Drug deal hurts consumers - Page 3

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

Its database includes numbers, for instance, on what a drug manufacturer like Aventis might charge distributor McKesson for the allergy medicine Allegra, a figure known as the "wholesale acquisition cost."

Because it's almost impossible to track every transaction between McKesson and retail chain pharmacies that McKesson distributes bulk drugs to, like Rite Aid and CVS Caremark McKesson, it's First DataBank's job to survey the distributors and come up with an "average wholesale price."

After you obtain a bottle of Allegra with a co-pay to take care of your stuffy nose, your insurance provider, say, Blue Cross or Kaiser Permanente or the SF Health Plan, refers to First DataBank's massive catalog of drugs — for which they've paid a hefty subscription fee — to make sure the price they're paying for your allergy medicine is the one properly set by the market.

First DataBank claimed for years that it was surveying multiple drug wholesalers like McKesson to come up with its average published prices and that it was increasing the number of surveys it conducted. But there aren't that many wholesalers to actually survey because so many of them have merged with one another in recent years. Also, two out of the nation's three top wholesalers apparently declined to participate in the surveys as a matter of policy.

Troy Kirkpatrick, a spokesperson for Cardinal Health, one of McKesson's few competitors, said his company doesn't give out proprietary information to anyone, let alone First DataBank.

"We have a long-standing policy of not providing confidential pricing information to external sources," Kirkpatrick said. "So if we get asked to share that type of information, we decline."

By 2001 it appeared that First Databank wasn't really surveying several wholesalers or even the two major companies that compete directly with McKesson, according to court records. First DataBank allegedly conspired with McKesson to establish an artificial baseline markup on hundreds of drugs that didn't accurately represent their true suggested retail price

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But if the bodega, or in this case, the retail pharmacy, is benefiting from the new stickers, then what's in it for McKesson?

Herrera's suit contends that if pharmacies like CVS and Rite Aid saw McKesson pressing the scales for them, they'd return to McKesson with their business instead of its two other major American wholesale competitors, Cardinal Health and AmerisourceBergen.

The three companies aggressively compete with one another for business just like they're supposed to in good ol' free-market America. But now it appears that McKesson has found a way to game the system and edge ahead of its two rivals. Indeed, McKesson is narrowly beating them in total revenue according to the Fortune 500 list.

Profit margins from drugstore chains were sagging at the time the alleged scheme between McKesson and First DataBank took off, and chain pharmacies had been pressing manufacturers to help them earn higher profit margins. According to the lawsuit, distributor McKesson came to the rescue.

So the final question, then, is whether the drug stores were enriched by all this.

Longs Drugs last year made more than $5 billion in revenue. About 20 percent of that, or $1 billion, came from the government-subsidized health care programs Medicare and Medicaid, according to company records.

In its most recent annual report to the Securities and Exchange Commission, Longs admits that if insurers began using a different benchmark than the prices published by First DataBank, such as a pricing guide that more accurately reflected market prices, there could be a "material adverse effect on our financial performance."

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