Settlement Impact on AWP Drug Pricing for Payors, Pharmacies, PBMs, and Consumers

Settlement Impact on AWP Drug Pricing for Payors, Pharmacies, PBMs, and Consumers Co-sponsored by the Life Sciences and Payors, Plans, and Managed Care Practice Groups Tuesday, November 3, 2009 1:00-2:30 pm Eastern Presenters: Don L. Bell II, Esquire, Senior Vice President, Legal Affairs and General Counsel, National Association of Chain Drug Stores Inc, Alexandria, VA T. Reed Stephens, Esquire, Partner, McDermott Will & Emery, Washington, DC Suzanne E. Broderick, Esquire (Moderator), The Phoenix Law Group of Feldman Brown Wala Hall & Agena PLC, Scottsdale, AZ 1

Average Wholesale Price Rollback T. Reed Stephens Partner Health Law and Trial Depts. McDermott Will & Emery LLP Washington, DC trstephens@mwe.com 2

Objectives for this Afternoon Familiarize you with the background of the AWP Drug Pricing Litigation and, specifically, the First DataBank/McKesson AWP Litigation 3

Direct Purchasing of Dispensed Drugs and Third-Party Payor Reimbursement for Dispensed Drugs State and Federal governments pay for drugs in two ways: either as a third-party payor (insurance company for specific eligible persons) or through direct purchasing contracts for certain programs. Medicare, Medicaid, and TRICARE are examples of third-party payors that reimburse healthcare providers for the cost of purchasing and administering drugs to patients. The Department of Veteran s Affairs, the Office of Management and Budget (Fed. Employees Health Benefits Plan), and the Department of Defense are examples of direct purchasers of drugs for eligible agency beneficiaries. 4

Determining Purchaser or Third-Party Payor Cost for Dispensed Drugs Medicare Part B Reimbursement No longer AWP/Now ASP Department of Veteran s Affairs and Department of Defense Procurement of products on the Federal Supply Schedule or through direct contracts Medicaid Reimbursement Still substantial AWP usage Federal Public Health Service 340B procurement of drugs Medicaid Drug Rebate Program reporting obligations Medicare Part D No direct price reporting 5

Transition from List Price Drug Reimbursement Prior to Jan. 2006, Government third-party payors reimbursed for drugs administered without knowing how much the healthcare providers actually paid for the drugs that were administered. So the payors set reimbursement benchmarks intended to approximate the purchase cost. AWP and WAC are simple list prices that are not calculated from specific sales transactions, are examples of these benchmarks, used by Medicare and Medicaid to approximate the purchase price. 6

Transition from List Price Drug Reimbursement Average Manufacturer s Price (non-federal AMP), Federal Ceiling Price (for the Federal Supply Schedule), and the 340B Price are all examples of prices that are generated from actual manufacturer sales data and must be accurately reported for purposes of government agency contractual purchases of drugs. As of Jan. 2006, Average Sales Price has replaced Average Wholesale Price for the Medicare Part B reimbursement benchmark. Average Sales Price is a price that is generated from actual manufacturer sales data and brings Medicare Part B reimbursement into line with the methodology of government direct purchasing by requiring that ASP be calculated from specific transaction data sets. 7

Role of First DataBank and Medispan in Publishing Drug Pricing Pharmacies usually buy drugs from wholesalers, who buy them from the manufacturer. The prices pharmacies pay to wholesalers are often based on WAC. Wholesalers then use the WAC to set the price they charge to pharmacies. Pharmacies usually buy drugs from a wholesaler and then sell them to consumers. Most consumers do not pay the full price of a prescription, but instead pay a co-payment. The bulk of the cost of a prescription is usually paid by an insurance company (such as an HMO) or a government program (such as Medicaid). This is the reimbursement. Third-party reimbursement has not been traditionally based on what the pharmacy actually paid for the drug, but instead is based on what is supposed to be an estimate of what pharmacies generally pay for that drug. This estimate has traditionally been the AWP. The pharmacy's profit is the difference between acquisition cost (based on WAC) and third-party reimbursement (based on AWP). Historically, the AWP was calculated by multiplying the WAC by 1.20 or 1.25. This markup typically was fixed over time. 8

Gov t and Private-Party Litigation of Drug Price Publishing During the 1990 s, few drug price reporting enforcement actions against pharmaceutical industry were brought and resolved. Examples, mid-1990 s DOD/VA pursued direct purchasing contract cases brought against Rugby and Baxter Healthcare, respectively, under the federal False Claims Act. Beginning in 1995, a series of AWP price reporting qui tams were filed in Miami, Boston, Philadelphia, etc., alleging drug price reporting fraud impacting third-party payor reimbursement by Medicare, Medicaid, TRICARE, etc. 2001 Bayer and TAP Pharmaceuticals were the first to resolve these False Claims Act qui tam matters. Bayer paid $14 million. TAP paid $870 million in criminal and civil damages, fines, and penalties. 9

AWP Litigation Tsunami The Bayer and TAP AWP qui tam resolutions gave credibility to the plaintiff theories of fraudulent third-party payor damages. Multiple government third-party payors, primarily led by State Attorneys General, began pursuing causes of action against dozens of drug manufacturers whose products had AWPs published by FDB and its competitor Medispan. Private-party class actions on behalf of third-party health plan members were also filed alleging fraudulent inflation of plan member co-payments concurrent with the allegedly inflated pharmacy reimbursement claims. These cases were consolidated in federal court in Boston. To date, several trials in various states and in the federal court in Boston have been conducted with plaintiffs successful in most. Just this past week, Ala. Supreme Court reversed $270 million in verdicts against Novartis, AstraZeneca, and GSK. 10

Court Findings in AWP MDL Litigation In the Boston MDL Litigation, presiding Judge Patti Saris concluded that there are three factors in determining whether a defendant engaged in unfair conduct: 1. Did the products carry spreads between AWP and WAC that were greater than 30%? Included in this analysis is the extent and duration of the spread. 2. The company s history of creating a spread. Was the spread created by an increase of the AWP and/or list price? Or was the spread created through increasing the discounts and rebates taken from the AWP and/or list price? 3. Was there a proactive scheme to market the spread? See the Decision, p. 160-161. No one factor was given more weight by the court than any other 11

AWP Litigation Engulfs FDB FDB became a defendant in the AWP litigation with lawsuits filed in June 2005 and February 2006 by members of the Prescription Access Litigation (PAL) coalition, alleging that FDB and wholesaler McKesson carried out an illegal scheme from 2002 to 2005 to raise the price of prescription drugs. The lead plaintiff in the primary PAL coalition lawsuit was the New England Carpenters Pension Fund The lawsuits alleged that, in 2002, McKesson and FDB arbitrarily raised the markup factor between the AWP and the WAC for 400 brand name drugs from 1.20 to 1.25, resulting in a 5% increase in the reimbursement spread between AWP and WAC beyond the already existing spread between AWP and pharmacy acquisition cost 12

FDB Settlement Finalized by the Court in 2009 FDB initially reached a settlement with the class action plaintiffs in 2007. The settlement process was protracted dragging on until March 17, 2009, when Judge Saris issued a MEMORANDUM AND ORDER giving final approval to the Amended and Restated Settlement Agreements, dated May 28, 2008, and July 15, 2008, with one significant modification On March 30, 2009, Judge Patti Saris issued the Final Order Certifying the settlement class and dismissing the lawsuit 13

Settlement Terms Approved by the Court FDB and MediSpan will reduce the markup factor on WAC from 1.25 to 1.20 for the 1,442 National Drug Codes (NDCs) affected by the alleged fraudulent scheme FDB and MediSpan will each make the adjustment 180 days from the entry of final judgment, regardless of whether a notice of appeal of this Final Order and Judgment is filed THE AWP ADJUSTMENT BECAME EFFECTIVE ON SEPTEMBER 26, 2009, FOR BOTH FDB AND MEDISPAN FDB and Medispan will each set up centralized litigation data repository to facilitate reasonable access to discoverable material concerning drug price reporting practices FDB and MediSpan will pay $2.7 million into the settlement fund for the benefit of the settlement classes ($2.1 million from FDB and $600,000 from MediSpan). This amount includes $1.2 million, the amount defendants have agreed to pay in attorneys fees and expenses. Plaintiffs have waived their right to attorneys fees in this action Separately, plaintiffs resolved their claims against co-defendant McKesson for $350 million 14

The Impact On Pharmacies Don L. Bell, II National Association Of Chain Drug Stores Alexandria, VA dbell@nacds.org 15

AWP Reductions on September 26, 2009 AWPs Reduced for 18,776 Drug Products (NDCs) Settlement: Cut AWPs for 1,442 NDCs Were 125% of Wholesale Acquisition Cost (WAC) Cut to 120% of WAC Customer Letters: Also cut AWPs for 17,334 other NDCs Were various levels above 120% of WAC Cut to 120% of WAC Average AWP Reduction for Brands: 4.215% For generics: 4.196% Most pharmacies make less than 4% net profit 16

Predicted Impact Plaintiff Expert: Reduced Reimbursement For pharmacies & PBMs that could not renegotiate contracts 2006: Payors would save $4 billion 2008: $1+ billion savings if 1,442 AWPs reduced Plus another $1+ billion for other AWP reductions? NCPA Expert: Thousands of Pharmacies May Close Up to 40% of independent pharmacies Plaintiff expert said exaggeration, but agreed some would close Pharmacy Affidavits Predicted store closings, reduced hours, cut services, etc. 17

Predicted Impact NACDS & PCMA: Substantial Transaction Costs Contract renegotiations; no real benefit to private plans District Court Cited plaintiff expert prediction of $1 billion in payor savings But noted potential contract renegotiations AWP reductions would reduce co-pays based on AWP First Circuit Pharmacies likely do stand to lose revenues But the duration and impact of such reductions are uncertain 18

Actual Impact on Private Market Disruption of Contracting Transaction costs associated with thousands of contracts Increased market uncertainty Most Reimbursement Contracts Revised 1 st Cir: Three-year delay of AWP cuts gave pharmacies a lengthy period to prepare for the rollback.... Drug-Benefit Cos Say They ve Adjusted For Price Rollback Dow Jones Newswire, 9/17/09 Backed out AWP reductions using list from CDS.net or others Changed discount off AWP Other revisions (e.g., move to WAC-based reimbursement) 19

Impact on Medicaid Automatically Cuts Medicaid Reimbursement Almost all states use AWP to set Medicaid reimbursement Established by statutes and regulations, not negotiations Some states (NC, NJ) may offset AWP reductions or move to WAC Economist: $550 Million Cut Per Year NY: $113 million cut CA: $81 million cut In Addition to Other Recent Medicaid Cuts States cut Medicaid due to budget deficits 20

Medicaid Litigation Pharmacies Challenging Medicaid Reimbursement Federal Law Sets Reimbursement Standards Patient Access: Payments must be sufficient to enlist enough providers so that care and services are available under the [Medicaid] plan at least to the extent that such care and services are available to the general population.... 42 U.S.C. 1396a(a)(30)(A) known as Section 30(A) Ninth Circuit Decisions Allow Pharmacies to Sue Claim rates insufficient to ensure that pharmacies will participate Supremacy Clause: State rates preempted by Section 30(A) 21

Medicaid Litigation California Challenge implementation of AWP reductions + Upper Billing Limit Same Judge that has currently enjoined earlier 10% and 5% cuts Minnesota Challenge implementation of AWP reductions + additional 1% cut New York Biggest impact Washington State Delaware Challenge implementation of AWP reductions + additional 2% cut Essentially same rates now as court halted 8 months ago Settlement eliminated most of additional cuts does not use FDB or MS AWPs 22

Unjust Enrichment Impact District Court: Pharmacies were unjustly enriched by AWP increases First Circuit: District Court s unjust enrichment conclusion was factual statement, not binding legal conclusion Class Action Attorneys: Sued certain chains for unjust enrichment McKesson Settlement: Says payors must drop related lawsuits Will unjust enrichment lawsuit against chains be dismissed? 23

Impact of Eliminating AWPs FDB and MS Stop Publishing AWPs Within 2 Years Keep Using AWP? Other smaller publishers exist, for now Replace AWP? Retail Survey Price (RSP) Healthcare reform bills would publish on website Average Manufacturer Price (AMP) Currently halted as reimbursement benchmark by lawsuit House and Senate reform bills help clarify and correct AMP Wholesale Acquisition Cost (WAC) Issues related to WACs for generics 24

Settlement Impact on AWP Drug Pricing for Payors, Pharmacies, PBMs, and Consumers Suzanne E. Broderick The Phoenix Law Group Scottsdale, AZ sbroderick@phoenixlawgroup.com 25

Impact to Pharmacies Pharmacies most concerned about AWP reductions On September 26, 2009, AWPs were reduced Per the Settlements, 1,442 drug products had AWPs reduced Additionally, 7,000+ other AWPs were also reduced AWPs were reduced to 120% of WAC (from 125% of WAC) Overall net reduction of approximately 4% Pharmacies have said publicly that most make less than a 4% net profit 26

Impact to Pharmacies Reduced AWPs mean reduced Medicaid Reimbursement 48 state Medicaid programs set reimbursement based on AWP Example: AWP 15% plus $2 dispensing fee Medicaid reimbursement rates are established by statutes and regulations, not negotiations Approximately $25 million reimbursement reduction per year if only 1,442 AWPs affected Approximately $68 million reimbursement reduction per year if all AWPs affected 27

Impact to Pharmacies Reduced AWPs mean reduced Medicaid Reimbursement (continued) The cost savings to Medicaid programs weighs against states willingness to act to revise pharmacy reimbursements Simultaneous with the AWP reductions, New Jersey Medicaid implemented an enhanced reimbursement rate of AWP 16% for affected medications NACDS and NCPA have filed federal lawsuits in California, Minnesota, New York, and Washington challenging the states failure to take action to prevent pharmacies from being reimbursed below cost under state Medicaid programs 28

Impact to Pharmacies Reduced AWPs mean reduced private payor reimbursements Only for pharmacies that could not renegotiate contracts with PBMs or payors Uncertain how many pharmacies this actually affected Pre-September 26, 2009, NCPA expert said thousands of pharmacies may close Pharmacy affidavits during litigation predicted store closing, reduced pharmacy hours, elimination of programs and services 29

Impact to Pharmacies Data Rooms concern pharmacies Contain pharmacy data for plaintiffs attorneys Data rooms could lead to more litigation 30

Impact to Private Third-Party Payors Reduced AWPs without contract amendments meant reduced private payor drug spend Typically a payor s contracted pharmacy rates are calculated based on AWP minus a discount Reportedly, most private payors, either directly or through their PBMs, have renegotiated pricing terms to neutralize affect of AWP rollback in other words, most private payors are not realizing reduced drug spend 31

Impact to Medicaid Payors Medicaid agencies drug costs are reduced September 2009 letter from National Association of State Medicaid Directors to pharmacy industry associations indicates that states are unwilling to change reimbursement rates in response to the AWP rollback 32

Impact to PBMs PBMs had to strike a balance between their relationships with private payor customers and their relationships with pharmacies On the one hand, PBMs had payor customers for whom a reduced AWP seemed attractive On the other hand, PBMs had pharmacies in networks saying that they could not absorb reduced reimbursement rates 33

Impact to PBMs How a PBM handled this issue on the pharmacy side directly impacts their relationship with private payor customers Possible failure to deliver rates Possible failure to meet network access requirements 34

PBM Response Is Varied Whichever response a PBM chose, most were consistent in addressing pharmacy and payor relationships 35

PBM Response Is Varied Move to WAC as pricing benchmark in place of AWP Said to focus on preserving economic neutrality Touted as long-term solution in anticipation of sunset of AWP Out of all the options, arguably required the most effort/ resources to negotiate with payors and pharmacies 36

PBM Response Is Varied Rolling Up published AWP prices Said to focus on preserving economic neutrality Some include new NDCs 37

PBM Response Is Varied Adjusting AWP discounts in contracts with payor customers and pharmacies Said to focus on preserving economic neutrality Applies to new NDCs too Some experts say each plans individual drug mix makes implementation of this solution less than ideal to achieve economic neutrality 38

Payor Impact Resulting from PBM Response Payor and PBM need common understanding of what economic neutrality means Payor should understand pricing adjustments proposed by PBM Payor should understand the detailed methodology that PBM will use to calculate pricing Payor should independently verify whether true economic neutrality achieved 39

Payor Response to PBMs When using a PBM to contract pharmacy network: If PBM Services Agreement did not mandate an adjustment to the pricing terms in the wake of the AWP rollback, some payors have insisted on no pricing changes If PBM Services Agreement mandated an adjustment to the pricing terms or if payors otherwise agreed, most payors have agreed to the PBMs proposed approach to maintain economic neutrality 40

Payor Response When contracting directly with pharmacy network: Payors have chosen to implement revised pricing terms similar to one of the options used by PBMs Payors have not agreed to pricing changes with pharmacies 41

Uncertainty Remains Not clear exactly how industry will address the longerterm impact of the end of AWP as a pricing benchmark 42

Settlement Impact on AWP Drug Pricing for Payors, Pharmacies, PBMs, and Consumers 2009 is published by the American Health Lawyers Association. All rights reserved. No part of this publication may be reproduced in any form except by prior written permission from the publisher. Printed in the United States of America. Any views or advice offered in this publication are those of its authors and should not be construed as the position of the American Health Lawyers Association. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought from a declaration of the American Bar Association 43