February 26, 2024


In a recent Pennsylvania decision, the Commonwealth Court has rejected the Bureau of Workers’ Compensation’s long-term use of the “Red Book” for valuing prescription drug prices.  This represents a significant win for insurers struggling to deal with the aggressive billing tactics of online pharmacies, and should result in a substantial reduction in payments required for prescription drugs in the Workers’ Compensation system.


The Workers’ Compensation Act requires insurers to pay for medical treatment (including prescription medication) that is reasonable, necessary, and causally related to an employee’s injury.  In prior efforts to address the rising cost of medical care for work injuries, the General Assembly imposed medical cost control legislation.  Included in this legislation was Section 306 (f.1)(3)(vi)(A), which directs that the “reimbursement for drugs and professional pharmaceutical services shall be limited to one hundred ten per centum of the average wholesale price (AWP) of the product calculated on a per unit basis, as of the date of dispensing.”  77 P.S. 531 (3)(vi)(A) (emphasis added).

The rationale behind adopting the AWP as the benchmark for the WC system was to attempt to limit the cost of such drugs.  For context, the supply chain of most prescription drugs involves multiple price points.  A given drug may be manufactured at a variety of different locations.  While pharmacies can, they often do not buy directly from manufacturers for logistical reasons.  Rather, manufacturers usually sell to a wholesaler, who then in turn sells the drugs to the pharmacies.  The manufacturer realizes a profit upon sale to the wholesaler.  The wholesaler then increases the price of the drug upon sale to a pharmacy to realize its own profit.  Likewise, the pharmacy then further increases the price upon sale to the end user.  The “average wholesale” generally means the average price paid by the wholesaler, which is the earliest and presumed lowest price point in this sequence. 

Unfortunately, this pricing system has proven to be more complex in practice.  The prices of prescription drugs are often complicated by various negotiated price differences, discounts, and rebates applied throughout the above-described process.  A lack of transparency in this process has been cited as one of the reasons for high drug prices.  The high cost of prescription drugs: causes and solutions, S. Vincent Rajkumar, Blood Cancer Journal, June 23, 2020, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7311400/.

One issue that arose following the passage of the medical cost control legislation was that the General Assembly never defined the process for calculating the “AWP” of a drug.  In this vacuum, the Bureau came to accept the prices published in the “Red Book” as a reliable reflection of this AWP.  The Red Book is a privately published electronic compendium of pharmaceutical wholesale drug prices, but the Bureau’s policy of utilizing it exclusively had been questioned by insurers and defense counsel for some time.  Criticisms included both that the compendium is privately owned and controlled, as well as the fact that there are other such compendiums available which list different wholesale prices for the same drugs.

The issue has become a more pressing concern in the last few years, as recent Commonwealth Court case law has empowered providers and pharmacies in the Medical Fee Review process.  This system permits such entities to challenge the prices paid by Workers’ Compensation insurers for their services and/or prescription drugs.  Recent decisions have hollowed out traditional mechanisms used to check questionable medical bills, and this is being exploited by such entities.

The Decision

Fortunately, the Court’s new Decision in Federated Insurance Company v. Summit Pharmacy (Bureau of Workers’ Compensation Fee Review Hearing Office), No. 115 C.D. 2023 (January 2, 2024) may now offer some limited relief to insurers.  In this case, the Insurer had been ordered to pay approximately $72,500 to Summit Pharmacy for prescription medications it had provided to an injured worker.  Consistent with its stated policy, the Bureau utilized the Red Book to determine the price of the relevant drugs.  The Insurer, however, explicitly challenged the use of this compendium.  It presented evidence showing that the publisher of the Red Book simply reports the manufacturer’s suggested AWP, and not the actual price paid by wholesalers.  This is similar to valuing a car only by using the MSRP (or “sticker price”) instead of the cost actually being paid by customers.  The evidence further showed that the Red Book price is heavily discounted in the marketplace as a result of competition.  Thus, the net effect of the Bureau’s unilateral adoption of the Red Book was to artificially inflate the price for prescription drugs. 

This has allowed pharmacies to charge significantly higher prices for drugs than what was expected under the legislative system.  A particularly egregious example of this effect was the price discrepancy for a bottle of Prozac.  The Red Book valued such bottle at $2,000, while the NADAC indicated a value of only $9!  The NADAC (National Average Drug Acquisition Cost) is a retail price survey that focuses on the actual cost paid by community pharmacies.  This is based upon a price point later down the supply chain, and thus might be expected to report a higher price compared to the AWP.  However, because it is based upon actual prices paid, it provides greater transparency and likely more accurately represents the true prices of prescription drugs.  The vast difference between the two listed prices therefore hints that pharmacies have been able to leverage this discrepancy to recognize inflated profits despite medical cost control goals.

Ultimately, the Court agreed with the Insurer and found that the Bureau’s reliance on the Red Book was improper.  It then directed the Bureau to promptly identify a new  “nationally recognized schedule” that it will use to determine the correct AWP of prescription drugs and give notice in the Pennsylvania Bulletin.  It is unclear, however, how long the Bureau will require to complete this process.  As such, the next definitive round in this ongoing struggle will have to await the Bureau’s action.


In the meantime, however, insurers should be conducting a review of their own evaluation methods of the AWP for submitted drugs.  Prior case law, Indem. Ins. Co. of N. Am. v. Bureau of Workers’ Comp. Fee Review Hearing Office, 245 A.3d 1158 (Pa.Cmwlth. 2021), had already suggested that insurers could argue that an alternative to the Red Book pricing should be utilized in a case-by-case basis.  Now, with the Red Book being thrown out, well-supported insurer arguments regarding the AWP of a drug based upon alternative sourcing will likely see greater effectiveness in the Medical Fee Review setting.  Insurers should review other compendiums and compare their pricing methods to other indexes to see which may best represent the “true” AWP of a given drug.

Furthermore, insurers with open Medical Fee Review cases involving prescription drugs may wish to consider requesting a stay until the Bureau makes its updated compendium selection.

We will continue to monitor and provide updates once a new index is chosen.  However, regardless of the Bureau’s next choice, Federated Insurance Company can only be viewed as a great victory in the battle against excessive prescription drug pricing.

If you have any questions about the recent Decision, its impact, or future actions that should be taken to make use of it, please do not hesitate to contact Ryan Murphy, Esq. at rmurphy@c-wlaw.com or (717) 390-3020.


The information in this article is provided for general informational purposes only and may not reflect the current law in your jurisdiction.  By reading this article, you understand that there is no attorney-client relationship between you and Cipriani & Werner, P.C. or any of our attorneys.  No information contained in this article should be construed as legal advice from Cipriani & Werner, P.C. or the individual authors.