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McKesson Settles Class Action Suit for $350 Million
The Legal Intelligencer
November 24, 2008
McKesson Corp., the nation's largest drug distributor, has agreed to pay $350 million to settle a class action suit alleging it fraudulently hiked up the price of more than 400 medications. The settlement was brought about in part by the Philadelphia class action firm of Spector Roseman Kodroff & Willis.
In New England Carpenters Health Benefits Fund, et al. v. McKesson Corp., et al., a class of consumers and health and welfare funds filed suit in 2005 against the company alleging violations of the Racketeer Influenced and Corrupt Organizations Act for allegedly falsely inflating the average wholesale price, or AWP, of a number of America's most popular prescription medications.
Those medications included allergy drug Allegra, arthritis/pain medication Celebrex, asthma drug Flonase and cholesterol medication Lipitor, which, according to Intercontinental Marketing Services, was the world's top-selling drug as of September.
The plaintiffs alleged in their second amended complaint that McKesson conspired with First DataBank, an electronic drug data publisher, to deceitfully increase the AWP, which is widely relied upon by "consumers, health and welfare plans, health insurers and other end payors for prescription drugs" as a pricing standard.
According to the complaint, McKesson and First DataBank hatched a scheme to increase the spread between medications' wholesale acquisition cost, or WAC, which is the price retailers pay for drugs, and the AWP, the price at which retailers sell drugs to consumers.
The complaint alleged that in late 2001 or early 2002 First DataBank, which claims it gets the WAC and AWP information from drug manufacturers or through surveying wholesalers, reached an agreement with McKesson in which First DataBank would rely solely on McKesson's WAC-to-AWP spread.
Around that same time, the complaint said, McKesson began marking up the AWP to 25 percent above the WAC for drugs that had previously only been marked up 20 percent. The complaint alleged that First DataBank did this even as some manufacturers specified that certain drugs receive only a 20 percent markup.
"On some occasions, some of the manufacturers secretly questioned this increase, but First DataBank refused to change the published AWP and the manufacturers failed to take any action to remedy defendant's unjustified raise in AWP," the complaint said.
According to the complaint, McKesson's alleged motivation for this plan partly stemmed from the fact that a large portion of its client base is made up of pharmaceutical retailers.
Increasing the AWP as the WAC stays the same translates to higher profits for those retailer clients as well as for McKesson's own pharmacy-related business, the complaint said, adding that First DataBank took part in the scheme in order to "curry favor" with McKesson so the distributor would use the publisher as its go-to pricing source in contracts with its clients.
First DataBank was also seeking increased business from pharmacies that are reimbursed by health plans and other benefit providers based on the AWP, with the assumption that those pharmacies would utilize First DataBank because of its higher markup, the complaint alleged.
The complaint said this plot caused class members to overpay for prescription medications by billions of dollars.
In its memorandum in support of its motion to dismiss the complaint, McKesson said the complaint was "undermined" by a discrepancy in dates.
The plaintiffs claimed drug prices saw a sudden 5 percent increase in late 2001 or early 2002 but went on to say First DataBank continued to survey multiple wholesalers through 2002-2003, "defeating the alleged agreement between FDB and McKesson in the first place," the defense said in its memorandum. McKesson also argued in its memorandum that the plaintiffs failed to allege the distributor had any knowledge of how First DataBank arrived at the increased AWP.
McKesson's agreement to pay $350 million is actually the second settlement in this suit. The class previously reached a $1 million settlement with co-defendant First DataBank, which also agreed to roll back the prices of the drugs it had increased.
A separate suit against Medi-Span, another drug information publisher, yielded a $500,000 settlement for the class, as well as an agreement to roll back its published drug prices. All settlements are pending court approval.
The settlement with McKesson, reached through mediation with retired Judge Edward A. Infante, formerly of the U.S. District Court for the Northern District of California, came on the cusp of a Dec. 1 trial date.
According to the plaintiffs' co-lead counsel, Jeffrey L. Kodroff of Spector Roseman Kodroff & Willis in Philadelphia, settlement negotiations lasted nearly six months, with a number of delays as parties waited for various court orders to come down.
Kodroff called the end result "a great number," but would not disclose his clients' prior demands or offers made by the defense, though he did say there were a number of each.
He said he feels the looming trial date was a major factor in an agreement finally being reached after "ongoing analysis and discussion and arguments between the parties."
Serving as co-lead counsel with Kodroff were John A. Macoretta of Spector Roseman; Edmund L. Carey, George E. Barrett, Gerald E. Martin and Timothy L. Miles of Barrett Johnston & Parsley in Nashville, Tenn.; Jennifer Fountain Connolly and Kenneth A. Wexler of Wexler Wallace in Chicago; and Thomas M. Sobol of Hagens Berman Sobol Shapiro in Cambridge, Mass.
"As we have consistently stated, we believe the plaintiffs' allegations are without merit, and that McKesson adhered to all applicable laws," McKesson Chief Executive John Hammergren said in a statement, according to an Associated Press report.
McKesson's co-counsel, Melvin R. Goldman of Morrison & Foerster in San Francisco, could not be reached at press time.
