PAL’s most important lawsuit and settlement to date wins final approval!

Yesterday, the Massachusetts federal District Court approved class action settlements with publishers First Databank and MediSpan that will require the roll back the illegally inflated prices of over 400 drugs!

PAL coalition members AFSCME District Council 37 Health and Security Plan in New York, and New England Carpenters Health Benefit Fund here in Boston brought the lawsuit against these two publishers, and the pharmaceutical wholesaler McKesson, for their role in unilaterally raising the prices of over 400 drugs through their alleged manipulation of the published “average wholesale price” or AWP. Though the system of pharmaceutical pricing and reimbursement is complex, the AWP is a benchmark that is used by insurers and government programs to reimburse pharmacies. It also effects the cost to cash-paying customers. It is alleged that defendants First Databank, Medispan, and McKesson raised the AWP, while keeping the actual cost (called a ‘wholesale acquisition cost’) the same. This done to give  the large chain and other pharmacies, many of which are McKesson’s customers, an increased return on each of these drugs.

It has been estimated that this 5% increase in the cost of hundreds of drugs by the defendants may have cost consumers, insurers, and government programs over $2 billion in additional drug expenses.

It is estimated that the “rollback” of the price of these 400 drugs could yield between $1.5 Billion or more in future savings on drug costs. Perhaps of even greater importance, this lawsuit, along with other litigation (AWP, Remicade, Lupron) by PAL members, has exposed the weaknesses of the pharmaceutical pricing system that have allowed drug makers and wholesalers to manipulate or “game” the benchmark prices that government programs and insurers use for reimbursement.

The Judge in the case did allow a six month delay before the rollback of the drug prices, ” to alleviate the impact on independent and rural pharmacies.” This addressed the concern raised that small ‘mom and pop’ pharmacies may be forced to bear the full cost of the price rollback if they were unable to renegotiate their supply contracts for drugs with manufacturers and wholesalers.

The settlement also provides $2.7 million to be distributed along with the $350 Million in the preliminary McKesson settlement.

Thanks to PAL members New England Carpenters Health Benefit Fund, and AFSCME District Council 37 Health and Security Plan in New York for their work in bringing this important lawsuit.

Follow these links to see a copy of the Judge’s decision, the First Databank settlement, the Medispan settlement, or the pending McKesson settlement.

Drug Benefit News brings us this fascinating story: Caterpillar/Wal-Mart Rx Drug Pilot Scraps Use of Average Wholesale Price, Uses Drug Cost-Plus Pricing.

Readers of this blog know that we are prone to getting on a soapbox about the flawed “Average Wholesale Price” (AWP) system that health plans and many government programs (like Medicaid) use to decide how much to pay pharmacies for prescription drugs. In fact, a number of members of our coalition have brought class action lawsuits against drug companies, drug pricing publishers and major drug wholesalers for allegedly inflating the Average Wholesale Prices of prescription drugs.

In a nutshell, pharmacies generally are very protective of the details of how much they pay to drug companies and wholesalers for the drugs that they then sell to consumers and health plans. They argue that revealing those prices would put them at a competitive disadvantage. So, health plans and governments are forced to decide how much to pay for drugs without knowing what the pharmacy paid. The Average Wholesale Price was intended to approximate what pharmacies in general were paying for a drug. The health plan would then agree in a contract with a pharmacy that they’d pay them an amount based on the AWP of each drug — say, AWP minus 5%. The idea was that a health plan would pay a pharmacy an amount that would be a modest amount higher than than what the pharmacy paid – the “actual acquisition cost.”

But AWPs no longer have any basis in any reality — the joke is that AWP stands for “Ain’t What’s Paid.” In the lawsuits mentioned above, there are examples cited where the AWP was many times, even tens or hundreds of times, higher than what pharmacies were actually paying. This meant that health plans were overpaying pharmacies — often massively – for prescription drugs.

First Databank and Medispan, two of the defendants in a class action lawsuit on this issue, have voluntarily agreed to stop publishing AWPs within approximately the next two years. Since these two companies are pretty much the only ones who publish AWPs anymore, this information is going to cease to be available pretty soon. That means that health plans, pharmacies and government programs are going to have to figure out an alternative. And that’s a major question still up in the air — what are they going to use instead of AWP?

Well, it looks as though WalMart (NYSE:WMT) and Caterpillar (NYSE:CAT) are already thinking about that, and have come up with an alternative — at least for those two companies. As Drug Benefit News explains:

A new pharmacy benefit pilot program involving Caterpillar Inc. and Wal-Mart Stores, Inc. cuts “significant waste” out of the pharmaceutical supply chain and scraps the long-maligned average wholesale price (AWP) discount methodology in favor of an Rx cost-plus model, say those involved in the program…

When Caterpillar approached Wal-Mart, the first thing the parties did was address the question of AWP, which Bisping describes as a “flawed methodology.” Typically, PBMs negotiate discounts off AWP, which can be wildly inflated and bear little resemblance to the true cost of the drug.

To address this concern, Caterpillar developed a new pricing methodology based on Wal-Mart’s actual invoice prices on drugs, Bisping says, adding that AWP doesn’t appear at all in the contract. “For all of the drugs that we purchase now from Wal-Mart, the core basis is on the real invoice price, of course, plus some money for their overhead and any margin they have to make,” he explains.

The article doesn’t go into very much detail about what this “new pricing methodology” actually means. We’re willing to bet that there are heavy-duty confidentiality provisions in the contract to prohibit Caterpillar from revealing the “real invoice prices” that Wal-Mart pays for drugs.

What’s most intriguing about this new model, as scant as the details are, is that it’s based on actual prices, instead of inherently unreliable and unverifiable “benchmark” prices. Basing drug reimbursements on actual costs is something we’ve supported for a long time, including in an article that ran several years ago in the BNA Pharmaceutical Law & Industry Report.

Another interesting aspect of this agreement is that it basically cuts out the traditional middleman between an employer (or health plan) and a pharmacy: the Pharmacy Benefit Manager (PBM). The PBM industry grew massively in the 90s to save employers and health plans from the hassle of having to engage in such negotiations. Now, Caterpillar is quite a large company, so don’t expect to see small- or even medium-size companies or health plans negotiating directly with pharmacies anytime soon. And Caterpillar’s PBM doesn’t seem that worried:

For their part, RESTAT [Caterpillar's PBM] executives say they are more than happy to assist Caterpillar with the program. The Wal-Mart agreement doesn’t do anything to change RESTAT’s basic relationship with Caterpillar, except for some negotiating relationships on acquisition costs at the pharmacy level, says David Kwasny, vice president of sales and marketing.

“We’re very flexible,” he tells DBN, adding that RESTAT is a highly transparent PBM that doesn’t make any spread on pharmacy utilization. “It’s not a conflict for us.”

Is this a sign of things to come? Can we expect to see other large employers and insurers moving away from AWP? With the coming demise of AWP, it’s inevitable. Let’s hope that other employers and health plans follow suit in the near future, rather than waiting until AWP is on its way out the door.

Several PAL members are plaintiffs in class action lawsuits concerning alleged schemes by publishers of drug price data and a prescription drug wholesaler to inflate the Average Wholesales Prices of prescription drugs. Notices have been issued concerning settlements in these cases, New England Carpenters Health Benefits Fund, et al. v. First DataBank, Inc., et al. (U.S. District Court, Massachusetts, Case No. 1:05-CV-11148-PBS) and District Council 37 Health & Security Plan v. Medi-Span (U.S. District Court, Massachusetts, Case No. 07-cv-10988-PBS).

The settlements do not provide cash payments by First Databank or Medi-Span. The settlements call for First Databank and McKesson to roll back increases in the published Average Wholesale Prices of hundreds of drugs, and to cease publication of Average Wholesale Price data within 2 years of the settlement becoming final. These changes are expected to have a significant impact on drug prices which will benefit the members of the class.

The classes in the settlements includes consumers who paid for all or part of the cost of certain prescription drugs based on data published by FDB or Medi-Span. You must have made these purchases based on First Databank published prices between January 1, 2000 and the date of Final Court Approval of the FDB Settlement and/or purchases based on Medi-Span published prices between December 19, 2001 and the date of Final Court Approval of the Medi-Span Settlement. The classes also include third party payors. Pharmacy Benefit Managers and consumers who paid “flat” (i.e. fixed) copayments are excluded.

Deadlines related to these settlements are:

• To exclude yourself from the class, you must mail a signed letter, postmarked no later than December 21, 2007, asking to be excluded to: FDB/Medi-Span Settlement Administrator, c/o Complete Claim Solutions, LLC, P.O. Box 24730, West Palm Beach, FL 33416. Include your name, the name of the person or entity seeking exclusion, an address and telephone number.
• To object to the settlements, you must file a written statement with the Clerk of the Court, John Joseph Moakley U.S. Courthouse, 1 Courthouse Way, Suite 2300, Boston, Massachusetts 02210, postmarked no later than December 21, 2007.
• The Court will hold a fairness hearing on January 22, 2008 at 2 PM at the John Joseph Moakley U.S. Courthouse, 1 Courthouse Way, Boston, Massachusetts 02210, to:
  1. determine whether the Settlements are fair, reasonable and adequate and in the best interests of the Class, whether it should be approved by the Court, and whether judgment should be entered;
  2. consider the application of Class Counsel for an award of attorneys’ fees and expenses; and
  3. consider any other issues the Court thinks necessary.

This is just a paraphrasing of the notice. The official note, with forms, instructions and copies of Court documents, can be found at fdbmedispansettlement.com.

McKesson Corporation, the other defendant in the New England Carpenters case, has not agreed to settle, and the case against them is proceeding.

More information about these lawsuits can also be found here.