Pennsylvania Court Rejects Red Book Pricing in Workers’ Compensation 

In the case of Federated Insurance Co. v. Summit Pharmacy, the Pennsylvania Commonwealth Court challenged the state's method of calculating pharmaceutical costs in workers' compensation cases.  
By: | February 22, 2024

In the case of Federated Insurance Co. v. Summit Pharmacy, the Pennsylvania Commonwealth Court challenged the state’s method of calculating pharmaceutical costs in workers’ compensation cases.  

The court objected to the use of Red Book values, which are similar to the manufacturer’s suggested retail price of a car, to determine the average wholesale price (AWP) of drugs. 

Federated Insurance Co. sought a review of an order from the Pennsylvania Bureau of Workers’ Compensation that required the insurer to pay Summit Pharmacy approximately $72,500 to reimburse the cost of generic drugs provided to a claimant for her work-related injuries.  

The hearing officer used the Red Book values to calculate this reimbursement amount, a practice adopted by the Bureau for resolving disputes over pharmaceutical costs. 

The insurer argued that the Bureau’s use of Red Book values was inconsistent with Pennsylvania’s Workers’ Compensation Act, which limits the reimbursement of pharmaceuticals to 110% of the AWP. The insurer also contended that the Bureau’s ongoing use of the Red Book represented an improper delegation of legislative authority to a private entity. 

Summit Pharmacy, on the other hand, argued that AWP is a term of art used within the pharmaceutical industry, which regards the Red Book as an accepted source of AWP. According to Pennsylvania precedent, AWP is intended to be an objective estimate of drug acquisition costs derived on a national basis. 

The court sided with the insurer, ruling that Red Book values did not reflect AWP as required by the Workers’ Compensation Act. The court directed the Bureau to identify and publish a different, nationally recognized schedule to determine AWP, reasoning that AWP should be an industry average price, not one charged by a single manufacturer. It noted that the Red Book’s publisher followed a policy under which AWP was reported by manufacturers, calculated based on a markup specified by the manufacturer and suggested wholesale price was reported by the manufacturer. 

Scorecard: The court ruled that the use of Red Book values to calculate prices for pharmaceuticals in workers’ compensation cases is inconsistent with the state’s Workers’ Compensation Act. The Bureau has been directed to identify and publish a different, nationally recognized schedule for determining AWP. 

Takeaway: This ruling underscores the importance of insurers understanding and challenging the methodologies used to calculate reimbursements in workers’ compensation cases. It may prompt a review of similar practices in other jurisdictions, potentially leading to more accurate and fair reimbursement rates. &

The R&I Editorial Team can be reached at [email protected].

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