US drug pricing: AWP = "'aint what's paid!"

For years, a little-known unit of publishing giant Hearst Corp. called First DataBank has played a powerful role in determining what Americans pay for prescription drugs. First DataBank doesn't buy or sell drugs - it publishes lists of drug prices. Health plans and state Medicaid programs use those prices as a benchmark in determining what they pay pharmacies.

If the benchmark goes up, so do costs for these payers. That's what happened in 2002, when First DataBank suddenly made broad revisions to its key published list. The new prices had the effect of fattening the profits of pharmacies, out of the view of patients and companies who pay for the soaring cost of health care.

A 2002 e-mail from a manager at one of the nation's largest drug wholesalers, San Francisco-based McKesson Corp., describes how pharmacies would be able to more than double their profit for dispensing the cholesterol drug Lipitor and adds, "that is awesome!!"

Now a tentative legal settlement, reached quietly this week in a Boston court, could reduce annual U.S. drug costs by billions of dollars. An economist hired by the plaintiffs puts the savings in 2007 alone at $4 billion.

One of the most important parts of the proposed settlement in U.S. District Court involves the benchmark price at issue in the litigation, known as average wholesale price, or AWP. The term is a misnomer because it no longer represents a price paid to wholesalers and is not an average of anything. An old industry joke holds that AWP stands for "ain't what's paid." First DataBank agreed that two years after the settlement is final it will stop publishing the AWP.

As AWP loses sway, employers, Medicaid programs and other drug payers may need to find new ways to figure out how much pharmacies are paying for drugs so that the pharmacies can be reimbursed at a fair, but not excessive, profit margin.

Mark Erlich, executive secretary-treasurer of the New England Regional Council of Carpenters, is one of the plaintiffs settling the case with First DataBank.

He expects the settlement will save about $400,000 a year for his union's health fund, which covers 22,000 people and spent $10 million on prescription drugs last year. Erlich called the earlier rise in First DataBank's published prices "a rip-off of consumers across the country."

It affects the union, he says, because its contract with the company managing its pharmacy benefits specifies that the drug prices the union pays will be based on First DataBank's AWP benchmarks.

Much more here.