The Price is Wrong

The judge in MDL 1465 found a few pharma companies innocent and a few guilty. But in her written opinion, everybody—regulators, payers, and pharma alike—shares the blame, and no one looks innocent.
Jul 30, 2007

Patrick Clinton
Of all pharma's marketing tactics, the hardest to swallow was "marketing the spread." This was a scheme developed in the 1990s for physician-administered drugs (PADs)—injectables, cancer drugs, etc., which are purchased from wholesalers by physicians and reimbursed by Medicare or third-party payers. Until recently, reimbursement was based on Average Wholesale Price (AWP). This sounds like it ought to mean the average of prices paid to wholesalers, but in practice, it was always closer to sticker price. Manufacturers discovered that they could give physicians a tidy bonus by creating a spread between AWP and what docs paid.

And, having provided such a benefit, some companies took care to point it out: Hence, "marketing the spread."

Inflated AWPs were at the heart of a class action suit recently concluded in Federal District Court in Boston. I wrote about it late last year. At the time, the Department of Justice asked Judge Patti Saris to rule that AWP meant exactly what the words implied—something that was never true in practice. Saris agreed, raising the disturbing possibility that, if her ruling became precedent, every company that ever filed a "sticker price" AWP (that is, every pharma company) could be hauled in for fraud and deceptive marketing.

Well, the results of the first of Saris' trials are in, and though several pharma companies are going to have to disgorge substantial sums, the news is not as bad as it could have been. Plaintiffs wanted zero tolerance of AWP spread. After weeks of testimony, Saris concluded that the stakeholders really did expect a spread of up to 30 percent. (Lawyers in the case called this the Hartman speed limit, named for the judge's economist consultant.) Companies that broke the limit—and that actively marketed the spread—were found guilty. Others escaped.

The bright side: By distinguishing between acceptable and unacceptable AWPs, Saris may have set a useful precedent that will help companies fight off attacks on AWPs they have filed—in good faith—in the past. Given OIG's recent habits, that could be important.

It's good news and a reasonable decision on Saris' part. But the conclusions aren't the only interesting part about her 183-page opinion in the case. (It's easy to find online, by the way. I read it at Saris created a remarkable history of AWP, asking, and mostly answering, basic questions: Why didn't the government react against fictional AWPs? (Too hard, and injectables weren't a significant expense.) Why didn't third-party payers? (Too hard, and they were afraid of alienating doctors by reducing their reimbursements.) When should any reasonable payer have known what was up with AWP? (August of 1997, following several government actions and news reports.) Who suffered? (The patients, whose co-pays rose with AWP, even if no doctor paid anything close to it.)

Saris' account is an appalling story of stupidity, laziness, and greed, with plenty of blame to go around, from the rule makers who gave pharma an incentive to cheat, to the payers who turned a blind eye, to pharma companies who marketed the physician's advantage rather than the patient's. I've seen news stories about Saris' decision, but none about the picture she painted. That's a shame. As important as it is to punish the guilty, today we really need systems that have a chance of success. As Saris shows, there was never a chance with AWP. All of us—legislators, payers, and pharma—need to do better if we're ever to be trusted again.

Patrick Clinton

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