[Source: Health Lawyers Weekly, September 7, 2007]
The U.S. District Court for the District of Massachusetts certified as a class action August 27 a lawsuit brought on behalf of individual consumers and health plans claiming that McKesson Corporation (McKesson) and First DataBank, Inc. (FDB) violated the Racketeer Influenced and Corrupt Organizations Act (RICO), as well as California state law, by engaging in a scheme to fraudulently “mark up” the average wholesale price (AWP) for numerous prescription drugs.
New England Carpenters Health Benefits Fund v. First DataBank Inc., No. 05-11148-PBS (D. Mass. Aug. 27, 2007).
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Notes:
Under Part B, Medicare pays providers for up to 80% of the "allowable cost" of physician-injected drugs. The remaining 20% is paid by the Medicare beneficiary as a "co-payment."
"Allowable cost" was defined by regulations until 1998 as the lesser of a drug's estimated actual acquisition cost or a drug's average wholesale price (AWP). See 42 C.F.R. § 405.517. On January 1, 1998, in response to a directive in the Balanced Budget Act of 1997, the Health Care Financing Administration (now known as the Centers for Medicare and Medicaid Services) amended 42 C.F.R. § 405.517 to redefine the allowable cost as the lower of the actual Medicare billing or 95% of the AWP. Traditionally, AWP is derived from industry sources compiling wholesale drug prices as supplied by manufacturers. No independent verification of the actual AWP was undertaken by Medicare or by the index's publishers.
Thus, by increasing the reported amount of the drug price in sales transactions, a manufacture could increase the AWP for its drug. An increase in AWP creates an increase in the "allowable cost" and, consequently, the reimbursement rate to providers. Providers continue to pay for the drug at low cost while receiving inflated reimbursements. This increased profit or "spread" is a windfall for the provider and creates tremendous incentive to prescribe and administer products from the manufacturer with the most inflated AWP. Manufacturers, recognizing this market advantage tailor their promotional programs to alert providers to this potential, hence the term "marketing the spread."
Since most private sources of healthcare funding—third party payors, including insurers, HMOs, and health plans—have reimbursement structures that also rely on benchmark pricing such as AWP, the marketing against the spread scheme is just as effective when marketing to providers reimbursed by private payors as when marketing to providers reimbursed by the government.
[Source: "Marketing the Spread - What it is and What Are Payors Doing About it?" by Gerald Lawrence]
