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Reimbursement of Prescription Drugs in Pennsylvania Workers Compensation

In one of the first decisions this year, the Commonwealth Court has addressed the use of the Red Book in calculating payment owed for prescription medications.  Specifically, the Workers’ Compensation Act provides that payment for prescription drugs and professional pharmaceuticals services shall be limited to 110% of the average wholesale price (AWP) of the product.  For years the industry standard was to use the Red Book to find the AWP.  However , Medicare and some states have stopped using the Red Book.   Accordingly, insurers in Pennsylvania have been challenging the Bureau’s use of the Red Book for the last several years.  Indemnity Insurance, 245 A.3d 1162 (Pa. Cmwlth. 2021).  The wheels of justice turn slowly but grind exceedingly fine.

Federated Insurance Co. v Summitt Pharmacy (Bureau of Workers’ Compensation Fee Review Hearing Office) __A3d.__, No. 115 C.D. 2023 (Pa. Cmwlth. 1/2/2024)


In a landmark Decision (a 24 page opinion by President Judge Cohn Jubelirer), the Commonwealth Court has invalidated the Bureau Regulations which allow the Bureau to rely on the Red Book in determining the AWP of prescription drugs used to calculate payment owed by the Insurer.  In this case,  the insurer reduced payment to an AZ online pharmacy, that provided prescriptions to the injured worker, based on the National Drug Acquisition Cost Index(NADAC).   Significantly, this resulted in a reduction of $72,499.88  from a $74,011.81 bill!  An application for Fee Review was filed.  The Fee Review  Determination used the Red Book based on the cost containment regulations promulgated under the Workers’ Compensation Act.  See Section 306(f.1)(3(vi)(A) of the Act, 77 P.S. Section 531(3)(vi)(A) (limiting reimbursement for prescription drugs and pharmaceuticals to 110% of the Average Wholesale Price (AWP) of the product).  Both sides presented expert opinion evidence to the Fee Review Hearing Officer(FRHO).  The FRHO affirmed the Bureau’s Fee Review Determination.  He concluded that Insurer’s expert’s qualifications were NOT sufficient to qualify him as an expert and moreover rejected his testimony as unpersuasive.  Instead the FRHO accepted as credible the Pharmacy’s expert witness. Insurer appealed to the Commonwealth Court.

The issue before the Court was the meaning of AWP.  The Court referenced its decision in Indemnity Insurance, 245 A.3d 1158 (Pa. Cmwlth. 2021) explaining that pursuant to such decision, the “plain meaning” of AWP is a price that is an industry average not one that is “charged by a single manufacturer,” and “is a number derived by averaging the wholesale prices of all manufacturers or wholesalers.” Although in Indemnity the insurer had not met its burden to prove AWP, “this did NOT mean an insurer could not produce evidence to support a calculation of an AWP more accurate than the one authorized by regulation and listed by the Bureau in the Pennsylvania Bulletin, such as proposing a Nationally recognized schedule other than the one listed by the Bureau in the Pennsylvania Bulletin when relitigating a pricing dispute.” Then the Court framed the issue as “whether the Red Book values are inaccurate.” Although both parties submitted expert testimony, the Court reasoned: “Both witnesses agreed that NADAC pricing is based on average prices pharmacies pay for a drug at wholesale nationally, while Red Book pricing is chosen unilaterally by a drug’s manufacturer, is not a mathematical average, and is not based on prices in any actual wholesale transactions.” It was likened to a MSRP.  The Court repeatedly referenced testimony that Prozac, for example, had an acquisition price of $9 for a bottle vs. $2,000 reimbursement based on the Red Book!!  Thus, the Court determined that the Red Book values CANNOT be an “accurate” AWP. Accordingly, the Court held that the Red Book values CANNOT be used to determine AWP as a matter of law. Therefore, the Court ordered that the Bureau Regulations (identifying the Red Book values as the AWP to be used to resolve payment disputes over pharmaceuticals) are INVALID.

As for the remedy in Federated, the Fee Review Determination was reversed and remanded to determine the appropriate reimbursement due to the pharmacy.  The Court instructed the Bureau  “to identify a Nationally recognized schedule that it will use to determine the AWP of prescription drugs to resolve payment disputes and give notice of that schedule in the Pennsylvania Bulletin annually,” and directed the Bureau to do this promptly.  The Hearing Officer was instructed to stay the remand until the Bureau publishes the schedule, after which a hearing will be held to allow the parties to introduce, if necessary, evidence regarding alternate indices or schedules they believe provide a more “ accurate” AWP.

COMMENT:  While this case represents a major win for the Insurer, it is disappointing that the Court didn’t go one step further and hold that NADAC accurately establishes the AWP.  Nonetheless, this case marks a major change for the Bureau and parties  in calculating what is owed for prescription drugs. WE ARE NO LONGER BOUND BY THE BUREAU’S USE OF THE RED BOOK IN CALCULATING AWP. Prior to this decision, the Bureau had been using the Red Book to resolve all Fee Review disputes. We are surprised that we have not yet received a Bureau communication regarding how it will be handling Fee Reviews in this interim period before it publishes a new source to rely on. Presumably, even if the Bureau is issuing Fee Review determinations, challenges before FRHO would be stayed based on Federated. Thus, we are thrown into a quagmire where there is no guidance as to how we should calculate prescription reimbursement.  The Regulations that may  still be in effect indicate that pharmacists and insurers may reach agreements on which Nationally recognized schedules shall be used to define the AWP of prescription drugs.  Thus, we could start with NADAC and see if the pharmacies would agree. In this regard, we have reached out to the Bureau, its vendor and other vendors to further analyze the best option for prescription drug reimbursement. This is where even after the Bureau publishes a new standard, insurers will be able to challenge the same, if we again believe that there is a more accurate source to use in calculating AWP.  As always, please feel free to contact us with any specific questions that you have as the rules regarding prescription reimbursement continue to evolve.