From the Editor: Under Revision

November 1, 2006

Pharmaceutical Executive

Volume 0, Issue 0

The US Department of Justice thinks that "Average Wholesale Price" should mean just what the words say-no more, no less. Why? It's never meant that before.

There's an old joke in which a patient goes to the doctor and learns he needs surgery that will cost $10,000. "I can't pay it, Doc," he says. "That's OK," responds the doctor. "For a hundred bucks I can retouch your X-rays."

Patrick Clinton

I thought of the joke as I looked through a friend-of-the-court brief filed in September by the Department of Justice (DOJ) on behalf of the Secretary of Health and Human Services (HHS). In its own way, it's a classic case of retouching the X-rays—although for worse rather than for better. It's also an example of genuinely unfair behavior on the part of the government that creates a dangerous situation for pharmaceutical companies.

Here's the background: In the US District Court for the District of Massachusetts, Judge Patti Saris is hearing MDL 1456, a multi-jurisdiction case that charges 42 pharmaceutical companies (and likely more to come) with violating various RICO and deceptive-trade-practice acts by artificially inflating the Average Wholesale Price (AWP) they reported to Medicare.

As most people involved in pharmaceuticals—including you, me, CMS, and the Secretary of HHS—know (or should), AWP is a key number in calculating Medicare rebates. It's also a misnomer—and always was. To the industry, AWP meant "sticker price," and that's what they submitted to CMS. CMS, which can hardly argue that it was unaware of what was going on, largely accepted this new definition—possibly because the use of a literal average wholesale price would have unacceptably limited access to needed drugs.

Anyway, Judge Saris asked the HHS Secretary what he thought AWP meant. Speaking on his behalf, DOJ replied that it means just what the words "average," "wholesale," and "price" mean in their dictionary sense. If the court agrees, the pharma defendants (that is, more or less all of you) will be blocked from arguing in court that AWP meant—well, exactly what it meant.

What about the fact that CMS knowingly accepted industry's "sticker price" AWPs? Couldn't have happened, says DOJ. "It is simply unfathomable that the Secretary, who set reimbursement rates in every other aspect of the Medicare program, implicitly meant for the industry, and not the agency, to set drug reimbursement rates," reads the DOJ brief.

Fair enough. It's unfathomable. But in practice, that's exactly what the Secretary did: He allowed industry to set its own AWP, and then reimbursed based on those numbers. Did he know? Certainly everyone else did. The authors of DOJ's brief are playing an old game—arguing that something couldn't have happened because they know full well they can't argue that it didn't.

It's not obvious how Judge Saris will rule, though courts tend to favor plain-meaning interpretations. What's more, says John Shakow, FDA and healthcare counsel at the law firm King & Spalding, "If the MDL court were to adopt the DOJ argument that AWP should be read in its plain meaning, it's very possible that that court's ruling would be adopted by other courts throughout the country." If that happens, every pharma company that has used AWP in dealing with government will be wide open to fraud charges.

I'm in favor of eliminating healthcare fraud. But there's enough of it out there to keep prosecutors busy. They don't need to fabricate new cases. AWP may have been a botch, but it wasn't an across-the-board fraud. DOJ's retouch job may look reasonable, but it's not the truth. Judge Saris should reject it.