Jul

Coventry – getting with the post-reform program

Posted by Joe Paduda on Friday, July 30th, 2010 | Comments

Coventry earnings call this morning was notable in at least two ways – more discussion about underlying cost drivers, utilization trends and management thereof, and the growing importance of low cost delivery systems from management.
And more evidence that (most) financial analysts don’t understand this business.
Here’s my view on the takeaways from the call.
The per-share earnings charge of $1.18 (from work comp PPO litigation in Louisiana) was the subject of a good deal of discussion during Coventry’s Q2 2010 earnings call this morning, but has to be considered in the context of the overall solid performance of the company.
Coventry actually increased guidance for the full year, marking another improvement in financials for the company that has been on a steady upward trend since CEO/Chair Allen Wise resumed his post a year and a half ago.
Commercial group membership grew nicely, while MLR (medical loss ratio) guidance decreased for the entire year. Coventry expects medical costs to increase in the second half of 2010, consistent with past experience.
In the prepared remarks part of the call, management diiscussed the implications of health reform, asserting the company’s recent results show it is well prepared for reform as it is able to control MLR while maintaining membership and expanding the company’s footprint in selected markets (the Mercy deal is an example)
The company’s statement noted Wise’s enthusiasm for results and performance of the company’s clinical management programs.
Clarity around MLR regulations was the first question – unsurprisingly, given the new regulations regarding limits on insurers’ administrative and other fees. Wise noted that the cost structure in one market in particular was going to improve by shrinking the company’s network, selecting more cost effective delivery systems/health systems. This marked a significant change from calls as recently as last year at this time. Coventry is clearly seeking to partner with more cost efficient health systems; as Wise put it, ‘we need to stop fighting over nickels and focus on overall costs’. [paraphrasing]
This was followed by a question about health plan utilization trends – overall utilization appears to have tapered off industry-wide, the question is why? Wise admitted Coventry doesn’t know, although they’ve spent a lot of time looking at this and their preliminary conclusion is the high deductibles and copays are leading to lower utilization, coupled with expiring COBRA benefits for some employees laid off quite a while ago.
Going forward, Wise sees the market as getting more competitive, making customer service and managing the little things critical to survival and success.
Wise thinks the group health product pendulum has swung back to mid-eighties model where networks are smaller, there’s less choice, and better control over cost and utilization. Coventry’s going to offer products with smaller networks based on provider systems with documented better outcomes and lower costs. They will preferentially look to buy provider-owned plans as they tend to have better cost structures than non-provider-owned plans. The analyst who asked the question wasn’t particularly interested in what Coventry was doing, but rather focused on pricing implications given the MLF regs coming out shortly.
That’s another example of how most of the analysts following this business are out of their depth. The real issue, the key to success, for Coventry and every other health plan, is how they are going to compete in a post-reform world. Price is a result of cost structure, and the failure of the analysts to focus on cost and cost drivers shows how disconnected the analysts are.
Another analyst asked if other health plans are pursuing similar acquisition strategies. Wise noted that there just aren’t that many potential acquisition targets that have good cost structures, fit geographically, and are provider-owned.
The company will be revamping its individual health product offering – in response to a question, Wise noted that the company’s distribution, IT, and benefit design are all works in progress, and there’s still a ways to go.
More to come after I review the transcript

Jul

The power of mis-information – a cautionary tale for health plans

Posted by Joe Paduda on Thursday, July 29th, 2010 | Comments

Today’s Kaiser Health Tracking Poll contains interesting data about support for health reform (steady positives, declining negatives), what’s much more telling is the extent of seniors’ a) ignorance of basic facts about health reform and b) widespread belief that reform includes death panels and cuts Medicare benefits.
Yikes.
According to Kaiser, “Half of seniors (50%) say the law will cut benefits that were previously provided to all people on Medicare, and more than a third (36%) incorrectly believe the law will “allow a government panel to make decisions about end-of-life care for people on Medicare.”
These are both factually incorrect.
Moreover, “Despite the fact that Medicare’s actuaries predict the health reform law will extend the life of the Medicare Part A Trust Fund by 12 years (from 2017 to 2029), only 14 percent of seniors know this and nearly half (45%) of seniors think the health reform law will weaken the financial condition of the fund. ”
There are several ways to look at this.
The power of the anti-reform noise machine is truly impressive; death panel myth promoters are clearly effective in getting people to believe their claims, despite widespread debunking of the claim by multiple independent organizations. (One well-respected organization, Politifact.com (run by the St Pete Times, a terrific newspaper, called it “pants on fire false).
Then again, it’s hard to underestimate the ignorance of the American public; we’re talking about a country where 43% of the population doesn’t believe in human evolution…
Seniors tend to vote in higher percentages than the rest of the population, so their concerns about reform, based at least in part on ignorance of the actual reform bill and its provisions, may well have a disproportionate impact on the election this fall.
Closer to home, health plans and insurers have to take note of these poll numbers and consider the impact on their own members.
As health plans increasingly emphasize provider network selection based on quality and outcomes data; rigorously employ evidence-based medical guidelines; and get tougher on experimental and unproven medical procedures and therapies, they are going to be exposed to the same type of fear-mongering from idiots using the public’s ignorance and fear to gain notoriety.
What does this mean for you?
Health plans must – and I mean must – develop and implement programs to stay on top of the public’s perception and opinions about them. Call it opinion monitoring, social network monitoring, complaint management, whatever, but do it. But this will only work if you proactively educate members and the markets about what you’re doing and why. Otherwise it’s purely defensive, will appear so, and will be little help when the stuff hits the fan.
Which it always does.

Jul

Like it or not, physician ratings are coming

Posted by Joe Paduda on Tuesday, July 20th, 2010 | Comments

Some physicians and physician groups are quite upset about insurers’ recent moves to offer employer customers tight, small networks of providers based on quality and cost criteria. In an effort to block these new plans, the AMA and other groups are focusing on the few problems with ratings and avoiding the larger issue – some physicians are just bad actors.
What they should be doing is working closely with health plans and regulators to ensure the rating process is transparent, fair, and objective.
Insurers, governmental agencies, employers, coalitions, organized labor, all have been involved in assessing provider performance, many for years. CMS has launched several initiatives including measures for nursing homes, hospitals, and more recently, a nascent physician quality reporting program.
In the private sector, a Mercer survey [purchase required] indicates 14% of large employers were using such “high-performance” health-provider networks in 2009, an increase from 12% in 2008.
According to the AMA, “Physicians’ reputations are being unfairly tarnished using unscientific methodologies and calculations.” The complaint appears to be based in part on concern that individual physician ratings may be derived from too few data points and some physicians may treat more severe or complex cases, and therefore their ratings will suffer – unfairly.
Health plans responding to the concerns contend they have dealt with the issue by rating physician groups instead of individual physicians.
The AMA’s contention has some validity, just as the health plans’ responses should be taken seriously.
The larger point is simple – networks based in large part on provider ratings are absolutely, inevitably the wave of the future. Some provider organizations, including the Minnesota Medical Association, have already bought into the trend, are engaging with payers, and helping to improve the assessment process.
The attempt by some ‘provider advocacy’ (my term) organizations to stop or hinder this is misguided and eventually counterproductive. Throughout history, guilds and labor organizations have tried to protect all members, including members they should censure, in an effort to keep control of their industry. Eventually, these efforts all fail.
What does this mean for you?
Providers would be well served to focus on substantive issues in provider rating systems, and realize protecting the bad actors hurts all providers and helps none.

Jun

Utilization review – A payer’s ethical responsibility

Posted by Joe Paduda on Tuesday, June 22nd, 2010 | Comments

Yesterday’s post about Mass General’s mishandling (to be kind) of a woman’s procedure and reimbursement thereof elicited a thoughtful email from the former CEO of a major work comp insurer.
Here’s what he said (identifying details removed to protect the source).
I got in trouble early on with (the payer’s) UR staff and attorneys because (after giving them multiple direct orders to clean up pre-auth letters) I began directing them to pay for procedures they approved but later wanted to deny. They would simply say that the procedure was appropriate for the injury but NEVER check the claim to see if it was part of the approved injury. For instance, they would approve a shoulder surgery as medically appropriate but the injury was for a knee. Had they checked the claim they would have seen the shoulder was not covered. Regardless, the UR folks approved it in pre-auth and the surgery was done.
Only afterwards, when the bill came in and the claims rep denied it did UR look at the claim more closely and support the adjuster. UR’s excuse was that in very small lettering at the bottom of the page it said that we (the payer) may not be liable if blah blah blah. I told them that was execrable and to clean up the process and language. For too long, the UR department did not and so I made them pay the claims and docked them in their evaluations.
If the doc and the patient did everything they were supposed to and got an OK in writing I felt it was the carrier’s ethical and moral responsibility to pay regardless of what the lawyers said.
Hear hear.
I’m of the opinion that this happens more frequently than one might surmise, but these types of determinations are kept quiet so as to not motivate more requests for treatment on non-covered body parts/conditions.
I’d also surmise that many non-approved treatments get paid due to the lack of an automated electronic connection between UR and bill review/claims. This is also an ethical issue of high importance, as it is a failure to act as a responsible fiduciary.
What does this mean for you?
How does your company handle these issues, and how do you feel about that?

Apr

Coventry – a good Q1 2010, but what about the future…

Posted by Joe Paduda on Friday, April 30th, 2010 | Comments

Coventry released its Q1 2010 financials today, and looking at the numbers one would have to be a naysayer to find fault. The company is successfully exiting the Medicare Private Fee for Service business, growing its Medicare, Medicaid, and Part D revenues, and has also seen an increase in commercial membership.
From a financial perspective, earnings are on a solid path and guidance is up over previous numbers. Medical Loss Ratios are well under control across all products, reserve development has been positive, enrollment in governmental programs is strong, and commercial membership is up by a bit.
While one would think it’s all good, I’m less sanguine.
Commercial membership was up due to an acquisition in Kansas, a region of growing interest at Coventry. Same store growth was actually negative by 20,000 members – not surprising given the economy, but nonetheless something to watch.
MLRs are being ‘managed’ more by rate increases than by ‘managing’ the medical; while Chairman and CEO Allen Wise talked a bit about the need to be the low cost provider, there wasn’t much – if any – discussion of exactly how Coventry was going to do this beyond identifying good providers and narrowing their networks to focus on those providers.
That’s all well and good, but any health plan can figure out who the ‘good’ providers are and strike a deal, and many of Coventry’s competitors are quite a bit larger, have lots more members, and therefore have greater leverage.
The skills, assets, and capabilities a health plan will need to survive and prosper in the future are fundamentally different from those that Coventry has deployed so adroitly in the last few quarters. Successful healthplans will be those with:
– market share that enables them to negotiate from a position of strength in each geographic market
– a strong, positive brand image in the employer and individual sectors
– skill and deep knowledge in medical management, including data mining and especially chronic care management
Less successful healthplans will:
– not be among the market leaders in their geographic targets
– have long and highly successful traditions of risk selection and underwriting, attributes that are of far less importance in the brave new post-reform world
– be late to the medical management party, with a culture more akin to the old indemnity insurance companies than a true Health Maintenance Organization.
When you step back and look at what’s made Coventry’s resurgence possible, it’s fairly simple – getting out of unprofitable businesses, risk selection and underwriting, careful management of the Medical Loss Ratio through pricing.
All valuable and necessary, but not nearly as important in the future as brand, share, and medical management

So what’s the future hold for Coventry?
Corporate culture is brutally hard to change, and Coventry’s culture is built on risk selection, tough price negotiation with providers, and an intense focus on the numbers. While one would think these are assets in any market and some of those skills are indeed critical in any market, some will actually be counterproductive in the post-reform world.
Despite what Coventry’s leadership says, and I’m sure believes, Coventry is not now, and will never be, the low cost supplier in most of their markets – they just don’t have the negotiating leverage with providers. In the past this was OK; what they didn’t have in buying power they more than compensated for with admirable skill in risk selection.
Coventry appears to be working closely with Wichita Kansas health care system Via Christi; owners of the HMO just bought by Coventry, and the provider for a new Medicare Advantage product offered by Coventry as well. If Coventry is going to be successful they are going to have to build lots of similar relationships fairly quickly. I would be remiss if I didn’t note that Coventry’s HMO/PPO share in the state is second (at 19%) to the Blues at 37%.
That skill will be of very little value in the future.

Mar

The ethics of clinical guidelines – the payers’ dilemma

Posted by Joe Paduda on Tuesday, March 30th, 2010 | Comments

In preparing for a talk on the ethics of comparative effectiveness I’m to give at the Geisinger Clinic in Danville PA in April, I’ve been interviewing medical directors from several health plans and workers comp insurers, along with physicians – both practicing and managing, in an effort to get their views on guidelines.
I’ve been somewhat surprised at what I’ve learned.
The real problem may not be payers’ efforts to deny medical care, but their willingness to ‘go along to get along’; to avoid making tough coverage decisions, and when in the slightest doubt, to approve the procedure/drug/treatment/therapy rather than run the risk of upsetting someone.
One would think payers would be keenly interested in supporting and using evidence-based clinical guidelines; costs would be reduced and outcomes improved, benefiting both patients and profits. And one might very well be wrong.
Payers operate in a market where public opinion matters a lot; if the payer has a negative image, it will be harder to convince employers and their employees to sign up for their health plan. It may also be harder to convince physicians and other providers to join and stay in their provider networks. And families may well be reluctant to carry an insurance card from a payer known for their tight controls on medical care.
We all know that restricting unnecessary care is not bad or immoral, but to the general public, it can certainly look like a profit-driven effort to cut costs, regardless of the effect on patients. To be sure, payers’ public efforts to terminate patients on the flimsiest of excuses and refuse coverage to anyone who might actually get sick haven’t helped their image. But the sense I get from the medical directors and practitioners I’ve spoken with is they are quite reluctant to deny treatment.
Part of this may be influenced by reality – when claims costs go up, so do premiums, and so does the health plan’s top line. There are few industries where built-in inflation results in near-double-growth same-store growth every year; health insurance is certainly one. This ‘reality’ is closely related to health plans’ motivations. Wall Street demands revenue growth, and for those health plans that are for-profit, their primary obligation is to their stockholders.
Allowing questionable treatments drives up revenues which benefits stockholders.
Of course, it isn’t anywhere near that simple or straightforward in the real world. Health plans’ profits are higher if medical costs are lower – at least over the short term. And most of the health plan execs I know are honestly trying to ensure their members get the care they need, care that they can’t afford if they approve any and all treatments no matter how ineffective.
But there is no question payers face an ethical dilemma, one complicated by patient demand, provider relations, market influences, and the obligation to their owners. (I’m not addressing the not for profits in this post)
A lot of Federal (taxpayer) dollars are going to be spent on comparative effectiveness research over the next few years, and if there’s a better use of my money I’m not aware of it. It is widely acknowledged that much of what we spend is wasted on unnecessary tests, advertising-driven consumer demand, unproven treatments and procedures that benefit device companies, specialists, and facility owners far more than patients.
It’s also equally clear that reining in those costs is going to be incredibly difficult, because much of it occurs in the somewhat grey area between procedures that are clearly useless or harmful, and those that are undeniably appropriate. And that grey area is where hundreds of billions are spent every year.
What does this mean for you?
Perhaps an ethical dilemma.

Feb

The Anthem Wellpoint mess: the other part of the story

Posted by Joe Paduda on Wednesday, February 24th, 2010 | Comments

There’s something missing from the debate/argument/shouting surrounding Wellpont’s rate increase announcement; nowhere, in any statement I could find, did the company or it’s critics address the core issue, Wellpoint’s inability to control costs.
Isn’t that what healthplans are supposed to do? Isn’t that a core part of their reason for existence?
If they can’t control costs they aren’t much more than transaction processors and provider contract aggregators.
Wellpont did make statements about the need to raise rates to address medical inflation and an aging population; what wasn’t presente was their solution to the problem.
Why not? Doesn’t one of the largest healthplans in the nation know how to control costs?
There’s no evidence that Anthem or United or Coventry or Aetna or Humana have any ability to manage medical care such that quality is high and costs aren’t. What is evident is their ability to raise rates to stay above medical inflation.
And therein lies the problem. Health plans, health insurers, both for- and not-for-profit, haven’t controlled costs. And outside the relatively minor investments in disease management and nascent provider profiling efforts, there is no evidence they are even working hard to figure it out.
I’m having a hard time understanding how the private sector is going to solve the health insurance crisis. Truth be told, Medicare’s blunt and clumsy approaches, for all theirany problems, have been more successful than any private plan.
What does this mean for you?
When costs get unaffordable, health plans will have no one to blame but themselves if they find their role reduced to administering a single payer program.

Feb

How’s Coventry doing?

Posted by Joe Paduda on Tuesday, February 16th, 2010 | Comments

Pretty well.
With the demise of health reform and the company’s continued focus on core businesses at the expense of ancillary or unrelated operations, things are looking up for the mid-tier managed care company. Last week’s Q4 2009 earnings call revealed a number of positive results while acknowledging significant ‘headwinds’ exist in the health plan business.
Since CEO/Chair Allen Wise resumed leadership of Coventry over a year ago, he’s done a creditable job turning things around despite a tough business environment. While there’s still a lot left to do, Coventry is clearly back on track, despite projecting commercial medical trend of 8.5% – 9% for 2010.
Wise et al dumped the Medicare fee for service business last year along with First Health Priority Services [note FHPS is NOT the workers comp bill review/network/case management business], moves that removed burdens while adding to the overall company’s profitability. There were a number of management changes as well, particularly in regional health plans and sales, that appear to be bearing fruit.
Coventry, like most other health plans, is facing declining enrollment. With employment numbers still troublesome, they are going to lose membership on the commercial sector side but will continue to raise prices to ensure profits grow.
One of the more encouraging statements in the call was from Wise, and pertained to medical management (an area long neglected by Coventry):
“we must do a better job in managing our members’ product care needs. And to that end, we’ve embarked on several initiatives and put considerable resources to improve this area. It’s difficult to do, but we understand that providing better care and more cost-effective care for our members is basic to stay in this business.”
Although this was specific to the Medicare Coordinated Care business, it is one of the first indications that Coventry is working to move from a company solely focused on risk selection and price arbitrage to one that is at least thinking about medical management.
Workers comp
Many MCM readers are interested in Coventry’s work comp operations, so here’s a few items of potential import.
First, Wise said:
“Some comments on our remaining businesses, which is our fee-based businesses. And that’s our workers’ compensation services, our rental network, and the federal, the FEHB business, which are all stable with improving results, well-positioned and produce a diversified revenue, earnings and cash flow stream while capitalizing on our core managed care capabilities. During 2009, we spent time addressing the administrative cost structure for these areas and improvement will continue during 2010.”
Coventry cut a lot of overhead in the WC unit in 2009 and earlier this year, and word is more reductions are on the way.
Second, and more obtuse, was a discussion about hospital unit costs and their impact on trend (which was described as ‘high single digits’). Coventry personnel described their efforts to recontract with hospitals to address trend, particularly as it effected Medicare costs. Not sure how or if this affects work comp, but some of Coventry’s work comp customers have been seeing significant increases in facility expenses.
Something to watch for.
What does this mean for you?
Watch your facility costs – particularly the price per service and volume of services, and especially for ER visits.

Feb

How many dollars are wasted on physical therapy?

Posted by Joe Paduda on Friday, February 12th, 2010 | Comments

Probably a lot. Perhaps most. And certainly a big chunk of the bucks your insurer/TPA is paying.
Unlike surgery, imaging, drugs, and other types of medical treatment, PT has long been a bit of a black art.
The clinical guidelines for PT that do exist (with one exception I’ll get to in a minute) usually say something like ‘two visits a week for four weeks’, without describing what is to be done during those visits, who’s supposed to do what gets done, and equally important, what shouldn’t be done.
That’s the primary reason physical medicine (PT and chiro) accounts for about one out of every five dollars spent on medical care in work comp, and would account for big bucks in group if it weren’t for tightly written benefit limits (x visits at a 50% copay).
Before the PTs out there start flaming me, know that I’m a believer in the ability of appropriate PT and have seen lots of data that support the use of PT in helping injured folks return to functionality. But I’ve also audited many work comp claims where the claimant had been to PT hundreds of times. I recall one where the claimant had over five hundred (500) visits over a three year period, with each PT note looking identical to the previous one. The payer couldn’t cut off the treatment because the treating physician had ordered it, and the clinical guidelines weren’t robust enough to force the issue in court.
Last month the NYTimes had an excellent article by Gina Kolata on just this issue. Here’s an excerpt:
“My doctor at the Hospital for Special Surgery in New York, Joseph Feinberg, seems to share my opinion [that much of PT is waste]. “Very often, I think the hot packs, cold packs, ultrasound and electrostimulation are unnecessary,” he said, adding, “For sure, in many cases these modalities are a waste of time.”
So has physical therapy been tested for garden-variety sports injuries like tendinosis? Or is it just accepted without much question by people who urgently want to get better?
It depends, says James J. Irrgang, a researcher in the department of orthopedic surgery at the University of Pittsburgh and president of the orthopedic section of the American Physical Therapy Association.
“There is a growing body of evidence that supports what physical therapists do, but there is a lot of voodoo out there, too,” Dr. Irrgang said. “You can waste a lot of time and money on things that aren’t very helpful.”

(not in Ms Kolata’s article, but helpful for perspective…)
Sometimes, manual stretching by a physical therapist can actually eliminate a sports injury, he said…They are the exceptions. More common are the “voodoo” treatments, he said. And what might those be? None other than ice and heat and ultrasound, Dr. Irrgang said.
Ice and heat, Dr. Irrgang said, “can control pain a little bit” but “are not going to take care of the problem.” The underlying injury remains.”
But the lack of credible evidence-based clinical guidelines can make it difficult for payers to contest unnecessary treatment, especially in those states where regulations make it tough for payers to stop paying for unnecessary treatments.
There are credible, thoroughly researched clinical guidelines specific to PT, with the best focused not only on how many visits over how many weeks, but what should be done during those visits. I’ve reviewed all of the guidelines used in work comp for PT, and the most thorough are published by Expert Clinical Benchmarks, a subsidiary of MedRisk. (MedRisk is an HSA client)
Guidelines can’t be developed in six months; rather they must be carefully researched, assessed by acknowledged experts in the field, tested against claims and medical billing data, and reviewed periodically. There are far too many companies touting their ‘utilization review’ programs which are based on little more than the ‘same old same old’ guidelines that have never worked in the past, or quickly-assembled amalgamations of journal articles, neither of which will be of any help in front of a work comp judge.
What does this mean for you?
If you’re serious about managing PT, start with science.
UPDATE
I received an email from a good friend and colleague in the PT business who felt my post was an insult.

Let me reiterate – there are good PTs, and bad PTs.
There is good PT management, and bad PT management.
Some PT is quite useful, appropriate, and necessary, and some is not. When payers don’t use solid clinical guidelines it makes it very difficult for adjusters, case managers, peer reviewers, and hearing judges to differentiate between appropriate and inappropriate PT. And there’s lots of inappropriate PT in work comp.
In the course of my consulting practice, I’ve seen dozens of cases where claimants received more than a hundred PT visits over a year, and many where the total number was well over two hundred. This type of utilization is simply indefensible, and unfortunately often results in adoption of regulatory control mechanisms.
Some states have chosen to use caps on visits as proxies for utilization management, with 24 appearing to be the most common limit. This is at best a blunt instrument, but nonetheless it appears to have resulted in lower costs for physical medicine in the jurisdictions that have adopted the ’24 visit rule’.

Jan

What’s replacing AWP?

Posted by Joe Paduda on Friday, January 29th, 2010 | Comments

As industry insiders have known for almost a year, Average Wholesale Price as published by First DataBank, is going away. Triggered by a settlement in a lawsuit filed in Boston in 2006, as of March 2011 FDB will no longer publish their version of AWP. (There’s a bit of disagreement as to timing, as one authoritative source indicates FDB is scheduled to discontinue the publishing of AWP in October 2011 (not March). I’ll find out what I can find out)
Regardless, FDB’s publication of AWP is going to cease. Sources indicate the National Association of Chain Drug Stores (NACDS) is suggesting a move to a new pricing methodology based on Wholesale Acquisition Cost, or WAC.
What’s with WAC?
WAC is the manufacturer’s list price for drug wholesalers and direct purchasers, excluding prompt pay or other discounts. (Note WAC may not bear much resemblance to the actual price paid, a problem it shares with AWP…)
NACDS and drug retailers would like to see a conversion to WAC; in fact NACDS has been advocating WAC for at least five years. WAC is generally accepted in broad swaths of the payer community; around ten states use WAC in their Medicaid pricing; the huge TriCare program is also WAC-based.
Here’s a bit of history.
The original legal case rested on FDB’s selection of McKesson as the sole source of drug pricing data. FDB’s AWP was based on the actual price that McKesson paid for the drug, plus a margin. For years the typical margin was 20%; six years ago McKesson changed the margin to 25% to make it ‘simpler to administer pricing internally’.
The price increase also earned McKesson points with its customers, retail pharmacies, who saw an immediate increase in profitability – profits on Lipitor immediately jumped three-fold after the 2002 increase. As part of the settlement in the 2006 case, FDB agreed to stop publishing prices two years after the finalization of the settlement (which is March of next year).
As cognoscenti are well aware, the suit has already had repercussions. On September 26, 2009, First DataBank and MediSpan, the firms that publish Average Wholesale Pricing tables changed their methodology to revert to the 20% margin, thereby reducing the drug’s AWP cost by almost four percent.
Wait, it gets more complicated. FDB is not the only publisher of AWP, and AWP, as published by RedBook and MediSpan, may be around in some markets for a while. The case for the persistence of AWP is that it is broadly used today, and RedBook and Medispan have not been charged with the kind of pricing manipulation that led to the FDB settlement.
Conversely, for some time AWP has been disappearing in generic pricing, where it is being replaced by MAC (maximum allowable cost), FUL (Federal upper limit), and other methodologies that seem to provide a more objective and less fungible baseline.
There’s another reason AWP may be on life support; it is broadly reviled as few payers believe, and with good reason, it has any real objective basis.
Implications for workers’ comp
As I reported several months ago, work comp regulators are wrestling with the issue, as 33 states base their work comp fee schedule on AWP (California doesn’t). Where they end up will be heavily influenced by the metric chosen by group/Medicare/Medicaid; drug spend in comp is about 2% of the nation’s total bill of $220 billion.

Category: Manage Care – Group Health