Sticker Shock Prompts Pa. Court to Blackball Red Book Average Wholesale Prices

Harrisburg, PA (WorkersCompensation.com) -- Anyone who's ever paid for expensive prescriptions has probably felt a degree of "sticker shock" when footing the bill.

But in Federated Insurance Co. v. Summit Pharmacy, No. 115 C.D. 2023 (Pa. Commw. Ct. 01/02/24), the court took issue with how Pennsylvania calculates the "sticker price" for pharmaceuticals in workers' compensation cases and required a new method to determine how much insurers must pay.

An insurer sought review of an order of the Pennsylvania Bureau of Workers' Compensation. Specifically, the insurer took issue with the hearing officer's order to pay a pharmacy approximately $72,500 to reimburse the pharmacy for generic drugs provided to a claimant for her work-related injuries.

In ordering this reimbursement amount, the hearing officer used the "Red Book" values for the prescriptions at issue. The Bureau adopted these values as the average wholesale price to be used in resolving disputes over pharmaceuticals.

The Red Book is a privately published electronic compendium of pharmaceutical and over-the-counter drug AWPs available online. In a statement of policy, the Red Book's publisher has indicated that, in most cases, the AWPs it publishes are the manufacturer's suggested AWPs and do not reflect the actual AWPs charged by a wholesaler.

As the court explained in the case, "Red Book values have been described as being similar to the manufacturer's suggested retail or 'sticker price' of a car."

On one side of the case, the insurer argued that the Bureau's adoption and use of Red Book values was inconsistent with Pennsylvania's Workers' Compensation Act, which limits the reimbursement of pharmaceuticals to 110 percent of the AWP. In the alternative, the insurer argued that the Bureau's ongoing adoption of the Red Book represented an improper delegation of legislative authority to a private entity.

On the other side of the case, the pharmacy contended that AWP was a term of art used within the pharmaceutical industry, which regards the Red Book as an accepted source of AWP.

Under precedent cases in Pennsylvania, AWP was intended to be an objective estimate of the costs of acquiring drugs derived on a national basis.

The court agreed with the insurer's primary argument and held that Red Book values did not reflect AWP as required by the Workers' Compensation Act. The court directed the Bureau to promptly identify and publish in the Pennsylvania Bulletin a different, nationally recognized schedule to be used to determine AWP.

Looking to case law, the court reasoned that the "plain meaning" of AWP was a price that was an industry average and not one that is charged by a single manufacturer. Instead, the price is a number derived by averaging the wholesale prices of all manufacturers or wholesalers.

The court noted that the Red Book's publisher followed a policy under which:

+ AWP was reported by manufacturers.
+ AWP was calculated based on a markup specified by the manufacturer.
+ Suggested wholesale price was reported by the manufacturer.

The court explained that previous cases have held that AWP is a number derived by averaging the wholesale prices of all manufacturers or wholesalers, meaning Red Book values could not be "accurate."

"[W]e conclude that the Red Book values adopted and used by the Bureau as the AWP to resolve payment disputes for pharmaceutical drugs is inconsistent with the statutory language of [the Workers' Compensation Act] and is, therefore, invalid," the court wrote.

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