A Medical Device Daily

A Seattle-based law firm representing consumers and third-party payers are proposing a landmark $350 million settlement with healthcare services giant McKesson (San Francisco) to settle allegations the company fraudulently inflated the price of more than 400 prescription drugs by manipulating drug-pricing benchmarks.

The lawsuit, filed under the Racketeer Influenced and Corrupt Organizations Act (RICO), claimed McKesson conspired with drug publishing company First DataBank (FDB) to fraudulently inflate the widely used Average Wholesale Price (AWP) figures, which insurance companies, retailers and others use to calculate the purchase price, payments and co-payments of the most common prescription medications.

According to the attorneys from the law firm Hagens Berman Sobol Shapiro, the settlement is one of the nation's largest RICO settlements, and if approved by the court will be distributed among third-party payers, cash and co-pay consumers.

"The impact of this settlement is very significant for all who have paid for brand name drugs," said Steve Berman, managing partner at Hagens Berman Sobol Shapiro and lead counsel.

Retailers typically buy drugs based on the wholesale acquisition cost (WAC) and base co-pays and charges to third-party payers using the AWP, court documents show. The suit alleged McKesson and FDB increased the AWP spread between WAC and AWP from 20% to 25% beginning in 2001, allowing retail clients to reap larger profits at the expense of consumers and third-party payers, such as insurance companies. By 2004, nearly every common prescription drug enjoyed a 25% spread between the two benchmarks, according to the attorneys.

Plaintiffs claimed McKesson orchestrated the scheme to put the company in good favor with retailers who might otherwise choose to buy wholesale prescriptions from McKesson's competitors in the highly competitive wholesale arena. Retailers make a profit off the increased spread created by the McKesson engineered scheme.

The attorneys note that, according to court documents, FDB claimed it surveyed a number of wholesalers when it published its AWP benchmark, when in fact it relied on McKesson as its sole source of information. Beginning in 2001 and through 2003, McKesson changed the mark up on hundreds of brand name drugs from 20% to 25% as part of the scheme, the lawsuit alleges.

"For years consumers have been burdened with inflated drug prices and as a firm we feel a sense of gratitude in being able to ease that burden for many," said Berman. "Today's settlement goes a step further in helping to correct corrupt business practices and rectify a damaging situation to consumers."

Plaintiffs in the case include those who paid for the brand name drugs and whose payments were tied to AWP. This includes all purchases from Aug. 1, 2001 until March 15, 2005. The plaintiffs propose the $350 million disperse among three groups: insurers and other entities that paid for drugs ($288,675,000), consumers who paid a graduated co-payment ($20,900,000), and cash paying consumers ($40,425,000).

A settlement-approval hearing has not yet been set.

In other legalities, Miami physicians Carlos Contreras and Ramon Pichardo were sentenced to 37 months and 48 months in prison, respectively, for defrauding the Medicare program in connection with a $6.8 million HIV infusion fraud scheme, according to Matthew Friedrich, acting assistant attorney general of the Criminal Division and U.S. Attorney R. Alexander Acosta of the Southern District of Florida.

Judge Federico Moreno of the U.S. District Court for the Southern District of Florida also ordered that Contreras and Pichardo be placed on three years of supervised release following their prison terms and that they pay $4.2 million in restitution to the Medicare trust fund.

On Sept. 11, Contreras and Pichardo each pleaded guilty to one count of conspiracy to commit health care fraud. Contreras pleaded guilty in connection with his role as the owner and medical doctor at CNC Medical, a Miami-area HIV clinic that purported to provide HIV infusion services to Medicare beneficiaries. Pichardo pleaded guilty in connection with his role as a medical doctor at CNC Medical.

In their pleas, Contreras and Pichardo admitted that between November 2002 and April 2004, they conspired with others to file $6.8 million in false claims to the Medicare program for HIV infusion services that were not provided, nor were they medically necessary. As a result of their fraud, the Medicare program paid about $4.2 million in fraudulent bills.

Contreras admitted that after Medicare proceeds were deposited into the CNC Medical bank accounts, he transferred roughly $1.7 million of the proceeds to sham management, marketing and investment companies owned and operated by alleged co-conspirators Carlos, Luis and Jose Benitez (Medical Device Daily, Nov. 20, 2008).

The Benitez brothers and Thomas McKenzie were charged separately with healthcare fraud and money laundering crimes in an indictment unsealed on June 11.

The cases were brought as part of the Medicare Fraud Strike Force (MFSF). Since the inception of MFSF operations in 2007, federal prosecutors have indicted 104 cases with 184 defendants in Los Angeles and Miami. Collectively, officials say these defendants fraudulently billed the Medicare program for more than half a billion dollars.