Case Title: AstraZeneca LP and Astrazeneca Pharmaceuticals LP v. The State of Alabama

Citation: 

Docket Number: 1071439

State: alabama

Court: Alabama Supreme Court

Date: 2009-10-16T00:00:00Z

Document:
REL: 10/16/09 
Notice: T h i s 
o p i n i o n i s s u b j e c t t o f o r m a l 
r e v i s i o n b e f o r e 
p u b l i c a t i o n i n 
t h e 
advance 
s h e e t s o f 
Southern Reporter. 
R e a d e r s a r e 
r e q u e s t e d t o n o t i f y t h e 
Reporter of 
Decisions, 
Alabama 
A p p e l l a t e 
C o u r t s , 
300 D e x t e r Avenue, Montgomery, Alabama 36104-3741 
((334) 
2 2 9 - 0 6 4 9 ) , o f 
any t y p o g r a p h i c a l o r o t h e r e r r o r s , i n 
o r d e r t h a t c o r r e c t i o n s may be made 
b e f o r e t h e 
o p i n i o n i s 
p r i n t e d i n 
Southern Reporter. 
SUPREME COURT OF ALABAMA 
OCTOBER TERM, 2009-2010 
1071439 
AstraZeneca LP and AstraZeneca Pharmaceuticals LP 
v. 
S t a t e o f 
Alabama 
1071440 
AstraZeneca LP and AstraZeneca Pharmaceuticals LP 
v. 
S t a t e o f 
Alabama 
1071704 
S m i t h k l i n e Beecham C o r p o r a t i o n d/b/a G l a x o s m i t h k l i n e 
v. 
S t a t e o f Alabama 
1071759 
N o v a r t i s Pharmaceuticals 
C o r p o r a t i o n 
v. 
S t a t e o f Alabama 
Appeals from Montgomery C i r c u i t Court 
(CV-05-219.10; CV-05-219.11; CV-05-219.68; and CV-05-219.52) 
WOODALL, J u s t i c e . 
A s t r a Z e n e c a 
LP 
a n d 
A s t r a Z e n e c a 
P h a r m a c e u t i c a l s 
LP 
( h e r e i n a f t e r 
r e f e r r e d 
t o 
j o i n t l y 
as 
" A s t r a Z e n e c a " ) ;
1 
S m i t h k l i n e Beecham C o r p o r a t i o n d/b/a G l a x o s m i t h k l i n e ("GSK"); 
and N o v a r t i s P h a r m a c e u t i c a l s C o r p o r a t i o n 
( " N o v a r t i s " ) 
a p p e a l 
f r o m j u d g m e n t s e n t e r e d on j u r y v e r d i c t s i n f a v o r o f t h e S t a t e 
1 A s t r a Z e n e c a LP a n d A s t r a Z e n e c a 
P h a r m a c e u t i c a l s LP h a v e 
s t i p u l a t e d 
t h a t t h e y a r e t o be r e g a r d e d as one e n t i t y f o r 
p u r p o s e s o f t r i a l a n d a p p e a l . 
2 
1071439, 1071440, 1071704, & 1071759 
o f A l a b a m a 
i n a c t i o n s 
a l l e g i n g 
t h a t A s t r a Z e n e c a , 
GSK, 
and 
N o v a r t i s 
f r a u d u l e n t l y 
i n f l a t e d 
t h e 
p r i c e s 
o f 
t h e i r 
p r e s c r i p t i o n 
d r u g s 
f o r 
p u r p o s e s 
o f 
r e i m b u r s e m e n t 
by 
t h e 
A l a b a m a M e d i c a i d A g e n c y 
("the AMA"). 
We 
r e v e r s e t h e 
t r i a l 
c o u r t ' s j u d g m e n t s and r e n d e r j u d g m e n t s f o r A s t r a Z e n e c a , 
GSK, 
and N o v a r t i s . 
I . F a c t u a l and P r o c e d u r a l B a c k g r o u n d 
T h i s i s t h e t h i r d t i m e some a s p e c t o f t h i s 
l i t i g a t i o n 
has 
b e e n b e f o r e u s . 
See Ex p a r t e N o v a r t i s P h a r m a c e u t i c a l s 
C o r p . , 
975 
So. 
2d 
297 
( A l a . 2007) 
( " N o v a r t i s 
I " ) , and 
Ex 
p a r t e 
 
N o v a r t i s 
P h a r m a c e u t i c a l s 
C o r p . , 
991 
So. 
2d 
1263 
( A l a . 2008) 
( " N o v a r t i s 
I I " ) . These 
c a s e s 
a r e 
e x e m p l a r y 
o f 
l i t i g a t i o n 
c u r r e n t l y 
p e n d i n g 
i n 
s t a t e 
and 
f e d e r a l 
c o u r t s 
i n v o l v i n g 
a l l e g a t i o n s 
t h a t 
t h e 
n a t i o n w i d e 
p r i c i n g 
p o l i c i e s 
o f 
p h a r m a c e u t i c a l m a n u f a c t u r e r s 
c a u s e d 
s t a t e s t o 
o v e r - r e i m b u r s e 
p r o v i d e r s o f 
p r e s c r i p t i o n d r u g s u n d e r t h e s t a t e s ' r e s p e c t i v e 
M e d i c a i d p r o g r a m s . 
"The 
M e d i c a i d p r o g r a m was 
c r e a t e d i n 1965, when C o n g r e s s 
a d d e d T i t l e X I X t o t h e 
S o c i a l S e c u r i t y A c t , 79 
S t a t . 343, 
as 
amended, 42 U.S.C. § 1396 
e t s e q . 
... 
[ ( ' t h e M e d i c a i d 
A c t ' ) ] , 
f o r t h e p u r p o s e o f p r o v i d i n g f e d e r a l 
f i n a n c i a l a s s i s t a n c e t o 
3 
1071439, 1071440, 1071704, & 1071759 
S t a t e s 
t h a t 
c h o o s e 
t o 
r e i m b u r s e 
c e r t a i n 
c o s t s 
o f 
m e d i c a l 
t r e a t m e n t 
f o r n e e d y p e r s o n s . " 
H a r r i s v. McRae, 448 
U.S. 
297, 
301 
( 1 9 8 0 ) . 
" A l t h o u g h 
p a r t i c i p a t i o n 
i n t h e M e d i c a i d p r o g r a m 
i s 
e n t i r e l y 
o p t i o n a l , once a S t a t e e l e c t s t o p a r t i c i p a t e , i t 
must c o m p l y w i t h t h e r e q u i r e m e n t s 
o f T i t l e X I X . " 
448 
U.S. 
a t 
301. 
M e d i c a i d p r o v i d e s 
" j o i n t 
f e d e r a l 
and 
s t a t e f u n d i n g 
o f 
m e d i c a l 
c a r e 
f o r i n d i v i d u a l s who 
c a n n o t 
a f f o r d 
t o p a y 
t h e i r 
own 
m e d i c a l 
c o s t s . " 
A r k a n s a s Dep't o f H e a l t h & Human S e r v s .  
v. 
A h l b o r n , 
547 
U.S. 
2 
68 , 
275 
(200 6 ) . 
The 
" [ f ] e d e r a l 
f i n a n c i a l 
p a r t i c i p a t i o n , " 
42 C.F.R. § 4 3 0 . 1 , was, 
d u r i n g 
t h e 
t i m e r e l e v a n t t o t h i s d i s p u t e , a p p r o x i m a t e l y 7 0 % o f t h e amount 
o f t h e e x p e n s e t h e AMA 
i n c u r r e d u n d e r i t s M e d i c a i d p r o g r a m . 
A t 
t h e 
f e d e r a l 
l e v e l , 
M e d i c a i d 
i s a d m i n i s t e r e d 
b y 
t h e 
C e n t e r s 
f o r 
M e d i c a i d 
and 
M e d i c a r e 
S e r v i c e s 
("the 
CMS"), 
f o r m e r l y known as 
t h e H e a l t h C a r e F i n a n c i n g A d m i n i s t r a t i o n . 
See 
C e n t e r s 
f o r M e d i c a r e 
& M e d i c a i d 
S e r v i c e s ; S t a t e m e n t 
o f 
 
O r g a n i z a t i o n , 
F u n c t i o n s 
and 
D e l e g a t i o n s 
o f 
A u t h o r i t y ; 
 
R e o r g a n i z a t i o n 
O r d e r , 
66 
F e d . 
Reg. 
35,437 
( J u l y 
5, 
2 0 0 1 ) ; 
S t a t e m e n t 
o f 
O r g a n i z a t i o n , 
F u n c t i o n s , 
and 
D e l e g a t i o n s 
o f 
 
A u t h o r i t y , 49 F e d . Reg. 35,247 ( S e p t . 6, 1 9 8 4 ) ; R e o r g a n i z a t i o n 
O r d e r , 
42 F e d . 
Reg. 
13,262 
(Mar. 
9, 1 9 7 7 ) . 
The 
CMS 
m o n i t o r s 
4 
1071439, 1071440, 1071704, & 1071759 
t h e 
s t a t e s ' 
c o m p l i a n c e 
w i t h 
f e d e r a l l a w t o , among 
o t h e r 
t h i n g s , 
e n s u r e 
t h a t 
"payments 
[ a r e ] s u f f i c i e n t 
t o 
e n l i s t 
e n o u g h 
p r o v i d e r s so t h a t 
s e r v i c e s u n d e r t h e [ p r o g r a m ] a r e 
a v a i l a b l e t o r e c i p i e n t s a t l e a s t t o t h e e x t e n t 
t h a t 
t h o s e 
s e r v i c e s a r e a v a i l a b l e t o t h e g e n e r a l p o p u l a t i o n . " 
42 C.F.R. 
§ 4 4 7 . 2 0 4 .
2 
" P r o v i d e r s " a r e t y p i c a l l y p h y s i c i a n s and 
r e t a i l 
p h a r m a c i e s 
t h a t 
d i s b u r s e 
p r e s c r i p t i o n 
d r u g s 
t o 
p e r s o n s 
e l i g i b l e f o r 
M e d i c a i d 
b e n e f i t s . 
The AMA r e i m b u r s e s p r o v i d e r s f o r d r u g s t h e y 
d i s p e n s e t o 
e l i g i b l e 
r e c i p i e n t s . 
R e i m b u r s e m e n t must, h o w e v e r , be made 
c o n s i s t e n t w i t h a m e t h o d o l o g y a d o p t e d w i t h t h e a p p r o v a l o f 
t h e 
CMS t h a t t a k e s economy i n t o a c c o u n t . 
See 42 C.F.R. § 447.512 
( f o r m e r l y 42 C.F.R. § 4 4 7 . 3 3 1 ) . 
F o r t h e brand-name d r u g s a t 
i s s u e i n t h e s e 
a p p e a l s , 
r e i m b u r s e m e n t must n o t e x c e e d , i n 
t h e 
a g g r e g a t e , t h e l e s s e r o f " ( 1 ) [ t h e 
E s t i m a t e d A c q u i s i t i o n C o s t 
('the EAC') o f t h e d r u g ] p l u s r e a s o n a b l e 
d i s p e n s i n g 
f e e s 
o r (2) [ p ] r o v i d e r s ' u s u a l and c u s t o m a r y c h a r g e s t o t h e g e n e r a l 
p u b l i c . " 
42 C.F.R. § 4 4 7 . 5 1 2 ( b ) . 
EAC i s d e f i n e d as " t h e 
a g e n c y ' s b e s t 
e s t i m a t e o f t h e p r i c e g e n e r a l l y and c u r r e n t l y 
2 A c c o r d i n g 
t o t h e 
c u r r e n t 
c o m m i s s i o n e r 
o f t h e AMA, 
" f e d e r a l l a w r e q u i r e s [ t h e S t a t e ] 
... t o p r o v i d e 
c o m p a r a b l e 
a c c e s s 
t o s e r v i c e s f o r a M e d i c a i d 
r e c i p i e n t t h a t 
[ a n y o n e ] 
w o u l d r e c e i v e i n t h e p r i v a t e m a r k e t . " 
5 
1071439, 1071440, 1071704, & 1071759 
p a i d by p r o v i d e r s f o r a d r u g m a r k e t e d o r s o l d by a 
p a r t i c u l a r 
m a n u f a c t u r e r 
o r 
l a b e l e r 
i n 
t h e 
p a c k a g e 
s i z e 
o f 
d r u g 
most 
f r e q u e n t l y p u r c h a s e d 
by p r o v i d e r s . " 
42 C.F.R. § 4 4 7 . 5 0 2 . 
I n 
o t h e r w o r d s , M e d i c a i d r e i m b u r s e m e n t s may 
be made on t h e b a s i s 
o f what p r o v i d e r s a c t u a l l y p a i d f o r e a c h d r u g o r on t h e b a s i s 
o f an e s t i m a t e d c o s t . 
V a r i o u s r e i m b u r s e m e n t m e t h o d o l o g i e s 
a r e 
e m p l o y e d by t h e v a r i o u s s t a t e M e d i c a i d a g e n c i e s t o o b t a i n t h e 
EAC 
f o r e a c h 
d r u g 
d i s b u r s e d u n d e r 
t h e i r 
M e d i c a i d 
p r o g r a m s . 
The 
g o a l i s t o p r o d u c e a payment r a t e s u f f i c i e n t t o e n c o u r a g e 
p r o v i d e r s 
t o p a r t i c i p a t e 
i n t h e M e d i c a i d p r o g r a m , w h i l e , 
a t 
t h e same t i m e , m i n i m i z i n g M e d i c a i d c o s t s . 
F e d e r a l 
f i n a n c i a l 
p a r t i c i p a t i o n 
i n t h e 
s t a t e 
M e d i c a i d 
p r o g r a m s i s made c o n t i n g e n t upon a m e t h o d o l o g y t h a t , i n 
t h e 
v i e w o f t h e CMS, 
s u f f i c i e n t l y a d d r e s s e s 
t h e somewhat c o m p e t i n g 
o b j e c t i v e s o f a d e q u a t e c o m p e n s a t i o n and economy. 
However, t h e 
CMS 
has 
a f f o r d e d t h e 
s t a t e s 
f l e x i b i l i t y 
i n t h e 
f o r m u l a s 
by 
w h i c h t h e y a t t e m p t 
t o a r r i v e a t t h e EAC. 
F o r m u l a t i o n o f 
t h e s e 
m e t h o d o l o g i e s 
o r d i n a r i l y 
i n v o l v e s 
t h e 
use 
o f 
i n f o r m a t i o n 
s u p p l i e d by p h a r m a c e u t i c a l 
m a n u f a c t u r e r s 
t o a n a t i o n a l p r i c e 
compendium, 
s u c h 
as 
F i r s t 
D a t a B a n k , 
I n c . 
( " D a t a B a n k " ) . 
D a t a B a n k d e f i n e s 
i t s e l f 
as a " p o i n t o f c a r e d a t a b a s e company 
6 
1071439, 1071440, 1071704, & 1071759 
whose 
p u r p o s e 
i t i s t o p r o v i d e 
c u s t o m 
d r u g 
[ i n f o r m a t i o n ] 
a c c o r d i n g 
t o M e d i c a i d 
s p e c i f i c a t i o n s 
f o c u s e d 
on 
p r o v i d i n g 
a c c u r a t e 
d r u g 
p r i c i n g . " 
D r u g - p r i c i n g 
i n f o r m a t i o n 
i s t y p i c a l l y 
r e p o r t e d 
i n t h e 
f o r m o f " w h o l e s a l e 
a c q u i s i t i o n c o s t " ("WAC") o r i n 
t h e f o r m o f 
b o t h WAC and " a v e r a g e w h o l e s a l e 
p r i c e " 
("AWP"). 
D e f i n i t i o n s 
f o r AWP and WAC h a v e v a r i e d t h r o u g h o u t t h e i n d u s t r y d u r i n g t h e 
p e r i o d r e l e v a n t t o t h i s d i s p u t e . 
However, AWP was d e f i n e d i n 
D a t a B a n k , M o n t h l y I n t e r e s t ( S e p t e m b e r 1 9 9 1 ) , a s : 
" [ A ] n a v e r a g e p r i c e w h i c h a w h o l e s a l e r w o u l d c h a r g e 
a p h a r m a c y f o r 
a p a r t i c u l a r p r o d u c t . 
The o p e r a t i v e 
w o r d 
i s a v e r a g e . 
AWP 
n e v e r 
means 
t h a t 
e v e r y 
p u r c h a s e o f t h a t 
p r o d u c t 
w i l l be e x a c t l y a t t h a t 
p r i c e . 
T h e r e a r e many f a c t o r s i n v o l v e d i n p r i c i n g 
a t t h e w h o l e s a l e 
l e v e l w h i c h c a n m o d i f y t h e p r i c e s 
c h a r g e d e v e n among a g r o u p o f c u s t o m e r s 
f r o m t h e 
same w h o l e s a l e r . 
AWP was d e v e l o p e d b e c a u s e 
t h e r e 
had t o be some p r i c e w h i c h a l l p a r t i e s c o u l d 
a g r e e 
upon i f 
m a c h i n e p r o c e s s i n g was t o be p o s s i b l e . " 
( E m p h a s i s i n o r i g i n a l . ) 
I n 1992, t h e H e a l t h 
and Human S e r v i c e s 
S t a t e 
M e d i c a i d 
M a n u a l 
("the M e d i c a i d 
m a n u a l " ) 
e x p l a i n e d 
t h a t 
"AWP 
l e v e l s 
 
o v e r s t a t e t h e p r i c e s t h a t p h a r m a c i s t s 
a c t u a l l y p a y f o r d r u g  
p r o d u c t s 
by as much as 10-20 p e r c e n t 
b e c a u s e 
t h e y 
do n o t  
r e f l e c t 
d i s c o u n t s , 
p r e m i u m s , 
s p e c i a l o f f e r s o r i n c e n t i v e s , 
e t c . " 
( E m p h a s i s added.) 
7 
1071439, 1071440, 1071704, & 1071759 
I n 1996, t h e C o n g r e s s i o n a l B u d g e t 
O f f i c e p u b l i s h e d CBO  
P a p e r s : How t h e M e d i c a i d R e b a t e on P r e s c r i p t i o n D r u g s A f f e c t s  
P r i c i n g 
i n t h e 
P h a r m a c e u t i c a l 
I n d u s t r y 
( 1 9 9 6 ) . 
T h a t 
p u b l i c a t i o n s t a t e d , i n p e r t i n e n t p a r t : "The a v e r a g e 
w h o l e s a l e 
p r i c e (AWP) i s t h e p u b l i s h e d 
( l i s t ) 
p r i c e t h a t 
m a n u f a c t u r e r s 
s u g g e s t 
w h o l e s a l e r s 
c h a r g e 
t h e i r 
c u s t o m e r s . 
W h o l e s a l e r s 
 
u s u a l l y c h a r g e p h a r m a c i s t s a p r i c e t h a t i s 
l o w e r t h a n t h e AWP,  
w h i c h i s 
t h e p r i c e t h a t i s 
most w i d e l y a v a i l a b l e i n 
p u b l i s h e d 
 
f o r m . " 
I d . 
a t 20 ( e m p h a s i s 
a d d e d ) . 
A 
s i m i l a r 
d e f i n i t i o n 
f o r AWP 
a p p e a r e d 
i n 
N o v a r t i s , 
P h a r m a c y B e n e f i t R e p o r t : 
F a c t s & F i g u r e s 
( 2 0 0 0 ) : 
" A v e r a g e 
w h o l e s a l e 
p r i c e 
(AWP) 
-- 
A 
p u b l i s h e d 
s u g g e s t e d w h o l e s a l e p r i c e f o r 
a d r u g , b a s e d on t h e 
a v e r a g e 
c o s t o f t h e d r u g 
t o a p h a r m a c y 
f r o m 
a 
r e p r e s e n t a t i v e 
s a m p l e o f d r u g 
w h o l e s a l e r s . 
T h e r e 
a r e many AWPs a v a i l a b l e w i t h i n t h e i n d u s t r y . 
AWP i s 
o f t e n 
u s e d by p h a r m a c i e s 
t o p r i c e 
p r e s c r i p t i o n s . 
H e a l t h p l a n s a l s o u s e AWP -- u s u a l l y d i s c o u n t e d -¬
as 
t h e 
b a s i s 
o f 
r e i m b u r s e m e n t 
o f 
c o v e r e d 
m e d i c a t i o n s . " 
( E m p h a s i s 
added.) 
WAC was s p e c i f i c a l l y d e f i n e d i n 
t h e M e d i c a r e 
P r e s c r i p t i o n 
D r u g I m p r o v e m e n t and M o d e r n i z a t i o n A c t o f 2003, Pub. L. No. 
1 0 8 - 1 7 3 , § 3 0 3 , 117 S t a t . 2066, 2242 
( 2 0 0 3 ) , 
c o d i f i e d a t 42 
U.S.C. § 1 3 9 5 w - 3 a ( c ) ( 6 ) ( B ) , as f o l l o w s : 
8 
1071439, 1071440, 1071704, & 1071759 
"The 
t e r m 
' w h o l e s a l e 
a c q u i s i t i o n c o s t ' means, 
w i t h 
r e s p e c t t o a d r u g o r b i o l o g i c a l , t h e m a n u f a c t u r e r ' s 
l i s t p r i c e f o r 
t h e d r u g o r b i o l o g i c a l t o 
w h o l e s a l e r s 
o r 
d i r e c t 
p u r c h a s e r s 
i n t h e U n i t e d 
S t a t e s , 
n o t  
i n c l u d i n g p r o m p t p a y o r o t h e r 
d i s c o u n t s , 
r e b a t e s o r  
r e d u c t i o n s 
i n p r i c e , f o r 
t h e most r e c e n t month f o r 
w h i c h t h e i n f o r m a t i o n i s a v a i l a b l e , as r e p o r t e d i n 
w h o l e s a l e p r i c e g u i d e s o r o t h e r p u b l i c a t i o n s o f d r u g 
o r b i o l o g i c a l p r i c i n g 
d a t a . " 
( E m p h a s i s added.) P u b l i c Law No. 1 0 8 - 1 7 3 , § 3 0 3 ( i ) ( 4 ) ( B ) ( i i i ) , 
amended t h e M e d i c a i d A c t 
t o i n c o r p o r a t e 
t h i s d e f i n i t i o n o f WAC 
i n t o t h e M e d i c a i d 
s t a t u t o r y scheme. 
See 42 U.S.C. § 1 3 9 6 r -
8 ( b ) ( 3 ) ( A ) ( i i i ) ( I I ) . 
N o t a l l s u c h i n d u s t r y p u b l i c a t i o n s h a v e 
d e f i n e d WAC/AWP 
as " s u g g e s t e d " o r " l i s t " 
p r i c e s . 
I n t h e 1 9 7 0 s , t h e AMA m e r e l y r e i m b u r s e d p r o v i d e r s on t h e 
b a s i s o f t h e i r a c t u a l a c q u i s i t i o n p r i c e . 
I n d e e d , i n 
a 
l e t t e r 
t o t h e " h e a r i n g 
c l e r k " o f t h e U n i t e d 
S t a t e s 
F o o d and D r u g 
A d m i n i s t r a t i o n , 
d a t e d F e b r u a r y 13, 1975, Sam T. H a r d i n , 
t h e n 
d i r e c t o r o f t h e AMA P h a r m a c e u t i c a l S e r v i c e s 
M e d i c a l 
S e r v i c e s 
A d m i n i s t r a t i o n , 
o b j e c t e d 
t o any p r o p o s e d 
r u l e 
t h a t 
w o u l d 
r e p l a c e 
t h e AMA's 
a c t u a l - c o s t 
b a s i s , 
t h e n 
c u r r e n t , 
w i t h a 
m e t h o d o l o g y 
b a s e d 
on AWP. 
More 
s p e c i f i c a l l y , 
he 
s t a t e d : 
" B a s e d on a s t u d y 
r e c e n t l y c o n d u c t e d f o r s e v e r a l o f o u r 
t o p 
200 
d r u g s , a s a v i n g s i s b e i n g 
r e a l i z e d by u s e o f a c t u a l 
c o s t 
9 
1071439, 1071440, 1071704, & 1071759 
v s . AWP 
" N e v e r t h e l e s s , i n 
t h e e a r l y 1 9 8 0 s , t h e 
AMA b e g a n 
r e i m b u r s i n g 
p r o v i d e r s a t a r a t e o f 10 
0% o f AWP.
3 
I n J u n e 1985, 
h o w e v e r , R i c h a r d M o r r i s , a s s o c i a t e r e g i o n a l 
a d m i n i s t r a t o r o f t h e D e p a r t m e n t o f H e a l t h and Human 
S e r v i c e s 
("the 
DHHS") 
s e n t 
a 
l e t t e r 
t o t h e n AMA 
C o m m i s s i o n e r 
F a y e 
B a g g i a n o 
("the M o r r i s 
l e t t e r " ) , 
t h r e a t e n i n g 
t o 
w i t h d r a w 
f e d e r a l 
f i n a n c i a l 
p a r t i c i p a t i o n 
f r o m t h e A l a b a m a 
M e d i c a i d 
p r o g r a m b e c a u s e o f t h e AMA's u s e o f 100% o f AWP as t h e b a s i s 
f o r r e i m b u r s e m e n t . 
The l e t t e r 
s t a t e d : 
" T h i s i s t o i n f o r m you o f c o r r e c t i v e a c t i o n 
b e i n g 
p u r s u e d by 
t h i s 
o f f i c e 
t o s e c u r e 
c o m p l i a n c e 
w i t h 
F e d e r a l r e g u l a t i o n s r e g a r d i n g M e d i c a i d p r e s c r i p t i o n 
d r u g r e i m b u r s e m e n t and t o r e q u e s t y o u r a s s i s t a n c e i n 
i m p l e m e n t i n g c e r t a i n c h a n g e s by O c t o b e r 1, 1985. 
"The 
F e d e r a l 
r e g u l a t i o n s 
a t 
42 
CFR 
447.331 
[ c u r r e n t l y 42 C.F.R. § 447.512] 
p r o v i d e 
t h a t t h e 
S t a t e A g e n c y may n o t p a y more f o r p r e s c r i b e d 
d r u g s 
t h a n t h e l o w e r o f i n g r e d i e n t c o s t p l u s a 
r e a s o n a b l e 
d i s p e n s i n g f e e 
o r t h e p r o v i d e r ' s u s u a l and c u s t o m a r y 
c h a r g e t o t h e g e n e r a l 
p u b l i c . 
C o s t s 
f o r c e r t a i n 
m u l t i p l e 
s o u r c e 
d r u g s a r e s u b j e c t t o t h e l o w e r o f 
' e s t i m a t e d 
a c q u i s i t i o n 
c o s t ' 
(EAC) o r t h e 'maximum 
a l l o w a b l e 
c o s t ' 
(MAC) 
l i m i t 
as p u b l i s h e d 
i n t h e 
F e d e r a l 
R e g i s t e r . 
F o r a l l o t h e r 
d r u g s , 
t h e 
a l l o w a b l e 
c o s t 
l i m i t 
i s t h e S t a t e 
A g e n c y ' s 
b e s t 
e s t i m a t e 
o f what 
p r i c e 
p r o v i d e r s 
g e n e r a l l y a r e 
p a y i n g 
b a s e d 
on t h e p a c k a g e 
s i z e 
p r o v i d e r s 
most 
f r e q u e n t l y p u r c h a s e -- 42 C.F.R. 4 4 7 . 3 3 2 ( c ) . 
3 A t 
a l l 
t i m e s 
r e l e v a n t 
t o 
t h i s 
d i s p u t e , 
t h e AMA 
was 
r e c e i v i n g , p u r s u a n t t o a c o n t r a c t w i t h D a t a B a n k , d r u g - p r i c i n g 
J
.
_
^
_ 
j _ J 
• ^ ^ _ J _ _ T - , _ . _ ^ _ 
i n f o r m a t i o n f r o m D a t a B a n k . 
10 
1071439, 1071440, 1071704, & 1071759 
"As 
e a r l y as 1975 t h e [DHHS] c a u t i o n e d 
a g a i n s t t h e 
 
use o f 
AWPs as e s t i m a t e s o f d r u g i n g r e d i e n t c o s t s b y  
s t a t i n g 
i n t h e p r e a m b l e 
t o t h e 
f i n a l 
F e d e r a l 
 
R e g u l a t i o n s t h a t p u b l i s h e d w h o l e s a l e 
p r i c e s a r e n o t  
c l o s e l y 
r e l a t e d 
t o 
p r i c e s 
a c t u a l l y 
p a i d 
b y 
 
p r o v i d e r s . 
T h i s h a s b e e n r e i t e r a t e d b y t h e [DHHS]  
o v e r t h e y e a r s t o S t a t e M e d i c a i d 
A g e n c i e s 
t h r o u g h 
 
p o l i c y 
i s s u a n c e s 
w h i c h 
have 
s t a t e d 
t h a t 
t h e 
e s t i m a t e d a c q u i s i t i o n c o s t (EAC) 
s h o u l d be 'as c l o s e 
as 
f e a s i b l e t o t h e p r i c e 
g e n e r a l l y a n d 
c u r r e n t l y 
p a i d b y p r o v i d e r s . ' 
I n J u n e 1984, 
t h e 
DHHS 
O f f i c e 
o f I n s p e c t o r G e n e r a l i s s u e d a R e p o r t t o C o n g r e s s a n d 
HCFA 
[ c u r r e n t l y 
t h e CMS] r e c o m m e n d i n g 
a c t i o n t o 
r e d u c e 
i n f l a t e d 
M e d i c a i d 
d r u g 
r e i m b u r s e m e n t . The 
IG's r e c o m m e n d a t i o n s were b a s e d on a n a t i o n a l r e v i e w 
o f S t a t e p r a c t i c e s t h r o u g h 
i n t e n s i v e s a m p l e 
s u r v e y s 
i n s i x S t a t e s . The r e v i e w s 
c o n s i s t e n t l y showed t h a t 
M e d i c a i d 
EACs 
were 
p r i m a r i l y 
b a s e d on 
p u b l i s h e d 
a v e r a g e w h o l e s a l e 
p r i c e s (AWPs) w h i c h were 
i n f l a t e d  
by an a v e r a g e o f 15.96 p e r c e n t . 
HCFA 
a c c e p t a n c e 
s a m p l e s i n F l o r i d a a n d G e o r g i a 
c o n f i r m e d t h e 
I G ' s 
f i n d i n g s . 
"On t h e f a c e o f t h i s 
s u b s t a n t i a l 
d a t a , we c o n v e n e d 
a w o r k g r o u p 
c o m p r i s e d 
o f R e g i o n I V S t a t e 
M e d i c a i d 
C o n s u l t a n t P h a r m a c i s t s t o d e v e l o p a r a n g e o f o p t i o n s  
t o r e d u c e t h e i n f l a t e d 
l e v e l s o f d r u g 
r e i m b u r s e m e n t  
c a u s e d b y u s e 
o f 
AWP as ' e s t i m a t e d a c q u i s i t i o n c o s t '  
( E A C ) . 
The A l a b a m a r e p r e s e n t a t i v e , Mr. Sam H a r d i n ,  
was 
an a c t i v e 
p a r t i c i p a n t i n t h e w o r k s h o p a n d h i s 
c o n t r i b u t i o n s 
were 
a p p r e c i a t e d . 
I n two m e e t i n g s 
d u r i n g 
A p r i l 
a n d J u n e 
1 9 8 5 , S t a t e 
a n d 
R e g i o n a l 
O f f i c e 
s t a f f 
r e a c h e d an a g r e e m e n t on t h e f o l l o w i n g 
m e t h o d o l o g y f o r o b t a i n i n g t h e E s t i m a t e d 
A c q u i s i t i o n 
C o s t 
(EAC): 
" O b t a i n t h e W h o l e s a l e 
A c q u i s i t i o n 
[ C o s t ] 
(WA[C]) 
f o r e a c h 
d r u g 
i n t h e 
S t a t e 
f o r m u l a r y 
a n d a d d 5.01 p e r c e n t 
t o t h a t 
p r i c e . 
The p r o d u c t 
o b t a i n e d 
w i l l be t h e 
maximum a l l o w a b l e amount 
p a y a b l e . 
11 
1071439, 1071440, 1071704, & 1071759 
"The 
m e t h o d o l o g y s e t f o r t h above 
s h o u l d 
p r o d u c e a 
p r i c e 
t h a t i s 13.9 p e r c e n t 
b e l o w AWP and r e s u 1 t i n 
an EAC a d j u s t e d t o more r e a l i s t i c a l l y 
r e f l e c t a c t u a l  
c o s t 
i n t h e 
p a c k a g e 
s i z e 
p r o v i d e r s 
b u y 
most 
f r e q u e n t l y . 
" I n 
t h e p a s t , 
S t a t e s 
w h i c h 
u t i l i z e d 
t h e AWP 
as 
' e s t i m a t e d 
a c q u i s i t i o n c o s t ' have n o t b e e n f o u n d t o 
be 
o u t o f 
c o m p l i a n c e 
w i t h 
F e d e r a l 
r e g u l a t i o n s . 
F u r t h e r , 
no 
s a n c t i o n s 
o r 
p e n a l t i e s 
h a v e 
b e e n 
a p p l i e d . 
However, 
b a s e d 
on 
c u r r e n t 
c o n c l u s i v e 
 
e v i d e n c e t h a t t h e p u b l i s h e d AWP d o e s n o t r e f l e c t t h e  
t r u e 
c o s t o f d r u g 
p r o d u c t s 
we do n o t c o n s i d e r i t 
 
a c c e p t a b l e 
f o r u s e as t h e S t a t e ' s EAC, u n l e s s t h e  
AWP h a s b e e n r e d u c e d s i g n i f i c a n t l y t o r e f l e c t a more  
a c c u r a t e 
r e p r e s e n t a t i o n 
o f 
t h e 
t r u e 
e s t i m a t e d 
 
a c q u i s i t i o n c o s t o f a d r u g . 
As an a l t e r n a t i v e , HCFA 
w i l l 
f i n d 
a c c e p t a b l e 
e i t h e r 
t h e 
m e t h o d o l o g y 
d e v e l o p e d b y t h e R e g i o n I V EAC w o r k g r o u p o r a n o t h e r 
m e t h o d o l o g y 
t h a t 
w o u l d 
r e s u l t 
i n 
e q u i v a l e n t 
r e d u c t i o n s . 
" B a s e d 
on 
o u r 
u n d e r s t a n d i n g 
o f 
c u r r e n t 
A l a b a m a 
p r a c t i c e , 
y o u r 
c u r r e n t 
EAC 
m e t h o d o l o g y 
d o e s n o t 
r e s u l t 
i n ' e s t i m a t e d 
a c q u i s i t i o n 
c o s t ' 
c o n s i s t e n t 
w i t h 
t h e 
i n t e n t 
o f t h e 
r e g u l a t i o n s 
a t 42 
CFR 
4 4 7 . 3 3 1 - 4 4 7 . 3 3 2 . 
T h e r e f o r e , i t 
i s o u r o p i n i o n 
t h a t 
A l a b a m a c o m p l i a n c e w i t h 
t h e s e 
F e d e r a l 
r e q u i r e m e n t s 
i s 
i n q u e s t i o n . 
U n l e s s 
we 
r e c e i v e 
e v i d e n c e 
t h a t 
A l a b a m a 
h a s 
e f f e c t e d 
c h a n g e s 
i n 
t h e 
EAC 
d e t e r m i n a t i o n 
m e t h o d o l o g y 
c o n s i s t e n t 
w i t h 
t h e 
p r i n c i p l e s p r e v i o u s l y d e s c r i b e d , 
e f f e c t i v e no 
l a t e r 
t h a n O c t o b e r 1, 1985, t h i s i s s u e w i l l be r e p o r t e d t o 
t h e HCFA C e n t r a l O f f i c e on t h e c o m p l i a n c e r e p o r t f o r 
t h e q u a r t e r e n d i n g S e p t e m b e r 30, 1985. I n a d d i t i o n , 
F e d e r a l 
f i n a n c i a l 
p a r t i c i p a t i o n 
(FFP) w i l l 
n o t be 
a v a i l a b l e b e y o n d S e p t e m b e r 30, 1985, i n 
p a y m e n t s 
f o r 
p r e s c r i b e d d r u g s i n e x c e s s o f t h e amounts t h a t w o u l d 
h a v e b e e n a c h i e v e d h a d A l a b a m a i m p l e m e n t e d t h e EAC 
m e t h o d o l o g y 
d e v e l o p e d 
by 
t h e 
R e g i o n 
I V 
D r u g 
R e i m b u r s e m e n t W o r k g r o u p 
( i . e . w h o l e s a l e 
a c q u i s i t i o n 
[ c o s t ] 
(WA[C]) p l u s 5.01 p e r c e n t ) , o r a c o m p a r a b l e 
12 
1071439, 1071440, 1071704, & 1071759 
m e t h o d o l o g y 
a p p r o v e d by 
t h e H e a l t h 
C a r e 
F i n a n c i n g 
A d m i n i s t r a t i o n p r i o r t o i m p l e m e n t a t i o n . 
" P l e a s e a d v i s e 
t h i s 
o f f i c e by 
J u l y 8, 1985 
o f y o u r 
t i m e 
f r a m e 
f o r 
i m p l e m e n t i n g 
t h e 
new 
EAC. 
m e t h o d o l o g y . 
As 
a l w a y s , we 
s t a n d r e a d y 
t o be 
o f 
a s s i s t a n c e upon r e q u e s t . " 
( E m p h a s i s 
a d d e d . ) 
B a g g i a n o r e s p o n d e d t o t h e M o r r i s l e t t e r on J u n e 26, 
1985. 
Her 
l e t t e r 
s t a t e d : 
" T h i s 
i s i n r e s p o n s e 
t o 
y o u r 
l e t t e r 
o f 
J u n e 
18 
c o n c e r n i n g 
c o r r e c t i v e 
a c t i o n b e i n g p u r s u e d by 
y o u r 
o f f i c e t o s e c u r e c o m p l i a n c e w i t h f e d e r a l 
r e g u l a t i o n s 
w i t h 
r e g a r d 
t o 
M e d i c a i d 
p r e s c r i p t i o n 
d r u g 
r e i m b u r s e m e n t . 
" T h i s 
A g e n c y 
p l a n s 
t o 
p u r s u e 
and 
i m p l e m e n t 
t h e 
 
m e t h o d o l o g y 
f o r 
e s t a b l i s h i n g 
t h e 
e s t i m a t e d 
 
a c q u i s i t i o n 
c o s t 
(EAC) 
f o r d r u g s p a y a b l e u n d e r 
t h e  
p r o g r a m 
( i . e . , w h o l e s a l e a c q u i s i t i o n 
[ c o s t ] 
(WA[C]) 
 
p l u s 5.01%) t o be e f f e c t i v e O c t o b e r 1, 
1985. 
" I t i s o u r o p i n i o n t h i s c h a n g e w i l l p l a c e A l a b a m a i n 
c o m p l i a n c e w i t h t h e i n t e n t o f t h e r e g u l a t i o n s a t 42 
C.F.R. 4 4 7 . 3 3 1 - . 3 3 2 . " 
( E m p h a s i s added.) 
On S e p t e m b e r 
6, 1985, t h e AMA 
s e n t " P r o v i d e r N o t i c e 
8 5 ¬
18" t o " a l l p h a r m a c i e s and d i s p e n s i n g p h y s i c i a n s 
p a r t i c i p a t i n g 
i n t h e A l a b a m a T i t l e X I X 
( M e d i c a i d ) P h a r m a c e u t i c a l P r o g r a m , " 
n o t i f y i n g 
p r o v i d e r s 
o f 
t h e 
c h a n g e 
i n 
r e i m b u r s e m e n t 
m e t h o d o l o g y . 
The 
n o t i c e 
s t a t e d , i n p e r t i n e n t 
p a r t : 
13 
1071439, 1071440, 1071704, & 1071759 
" T h r o u g h i n t e n s i v e s a m p l e s u r v e y s , 
t h e D e p a r t m e n t o f 
H e a l t h and Human S e r v i c e s 
(HHS) 
has 
d e t e r m i n e d 
t h a t 
p u b l i s h e d 
AWPs 
( a v e r a g e 
w h o l e s a l e 
p r i c e s ) 
a r e 
 
i n f l a t e d 
and 
t h a t 
AWP 
i s 
n o t 
t h e 
[AMA's] 
' b e s t 
 
e s t i m a t e 
o f 
what 
p r i c e 
p r o v i d e r s 
g e n e r a l l y 
a r e 
 
p a y i n g 
f o r a d r u g . ' 
The 
r e v i e w s 
c o n s i s t e n t l y showed 
t h a t M e d i c a i d EACs were p r i m a r i l y b a s e d on 
p u b l i s h e d 
a v e r a g e w h o l e s a l e 
p r i c e s . 
I n o r d e r 
t o c o m p l y 
w i t h 
f e d e r a l 
r e g u l a t i o n s , 
t h e 
m e t h o d o l o g y 
u s e d 
t o 
d e t e r m i n e e s t i m a t e d 
a c q u i s i t i o n c o s t w i l l be c h a n g e d 
e f f e c t i v e 
O c t o b e r 
1, 
1985. 
The 
[AMA] 
w i l l 
o b t a i n 
t h e 
w h o l e s a l e 
a c q u i s i t i o n 
[ c o s t ] p l u s 
a p e r c e n t 
t o 
a r r i v e 
a t 
t h e 
e s t i m a t e d 
a c q u i s i t i o n 
c o s t . 
T h i s 
m e t h o d o l o g y 
w i l l 
r e s u l t 
i n 
an 
EAC 
w h i c h 
more 
 
r e a l i s t i c a l l y 
r e f l e c t s 
t h e 
a c t u a l 
c o s t 
i n 
t h e 
p a c k a g e s i z e p r o v i d e r s buy most f r e q u e n t l y . " 
( E m p h a s i s added.) 
I m m e d i a t e l y a f t e r w a r d , 
t h e AMA 
c o n d u c t e d i t s own 
s u r v e y 
o f w h o l e s a l e 
d r u g c o m p a n i e s t o d e t e r m i n e what p r o v i d e r s were 
a c t u a l l y p a y i n g . 
On November 22, 
1985, 
B a g g i a n o s e n t 
M o r r i s 
a 
l e t t e r 
r e p o r t i n g 
t h e 
r e s u l t s 
o f 
t h i s 
s u r v e y . 
I n 
t h a t 
l e t t e r , 
she 
a l s o r e q u e s t e d 
a p p r o v a l f r o m t h e DHHS t o 
i n c r e a s e 
t h e 
markup 
f r o m 
WAC 
+ 
5.01% 
t o 
WAC 
+ 8.45%, b a s e d 
on 
t h e 
s u r v e y 
r e s u l t s . 
S p e c i f i c a l l y , 
t h e 
l e t t e r 
s t a t e d : 
" I n a c c o r d a n c e w i t h f e d e r a l r e g u l a t i o n s 42 
CFR 
447.332 [now 
42 C.F.R. 447.512] e f f e c t i v e O c t o b e r 
1, 
1985, 
t h e 
[AMA] 
a d o p t e d 
t h e 
p r i c e m e t h o d o l o g y 
f o r 
p h a r m a c y p r o g r a m s 
as 
s u g g e s t e d 
by 
HCFA 
[now 
CMS] 
r e g i o n a l 
o f f i c e 
(WA[C]) 
p l u s 
5.01%) 
f o r 
r e i m b u r s e m e n t . 
" S t u d i e s 
h a v e 
s i n c e 
b e e n 
c o n d u c t e d , 
and 
an 
a l t e r n a t i v e m e t h o d o l o g y i s b e i n g 
f o r w a r d e d f o r y o u r 
14 
1071439, 1071440, 1071704, & 1071759 
a p p r o v a l . 
S t u d i e s 
c o n s i d e r e d 
t h e t o p 100 
most 
f r e q u e n t l y p r e s c r i b e d d r u g s (600 e n t i t i e s ) 
s u p p l i e d 
t o 
A l a b a m a 
M e d i c a i d 
r e c i p i e n t s . The 
[AMA] 
w i l l 
u t i l i z e 
t h e 
f o l l o w i n g 
m e t h o d o l o g y 
f o r o b t a i n i n g 
e s t i m a t e d 
a c q u i s i t i o n c o s t : 
o b t a i n 
t h e w h o l e s a l e 
a c q u i s i t i o n 
[ c o s t ] 
(WA[C]) f o r e a c h 
d r u g 
i n t h e 
s t a t e f o r m u l a r y and a d d 8.45% t o t h a t p r i c e . 
" S t u d i e s were a c c o m p l i s h e d f o r 
M e d i c a i d b y t h e 
two 
p r i m a r y 
w h o l e s a l e 
d r u g c o m p a n i e s 
( W a l k e r 
D r u g 
Company and D u r r - F i l l a u e r M e d i c a l , 
I n c . ) , 
s e r v i n g 
80% o f A l a b a m a p h a r m a c i e s . 
C o p i e s o f t h e s e 
s t u d i e s 
a r e a t t a c h e d f o r 
y o u r r e v i e w . 
The s t u d i e s i n d i c a t e d  
t h a t t h e a v e r a g e 
p e r c e n t a g e markup on WA[C] 
t h a t 
 
A l a b a m a p h a r m a c i e s a r e p a y i n g a r e 7.3% ( W a l k e r ) and  
7.6% 
( D u r r - F i l l a u e r ) . 
The 
a v e r a g e 
o f 
t h e s e 
p e r c e n t a g e s i s 7.45%. 
We a r e a d d i n g an a d d i t i o n a l 
1% 
t o c o m p e n s a t e 
f o r h i g h e r 
c o s t 
p a i d 
b y 
some 
p h a r m a c i s t s 
who a r e u n a b l e 
t o t a k e 
a d v a n t a g e o f  
d i s c o u n t s . 
D i s c o u n t s 
a r e o f f e r e d o n l y i f 
t h e y make 
t i m e l y p a y m e n t s 
( t w i c e m o n t h l y ) a n d / o r i f t h e y a r e 
a b l e 
t o p u r c h a s e 
i n l a r g e 
v o l u m e s . 
W i t h 
y o u r 
a p p r o v a l , 
we 
p l a n 
t o 
i m p l e m e n t 
t h i s 
p r o g r a m 
e f f e c t i v e J a n u a r y 1, 1985 
[ s i c ] . 
" Y o u r 
c o n s i d e r a t i o n 
and 
a p p r o v a l 
o f 
t h i s 
a l t e r n a t i v e m e t h o d o l o g y i s a p p r e c i a t e d . " 
( E m p h a s i s added.) 
On November 26, 1985, M o r r i s 
r e p l i e d t o 
B a g g i a n o , 
s t a t i n g 
t h a t 
t h e DHHS 
a c c e p t e d 
h e r 
" p r o f f e r e d 
m e t h o d o l o g y 
and 
i m p l e m e n t a t i o n 
d a t e 
f o r i m p l e m e n t i n g t h e 
[AMA's] b e s t 
e s t i m a t e 
o f t h e p r i c e p r o v i d e r s 
g e n e r a l l y a r e 
p a y i n g f o r 
a d r u g ( s ) . " 
I n M a r c h 1987, C a r o l H e r r m a n n , t h e n an o f f i c i a l a t CMS, 
r e c e i v e d 
an 
i n t e r n a l 
memorandum 
r e g a r d i n g 
" I n i t i a t i v e 
on 
15 
1071439, 1071440, 1071704, & 1071759 
L o w e r i n g D r u g A c q u i s i t i o n C o s t and t h e S t a t e o f A l a b a m a " ("the 
I n i t i a t i v e " ) . 
The memorandum s t a t e d , i n p e r t i n e n t 
p a r t : 
" I n a p p r o x i m a t e l y M a r c h 1985, u n d e r a HCFA [now 
CMS] 
PATROL 
I n i t i a t i v e , 
S t a t e s 
were 
i n s t r u c t e d 
( t h r o u g h HCFA 
R e g i o n a l 
O f f i c e s ) 
t o o b t a i n 
b e t t e r 
e s t i m a t i o n s 
o f a c q u i s i t i o n c o s t s on s i n g l e 
s o u r c e 
d r u g s . 
M o s t 
S t a t e s 
were 
u s i n g 
a v e r a g e 
w h o l e s a l e 
 
p r i c e 
(AWP) 
l i s t i n g s 
w h i c h 
a r e u s u a l l y 
a b o u t 
20  
p e r c e n t 
h i g h e r 
t h a n 
a c q u i s i t i o n 
c o s t s . 
A 
few 
r e g i o n s , 
i n c l u d i n g A t l a n t a , 
t h r e a t e n e d 
S t a t e s 
w i t h 
n o n c o m p l i a n c e i f 
t h e y d i d n ' t c h a n g e t h e i r p o l i c y b y 
O c t o b e r 1, 1985, and r e v i s e t h e i r AWP 
l i s t i n g s . " 
( E m p h a s i s added.) 
I n 1989, C a r o l H e r r m a n n came t o A l a b a m a t o s e r v e as AMA 
c o m m i s s i o n e r . 
I n t h a t c a p a c i t y , she s e n t a l e t t e r on F e b r u a r y 
26, 
1992, t o t h e a s s o c i a t e 
r e g i o n a l 
a d m i n i s t r a t o r 
o f t h e 
H e a l t h 
C a r e 
F i n a n c i n g 
A d m i n i s t r a t i o n 
(now t h e CMS). 
The 
l e t t e r c o n t a i n e d 
a s s u r a n c e s t h a t t h e 
AMA h a d r e v i e w e d " p r i c i n g 
f o r m u l t i p l e s o u r c e d r u g s " a n d h a d f o u n d M e d i c a i d 
e x p e n d i t u r e s 
t o 
be 
c o n s i s t e n t 
w i t h 
f e d e r a l 
r e g u l a t i o n s . 
A t t a c h e d t o 
C o m m i s s i o n e r 
H e r r m a n n ' s 
l e t t e r 
was 
an 
e x c e r p t 
f r o m t h e 
M e d i c a i d 
m a n u a l , s t a t i n g , i n p e r t i n e n t 
p a r t : 
" E s t i m a t e d a c q u i s i t i o n c o s t s (EAC) mean t h e a g e n c y ' s 
b e s t e s t i m a t e o f t h e p r i c e g e n e r a l l y , and c u r r e n t l y , 
p a i d b y p r o v i d e r s f o r 
a d r u g m a r k e t e d o r s o l d by a 
p a r t i c u l a r 
m a n u f a c t u r e r o r l a b e l e r i n t h e p a c k a g e 
s i z e most 
f r e q u e n t l y 
p u r c h a s e d b y p r o v i d e r s . 
F o r 
e x a m p l e , i n 
t h e p a s t , many S t a t e s b a s e d t h e EAC upon 
A v e r a g e W h o l e s a l e P r i c e (AWP) l e v e l s as c o n t a i n e d i n 
16 
1071439, 1071440, 1071704, & 1071759 
v a r i o u s 
c o m m e r c i a l l y 
a v a i l a b l e 
p u b l i c a t i o n s . 
H o w e v e r , 
a number 
o f 
s t u d i e s 
have 
shown 
t h a t 
i n 
r e c e n t 
y e a r s 
t h e 
d r u g m a r k e t p l a c e 
has 
c h a n g e d 
and 
t h e r e 
i s 
a 
p r e p o n d e r a n c e 
o f 
e v i d e n c e 
t h a t 
d e m o n s t r a t e s 
t h a t 
s u c h 
AWP 
l e v e l s 
o v e r s t a t e 
t h e 
 
p r i c e s 
t h a t 
p h a r m a c i s t s 
a c t u a l l y 
pay 
f o r 
d r u g 
 
p r o d u c t s 
by as much as 10-20 
p e r c e n t b e c a u s e t h e y 
do 
 
n o t 
r e f l e c t 
d i s c o u n t s , p r e m i u m s , s p e c i a l o f f e r s 
o r  
i n c e n t i v e s , 
e t c . 
C o n s e q u e n t l y , 
a b s e n t 
v a l i d 
d o c u m e n t a t i o n t o t h e c o n t r a r y , a p u b l i s h e d AWP 
l e v e l 
as 
a 
S t a t e 
d e t e r m i n a t i o n 
o f 
EAC 
w i t h o u t 
a 
 
s i g n i f i c a n t 
d i s c o u n t 
b e i n g 
a p p l i e d 
i s 
n o t 
an 
a c c e p t a b l e 
e s t i m a t e 
o f 
p r i c e s 
g e n e r a l l y 
and 
c u r r e n t l y p a i d by 
p r o v i d e r s . " 
( E m p h a s i s added.) 
M e a n w h i l e , 
on 
O c t o b e r 
29, 
1987, 
t h e 
AMA 
i n c r e a s e d 
t h e 
markup u s e d i n i t s r e i m b u r s e m e n t m e t h o d o l o g y f r o m WAC 
+ 
8.45% 
t o 
WAC 
+ 
9.2%. 
T h i s 
c h a n g e 
r e s u l t e d 
f r o m 
s u r v e y s 
and 
a n a l y t i c a l s t u d i e s c o n d u c t e d by t h e AMA 
a f t e r 1985. 
H o w e v e r , 
b e g i n n i n g 
i n a p p r o x i m a t e l y 
1991, 
t h e AMA 
b e g a n 
s u p p l e m e n t i n g 
i t s 
m e t h o d o l o g y 
w i t h 
t h e 
use 
o f 
a 
d i s c o u n t e d 
AWP. 
S p e c i f i c a l l y , 
f r o m 1991 
t h r o u g h 2002, t h e AMA 
u s e d AWP 
m i n u s 
10.2% 
( h e r e i n a f t e r "AWP 
- 10.2%") w h e n e v e r t h e p u b l i s h e d 
AWP 
was more c u r r e n t t h a n t h e p u b l i s h e d WAC. 
S i n c e 2002, t h e 
AMA 
has 
u s e d 
AWP 
- 
10.2% 
w h e n e v e r 
t h e 
d i s c o u n t e d 
AWP 
f o r m u l a 
y i e l d s 
a 
l o w e r 
number t h a n 
t h e m a r k e d - u p 
WAC 
f o r m u l a . 
I n 
o t h e r w o r d s , s i n c e 1987, 
t h e AMA 
has 
-- w i t h two 
e x c e p t i o n s 
-¬
r e i m b u r s e d p r o v i d e r s on t h e b a s i s o f e i t h e r WAC 
+ 9.2% 
o r 
AWP 
17 
1071439, 1071440, 1071704, & 1071759 
- 1 0 . 2 % . 
The 
e x c e p t i o n s 
a r e 
(1) 
f o r 
p h y s i c i a n - a d m i n i s t e r e d 
d r u g s and 
(2) f o r a "DEA 
[ D r u g E n f o r c e m e n t A d m i n i s t r a t i o n ] 2 
( c o n t r o l l e d s u b s t a n c e ) , " 
f o r w h i c h , a t l e a s t f o r a p o r t i o n o f 
t h e p e r i o d f r o m 1991 
t o 2005, t h e 
S t a t e a l l e g e d l y r e i m b u r s e d 
a t 100% 
o f AWP.
4 
As o f S e p t e m b e r 2004, A l a b a m a was 
one 
o f s i x s t a t e s u s i n g 
WAC 
and 
AWP 
f o r m u l a s 
as 
a l t e r n a t e b a s e s 
f o r 
r e i m b u r s e m e n t . 
F o r t y - o n e s t a t e s u s e d a C M S - a p p r o v e d , d i s c o u n t e d 
AWP 
f o r m u l a 
w i t h o u t WAC. 
H o w e v e r , t h e p e r c e n t a g e t h a t t h o s e s t a t e s ' p l a n s 
d i s c o u n t e d 
f r o m t h e p u b l i s h e d AWP 
p r i c e v a r i e d 
c o n s i d e r a b l y . 
F o r 
e x a m p l e , 
d i s c o u n t s 
a p p l i e d 
i n a number 
o f 
s t a t e s 
f e l l 
w i t h i n 
t h e 
10% 
t o 
12% 
r a n g e . 
By 
c o n t r a s t , t h e 
C o n n e c t i c u t 
p l a n 
a p p l i e d 
a 
40% 
d i s c o u n t 
t o 
t h e 
p u b l i s h e d 
AWP 
p r i c e 
on 
g e n e r i c 
d r u g s , 
and 
W a s h i n g t o n 
a p p l i e d 
a 
50% 
d i s c o u n t 
t o 
a 
c l a s s o f " m u l t i p l e - s o u r c e " 
d r u g s . 
D u r i n g 
t h e 
t r i a l 
o f t h e c a s e a g a i n s t GSK 
and 
N o v a r t i s ,
5 
Dr. G e r a r d A n d e r s o n , t h e S t a t e ' s e x p e r t w i t n e s s 
i n t h e a r e a 
o f 
d r u g 
p r i c i n g , 
t e s t i f i e d 
t h a t 
" t h e r e 
i s 
a 
m a t h e m a t i c a l 
4 T h e use 
o f 100% 
o f AWP 
as a f o r m u l a 
f o r r e i m b u r s e m e n t 
o f 
p h y s i c i a n - a d m i n i s t e r e d 
d r u g s was 
a p p a r e n t l y 
d i s c o n t i n u e d 
i n 
1999. 
5 T h e c l a i m s a g a i n s t GSK 
and N o v a r t i s were c o n s o l i d a t e d f o r 
t r i a l . 
18 
1071439, 1071440, 1071704, & 1071759 
r e l a t i o n s h i p b e t w e e n ... t h e WAC 
p r i c e and t h e AWP 
p r i c e , " 
m e a n i n g t h a t , 
" i f t h e WAC 
p r i c e i s n o t a t r u e 
p r i c e , 
t h e n , 
m a t h e m a t i c a l l y , 
t h e 
AWP c a n n o t be a t r u e p r i c e e i t h e r . " 
A l s o , 
i n p o s t j u d g m e n t r e s p o n s e s 
f i l e d i n t h e t r i a l c o u r t , t h e S t a t e 
e x p l a i n e d t h a t t h e AWP was c a l c u l a t e d "by a d d i n g 2 0 % o r 2 5 % t o 
t h e 
r e p o r t e d 
WAC" 
and t h u s 
" b o r e 
a 
c o n s i s t e n t , 
f o r m u l a i c 
r e l a t i o n s h i p t o WAC." 
I n f a c t , t h e S t a t e c o n c e d e s t h a t t h e 
WAC 
a n d AWP 
f o r m u l a s 
a r e d e s i g n e d 
t o -- and do -- 
y i e l d 
r o u g h l y t h e same number. 
T h i s 
m a t h e m a t i c a l 
l i n k a g e 
b e t w e e n 
WAC 
and AWP 
was 
s p e c i f i c a l l y 
a d d r e s s e d i n an i n t e r n a l AMA memorandum 
d a t e d 
November 
28, 1995, r e g a r d i n g 
" s u g g e s t e d 
c o s t 
c o n t a i n m e n t 
m e a s u r e s . " 
The memorandum f r o m M a r y F i n c h , an o f f i c i a l o f 
t h e 
AMA, t o t h e d i r e c t o r o f M e d i c a l 
S e r v i c e s f o r t h e AMA ("the 
F i n c h memo") s t a t e d , i n p e r t i n e n t 
p a r t : 
" B e c a u s e o f t h e p r e s e n t 
b u d g e t a r y 
s i t u a t i o n o f t h e 
[ A M A ] , c e r t a i n c o s t c o n t a i n m e n t m e a s u r e s have b e e n 
e v a l u a t e d 
and a r e p r e s e n t e d 
t o you f o r f u r t h e r 
e v a l u a t i o n 
• 
Make 
a d j u s t m e n t s 
i n 
t h e 
c u r r e n t 
p r i c i n g 
 
m e t h o d o l o g y : 
C o v e r e d 
d r u g s 
a r e 
c u r r e n t l y 
r e i m b u r s e d 
a t 
a 
r a t e 
o f 
t h e 
w h o l e s a l e 
a c q u i s i t i o n 
c o s t 
(WAC) 
p l u s 
9.2%. 
T h i s i s 
a p p r o x i m a t e l y 
e q u a l t o A v e r a g e W h o l e s a l e 
P r i c e 
(AWP) m i n u s 10%. 
B e c a u s e t h e a c c e p t e d 
f i g u r e 
f o r 
t h e 
d i s c o u n t 
r e c e i v e d 
b y 
p h a r m a c i e s 
19 
1071439, 1071440, 1071704, & 1071759 
r e c e i v i n g 
t h e AWP 
i s 14%, t h e r e i s room t o 
d e c r e a s e t h e p e r c e n t a g e a d d e d t o WAC. 
"WAC + 9.2% = AWP - 10% 
"WAC + 7.99% = AWP - 1 1 % 
"WAC + 6.78% = AWP - 12% 
"WAC + 5.57% = AWP - 13% 
"WAC + 4.36% = AWP - 14% 
" I f 
t h e p e r c e n t a g e 
a d d e d t o WAC 
i s d e c r e a s e d t o 
4.3 
6, a p p r o x i m a t e l y $5.6 m i l l i o n 
c o u l d be s a v e d . " 
(Some e m p h a s i s 
a d d e d . ) 
H o w e v e r , no c h a n g e s were made t o 
t h e 
AMA's r e i m b u r s e m e n t 
m e t h o d o l o g y o f WAC + 9.2% o r AWP - 1 0 . 2 % , 
and t h o s e f o r m u l a s a r e t h e f o r m u l a s c u r r e n t l y i n u s e . 
On J a n u a r y 26, 2005, t h e S t a t e s u e d 73 p h a r m a c e u t i c a l 
m a n u f a c t u r e r s , i n c l u d i n g A s t r a Z e n e c a , N o v a r t i s , a n d GSK. The 
c o m p l a i n t 
a l l e g e d ( 1 ) t h a t 
t h e m a n u f a c t u r e r s 
f r a u d u l e n t l y 
" p r o v i d e d o r c a u s e d t o be p r o v i d e d 
f a l s e a n d i n f l a t e d 
AWP 
[ a n d ] WAC ... i n f o r m a t i o n f o r t h e i r d r u g s t o ... D a t a B a n k " ; 
( 2 ) t h a t t h e r e p o r t e d AWPs a n d WACs 
" g r e a t l y 
e x c e e d e d t h e 
a c t u a l p r i c e s a t w h i c h [ t h e m a n u f a c t u r e r s ] s o l d t h e i r d r u g s t o 
r e t a i l e r s 
( p h y s i c i a n s , 
h o s p i t a l s , 
a n d 
p h a r m a c i e s ) 
a n d 
w h o l e s a l e r s , " 
b e c a u s e 
t h e y 
d i d n o t 
i n c l u d e 
" u n d i s c l o s e d 
d i s c o u n t s , r e b a t e s , a n d o t h e r i n d u c e m e n t s w h i c h h a d t h e e f f e c t 
o f l o w e r i n g t h e a c t u a l w h o l e s a l e o r s a l e s 
p r i c e s 
c h a r g e d t o 
t h e i r c u s t o m e r s as c o m p a r e d t o t h e r e p o r t e d p r i c e s " ; ( 3 ) t h a t 
20 
1071439, 1071440, 1071704, & 1071759 
t h e m a n u f a c t u r e r s "knew t h a t t h e f a l s e and d e c e p t i v e 
i n f l a t i o n 
o f AWP 
[ a n d ] WAC] 
... 
f o r t h e i r d r u g s w o u l d c a u s e [ t h e AMA] 
t o 
pay 
e x c e s s i v e amounts f o r t h e s e 
d r u g s " ; and 
( 4 ) t h a t t h e 
AMA 
" r e a s o n a b l y 
r e l i e d 
on 
t h e 
f a l s e 
p r i c i n g 
d a t a 
i n 
s e t t i n g 
p r e s c r i p t i o n d r u g r e i m b u r s e m e n t r a t e s and m a k i n g payment b a s e d 
on s a i d r a t e s . " 
The 
c o m p l a i n t 
c o n t a i n e d 
c l a i m s o f 
f r a u d u l e n t 
m i s r e p r e s e n t a t i o n , 
f r a u d u l e n t s u p p r e s s i o n , 
and w a n t o n n e s s 
and 
s o u g h t c o m p e n s a t o r y and 
p u n i t i v e damages f o r t h e p e r i o d 
f r o m 
J a n u a r y 1, 
1991, 
t h r o u g h t h e 
f i r s t 
q u a r t e r 
o f 2 0 0 5 .
6 
I n N o v a r t i s I , we 
i s s u e d a w r i t o f mandamus 
" d i r e c t [ i n g ] 
t h e 
t r i a l 
c o u r t 
t o 
s e v e r 
t h e 
c l a i m s 
a g a i n s t 
a l l 
[ t h e 
p h a r m a c e u t i c a l ] 
c o m p a n i e s . " 
975 
So. 
2d 
a t 
304 
( e m p h a s i s 
a d d e d ) . 
T r i a l 
o f 
t h e 
c l a i m s 
a g a i n s t 
A s t r a Z e n e c a b e g a n 
on 
F e b r u a r y 11, 2008. 
The 
c l a i m s 
a g a i n s t N o v a r t i s and 
GSK 
were 
p r e s e n t e d 
i n a c o n s o l i d a t e d t r i a l t h a t b e g a n on J u n e 16, 2008. 
A s t r a Z e n e c a , 
N o v a r t i s , and GSK 
e a c h 
f i l e d 
t i m e l y m o t i o n s 
f o r 
j u d g m e n t s as a m a t t e r o f l a w ( " J M L " ) , p l a c i n g i n i s s u e 
t h e 
s u f f i c i e n c y 
o f 
t h e 
e v i d e n c e 
as 
t o 
t h e 
f r a u d u l e n t -
m i s r e p r e s e n t a t i o n 
and 
f r a u d u l e n t - s u p p r e s s i o n 
c l a i m s . 
I n 
6 A l t h o u g h 
t h e c o m p l a i n t 
a l s o c o n t a i n e d 
a c l a i m o f 
u n j u s t 
e n r i c h m e n t , 
t h e S t a t e 
v o l u n t a r i l y w i t h d r e w t h a t 
c l a i m as 
t o 
A s t r a Z e n e c a , 
N o v a r t i s , and 
GSK. 
21 
1071439, 1071440, 1071704, & 1071759 
p a r t i c u l a r , t h e y c h a l l e n g e d t h e s u f f i c i e n c y o f t h e e l e m e n t o f  
r e l i a n c e . 
A f t e r t h o s e m o t i o n s were d e n i e d , t h e j u r i e s i n b o t h 
t r i a l s 
r e t u r n e d v e r d i c t s i n f a v o r o f t h e S t a t e . 
The 
j u r y 
i n A s t r a Z e n e c a ' s 
t r i a l 
r e t u r n e d 
a 
v e r d i c t 
a g a i n s t i t on t h e c l a i m s o f m i s r e p r e s e n t a t i o n and 
f r a u d u l e n t 
s u p p r e s s i o n , a w a r d i n g $40,000,000 i n c o m p e n s a t o r y damages and 
$175,000,000 p u n i t i v e damages. 
The j u r y i n t h e N o v a r t i s / G S K 
t r i a l r e t u r n e d a v e r d i c t a g a i n s t N o v a r t i s and GSK on t h e c l a i m 
o f 
f r a u d u l e n t 
m i s r e p r e s e n t a t i o n 
o n l y , 
a w a r d i n g 
t h e 
S t a t e 
$33,257,694 
i n c o m p e n s a t o r y 
damages 
a g a i n s t 
N o v a r t i s 
and 
$ 8 0 , 9 8 9 , 5 3 9 
a g a i n s t 
GSK. 
The 
j u r i e s 
f o u n d i n f a v o r 
o f t h e 
d e f e n d a n t s 
on 
t h e w a n t o n n e s s 
c l a i m s 
i n b o t h 
t r i a l s . 
The 
d e f e n d a n t s 
r e n e w e d 
t h e i r 
JML 
m o t i o n s 
p o s t j u d g m e n t . 
B o t h 
m o t i o n s were d e n i e d . 
I n A s t r a Z e n e c a ' s c a s e , t h e t r i a l 
c o u r t 
r e d u c e d t h e p u n i t i v e - d a m a g e s a w a r d t o $ 1 2 0 , 0 0 0 , 0 0 0 , l e a v i n g a 
j u d g m e n t 
a g a i n s t 
A s t r a Z e n e c a 
f o r $16 
0,000,000. 
From 
t h o s e 
j u d g m e n t s , A s t r a Z e n e c a , 
N o v a r t i s , and GSK a p p e a l e d . 
C a s e s no. 
1071439 and no. 1071440 r e p r e s e n t A s t r a Z e n e c a ' s a p p e a l , 
c a s e 
no. 
1071704 
r e p r e s e n t s 
GSK's 
a p p e a l , 
and c a s e no. 
1071759 
r e p r e s e n t s N o v a r t i s ' s a p p e a l . 
S e v e r a l a m i c i c u r i a e , i n c l u d i n g 
22 
1071439, 1071440, 1071704, & 1071759 
t h e N a t i o n a l Community P h a r m a c i s t s A s s o c i a t i o n 
("the N C P A " ) ,
7 
f i l e d 
b r i e f s 
i n s u p p o r t 
o f b o t h 
s i d e s 
o f t h e 
d i s p u t e . 
We 
c o n s o l i d a t e d 
t h e s e 
a p p e a l s 
f o r 
t h e 
c o n s i d e r a t i o n 
and 
r e s o l u t i o n o f an i s s u e r a i s e d i n t h e d e f e n d a n t s ' m o t i o n s 
f o r 
a JML 
t h a t i s common t o t h e p a r t i e s and 
d i s p o s i t i v e o f t h e s e 
a p p e a l s : 
W h e t h e r 
t h e 
S t a t e p r e s e n t e d 
s u b s t a n t i a l 
e v i d e n c e 
t h a t i t r e a s o n a b l y r e l i e d on t h e p u b l i s h e d WAC 
and AWP 
p r i c e s 
f o r 
t h e p h a r m a c e u t i c a l m a n u f a c t u r e r s ' 
p r e s c r i p t i o n 
d r u g s . 
I I . D i s c u s s i o n 
The 
s t a n d a r d o f r e v i e w o f a 
r u l i n g 
on 
a JML 
m o t i o n 
i s 
w e l l 
s e t t l e d : 
" ' I n 
r e v i e w i n g a r u l i n g on a m o t i o n 
f o r a 
JML, 
t h i s 
C o u r t 
v i e w s 
t h e 
e v i d e n c e 
i n t h e 
l i g h t 
most 
f a v o r a b l e 
t o 
t h e 
nonmovant 
and 
e n t e r t a i n s 
s u c h 
r e a s o n a b l e i n f e r e n c e s f r o m t h a t e v i d e n c e as t h e 
j u r y 
w o u l d 
h a v e 
b e e n 
f r e e 
t o 
draw.' 
D a n i e l s 
v. 
E a s t 
 
A l a b a m a P a v i n g , 
I n c . , 740 
So. 
2d 
1033, 
1037 
( A l a . 
1 9 9 9 ) . 
'The 
d e n i a l 
o f a d e f e n d a n t ' s 
m o t i o n 
f o r a 
JML 
i s p r o p e r o n l y when t h e p l a i n t i f f has 
p r e s e n t e d 
s u b s t a n t i a l e v i d e n c e t o s u p p o r t e a c h e l e m e n t o f t h e 
p l a i n t i f f ' s 
c l a i m . ' 
K m a r t C o r p . v. B a s s e t t , 769 
So. 
2d 282, 284 
( A l a . 2 0 0 0 ) . 
' " S u b s t a n t i a l e v i d e n c e " i s 
" e v i d e n c e 
o f 
s u c h 
w e i g h t 
and 
q u a l i t y 
t h a t 
f a i r -
m i n d e d p e r s o n s i n t h e e x e r c i s e o f i m p a r t i a l j u d g m e n t 
c a n 
r e a s o n a b l y 
i n f e r 
t h e 
e x i s t e n c e 
o f 
t h e 
f a c t 
s o u g h t t o be p r o v e d . " ' I d . ( q u o t i n g West v. F o u n d e r s 
7The NCPA c l a i m s t o " r e p r e s e n t [ ] t h e p h a r m a c i s t 
o w n e r s , 
m a n a g e r s , 
and 
e m p l o y e e s 
o f 
more 
t h a n 
24,000 
i n d e p e n d e n t 
c o m m u n i t y p h a r m a c i e s 
a c r o s s t h e U n i t e d S t a t e s , 
i n c l u d i n g 
598 
i n t h e S t a t e o f A l a b a m a . " 
NCPA's b r i e f , 
a t 1. 
23 
1071439, 1071440, 1071704, & 1071759 
L i f e A s s u r a n c e Co. o f F l o r i d a , 547 So. 2d 870, 871 
( A l a . 
1 9 8 9 ) ) . " 
L o n g v. Wade, 980 So. 2d 378, 383 ( A l a . 2 0 0 7 ) . 
"'To 
e s t a b l i s h 
t h e 
e l e m e n t s 
o f 
f r a u d u l e n t 
m i s r e p r e s e n t a t i o n 
[ t h e S t a t e ] 
h a [ s ] 
t o show: " ( 1 ) 
t h a t 
t h e 
[ p h a r m a c e u t i c a l 
m a n u f a c t u r e r s ' ] 
r e p r e s e n t a t i o n was 
f a l s e , 
(2) t h a t i t c o n c e r n e d a 
m a t e r i a l 
f a c t , 
(3) t h a t 
[ t h e S t a t e ] 
r e l i e d on t h e 
f a l s e 
r e p r e s e n t a t i o n , 
a n d (4) t h a t 
a c t u a l 
i n j u r y 
r e s u l t e d f r o m t h a t r e l i a n c e . " ' 
C o n s o l i d a t e d 
C o n s t r . 
 
Co. o f A l a b a m a v . M e t a l 
B l d g . C o m p o n e n t s , L . P . , 961 
So. 2d 820, 825 ( A l a . 2007) 
( B o l i n , J . , c o n c u r r i n g 
s p e c i a l l y ) 
( q u o t i n g 
B o s w e l l 
v. L i b e r t y N a t ' l 
L i f e 
 
I n s . Co., 643 So. 2d 580, 581 ( A l a . 
1 9 9 4 ) ) . 
"'The 
e l e m e n t s o f 
a f r a u d u l e n t - s u p p r e s s i o n 
c l a i m 
a r e " ' ( 1 ) a d u t y on t h e p a r t o f t h e d e f e n d a n t t o 
d i s c l o s e 
f a c t s ; (2) c o n c e a l m e n t o r n o n d i s c l o s u r e o f 
m a t e r i a l 
f a c t s b y t h e d e f e n d a n t ; (3) i n d u c e m e n t o f 
t h e 
p l a i n t i f f t o a c t ; (4) a c t i o n b y t h e p l a i n t i f f t o 
h i s o r h e r i n j u r y . ' " ' 
M c I v e r v. B o n d y ' s F o r d , 
I n c . , 
963 So. 2d 136, 143 ( A l a . C i v . App. 2007) 
( q u o t i n g 
F r e i g h t l i n e r , L.L.C. v. W h a t l e y C o n t r a c t 
C a r r i e r s ,  
L.L.C., 932 So. 2d 883, 891 ( A l a . 2 0 0 5 ) , q u o t i n g i n 
t u r n L a m b e r t v . M a i l H a n d l e r s B e n e f i t P l a n , 682 So. 
2d 61, 63 ( A l a . 
1 9 9 6 ) ) . " 
N o v a r t i s 
I I , 991 So. 2d a t 1275-76. 
M o r e o v e r , " [ u ] n d e r 
F o r e m o s t I n s u r a n c e Co. v . Parham, 693 
So. 
2d 409 ( A l a . 1 9 9 7 ) , a p a r t y 
a l l e g i n g any f o r m o f f r a u d 
must 
p r e s e n t 
e v i d e n c e 
o f 
' r e a s o n a b l e 
r e l i a n c e ' 
on t h e 
p u r p o r t e d 
f r a u d . " 
Hawk v . R o g e r W a t t s I n s . A g e n c y , 989 So. 2d 
584, 589 ( A l a . C i v . App. 2008) ( e m p h a s i s a d d e d ) . 
See H o u s t o n 
24 
1071439, 1071440, 1071704, & 1071759 
C o u n t y 
H e a l t h 
C a r e A u t h . v . W i l l i a m s , 
961 So. 2d 795, 814 
( A l a . 
2006) 
("a 
p l a i n t i f f 
i n a s u p p r e s s i o n 
c a s e must 
p r o v e 
t h a t 
[ i t ] was i n d u c e d t o a c t by 
[ i t s ] r e a s o n a b l e r e l i a n c e on 
t h e 
s t a t e o f a f f a i r s 
as i t a p p e a r e d i n t h e a b s e n c e o f t h e 
s u p p r e s s e d 
i n f o r m a t i o n " ) . 
The t h e o r y 
o f t h e S t a t e ' s 
c a s e i s t h a t , t h r o u g h o u t t h e 
c l a i m p e r i o d -- 1991 t o 2005 -- t h e AMA b e l i e v e d t h a t t h e WAC 
and AWP 
p u b l i s h e d 
b y D a t a B a n k r e p r e s e n t e d 
a c t u a l p r i c e s and 
t h a t 
i t r e i m b u r s e d 
p r o v i d e r s 
on t h e b a s i s 
o f t h a t 
b e l i e f . 
S p e c i f i c a l l y , t h e S t a t e a r g u e s t h a t t h e AMA u n d e r s t o o d t h e AWP 
t o be "a t r u e 
a v e r a g e o f w h o l e s a l e 
p r i c e s 
p a i d b y p h a r m a c y 
r e t a i l e r s t o w h o l e s a l e r s 
f o r a p a r t i c u l a r d r u g , " and t h e WAC 
t o be " t h e a c t u a l p r i c e p a i d by t h e w h o l e s a l e r 
t o t h e d r u g 
m a n u f a c t u r e r . " 
S t a t e ' s 
b r i e f , a t 12-13 ( c a s e s no. 1071439 and 
no. 
1071440) 
( e m p h a s i s a d d e d ) . 
A c c o r d i n g 
t o t h e S t a t e , t h e 
AMA d i d n o t know t h a t t h e p r i c e s p u b l i s h e d 
b y D a t a B a n k were 
m e r e l y 
" l i s t 
p r i c e s , " 
t h a t 
i s , t h a t 
t h e p r i c e s 
" d i d n o t 
i n c l u d e d i s c o u n t s , r e b a t e s , c h a r g e b a c k s , p r o m p t - p a y d i s c o u n t s , 
o r o t h e r p r i c e c o n c e s s i o n s t h a t 
r e f l e c t t h e a c t u a l p r i c e 
p a i d 
f o r d r u g s . " 
S t a t e ' s 
b r i e f , a t 35 
( c a s e s no. 1071439 and no. 
1 0 7 1 4 4 0 ) . 
The S t a t e s a y s (1) t h a t A s t r a Z e n e c a , 
N o v a r t i s , and 
25 
1071439, 1071440, 1071704, & 1071759 
GSK 
p u b l i s h e d , o r a l l o w e d t o 
be p u b l i s h e d , WACs a n d 
AWPs t h a t 
were n o t n e t p r i c e s i n o r d e r t o i n d u c e t h e S t a t e t o o v e r p a y 
p r o v i d e r s ; (2) t h a t t h e S t a t e was d e c e i v e d b y t h e p u b l i c a t i o n 
o f 
t h o s e 
p r i c e s ; a n d (3) t h a t i t 
d i d o v e r p a y 
p r o v i d e r s b y 
m i l l i o n s o f d o l l a r s i n r e l i a n c e on t h e i n f l a t e d WACs a n d 
AWPs.
8 
T h i s 
t h e o r y " o f 
a b r o a d , s y s t e m i c 
f r a u d " i s a s s e r t e d 
a g a i n s t 
a l l 73 d e f e n d a n t s , 
w h i c h , 
a c c o r d i n g 
t o t h e NCPA, 
c o m p r i s e 
" v i r t u a l l y 
e v e r y 
p h a r m a c e u t i c a l 
m a n u f a c t u r e r 
u n d e r 
M e d i c a i d . " 
NCPA's b r i e f , a t 3. 
N o v a r t i s , A s t r a Z e n e c a , 
a n d GSK c o n c e d e t h a t t h e 
WAC a n d 
AWP p r i c e s p u b l i s h e d b y D a t a B a n k were n o t n e t p r i c e s . 
They 
c o n t e n d , 
h o w e v e r , 
t h a t 
t h e i n d u s t r y 
-- a n d t h e AMA i n 
p a r t i c u l a r 
was a t a l l r e l e v a n t t i m e s 
f u l l y c o g n i z a n t o f t h e 
f a c t t h a t t h e 
m a n u f a c t u r e r ' s p u b l i s h e d d r u g p r i c e s were 
l i s t 
p r i c e s , 
w h i c h 
e x c l u d e d 
d i s c o u n t s , a n d t h a t , as a m a t t e r o f 
l a w , 
t h e S t a t e 
c o u l d 
n o t have 
r e a s o n a b l y 
r e l i e d 
on t h e 
8 P h a r m a c e u t i c a l 
m a n u f a c t u r e r s p r o f i t u n d e r s u c h a scheme, 
a c c o r d i n g t o t h e S t a t e ' s 
t h e o r y , b y " m a r k e t i n g 
t h e s p r e a d , " 
w h i c h i s 
t h e " d i f f e r e n c e b e t w e e n t h e amount t h a t a p r o v i d e r 
... 
r e c e i v e s as r e i m b u r s e m e n t f r o m M e d i c a i d a n d 
t h e 
amount 
t h e 
p r o v i d e r p a i d f o r t h e d r u g . " 
S t a t e ' s 
b r i e f , a t 17 ( c a s e no. 
1 0 7 1 7 5 9 ) . 
A c c o r d i n g t o t h e S t a t e , p h a r m a c i s t s 
t e n d t o 
f i l l 
p r e s c r i p t i o n s 
u s i n g 
t h e d r u g s 
m a n u f a c t u r e d b y 
c o m p e t i t o r 
c o m p a n i e s w i t h t h e 
w i d e s t 
s p r e a d . 
See N o v a r t i s I I , 991 So. 
2d 
a t 1268. 
26 
1071439, 1071440, 1071704, & 1071759 
p u b l i s h e d 
p r i c e s . 
C o n s e q u e n t l y , 
a c c o r d i n g 
t o 
N o v a r t i s , 
A s t r a Z e n e c a , 
and GSK, 
t h e y 
were 
e n t i t l e d 
t o a JML on t h e 
S t a t e ' s 
f r a u d c l a i m s . 
As N o v a r t i s 
s t a t e s : 
"The S t a t e knew 
f o r 
d e c a d e s 
t h a t 
WAC 
and AWP 
d i d n o t 
r e p r e s e n t 
a c t u a l , 
d i s c o u n t e d 
t r a n s a c t i o n p r i c e s , " N o v a r t i s ' s 
b r i e f , a t 65, y e t 
t h e AMA h a s n o t c h a n g e d i t s r e i m b u r s e m e n t m e t h o d o l o g y 
s i n c e 
l e a r n i n g 
o f t h e a l l e g e d 
f r a u d . 
N o v a r t i s ' s 
b r i e f , 
a t 61. 
" [ A ] c c o r d i n g l y , 
t h e r e 
was 
no 
r e a s o n a b l e 
r e l i a n c e and no 
f r a u d . " 
N o v a r t i s ' s 
b r i e f , a t 65. 
We 
a g r e e . 
" K n o w l e d g e may be e s t a b l i s h e d b y c i r c u m s t a n t i a l e v i d e n c e 
e v e n i n t h e f a c e o f p r o f e s s i o n s o f i g n o r a n c e . " 
L i b e r t y N a t ' l  
L i f e I n s . 
Co. v. W e l d o n , 267 A l a . 1 7 1 , 196, 100 So. 2d 696, 
7 1 8 ( 1 9 5 8 ) . 
"To c l a i m r e l i a n c e upon a m i s r e p r e s e n t a t i o n , t h e 
a l l e g e d l y d e c e i v e d p a r t y must have b e l i e v e d i t 
t o be t r u e . I f 
i t 
a p p e a r s t h a t he was i n f a c t so s k e p t i c a l as t o i t s t r u t h  
t h a t he p l a c e d no c o n f i d e n c e 
i n i t , 
i t 
c a n n o t be v i e w e d as a 
s u b s t a n t i a l c a u s e o f h i s 
c o n d u c t . " 
S m i t h v. J.H. B e r r y 
R e a l t y 
Co., 
528 So. 2d 314, 316 ( A l a . 1988) ( e m p h a s i s a d d e d ) . " ' I f 
t h e p l a i n t i f f knew t h a t t h e r e p r e s e n t a t i o n s were f a l s e ... 
, he 
can n o t c o m p l a i n t h a t he h a s b e e n m i s l e d t o h i s 
damage by t h e 
d e f e n d a n t ' s 
a t t e m p t e d 
d e c e p t i o n . 
... The 
i d e a o f a 
p e r s o n 
27 
1071439, 1071440, 1071704, & 1071759 
k n o w i n g 
a 
r e p r e s e n t a t i o n 
t o be 
f a l s e and 
a t t h e same 
t i m e 
" r e l y i n g " t h e r e o n i s a c o n t r a d i c t i o n i n t e r m s . ' " 
Shades R i d g e  
H o l d i n g Co. v. C o b b s , A l l e n & H a l l M o r t g a g e Co., 
390 
So. 
2d 
601, 610-11 
( A l a . 1 9 8 0 ) . 
I n L i b e r t y N a t i o n a l 
L i f e I n s u r a n c e Co. v. A l l e n , 699 
So. 
2d 
138, 
141 
( A l a . 1 9 9 7 ) , 
t h i s 
C o u r t 
s u m m a r i z e d 
S m i t h 
as 
f o l l o w s : 
" S m i t h , who was p u r c h a s i n g a h o u s e , a s k e d t h e r e a l t y 
a g e n t 
w h e t h e r 
t h e h o u s e 
and 
t h e 
p o s i t i o n i n g 
o f 
a 
f e n c e 
c o m p l i e d 
w i t h 
' a p p l i c a b l e 
r e g u l a t i o n s . ' 
The 
a g e n t 
t o l d 
S m i t h 
t h a t 
t h e y d i d c o m p l y . 
B e f o r e 
t h e 
c l o s i n g , S m i t h e x t e n s i v e l y 
i n v e s t i g a t e d w h e t h e r 
t h e 
h o u s e a c t u a l l y c o m p l i e d w i t h 
t h e b u i l d i n g code 
and 
z o n i n g 
r e g u l a t i o n s . 
A f t e r 
S m i t h 
p u r c h a s e d 
t h e 
h o u s e , 
he 
l e a r n e d 
t h a t 
i t d i d n o t 
c o m p l y 
w i t h 
a 
z o n i n g r e g u l a t i o n . 
T h i s C o u r t 
s t a t e d : 
The 
u n d i s p u t e d 
f a c t 
t h a t 
Mr. 
 
S m i t h was u n w i l l i n g t o a c c e p t t h e s t a t e m e n t 
o f 
t h e 
d e f e n d a n t ' s 
a g e n t 
w i t h o u t 
v e r i f i c a t i o n 
i s e v i d e n c e 
t h a t 
he 
d i d n o t  
r e l y on i t . B a s e d on h i s own 
t e s t i m o n y , i t 
i s 
c l e a r 
t h a t 
Mr. 
S m i t h was 
u n w i l l i n g 
t o 
a c c e p t 
t h e 
s t a t e m e n t 
o f 
t h e 
d e f e n d a n t ' s 
a g e n t 
r e g a r d i n g 
t h e 
a p p l i c a b l e 
z o n i n g 
r e g u l a t i o n s . ' " 
699 
So. 
2d 
a t 141-42 
( e m p h a s i s 
a d d e d ) . 
C o n s e q u e n t l y , 
t h e 
C o u r t i n S m i t h h e l d t h a t e v i d e n c e o f r e l i a n c e was 
i n s u f f i c i e n t 
as 
a m a t t e r 
o f l a w . 
S m i t h , 
528 
So. 
2d 
a t 316. 
See 
a l s o 
B u r r o u g h s 
v. 
J a c k s o n N a t ' l 
L i f e 
I n s . Co., 
618 
So. 
2d 
1329, 
28 
1071439, 1071440, 1071704, & 1071759 
1332 ( A l a . 
1993) ( " ' I f 
t h e r e p r e s e n t e e 
makes an i n v e s t i g a t i o n 
... t h a t i s f r e e and u n h a m p e r e d , and he l e a r n s t h e t r u t h , o r  
c o n d i t i o n s a r e s u c h 
t h a t he must 
o b t a i n t h e i n f o r m a t i o n 
he 
 
d e s i r e s ... he i s p r e s u m e d t o r e l y on h i s own i n v e s t i g a t i o n , 
and n o t on t h e r e p r e s e n t a t i o n . ' " 
( q u o t i n g 37 Am. J u r . 2d F r a u d  
and 
D e c e i t § 230 
( 1 9 6 8 ) ) . 
S i m i l a r l y , 
" [ r ] e l i a n c e 
r e q u i r e s 
t h a t 
t h e 
m i s r e p r e s e n t a t i o n 
a c t u a l l y i n d u c e d t h e i n j u r e d p a r t y t o c h a n g e 
i t s c o u r s e o f a c t i o n . " 
Hunt P e t r o l e u m C o r p . v. S t a t e , 901 So. 
2d 1, 4 ( A l a . 
2 0 0 4 ) . 
T h u s , where t h e p l a i n t i f f " ' " w o u l d h a v e 
a d o p t e d t h e same c o u r s e i r r e s p e c t i v e o f t h e 
m i s r e p r e s e n t a t i o n 
and w o u l d h a v e s u s t a i n e d t h e same d e g r e e o f damages, 
anyway, 
i t 
c a n n o t 
be 
s a i d 
t h a t 
t h e 
m i s r e p r e s e n t a t i o n 
c a u s e d 
any 
damage, and t h e d e f e n d a n t w i l l n o t be l i a b l e t h e r e f o r . " ' " I d . 
( q u o t i n g Shades R i d g e H o l d i n g Co., 390 So. 2d a t 611, 
q u o t i n g 
i n 
t u r n F o w l e r V. H a r p e r and F l e m i n g James, J r . , 
The Law o f  
T o r t s § 7.13 
( 1 9 5 6 ) ) . 
A p p l y i n g 
t h e s e 
p r i n c i p l e s i n Hunt 
P e t r o l e u m , 
we 
h e l d 
t h e r e 
t h a t t h e S t a t e h a d n o t p r e s e n t e d 
s u b s t a n t i a l e v i d e n c e 
t h a t i t r e l i e d , as an e l e m e n t o f i t s 
f r a u d c l a i m , on r o y a l t y 
r e p o r t s 
f i l e d 
b y Hunt P e t r o l e u m 
C o r p o r a t i o n 
( " H u n t " ) . 
The 
d i s p u t e i n t h a t c a s e a r o s e o u t o f a c o n t r a c t b e t w e e n Hunt and 
29 
1071439, 1071440, 1071704, & 1071759 
t h e S t a t e r e q u i r i n g Hunt t o p a y r o y a l t i e s , n a m e l y , " 2 5 % 
o f 
t h e 
g r o s s 
p r o c e e d s " f r o m gas i t e x t r a c t e d f r o m w e l l s 
d r i l l e d i n 
M o b i l e B a y . 901 So. 2d a t 2. 
"Hunt and t h e S t a t e 
d i s p u t e [ d ] 
t h e p r o p e r p o i n t i n t h e e x t r a c t i o n p r o c e s s 
a t w h i c h t h e gas 
s h o u l d have b e e n v a l u e d , 
t h a t 
i s , t h e p o i n t a t w h i c h 
' g r o s s 
p r o c e e d s ' 
s h o u l d 
have b e e n 
c a l c u l a t e d . " 
I d . 
The 
S t a t e 
c o n s t r u e d t h e t e r m " ' g r o s s 
p r o c e e d s ' ... t o mean r e v e n u e ' a t 
t h e 
t a i l g a t e , ' n e t o f t r a n s p o r t a t i o n c o s t s f r o m t h e t a i l g a t e 
t o 
a 
p i p e l i n e , " 
w h i l e 
Hunt 
i n t e r p r e t e d t h e t e r m 
t o mean 
" r e v e n u e n o t o n l y n e t o f t h e c o s t s o f t r a n s p o r t i n g t h e gas 
f r o m t h e t a i l g a t e t o a p i p e l i n e f o r f i n a l 
s a l e , b u t a l s o n e t 
o f t h e t r a n s p o r t a t i o n c o s t s f r o m t h e w e l l h e a d t o t h e t r e a t m e n t 
p l a n t and t h e c o s t s o f t r e a t i n g t h e g a s . " 901 So. 2d a t 3. 
E v e r y month, Hunt 
" r e p o r t e d 
r o y a l t i e s t o t h e S t a t e b a s e d on 
t h e v a l u e o f t h e gas p r o d u c e d ' a t t h e w e l l h e a d . ' " 
I d . 
The 
S t a t e 
s u e d Hunt 
a l l e g i n g 
f r a u d on t h e t h e o r y 
t h a t 
e a c h one o f o v e r 100 m o n t h l y r o y a l t y r e p o r t s f r o m l a t e 1993 
t o 
A u g u s t 
1997 
c o n s t i t u t e d 
a 
m i s r e p r e s e n t a t i o n 
t h a t " ' n e t 
p r o c e e d s ' were 
' g r o s s 
p r o c e e d s ' u n d e r t h e l e a s e a g r e e m e n t . " 
901 So. 2d a t 3. 
A j u r y r e t u r n e d a v e r d i c t i n f a v o r o f t h e 
S t a t e f o r 
$3,403,200 i n c o m p e n s a t o r y damages and $20,000,000 
i n 
p u n i t i v e damages. 
I d . 
Hunt a p p e a l e d t h e d e n i a l o f i t s 
30 
1071439, 1071440, 1071704, & 1071759 
m o t i o n f o r a JML as t o t h e f r a u d 
c l a i m , 
a r g u i n g 
t h a t " t h e 
S t a t e f a i l e d t o e s t a b l i s h t h a t t h e S t a t e r e l i e d on t h e a l l e g e d 
m i s r e p r e s e n t a t i o n s made b y H u n t . " 
901 So. 2d a t 4. 
T h i s C o u r t a g r e e d w i t h H u n t . 
I t 
d i d 
s o , b e c a u s e , d e s p i t e 
t h e 
S t a t e ' s 
" b a l d a s s e r t i o n " t o t h e c o n t r a r y , t h e S t a t e h a d 
n e v e r assumed t h e r o y a l t y r e p o r t s t o be t r u e . 
I n s t e a d , i t 
was u n d i s p u t e d 
t h a t t h e S t a t e h a d a l w a y s i n t e n d e d t o " a u d i t 
t h e r o y a l t y c a l c u l a t i o n s . " 901 So. 2d a t 6 ( e m p h a s i s a d d e d ) . 
" I f 
t h e S t a t e 
m e r e l y 
'assumed' 
t h a t t h e c a l c u l a t i o n s were 
c o r r e c t , 
t h e r e w o u l d h a v e b e e n no n e e d f o r an a u d i t . " 
I d . 
M o r e o v e r , t h e S t a t e d i d 
n o t c h a n g e i t s c o u r s e o f c o n d u c t 
a f t e r 
a c t u a l l y d i s c o v e r i n g t h e d i s c r e p a n c y . 
S p e c i f i c a l l y , 
" [ t ] h e 
o n l y 
e v i d e n c e o f t h e e f f e c t o f t h e m o n t h l y 
r o y a l t y r e p o r t s on t h e S t a t e ' s c o n d u c t a f t e r A u g u s t 
1997 
when 
t h e 
S t a t e 
r e a l i z e d 
t h e 
r e p o r t s 
were 
i n a c c u r a t e 
i s t h a t 
t h e 
S t a t e 
' a d o p t e d 
t h e same 
c o u r s e , ' t h a t i s , i t 
a c c e p t e d t h e c h e c k s and a l l o w e d 
Hunt t o s e l l t h e gas e x a c t l y as ... t h e S t a t e [ h a d 
done] 
w i t h 
t h e 
r e p o r t s 
i t h a d 
'assumed' 
were 
a c c u r a t e . " 
901 So. 2d a t 8. 
T h e r e was, t h e r e f o r e , as a m a t t e r o f l a w , no 
r e l i a n c e . 
See a l s o E x x o n M o b i l 
C o r p . v . A l a b a m a Dep't o f  
C o n s e r v a t i o n 
& N a t u r a l R e s . , 986 So. 2d 1 0 9 3 , 1115-16 ( A l a . 
2007) 
( t h e r e 
c o u l d 
be 
no 
r e l i a n c e 
on 
a l l e g e d 
m i s r e p r e s e n t a t i o n s 
as a m a t t e r o f l a w when t h e D e p a r t m e n t o f 
31 
1071439, 1071440, 1071704, & 1071759 
C o n s e r v a t i o n 
a n d N a t u r a l 
R e s o u r c e s d i d n o t " a c t [ ] on t h e 
a l l e g e d 
m i s r e p r e s e n t a t i o n s 
b y c h a n g i n g i t s 
p o s i t i o n " a f t e r 
l e a r n i n g t h a t r o y a l t y p a y m e n t s were n o t b e i n g made c o n s i s t e n t 
w i t h 
i t s v i e w o f c e r t a i n o i l a n d g a s l e a s e s ) . 
The 
s i n e qua non o f t h e S t a t e ' s 
f r a u d 
c l a i m s i n t h e s e 
a p p e a l s 
i s i t s 
a s s e r t i o n 
t h a t 
i t d i d n o t know 
t h a t t h e 
p u b l i s h e d WACs a n d AWPs were m e r e l y s u g g e s t e d -- o r l i s t -¬
p r i c e s , e x c l u s i v e o f d i s c o u n t s a n d o t h e r 
i n c e n t i v e s a v a i l a b l e 
t o w h o l e s a l e r s a n d p r o v i d e r s . 
T h i s a s s e r t i o n i s 
u n t e n a b l e i n 
l i g h t o f 
t h e 
c o r r e s p o n d e n c e a n d i n t e r n a l memoranda i n v o l v e d 
i n 
t h e 
S t a t e ' s 
f o r m u l a t i o n o f i t s r e i m b u r s e m e n t m e t h o d o l o g y . 
As 
e a r l y as 1 9 7 5 , t h e AMA knew, 
t h r o u g h 
D i r e c t o r Sam 
H a r d i n , 
t h a t t h e p u b l i s h e d AWPs were h i g h e r 
t h a n t h e a c t u a l 
p r i c e s p a i d . 
N e v e r t h e l e s s , b y 1985, t h e 
AMA was 
r e i m b u r s i n g 
p r o v i d e r s a t t h e h i g h e r 
r a t e . 
S i g n i f i c a n t l y , i n t h a t 
same 
y e a r , t h e 
AMA r e c e i v e d a w a r n i n g f r o m t h e 
DHHS t h a t t h e S t a t e 
s t o o d 
t o l o s e 
f e d e r a l 
f i n a n c i a l 
p a r t i c i p a t i o n 
i f t h e AMA 
c o n t i n u e d t o r e i m b u r s e on t h e b a s i s o f an u n d i s c o u n t e d AWP. 
The 
M o r r i s 
l e t t e r 
c l e a r l y 
s t a t e d 
t h a t 
p u b l i s h e d AWPs were 
b e i n g 
i n f l a t e d b y "an 
a v e r a g e o f 15.96 p e r c e n t . " 
M o r r i s 
demanded t h a t t h e 
AMA f o r m u l a t e a m e t h o d o l o g y t h a t 
d i s c o u n t e d 
t h e 
p u b l i s h e d AWP 
" s i g n i f i c a n t l y t o r e f l e c t a more 
a c c u r a t e 
32 
1071439, 
1071440, 
1071704, & 1071759 
r e p r e s e n t a t i o n o f t h e t r u e 
e s t i m a t e d 
a c q u i s i t i o n 
c o s t o f a 
d r u g . " 
I n A s t r a Z e n e c a ' s 
t r i a l , 
D r . G e r a r d A n d e r s o n , t h e 
S t a t e ' s e x p e r t , 
t e s t i f i e d 
t h a t , b a s e d on M o r r i s ' s 
l e t t e r , i t 
was 
" c l e a r as d a y t h a t [ t h e 
AMA was] on n o t i c e 
t h a t AWP was  
n o t 
an a c t u a l 
a c q u i s i t i o n 
c o s t . " 
( E m p h a s i s added.) 
The M o r r i s 
l e t t e r s e t i n m o t i o n t h e p r o c e s s c u l m i n a t i n g 
i n t h e 
AMA's c u r r e n t r e i m b u r s e m e n t m e t h o d o l o g y . 
F i r s t , 
t h e n 
C o m m i s s i o n e r B a g g i a n o 
n o t i f i e d M o r r i s o f t h e 
AMA's i n t e n t t o 
a d o p t a m e t h o d o l o g y b a s e d on WAC + 5.01%, w h i c h , a c c o r d i n g t o 
t h e 
F i n c h memo, 
c o r r e s p o n d e d t o a 
d i s c o u n t 
f r o m AWP o f  
a p p r o x i m a t e l y 
1 3 . 5 % . 
T h i s 
i n t e n t was t h e n c o m m u n i c a t e d 
on 
S e p t e m b e r 6, 1985, 
t o " a l l p h a r m a c i e s ... p a r t i c i p a t i n g i n t h e 
A l a b a m a 
T i t l e X I X ( M e d i c a i d ) P h a r m a c e u t i c a l P r o g r a m " t h r o u g h 
N o t i c e 85-18. 
I n N o t i c e 85-18, t h e AMA 
i t s e l f 
a c k n o w l e d g e d 
t h a t 
" p u b l i s h e d AWPs ... a r e i n f l a t e d a n d ... [ a r e ] n o t 
t h e 
[AMA's] ' b e s t e s t i m a t e o f what p r i c e p r o v i d e r s g e n e r a l l y a r e 
p a y i n g f o r 
a d r u g . " 
( E m p h a s i s added.) 
The e x p e r i e n c e o f C o m m i s s i o n e r Herrmann p r o v i d e s 
f u r t h e r 
e v i d e n c e o f t h e 
AMA's a c t u a l k n o w l e d g e o f t h e t r u e m e a n i n g o f 
AWP. 
The I n i t i a t i v e she r e c e i v e d i n 
1987 w h i l e she w o r k e d f o r 
t h e 
CMS 
i n f o r m e d h e r t h a t t h e AWP 
l i s t i n g s 
u s e d b y "most 
s t a t e s " were 
" u s u a l l y a b o u t 20 p e r c e n t h i g h e r t h a n 
[ a c t u a l ] 
33 
1071439, 1071440, 1071704, & 1071759 
a c q u i s i t i o n 
c o s t s . " 
A c c o r d i n g 
t o t h e S t a t e , 
h o w e v e r , t h e 
I n i t i a t i v e , b e c a u s e i t was " n o t a d d r e s s e d o r s e n t t o 
t h e AMA, 
d i d n o t g i v e AMA n o t i c e o f a n y t h i n g . " 
S t a t e ' s 
b r i e f , a t 
49 
( c a s e no. 1 0 7 1 7 5 9 ) . 
The S t a t e ' s p o s i t i o n , i n 
o t h e r w o r d s , 
i s 
t h a t a n y k n o w l e d g e t h e f u t u r e AMA C o m m i s s i o n e r 
a c q u i r e d i n 
W a s h i n g t o n , D.C., d i d n o t 
accompany h e r t o 
A l a b a m a . We r e j e c t 
t h i s a r g u m e n t o u t 
o f h a n d . 
M o r e o v e r , i n 
1992, 
w h i l e H e r r m a n n was a c t u a l l y s e r v i n g as 
AMA 
C o m m i s s i o n e r , s h e 
was a c q u a i n t e d 
w i t h t h a t p o r t i o n o f t h e 
M e d i c a i d m a n u a l s t a t i n g t h a t "AWP l e v e l s o v e r s t a t e t h e 
p r i c e s 
t h a t p h a r m a c i s t s 
a c t u a l l y p a y f o r d r u g p r o d u c t s b y as much as 
1 0 - 2 0 % 
b e c a u s e 
t h e y 
do n o t r e f l e c t 
d i s c o u n t s , 
p r e m i u m s , 
 
s p e c i a l o f f e r s o r i n c e n t i v e s , e t c . " 
( E m p h a s i s added.) 
Thus, 
by 1992 a t t h e v e r y 
l a t e s t , t h e 
AMA h a d a c t u a l k n o w l e d g e o f 
what t h e S t a t e now s e e k s t o d i s a v o w , t h a t i s , t h a t 
p u b l i s h e d 
AWPs were n o t 
n e t 
p r i c e s . 
As 
f o r WAC, t h e 
m a t h e m a t i c a l l i n k a g e b e t w e e n AWP, w h i c h 
i s 
t h e a v e r a g e 
q u o t e d 
p r i c e 
p a i d 
b y 
p h a r m a c i s t s 
t o 
w h o l e s a l e r s , 
a n d WAC, t h e p r i c e 
q u o t e d t o w h o l e s a l e r s b y 
m a n u f a c t u r e r s , 
was f u l l y 
e x p l o r e d i n t h e F i n c h memo. 
The 
F i n c h memo d e m o n s t r a t e d t h a t a h i g h e r AWP d i s c o u n t 
l o g i c a l l y 
c o r r e s p o n d e d t o 
-- a n d r e q u i r e d -- a s m a l l e r WAC markup . 
T h a t 
34 
1071439, 1071440, 1071704, & 1071759 
t h e AMA u n d e r s t o o d 
t h i s l i n k a g e i s o b v i o u s f r o m t h e u n d i s p u t e d 
e v i d e n c e 
t h a t t h e u s e o f WAC 
+ 9.2% and AWP 
- 1 0 . 2 % was 
d e s i g n e d 
t o , and 
d i d , y i e l d 
r o u g h l y 
t h e 
same 
number. 
O t h e r w i s e 
s t a t e d , 
any 
a l l e g e d 
i n f l a t i o n 
o r 
o v e r s t a t e m e n t 
n e c e s s a r i l y 
a f f e c t e d 
b o t h WAC 
and AWP 
p r o p o r t i o n a t e l y and 
r e q u i r e d p r o p o r t i o n a t e a d j u s t m e n t s 
t o b o t h . 
A l s o , i n 2003, 
WAC was s p e c i f i c a l l y d e f i n e d by t h e M e d i c a r e P r e s c r i p t i o n D r u g 
I m p r o v e m e n t 
and 
M o d e r n i z a t i o n 
A c t 
o f 
2003 
as 
" t h e 
m a n u f a c t u r e r ' s 
l i s t 
p r i c e 
f o r t h e d r u g 
o r 
b i o l o g i c a l 
t o 
w h o l e s a l e r s o r d i r e c t 
p u r c h a s e r s i n t h e U n i t e d S t a t e s , n o t  
i n c l u d i n g p r o m p t p a y o r o t h e r d i s c o u n t s , r e b a t e s o r r e d u c t i o n s 
 
i n p r i c e . " 
( E m p h a s i s 
a d d e d . )
9 
M o r e o v e r , 
t h e 
r e i m b u r s e m e n t 
v a l u e 
o f WAC 
c u r r e n t l y 
e m p l o y e d by t h e AMA was d e t e r m i n e d 
f r o m s u r v e y s c o n d u c t e d b y  
t h e AMA, 
i t s e l f , 
f r o m 1985 t o 1987. The 1985 s u r v e y was done 
f o r 
t h e AMA 
"by t h e two p r i m a r y 
w h o l e s a l e 
d r u g 
c o m p a n i e s 
( W a l k e r Drug Company and D u r r - F i l l a u e r M e d i c a l , I n c . ) 
s e r v i n g 
80% o f A l a b a m a p h a r m a c i e s . " 
B a s e d on t h a t s u r v e y , t h e AMA 
9The S t a t e a l s o 
r e l i e s on d i c t i o n a r y 
d e f i n i t i o n s o f t h e 
w o r d s i n c l u d e d i n t h e t e r m s WAC and AWP a n d a r g u e s 
t h a t t h e 
" p l a i n m e a n i n g " o f t h e w o r d s s u p p o r t s i t s p o s i t i o n . 
However, 
any r e l e v a n c e t h e " p l a i n - m e a n i n g " r u l e m i g h t have h a d i n t h i s 
d i s p u t e 
i s n e g a t e d 
by t h e S t a t e ' s 
a c t u a l 
k n o w l e d g e 
o f a 
d i f f e r e n t m e a n i n g . 
35 
1071439, 1071440, 1071704, & 1071759 
r e q u e s t e d , 
and o b t a i n e d , 
f r o m t h e DHHS p e r m i s s i o n 
t o 
i n c r e a s e 
t h e WAC 
markup f r o m t h e 
5.01% 
s u g g e s t e d by 
M o r r i s 
t o 8.45%. 
S u b s e q u e n t s u r v e y s and a n a l y t i c a l s t u d i e s -- a l s o c o n d u c t e d by 
t h e AMA 
-- 
r e s u l t e d i n t h e 
i n c r e a s e , on O c t o b e r 29, 
1987, 
o f 
t h e 
WAC 
markup 
f r o m 
8.45% 
t o 
i t s c u r r e n t 
9.2%. 
Thus, 
t h e 
AMA's u n d e r s t a n d i n g 
o f t h e m e a n i n g o f WAC 
d e r i v e d , 
n o t 
f r o m 
t h e 
m a n u f a c t u r e r s ' 
m i s r e p r e s e n t a t i o n s 
o r 
s u p p r e s s i o n s , 
b u t 
f r o m 
i t s own 
s t u d i e s 
and 
s u r v e y s . 
A 
p a r t y 
t h a t 
r e a c h e s 
a 
c o n c l u s i o n 
r e g a r d i n g 
a s t a t e o f 
f a c t s on 
t h e 
b a s i s 
o f 
t h a t 
p a r t y ' s own 
t r u l y i n d e p e n d e n t i n v e s t i g a t i o n c a n n o t c l a i m t h a t 
i t 
r e l i e d 
on 
an 
a l l e g e d l y 
f r a u d u l e n t 
m i s r e p r e s e n t a t i o n . 
B u r r o u g h s , s u p r a ; 
S m i t h , 
s u p r a . 
Thus, t h e 
d i s s e n t , w h i c h 
f o c u s e s 
on 
t h e 
r o l e 
o f WAC 
i n 
t h e S t a t e ' s 
f o r m u l a t i o n o f i t s r e i m b u r s e m e n t m e t h o d o l o g y , i s 
u n p e r s u a s i v e . 
A t " t h e eye 
o f 
[ t h i s ] h u r r i c a n e " i s AWP, 
G r a n t 
B a g l e y , 
J o h n B e n t i v o g l i o , a n d R o s e m a r y M a x w e l l , A c c u r a t e 
D r u g  
P r i c e 
R e p o r t i n g : 
a 
M o d e s t 
P r o p o s a l 
19 
No. 
11 
A n d r e w s 
P h a r m a c e u t i c a l 
L i t i g . 
Rep. 
13 
( J a n u a r y 
2 0 0 4 ) , n o t WAC. 
T h i s 
i s s o , b e c a u s e t h e S t a t e n e i t h e r p a i d -- n o r e v e r i n t e n d e d 
t o 
p a y 
-- WAC. 
I n s t e a d , 
i t h a s , 
a t t i m e s , p a i d a markup o f 
WAC. 
T h i s markup was 
d e r i v e d , h o w e v e r , n o t f r o m a n y t h i n g 
r e p o r t e d 
36 
1071439, 1071440, 1071704, & 1071759 
b y t h e m a n u f a c t u r e r s , b u t f r o m t h e AMA's own 
s t u d i e s a n d 
s u r v e y s . 
As n o t e d b y GSK: 
" [ W ] h i l e AMA h a s r e i m b u r s e d p h a r m a c i s t s u s i n g a WAC-
b a s e d 
f o r m u l a s i n c e t h e m i d - 1 9 8 0 s , i t 
h a s n o t done 
s o 
i n 
' r e l i a n c e ' 
on a 
b e l i e f 
t h a t 
WAC 
i t s e l f 
r e p r e s e n t s an a c t u a l 
t r a n s a c t i o n 
p r i c e ; r a t h e r , i t 
h a s done s o b e c a u s e , 
w h a t e v e r WAC 
r e p r e s e n t s , AMA 
h a s deemed WAC + 9.2% t o be an a p p r o p r i a t e m e a s u r e 
b y 
w h i c h 
t o 
r e i m b u r s e 
a l l 
A l a b a m a 
p h a r m a c i s t s 
f a i r l y , 
w i t h o u t r e g a r d t o s i z e o r m a r k e t p o w e r . " 
GSK's 
r e p l y 
b r i e f , 
a t 25 
( c a s e no. 1071704) 
( e m p h a s i s i n 
o r i g i n a l ) . 
I n d e e d , t h e WAC markup h a s b e e n i n t e n d e d t o a p p r o x i m a t e 
w h a t t h e 
AMA h a s d e t e r m i n e d t o 
be t h e a p p r o p r i a t e d i s c o u n t o f 
 
AWP. 
I n l i g h t o f t h e AMA's s u r v e y s a n d t h e manner i n w h i c h 
t h e AMA u l t i m a t e l y 
a r r i v e d a t i t s m e t h o d o l o g y , what t h e AMA 
t h o u g h t 
a b o u t WAC i s l a r g e l y 
i r r e l e v a n t . 
T h e r e 
i s , as a 
m a t t e r o f l a w , no b a s i s on w h i c h t h e S t a t e c a n p l a u s i b l y 
c o n t e n d 
t h a t 
i t r e l i e d 
on WAC 
t o d e t e r m i n e 
what t o p a y 
p r o v i d e r s . 
P e r h a p s , 
h o w e v e r , t h e most 
i r r e f u t a b l e 
e v i d e n c e o f t h e 
S t a t e ' s 
a c t u a l 
u n d e r s t a n d i n g 
o f 
WAC 
a n d 
AWP 
i s t h e 
r e i m b u r s e m e n t 
m e t h o d o l o g y i t s e l f . 
The AMA u s e s WAC + 9.2% a n d 
AWP - 1 0 . 2 % t o a r r i v e a t EAC. 
S t a t e ' s b r i e f , a t 7-8 
( c a s e s 
37 
1071439, 1071440, 1071704, & 1071759 
no. 1071439 & no. 
1 0 7 1 4 4 0 ) . 
The 
S t a t e c o n c e d e s t h a t "EAC 
i s 
n o t a 
' l i s t ' 
p r i c e o r an ' u n d i s c o u n t e d 
p r i c e , ' b u t i s a 
' p r i c e 
p a i d . ' " 
S t a t e ' s b r i e f , a t 6 ( c a s e no. 1 0 7 1 7 0 4 ) . 
R e m a r k a b l y , 
t h e 
S t a t e 
has 
t a k e n 
t h e 
p o s i t i o n 
t h a t 
AWP 
a l s o means 
"an 
a c t u a l a v e r a g e p r i c e " p a i d . 
S t a t e ' s b r i e f , 
a t 43 
( c a s e s 
no. 
1071439 
& no. 
1071440) 
( e m p h a s i s a d d e d ) . 
See 
a l s o 
S t a t e ' s 
b r i e f , a t 39 
("AWP 
i s t h e a v e r a g e p r i c e p a i d by p h a r m a c i e s t o 
w h o l e s a l e r s 
f o r d r u g s , 
n e t 
o f a l l d i s c o u n t s and 
o t h e r 
p r i c e 
c o n c e s s i o n s " ) 
( c a s e no. 1 0 7 1 7 0 4 ) ; S t a t e ' s b r i e f , a t 40 
(AWP 
i s 
"an 
a c t u a l 
a v e r a g e 
o f 
p r i c e s 
p a i d 
b y 
r e t a i l e r s 
t o 
w h o l e s a l e r s " ) 
( c a s e no. 
1 0 7 1 7 5 9 ) . 
I f t h e s e 
a s s e r t i o n s were 
t r u e , 
t h e n 
t h e 
S t a t e c o u l d m e r e l y 
r e i m b u r s e 
on 
t h e b a s i s 
o f 
AWP 
- 0%, 
as i t was 
d o i n g i n 1 9 8 5 .
1 0 
The 
S t a t e , h o w e v e r , 
has 
n o t r e i m b u r s e d 
p r o v i d e r s on t h e b a s i s o f an u n d i s c o u n t e d 
AWP 
s i n c e 1985 when t h e DHHS t h r e a t e n e d t o c u t o f f f e d e r a l 
f u n d i n g 
on a c c o u n t 
o f t h a t p r a c t i c e . 
I n t r u t h , t h e S t a t e -- as do a l l 
t h e s t a t e s -- t a k e s a d i s c o u n t f r o m AWP 
t o c o m p e n s a t e f o r t h e 
f a c t 
t h a t AWP 
i s n o t 
a n e t 
f i g u r e . 
The 
AWP 
d i s c o u n t s 
a r e 
1 0 T h e s e s t a t e m e n t s amount t o a d e f a u l t t o t h e p o s i t i o n 
t h e 
S t a t e 
was 
t a k i n g 
i n 
1985, 
a 
p o s i t i o n 
t h a t 
o c c a s i o n e d 
t h e 
M o r r i s 
l e t t e r . 
38 
1071439, 1071440, 1071704, & 1071759 
meant t o o f f s e t t h e 
d i s c o u n t s a n d o t h e r p r i c e c o n c e s s i o n s 
t h a t 
a r e 
a v a i l a b l e t o p r o v i d e r s . 
A s i d e 
f r o m t h e f a c t 
t h a t t h e S t a t e ' s 
c u r r e n t 
p o s i t i o n 
f l a t l y 
c o n t r a d i c t s t h e DHSS mandate 
s t a t e d i n t h e M o r r i s 
l e t t e r , 
i f , 
i n f a c t , t h e 
AMA b e l i e v e d , as i t 
now c l a i m s , 
t h a t 
t h e p u b l i s h e d AWPs w e r e , l i k e EAC, p r i c e s a c t u a l l y p a i d , 
t h e n , 
u n d i s p u t e d l y , t h e S t a t e , b y d i s c o u n t i n g t h e 
p u b l i s h e d AWPs b y 
1 0 . 2 % , must h a v e 
i n t e n d e d 
t o r e i m b u r s e 
i t s p r o v i d e r s a t an 
a v e r a g e o f a p p r o x i m a t e l y 
10% b e l o w 
t h e i r 
a c t u a l 
c o s t . 
The 
S t a t e 
p o i n t s t o t h e f a c t t h a t i t 
h a s c o n t i n u e d t o r e i m b u r s e 
p r o v i d e r s f o r 
t h e d i s t r i b u t i o n o f two c l a s s e s o f d r u g s a t 1 0 0 % 
o f AWP as p r o o f 
t h a t i t b e l i e v e d t h e p u b l i s h e d AWPs were 
a c t u a l 
a c q u i s i t i o n c o s t s 
f o r a l l 
d r u g s . 
However, 
t h e s e 
r e i m b u r s e m e n t s a c t u a l l y p r o v e t h e o p p o s i t e . 
S p e c i f i c a l l y , i n 
t h e 
G S K / N o v a r t i s 
t r i a l , 
F i n c h 
t e s t i f i e d f o r 
t h e S t a t e , as 
f o l l o w s : 
"Q. 
[ S t a t e ' s 
c o u n s e l ] : 
I n t h a t 
m e t h o d o l o g y , 
d o e s 
t h e S t a t e o f A l a b a m a u s e 100 p e r c e n t o f 
AWP 
f o r 
a n y t h i n g ? 
"A. 
[ F i n c h ] : We do. 
"Q. Okay. 
T e l l us a b o u t 
t h a t . 
"A. 
W e l l , 
d u r i n g t h e p e r i o d 
t h a t I t a l k e d a b o u t a 
moment ago i n t h e l a t e 
e i g h t i e s when 
t h i s 
d i r e c t i v e 
came 
down 
f r o m 
t h e 
f e d e r a l 
39 
1071439, 1071440, 1071704, & 1071759 
g o v e r n m e n t , 
we 
went 
t h r o u g h 
a 
p r o c e s s 
o f 
d e t e r m i n i n g 
how 
we 
c o u l d 
a p p r o p r i a t e l y c o m p l y 
w i t h 
t h e 
f e d e r a l 
l a w 
t h a t s a y s 
we 
have t o 
p a y 
w h a t ' s g e n e r a l l y and 
c u r r e n t l y b e i n g p a i d , 
o u r 
b e s t e s t i m a t e o f what t h a t i s . 
"What we 
d i d i s d u r i n g 
t h a t 
t i m e 
c o n d u c t e d 
a 
 
c o u p l e 
o f s u r v e y s 
o f w h o l e s a l e r s , and we 
f o u n d 
t h a t 
f o r d r u g s t h a t a r e 
c o n t r o l l e d 
d r u g s , 
t h e 
 
e s t i m a t e d 
a c q u i s i t i o n c o s t f o r t h o s e d r u g s 
was 
 
a c t u a l l y AWP. 
B e c a u s e we were u n d e r a 
f e d e r a l 
d i r e c t i v e 
t o 
d i s c o u n t 
o f f 
o f 
AWP, 
we 
c o r r e s p o n d e d 
b a c k w i t h t h e 
f e d e r a l 
g o v e r n m e n t , 
s h a r e d 
o u r 
f i n d i n g s 
w i t h 
them, 
and 
t h e y 
a c t u a l l y 
a p p r o v e d 
f o r 
us 
f o r 
t h a t 
g r o u p 
o f 
d r u g s -- t h o s e 
c o n t r o l l e d d r u g s -- t o 
c o n t i n u e 
t o 
p a y 
AWP 
and 
t h e n 
t o t a k e 
a d i s c o u n t 
o f f o f 
t h e 
o t h e r 
d r u g s , 
w h i c h 
i s where 
o u r 
c u r r e n t 
f o r m u l a i s . " 
( E m p h a s i s added.) 
The 
u n m i s t a k a b l e 
i n f e r e n c e f r o m 
F i n c h ' s 
t e s t i m o n y 
i s t h a t , f o r a l l t h e " o t h e r d r u g s , " 
t h e S t a t e knew 
t h a t 
" t h e 
e s t i m a t e d 
a c q u i s i t i o n 
c o s t 
... 
was 
[ n o t ] 
a c t u a l l y 
AWP." 
A l t h o u g h 
t h e 
t r i a l 
j u d g e 
d i s a l l o w e d 
t h e 
p r o f f e r e d 
t e s t i m o n y 
o f p h a r m a c i s t s 
who 
w o u l d have p r o v i d e d e v i d e n c e 
as 
t o what t h e AMA 
a c t u a l l y knew, t h e NCPA s t a t e s i n i t s a m i c u s 
b r i e f 
t h a t 
a p r a c t i c e 
o f 
d i s c o u n t i n g by 
10% 
an 
a c t u a l 
AWP 
" w o u l d c a u s e p h a r m a c i e s t o l o s e money on 
e v e r y 
p r e s c r i p t i o n 
t h e y 
f i l l e d 
on 
b e h a l f 
o f 
a 
M e d i c a i d 
r e c i p i e n t " 
and 
w o u l d 
" f o r c e many p h a r m a c i e s 
t o 
d i s c o n t i n u e p a r t i c i p a t i o n 
i n 
t h e 
M e d i c a i d p r o g r a m a l t o g e t h e r . " NCPA's b r i e f , a t 5-6. 
I n o t h e r 
40 
1071439, 1071440, 1071704, & 1071759 
w o r d s , r e i m b u r s i n g A l a b a m a p r o v i d e r s a t a p p r o x i m a t e l y 90% 
o f 
t h e i r 
a c t u a l 
c o s t 
w o u l d 
d r i v e 
them 
f r o m , 
a n d , 
p e r h a p s , 
e f f e c t i v e l y t e r m i n a t e , A l a b a m a ' s M e d i c a i d p r o g r a m . 
B e c a u s e 
t h e r e i s no e v i d e n c e 
i n d i c a t i n g o r c o n t e n t i o n 
t h a t t h e 
S t a t e i n t e n d s t o d i s c o n t i n u e i t s M e d i c a i d p r o g r a m , 
i t 
must n o t have i n t e n d e d t o d i s c o u n t t h e a c t u a l AWP b y 1 0 . 2 % . 
I n d e e d , t e s t i f y i n g f o r 
t h e S t a t e i n 
t h e t r i a l o f N o v a r t i s a n d 
GSK, 
F i n c h 
a g r e e d 
t h a t t h e AMA c o u l d n o t l e g a l l y 
r e i m b u r s e 
p r o v i d e r s a t 9% o r 10% l e s s t h a n EAC, o r t r u e AWP. 
Thus, t h e 
S t a t e ' s 
a r g u m e n t 
t h a t i t b e l i e v e d t h e p u b l i s h e d AWPs t o 
r e p r e s e n t a c t u a l AWPs i s s i m p l y u n t e n a b l e . 
On t h e c o n t r a r y , 
i t i s c l e a r b e y o n d 
c a v i l 
t h a t t h e r e i m b u r s e m e n t m e t h o d o l o g y 
a d o p t e d 
b y t h e AMA 
i s t h e p r o d u c t 
o f a 
c o n s c i o u s 
a n d 
d e l i b e r a t e 
p o l i c y 
d e c i s i o n , w h i c h s e e k s t o " b a l a n c e 
( i ) t h e 
amount 
[ i t ] r e i m b u r s e [ s ] 
p h a r m a c i e s 
t h a t 
d i s p e n s e 
d r u g s t o 
M e d i c a i d p a t i e n t s , a n d ( i i ) 
t h e r e q u i r e m e n t -- e s t a b l i s h e d 
b y 
f e d e r a l 
l a w -- t o s e t r e i m b u r s e m e n t 
s u f f i c i e n t l y 
h i g h t o 
e n s u r e 
p a r t i c i p a t i o n 
i n t h e M e d i c a i d 
p r o g r a m 
b y 
r e t a i l 
p h a r m a c i e s . " 
NCPA's b r i e f , a t 3. 
T h u s , we a g r e e w i t h A s t r a Z e n e c a 
when i t c o n t e n d s 
t h a t 
t h i s 
l i t i g a t i o n i s e s s e n t i a l l y an " a t t e m p t t o 
u s e t o r t l a w 
t o 
r e - d e f i n e 
[ t h e 
AMA's] 
M e d i c a i d 
r e i m b u r s e m e n t 
o b l i g a t i o n s . " 
41 
1071439, 1071440, 1071704, & 1071759 
A s t r a Z e n e c a ' s 
b r i e f , 
a t 
32. 
Such 
r e g u l a t i o n by 
l i t i g a t i o n 
r a i s e s , o f c o u r s e , 
s e r i o u s q u e s t i o n s 
o f f e d e r a l p r e e m p t i o n 
and 
s u p r e m a c y , none o f w h i c h we a d d r e s s h e r e . 
However, g i v e n 
t h e 
S t a t e ' s 
p a r t i c u l a r i z e d k n o w l e d g e o f t h e 
c h a l l e n g e d 
r e p o r t i n g 
p r a c t i c e s , a c l a i m o f common-law f r a u d -- w i t h i t s e l e m e n t 
o f 
r e a s o n a b l e 
r e l i a n c e -- i s , l i k e t h e p r o v e r b i a l " s q u a r e peg 
i n 
a r o u n d h o l e , " 
p a r t i c u l a r l y 
i l l - s u i t e d f o r t h e 
t a s k t o w h i c h 
i t 
was 
p u t 
i n t h i s 
d i s p u t e . 
I n s h o r t , t h e S t a t e d e t e r m i n e d f o r i t s e l f t h e 
a p p r o p r i a t e 
r e i m b u r s e m e n t 
f o r m u l a s 
b a s e d 
on 
i t s 
own 
s u r v e y s 
and 
c a l c u l a t i o n s . 
I t c a n n o t , t h e r e f o r e , " c l a i m r e l i a n c e upon 
[ t h e 
a l l e g e d ] 
m i s r e p r e s e n t a t i o n [ s ] . " 
S m i t h , 
528 
So. 
2d 
a t 
316. 
A l t h o u g h 
t h e 
S t a t e d o e s n o t 
e x p l a i n when, o r 
how, 
i t 
f i r s t 
b e g a n 
t o 
t a k e 
i s s u e 
w i t h 
t h e 
p h a r m a c e u t i c a l 
m a n u f a c t u r e r s ' 
methods 
o f 
r e p o r t i n g , 
i t i s 
u n d i s p u t e d 
t h a t 
t h e 
r e l e v a n t 
r e i m b u r s e m e n t m e t h o d o l o g y 
has 
n o t 
c h a n g e d 
s i n c e 
1987. 
I n 
o t h e r w o r d s , t h e S t a t e has n e v e r a l t e r e d i t s c o u r s e o f c o n d u c t 
s i n c e t a k i n g i s s u e w i t h t h e r e p o r t i n g m e t h o d s . 
See H u n t , 
901 
So. 2d a t 8 ( r e a s o n a b l e - r e l i a n c e r e q u i r e m e n t was 
n o t met 
where 
t h e 
S t a t e 
d i d 
n o t 
c h a n g e 
i t s 
c o u r s e 
o f 
c o n d u c t 
a f t e r 
d i s c o v e r i n g 
t h e 
a l l e g e d 
d i s c r e p a n c y ) . 
I n H u n t , 
t h e 
S t a t e 
n e v e r assumed t h e 
r o y a l t y r e p o r t s 
t o be 
t r u e , w h i l e 
i n 
t h i s 
42 
1071439, 1071440, 1071704, & 1071759 
c a s e , t h e S t a t e d i d n o t a c c e p t 
t h e p u b l i s h e d AWP 
r e p o r t s as 
t r u e , n o r d i d 
i t r e l y on t h e t r u t h f u l n e s s o f t h e p u b l i s h e d WAC 
r e p o r t s . 
I n H u n t , t h e S t a t e 
a l w a y s 
i n t e n d e d 
t o a u d i t t h e 
r o y a l t y 
c a l c u l a t i o n s , 
w h i l e 
h e r e , t h e S t a t e a l w a y s u s e d t h e 
f o r m u l a 
i t deemed a p p r o p r i a t e . 
I n d e e d , t h e S t a t e 
c o n t e n d s 
t h a t i t s h o u l d n o t have t o c h a n g e i t s 
c o n d u c t b u t t h a t t h e 
m a n u f a c t u r e r s 
s h o u l d 
have 
t o 
c h a n g e 
t h e i r 
c o n d u c t 
b y 
" r e p o r t [ i n g ] 
r e a l p r i c e s p a i d . " 
S t a t e ' s 
b r i e f , a t 68 
( c a s e 
no. 
1 0 7 1 7 0 4 ) . 
I I I . 
C o n c l u s i o n 
I n summary, 
t h i s 
c a s e 
i s c o n t r o l l e d b y Hunt and t h e 
a u t h o r i t y on w h i c h Hunt r e l i e d . 
The S t a t e 
f a i l e d t o p r o d u c e 
s u b s t a n t i a l 
e v i d e n c e 
t h a t 
i t r e a s o n a b l y 
r e l i e d 
on t h e 
m i s r e p r e s e n t a t i o n s 
a n d / o r 
f r a u d u l e n t 
s u p p r e s s i o n 
i t a l l e g e d 
A s t r a Z e n e c a , 
GSK, and N o v a r t i s 
e n g a g e d i n i n t h e s e 
c a s e s . 
C o n s e q u e n t l y , t h e t r i a l c o u r t e r r e d i n d e n y i n g t h e m o t i o n s f o r 
a JML o f A s t r a Z e n e c a , 
N o v a r t i s , and GSK. 
The j u d g m e n t s i n 
f a v o r o f t h e S t a t e a r e r e v e r s e d , 
and j u d g m e n t s a r e h e r e b y 
r e n d e r e d 
i n f a v o r o f A s t r a Z e n e c a , 
N o v a r t i s , and GSK. 
1071439 -- REVERSED AND JUDGMENT RENDERED. 
1071440 -- REVERSED AND JUDGMENT RENDERED. 
1071704 -- REVERSED AND JUDGMENT RENDERED. 
1071759 -- REVERSED AND JUDGMENT RENDERED. 
43 
1071439, 1071440, 1071704, & 1071759 
L y o n s , S t u a r t , 
S m i t h , B o l i n , and Shaw, J J . , c o n c u r . 
Cobb, C . J . , and M u r d o c k , J . , c o n c u r i n t h e 
r e s u l t . 
P a r k e r , J . , d i s s e n t s . 
44 
1071439, 1071440, 1071704, & 1071759 
COBB, C h i e f 
J u s t i c e 
( c o n c u r r i n g i n 
t h e r e s u l t ) . 
To t h e e x t e n t 
t h a t t h e m a i n 
o p i n i o n 
r e l i e s 
on Hunt 
P e t r o l e u m C o r p . v . S t a t e , 901 So. 
2d 1 ( A l a . 2 0 0 4 ) , I c a n n o t 
c o n c u r i n 
i t s r a t i o n a l e , b e c a u s e I b e l i e v e t h a t H u n t 
u n d u l y 
r e s t r i c t s t h e 
j u r y ' s c o n s i d e r a t i o n o f r e l i a n c e i s s u e s i n f r a u d 
c a s e s . 
The a p p l i c a t i o n o f Hunt t o 
t h e 
f a c t s o f t h i s c a s e 
i s 
as w r o n g i n t h i s 
c a s e a s i t 
was i n E x x o n 
M o b i l 
C o r p . v . 
A l a b a m a D e p a r t m e n t o f 
N a t u r a l R e s o u r c e s , 986 
So. 2 d 
1093 ( A l a . 
2 0 0 7 ) , i n 
w h i c h I d i s s e n t e d . 
I d i s c u s s e d my c o n c e r n s i n t h i s 
r e s p e c t a t l e n g t h i n 
my d i s s e n t i n 
E x x o n . 
However, u n l i k e 
t h e 
s i t u a t i o n i n 
E x x o n , I b e l i e v e t h a t t h e f a c t s o f t h i s c a s e 
f a i l 
t o 
r a i s e an i s s u e o f f a c t f o r 
t h e 
j u r y w i t h 
r e s p e c t t o t h e 
i s s u e o f r e l i a n c e . I n a d d i t i o n t o 
t h e f a c t t h a t t h e w h o l e s a l e 
a c q u i s i t i o n c o s t ("WAC") i s s t a t u t o r i l y d e f i n e d a s 
a c o s t 
n o t 
i n c l u d i n g v a r i o u s d i s c o u n t s , s e e 
42 
U.S.C. § 13 9 5 w - 3 a ( c ) ( 6 ) ( B ) 
and 42 
U.S.C. § 1 3 9 6 r - 8 ( b ) ( 3 ) ( A ) ( i i i ) ( I I ) , t h e r e c o r d 
c o n t a i n s 
c o m p e l l i n g 
e v i d e n c e i n d i c a t i n g t h a t t h e 
S t a t e was aware 
t h a t 
n e i t h e r t h e 
a v e r a g e w h o l e s a l e p r i c e ("AWP") n o r 
t h e 
WAC w e r e 
a c t u a l 
c o s t s . 
F o r e x a m p l e , i n d i s c u s s i n g h e r F e b r u a r y 2 6 , 
1992, 
l e t t e r t o t h e CMS, AMA C o m m i s s i o n e r 
C a r o l 
H e r r m a n n 
t e s t i f i e d a s f o l l o w s : 
45 
1071439, 1071440, 1071704, & 1071759 
"Q. 
[MR. 
CHRISTIAN, d e f e n s e c o u n s e l : ] And 
t h i s i s -¬
t h i s 
i s d a t e d F e b r u a r y 2 6 t h , 1992, 
t h e 
l e t t e r 
i s ? 
"A. 
Y e s . 
"Q. 
A l l r i g h t . C o u l d you 
-- and 
t h i s s a y s , 
'However, 
a number o f s t u d i e s h a v e shown t h a t i n r e c e n t 
y e a r s , 
t h e 
d r u g m a r k e t p l a c e 
has 
c h a n g e d , 
and 
t h e r e 
i s 
a 
p r e p o n d e r a n c e 
o f 
e v i d e n c e 
t h a t 
d e m o n s t r a t e s 
t h a t 
s u c h 
AWP 
l e v e l s 
o v e r s t a t e 
t h e 
p r i c e s 
t h a t 
p h a r m a c i s t s 
a c t u a l l y p a y 
f o r 
a d r u g p r o d u c t by 
as 
much as 10 t o 20 p e r c e n t b e c a u s e t h e y do n o t 
r e f l e c t 
d i s c o u n t s , p r e m i u m s , s p e c i a l o f f e r s , o r i n c e n t i v e s . ' 
And 
t h e n 
t h e y 
s a y , 
'Don't 
do 
t h a t , ' 
i n 
e f f e c t , 
r i g h t ? 
"MR. 
O'REAR 
[ S t a t e ' s 
c o u n s e l ] : 
O b j e c t i o n . 
T h a t ' s 
o v e r b r o a d . 
"MR. 
CHRISTIAN: 
I ' l l 
go a h e a d and 
r e a d i t . 
"Q. 
' C o n s e q u e n t l y , a b s e n t v a l i d d o c u m e n t a t i o n t o 
t h e 
c o n t r a r y , 
a 
p u b l i s h e d 
AWP 
l e v e l 
as 
a 
s t a t e 
d e t e r m i n a t i o n 
o f 
EAC 
[ e s t i m a t e d 
a c q u i s i t i o n 
c o s t ] 
w i t h o u t a s i g n i f i c a n t d i s c o u n t 
b e i n g 
a p p l i e d i s 
n o t 
an 
a c c e p t a b l e 
e s t i m a t e 
o f 
p r i c e s 
g e n e r a l l y 
and 
c u r r e n t l y 
p a i d 
b y 
t h e 
p r o v i d e r s . ' 
I s 
t h a t 
e x a c t l y 
what i t s a y s ? 
"A. 
T h a t ' s e x a c t l y what i t s a y s . 
"Q. 
And 
t h i s w o u l d be 
i m p o r t a n t i n f o r m a t i o n 
f o r 
you 
t o know, w o u l d i t n o t ? 
"A. 
Y e s . 
"Q. 
So a t l e a s t on F e b r u a r y t h e 2 6 t h , 1992, 
you knew 
t h a t 
-- 
a b o u t 
a l l o f t h e s e 
s t u d i e s 
t h a t h a v e b e e n 
made 
t h a t 
t o l d 
you 
t h a t 
t h e s e 
-- 
t h a t 
t h i s 
AWP 
o v e r s t a t e d 
t h e 
p r i c e b y 
a b o u t as much as 
10 
t o 
20 
p e r c e n t ? 
46 
1071439, 1071440, 1071704, & 1071759 
"A. 
We 
knew 
t h a t 
CMS 
b e l i e v e d 
t h a t 
t h e r e 
was 
a 
 
p r e p o n d e r a n c e 
o f 
e v i d e n c e . 
Our 
AWP 
h a d 
a l r e a d y 
 
r e f l e c t e d a 10 p e r c e n t 
r e d u c t i o n . And 
a g a i n , i t g e t s  
t o g u e s s t i m a t i n g 
b y how much t h e y ' r e 
o v e r e s t i m a t i n g 
 
t h e i r AWP 
i n s t e a d o f r e p o r t i n g an a c c u r a t e 
p r i c e t o  
b e g i n 
w i t h . " 
( E m p h a s i s 
added.) 
S i m i l a r l y , 
when 
C o m m i s s i o n e r 
H e r r m a n n 
t e s t i f i e d as t o a M a r c h 1987 memorandum she h a d 
r e c e i v e d f r o m 
t h e 
C e n t e r 
f o r M e d i c a i d 
and 
M e d i c a r e 
S e r v i c e s 
("CMS"), 
she 
s t a t e d : " S t a t e s w e r e i n s t r u c t e d t h r o u g h [CMS] 
R e g i o n a l O f f i c e s 
t o 
o b t a i n 
b e t t e r 
e s t i m a t i o n s 
o f 
a c q u i s i t i o n 
c o s t s 
on 
s i n g l e - s o u r c e d r u g s . M o s t s t a t e s w e r e u s i n g a v e r a g e 
w h o l e s a l e 
p r i c e , AWP, 
l i s t i n g s w h i c h a r e u s u a l l y a b o u t 20 p e r c e n t 
h i g h e r 
 
t h a n a c q u i s i t i o n c o s t . " 
( E m p h a s i s added.) 
T h u s , I c o n c l u d e t h a t t h e S t a t e f a i l e d t o meet i t s b u r d e n 
o f s h o w i n g t h a t 
i t r e a s o n a b l y 
r e l i e d 
on 
t h e 
AWP 
a n d 
WAC 
as 
a c t u a l 
c o s t s , a n d 
t h e d r u g m a n u f a c t u r e r s - - A s t r a Z e n e c a , 
GSK, 
and 
N o v a r t i s - - w o u l d 
t h e r e f o r e be 
e n t i t l e d 
t o j u d g m e n t s as 
a 
m a t t e r o f l a w u n d e r a more a p p r o p r i a t e l e g a l a n a l y s i s t h a n 
t h e 
a n a l y s i s i n H u n t . 
See, 
e.g., 
Ex p a r t e A l a b a m a F a r m e r s Coop.,  
I n c . , 
911 
So. 
2d 696 
( A l a . 2 0 0 4 ) ; A l f a Mut. 
F i r e I n s . Co. 
v. 
 
Thomas, 738 
So. 
2d 
815 
( A l a . 1 9 9 9 ) ; 
a n d 
AT 
& T I n f o . 
S y s . , 
 
I n c . v. Cobb P o n t i a c - C a d i l l a c , I n c . , 553 
So. 2d 529, 
532 
( A l a . 
1 9 8 9 ) . 
A c c o r d i n g l y , 
I c o n c u r i n t h e 
r e s u l t . 
47 
1071439, 1071440, 1071704, & 1071759 
PARKER, J u s t i c e 
( d i s s e n t i n g ) . 
I 
r e s p e c t f u l l y d i s s e n t 
f r o m t h e h o l d i n g 
o f t h e m a i n 
o p i n i o n . 
I do a g r e e t h a t t h e 
A l a b a m a M e d i c a i d 
A g e n c y 
("the 
AMA") 
c a n n o t 
c l a i m 
l a c k 
o f k n o w l e d g e 
t h a t 
t h e a v e r a g e 
w h o l e s a l e p r i c e ("AWP") was 
n o t 
a t r u e a v e r a g e w h o l e s a l e p r i c e 
p a i d , as e v i d e n c e d b y t h e f a c t t h a t t h e 
AMA's r e i m b u r s e m e n t 
f o r m u l a f o r 
p h a r m a c i e s -- AWP - 10% 
-- r e d u c e d t h e 
AWP. 
T h i s 
f o r m u l a i s 
t h e 
p r o d u c t i n l a r g e p a r t o f s t u d i e s t h e 
AMA 
h a d 
c o n d u c t e d 
i n 1985 a n d 1987 b y two l a r g e 
p h a r m a c e u t i c a l 
w h o l e s a l e r s 
o f t h e a v e r a g e 
p r i c e s 
p a i d b y p h a r m a c i e s f o r 
p r e s c r i p t i o n 
d r u g s . 
I d i s s e n t , h o w e v e r , f r o m t h e h o l d i n g i n 
t h e 
m a i n 
o p i n i o n 
t h a t 
t h e AMA d i d n o t r e a s o n a b l y 
r e l y 
on t h e w h o l e s a l e 
a c q u i s i t i o n 
c o s t ("WAC") b e c a u s e t h e 
AMA a l s o knew t h a t t h e 
WAC was n o t a 
t r u e 
p r i c e 
p a i d 
b y 
w h o l e s a l e r s 
t o t h e 
p h a r m a c e u t i c a l m a n u f a c t u r e r s n e t 
o f 
p u r c h a s e r d i s c o u n t s . 
I 
do 
n o t 
b e l i e v e 
t h a t 
e i t h e r t h e s u r v e y s 
p e r f o r m e d b y A l a b a m a 
p h a r m a c e u t i c a l 
w h o l e s a l e r s 
f o r t h e AMA o r t h e M e d i c a r e 
P r e s c r i p t i o n Drug I m p r o v e m e n t a n d M o d e r n i z a t i o n 
A c t 
o f 2003, 
Pub. L. No. 1 0 8 - 1 7 3 , e m p h a s i z e d i n 
t h e 
m a i n o p i n i o n , p u t t h e 
AMA on n o t i c e 
t h a t t h e 
WAC was n o t 
a n e t 
p r i c e . 
T h e r e i s no 
e v i d e n c e 
i n d i c a t i n g t h a t t h e s u r v e y s e x a m i n e d t h e 
WAC, a n d 
48 
1071439, 1071440, 1071704, & 1071759 
t h e r e 
i s 
no 
c r e d i b l e 
e v i d e n c e 
t h a t 
t h e 
2003 
M e d i c a r e 
M o d e r n i z a t i o n 
A c t 
a f f e c t e d 
t h e 
WAC 
f o r 
s t a t e 
M e d i c a i d 
r e i m b u r s e m e n t . 
The 
1985 
and 1987 
S u r v e y s 
I n 
a November 
22, 
1985, 
l e t t e r , 
t h e n AMA 
C o m m i s s i o n e r 
F a y e 
B a g g i a n o 
t o l d 
r e g i o n a l 
d i r e c t o r 
o f 
t h e 
U n i t e d 
S t a t e s 
D e p a r t m e n t 
o f 
H e a l t h 
and 
Human 
S e r v i c e s ("DHHS") 
R i c h a r d 
M o r r i s a b o u t 
t h e 
r e s u l t s 
o f s u r v e y s t h a t had b e e n 
p e r f o r m e d 
f o r t h e AMA 
b y two A l a b a m a p h a r m a c e u t i c a l w h o l e s a l e r s : 
" S t u d i e s were a c c o m p l i s h e d f o r M e d i c a i d b y 
t h e 
two 
p r i m a r y w h o l e s a l e 
d r u g 
c o m p a n i e s 
( W a l k e r 
D r u g 
Company and D u r r - F i l l a u e r M e d i c a l , I n c . ) s e r v i n g 
80% 
o f A l a b a m a p h a r m a c i e s . 
C o p i e s o f t h e s e s t u d i e s 
a r e 
a t t a c h e d 
f o r y o u r 
r e v i e w . 
The 
s t u d i e s 
i n d i c a t e d 
t h a t 
t h e 
a v e r a g e 
p e r c e n t a g e 
markup 
on 
WA[C] 
t h a t 
A l a b a m a p h a r m a c i e s 
a r e p a y i n g a r e 7.3% 
( W a l k e r ) 
and 
7.6% 
( D u r r - F i l l a u e r ) . 
The 
a v e r a g e 
o f 
t h e s e 
p e r c e n t a g e s 
i s 7.45%. 
We 
a r e a d d i n g an 
a d d i t i o n a l 
1% 
t o 
c o m p e n s a t e 
f o r 
h i g h e r 
c o s t 
p a i d 
by 
some 
p h a r m a c i s t s 
who 
a r e 
u n a b l e 
t o 
t a k e 
a d v a n t a g e 
o f 
d i s c o u n t s . 
D i s c o u n t s a r e o f f e r e d o n l y i f t h e y make 
t i m e l y p a y m e n t s 
( t w i c e m o n t h l y ) 
a n d / o r 
i f t h e y 
a r e 
a b l e 
t o 
p u r c h a s e 
i n 
l a r g e 
v o l u m e s . 
W i t h 
y o u r 
a p p r o v a l , 
we 
p l a n 
t o 
i m p l e m e n t 
t h i s 
p r o g r a m 
e f f e c t i v e J a n u a r y 1, 
1 9 8 5 [ s i c ] . " 
( E m p h a s i s added.) 
As t h e B a g g i a n o 
l e t t e r s t a t e s , t h e AMA 
d i d 
n o t 
s u r v e y 
p h a r m a c e u t i c a l 
w h o l e s a l e r s ; t h e 
AMA 
had 
two 
p h a r m a c e u t i c a l w h o l e s a l e r s s u r v e y p h a r m a c i e s . 
These 
s t u d i e s 
were 
b y 
two 
p h a r m a c e u t i c a l 
w h o l e s a l e r s , 
n o t 
o f 
t h e 
49 
1071439, 1071440, 1071704, & 1071759 
w h o l e s a l e r s . 
The 
f o c u s was t h e markup 
on t h e WAC 
p a i d b y 
p h a r m a c i s t s ; t h e f o c u s was n o t t h e WAC 
i t s e l f . 
A n o t h e r 
s u r v e y was c o n d u c t e d 
f o r 
t h e AMA i n 1987 b y t h e 
same two p h a r m a c e u t i c a l w h o l e s a l e r s : 
" E f f e c t i v e 
O c t o b e r 
29, 1987, t h e p e r c e n t a g e 
markup 
was i n c r e a s e d t o 9.2%. 
A n a l y t i c a l s t u d i e s were once 
a g a i n a c c o m p l i s h e d 
f o r M e d i c a i d b y t h e two p r i m a r y 
w h o l e s a l e 
d r u g 
c o m p a n i e s 
s e r v i c i n g 
A l a b a m a 
p h a r m a c i e s 
( W a l k e r 
Drug Company and 
D u r r - F i l l a u e r 
M e d i c a l , 
I n c . ) . 
The 
s t u d i e s 
i n d i c a t e d 
a v e r a g e 
p e r c e n t a g e 
markups on WA[C] f o r A l a b a m a 
p h a r m a c i e s 
as 7.95% 
( W a l k e r ) 
and 8.45% 
( D u r r - F i l l a u e r ) . 
The 
a v e r a g e 
o f 
t h e s e 
p e r c e n t a g e s 
i s 
8.2%. 
The 
a d d i t i o n a l 
1% was 
a g a i n 
a d d e d 
t o c o m p e n s a t e f o r 
h i g h e r 
c o s t p a i d by p h a r m a c i s t s who a r e u n a b l e t o 
t a k e a d v a n t a g e o f d i s c o u n t s 
o f f e r e d . " 
( E m p h a s i s 
added.) 
Thus, t h e s e two s u r v e y s , t h e one c o m p l e t e d 
i n 1985 and 
t h e one i n 1987, d i d 
n o t s t u d y t h e p r i c e s t h e p h a r m a c e u t i c a l 
w h o l e s a l e r s 
a c t u a l l y 
p a i d t o t h e m a n u f a c t u r e r s 
-- t h e WAC; 
i n s t e a d , t h e y f o c u s e d on t h e markup on t h e WAC t h a t p h a r m a c i e s 
were 
a c t u a l l y 
p a y i n g 
t o t h e p h a r m a c e u t i c a l 
w h o l e s a l e r s . 
These s t u d i e s d i d 
n o t p u t t h e AMA on n o t i c e t h a t t h e r e p o r t e d 
WAC was n o t a t r u e n e t p r i c e . 
2003 M e d i c a r e 
Law 
I b e l i e v e t h a t t h e AMA 
p r e s e n t e d 
s u b s t a n t i a l 
e v i d e n c e 
t h a t t h e 2003 M e d i c a r e 
M o d e r n i z a t i o n A c t , c i t e d i n t h e m a i n 
50 
1071439, 1071440, 1071704, & 1071759 
o p i n i o n , had no 
a p p l i c a t i o n t o t h e A l a b a m a M e d i c a i d p r o g r a m 
and, 
t h u s , d i d n o t p u t t h e AMA 
on n o t i c e t h a t t h e WAC 
i s a 
l i s t 
p r i c e , 
i n s t e a d o f a n e t p r i c e . 
On 
December 
8, 
2003, 
C o n g r e s s 
p a s s e d 
t h e 
M e d i c a r e 
P r e s c r i p t i o n Drug Improvement and M o d e r n i z a t i o n A c t o f 2003, 
Pub. L. No. 1 0 8 - 1 7 3 , w h i c h c o n t a i n e d t h e f o l l o w i n g 
d e f i n i t i o n 
f o r WAC, 
c o d i f i e d a t 42 U.S.C. § 13 
9 5 w - 3 a ( c ) ( 6 ) ( B ) , a p p l i c a b l e 
t o 
M e d i c a r e , 
n o t M e d i c a i d : 
"The 
t e r m 
' w h o l e s a l e 
a c q u i s i t i o n 
c o s t ' means, 
w i t h 
r e s p e c t t o a d r u g o r b i o l o g i c a l , t h e 
m a n u f a c t u r e r ' s 
l i s t p r i c e f o r t h e d r u g o r b i o l o g i c a l t o w h o l e s a l e r s 
o r 
d i r e c t 
p u r c h a s e r s 
i n t h e 
U n i t e d 
S t a t e s , 
n o t 
i n c l u d i n g p r o m p t p a y o r o t h e r d i s c o u n t s , r e b a t e s o r 
r e d u c t i o n s i n p r i c e , f o r t h e most r e c e n t month f o r 
w h i c h t h e i n f o r m a t i o n i s a v a i l a b l e , as r e p o r t e d i n 
w h o l e s a l e 
p r i c e g u i d e s o r o t h e r p u b l i c a t i o n s o f d r u g 
o r b i o l o g i c a l 
p r i c i n g 
d a t a . " 
P u r s u a n t 
t o 42 U.S.C. § 1 3 9 5 w - 3 a ( a ) ( 1 ) , 
" t h i s 
s e c t i o n 
s h a l l 
a p p l y t o payment f o r d r u g s and b i o l o g i c a l s t h a t a r e d e s c r i b e d 
i n s e c t i o n 1 3 9 5 u ( o ) ( 1 ) ( C ) 
o f t h i s 
t i t l e and t h a t a r e f u r n i s h e d 
on o r a f t e r J a n u a r y 
1, 2 0 0 5 . " 
Dr. 
G e r a r d 
A n d e r s o n , 
an 
e x p e r t 
w i t n e s s 
f o r t h e 
AMA, 
d e s c r i b e d 
why 
t h e 2003 
M e d i c a r e 
M o d e r n i z a t i o n 
A c t d i d n o t 
a p p l y i n t h i s 
c a s e : 
"Q. 
[COUNSEL FOR THE AMA:] 
W o u l d you 
t e l l 
t h e 
j u r y 
i f 
[ t h e 2003 M e d i c a r e 
M o d e r n i z a t i o n A c t ] d i d , 
51 
1071439, 1071440, 1071704, & 1071759 
i n 
f a c t , have any a p p l i c a t i o n t o e i t h e r AWP o r 
WAC? 
"A. 
W e l l , I t h i n k i n 
any number o f r e a s o n s , i t 
d o e s n ' t . 
F i r s t o f a l l , i t d o e s n ' t b e c a u s e 
as I r e a d t h e 
A c t - a n d I'm n o t a 
l a w y e r . 
B u t as I r e a d t h e A c t , 
i t b e g i n s i n 2005. 
"[DEFENSE COUNSEL]: O b j e c t , 
Y o u r H o n o r . 
He's 
g i v i n g a l e g a l c o n c l u s i o n , s a y i n g h e ' s 
n o t 
a l a w y e r . 
I t ' s 
o b j e c t i o n a b l e by h i s 
own 
a d m i s s i o n . 
"THE 
COURT: He j u s t 
t o l d y o u h e ' s 
n o t a l a w y e r . 
O v e r r u l e d . 
"[ANOTHER DEFENSE COUNSEL]: Y o u r 
H o n o r , we'd 
a l s o j u s t s a y t h a t t h e j u r o r s c a n r e a d t h i s document 
and s e e w h e t h e r i t ' s a p p l i c a b l e o r n o t . 
"THE COURT: The j u r o r s a r e 
g o i n g t o 
be t h e f i n a l 
j u d g e . 
O v e r r u l e d . 
A l l 
r i g h t , 
[ c o u n s e l f o r 
t h e 
AMA]. 
F i n i s h up. 
"[COUNSEL FOR THE AMA]: Y e s , s i r . 
"A. 
So, f i r s t o f a l l , i t 
-- I b e l i e v e i t 
s t a r t s i n 
2005. 
S e c o n d o f a l l , I b e l i e v e t h a t i t a p p l i e s 
t o 
p h y s i c i a n - a d m i n i s t e r e d 
d r u g s , 
n o t 
s e l f -
a d m i n i s t e r e d 
d r u g s . 
T h i r d o f a l l , I b e l i e v e 
t h a t i t 
a p p l i e s t o t h e M e d i c a r e p r o g r a m 
o n l y , 
n o t t h e M e d i c a i d 
p r o g r a m . 
A n d p r o b a b l y 
most 
i m p o r t a n t l y , i t 
r e -- i t ' s r e l a t e d t o a t h i n g 
t h a t we've 
o n l y 
h e a r d 
a 
l i t t l e 
b i t 
a b o u t i n 
t h i s t h i n g , w h i c h i s 
t h e 
ASP, o r a v e r a g e 
s a l e s 
p r i c e , a n d t h a t ' s how t h e y ' r e 
s u p p o s e d t o p a y 
d r u g s 
u n d e r 
M e d i c a r e 
P a r t 
B 
f o r -- f o r 
p h y s i c i a n - a d m i n i s t e r e d 
d r u g s . 
A n d when 
t h e r e 
i s n ' t an a v e r a g e s a l e p r i c e , when t h e r e i s n o t 
an 
a v e r a g e 
s a l e 
p r i c e , 
b e c a u s e 
t h e r e 
h a s n ' t 
b e e n any s a l e s y e t , t h e n y o u d e f e r t o t h e WAC 
as a s y s t e m . So t h e WAC o n l y a p p l i e s i n a new 
-- n e w l y i s s u e d d r u g i n t h e f i r s t 
q u a r t e r when 
t h e r e 
h a v e n ' t 
b e e n 
any 
s a l e s . 
A n d 
s o , 
52 
1071439, 1071440, 1071704, & 1071759 
t h e r e f o r e , 
t h e r e 
w o u l d 
be 
no 
d i s c o u n t s 
o r 
r e b a t e s 
o r 
c h a r g e - b a c k s 
o r 
a n y t h i n g 
e l s e 
b e c a u s e t h e r e h a v e b e e n no s a l e s . " 
The 
WAC 
i n 
t h e 
M e d i c a i d 
p r o g r a m 
a p p l i e s 
t o 
s e l f -
a d m i n i s t e r e d 
d r u g s p u r c h a s e d f r o m 
r e t a i l p h a r m a c i e s , 
n o t 
t o 
p h y s i c i a n - a d m i n i s t e r e d d r u g s , 
b u t t h e WAC 
a d o p t e d i n t h e 2003 
M e d i c a r e M o d e r n i z a t i o n 
A c t a p p l i e d t o 
p h y s i c i a n - a d m i n i s t e r e d 
d r u g s . 
M o r e o v e r , t h e WAC 
i n t h e 2003 M e d i c a r e 
M o d e r n i z a t i o n 
A c t 
was 
a d e f a u l t p r o v i s i o n f o r new 
d r u g s 
h a v i n g 
no 
s a l e s 
h i s t o r y , a p p l i c a b l e i n t h e 
f i r s t q u a r t e r o n l y a f t e r t h e d r u g s 
were i n t r o d u c e d 
i n t o t h e m a r k e t . 
T h e r e f o r e , 
t h i s 
l i s t - p r i c e 
d e f i n i t i o n f o r n e w - d r u g l a u n c h e s u n d e r M e d i c a r e c o u l d n o t 
p u t 
t h e AMA 
on n o t i c e a b o u t a d e f i n i t i o n f o r t h e WAC 
f o r M e d i c a i d 
p u r p o s e s . 
I n a d d i t i o n , i t s e f f e c t i v e d a t e was 
l e s s t h a n 
f o u r 
weeks 
b e f o r e 
t h e 
f i l i n g 
o f 
a l l t h e 
c a s e s 
a g a i n s t 
t h e 
p h a r m a c e u t i c a l 
m a n u f a c t u r e r s 
on 
J a n u a r y 
26, 
2005. 
A c c o r d i n g l y , 
I d i s a g r e e 
w i t h t h e m a i n o p i n i o n ' s 
r e l i a n c e on 
t h e 2003 M e d i c a r e M o d e r n i z a t i o n 
A c t . 
The 
m a i n 
o p i n i o n 
f u r t h e r 
r e l i e s 
on 
t h e 
2003 
M e d i c a r e 
M o d e r n i z a t i o n 
A c t as 
" i n c o r p o r a t [ i n g ] t h i s 
d e f i n i t i o n 
o f 
WAC 
i n t o 
t h e M e d i c a i d 
s t a t u t o r y scheme. 
See 
42 U.S.C. § 1 3 9 6 r -
8 ( b ) ( 3 ) ( A ) ( i i i ) ( I I ) . " 
So. 
3d 
a t 
. T h i s 
r e l i a n c e i s 
i n a p p r o p r i a t e b e c a u s e t h e 
d e f i n i t i o n 
a p p l i e s t o m a n u f a c t u r e r 
53 
1071439, 1071440, 1071704, & 1071759 
i n f o r m a t i o n t o be 
f u r n i s h e d t o t h e 
S e c r e t a r y 
o f DHHS f o r 
t h e 
F e d e r a l M e d i c a i d p r o g r a m f o r r e b a t e 
p u r p o s e s : 
"(b) Terms o f r e b a t e 
a g r e e m e n t 
"(1) 
P e r i o d i c 
r e b a t e s 
"(A) 
I n 
g e n e r a l 
"A 
r e b a t e 
a g r e e m e n t u n d e r 
t h i s 
s u b s e c t i o n 
s h a l l r e q u i r e t h e m a n u f a c t u r e r t o 
p r o v i d e , 
t o 
e a c h 
S t a t e 
p l a n 
a p p r o v e d 
u n d e r 
t h i s 
s u b c h a p t e r , 
a r e b a t e f o r a r e b a t e p e r i o d i n 
an amount 
s p e c i f i e d 
i n s u b s e c t i o n 
(c) 
o f 
t h i s 
s e c t i o n f o r c o v e r e d 
o u t p a t i e n t 
d r u g s 
o f 
t h e 
m a n u f a c t u r e r 
d i s p e n s e d 
a f t e r 
December 
31, 
1990, 
f o r w h i c h payment 
was 
made u n d e r t h e S t a t e p l a n f o r s u c h p e r i o d . 
S u c h 
r e b a t e 
s h a l l 
be 
p a i d 
by 
t h e 
m a n u f a c t u r e r n o t 
l a t e r 
t h a n 30 d a y s 
a f t e r 
t h e 
d a t e 
o f 
r e c e i p t 
o f 
t h e 
i n f o r m a t i o n 
d e s c r i b e d 
i n p a r a g r a p h 
(2) 
f o r t h e 
p e r i o d 
i n v o l v e d . 
"(B) 
O f f s e t a g a i n s t m e d i c a l 
a s s i s t a n c e 
"Amounts 
r e c e i v e d 
by 
a 
S t a t e 
u n d e r 
t h i s 
s e c t i o n 
( o r u n d e r an a g r e e m e n t 
a u t h o r i z e d 
by t h e S e c r e t a r y u n d e r s u b s e c t i o n 
( a ) ( 1 ) 
o f 
t h i s 
s e c t i o n o r an a g r e e m e n t d e s c r i b e d 
i n 
s u b s e c t i o n 
( a ) ( 4 ) 
o f 
t h i s 
s e c t i o n ) 
i n 
any 
q u a r t e r 
s h a l l 
be 
c o n s i d e r e d 
t o 
be 
a 
r e d u c t i o n i n t h e amount e x p e n d e d u n d e r 
t h e 
S t a t e 
p l a n 
i n 
t h e 
q u a r t e r 
f o r 
m e d i c a l 
a s s i s t a n c e 
f o r 
p u r p o s e s 
o f 
s e c t i o n 
1 3 9 6 b ( a ) ( 1 ) o f 
t h i s 
t i t l e . 
" ( 2 ) 
S t a t e p r o v i s i o n o f 
i n f o r m a t i o n 
"(A) 
S t a t e 
r e s p o n s i b i l i t y 
54 
1071439, 1071440, 1071704, & 1071759 
" E a c h 
S t a t e 
a g e n c y 
u n d e r 
t h i s 
s u b c h a p t e r 
s h a l l r e p o r t t o e a c h m a n u f a c t u r e r n o t l a t e r  
t h a n 60 d a y s 
a f t e r t h e e n d o f e a c h 
r e b a t e 
 
p e r i o d 
a n d i n a f o r m 
c o n s i s t e n t 
w i t h 
a 
 
s t a n d a r d 
r e p o r t i n g 
f o r m a t 
e s t a b l i s h e d b y  
t h e 
S e c r e t a r y , 
i n f o r m a t i o n 
on t h e 
t o t a l  
number o f u n i t s o f e a c h 
d o s a g e 
f o r m a n d  
s t r e n g t h a n d p a c k a g e 
s i z e o f e a c h 
c o v e r e d  
o u t p a t i e n t 
d r u g 
d i s p e n s e d 
a f t e r 
December 
 
31, 1990, f o r 
w h i c h payment was made u n d e r  
t h e 
p l a n 
d u r i n g 
t h e p e r i o d , 
a n d 
s h a l l 
 
p r o m p t l y t r a n s m i t a c o p y o f s u c h r e p o r t t o  
t h e 
S e c r e t a r y . 
"(B) 
A u d i t s 
"A m a n u f a c t u r e r may a u d i t t h e i n f o r m a t i o n 
p r o v i d e d ( o r 
r e q u i r e d t o 
be p r o v i d e d ) u n d e r 
s u b p a r a g r a p h 
( A ) . 
A d j u s t m e n t s 
t o 
r e b a t e s 
s h a l l 
be 
made 
t o 
t h e 
e x t e n t 
t h a t 
i n f o r m a t i o n 
i n d i c a t e s t h a t u t i l i z a t i o n was 
g r e a t e r o r l e s s t h a n t h e amount p r e v i o u s l y 
s p e c i f i e d . 
" ( 3 ) M a n u f a c t u r e r p r o v i s i o n o f p r i c e 
i n f o r m a t i o n 
"(A) I n g e n e r a l 
" E a c h 
m a n u f a c t u r e r 
w i t h 
an a g r e e m e n t i n  
e f f e c t u n d e r 
t h i s 
s e c t i o n 
s h a l l 
r e p o r t t o  
t h e 
S e c r e t a r y - -
" ( i ) n o t l a t e r t h a n 30 d a y s 
a f t e r t h e l a s t 
day 
o f 
e a c h 
r e b a t e 
p e r i o d 
u n d e r 
t h e 
a g r e e m e n t - ¬
" ( I ) on t h e a v e r a g e 
m a n u f a c t u r e r 
p r i c e 
(as d e f i n e d i n 
s u b s e c t i o n 
( k ) ( 1 ) 
o f 
t h i s 
s e c t i o n ) 
f o r 
c o v e r e d o u t p a t i e n t 
d r u g s f o r t h e 
r e b a t e p e r i o d u n d e r t h e a g r e e m e n t 
( i n c l u d i n g 
f o r a l l 
s u c h 
d r u g s 
t h a t a r e s o l d 
u n d e r 
a new 
d r u g 
55 
1071439, 1071440, 1071704, & 1071759 
a p p l i c a t i o n 
a p p r o v e d 
u n d e r 
s e c t i o n 
5 0 5 ( c ) 
o f 
t h e 
F e d e r a l 
F o o d , D r u g , and C o s m e t i c A c t 
[21 
U.S.C.A. § 3 5 5 ( c ) ] ) ; 
and 
" ( I I ) f o r s i n g l e s o u r c e d r u g s and 
i n n o v a t o r 
m u l t i p l e 
s o u r c e 
d r u g s 
( i n c l u d i n g 
a l l s u c h 
d r u g s 
t h a t 
a r e 
s o l d 
u n d e r 
a 
new 
d r u g 
a p p l i c a t i o n 
a p p r o v e d 
u n d e r 
s e c t i o n 
5 0 5 ( c ) 
o f 
t h e 
F e d e r a l 
F o o d , D r u g , and C o s m e t i c A c t ) , on 
t h e m a n u f a c t u r e r ' s b e s t p r i c e (as 
d e f i n e d 
i n s u b s e c t i o n 
( c ) ( 1 ) ( C ) 
o f 
t h i s 
s e c t i o n ) 
f o r s u c h 
d r u g s 
f o r 
t h e r e b a t e p e r i o d 
u n d e r 
t h e 
a g r e e m e n t ; 
" ( i i ) n o t l a t e r t h a n 30 d a y s a f t e r t h e d a t e 
o f 
e n t e r i n g 
i n t o an a g r e e m e n t u n d e r 
t h i s 
s e c t i o n on t h e a v e r a g e m a n u f a c t u r e r p r i c e 
(as 
d e f i n e d 
i n s u b s e c t i o n 
( k ) ( 1 ) 
o f 
t h i s 
s e c t i o n ) as o f O c t o b e r 1, 1990 f o r e a c h o f 
t h e m a n u f a c t u r e r ' s c o v e r e d o u t p a t i e n t d r u g s 
( i n c l u d i n g 
f o r s u c h 
d r u g s 
t h a t 
a r e 
s o l d 
u n d e r a new d r u g a p p l i c a t i o n a p p r o v e d u n d e r 
s e c t i o n 5 0 5 ( c ) o f t h e F e d e r a l 
F o o d , 
D r u g , 
and C o s m e t i c A c t ) ; and 
" ( i i i ) 
f o r c a l e n d a r q u a r t e r s 
b e g i n n i n g on 
o r 
a f t e r J a n u a r y 1, 2004, i n 
c o n j u n c t i o n 
w i t h 
r e p o r t i n g 
r e q u i r e d 
u n d e r 
c l a u s e 
( i ) 
and 
by 
N a t i o n a l 
D r u g 
Code 
( i n c l u d i n g 
p a c k a g e 
s i z e ) - ¬
" ( I ) 
t h e m a n u f a c t u r e r ' s 
a v e r a g e 
s a l e s 
p r i c e 
(as 
d e f i n e d 
i n 
s e c t i o n 
1 3 9 5 w - 3 a ( c ) 
o f 
t h i s 
t i t l e ) 
and 
t h e 
t o t a l 
number 
o f 
u n i t s 
s p e c i f i e d 
u n d e r 
s e c t i o n 
1 3 9 5 w - 3 a ( b ) ( 2 ) ( A ) 
o f t h i s 
t i t l e ; 
56 
1071439, 1071440, 1071704, & 1071759 
" ( I I ) i f 
r e q u i r e d t o make payment  
u n d e r 
s e c t i o n 
1395w-3a o f 
t h i s 
t i t l e , 
t h e 
m a n u f a c t u r e r ' s 
w h o l e s a l e 
a c q u i s i t i o n 
c o s t , 
as 
 
d e f i n e d i n s u b s e c t i o n 
( c ) ( 6 ) o f 
s u c h s e c t i o n 
" 
( E m p h a s i s added.) 
S u b s e c t i o n 
( b ) ( 3 ) ( A ) ( i i i ) ( I I ) , 
e m p h a s i z e d 
a b o v e , a u t h o r i z e s m a n u f a c t u r e r s t o u s e t h e 
WAC d e f i n i t i o n f r o m 
t h e 
2003 
M e d i c a r e 
M o d e r n i z a t i o n 
A c t , 42 U.S.C. 
§ 
1395w-
3 a ( c ) ( 6 ) ( B ) , i n r e p o r t i n g t o t h e S e c r e t a r y o f DHHS. The s t a t e s 
h a v e a 
s e p a r a t e 
r e p o r t i n g 
r e s p o n s i b i l i t y 
u n d e r 
s u b s e c t i o n 
( b ) ( 2 ) ( A ) , a l s o e m p h a s i z e d a b o v e , w h i c h h a s n o t h i n g t o do w i t h 
t h e WAC. 
T h e r e i s 
no p r o v i s i o n m a k i n g t h e M e d i c a r e 
d e f i n i t i o n 
o f t h e WAC 
a p p l i c a b l e t o t h e s t a t e s ; i t 
a p p l i e s o n l y t o t h e 
m a n u f a c t u r e r s f o r f e d e r a l r e p o r t i n g p u r p o s e s . 
The i n f o r m a t i o n 
f u r n i s h e d b y t h e p h a r m a c e u t i c a l 
m a n u f a c t u r e r s i s r e q u i r e d t o 
be t r e a t e d as c o n f i d e n t i a l u n d e r 42 U.S.C. § 13 
9 6 r - 8 ( b ) ( 3 ) ( D ) : 
"(D) 
C o n f i d e n t i a l i t y o f i n f o r m a t i o n 
" N o t w i t h s t a n d i n g 
any 
o t h e r 
p r o v i s i o n 
o f l a w , 
i n f o r m a t i o n 
d i s c l o s e d 
b y 
m a n u f a c t u r e r s 
o r 
w h o l e s a l e r s 
u n d e r 
t h i s 
p a r a g r a p h 
o r 
u n d e r 
an 
a g r e e m e n t 
w i t h 
t h e S e c r e t a r y 
o f V e t e r a n s 
A f f a i r s 
d e s c r i b e d 
i n 
s u b s e c t i o n 
( a ) ( 6 ) ( A ) ( i i ) 
o f 
t h i s 
s e c t i o n 
( o t h e r t h a n t h e w h o l e s a l e 
a c q u i s i t i o n 
c o s t 
f o r 
p u r p o s e s o f c a r r y i n g o u t s e c t i o n 1395w-3a o f 
t h i s 
t i t l e ) 
i s 
c o n f i d e n t i a l 
and 
s h a l l 
n o t be 
d i s c l o s e d 
b y t h e S e c r e t a r y 
o r t h e S e c r e t a r y 
o f 
V e t e r a n s 
A f f a i r s o r a S t a t e 
a g e n c y 
( o r c o n t r a c t o r 
t h e r e w i t h ) i n 
a f o r m w h i c h d i s c l o s e s t h e i d e n t i t y o f 
a 
s p e c i f i c 
m a n u f a c t u r e r 
o r 
w h o l e s a l e r , 
p r i c e s 
57 
1071439, 1071440, 1071704, & 1071759 
c h a r g e d 
f o r 
d r u g s 
by 
s u c h 
m a n u f a c t u r e r 
o r 
w h o l e s a l e r , 
e x c e p t - -
" ( i ) 
as 
t h e 
S e c r e t a r y 
d e t e r m i n e s 
t o 
be 
n e c e s s a r y 
t o 
c a r r y 
o u t 
t h i s 
s e c t i o n , 
t o 
c a r r y 
o u t 
s e c t i o n 
1395w-3a 
o f 
t h i s 
t i t l e 
( i n c l u d i n g 
t h e 
d e t e r m i n a t i o n 
and 
i m p l e m e n t a t i o n 
o f 
t h e payment a m o u n t ) , 
o r 
t o 
c a r r y 
o u t 
s e c t i o n 
1395w-3b 
o f 
t h i s 
t i t l e , 
" ( i i ) 
t o p e r m i t t h e 
C o m p t r o l l e r 
G e n e r a l 
t o 
r e v i e w t h e 
i n f o r m a t i o n 
p r o v i d e d , 
" ( i i i ) 
t o 
p e r m i t 
t h e 
D i r e c t o r 
o f 
t h e 
C o n g r e s s i o n a l 
B u d g e t O f f i c e 
t o r e v i e w 
t h e 
i n f o r m a t i o n 
p r o v i d e d , 
" ( i v ) 
t o 
S t a t e s 
t o 
c a r r y 
o u t 
t h i s 
s u b c h a p t e r , 
and 
" ( v ) 
t o t h e 
S e c r e t a r y 
t o d i s c l o s e 
( t h r o u g h 
a w e b s i t e a c c e s s i b l e t o t h e p u b l i c ) 
a v e r a g e 
m a n u f a c t u r e r 
p r i c e s . 
"The 
p r e v i o u s 
s e n t e n c e 
s h a l l 
a l s o 
a p p l y 
t o 
i n f o r m a t i o n 
d i s c l o s e d u n d e r s e c t i o n 
1 3 9 5 w - 1 0 2 ( d ) ( 2 ) 
o r 1 3 9 5 w - 1 0 4 ( c ) ( 2 ) ( E ) o f t h i s 
t i t l e 
and d r u g 
p r i c i n g 
d a t a 
r e p o r t e d 
u n d e r 
t h e 
f i r s t 
s e n t e n c e 
o f 
s e c t i o n 
1 3 9 5 w - 1 4 1 ( i ) ( 1 ) o f 
t h i s 
t i t l e . " 
T h e r e i s no e v i d e n c e c i t e d by 
t h e p a r t i e s i n d i c a t i n g t h a t 
any 
o f t h i s c o n f i d e n t i a l i n f o r m a t i o n 
was 
f u r n i s h e d 
t o t h e 
s t a t e s , 
o r s p e c i f i c a l l y t o A l a b a m a . 
I n c o n t r a s t , 
t h e r e 
i s a m a n d a t o r y 
p r o v i s i o n i n t h i s s e c t i o n t h a t " [ i ] n f o r m a t i o n on 
r e t a i l 
s u r v e y 
p r i c e s 
... 
s h a l l be 
p r o v i d e d 
t o S t a t e s 
on 
a t l e a s t a m o n t h l y 
b a s i s . " 
42 
U.S.C. 
§ 
13 9 
6 r - 8 ( f ) ( 1 ) ( E ) . 
Thus, 
r e t a i l 
58 
1071439, 1071440, 1071704, & 1071759 
i n f o r m a t i o n 
i s t o be 
p r o v i d e d 
t o t h e 
s t a t e s ; 
w h o l e s a l e 
i n f o r m a t i o n , h o w e v e r , i s t o be t r e a t e d as c o n f i d e n t i a l . 
The f u r n i s h i n g o f p r o t e c t e d , 
c o n f i d e n t i a l i n f o r m a t i o n b y 
p h a r m a c e u t i c a l m a n u f a c t u r e r s t o t h e S e c r e t a r y 
o f DHHS 
u s i n g 
t h e 
d e f i n i t i o n o f WAC i n t h e 2003 M e d i c a r e M o d e r n i z a t i o n A c t 
f o r p u r p o s e s o f t h e r e b a t e 
p r o g r a m d i d n o t p u t t h e AMA on 
n o t i c e 
t h a t , f o r M e d i c a i d 
p u r p o s e s , t h e WAC was n o t a n e t 
w h o l e s a l e f i g u r e . 
M a t h e m a t i c a l R e l a t i o n s h i p B e t w e e n t h e WAC and t h e AWP 
The m a i n o p i n i o n 
r e c o g n i z e s 
t h a t t h e r e i s 
a m a t h e m a t i c a l 
r e l a t i o n s h i p b e t w e e n t h e WAC and t h e AWP. 
So. 3d a t 
. 
C o n c e p t u a l l y , 
i f t h e 
WAC i s i n f l a t e d , t h e n t h e 
AWP i s l i k e w i s e 
i n f l a t e d . 
T h i s 
p o i n t 
was 
made 
by 
GSK's 
c o r p o r a t e 
r e p r e s e n t a t i v e : 
"Q. And i f t h a t 
WAC 
p r i c e 
i s f a l s e , 
t h e n t h e 
m u l t i p l i e r 
w o u l d 
s i m p l y 
r e p o r t 
a 
f a l s e 
AWP 
a l s o , 
c o r r e c t ? 
"A. You've 
g o t t o make 
t h a t 
l e a p 
a g a i n 
o f an 
a s s u m p t i o n o f --
"Q. 
I'm g o i n g t o make t h a t 
l e a p , and t h e j u r y i s 
g o i n g t o be a s k e d t o do i t l a t e r . 
"A. 
Okay. 
"Q. 
So, i f t h a t 
o r i g i n a l WAC 
p r i c e i s f a l s e , t h e 
m u l t i p l i e r 
s i m p l y 
t a k e s 
a 
f a l s e 
p r i c e 
and 
m u l t i p l i e s 
a g a i n s t 
i t ; 
am I c o r r e c t ? 
59 
1071439, 1071440, 1071704, & 1071759 
"A. 
I t i s s i m p l y math, 
y e s . 
"Q. 
S i m p l y math. 
E x a c t l y . " 
T h i s 
p o i n t 
was 
a l s o made 
by 
t h e 
S t a t e ' s 
w i t n e s s , 
Dr. 
G e r a r d A n d e r s o n : 
"Q. 
I f 
t h e 
WAC 
i s 
f a l s e 
and 
n o t 
a 
t r u e 
p r i c e , 
a 
c a l c u l a t e d 
AWP 
w i l l 
a l s o 
be 
f a l s e 
and 
n o t 
a 
t r u e 
p r i c e . 
"A. 
Okay. 
T h e r e 
i s 
a 
m a t h e m a t i c a l 
r e l a t i o n s h i p 
b e t w e e n one 
-- 
t h e 
WAC 
p r i c e 
and 
t h e 
AWP 
p r i c e . 
So 
-- 
and 
e s s e n t i a l l y i f t h e 
WAC 
p r i c e 
i s n o t 
a 
t r u e 
p r i c e , 
t h e n m a t h e m a t i c a l l y t h e 
AWP 
c a n n o t 
be 
a t r u e 
p r i c e 
e i t h e r . " 
C o n t r a r y t o t h e 
i m p l i c a t i o n 
i n t h e m a i n o p i n i o n , 
h o w e v e r , 
I 
b e l i e v e 
t h a t 
t h i s 
m a t h e m a t i c a l 
r e l a t i o n s h i p 
i s 
a one-way 
r e l a t i o n s h i p , 
n o t 
a 
two-way 
r e l a t i o n s h i p ; 
d e p e n d e n t , 
n o t 
i n t e r d e p e n d e n t . 
T h a t 
i s , t h e 
AWP 
i s b a s e d upon 
t h e 
WAC: 
an 
i n c r e a s e 
t o 
t h e 
WAC 
c a u s e s an e q u a l i n c r e a s e 
t o 
t h e 
AWP; 
b u t 
t h e 
WAC 
i s 
n o t 
t i e d 
t o 
t h e 
AWP 
i n 
a 
f i x e d 
r e l a t i o n s h i p : 
a 
d e d u c t i o n f r o m t h e 
AWP 
d o e s n o t c a u s e an e q u a l d e d u c t i o n f r o m 
t h e 
WAC. 
The 
d e f e n d a n t s 
r e f e r 
t o 
t h e 
AWP 
as 
a b e n c h m a r k t h a t 
i s 
b a s e d 
upon 
t h e 
WAC 
p l u s 
20% 
o r 
25%. 
The 
AMA 
d i s c o v e r e d 
t h r o u g h 
t h e 
r e t a i l 
s u r v e y s 
i t had 
p e r f o r m e d 
by 
two 
A l a b a m a 
p h a r m a c e u t i c a l 
w h o l e s a l e r s 
t h a t 
t h e 
AWP 
was 
n o t 
a 
t r u e 
r e p r e s e n t a t i o n 
o f 
t h e 
p r i c e s 
t h a t 
A l a b a m a p h a r m a c i e s 
were 
60 
1071439, 1071440, 1071704, & 1071759 
p a y i n g 
f o r d r u g s . 
Thus, 
t h e 
d e d u c t i o n 
f r o m t h e 
AWP 
i n 
t h e 
f o r m u l a : 
AWP 
- 
10%. 
B u t 
t h e 
f a c t 
t h a t 
t h e r e 
has 
t o 
be 
a 
d e d u c t i o n 
f r o m t h e 
AWP 
t o more c l o s e l y a p p r o x i m a t e 
t h e 
t r u e 
p r i c e p a i d by p h a r m a c i e s does n o t mean t h a t t h e r e has 
t o be 
an 
e q u a l 
d e d u c t i o n 
f r o m 
t h e 
WAC. 
No 
p a r t y 
i s a d v o c a t i n g 
t h a t 
h e r e . 
F o r 
t h e s e 
r e a s o n s 
I b e l i e v e 
t h a t 
t h e 
f a c t 
t h a t 
t h e 
b e n c h m a r k AWP 
was 
n o t 
a t r u e 
p r i c e 
d i d 
n o t 
p u t 
t h e 
AMA 
on 
n o t i c e t h a t t h e WAC 
was 
t h e r e f o r e 
n o t 
a t r u e 
p r i c e . 
The 
E f f e c t 
o f t h e WAC 
i n These C a s e s 
The 
WAC 
was 
t h e p r i m a r y b a s i s 
f o r payment by 
t h e AMA 
i n 
t h e s e 
c a s e s : 
83% 
o f 
t h e 
c l a i m s 
f o r 
d r u g s 
m a n u f a c t u r e d 
by 
A s t r a Z e n e c a were r e i m b u r s e d b a s e d upon t h e WAC 
( S t a t e ' s b r i e f , 
a t 
6 2 - 6 3 ) ; 
85% 
o f 
t h e 
c l a i m s 
f o r d r u g s m a n u f a c t u r e d by 
GSK 
were r e i m b u r s e d b a s e d upon t h e WAC 
( S t a t e ' s b r i e f , a t 6 2 ) ; 
and 
85% 
o f 
t h e 
c l a i m s 
f o r d r u g s m a n u f a c t u r e d 
by 
N o v a r t i s 
were 
r e i m b u r s e d b a s e d upon t h e WAC 
( S t a t e ' s b r i e f , a t 6 6 ) . The 
AWP 
- 10% 
f o r m u l a 
was 
u s e d f o r r e i m b u r s e m e n t l e s s t h a n 1% o f 
t h e 
t i m e f o r N o v a r t i s 
and 
l e s s t h a n 2% 
f o r GSK 
and 
a b o u t 
8% 
f o r 
A s t r a Z e n e c a . 
T h e r e f o r e , 
t h e WAC 
was 
t h e p r e d o m i n a n t b a s i s f o r 
t h e AMA 
p a y m e n t s i n t h e s e 
c a s e s . 
T h i s e v i d e n c e i s 
u n d i s p u t e d . 
61 
1071439, 1071440, 1071704, & 1071759 
C o n c l u s i o n 
The AMA's own s u r v e y s p u t t h e 
AMA on n o t i c e t h a t t h e AWP 
b e n c h m a r k was n o t 
a t r u e r e p r e s e n t a t i o n o f t h e p r i c e s a c t u a l l y 
p a i d 
by 
p h a r m a c i e s 
i n A l a b a m a 
f o r d r u g s 
p u r c h a s e d 
f r o m 
p h a r m a c e u t i c a l 
w h o l e s a l e r s . 
The AMA's r e i m b u r s e m e n t 
f o r m u l a , 
w h i c h 
d e d u c t e d 10% f r o m t h e AWP, 
g r a p h i c a l l y c o d i f i e s t h e 
AMA's u n d e r s t a n d i n g 
t h a t t h e 
AWP was n o t 
a t r u e 
r e p r e s e n t a t i o n 
o f t h e p r i c e p a i d b y p h a r m a c i e s i n A l a b a m a . 
I n 
c o n t r a s t , t h e m a t h e m a t i c a l 
r e l a t i o n s h i p b e t w e e n t h e 
WAC a n d t h e AWP, t h e two s u r v e y s by A l a b a m a 
p h a r m a c e u t i c a l 
w h o l e s a l e r s 
o f t h e markup on t h e WAC 
p a i d b y p h a r m a c i e s i n 
A l a b a m a , a n d t h e 2003 M e d i c a r e M o d e r n i z a t i o n 
A c t d i d 
n o t 
p u t 
t h e AMA on n o t i c e t h a t t h e 
WAC was n o t a n e t f i g u r e . 
The AMA 
p r e s e n t e d 
s u b s t a n t i a l 
e v i d e n c e 
i n d i c a t i n g 
t h a t 
t h e 2003 
M e d i c a r e M o d e r n i z a t i o n A c t 
d i d n o t a p p l y t o M e d i c a i d o r t o 
t h e 
s t a t e s , 
a n d t h e m a i n 
o p i n i o n 
m i s t a k e n l y 
draws 
t h e w r o n g 
c o n c l u s i o n s 
f r o m 
t h e 
two 
s u r v e y s 
a n d 
t h e 
d e p e n d e n t 
r e l a t i o n s h i p o f t h e 
AWP t o t h e 
WAC. The e v i d e n c e i s u n d i s p u t e d 
t h a t t h e WAC was t h e p r i m a r y b a s i s f o r 
r e i m b u r s e m e n t b y t h e 
AMA. 
62 
1071439, 1071440, 1071704, & 1071759 
T h e r e f o r e , I r e s p e c t f u l l y d i s s e n t f r o m t h e h o l d i n g i n t h e 
m a i n o p i n i o n t h a t t h e AMA c o u l d n o t r e a s o n a b l y r e l y on t h e WAC 
as a n e t 
f i g u r e . 
63