys (which, with full disclosure, included me) advocated that any settlement include transparency terms, requiring the settling manufacturer to disclose future average sales prices to the state Medicaid programs. Federal law does not mandate states use AWP as a basis for Medicaid reimbursement, so theoretically states could base Medicaid reimbursement on more accurate information directly provided by the manufacturers. We believed the states could and would adjust reimbursement rates using these new, more accurate, pricing reports.

So beginning in 2000, multiple AWP settlements incorporated requirements that the manufacturer report average sales price information to the State Medicaid program on a quarterly basis, and those reports were filed with the states.

In the years that followed, AWP litigation became a cottage industry for the states. In multiple states, contingency fee counsel filed AWP lawsuits on behalf of State Attorneys General against almost every known drug manufacturer; these lawsuits alleged that State Medicaid programs unwittingly overpaid for drugs due to their reliance on AWP-based reimbursement. When it came to drugs dispensed through pharmacies, these lawsuits frequently alleged that AWP manipulation was used to persuade pharmacists to dispense certain manufacturers’ drugs over competitor products, ignoring the physicians’ role in prescribing the drugs in the first place.

In those post-2000 lawsuits, manufacturers pointed out that the state Medicaid programs were not mandated to use AWP and in fact had certain sales price information in hand, directly provided by manufacturers under the prior AWP settlements. In response, the states argued that those price reports went unread, generally because they were too complicated for the state employees to understand, let alone act upon.

The AWP experience in Mississippi is illustrative. In 2006 the MS Attorney General filed an AWP lawsuit against more than 100 drug manufacturers, alleging that the state was defrauded into overpaying for thousands of drugs because the MS Medicaid reimbursement methodology largely relied upon AWP. Specifically, MS asserted that its Medicaid program staff believed that AWP was the price at which pharmacies actually purchased drugs from wholesalers, inclusive of all discounts, and was shocked to “recently” learn that was not the case.

At the time that lawsuit was filed in 2006, MS had already participated in multiple AWP lawsuits and had been receiving average sales price reports from those settling manufacturers. Yet, not only did MS Medicaid continue to use an AWP-based Medicaid reimbursement formula for six years before it filed its lawsuit, it continued to use AWP as a basis for Medicaid reimbursement for eight more years afterfiling that lawsuit.

Finally, MS Medicaid announced that beginning July 1, 2014 it would drop AWP and instead base Medicaid reimbursement on the average cost pharmacies paid to purchase the drugs (Average Acquisition Cost or AAC).

And that change lasted less than eight weeks. MS pharmacists revolted, later bragging that it was “the quick and effective actions” of the MS Independent Pharmacists Association that forced the state to reverse course. Effective August 21, 2014, the state abandoned AAC and reverted to its prior Medicaid reimbursement methodology using AWP; MS Medicaid notified pharmacies they could resubmit any claims paid using AAC for reprocessing under the old AWP formula. And MS continues to use AWP in its Medicaid pharmacy reimbursements.

Moral of the AWP Story

When it comes to payment for prescription drugs in the United States, the process is admittedly opaque. But in fact most state citizens do not purchase their medications directly from pharmaceutical manufacturers at a price set by that manufacturer. Most drugs are dispensed by pharmacies, or in hospitals or other facilities, or are administered by physicians; those entities obtain the drugs from wholesalers or repackagers, many utilizing the services of a Group Purchasing Organization or Pharmacy Services Administrative Organization; the entity dispensing the drugs is often reimbursed in whole or in part by a government program or by private insurer who may have utilized the services of a pharmaceutical benefit manager in setting standards for payment, including setting the individual’s co-payment rates.

The saga of AWP litigation should have made clear to state legislators that getting the government’s arms around drug pricing involves more than just requiring the manufacturers to report prices to some state government entity. Indeed, they may first want to ask their State Medicaid programs whether anyone in the agency reviewed the last fifteen years of sales price reports already furnished by manufacturers who settled AWP litigation, and/or inquire whether like in MS, access to that information was never considered in determining the prices their state Medicaid program paid for those drugs.