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Not Dead Yet: Drug Price Manipulation Scams Enter Their Sunset Years

The state of Hawaii's lawsuit against pharmacy benefit manager McKesson (MCK) and drug database manager First DataBank could signal the end of drug price manipulation, at least as we currently know it. The Hawaii suit makes the usual allegations: That McKesson and First DataBank cooperated with companies to report fictitious "average wholesale price" lists of drugs on which Medicaid and Medicare base their reimbursements. After rebates and discounts are factored in, the real prices are much lower, but the taxpayer pays the higher price.

AWP manipulations aren't small: Drugs have ended up costing taxpayers five times as much as they should. In one spectacular case against Baxter International (BAX), the government was allegedly charged $928 on bags of saline solution costing just $1.71 -- a 54,000 percent markup. They might be increasingly rare, however, following dozens of mostly successful suits in which states and whistleblower have demanded that overcharges be repaid. Like the plague victim in Monty Python and the Holy Grail, AWP scams aren't dead yet, but they might as well be.

State attorneys general have spent years going after drug companies for this scam. Some, such as AstraZeneca (AZN), Merck (MRK) and Pfizer (PFE) have settled. Now governments are turning their attention to McKesson and First DataBank. In McKesson's most recent quarterly report it listed eight drug pricing scam lawsuits filed against it since 2008, and four of those were filed this year (see page 16):

  • In re McKesson Governmental Entities Average Wholesale Price Litigation, filed against the Company in the United States District Court for Massachusetts.
  • Board of County Commissioners of Douglas County, Kansas et al. v. McKesson Corporation, Civil Action No. 1:08-CV-11349-PBS
  • San Francisco Health Plan v. McKesson Corporation, Civil Action No. 1:08-CV-10843-PBS
  • State of Connecticut v. McKesson Corporation, Civil Action No. 1:08-CV-10900-PBS, settled on October 15, for $26 million.
  • State of Kansas ex rel. Steve Six v. McKesson Corporation, et al., Case No. 10CV1491.
  • State of Mississippi v. McKesson Corporation, et al., Cause No. 251-10-862CIV.
  • State of Utah v. McKesson Corporation, et al., Case No. CV 10-4743-SC.
  • State of Wisconsin ex rel. Hagens Berman Sobol Shapiro LLP, et al. v. McKesson Corporation, Case No. 10CV3411.
The dam broke after McKesson settled a massive AWP case with the Prescription Access Litigation project, for $350 million. Virtually all drug companies and PBMs have been named in suits alleging AWP manipulation. As the settlements keep rolling in -- Hawaii extracted another $82 million from a swathe of pharmaceutical firms in October -- it dims the prospect that the remaining defendants can win any of the cases against them.

Don't declare "marketing the spread" between AWP and the real price of drugs dead yet, but the prospect could be within sight.