San Francisco City Attorney Dennis Herrera
Photo by Luke Thomas
City Program is First Government Plaintiff in Federal Suit Alleging Multimillion Dollar Conspiracy
to Hike Prices on Consumers, Providers
From the Office of City Attorney Dennis Herrera
May 20, 2008
City Attorney Dennis Herrera and the San Francisco Health Plan, the City-sponsored program that provides health insurance to more than 50,000 low-income San Franciscans, today filed suit against McKesson Corporation for illegally conspiring to manipulate pharmaceutical drug prices beginning as far back as 2001. The 88-page complaint filed in U.S. District Court in Boston this morning alleges an elaborate scheme to increase the markup on more than four hundred brand-name prescription drugs in violation of federal and state laws, forcing consumers and health coverage plans “to make hundreds of millions of dollars of excess payments.”
“At a time in which health care prices are spiraling out of control and San Francisco is acting to expand access to quality medical care for uninsured residents, we have an obligation to make sure that the marketplace is working fairly for us all,” Herrera said. “Unfortunately, here the evidence is compelling that McKesson illegally abused its market position to manipulate prices, and to artificially escalate the health care costs to the detriment of patients, businesses and taxpayers. This situation needs to be remedied, and San Francisco, its businesses and coverage providers must work together to address the health care challenges we face.”
“With the lack of effective regulation on pricing in the pharmaceutical industry in the U.S., the onus must on occasion fall on consumers to exact a reasonable standard to prevent illegal price manipulation,” said John F. Grgurina, Jr., CEO of San Francisco Health Plan. “While litigation is never a pleasant ordeal and not one we enter into lightly, it’s a necessary means to what we hope will be a fair and equitable end.”
The civil action, which Herrera filed in tandem with the San Francisco Health Plan, is related to a class action lawsuit by private parties originally filed in U.S. District Court for the District of Massachusetts in 2005. Federal District Court Judge Patti B. Saris certified the classes of private consumers and private third-party payors in March. As alleged in that action, however, those classes did not include governmental entities.
Herrera’s lawsuit represents the first government plaintiff to seek to recover damages caused by the illicit price-fixing scheme implemented by McKesson Corp. and First DataBank, a publisher of prescription drug prices. According to the complaint, the intent of the conspiracy was to increase the difference between the “wholesale acquisition cost” (which is the basis for what pharmacies pay wholesalers for prescription drugs) and the “average wholesale price” (the basis for what pharmacies charge health plans and insurers for those drugs).
The difference between the two prices—referred to as the “spread”—is alleged to have been arbitrarily hiked from 20 percent to 25 percent, forcing health coverage plans and consumers to pay artificially inflated prices on hundreds of prescription medications, including Allegra, Celebrex, Lipitor, Nexium, Valium and others. As a result, numerous governmental entities in California—including the San Francisco Health Plan and the State Medi-Cal program—paid hundreds of millions of dollars more than they should have for those prescription drugs.
The San Francisco-based McKesson Corp. is a Delaware corporation whose annual revenues in excess of $93.5 billion rank it number 18 on the annual Fortune 500 list for 2008, according to Fortune Magazine.
Describing itself on its Web site as “the largest pharmaceutical distributor in North America,” McKesson claims daily distribution of “one-third of the medicines used in North America, supplying more than 40,000 U.S. health care locations from Wal-Mart to the Department of Veterans Affairs to community pharmacies.”
San Bruno, Calif.-based First DataBank reached a settlement in the original class action litigation in October 2006, agreeing to change the method by which it calculated average wholesale prices and to eventually cease publishing its list of wholesale drug prices. First DataBank is not named in the litigation by Herrera and SFHP, but is identified as “an unnamed co-conspirator.” McKesson was not a part of that settlement, and remains a defendant in the original matter.
As part of the federal lawsuit filed today, San Francisco Health Plan seeks certification of a class comprised of government entities in the State of California for the period of August 1, 2001 to the present. The complaint, which alleges violations of the federal Racketeer Influenced and Corrupt Organizations (RICO), and the California Cartwright Act, False Claims Act and Unfair Competition Law, seeks unspecified damages, civil penalties and restitution as well as attorneys costs and fees.
The case is: San Francisco Health Plan and the People of the State of California v. McKesson Corp., United States District Court for the District of Massachusetts, Civil Action No. 08-10843, filed May 20, 2008. The related case is New England Carpenters Health Benefits Fund et al. vs. First DataBank Inc. and McKesson Corp., U.S. District Court for the District of Massachusetts, Civil Action No. 05-11148, filed June 2, 2005.
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