OGC Opinion No. 07-04-16

The Office of General Counsel issued the following opinion on April 25, 2007, representing the position of the New York State Insurance Department.

RE: Reimbursement for Chemotherapy Drugs at Average Wholesale Price

Question Presented:

Is ABC Insurance Company (ABC) in compliance with its contract language when it reimburses insureds for injectable chemotherapy drugs administered by a non-participating health care provider at the Average Wholesale Price (AWP), even though its contract provides that it will make reimbursement based upon the reasonable and customary charge as defined in the contract?

Conclusion:

No. ABC is not in compliance with its contract language, since there is nothing in the contract that explains how the AWP relates to the reasonable and customary charge as defined in the contract.

Facts:

Mr. A filed a complaint with this Department against ABC alleging that ABC failed to make adequate reimbursement for chemotherapy drugs administered to his wife, Mrs. B, who is a cancer patient at DEF hospital, a comprehensive cancer center in New York City. DEF was a non-participating provider when the services were rendered, but now participates with the Plan. Mrs. B has primary coverage under an individual contract with the Plan and secondary coverage under her husband's family contract with the Plan. ABC administers the medical portion of the Plan.

At all relevant times, the ABC certificate for the Plan dated July 1, 2000 provided, in pertinent part:

Basic Medical Program (A Non-Participating Provider)

Before your covered expenses can be reimbursed, you must meet an annual medical deductible. If you have Family coverage, your enrolled spouse/domestic partner must meet an annual deductible. . . .

You submit claims to ABC. The Plan reimburses you 80 percent of the reasonable and customary charges for covered services, or the actual billed charges, whichever is less.

You pay the remaining 20 percent (coinsurance) until you and your family meet the coinsurance maximum. You also pay any charges above the reasonable and customary amount.

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O. Covered Medical Expenses under the Basic Medical portion of this Plan means the reasonable and customary charges for covered medical services performed or supplies prescribed by a doctor, except as otherwise provided, due to your sickness, injury or pregnancy.

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P. Reasonable and Customary Charge means the lowest of 1. the actual charge for a service or supply; or 2. the usual charge by the doctor or other provider for the same or similar service or supply; or 3. the usual charge of other doctors or other providers of similar training or experience in the same or similar geographic area for the same or similar service or supply. The determination of the reasonable and customary charge for a service or supply is made by ABC. You are responsible for any amount billed by a non-participating provider which exceeds the reasonable and customary charge, in addition to the annual deductible and coinsurance amounts.

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What is covered under the Basic Medical Program (non-participating providers)

Under the Basic Medical Program, covered medical expenses include charges for the following services or supplies: . . . R. Miscellaneous services-The following services are covered under the Basic Medical Program when not covered by JKL: . . . (f). Chemotherapy . . .

The insurance contract provides that ABC will pay the reasonable and customary charge for covered services, which includes the administering of chemotherapy drugs by a non-participating provider. However, ABC states that it actually covers injectable chemotherapy drugs at 100% of the AWP, even though the contract does not specify how the AWP relates to the reasonable and customary charge. DEF has informed the Department that its charges for such drugs are based upon the AWP multiplied by 1.59 to cover the costs of shipping, storage and disposal of expired drugs. Since the amounts billed by DEF for injectable chemotherapy drugs exceed the AWP, DEF refused to pay a significant portion of the insured's medical bills, in the amount of $42,709.

The Department's Consumer Services Bureau requested that the insurer contact DEF to assist Mr. A in negotiating the amount being billed, since DEF now participates with the Plan. DEF has agreed to forgive half of the amount being billed, leaving the insured with out of pocket costs of $21,000. ABC has refused to pay the $21,000 on the ground that the AWP is the equivalent of the reasonable and customary charge as defined in the contract and will make no additional payment.

Analysis:

It is the Department's position that insurers, if choosing to reimburse at AWP or a percentage of AWP, should accurately and expressly disclose their methodology of reimbursement to insureds.

While ABC's certificate, as quoted above, defines the term reasonable and customary charge, it fails to indicate how the AWP relates to the reasonable and customary charge as defined in the contract. Specifically, ABC has failed to show that the AWP is the lowest of: 1) the actual charge for the chemotherapy drugs; 2) the usual charge by other doctors or other providers of similar training or experience; or 3) the usual charge of doctors in the New York City area or a similar geographic area for administering chemotherapy drugs.

In its October 17, 2005 letter to the Department, ABC, citing Freundlich v. Metropolitan Life Ins. Co., 8/10/95, N.Y.L.J,¹ stated that it has discretion to use available tools to determine what a reasonable and customary charge is. ABC stated that, using its discretion, it took into account the amount that doctors in good faith would charge for physician-administered drugs and determined that, absent extenuating circumstances or other distinguishing factors, reimbursement at AWP is a reasonable reimbursement amount.

Although ABC may have the discretion to determine what a reasonable and customary charge is, any such determination must be consistent with its contract language. Moreover, ABC has failed to provide any documentation to the Department regarding what other doctors would charge for physician-administered chemotherapy drugs.

ABC further argues in its October 17, 2005 letter that the AWP, which is the list price that is reported by drug manufacturers and distributors, is a reasonable reimbursement methodology. ABC cites Midpoint v. Connecticut Gen. Life Ins. Co., 152 F. Supp. 2d 306 (S.D.N.Y. 2001),² for the proposition that AWP is an industry standard that is widely accepted by physicians, governments and managed care companies, as reasonable and customary payment by out-of-network providers. ABC also states that government studies have shown that the AWP is typically significantly higher than the actual prices paid by physicians and provides them with a profit margin.

Although ABC asserts that AWP is a reasonable reimbursement methodology, it maintains that many of the billed charges for physician-administered drugs, such as chemotherapy drugs, are not related to the value of the drugs actually provided, because these charges have been deliberately inflated by many doctors or other providers. ABC states that reimbursement at the highly inflated rates was never contemplated by the Plan and would frustrate the purposes of the Plan.

However, the Department is not requiring ABC to reimburse insureds at inflated rates, but is simply requiring that ABC comply with its contractual obligations. One alternative is for ABC to ask DEF to moderate its demands by reducing or eliminating any amounts owed by the complainant. Regardless, however, ABC is not in compliance with its contract language based upon the information that it has submitted to the Department. If ABC wishes to use the AWP to reimburse insureds for physician-administered chemotherapy drugs, the contract must clearly disclose to insureds how the AWP relates to the reasonable and customary charge. Otherwise, given ABC's current contract language, it may not use the AWP as a reimbursement methodology.

For further information you may contact Associate Attorney Pascale Jean-Baptiste at the New York City Office.

¹ Freundlich v. Metropolitan Life Ins. Co., N.Y.L.J., August 10, 1995, at 24 (N.Y. Civ. Ct. August 10, 1995) (holding that MetLife's methodology for calculating the reasonable and customary charge, which involved the use of an external database relying on the amount of charges that MetLife received annually and the number of providers that participated in the plan, did not violate the terms of the plan, since MetLife had sole discretion and wide latitude in calculating the reasonable and customary charge).

² Midpoint v. Connecticut Gen. Life Ins. Co., 152 F. Supp. 2d 306 (S.D.N.Y. 2001) (holding that evidence that most other providers charged the AWP for Gammagard treatment, a drug used for intravenous immunoglobulin therapy, while plaintiff provider charged 2.5 times the AWP, justified the insurer's rejection of the charges under the policy's reasonable and customary coverage provision); but see Schwartz v. Oxford Health Plans, Inc., 175 F. Supp. 2d 581 (S.D.N.Y. 2001) (holding that insurer's methodology of reimbursing insured for chemotherapy drugs at 110% of the AWP was not reasonable since insured was not a wholesaler and that it would have been reasonable for insurer to determine the reasonable and customary charge based on what other comprehensive cancer centers in New York City charged for similar outpatient services).