On January 2, 2024, the Pennsylvania Commonwealth Court ruled to set aside the long-utilized “Red Book” standard for repricing prescription medications in Pennsylvania workers’ compensation claims. The court directed the Pennsylvania Bureau of Workers’ Compensation (the Bureau) to identify and publish in its place a nationally recognized repricing schedule that accurately reflects the actual Average Wholesale Price (AWP) of prescription drugs. Federated Insurance Company v. Summit Pharmacy (Bureau of Workers’ Compensation Fee Review Hearing Office), No. 115 CD 2023 (Pa. Cmwlth. 2023). As co-counsel for Federated, Chartwell Law partner Jason Hanford, explained, “we are pleased that the court recognized how far the Red Book AWP has strayed from the actual AWP of prescription drugs. We expect this decision will result in significant cost savings for prescription drugs, which benefits those paying for the drugs in Pennsylvania and the injured workers who need them.”

A discussion of the history – of both the use of the Red Book and the Federated case – is instructive as we look forward to the impacts of the decision on Pennsylvania workers’ compensation claims.

The “Average Wholesale Price” Standard

The vast majority of prescription medications in Pennsylvania workers’ compensation claims are repriced and paid at a rate of 110% of the drugs’ AWP. While this general standard for repayment is set by the Pennsylvania Workers’ Compensation Act (the Act), the determination of the basis upon which AWP is measured is primarily delegated to the Bureau. In implementing this important mandate of the Act, the Bureau has relied upon the drug wholesale prices published in the Red Book, which the Bureau has selected as the “nationally recognized schedule” of AWP to be used in repricing of Pennsylvania workers’ compensation prescriptions – as announced annually by the Bureau in the Pennsylvania Bulletin.

In recent years, as prescription drug costs have skyrocketed both in and outside the workers’ compensation industry, it has become increasingly obvious that the AWP numbers published via the Red Book often end up significantly higher than the actual AWP paid by pharmacies and wholesalers. This issue was first brought to the Pennsylvania Commonwealth Court’s attention in Indemnity Insurance Co. of North America v. Bureau of Workers’ Compensation Fee Review Hearing Office (Insight Pharmacy), 245 A.3d 1158 (Pa. Cmwlth. 2021).

In Indemnity, Chartwell Law’s Jason Hanford argued, as co-counsel on behalf of Chartwell’s insurer client, that because the Red Book – per its own disclaimer – does not purport to be a measure of actual AWP, it cannot meet the Act’s requirement that “Average Wholesale Price” be used as the basis for repricing prescription drugs. While Chartwell’s client was not successful on the merits in Indemnity – with the court finding that it had failed to present evidence of a more accurate alternative measure for AWP – that decision left open the possibility of a future challenge: “the regulation does not prevent a provider or employer from proposing a Nationally recognized schedule other than the one listed by the Bureau in the Pennsylvania Bulletin when litigating a repricing dispute before the Medical Fee Review Section or the Hearing Officer.” Indem. Ins. Co. of N. Am., 245 A.3d at 1168 (Pa. Cmwth. Ct. 2021) (italics added).

The Federated v. Summit Decision

With the door opened by Indemnity, Chartwell’s insurer client in Federated chose to address this pricing issue head-on. Before a Fee Review Hearing Officer, Chartwell’s client presented expert testimony explaining that (1) Red Book AWP was simply not an accurate measure of the actual AWP of the prescription drugs at issue, and (2) an alternative well-known pricing measure known as the National Average Drug Acquisition Cost (NADAC) could be used to determine more accurately the actual AWP for these drugs.

The Fee Review Hearing Officer in Federated determined that the expert who testified in support of the NADAC standard was not persuasive and that the pharmacy was owed a total of $74,011.81 for the prescription drugs at issue pursuant to Red Book repricing (the insurer had already paid $1,511.93 pursuant to NADAC repricing).

On appeal to the Commonwealth Court, Chartwell’s insurer client argued that the Bureau had ignored the plain meaning of the term “Average Wholesale Price” as set forth in the Act by continually adopting the Red Book measure of AWP – which was not an accurate measure of actual AWP.

Following up on its in analysis in Indemnity, the Federated court undertook a deeper discussion of the plain meaning of AWP noting, importantly, that (1) the Red Book itself concedes in its text that, in most cases, Red Book AWP “does not reflect the actual AWP charged by a wholesaler,” Federated Ins. Co., at 20, and (2) the pharmacy’s expert conceded in his testimony before the Fee Review Hearing Officer that “Red Book’s AWP is not a mathematical average of actual prices paid, but rather a manufacturer’s suggested price that is used as a reference in benefit negotiations between pharmacies, PBMs, and third parties.” Federated Ins. Co., at 7.

The Federated court concluded that Red Book AWP was not in any way a measure of the actual AWP paid by pharmacies and wholesalers and was therefore invalid:

If an agency’s regulations “are contrary to the legislative intent of [the] statutory provisions to which they relate,” they are invalid. Accordingly, the regulations identifying the Red Book values as the AWP to be used to resolve payment disputes over pharmaceuticals are invalid, and the Hearing Officer erred in relying thereon to calculate the amount Petitioner must reimburse Respondent for the disputed drugs.

Federated Ins. Co., at 22 (citation omitted).

A Remand Mandate and What Happens Next?

Having properly concluded that Red Book AWP is not a valid measure for AWP, the Federated court turned to the critical question: What Happens Next?

The court recognized two important issues to be addressed: (1) a determination of what is actually owed for the nearly $110,000.00 in pharmaceutical bills at issue in Federated, and (2) an alternative pricing schedule is needed.

Rather than attempting to address these questions based on the evidentiary record, the court instead remanded the matter to the Fee Review Hearing Officer with the following important mandate:

We remand for further proceedings before the Hearing Officer. However, the Hearing Officer shall stay those proceedings pending the Bureau’s identification of a “Nationally recognized schedule” of AWP to be used in payment disputes and publication of that schedule in the Pennsylvania Bulletin as required by Section 127.131(b) of the regulations, 34 Pa. Code § 127.131(b). The Bureau is directed to perform these actions promptly.

Federated Ins. Co., at 24.

As Pennsylvania employers and insurers await an AWP schedule from the Bureau, the question of “What Happens Next?” will only be magnified. The identification and selection of a Red Book replacement by the Bureau will take time. Still, prescription bills will continue to be submitted for Pennsylvania claims and must be addressed in turn. It will be necessary for insurers and employers to assess the next steps on this issue with their repricing vendors and counsel. When a pricing replacement for Red Book that properly accounts for actual AWP (as mandated by Federated) is identified, the prescription drug cost savings from that important change will likely be tremendous.

While not necessarily a representative sample across the board, the prescription drug bills at issue in Federated were submitted to the carrier in a billed amount of nearly $110,000.00. This billed amount was repriced by the Bureau via the Red Book and ordered to be paid at an amount of $74,011.81. Alternate calculations for those same bills via NADAC reached a total owed of only $1,511.93.

While different drugs will result in different savings and other nationally recognized schedules may not reprice quite as low as NADAC, it is certainly anticipated that any nationally recognized index accurately reflecting actual AWP as paid by pharmacies and wholesalers is certainly likely to trend more in the direction of the NADAC numbers than in the now invalidated Red Book standard. This potential cost savings – which will likely make it easier for injured workers to obtain prescriptions – only serves to benefit both employers and employees in Pennsylvania in the unfortunate instance when a work injury occurs.