Lawsuit a Bid to Slash Drug Costs
    By Steve Johnson
    The San Jose Mercury News

    Friday 22 December 2006

A proposed settlement would roll back benchmark drug prices, which a suit claims have been illegally inflated.

    A federal class-action lawsuit and proposed settlement involving an obscure San Bruno database service and a San Francisco wholesaling giant has revealed a drug-pricing system critics claim has gouged consumers out of billions of dollars.

    The suit filed in 2005 accuses First DataBank and McKesson of conspiring to inflate benchmark prices published by First DataBank that are widely used to set retail drug prices. As a result, the suit claims, consumers and insurers were stuck with $7 billion in unnecessary costs for drugs from 2001 to 2005.

    Executives at both companies have denied the allegations.

    "The claims against McKesson have no merit, and we will defend ourselves vigorously," said Kate Rohrbach, spokeswoman for the San Francisco company.

    First DataBank President Donald Nielsen issued a statement insisting his company "has engaged in no wrongdoing."

    Nonetheless, in a settlement that could be final within months, the San Bruno company in October agreed to scale back the benchmark prices it publishes. The deal could save consumers more than $4 billion next year alone, according to an analysis by plaintiffs.

    "There is absolutely no doubt that it's going to reduce prices," said Alex Sugerman-Brozan of the Prescription Access Litigation Project in Boston, one of the groups that filed the suit pending in U.S. District Court in Boston.

    The rising cost of prescription medicines has stirred national concern. Annual price increases by drug manufacturers for commonly used prescription medicines have ranged from 4.1 percent to 7.1 percent for the past six years, far outpacing the 1.6 percent to 3.4 percent annual increases in the consumer price index, according to AARP, formerly the American Association of Retired Persons.

    The Little Guy

    However, individual consumers might not see large savings unless they purchase a lot of prescription medicine.

    Barney Gorter, a 61-year-old retired government social services employee who lives outside of Milwaukie, Ore., believes the alleged scheme inflated the price of the Lipitor he has been taking for four years to keep his cholesterol under control.

    One of three individual plaintiffs in the suit, Gorter estimates he was overcharged about a dollar a month. It adds up when multiplied by the millions of prescription drug users nationwide, he said.

    "As a consumer, I don't mind a profit. I just don't want people profiteering," Gorter said. "The little guy doesn't have a chance, and I guess I'm a little guy."

    Others say consumers might not benefit at all from the settlement.

    For one thing, some experts doubt the published benchmarks actually led to gouging. And if they are scaled back, pharmacies can find other ways to maintain their profits, according to drug-industry consultant Adam Fein. Consequently, estimates of a $4 billion savings "are very inflated," he said.

    The published average prices at issue are supposed to roughly mirror what pharmacies pay wholesalers for drugs.

    The pricing benchmarks were devised in the 1960s by California's Medicaid officials, who hoped to standardize drug-purchase reimbursements, said Mick Kolassa, a marketing consultant who has studied its history.

    "They came up with it as a way to make it easier to process all these claims," Kolassa said.

    The officials estimated that average wholesale prices at the time were 20 percent more than what drug manufacturers actually charged wholesalers. So the state let pharmacists bill Medicaid the average wholesale price plus a drug dispensing fee to give them a profit.

    Lacking a better measure, other states and the federal government began using the published benchmarks, too. But they no longer reflect what anyone actually pays and are unrealistically high, critics contend.

    Settlement

    For one thing, competition over the past decade has forced drug wholesalers to trim their markup to pharmacies. Instead of selling drugs at 20 percent more than what manufacturers charge, wholesalers generally have cut that to about 3 percent, industry experts say.

    Moreover, Medicaid officials and most private insurers now reimburse pharmacies at rates well below the 20 percent markup.

    A federal commission reported last year that the average wholesale price "does not reflect a valid benchmark." It's commonly joked within the industry that the letters AWP mean "ain't what's paid." As a result, the federal government has begun reducing its reliance on the index.

    Nonetheless, average wholesale prices are still widely used by wholesalers and stores as a starting point for setting prescription prices. And many of them buy lists of the prices from First DataBank, a subsidiary of Hearst, which owns the San Francisco Chronicle and helped finance MediaNews' purchase of the Mercury News.

    First DataBank maintained the 20 percent markup over wholesale prices until late 2001 or early 2002, the suit claims. Then the company allegedly boosted the markup to 25 percent on hundreds of drugs, from the allergy medicine Allegra to Celebrex, an arthritis treatment.

    First DataBank has told its customers it derived the prices by surveying drug wholesalers and manufacturers.

    But the lawsuit claims the company conspired with McKesson to artificially raise the markup, triggering what it says was a $7 billion windfall over a five-year period for pharmacies and others who sell drugs to the public.

    The suit contends both McKesson's wholesale business and its limited retail operations stood to benefit from inflated drug prices.

    First DataBank's alleged motive was to increase demand for its lists, the suit contends.

    Under the proposed settlement, which doesn't include McKesson and has yet to be approved by the judge, First DataBank has agreed to roll back the price markup on its lists to 20 percent from 25 percent and to stop publishing the benchmark in two years.

    The statement issued by First DataBank's president emphasized that the settlement would not require the company to pay damages. David Manin, First DataBank's marketing director, declined to comment further.

    Pharmacies React

    Major pharmacy chains would probably react to the reduced markup by demanding a higher drug dispensing fee to maintain their profits, some experts warn. CVS, which operates 6,200 pharmacies nationwide, already has announced it plans to do just that.