Average Wholesale Prices in Workers’ Comp Pharma Are a Canard. Why Are We Still Using them to Calculate Medicare Set-Asides?

By: | February 16, 2023

Cliff Goldstein litigated more than 1,000 occupational disease and other complex workers’ compensation cases while serving as the CEO and as a Senior Litigator at Chartwell Law, a top 200 national firm. Previously, he founded and ran Weber Goldstein, n/k/a Weber Gallagher, another large defense firm. He recently founded Oursource Consulting, offering strategic advice to employers, carriers and defense attorneys on the best strategies for handling high-exposure and complex cases.

In most high-dollar workers’ compensation settlements (and in some liability cases), a Medicare set-aside (MSA) is considered as a possibility.

The intent of the MSA is to provide injured workers with a fund from which their future medical expenses will be paid so that Medicare won’t be on the hook for payments if the person burns through the settlement money and has no other insurance to pay medical bills. The parties typically submit proposed MSAs to the Centers for Medicaid and Medicare Services (CMS) for approval, and these submissions include estimated future costs for drugs for the worker’s predicted life expectancy.

Complicated rules govern how the MSA should be calculated. An entire industry has developed to calculate the MSA and obtain CMS approval. MSAs include projected costs for prescription drugs, but these projections are based on bizarre and unrealistic drug prices.

Here’s the problem as exemplified by a recent case: A worker has been taking a drug for two years and is expected to continue the drug indefinitely. The worker is 40 years old, and the drug can be obtained from an online retail pharmacy for $5 a month. The worker’s predicted life expectancy is another 40 years, so one would expect that the MSA would include a set-aside of $2,400 ($5 per month, 12 months a year, for 40 years).

But this isn’t what happened. Instead, CMS Guides require that the drug be priced based on “AWP” (average wholesale price) as reported in Red Book.

The Red Book AWP price has nothing at all to do with the actual retail cost of the drug, and the term “AWP” is a misnomer. AWP has nothing to do with the average price paid by pharmacies to acquire the drug at wholesale. It is merely a number given by a manufacturer to Red Book with no disclosure or explanation of how it was derived and with no verification of any price actually paid. CMS, the federal courts and the U.S. Inspector General concluded long ago that AWP amounts are “fictitious” and “totally unrelated to the amounts paid at wholesale.”

The drug in the case mentioned above retails for $5 but has a Red Book AWP of $1,296. This is not an unusual case. The AWP in Red Book can be 100 to 150 times higher than the actual cost of buying the drug at retail. The MSA is based on a presumed lifetime on the same drug, thus compounding the error, and the MSA — which would have been $2,400 if real prices had been used in the calculation — soared to $622,080 using the fictitious price listed as AWP in Red Book.

AWP has been a source of litigation, challenges and legislation for decades. CMS no longer allows AWP to be used as a basis for pricing drugs under Medicare. Federal comp programs no longer allow AWP to be used in their programs. Nearly all private insurance carriers and many state comp systems got rid of AWP years ago. But because the CMS Guides have not yet been changed to drop reference to Red Book AWP in pricing drugs for MSAs, nearly all MSAs are dramatically overpriced, and carriers and employers have been hit for billions of dollars in unnecessary expenses to settle cases.

The MSA calculation and submission companies, lawyers, and MSA annuity companies have no financial incentives to change the status quo. Insurers and employers may be unaware of this monumental waste of money or may have been habituated to thinking that Red Book AWP reflects true drug prices. Others see the problem but don’t see a solution. But since CMS itself jettisoned AWP as a standard for pricing, it is ridiculous for CMS to require carriers and employers to continue using this totally irrelevant and wildly inflated pricing scheme for MSAs.

Carriers and employers can and should get much more aggressive about challenging the CMS double standard on the use of AWP for drug pricing. Some strategies involve intervention before an MSA is submitted to CMS, and others are designed to challenge — and, if necessary, litigate — to force the use of realistic drug pricing. &