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On August 27, 2007, Judge Patti B. Saris of the U.S. District Court for the District of Massachusetts issued an order allowed the case of New England Carpenters Health Benefits Funds et. al. v. First Databank, Inc., and McKesson (NYSE:MCK) to proceed as a class action. The lawsuit was brought by PAL members New England Carpenters Health Benefits Funds and AFSCME District Council 37 Health and Security Plan in June 2005 and February 2006.

The case alleged that First Databank, the preeminent publisher of whole prescription drug pricing information, and McKesson, one of the three largest prescription drug wholesalers, conspired to increase the “Average Wholesale Prices” published by First Databank for hundreds of brand-name prescription drugs. The “Average Wholesale Price,” or AWP, is a benchmark figure used by health plans and Pharmacy Benefit Managers to determine how much to pay pharmacies for prescription drugs that are dispensed to patients with insurance. For instance, a health plan may have a contract to pay a pharmacy AWP minus 15% for drugs given to its members.

Manufacturers report either the AWPs for their drugs to First Databank, or another figure, Wholesale Acquisition Cost (WAC), which is the price that manufacturers typically sell their drugs to wholesalers. First Databank would then apply a “markup” of 20% or 25% to the WAC to calculate the AWP. The lawsuit alleged that:

“Beginning in late 2001, First DataBank and McKesson reached a secret agreement on how the WAC to AWP markup would be established for hundreds of brand-name drugs. McKesson and First DataBank, raised the WAC to AWP spread from 20% to 25% for over four hundred brand-name drugs that previously had received only the 20% markup.” (Memorandum & Order, p.6)

By raising the “spread” from 20% to 25%, this alleged scheme had the effect of raising the prices of the drugs in question by 4% across the board. Tens of millions of purchases of hundreds of drugs were thus made at the new, inflated prices, cause billions in unnecessary and allegedly illegal overpayments.

In October 2006, First Databank agreed to settle the case against it. First Databank agreed to rollback the “spread” on hundreds of drugs (representing 95% of the retail branded drug market) from 25% to 20%. This rollback will save an estimated $4 billion on drug spending in the first year alone. First Databank also agreed to go out of the business of publishing Average Wholesale Price data, which will result in health plans, Pharmacy Benefit Managers, and government programs shifting away from using the flawed AWP system to using a more transparent and accurate benchmark for paying for prescription drugs. In November 2006, the Court granted preliminary approval to that settlement. Just recently, in August 2007, the Court ordered that notices be published notifying consumers of the settlement and mailed to Third Party Payors (health plans, insurers, etc.)

McKesson, however, did not settle, and the plaintiffs continued to pursue the case against it aggressively. When a case is brought as a class action, it combines the claims of many individuals and entities into one lawsuit. This is particularly important when it would be infeasible for individuals to bring lawsuits on their own, such as when the damages that could be won in such a suit would be far outweighed by the costs of bringing it. The Judge must determine whether or not a case brought as a class action should in fact proceed as a class action. This is called “class certification.” Whether or not a class action is certified usually determines whether or not the case ultimately can go forward at all.

In her August 27 order, Judge Saris certified two classes:

  • Class 1, Consumer Purchasers: All individual persons who paid, or incurred a debt enforceable at the time of judgment in this case to pay, a percentage co-payment for the Marked Up Drugs during the Class Period based on AWP, pursuant to a plan, which in turn reimbursed the cost of brand-name pharmaceutical drugs based on AWP. The Marked Up Drugs include all of the drugs identified in Exhibit A to the Second Amended Complaint and consist of certain brand-name drugs only; and
  • Class 2, Third-Party Payors: All third-party payors (1) the pharmaceutical payments of which were based on AWP during the Class Period; (2) that made reimbursements for drugs based on an AWP that was marked up from 20 to 25% during the term of its contract with its PBM or with another entity involved in drug reimbursement; and (3) that used First DataBank or Medispan for determining the AWP of the marked up drugs. The Marked Up Drugs are all drugs identified in Exhibit A and consist of brand-name drugs only.

Excluded from the Class are (a) each defendant and any entity in which any defendant has a controlling interest, and their legal representatives, officers, directors, assignees and successors; (b) any co-conspirators; and (c) any governmental entities that purchased such drugs during the class period.

At this juncture, Class 1 is certified for liability and for damages, but Class 2 is only certified for liability and for equitable relief. I defer deciding whether to certify the TPP class for purposes of damages until plaintiffs propose a feasible aggregate damage methodology for TPPs.

The importance of this case cannot be overstated — a massive fraud was allegedly perpetrated by two pharmaceutical industry middlemen that virtually no consumers were aware even existed. McKesson Corporation, not exactly a household name, had $88 billion in annual revenues last year, and was 18th on the Fortune 500 list. This puts them ahead of AT&T (#27), Procter & Gamble (#25), Costco (#32), and Target (#33), among many other more well-known companies. This alleged conspiracy caused consumers, health plans, employers and taxpayers to unnecessarily pay billions more for prescription drugs. This case illustrates how the arcane world of prescription drug pricing, which is so important to the well-being and pocketbooks of millions of Americans, resembles a lawless wild west sorely in need of a new Sheriff. The Judge’s certification of these two classes allows the case against McKesson to go forward.

The Judge’s order can be found here and it provides an interesting and readable overview not just of this alleged scheme but also of the bizarre world of how drug prices are determined. More about this case can be found here. The press release issued by the plaintiffs’ co-lead counsel can be found here.