How a drug-data publisher owned by media giant Hearst inflated the cost of medicine
The furor over escautf8g prescription drug prices has inspired dozens of state investigations and civil lawsuits in recent years across the United States, most of them targeting manufacturers.
But another factor in the increases quietly surfaced Oct. 6 in a Boston federal courthouse. Two major Bay Area companies were accused in court documents of infutf8g the cost of prescription drugs to the tune of an estimated $7 billion between 2001 and 2005.
The Wall Street Journal first reported in early October that a drug data publishing company based in San Bruno called First DataBank had reached a settlement with a group of unions in Massachusetts and Pennsylvania over how the company gathered and presented prices in the pharmaceutical catalog that it's maintained for years.
First DataBank is a subsidiary of the New York–based media empire Hearst Corp., owner of the San Francisco Chronicle, Esquire, and dozens of other publications across the country. Another company still being targeted by the plaintiffs is the San Francisco–based drug wholesaler McKesson Corp., which earned $88 billion in revenue last year and is ranked 16th among Fortune 500 companies.
First DataBank's price listings play an enormous role in determining what Americans pay for medications. When you receive a bottle of antibiotics to treat an infection, for instance, your private health insurer or state Medicaid program (known as Medi-Cal here) will refer to First DataBank's listed drug prices as a benchmark to determine what it'll pay the pharmacy as a reimbursement. That means if the benchmark goes up, so too can your insurance premiums and the cost to state governments.
The settlement, according to federal records, forces First DataBank to adjust the formula it uses to determine those prices. An economist hired by the plaintiffs testified that the savings in 2007 alone for consumers could amount to a staggering $4 billion. First DataBank has also agreed to cease publishing the prices in their drug guides within two years.
Physicians, hospitals, pharmacists, and all manner of other health care professionals pay First DataBank a subscription rate for access to a digital clearinghouse of information on drug dosages and allergies, among other things.
More importantly, First DataBank publishes what's known as an "average wholesale price" for more than 290,000 pharmaceuticals. There are three major drug wholesalers in the United States, including McKesson, that buy drugs directly from manufacturers and then mark up the price before selling the drugs to pharmacies. The average wholesale price — widely used around the country to determine what pharmacies will get as a reimbursement — is supposed to be a reasonable reflection of what the pharmacies pay the wholesalers for drugs.
First DataBank claimed to survey these wholesalers to come up with an average price that includes the markup, which it then lists in its drug-pricing database. But in recent years, the Journal reported, such surveys have been few and far between, and sometime around 2002, First DataBank inexplicably froze the markup at 25 percent, even though the prices pharmacies were actually paying fluctuated dramatically due to competition.
Citing testimony from one employee, the Journal notes that First DataBank began surveying only one company to come up with its average: McKesson. The cost to pharmacies still varied, but McKesson had reportedly standardized its markups on paper at 25 percent. That meant insurers and state health care administrators relying on First DataBank were making reimbursements that translated to higher profits for the pharmacies.
The employee's testimony and documents in the case indicated that McKesson knew exactly what was happening. What remained unclear at press time was why First DataBank would choose to survey only McKesson or how it might have benefited from the decision.
The Journal notes the pharmacies were the only ones that stood to profit from the standardized markups, not McKesson directly. But internal McKesson e-mails show the company not only was aware of its impact on First DataBank's published figures but hoped pharmacies would see McKesson working in their best interests — a marketing scheme, if you will.
An e-mail from one McKesson product manager gleefully exclaims that the profit for pharmacies dispensing a bottle of the cholesterol drug Lipitor leaped from $6.86 to $17.18.
First DataBank admitted no wrongdoing and is not paying money to the plaintiffs of the Boston settlement. The company was founded in 1977, and Hearst purchased it in 1980. Federal records show that in 1998, Hearst bought a $38 million company that owned one of First DataBank's only real competitors, Medi-Span.
A later investigation by the Federal Trade Commission revealed that Hearst had failed to turn over key documents to the Justice Department's antitrust division during the sale. As a result the feds slapped Hearst with a $4 million fine in 2001, at that time the largest premerger antitrust penalty in US history. The FTC also belatedly concluded that Hearst's ownership of Medi-Span gave it a monopoly over the drug database market and not only required that Hearst give up Medi-Span but forced the company to disgorge $19 million in profits generated from the acquisition.
Hearst spokesperson Paul Luthringer directed us to a bare-bones statement when the Guardian called with questions about the Boston suit. "The allegations made in these actions have raised concerns with respect to the integrity of the pricing information that is provided to First DataBank for purposes of publishing [the average wholesale price]," the release states. "In light of these concerns, First DataBank has determined to make certain changes in its drug pricing reporting practices."
Climbing drug costs can't be attributed mainly to First DataBank or McKesson, of course. In fact, recent investigations and civil suits spearheaded to find out why prices have skyrocketed have focused on the manufacturers. During those inquiries First DataBank has been hit with dozens of subpoenas nationwide requesting company records and testimony, according to San Mateo Superior Court records. Many of those cases are still ongoing.
Attorneys for the plaintiffs in Boston who made McKesson and First DataBank defendants in the summer of 2005 declined to comment. McKesson also has remained tight-lipped since the Journal story was published. Spokesperson James Larkin said the company would not answer questions beyond a prepared statement.
"If First DataBank decided to survey McKesson only, it did so without telling McKesson," the statement reads. "In fact, First DataBank has affirmed in an earlier lawsuit involving other parties that it never told McKesson that at times McKesson was the only wholesaler being surveyed." SFBG
Here are links to key documents, including federal court records of the Oct. 6 Boston settlement with the Hearst-owned First DataBank (www.hagens-berman.com/first_data_bank_settlement.htm ), the Justice Department's antitrust fine of Hearst in 200l (www.usdoj.gov/atr/cases/indx330.htm ), and the Federal Trade Commission decision requiring Hearst to give up its monopolistic subsidiary, Medi-Span (www.ftc.gov/bc/healthcare/antitrust/commissionactions.htm ).