Federal court's approval clears the way for pricing rollback of pharmaceutical drugs

Purchasers of pharmaceutical drugs including consumers and health plans will soon enjoy a rollback of benchmark prices of some of the most common prescription medications after a Federal Appeals Court last week affirmed the approval of a settlement with two leading drug-pricing publishers, First DataBank, Inc. and Medi-Span, a division of Wolters Kluwer Health, Inc.

The court's approval clears the way for the pricing rollback to go into effect on Sept. 26, 2009, and could save consumers and other purchasers hundreds of millions of dollars.

The settlement stems from a 2005 class-action lawsuit brought on behalf of health benefit plans and consumers against First DataBank (FDB) and McKesson Corporation, a large pharmaceutical wholesaler. According to the suit filed by Hagens Berman Sobol Shapiro, plaintiffs claimed that the majority of brand name drugs are reimbursed based on a pricing benchmark known as the "average wholesale price" or AWP, a benchmark that the suit claimed was manipulated by the defendants to boost profits.

District Judge Patti Saris of the District of Massachusetts summarized the allegations in her approval order, "[t]ypically, a drug's wholesale acquisition cost or 'WAC' was understood as the price wholesalers paid to purchase a drug from the manufacturer; the WAC was then marked up by a fixed percentage to derive the AWP. Beginning in 2001, FDB and McKesson reached a secret agreement to raise the markup between WAC and AWP from its standard 20 percent to 25 percent for more than 400 drugs. The scheme resulted in higher profits for retail pharmacies that purchased drugs on the basis of WAC but are reimbursed on the basis of AWP."

On June 6, 2007, HBSS settled claims with FDB, a subsidiary of Hearst Corporation. Under the agreement, FDB agreed to rollback pricing by five basis points, from 1.25 to 1.20. The markup over WAC was used to calculate the AWP, the reimbursement benchmark for most widely used prescription drugs, which, in turn, would reduce the price of most medications by four percent. In a later lawsuit, the other large supplier of electronic data files, Medi-Span, agreed to a similar rollback.

First DataBank and Medi-Span have indicated that in addition to the drugs included in the settlement, they also intend to independently rollback the AWP benchmark price of other drugs not covered by the settlement, which should create cost-savings on a much broader range of prescription medications.

An alphabet soup of associations representing the pharmacies and pharmacy benefit managers fought the proposed rollback before federal trial and appellate courts. The National Association of Chain Drugstores, the Pharmaceutical Management Association, the National Community of Pharmacists Association, and others claimed either that small pharmacies would be put out of business through implementation of the rollback, or that the savings to the health plans and consumers would not be large enough to justify the settlement.

The courts rejected these claims and in a ruling on Sept. 4, 2009, affirmed the approval of the settlement. The First Circuit Court of Appeals stated:

"In principle, the rollback makes some sense: it should -- to the extent that process remain above some hypothetical market level -- wash out any remaining inflation for the future; and, to the extent it forces prices temporarily below the market level, it will take back some of the windfall profits obtained (even if innocently through another's fraud) and give some compensation for past overcharges. The market forces that eroded excess gains in the past should also in the future redress unduly low reimbursement; and to the extent that those forces operate symmetrically, the gains and the losses may even tend to balance out."

Separately, Massachusetts Federal Judge Patti J. Saris approved the settlement with the second defendant, McKesson, for $350 million on behalf of the health benefit plans and consumers nationwide.

"The impact of this settlement is very significant for all who have paid for brand name drugs," said Steve Berman, a lead counsel and managing partner at Hagens Berman Sobol Shapiro.

"The First DataBank and Medi-Span settlement shows all payers that the markup differences between WAC and AWP are entirely artificial and thus should be adjusted to ensure the lowest payment for prescription drugs," said Thomas M. Sobol, a lead attorney and managing partner of the Cambridge office of Hagens Berman Sobol Shapiro.