This week, a federal court in Massachusetts granted final approval for a $350 million settlement to reimburse consumers and insurers who were victims of the alleged scheme to raise the prices of hundreds of prescription drugs by 5%.  The settlement stems from the PAL member class action lawsuit that alleges that the drug wholesaler McKesson Corp. conspired with publishers First Databank and Medi-Span to artificially raise the prices hundreds of popular prescription drugs. These include Adderall, Advair, Allegra, Ambien, Celebrex, Clarinex, Claritin, Coumadin, Levaquin, Lipitor, Nasonex, Nexium, Ortho Tri-Cyclen, Plavix, Prevacid, Prilosec, Protonix, Prozac, Risperdal, Seroquel, Topamax, Valium, Valtrex, Zantac, Zyprexa and many others.


Allegedly these prices were wrongfully inflated by manipulating the mark-up factor McKesson used to determine the Average Wholesale Price (AWP), which is the benchmark used by insurers and the government to reimburse pharmacies.


In her order for final approval, Judge Saris of the U.S. District Court for the District of Massachusetts noted the “near-unanimous and “eye-popping” support for this settlement” and described the method of notifying class members as “innovative, expansive and reasonable.” $288 million will be distributed to non-government insurers, health insurance plans, union benefit funds, and self-insured employers who paid a pharmacy for any of the 386 prescription drugs on behalf of their members. Consumers who paid for the drugs out of pocket or through a percentage co-payment will receive the remaining $62 million. Consumers will be identified using information gathered from TPP’s filing claims, as well as from large chain pharmacies under subpoena. 


In addition to the money awarded to consumers and insurers, this lawsuit has exposed a unique vulnerability of our nation’s drug pricing system to manipulation for profit, spurring important changes in industry practice. This includes the prospective relief for consumers and insurers in the form of a rollback of prices for the current benchmark, the Average Wholesale price (AWP). This rollback should provide significant future savings for health plans, consumers, and state Medicaid programs, up to $1.04 Billion annually, but reduced gradually as more and more of these listed brand name drugs become available as generics. The rollback is currently scheduled to be implemented in mid-September 2009. 


Part of these future savings resulting from this class action on behalf of private party consumers and insurers will benefit government programs. For instance, as of June 30, 2009, over 36 state Medicaid programs continue to use AWP in their drug reimbursement formulae for pharmacies, while another 12 states include an AWP-based benchmark price as possible ‘best-price’ alternative. (See CMS data). All these states stand to realize significant savings on drug expenditures as a result of the rollback.  Such a result is especially critical to state budgets during the fiscal difficulties brought on by the current economic recession.


Efforts by state Medicaid programs to cut their expenditures on prescription drugs through changes in the drug reimbursement formulae can expose them to extensive political and economic pressure from the large corporate pharmacy chains.  For instance, a proposal by the Washington State Medicaid program to reduce Medicaid reimbursement rates by 6% drew serious opposition — a legal challenge, and a threat by Walgreens to cease service to Washington’s Medicaid customers.  In response, Washington has abandoned this proposal. (See article here.) Quite simply, many state Medicaid programs may choose not to initiate such savings for fear that the large chain pharmacies response may leave their low-income participants without easy access to the chain pharmacies. Fortunately, the nationwide AWP rollback in the First Databank and Medi-Span settlements will provide state Medicaid programs with reduced drug costs in a manner that is insulated from such political and economic pressures by the large chain pharmacies. 


The rollback may allow some small non-profit union benefit funds to have more power when negotiating prices for prescription prices in contracts with Pharmacy Benefit Managers (PBMs), which are middlemen between insurers and drug companies. The rollback at the very least has created an educational opportunity for insurers to understand and monitor how reimbursement ‘benchmark’ prices are selected by their PBMs. 


Another change in practice is the initial start of a shift away form AWP in favor of alternate benchmarks that are reliable and transparent. As we have blogged previously, Caterpillar Corporation has replaced their use of AWP with a benchmark based on actual costs.  While PAL supports this innovative pilot project by Caterpillar, we caution that other reforms and innovations shall become essential as the deadline for the publishers FirstDataBank and MediSpan to cease publishing AWP information in two years draws closer.


PAL is grateful to the participation of our coalition members AFSCME District Council 37 and New England Carpenters who were instrumental in bringing this lawsuit.