Corporation Sued For Inflating Drug Prices
(CompNewsNetwork) - Connecticut Attorney General Richard Blumenthal has announced a lawsuit
against McKesson Corporation, a pharmaceutical distributor, for artificially inflating drug
costs incurred by Connecticut consumers and state-funded health care programs.
Blumenthal sued on behalf of Department of Social Services (DSS) Commissioner Michael P.
Starkowski and Department of Consumer Protection (DCP) Commissioner Jerry Farrell, Jr.
The inflated costs affected several top-brand drugs, including Allegra, Azmacort,
Celebrex, Flonase, Lipitor, Neurontin, Nexium, Prevacid and Valium. These drugs are used to
treat a variety of ailments such as asthma, allergies, pain, arthritis and cholesterol.
The lawsuit accuses McKesson of conspiring with First DataBank to inflate the average
wholesale prices (AWP) for their pharmaceuticals - creating a larger "spread" between the
cost by the state and Medicare program and the actual charges to health care providers,
such as physicians and pharmacies.
Because federal and state agencies, like DSS, use AWP when setting pharmaceutical
reimbursement rates, providers could increase their profits by prescribing or dispensing
drugs from McKesson. The effect was to artificially raise reimbursement amounts and
provider profits, which ultimately increased McKesson's market share at the expense of
taxpayers and consumers.
"Millions of dollars are due to taxpayers and consumers who paid inflated drug costs as
a result of McKesson's illegal and deceptive practices," Blumenthal said. "Our lawsuit
demands money back, because McKesson manipulated the drug market - conspiring to inflate
costs for hundreds of drugs. The victims of this surreptitious scheme included patients and
taxpayers who were overcharged by companies seeking higher sales and profits. McKesson
exploited publicly funded programs that serve our most vulnerable citizens. My office will
fight relentlessly for restitution and penalties, and continue our vigorous ongoing
industry-wide investigation into the pharmaceutical market."
Commissioner Starkowski said, "With the cost of pharmaceuticals a huge budget driver in
state and federal health care programs, constant vigilance is needed to protect the
investment by taxpayers in health coverage for children, people with disabilities and the
Blumenthal sued pursuant to state consumer protection laws and the federal Racketeering
Influenced and Corrupt Organizations Act (RICO).
The lawsuit alleges that McKesson and co-conspirators, including First DataBank,
allegedly engaged in racketeering activity in an effort to raise, fix and maintain the AWPs
of brand-name drugs at 25 percent over WAC, and raised prices in the market brand-name
In the pharmaceutical marketplace, those in the retail distribution chain - national and
independent pharmacies, mail order houses and other retailers - purchase drugs on the basis
of the published wholesale acquisition cost (or WAC), a benchmark price established by
manufacturers and used by them and wholesalers to establish prices to retailers.
Although retailers buy pharmaceuticals on the basis of WAC, they get paid or reimbursed
for branded drugs based on the AWP. The greater the difference between the AWP and WAC, the
greater the profit potential for middlemen like pharmaceutical benefit managers.
AWPs are compiled and published by publishing companies, including First Data Bank, so
that the various actors in the marketplace can determine the AWP at any moment in time for
the approximate 65,000 drugs in the marketplace.
Consumers, health and welfare plans, health insurers and governmental entities,
including the state's Medicaid program, rely on the AWP in purchasing prescription
First Data represented to those in the pharmaceutical market that it derived the WAC/AWP
markup either from manufacturers or by conducting a "survey" of wholesalers to verify
prices reported by the manufacturer. First Data further represented that AWP represents the
"average of prices charged by the national drug wholesalers" - including McKesson - and
that the number of surveys it was conducting to determine the published AWP was
Historically, in order to arrive at the AWP for branded drugs, manufacturers and/or
wholesalers applied a markup of 20 to 25 percent to the WAC. Whatever markup was given to a
particular branded drug "stuck" with that drug indefinitely. Until 2002, there was
variation, supposedly based on manufacturer direction or on First Data's wholesale
surveys, in the difference between the WAC to AWP spread for hundreds of brand-name
In reality, First Data and McKesson secret agreed how the WAC-to-AWP markup would be
established for hundreds of brand-name drugs. The two companies agreed to artificially
raise and fix the price on brand-name drugs.
As part of this agreement, First Data, relied only on the WAC-to-AWP markup provided by
McKesson as the basis for its published AWP and did not "survey" any other wholesalers.
Sometimes, within a day or less of requesting a price change or markup from McKesson, First
Data responded by increasing the markup.
McKesson and First Data, without any legitimate economic justification or competitive
benefit, raised the WAC-to-AWP spread to 25 percent for over 400 brand-name drugs that
previously had received only the 20 percent markup amount.
The scheme enabled McKesson to provide a benefit to its pharmacy clients because
pharmacies were reimbursed - at artificially inflated rates - by health plans, CMAP and
other state programs that rely on the AWP.
First Data allegedly agreed to the scheme in order to ease its burden of having to
establish and maintain accurate spreads.
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