DOJ: News Release

McGrath Sues Drug Companies Over Prescription Price Fraud

HELENA – Montana Attorney General Mike McGrath Monday filed a lawsuit against 18 companies involved in manufacturing, marketing and selling prescription pharmaceuticals, charging that the companies’ drug-pricing practices defrauded the state, consumers and others of millions of dollars.

The 45-page complaint filed in District Court in Helena charges that the companies inflated the so-called “Average Wholesale Price” or AWP. Reimbursements from Medicare, Medicaid and from some consumers are based on the AWP, a price that is “self-reported” to industry publications by pharmaceutical companies. Federal regulations require companies to report the lowest or “best” price. Many times, however, the reported AWP is vastly higher than the actual price charged to physicians and suppliers.

The “spread” between the reimbursement based on the AWP and the price actually paid for the drugs becomes a financial windfall.

“Montana taxpayers have been cheated out of millions of dollars,” McGrath said. “And it is especially troubling that Medicaid and Medicare consumers – often senior citizens – are hardest hit by this deception.

“Taxpayers are affected by the inflated reimbursement of Medicaid and Medicare dollars,” McGrath said. “Consumers are affected by higher co-payments.”

The lawsuit seeks restitution for Montana residents and the state and federal governments along with civil penalties, recovery of Medicaid costs and punitive damages. It also seeks accurate reporting of future AWPs.

Montana becomes the second state to file a suit related to fraudulent AWPs. Nevada filed a similar complaint in January.

Summary of Montana Drug Pricing Lawsuit
Charging Drug Companies with Consumer Fraud and False Claims
February 25, 2002

Filed by: Montana Attorney General Mike McGrath

On behalf of: The State of Montana, the federal government, low-income Medicaid recipients and the general public, particularly elderly patients who are on Medicare.

Against: 18 companies involved in manufacturing, marketing and selling prescription pharmaceuticals in the State of Montana, and a number of as yet unknown companies that participated in the illegal conduct, within both the U.S. and foreign countries. There are no Montana companies or residents named as defendants.

Where: First Judicial Court, Helena

Charges: That the drug companies engaged in Medicaid fraud; caused false claims to be made to the State and participated in deceptive trade practices by manipulating or misstating the average wholesale price (AWP) of drugs, forcing the state, consumers and others to grossly overpay for prescription drugs.

The Price Tag: America’s prescription drug prices, already the highest in the world, have risen nearly three times faster than inflation in the last 10 years. However, because many people need prescription drugs to live or function normally, they have no choice but to pay whatever price is necessary to obtain their medication. While a number of factors have contributed to this dramatic price increase, in some instances the competitive market for prescription drugs has been abused. By fraudulently inflating the AWP, the drug companies have reaped tens of millions of dollars in illegal profits at the expense of patients, government programs and, therefore, all Montana taxpayers.

According to a September 2000 U.S. Government Accounting Office report, Medicare payments – which reflect a discount of 5 percent below the AWP – are greater than the prices of physician-billed drugs, based on wholesaler and general purchasing organization (GPO) catalog prices. The discounts indicate that, on a national level, Medicare’s payments for these drugs were at least $532 million higher than providers’ acquisition costs the year 2000 alone. Further, the discounts reported may be only the starting point for additional discounts provided to certain purchasers, as chargebacks, rebates, and other discounts may drive down the final sale price.

The discrepancy is so significant that, in some instances, a patient’s 20 percent co-payment is more than the cost of the drug to the doctor or provider. For examples, see table on page 19 of the complaint.

State Claims: Montana’s lawsuit seeks restitution for losses incurred by Montana residents and the State; the recovery of fraudulently obtained Medicaid costs; civil penalties of $2,000 per false claim; double the damages sustained by the State as a result of the false claim and punitive damages. The suit also asks that future AWPs accurately reflect the actual prices paid for these products.

Amount of the Claim: The amount of the claim is unknown at this time. However, it is expected to be in the millions. For example, Montana’s Medicaid program paid approximately $13.9 million to these companies in 2001.

Type of Drugs: The drugs involved are primarily medications administered by physicians or hospitals, not provided by local pharmacies or over the counter. For example, many of the drugs are used in chemotherapy for cancer or other major illnesses.

Important Terms

Average Wholesale Price (AWP): The federal Medicare program, the state Medicaid program, and certain patients reimburse physicians and pharmacies for hundreds of prescription drugs based on the average wholesale price. Pharmaceutical companies “self-report” AWPs, which are published in industry publications such as the Red Book, Blue Book or Medispan.

Group Purchasing Organizations (GPOs): Physicians and suppliers may belong to group purchasing organizations that pool purchases to negotiate lower prices with wholesalers and manufacturers. Physicians are therefore able to purchase drugs they administer at prices significantly less than the average wholesale price used to determine Medicare or Medicaid payment.

The Spread: The “spread” refers to the difference between the inflated AWP-based reimbursements to the provider and the significantly lower direct price charged by defendants to the health care provider. Drug companies create inflated “spreads” as a financial incentive to providers to prescribe specific drugs.

AWP Scheme: Numerous drug companies have reported inflated Average Wholesale Prices, so that the reported AWP for certain drugs has little or no relationship to the price physicians and pharmacies actually paid for those drugs. This fraudulent scheme has gouged consumers, taxpayers and the Medicare and Medicaid programs.

The investigative materials compiled by Congressman Pete Stark (D-Calif.) provide examples of this manipulation. In the 2000 edition of the Red Book, defendant Bristol reported an AWP of $1,296.64 for one 20mg/ml, 50ml vial of Vepesid (Etoposide) for injection. At the same time, the defendant sold exactly the same drug to a GPO for $70 – a difference of $1,226.64 between Bristol’s falsely inflated AWP and the real price.

Bristol employed a number of other financial inducements to stimulate the sales of its drugs at the expense of the Medicare and Medicaid Programs. Such inducements included volume discounts, rebates, off-invoice pricing and free goods designed to lower the net cost to the purchaser while concealing the actual cost of the drug from U.S. Government and State of Montana reimbursement officials. For example, Bristol provided free Etopophos to two Florida oncologists in exchange for their agreement to purchase other Bristol cancer drugs. Similarly, other documents show that Bristol provided free Cytogards in order to create a lower-than-invoice cost to physicians who purchased other cancer drugs through the Oncology Therapeutic Network.

Medicare Insurance Program: While Medicare doesn’t cover the cost of prescription drugs that patients administer themselves (e.g. by swallowing a pill or liquid), Medicare Part B does cover drugs that must be administered by a medical provider (e.g. drugs that are injected).

Medicare patients are directly damaged by the defendants’ AWP scheme because patients frequently are required to make co-payments for a pharmaceutical, or occasionally make payments in full. For example, Medicare recipients must pay 20 percent of the total amount that is reimbursed by Medicare to the pharmaceutical manufacturer. Thus, if Medicare reimburses $100 for a covered drug based upon the reported AWP, the Medicare beneficiary pays 20 percent (or $20) in this situation.

Medicaid Program: The State of Montana Medicaid program, a federally and state-funded public insurance program for low income Montanans, has overpaid for medications based upon the fraudulently reported AWPs. Generally, in Montana, Medicaid is funded 75 percent with federal dollars and 25 percent with state dollars.

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