McKesson Pays $350 Million in Settlement That Lowers Drug Prices 4 Percent

The prices of about 1,400 branded drugs are about to get a little cheaper because of a $352.7 million class action settlement with wholesale drug distributor McKesson.

In addition to the payment, the prices of 1,442 medicines will be lowered by 4 percent, according to a federal court ruling.

The court-approved deal wraps up a lengthy case in which McKesson and First Databank were accused of engaging in a "racketeering enterprise to fraudulently increase the published 'average wholesale price' ('AWP') of over four hundred branded drugs by five percent from late 2001 to 2005," Judge Patti Saris (pictured) wrote. MediSpan published the same false prices.

Affected drugs include Lipitor, Claritin, Prozac, Nexium, Plavix, Allegra, Wellbutrin, Ambien, Prilosec, Zantac, Valtrex, Zyprexa, Celebrex, Imitrex, Risperdal, Seroquel, and Neurontin. Here's the judge's account of how the price inflation scheme worked:

Beginning in 2001, FDB and McKesson reached a secret agreement to raise the markup between WAC ("wholesale average cost")and AWP ("average wholesale price") from its standard 20% to 25% for over four hundred drugs. ... McKesson communicated these new 25% WAC to AWP markups to FDB, which then published AWPs with the new markup.

McKesson has estimated that by 2002, 95% of all prescription drug manufacturers used the inflated 25% markup, and by 2004, 99% of all prescription drug manufacturers did so. ... The scheme ended on March 15, 2005, when FDB told its customers that it would "no longer survey drug wholesalers for information relating to" AWP.

The scheme resulted in higher profits for retail pharmacies that purchase drugs on the basis of WAC but are reimbursed on the basis of AWP, a differential called "the spread". ... McKesson implemented the scheme in order to provide a greater "spread" to important retail pharmacy clients like Rite Aid as well as to its own pharmacy related businesses.

The price of 1,442 medicines will be reduced 4 percent in the next 90 days. (Why only 4 percent instead of 5 percent? Do the math: If a price rises 5 percent, a 4 percent cut from the higher price is roughly equal to the price you started with.)

Not everyone likes the settlement. Neighborhood mom-and-pop pharmacies complained that their margins are so slim they will be hurt by the forced price reduction. You know that judges are going to rule against you when they start writing jokes into their opinions, and that's exactly what Saris did:

A veritable alphabet soup of non-class members object, complaining that there are flies in the settlement...

A more compelling case is made by IPC, the largest group purchasing organization for independent pharmacies. It submitted an amicus curiae brief stating that at a margin of 2.8%, many of its members "cannot absorb a 4-5% reduction in reimbursement for brand name pharmaceuticals, approximately 80% of prescription sales." ...

While these concerns should be weighed, these pharmacies (both chain and independent) and PBMs, reimbursed on the basis of AWP, were unjustly enriched when drug prices were fraudulently inflated during the scheme, yet they have not been asked to disgorge their profits. None of the pharmacies protested the windfalls they received when prices were unilaterally inflated by five percent. Further, the pharmacies seem to have survived prior to the start of this fraudulent scheme, making it seem likely that they will survive after it has been undone.