In most high-dollar workers’ compensation settlements (and in some liability cases), a Medicare set-aside is considered.

Cliff Goldstein

The intent of the MSA is to provide a fund from which future medical expenses will be paid on behalf of the injured person so that Medicare won’t be on the hook for payments if the person burns through the settlement money and has no other insurance to pay medical bills.

The parties typically submit proposed MSAs to the Centers for Medicaid and Medicare Services for approval, and these submissions include estimated future costs for drugs for the worker’s predicted life expectancy.

Complicated rules govern how the MSA should be calculated. MSAs include projected costs for prescription drugs, but these projections are based on bizarre and unrealistic drug prices. CMS guides require that the drug be priced based on AWP (average wholesale price) as reported in the Red Book. 

The Red Book AWP price has nothing at all to do with the actual retail cost of the drug, and AWP is a misnomer. AWP has nothing to do with the average price paid by pharmacies to acquire the drug at wholesale. It is merely a number given by a manufacturer to the Red Book with no disclosure or explanation of how it was derived and with no verification of any price actually paid. 

CMS, the federal courts and the U.S. Inspector General concluded long ago that AWP amounts are “fictitious” and “totally unrelated to the amounts paid at wholesale.” For reasons unknown, CMS continues to require use of the Red Book AWP.

Using real average wholesale prices instead of fictitious Red Book AWPs can have a staggering impact on the amount of a workers' compensation MSA. For example, in a recent case, a worker had been taking a drug for two years and was expected to continue the drug indefinitely. The worker was 40 years old at the time of the settlement, and the drug was priced at an online retail pharmacy for $5 a month. The worker’s predicted life expectancy was another 40 years, so one would have expected that the MSA would include a set-aside of $2,400 ($5 per month for 40 years).  

But because the guides required the use of the Red Book, there was a ridiculous result.  The drug retailed for $5 but had a Red Book AWP of $1,296. This is not an unusual case. The AWP in the Red Book can be 100 to 150 times higher than the actual cost of buying the drug at retail. 

The MSA is based on a presumed lifetime on the drug, thus compounding the error, and the MSA, which should have been $2,400 if real prices had been used in the calculation, soared to $622,080 using the fictitious price listed as AWP in the Red Book. 

AWP has been the source of litigation, challenges and legislative reforms for decades.  Ironically, CMS no longer allows Red Book AWP as a basis for pricing drugs under Medicare. Federal comp programs no longer allow the Red Book AWP to be used in their programs. Nearly all private insurance carriers and many state comp systems got rid of the Red Book AWP years ago. But because the CMS guides have not yet been changed to drop reference to the Red Book in pricing drugs for MSAs, nearly all MSAs are dramatically overpriced, and carriers and employers have been hit for billions of dollars in unnecessary expenses to settle cases.

Carriers and employers can and should get much more aggressive about challenging the CMS double standard on use of Red Book AWP for drug pricing. One strategy that should be considered is the filing of a declaratory judgment action on behalf of a representative group of self-insureds or insurers seeking an injunction against CMS’ continuing use of the Red Book AWP as the basis for drug pricing for WCMSAs.  

Chances for successful litigation have increased due to the Supreme Court’s decision in Loper Bright Enterprises. This decision overturned the longstanding doctrine established in Chevron U.S.A. that directed courts to defer to an agency’s interpretation of a statute in circumstances in which the law in question is vaguely written. This decision may pave the way for a challenge to the portion of the CMS guides requiring the use of Red Book AWP in pricing drugs for WCMSAs. 

The meaning of AWP is ambiguous, as demonstrated by the fact that in other contexts, CMS itself outlawed use of Red Book AWPs. In light of Loper, on review by a federal court, the court does not have to defer to and accept the administrative agency’s position in a knee-jerk fashion. Instead, the federal court itself can resolve the ambiguity even if such resolution is contrary to the position of the administrative agency. The time may, therefore, be ripe for a direct challenge to CMS’ designation of the Red Book as a pricing standard for AWP.

Contemporaneously, a coordinated industry effort should be undertaken to lobby appropriate government officials to amend the guides to allow for use of a more realistic measure to set drug prices in WCMSAs.

By increasing focus on this issue, by initiating litigation and by lobbying for changes to the CMS guides, perhaps there will be movement to use normal drug pricing for WCMSAs. 

Cliff Goldstein is licensed to practice law in Pennsylvania and maintains an office in Merion Station.