First DataBank Agrees To Tentative Settlement in Suit Over Prescription Drug Average Wholesale Prices
Publisher First DataBank has agreed to a tentative settlement with plaintiffs in a lawsuit that alleges the company colluded with prescription drug wholesaler McKesson to raise the average wholesale prices of prescription drugs to increase pharmacy profits and win business for McKesson, the Wall Street Journal reports. California-based First DataBank, a unit of Hearst, is the main U.S. publisher of AWPs, which are used by insurers and state Medicaid programs to determine how much they reimburse pharmacies for dispensing drugs for their members and beneficiaries. According to the Journal, wholesalers today generally charge pharmacies about 2% to 3% more than they pay to purchase the drugs from pharmaceutical companies. Therefore, if AWPs increase, the result for a wholesaler is "higher margins for its pharmacy customers," the Journal reports. According to the Journal, First DataBank for years "described its AWPs as the results of a survey of national wholesalers." However, according to a deposition by a First DataBank manager, McKesson since 2003 has been the only company that participated in the survey. First DataBank's AWPs increased steeply in 2002, when the company increased from 20% to 25% the amount it marks up prices above the wholesaler's acquisition costs. The suit alleges that the plaintiffs, who include unions and employers, paid an extra $7 billion from August 2001 through March 2005 for drugs covered by the suit.
Settlement, Projected Savings
Under the settlement, which requires approval by a U.S. District Court judge, First DataBank agreed to reduce the AWPs for many drugs by five percentage points. First DataBank also agreed that it will stop publishing AWPs two years after the settlement is final. The company does not admit any wrongdoing and has not agreed to pay any damages to the plaintiffs. McKesson, which denies the allegations, is not included in the settlement. An economist hired by the plaintiffs projects that the settlement would reduce U.S. drug costs by $4 billion in 2007, although the "actual amount could be lower if pharmacies negotiate higher fees to make up for what they are losing," the Journal reports.
Origin of AWPs
According to the Journal, the term "average wholesale price" is a "misnomer because it no longer represents a price paid to wholesalers and is not an average of anything." The term originated in the late 1960s, when two consultants hired by the California Medicaid program reported that drug wholesalers generally charge retail pharmacies about a 20% markup on what they pay pharmaceutical companies for the drugs. However, the 20% markup "[g]radually ... became an anachronism" as wholesalers "consolidated and became more efficient amid competition," the Journal reports. As markups declined to about 2% to 3%, AWP publishers "continued to report a 20% markup" and states and employers "adjusted by demanding discounts of 5% to 15% off the AWP," according to the Journal. The markup remained about 20% until 2002, when First DataBank increased it to 25%. According to internal McKesson documents, nearly 99% of drugs carried the 25% markup by 2004. The Journal reports that McKesson sought the 25% markup because it wanted to simplify its computer system to include a standard markup rate. "But McKesson managers also recognized that if the markup were to be standardized, it would be beneficial to standardize it at a high level -- that is, at 25%," according to the Journal. The higher rate would result in greater profit margins for its pharmacy clients.
McKesson in statement said, "A full reading of McKesson documents, including e-mails, demonstrates that McKesson did not enter into any agreement with First DataBank to raise published AWPs." A company spokesperson added, "First DataBank has testified under oath in an earlier lawsuit involving other parties that it never told McKesson that at times McKesson was the only wholesaler being surveyed." First DataBank in a statement said, "First DataBank does not set pharmaceutical prices. First DataBank is a reporter and publisher of information that is collected from third parties." Plaintiffs' attorney Thomas Sobol of Hagens Berman Sobol Shapiro said, "We intend to continue to press the case against McKesson." Douglas Hoey, chief operating officer for the National Community Pharmacists Association, said, " We don't know where (the extra profits) went -- we just know where it did not go and that's to the community pharmacies," adding that many small pharmacies have closed or are considering closing because of slim profit margins (Martinez, Wall Street Journal, 10/6).