Private Lawsuits Follow TAP Settlement of Government Allegations of Overcharges for Drugs

Judith A. Waltz, JD



The focus on pharmaceutical company sales and marketing practices is not limited to government enforcement actions. There has been an increasing amount of litigation filed by private payers, health plans, and consumer coalitions.

Following closely upon the record-setting $875 million government settlement against TAP Pharmaceutical Products for sales and marketing prices involving its drug Lupron (see Legal Matters, November 2001), a coalition of consumer groups filed suit in December 2001 against 28 pharmaceutical companies alleging that they defrauded Medicare and private consumers by inflating the prices of drugs they sold to the Medicare program. The overcharges were estimated at more than $800 million for the preceding year alone and included allegations involving several common drugs for which copayments from the patient are required, which are generally paid either in cash or through premiums to Medigap insurers who pick up copayments as part of their coverage. The lawsuit seeks triple damages.

The lawsuit was filed in federal district court in Boston, to date the hub of government enforcement actions against pharmaceutical companies. Leading the coalition is the Prescription Access Litigation (PAL) project, which was joined in the suit by other consumer groups representing the elderly and other potentially impacted groups in California, Colorado, Florida, Massachusetts, Minnesota, New Jersey, New York, Pennsylvania, Vermont, West Virginia, and Wisconsin. Formed in 2001 by Boston-based Community Catalyst and the National Health Law Program, PAL is a coalition consisting of more than 70 organizations in more than 30 states and is the nation's largest consumer health advocacy organization.

Allegations in the lawsuit are premised on purported manipulations of the average wholesale price (AWP). Medicare reimburses single-source covered drugs at 95% of AWP. For multisource drugs, the Medicare payment allowance is 95% of the lower of the median AWP of all generic forms or the lowest AWP of a brand-name product. No adjustment to reimbursement is made for the actual cost of the drug paid by the supplier. There is currently an active debate as to how AWPs are calculated and their use for purposes of determining federal health care program reimbursements. The specifications for AWPs are not defined by law; instead, AWPs are periodically self-reported by manufacturers to such outlets as Red Book, or First DataBank, which compiles the National Drug Data File. In recent testimony before a House subcommittee, the AWP was described as neither an average price nor what wholesalers charge. In fact, the US General Accounting Office (GAO) estimates that Medicare's payments for physician-billed drugs were at least $532 million higher than providers' acquisition costs in 2000 based just on information relating to discounts and not including additional price reductions, such as chargebacks and other rebates.

The PAL lawsuit alleges that the named pharmaceutical companies have engaged in a pattern or practice of selling drugs to physicians at prices that are below the cost reimbursed by Medicare, resulting in violations of consumer laws and even racketeering statutes. According to reported statements by PAL lawyers, discounts given to physicians have ranged from 13% to 34% off the AWP, sometimes going as high as an 85% differential for particular drugs. These numbers appear to have been taken from a September 2001 report from the GAO entitled "Payments for Covered Outpatient Drugs Exceed Providers' Cost." As in the TAP case, PAL alleged that physicians were given severe discounts to promote use of products, which were then reimbursed by Medicare according to its preset payment levels. The practice of encouraging physicians to use a product based in part on the profit between what is paid for the drug and what is reimbursed by a health care payer is generally known as "marketing the spread." The PAL suit also alleges that the reported AWP itself was inflated.

Other lawsuits have also been filed in the aftermath of the TAP settlement based on alleged manipulations of the AWP. These include a class action suit filed by the Teamsters Health and Welfare Fund of Philadelphia (an employee benefit plan) against a pharmaceutical manufacturer on behalf of all those who relied on the AWP in paying for certain cancer drugs. A second class action suit was filed by this group against another manufacturer for alleged manipulations of the AWP of 2 drugs used to help prevent nausea during chemotherapy. It was alleged in both cases that the pharmaceutical manufacturer fraudulently inflated the AWP in industry publications, knowing that this information would be used to determine drug reimbursement levels. Empire Healthchoice, Inc, and Blue Cross and Blue Shield of Massachusetts have sued TAP to recover alleged overpayments made through Medicare and Medicaid HMO programs, which were not covered by the settlement with the government.

It seems clear that allegations of improper pricing will continue to follow drug manufacturers and that legal defense costs and potential damage claims may result in an overall increase in drug costs for many consumers. This trend is likely to be compounded by a reduction in government reimbursements resulting from a change in methodology away from the AWP to a more market-based approach.


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