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Drug Manufacturers Under Fire for Pricing Policies

Tue, 05/30/2000 - 11:00pm — Karen Stevenson
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The government is investigating changing the way they price drugs under the Medicare and Medicaid programs. The primary basis for program pricing currently is the Average Wholesale Price (AWP) of each medication, a calculation provided by drug manufacturers, rather than by any independent third party source. The Wall Street Journal and Reuters report that recent government studies show that these prices have been artificially inflated, resulting in possible overpayments by Medicare and Medicaid of $1 billion a year. The reports show that actual selling prices for many drugs are far less than the AWP, allowing pharmacies and other providers to make a significant profit on pharmaceuticals billed to Medicare or Medicaid.

The Commerce Committee is investigating this issue. The committee chairman, Tom Bliley, wrote in a letter to Donna E. Shalala, Secretary of the Health Care Financing Administration (HCFA), "In its December 1997 report, the Office of Inspector General (OIG) estimated that, in 1996 alone, Medicare could have saved $447 million by reducing the Medicare-allowed price for just 22 drugs to the actual prices available in the private wholesale sector. The OIG also found that Medicare could have saved at least 40 percent of the current allowance for almost half of the 22 drugs, and 93 percent for one particular drug, by limiting reimbursement to the available private sector prices for those drugs. As you know, Medicare is supposed to pay only 95 percent of the Average Wholesale Price (AWP) of these drugs under Federal law."

"These findings are supported by additional investigative work that the Committee on Commerce has conducted. The Committee has written to several drug manufacturers, inquiring about the prices they charge to wholesale purchasers. The responses the Committee received confirmed that Medicare does in fact pay considerably more for certain drugs than the actual average price paid by such wholesalers. In addition, the Committee is continuing to investigate the practices of certain drug manufacturers relating to allegations that they manipulated the AWP of particular drugs in order to increase the sales of these drugs."

In a letter to Charles Rice, CEO of Dey Laboratories, Biley wrote, "When queried by the Committee about the setting of AWPs, the trade association representing the drug manufacturing industry, the Pharmaceutical Research and Manufacturers of America (PhRMA), essentially admitted that AWP is not what it claims to be on its face -- the average price charged to wholesalers -- but is rather just a publicly available benchmark set by manufacturers in their discretion, and upon which insurers base their reimbursements. Indeed, for certain Medicare-covered drugs, it appears that very few, if any, purchasers actually pay the AWP or any price close to it ? except, of course, the Federal government."

The government is investigating changing the way they price drugs under the Medicare and Medicaid programs. The primary basis for program pricing currently is the Average Wholesale Price (AWP) of each medication, a calculation provided by drug manufacturers, rather than by any independent third party source. The Wall Street Journal and Reuters report that recent government studies show that these prices have been artificially inflated, resulting in possible overpayments by Medicare and Medicaid of $1 billion a year. The reports show that actual selling prices for many drugs are far less than the AWP, allowing pharmacies and other providers to make a significant profit on pharmaceuticals billed to Medicare or Medicaid.

The Commerce Committee is investigating this issue. The committee chairman, Tom Bliley, wrote in a letter to Donna E. Shalala, Secretary of the Health Care Financing Administration (HCFA), "In its December 1997 report, the Office of Inspector General (OIG) estimated that, in 1996 alone, Medicare could have saved $447 million by reducing the Medicare-allowed price for just 22 drugs to the actual prices available in the private wholesale sector. The OIG also found that Medicare could have saved at least 40 percent of the current allowance for almost half of the 22 drugs, and 93 percent for one particular drug, by limiting reimbursement to the available private sector prices for those drugs. As you know, Medicare is supposed to pay only 95 percent of the Average Wholesale Price (AWP) of these drugs under Federal law."

"These findings are supported by additional investigative work that the Committee on Commerce has conducted. The Committee has written to several drug manufacturers, inquiring about the prices they charge to wholesale purchasers. The responses the Committee received confirmed that Medicare does in fact pay considerably more for certain drugs than the actual average price paid by such wholesalers. In addition, the Committee is continuing to investigate the practices of certain drug manufacturers relating to allegations that they manipulated the AWP of particular drugs in order to increase the sales of these drugs."

In a letter to Charles Rice, CEO of Dey Laboratories, Biley wrote, "When queried by the Committee about the setting of AWPs, the trade association representing the drug manufacturing industry, the Pharmaceutical Research and Manufacturers of America (PhRMA), essentially admitted that AWP is not what it claims to be on its face -- the average price charged to wholesalers -- but is rather just a publicly available benchmark set by manufacturers in their discretion, and upon which insurers base their reimbursements. Indeed, for certain Medicare-covered drugs, it appears that very few, if any, purchasers actually pay the AWP or any price close to it ? except, of course, the Federal government."