Opinion ID: 204019
Heading Depth: 2
Heading Rank: 1

Heading: The History of Average Wholesale Price in the BBA

Text: Congress created Medicare Part B in 1965 to establish a supplemental medical insurance program for senior and disabled citizens. See 42 U.S.C. §§ 1395j-1395w-4. The Secretary of the Department of Health and Human Services (DHHS) oversees the program, and the Centers for Medicare and Medicaid Services (CMS), formerly known as the Health Care Financing Administration (HCFA), administers it. See id. Among its services, Medicare Part B provides insurance for physician services, for which it has historically paid a reasonable charge limited to the lowest of the physician's actual charge, the physician's customary charge, or the prevailing charge in the relevant locality for similar services. See 42 U.S.C. §§ 1395 l (a), 1395u(b); 42 C.F.R. §§ 405.500 et seq. For covered prescription or physician-administered drugs, Medicare Part B reimburses providers for up to eighty percent of the allowable cost, and the program's beneficiary pays the remaining twenty percent as a co-payment. See 42 U.S.C. § 1395 l ; Montana v. Abbot Labs., 266 F.Supp.2d 250, 252 (D.Mass. 2003). The term average wholesale price has not always featured in the Medicare Part B repayment lexicon. Prior to 1991, the standard for Medicare reimbursement was the reasonable charge of the covered services rendered. See 42 U.S.C. §§ 1395 l, 1395u(o). In 1991, the Secretary of DHHS promulgated a new rule set[ting] forth a fee schedule for payment for physicians' services that incorporated the term average wholesale price. Medicare Program; Fee Schedule for Physicians' Services, 56 Fed.Reg. 59,502, 59,502 (Nov. 25, 1991) (final rule). Notably, five months earlier, AWP was not part of the Secretary's proposed rule: although the Secretary believed that ultimately there should be a national fee schedule for reimbursement, he concluded that the large number of different drugs and the myriad ... dosage levels made such a schedule impractical. Medicare Program; Fee Schedule for Physicians' Services, 56 Fed.Reg. 25,792, 25,800 (June 5, 1991) (proposed rule). The Secretary's proposed rule therefore settled instead on continuing the reasonable charge regime that was already in place, proposing to reimburse at a rate of 85 percent of the national wholesale price. Id. The Secretary proposed that reimbursement level because the Red Book and other wholesale price guides substantially overstate the true cost of the drugs by failing to reflect an average discount of 15.9 percent off the published wholesale price. Id. After receiving a great many comments on the proposed rule pointing out that, for providers, many drugs could be purchased for considerably less than 85 percent of AWP... while others were not discounted, and that individual physicians often paid more for drugs than did pharmacies or large practices, the Secretary modified the proposed policy. 56 Fed.Reg. at 59,524-59,525. The final promulgated rule, effective January 1, 1992, stated: (b) Methodology. Payment for a drug described in paragraph (a) of this section is based on the lower of the estimated acquisition cost or the national average wholesale price of the drug. The estimated acquisition cost is determined based on surveys of the actual invoice prices paid for the drug. In calculating the estimated acquisition cost of a drug, the carrier may consider factors such as inventory, waste, and spoilage. (c) Multiple-Source drugs. For multiple-source drugs, payment is based on the lower of the estimated acquisition cost described in paragraph (b) of this section or the wholesale price that, for this purpose, is defined as the median price for all sources of the generic form of the drug. 56 Fed.Reg. at 59,621 (promulgating 42 C.F.R. § 405.517 (1992)) (emphasis added). In promulgating the rule, the Secretary added that, to determine the estimated acquisition cost, [c]arriers could survey a sample of the physicians who furnish the drugs to obtain cost information, or, [a]s an alternative, carriers could request that physicians periodically provide cost information when they submit claims for payment for the drugs. [7] Id. at 59,525. The reimbursement scheme was augmented again by the BBA, prompted in part by concerns that the average wholesale price was little more than a sticker price bearing little resemblance to the actual acquisition costs of the reimbursed drugs. For instance, the Senate Committee on Finance heard testimony from the Secretary of DHHS that the AWP is not the average price actually charged by wholesalers to their customers ... [r]ather, it is a `sticker' price set by drug manufacturers and published in several commercial catalogs. President's Fiscal Year 1998 Budget Proposal for Medicare, Medicaid, and Welfare: Hearing Before the S. Comm. on Finance, 105th Cong. 265 (1997) (statement of Donna E. Shalala, Secretary of Health and Human Services); see In re Pharm., 460 F.Supp.2d at 280-81. Similarly, a report from the House of Representatives Committee on the Budget noted that over the past several years, Medicare had been reimbursing certain drugs at rates far above providers' actual acquisition costs, sometimes nearly 1000 percent higher. H.R.Rep. No. 105-149, at § 10616 (1997); see In re Pharm., 460 F.Supp.2d at 281. The committee therefore stated its intention that the Secretary of DHHS, in determining the average wholesale price, should take into consideration commercially available information including such information as may be published or reported in various commercial reporting services. H.R.Rep. No. 105-149, at § 10616; see In re Pharm., 460 F.Supp.2d at 281. Based on these concerns, the BBA amended the relevant Medicare statute to state that the amount payable for the drug or biological is equal to 95 percent of the average wholesale price.  42 U.S.C. §§ 1395u(o) (West 1998) (emphasis added). The BBA also directed the Secretary of DHHS to study the effect on the average wholesale price of drugs and biologicals of the statutory change, and to report its findings to separate House and Senate committees. 42 U.S.C. § 4556(c) (West 1998). [8] Roughly a year later, the DHHS regulations were amended to reflect the new statutory provision. See Medicare Program; Revisions to Payment Policies and Adjustments to the Relative Value Units Under the Physician Fee Schedule for Calendar Year 1999, 63 Fed.Reg. 58,814, 58,905 (Nov. 2, 1998) (codified as 42 C.F.R. § 405.517 (1999)). In the process, HCFA noted that the law does not define the term `average wholesale price,' but nonetheless interpreted the term for regulatory purposes to require that, when there is an array of charges, the median is an appropriate measure of central tendency. Id. at 58,849. As for the DHHS's study on the effect of the statutory change, the results were delivered to Congress in 1999. The Secretary included a history of Medicare drug reimbursement noting that [f]or the past 13 years, the Office of Inspector General... has issued a series of reports that consistently show a finding that the Medicare program overpays for the drugs ... it covers. It further noted that DHHS's attempt to fix the problema proposal in the 1997 budget to base payment on the lower of the billed charge or the actual acquisition cost for the relevant drughad been rejected in favor of the current rule, which is to pay based on the lower of the billed charge, or 95 percent of the AWP. Rep. to Cong., The Average Wholesale Price for Drugs Covered Under Medicare, DHHS 1-2 (1999); In re Pharm., 460 F.Supp.2d at 281-82. The BBA and the resulting regulations stayed in effect until 2003, when Congress enacted the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub.L. No. 108-173, 117 Stat. 2066 (2003 Act), but the issue of Medicare reimbursement remained an active issue both in Congress and at DHHS throughout that time. In 2000, DHHS announced its intention to abandon AWP as a reimbursement baseline in favor of an alternative set of price lists, thereby provoking a letter from two Senators reminding the agency that Congress [had] instructed [D]HHS to base Medicare reimbursement... on 95 percent of the `average wholesale price,' or AWP, a term widely understood and indeed defined by [D]HHS manuals to reference amounts reflected in specified publications. See Letter from Sen. Christopher Bond and Sen. John Ashcroft to Donna E. Shalala, Secretary of Health and Human Services (Aug. 3, 2000); In re Pharm., 460 F.Supp.2d at 282. Later that year, Congress passed an act requiring DHHS to study the difference between acquisition costs and AWP, and in the meantime, avoid actions that would directly or indirectly decrease the rates of reimbursement ... under the current medicare payment methodology.... Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000, Pub.L. 106-554, § 429(c), 114 Stat. 2763. In 2001, while testifying before Congress about his concern that Medicare beneficiaries and taxpayers were paying far more than the `average' price that we believe the law intended them to pay, the Administrator of CMS stated, The AWP is intended to represent the average price at which wholesalers sell drugs to their customers, which include physicians and pharmacies.... This Committee, CMS, the [DHHS] Inspector General (IG), and others have long recognized the shortcomings of AWP as a way for Medicare to reimburse for drugs. Medicare Drug Reimbursements: A Broken System for Patients and Taxpayers: Joint Hearing Before the Subcommittee on Health and the Subcommittee on Oversight and Investigations of the House Commission on Energy and Commerce, 107th Cong. 87-88 (2001) (prepared statement of Thomas Scully, Administrator, CMS); see In re Pharm., 460 F.Supp.2d at 282. This testimony prompted a question from the chairman of the committee that largely echoes the gravamen of the plaintiffs' complaint in this class action: Why on earth do we have a system that requires a Medicare beneficiary to pay 20 percent as a copay of an artificial price? Medicare Drug Reimbursements: A Broken System for Patients and Taxpayers, 107th Cong. at 95; In re Pharm., 460 F.Supp.2d at 282. Finally, in 2003, the DHHS Inspector General issued a voluntary compliance program for the health care industry that stated, Where appropriate, manufacturers' reported prices should accurately take into account price reductions, cash discounts, free goods contingent on a purchase agreement, rebates, up-front payments, coupons, goods in kind, free or reduced-price services, grants, or other price concessions or similar benefits offered to some or all purchasers. OIG Compliance Program Guidance for Pharmaceutical Manufacturers, 68 Fed.Reg. 23,731-01, 23,733-27,734 (May 5, 2003). The term average wholesale price was eventually phased out of the Medicare reimbursement scheme by the 2003 Act, which stipulated that reimbursements for drugs furnished on or after January 1, 2005 would be based on either a competitive acquisition program or an average sales price, a term defined to include all discounts and rebates. See 42 U.S.C. §§ 1395u(o), 1395w-3, 1395w-3a, 1395w-3b (2006). Although the 2003 Act retained the term average wholesale price in the interim, the House Committee on Ways and Means issued a report explaining its understanding of AWP in more detail, stating, The term `AWP' is not defined in statute or regulation, but generally, AWP is intended to represent the average price used by wholesalers to sell drugs to their customers. It continued: AWPs are not grounded in any real market transaction, and do not reflect the actual price paid by purchasers. Congress has long recognized AWP is a list price and not a measure of actual prices. Congress is now able to adopt an alternative basis for payment that will more accurately reflect actual acquisition costs for physicians. This will ensure that Medicare no longer bases its payments on prices that do not reflect prices otherwise available through market incentives and transactions. H.R.Rep. No. 108-178, pt. 2, at 194, 197-98 (2003); In re Pharm., 460 F.Supp.2d at 283.