A recent decision by the Commonwealth Court in the case of Federated Mutual Insurance Company v. Summit Pharmacy has brought to light a critical issue that validates longstanding concerns voiced by the PA Chamber. This decision, which may have significant implications for Pennsylvania employers, addresses the requirement that employers and insurers use the “Red Book” for determining the Average Wholesale Price (AWP) of prescription drugs prescribed under the state’s workers’ compensation program.

Under Pennsylvania’s Workers’ Compensation law, employers are responsible for all prescription drug costs at a rate of 110 percent of AWP. Until now, the state Bureau of Workers’ Compensation required employers to utilize a publication known as the Red Book for determining AWP. The PA Chamber and employers have argued for years that Red Book prices are frequently not aligned with actual average wholesale prices, particularly for generic drugs, and facilitate abuse of the system, such as charging exorbitant prices for compound creams and other questionable treatments. The court’s ruling asserts that the Workers’ Compensation Act mandates the use of actual Average Wholesale Prices and the Red Book is not accurate.

Consequently, the Red Book is no longer considered a valid tool for pricing drugs in the Pennsylvania workers’ compensation system, and the Bureau has been directed to devise a new pricing schedule.

This change, which is effective immediately, significantly alters the landscape for processing and paying prescription drug bills. The decision suggests that payers relying on third parties, such as Third Party Administrators (TPAs), Pharmacy Benefit Managers (PBMs), or repricers, may have inadvertently overpaid for drugs, as these entities often use Red Book AWP as a starting point.

The court’s emphasis on utilizing a more accurate, nationally recognized schedule based on actual average wholesale prices could lead to substantial reductions in payments, especially for generic drugs, potentially lowering costs by up to 99 percent.

To illustrate the significance of this decision, consider the case of Duloxetine, the generic alternative for Cymbalta, for which the Red Book AWP is listed at $777 compared to the real Average Wholesale Price of $13. The Commonwealth Court’s decision suggests that payments should be based on the actual amount paid by pharmacies at wholesale, which could lead to a substantial cost reduction for employers.

The PA Chamber has led efforts for years to fight abuse and over-charging of prescription drugs in workers’ compensation and address prescription drug addiction among injured workers. For example, the PA Chamber championed legislation to establish a prescription drug formulary, which other states like California and New York have passed to address over-prescribing and addiction in workers’ compensation. While that legislation passed both the PA House and Senate, it was unfortunately vetoed by then-Gov. Tom Wolf.

Employers are left with many questions following the court decision, including implications for prior payments, settlement amounts, and the potential impact on Workers’ Compensation Medicare Set-Aside Arrangements (WCMSAs). While it is possible the decision may be appealed, the Commonwealth Court directive is clear – bills must now be processed according to the new guidelines. If you have questions while we await further guidance from the Bureau of Workers Compensation, please feel free to contact the PA Chamber.