Commonwealth Court Invalidates Use of “Red Book” In Calculating Prescription Pricing


Reacting to regulatory overreach, the Commonwealth Court has found that the use of the “Red Book” for determining the average wholesale price (“AWP”) of prescription drugs was inconsistent with the provisions of the Pennsylvania Workers’ Compensation Act (the Act) and the cost containment regulations due to the Red Book having inaccurate or excessive pricing. In the case of Federated Insurance Company v. Summit Pharmacy (WC Fee Review Hearing Office), No. 115 C.D. 2023, issued on January 2, 2024, the Commonwealth Court vacated a Hearing Officer’s Decision and remanded the matter for further proceedings and a new determination as to the appropriate AWP of the prescriptions in question. 


This matter came before a Fee Review Hearing Officer on petitions filed by both the Insurer, Federated Insurance Company, and the Pharmacy, Summit Pharmacy, regarding prescriptions provided to a claimant for a work-related injury.  The Pharmacy charged $74,011.81 for generic prescriptions provided to the claimant and the Insurer determined that the AWP of those prescriptions was only $1,511.93.  The Pharmacy challenged the bills by filing multiple applications for fee review, which were then appealed to a Fee Review Hearing Officer.  After extensive testimony from expert witnesses presented by both Insurer and Pharmacy, the Hearing Officer found that Insurer was required to pay Pharmacy an additional $72,500.00, in accordance with the AWP of the prescriptions pursuant to the prices in the Red Book.  The Insurer appealed, arguing that Red Book values were not average wholesale prices as required by the Act.


The Commonwealth Court found this to be a case of statutory construction regarding the meaning of AWP under Section 306(f.1)(3)(vi)(A) of the Act, which provides that pharmacies should be reimbursed at 110% of the AWP of the product.  Average wholesale price is not a term defined in the Act or the cost containment regulations.  In prior cases, the Commonwealth Court in Indemnity Insurance Company of North America v. Bureau of Workers’ Compensation (Insight Pharmacy), 245 A.3d 1158 (Pa. Cmwlth. 2021), held that the AWP is a price used by the industry, not one charged by a single manufacturer, and is a number to be derived by averaging wholesale prices of all manufacturers or wholesalers. 

While the Insurer in Indemnity Insurance was not successful in its position to reduce the prescription bills, the Commonwealth Court in this matter has finally agreed with the insurance industry that the Red Book values do not generally represent the AWP of prescriptions as contemplated by the Act and the Cost Containment Regulations.  The Court noted that the AWPs listed in the Red Book are figures provided by the manufacturer of the prescription, the publisher of the Red Book is a private publisher, and the publisher does not independently analyze the data provided by the manufacturer to ascertain the amounts paid for the product by pharmacies and wholesalers.  The Court suggested that the Red Book values are similar to the manufacturer’s suggested retail price, or “sticker price” of a car.  The experts who testified before the Hearing Officer on behalf of Federated and Summit Pharmacy cited an example that a prescription for Prozac costs about $9.00, yet the Red Book value could be as much as $2,000.00.  Hence, this is further proof that the Red Book values are inflated, fictitious, and do not represent the average wholesale prices of prescriptions as intended by the Act and Cost Containment Regulations.

The Court further directed the Bureau to promptly identify and publish in the Pennsylvania Bulletin a “Nationally recognized schedule” of AWP to be used in payment disputes for prescriptions in Pennsylvania workers’ compensation claims.  The proceedings before the Hearing Officer are to be stayed pending the publication of a new schedule for payment of prescription medications.


This is a very favorable decision for insurers and self-insured employers in Pennsylvania and appears to be consistent with the Cost Containment Regulations and the legislative intent.  The Court has finally determined that the Red Book values are essentially fictitious numbers and do not represent the AWP of prescriptions. We expect that going forward, this Decision is going to have a big impact on the cost of claims regarding prescription medications.   We look forward to the Bureau publishing new standards in the upcoming weeks, as bills still need to be paid, and will watch to see whether the Pharmacy appeals this Decision. Please reach out for specific advising on any billing examples that arise in the interim.

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