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Class action lawyers have begun filing suits on behalf of health insurance funds and others, to recover money they say they lost to inflated drug prices engineered by the pharmaceutical industry. The suits have been encouraged by congressional hearings, a Justice Department investigation and an $875 million settlement in one case. In the last few weeks, proposed class actions have been filed in a dozen federal courts from California to New York. The defendants include most major pharmaceutical companies. The suits contend that the companies reaped hundreds of millions in profits by building market share in select drugs using an inflated “national average wholesale price.” AWP, as it is commonly called, is the basis that the U.S. government and, by extension, many health insurers have used since 1998 to reimburse medical providers under Medicare for expensive, commonly used drugs. The government’s source for drug AWPs has been such trade publications as the “Blue Book,” the “Red Book” and “Medispan” — all of which get data from the drug manufacturers. PRICE GAP ALLEGED Critics of the system contend that the official average wholesale prices now bear little relation to the actual prices that drug companies charge private doctors, hospitals and medical providers for non-Medicare patients. The lawsuits maintain that the AWP has become a tool to allow pharmaceutical companies to build market share and a financial carrot to reward doctors who buy and prescribe their drugs, at the expense of taxpayers and employee medical plans. Class action counsel say that November’s burst of litigation is just the beginning. “Next you’re going to see the suits filed by the states over Medicaid. There are a lot of levels of AWP lawsuits that are going to be filed,” said Marc H. Edelson of the Doylestown, Pa., firm of Hoffman & Edelson. Edelson’s firm, joined by seven others around the United States, joined the wave of litigation Nov. 15 with a class action racketeering lawsuit against Abbott Laboratories in the Northern District of Illinois on behalf of the Action Alliance of Senior Citizens of Greater Philadelphia and the Chicago-based United Food and Commercial Workers Union and Employers Midwest Health Benefits Fund. By the end of business the next day, with the filing of a suit in the Eastern District of Pennsylvania on behalf of the same plaintiffs against GlaxoSmithKline PLC, Edelson’s legal network had filed nine class actions against drug companies in federal courts in California, Illinois, Nevada, New Jersey and Washington. The individual defendant companies — Abbott, GlaxoSmithKline and Bristol-Myers Squibb Co. — declined comment on the allegations raised in the complaints. During congressional hearings last year, GlaxoSmithKline officials defended the use of AWP and said their pricing practices were “fully within the law and always have been.” The company compared AWP to the sticker price of an automobile. A spokesman for the industry’s leading trade group — the Pharmaceutical Research and Manufacturers of America — said that the group does not comment on litigation and has taken no stand on the AWP controversy. CROSSING THE LINE? Many health plan administrators are sharply critical of the AWP practice. “Our participants are getting squeezed by these inflated prices,” said William Einhorn, administrator for the Teamsters Health & Welfare Fund of Philadelphia and Vicinity, the plaintiff in a Nov. 19 class action filed against Bristol-Myers Squibb in U.S. District Court for the Southern District of New York. “Everyone knows that medical costs are high enough without an unfair and artificial pricing mechanism,” Einhorn said. The Medicare program does not cover most prescription drugs. But the so-called Part B of Medicare reimburses a doctor or medical provider 80 percent of the cost of certain prescription drugs that cannot be self-administered (mostly cancer chemotherapy), drugs administered using some type of covered “durable medical equipment” and selected immunizations and self-administered drugs like blood-clotting factors, some oral cancer drugs and immunosuppressive medications. Since 1998, the Part B reimbursement for covered drugs has been based on “the lower of the actual charge on the Medicare claim for benefits, or 95 percent of the national average wholesale price.” Medicare then reimburses the doctor or medical provider 80 percent of the allowable amount, and the remainder is billed to the patient or Medicare beneficiary as the “co-payment” or to fulfill the deductible. At some point, the lawsuits contend, the drug makers “realized that they could, and in actuality did, directly control, manipulate and raise the AWP for covered drugs at various times by simply forwarding to the publications a new and higher AWP.” The result, alleges the Philadelphia suit against GlaxoSmithKline, is that Medicare pays prices “substantially higher than the prices [GlaxoSmithKline] charges private sector purchasers.” Jeffrey L. Kodroff of the Philadelphia firm Spector, Roseman & Kodroff, which filed the Nov. 19 suit in New York against Bristol-Myers Squibb, called the current system the result of “simplicity and politics.” It was easier for the government to adopt the drug industry’s suggested wholesale prices than research wholesale prices on its own, especially in the face of heavy lobbying from drug makers and American physicians. At stake is big money. Last year, for example, a report by the U.S. Office of the Inspector General found Medicare reimbursements for the 24 leading drugs were $887 million more than actual wholesale prices the pharmaceutical firms charged physicians and medical providers. Based on standard co-payments and deductibles, the lawsuit says, consumers and third-party payers would have paid $175 million less had Medicare reimbursements been based on actual wholesale prices. ‘THE SPREAD’ Last year’s inspector general’s report said the practice is especially lucrative to physicians for whom Medicare-reimbursable drugs are heavily used in their practices. Among medical professionals, it’s known as “the spread” — the difference between the actual wholesale price that the drug firms charge doctors and the wholesale price accepted by Medicare for reimbursement purposes. The inspector general’s report, for example, cited the example of an oncologist who pays the manufacturer $2.75 for 50 milligrams of leucovorin calcium, but gets reimbursed $17.52 by Medicare based on the inflated AWP for the drug. The lawsuits seek the creation of a trust fund from the drug industry’s purported overcharges that would be distributed to class members. The incentive is equally attractive for class action lawyers. Earlier this year, TAP Pharmaceuticals, which is half-owned by Abbott Laboratories, pleaded guilty and agreed to pay $875 million in criminal and civil penalties for Medicare and Medicaid overcharges allegedly involving its anti-cancer drug Lupron. The guilty plea was the result of a Justice Department investigation triggered by a “whistleblower complaint” under the federal False Claims Act. Since then, the U.S. Attorney’s Office in Boston has reportedly initiated AWP probes against 20 drug companies and GlaxoSmithKline has confirmed that it has received subpoenas from the U.S. Attorney in Boston, the U.S. Justice Department, and state prosecutors in Texas, California and Nevada, all involving drug-pricing issues. AstraZeneca has publicly acknowledged it is cooperating with federal prosecutors in Wilmington, Del., on the same issue. Shortly after TAP’s guilty plea, Kodroff’s firm filed the first private lawsuit against the pharmaceutical firm seeking reimbursement for senior citizens who were purportedly overcharged through Medicare Part B reimbursements for Lupron therapy. Kodroff acknowledged that DOJ’s settlement with TAP Pharmaceuticals underscored the importance of pursuing AWP-based class action cases. SPURRED BY UNIONS But the real incentive was provided by officials of the union health and welfare funds that his law firm represents, who last year became increasingly concerned as the U.S. House Commerce Committee, chaired by Rep. Tom Bliley, R-Va., focused on the disparity between the AWP relied on by Medicare and the actual wholesale price charged to medical providers by the drug firms. Kodroff noted that the U.S. Department of Veterans Affairs pays far lower prices than Medicare for the same drugs because it purchases the drugs through competitive bidding. “It’s a classic case of the left hand not knowing what the right hand is doing,” Kodroff said. “The great irony is that the current system is counterintuitive to everything we learned about economics. To increase demand, the government is increasing prices.”

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