McKesson Corporation Sued For Inflating Drug Prices


Hartford, CT (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 elderly."

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 drugs.

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 drugs.

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 "increasing."

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 drugs.

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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