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Accusations against drug wholesaler expand

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BOSTON—Pharmaceutical wholesaling giant McKesson Corp. faces widening litigation charging it manipulated prescription drug prices, while its alleged co-conspirator in the scheme, a leading publisher of drug pricing data, moves closer to a settlement.

Connecticut and a San Francisco city health plan have filed separate civil racketeering complaints against McKesson, charging that, starting in 2001, the company fraudulently added a 5% markup to the average wholesale price of hundreds of brand-name drugs, costing the state and city health plans millions of dollars. The San Francisco Health Plan suit seeks class action status on behalf of all public entity health plans in the state of California.

The two suits, filed in U.S. District Court in Boston, follow a related complaint filed by several union health plans in 2005 against McKesson and First DataBank Inc., a unit of Hearst Corp. and a leading provider of drug price databases. A federal judge earlier this year certified the case as a nationwide class action on behalf of roughly 11,000 private third party payers—including self-insured employers, insurers and union health plans—that reimbursed prescriptions based on average wholesale prices reported by First DataBank between 2001 and 2005.

Plaintiffs lawyers estimate the damages to third-party payers at more than $5 billion.

McKesson has not yet responded to the San Francisco Health Plan and Connecticut complaints, but has denied the allegations in the 2005 class action, asserting that it does not set average wholesale prices and did not conspire with First DataBank to do so.

Meanwhile, U.S. District Judge Patti B. Saris last week granted preliminary approval to First DataBank's proposed settlement of the 2005 class action.

Under the settlement—which awaits comment from class members and final approval—the San Bruno, Calif.-based publisher will eliminate the 5% additional markup it included in its reported average wholesale prices for 1,356 drugs identified in the complaint, and pay the plaintiffs $1 million.

Independent of the settlement, First DataBank also announced last week that it will similarly roll back reported average wholesale prices, or AWPs, for other drugs not included in the settlement and will stop publishing AWP data within two years of the pricing changes.

The AWP adjustments aren't likely to produce any savings for health plan sponsors, though First DataBank's settlement could open the door for third-party payers to negotiate better deals with their PBMs, benefit managers say. (See story, page 20).

The racketeering suits filed by San Francisco Health Plan and Connecticut—which do not name First DataBank as a defendant—are the latest in a long-running legal battle over alleged manipulations of AWP data by drug manufacturers and others. AWP data is used by third-party payers and PBMs as the basis for prescription reimbursements.

Since 2001, dozens of states, insurers and health plan sponsors have sued drug makers for allegedly inflating AWP figures to increase payouts. In March, for example, 11 manufacturers, including Abbott Laboratories and Watson Pharmaceuticals Inc., agreed to pay $125 million to settle a class action suit charging that they massively inflated the cost of drugs covered under Medicare Part B.

San Francisco-based McKesson, the nation's largest drug wholesaler, became a target in the AWP litigation in 2005, when a group of union health plans charged that it had conspired with First DataBank to boost markups on hundreds of drugs.

Pharmacy chains and other retailers typically buy drugs from McKesson and other wholesalers on the basis of "wholesale acquisition cost," or WAC, a benchmark price set by manufacturers. The pharmacies and PBMs, though, charge insurers and health plans on the basis of AWP, which is set by manufacturers and includes a markup over WAC.

First DataBank has acted as an information source for the marketplace, compiling WAC data on thousands of drugs and publishing AWP data that was based on surveys of wholesalers until it halted the surveys in 2005.

The 2005 class action suit—and the San Francisco Health Plan and Connecticut suits filed last month—charge that McKesson and First DataBank agreed to artificially boost AWP figures to benefit McKesson's retail pharmacy clients.

Starting in late 2001, the two companies reached a secret agreement to raise the WAC-to-AWP markup on more than 400 brand-name drugs to 25% from 20%, the suits allege. As part of this deal, First DataBank agreed not to use survey information from other wholesalers to establish the AWP for those drugs, but to rely solely on information supplied by McKesson, the suits allege.

The two companies camouflaged the alleged scheme by waiting until a drug manufacturer raised the underlying price of a drug before tacking on the additional 5% spread for that product, the suits allege. Several drug manufacturers asked First DataBank to explain the increases in their products' AWPs, but First DataBank stalled those inquiries and the manufacturers eventually acquiesced to the changes, the suits allege.

The alleged scheme ended in 2005, when First DataBank announced that it would stop conducting surveys to obtain AWP data, court filings say.

The three complaints all charge McKesson with violating the federal Racketeer Influenced and Corrupt Organizations law along with various antitrust, unfair trade practices and consumer protection laws.

The two recent suits expand the scope of the litigation, bringing public entity health plans into an action that until now has involved only private health insurers.