NEW YORK - Express Scripts Inc. and CIGNA Corp. have settled a lawsuit brought by New York state that accused the pharmacy benefit manager of inflating prescription drug costs for the state's largest employee health plan.

Under last week's settlement, St. Louis-based Express Scripts and Philadelphia-based health insurer CIGNA will jointly pay $27 million for their alleged fraudulent acts that increased drug costs for Empire Plan members by millions of dollars.

The Empire Plan provides health and prescription drug coverage for more than 1 million active and retired New York state public employees and their dependents. It formerly contracted with CIGNA to manage its prescription drug benefit, and CIGNA then subcontracted with Express Scripts to administer the program.

From 1999 to 2003, the years covered by the contracts, the Empire Plan's prescription drug costs rose from $455 million to $1 billion, the lawsuit states.

Empire Plan now contracts with UnitedHealthcare, said a spokesman from the New York State Department of Civil Service.

Both CIGNA and Express Scripts were named in the 2004 lawsuit, and neither company admitted any wrongdoing in last week's settlement. They also did not disclose how much each will pay of the $27 million.

"We're settling this so we can avoid the cost of the distraction of pursuing this litigation," said a spokesman for Express Scripts.

"We agreed to make a contribution, as prolonged litigation is not in anyone's best interest," CIGNA said in a statement.

The lawsuit claimed Express Scripts:

c Inflated the cost of generic drugs.

c Kept millions of dollars in manufacturer rebates that belonged to the plan.

c Engaged in fraud and deception to induce physicians to switch patients from one prescribed drug to another for which Express Scripts received money from the second drug's manufacturer.

c Sold and licensed Empire Plan data to drug manufacturers, data collection services and others without the plan's permission and in violation of the state's contract.

c Induced the state to enter into the contract by misrepresenting discounts the plan would receive for drugs purchased at retail pharmacies.

New York Attorney General Andrew Cuomo said the settlement will help prevent PBMs in New York state from engaging in drug switching.

"At a time when New Yorkers are struggling to pay rising health care premiums, today's landmark $27 million agreement cracks down on PBMs that put profits ahead of patients," Mr. Cuomo said in a statement.

Express Scripts also must make its business practices transparent to health organizations and consumers under the settlement, according to the attorney general's office. It is required to disclose its pricing methods, payments received from manufacturers, the percentage of manufacturer payments it retains, factors it uses to calculate targeted discount rates and the current discount rate for each generic drug.

In May, Express Scripts and 28 state attorneys general and the District of Columbia reached a separate settlement that also involved switching prescription drugs. Express Scripts agreed to pay $9.3 million to the states and reimburse up to $200,000 to patients who incurred expenses related to the prescription switches (BI, June 2).

Similar to the New York case, the PBM may have overstated to physicians and patients the cost benefits of switching medications. The company then would obtain rebates and other payments that it allegedly kept rather than passing on the savings to patients, the lawsuits stated.

A spokeswoman for Express Scripts said its "business practices already comply with essentially all requirements of the settlement" and that neither the May agreement nor the recent New York settlement will affect its second-quarter or future earnings because it already has reserved the necessary funds.