Markets

"Lick and Stick": Glaxo and Bayer Made Up Drug Prices Out of "Thin Air"

By Jim Edwards

Updated on: July 11, 2011 / 12:35 PM EDT / MoneyWatch

GlaxoSmithKline (GSK), Bayer (BAYRY), Novartis (NVS), Merck (MRK) Pfizer (PFE) and dozens of other drug companies have wrapped up settlements recently in a massive, long-running lawsuit that alleged the companies "made up" their drug prices out of "thin air" to overbill taxpayers.

The broad allegations in the case aren't new: Counties in New York claimed their Medicaid programs overpaid for drugs because the companies reported false high prices to RedBook, an industry manual which records the prices on which Medicaid and Medicare payments are based. Private health insurers, HMOs and hospital group purchasing organizations got lower prices. Medicaid is supposed to pay prices based on the "average wholesale price," or AWP, as reported in RedBook.

But one of the ways in which GSK and Bayer allegedly executed the scam was new: The "lick and stick" maneuver. The suit claims the two companies sold identical drugs to Medicaid and to the Kaiser Permanente Medical Care Program. Kaiser negotiated lower prices for its 6 million members, the suit says. To avoid reporting those low prices to RedBook, the companies put slightly different labels on the drugs that went to Medicaid and claimed they were different products than the ones whose prices were recorded in RedBook, the suit says:

The wrongful scheme in which they engaged was known as "lick and stick" wherein they relabeled products to an HMO at deep discounts, and then concealed and avoided their obligations to pay millions of dollars in additional rebates to the Medicaid program.

Into "thin air"

The suit doesn't go into much more detail about how much money the companies made from the scheme. It does, however, claim that drug prices paid by the government are created at whim:

... in many instances, the AWP reported by the defendant pharmaeutical manufacturers bears a minimal relationship to the prices actually paid by providers and is "made up" by corporate pricing committees literally out of "thin air" for the purpose of manipulating pharmaceutical markets and increasing market share.

The most spectacular example of overpricing belongs, perhaps, to Bristol-Myers Squibb (BMY). The suit alleges it sold Vepesid, an injectable drug that fights tumors, to Medicaid for $1,296.64 when it could be found on the open market for just $70. Other examples include:

Company: Drug, Medicaid price / real price
Abbott: Vancomycin $68.77 / $8.14.
Amgen: Enbrel, $163.33 / $109.74
AstraZeneca: Nexium, $4.14 / $3.02
Bayer: Cipro, $5.40 / $3.95
GlaxoSmithKline: $62.41 / $43.36
Schering-Plough: Claritin, $92.99 / $61.02

The settlements don't say how much the companies have agreed to pay. A 2009 ruling by Massachusetts federal judge Patti Saris does touch on the companies' defense of their actions, however. GlaxoSmithKline argued that because it sold more than 50 percent of its drugs at inflated prices it was therefore legal, because of an FTC rule which governs the fair "list price" of products. Saris wasn't buying it. She wrote that the mere fact that GSK routinely sold drugs at a high list price wasn't the test:

Is it a real list price at which substantial sales were made or an unfair and deceptive price used to jack up the AWP?

The latter, apparently.

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Image by Flickr user Hanan Cohen, CC.