John Carroll

Several attorneys general have joined the U.S. Justice Department in questioning some AWP billing and reimbursement practices in Medicaid and Medicare.

John Carroll

Attorneys general around the country have declared open season on drug companies' Medicaid and Medicare pricing policies. And a number of the AGs have made it clear that the barrage of litigation is aimed in part at enforcing basic price controls to help staunch a tidal wave of red ink swamping state budgets.

In just the past three months, at least three AGs — in California, New York, and Connecticut — joined Minnesota, Montana, Nevada, West Virginia, and Texas in claiming that many of the drug giants have been gaming the public programs' average-wholesale-pricing policies. To gain market share, the AGs allege, drug companies have been offering their pharmaceuticals to providers at a deep discount for years, letting the providers bill Medicaid and Medicare for reimbursement at the higher AWP.

Federal investigations

The deepening stack of fraud claims falls on top of federal investigations by two U.S. attorneys. Both Medicaid and Medicare base reimbursements on AWP, which critics contend routinely reflects a sticker price inflated well above industry catalog charges.

In Minnesota, Attorney General Mike Hatch went after Pharmacia, publicly roasting the company for allegedly creating an AWP for its chemotherapy drugs that was 10 times the discount price offered to physicians. And Hatch has his eyes trained on other companies.

It's hard to tell right now just how many more states may join in, but few would be surprised to see new lawsuits piling up on the doorsteps of the big drug companies.

"I've heard of other states that might file," says Connecticut Attorney General Richard Blumenthal. But while Blumenthal — the latest AG to file — says the states are coordinating activities to a certain extent, all are filing claims in state courts and expect to keep the cases separate.

Attorneys general see these cases as cut and dried. Pharmaceutical companies knowingly presented inaccurate statements "and profited as a result," says Blumenthal.

These suits have some big numbers in mind. A 2001 report from the Health and Human Services Office of Inspector General claims that Medicare alone paid $1.2 billion in inflated charges because of these schemes. Two companies — TAP and Bayer — have already paid to have two federal cases of AWP manipulation brought to a close. In a chart outlining New York's case, Spitzer claimed tens of millions of dollars in overcharges.

The states have been stung into action as they find themselves wedged between budget disasters that are forcing big cuts in Medicaid even as they're reeling from the sticker shock of rapidly escalating drug costs. And some state officials see the suits as a tool that can be used to adjust prices.

"The cost of ... drugs is the fastest-growing part of the state budget," says Michael Starkowski, Connecticut's deputy commissioner of social services. "Price gouging has hurt both clients and taxpayers as we try to honor our commitment to cover basic health care needs with limited resources."

Says New York's fiery attorney general, Eliot Spitzer: "With this action, we are sending a strong signal that the state of New York will use the law to bring health care costs under control."

Spitzer singled out Doxorubicin (Pharmacia's Adriamycin RDF/PFS), which is used to treat breast and ovarian cancer, as an example. The company generally made it available to doctors at a 76-percent discount. The docs based their bills on AWP for reimbursement and pocketed the difference. The company used the spread to help build market share and, the state alleges, in many cases the patients' share of the bill was actually more than the discounted price.

Overcharge of 488%

Connecticut singled out drugs like Day's albuterol, which has an AWP listed as $21.70 and an actual price of $3.25, creating a spread of $18.45 a dose — a 488 percent overcharge. Then there's Glaxo's Zofran, used for chemotherapy, which was reimbursed at $206.41 with an actual price of $110.08, a $96.33 gain for physicians.

For his part, Blumenthal says the suit would have been brought whether drug costs were soaring or stable. But he also says that drug companies may switch gears on pricing now rather than wait for the outcome of the state actions. "I hope that there will be changes sooner rather than later," Blumenthal said.

Right now, it's hard to tell exactly what many of the drug companies involved have in mind. Some didn't return calls; others did but declined to comment.

But Patricia Munzer, spokeswoman for Aventis, says that the company stopped reporting AWP prices almost two years ago and described the whole process as riddled with "discrepancies and inconsistencies."

"We just base it on list price — the real price or sticker price," she adds. Medicare and Medicaid would be charged the same wholesale price that all wholesalers receive. "Aventis is willing to discuss this," says Munzer, and the company is looking for a legislative solution that would outline a method for drug companies to set public pricing.

For Blumenthal's part, though, that position won't explain away allegations that Aventis sold Anzemet to the state for an AWP of $166.50 when it charged physicians $90.45.

Munzer says Aventis is interested in starting a dialog with the state to help clarify the issue.

Win or lose, the drug companies have a lot at stake. Analysts have been questioning the impact that federal and state investigations may have on the companies' ability to keep up profit margins.

The AWP spread is not the only area of interest to the Justice Department. U.S. Attorney James Sheehan in Philadelphia has accused the drug companies of making "secret payments" to pharmaceutical benefit managers to grease their way onto drug formularies in order to gain market share.

And drug companies have been waiting for more than a year to see if the Justice Department will target them with a federal suit. If it does, the cumulative weight of government lawsuits may soon force a public reckoning that could restructure the way prices are established for everyone in the U.S.

Spread, savings on sample of Pharmacia's, GSK's, Aventis's drugs
(Dollars in millions)
Generic (brand) name of drug Type of drug Spread (2000 prices) Estimated Medicare savings (2001 charges) Estimated savings to beneficiaries
Doxorubicin HCl
Anticancer 76.5% $24.3 $4.9
Anticancer 16.3% $26.3 $5.3
Vinorelbine Tartrate
Anticancer 15.1% $5.2 $1.0
Anticancer 11.6% $3.8 $0.7
Ondansetron HCl
Antiemetic 9.9% $6.0 $1.2
Dolasetron mesylate
Antiemetic 44.1% $49.7 $9.9
Anticancer 15.8% $26.5 $5.3
TOTAL $141.8 $28.4

SOURCE: Office of New York Attorney General

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