Drug deal hurts consumers

San Francisco sues two pharmaceutical titans, alleging plot to inflate prices
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Photo illustration by Ben Hopfer

gwschulz@sfbg.com

City Attorney Dennis Herrera made San Francisco the first government entity in the nation to accuse two major players in the pharmaceutical drug industry of conspiring to illegally manipulate the price of prescription drugs when he filed a lawsuit May 20. Connecticut followed Herrera's lead days later, and filed an almost identical suit making the same charges.

The cases could have far-reaching implications. If Raymond Hartman, an economist and visiting professor at Boalt Hall School of Law who testified in a related case filed by a group of East Coast labor unions two years ago is correct, then consumers, insurers, and Medicaid administrators nationwide have overpaid for prescription drugs by billions of dollars as a result of the price manipulation scheme (see "Big Pharma's Shadow," 12/20/06).

To explain the highly complex litigation, consider how goods are usually priced. Take the 99¢, three-ounce bags of chips that are reliably available at the corner store near your house. Cool Ranch Doritos. Chili Cheese Fritos. Sour Cream and Onion Ruffles. It wouldn't be a true bodega if there wasn't a rack of them situated near the front door or register.

For as long as anyone can remember, it seems, they've cost just 99¢, regardless of the local cost of living, from Richmond, Va. to San Francisco. That's because the suggested retail price of 99¢ is printed ubiquitously by the manufacturer on the packaging.

So you'd notice if a sticker suddenly appeared, lazily affixed to your bag of Sun Chips, stating a new price: $1.99. The manufacturer didn't place it there because behind the sticker you can still see the old printed price. And the counter clerk didn't place it there, because he knows the true suggested retail price is still just 99¢ and the laws of supply and demand never called for a price increase.

Instead, a local company that buys chips from the manufacturer and distributes them to the bodega in your neighborhood put it there. The bodega owner didn't complain because now it's possible for him to earn an extra dollar for each bag. In fact, as a result of the new sticker, he's more likely to take his business back to that particular distribution company over a competitor since that company is willing to artificially inflate the retail cost of a bag of chips on his behalf simply by putting a new price tag on the bag.

Now imagine that the product isn't a cheap bag of chips but billions of dollars worth of pain-reducing or life-saving pharmaceuticals. And the distributor isn't a local guy who drives a delivery truck full of boxes of chips but a multinational corporation, headquartered in San Francisco, that's ranked 18th on the Fortune 500 list, with $93.6 billion in annual revenue and a CEO, John Hammergren, who received compensation in 2007 worth more than $22 million after presiding over the company's record profits that year.

Imagine, too, that the distributor is powerful enough to slap new price stickers on cartons of drugs around the country, not just at your corner bodega, so you can't simply elect to shop elsewhere to protest the new prices. Neither can you just stop consuming needed medicines the way you can snack chips.

Herrera's federal civil suit probably has escaped media attention due to its esoteric nature (not to mention a potential conflict of interest at the San Francisco Chronicle, but we'll get to that in a minute). It charges that McKesson Corp., along with a tiny drug data publisher based in San Bruno called First DataBank, conspired in an "elaborate scheme" to unfairly mark up the price on more than 400 name-brand prescription drugs.

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