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Fuzzy line on drug prices

By Tim O'Reiley

Daily Record, November 3, 2002

Even by the bountiful marketing practices of the pharmaceutical industry, Warner-Lambert Co. went too far.

To gain market share in 1999 for its best-selling Lipitor cholesterol medication, the company promised the Ochsner Health Plan in Lousiana a $679,000 package of incentives to get favorable consideration.

The package included funding an education program, underwriting pharmacists' salaries and use of a promotional bus called the Lipivan.

The bill came to Warner-Lambert's successor, Pfizer, which last week agreed to settle for $49 million a whistleblower's lawsuit saying the arrangement had the side effect of overcharging state Medicaid programs by $21 million.

Pfizer did not admit guilt.

The case stands out not as an example of a few overzealous salespeople but because it offers a detailed look at a legal morass ensnaring much of the industry.

Numerous private individuals and groups, as well as the federal and state governments, have launched investigations and litigation saying pharmaceutical companies funneled covert rebates, or kickbacks, to pharmacies and health plans, effectively cutting the wholesale prices of drugs without offering the same discounts to government programs as required by law.

Companies involved would not comment on the actions because only a few suits have been resolved.

Jeff Trewhitt, a spokesman for the trade group Pharmaceutical Research and Manufacturers of America, cautioned against concluding that the industry engages in widespread rule-breaking.

"These are almost all preliminary suits at this point," he said. "There are a lot of allegations, but in the vast majority of cases, there has not been a verdict.

But Joel M. Androphy, the Houston lawyer who represented former Warner-Lambert sales executive John David Foster in the Pfizer case, said, "I expect the drug industry to be paying out a lot more in these kinds of cases."

The settlement includes $6 million for Foster, who must pay Androphy's legal fees. Androphy declined to discuss that amount, but lawyers in such cases generally receive about 40 percent of the client's share.

Rules may be revised

On another level, federal officials have started pushing to revise the reimbursement rules in the hope of shaving billions of dollars from government spending on drugs.

While nothing firm has been proposed beyond a voluntary code of ethics that would curtail the inducements that drugmakers could hand out to sway prescription decisions, some health care groups, particularly pharmacists, have organized against any changes.

The controversy stems from the nebulous nature of "average wholesale price," the benchmark for determining how much the federal government pays for drugs for the elderly, covered by Medicare, and state and federal governments pay for drugs for low-income people under Medicaid.

Testifying before Congress last month, George Reeb, assistant inspector general at the Centers for Medicare and Medicaid Audits, said the wholesale price is "not clearly defined by law or regulation," but rather is established by drug companies in industry reference publications, such as the Red Book.

That price "bear(s) little or no resemblance to actual wholesale prices available to physicians, suppliers (pharmacies) and large government purchasers," Reeb said.

The Medicare program pays the wholesale price minus a 5 percent discount, while many states pay varying discounts that average 10.3 percent for Medicaid prescriptions.

Commercial pharmacies, by contrast, not only admit paying substantially less but say that doing so is critical to their economic viability.

With Medicare, which covers only a handful of drugs used for dialysis, transplant and cancer therapies, the difference between the listed wholesale price and the street price is legal.

Medicaid, on the other hand, requires drug companies to pay rebates to government agencies to cover the difference if the "best available price" to the private sector undercuts the listed wholesale price.

Nevertheless, the system's ambiguities have opened the gates to numerous legal actions.

Here is a sample, based on disclosures in company financial reports:

n Madison-based Wyeth is one of 28 companies defending a suit in Massachusetts brought by a consumer group saying the companies artificially inflated wholesale prices, increasing the amounts that Medicare-covered patients had to spend as part of their 20 percent co-payments.

n A suit filed by the Montana attorney general in February seeking refunds for the state based on the alleged manipulation of the wholesale price and a similar measure, the average manufacturer's price, by Wyeth and 17 other companies.

n An investigation launched three years ago by the U.S. Attorney's office in Philadelphia that led to grand jury subpoenas being issued earlier this year about Schering-Plough Corp.'s dealings with managed care programs.

The probe has focused on whether contributions to disease management programs, heavily discounted drugs and other marketing tactics violated anti-kickback laws and constituted unreported discounts from the best price for which Medicaid could be reimbursed.

n Other actions by private groups or government authorities based on the wholesale price in Nevada, Arizona, Texas, West Virginia and Florida, among other states.

n Bayer Corp. settled one whistleblower's suit about Medicaid pricing for $14 million in January 2001.

n TAP Pharmaceutical Products paid out $875 million in another action, the largest settlement in a lawsuit concerning Medicare or Medicaid, involving kickbacks in the form of entertainment, grants and debt forgiveness.

Traced to promotion

The Warner-Lambert case, which was filed in 2000 but unsealed as part of the settlement last week, traces back to David Foster's promotion in July 1998 to national account manager for Texas and Louisiana at Parke-Davis, then the prescription drug division of Warner-Lambert.

The previous month, court papers say, Parke-Davis offered Ochsner Health Plan $108,000 to place the now-discontinued diabetes drug Rezulin on the unrestricted formulary list, meaning that it would be available to all the members for a $5 or $10 co-payment.

Although Foster told his bosses that an Ochsner pharmacist considered the proposal improper, a supervisor said such donations produced quadruple their face value in sales.

The Rezulin plan was ultimately dropped for unexplained reasons, but another with Lipitor went ahead.

The plan included a 15 percent discount for Ochsner, $200,000 for a cholesterol education program, $50,000 annually for three years to help cover the salaries of Ochsner pharmacists, $25,000 for training for Ochsner pharmacists and doctors, as much as $200,000 for a disease management program, and four days of using the Lipivan, a mobile cholesterol testing lab run by Parke-Davis employees, valued at $25,000 a day.

The training and disease management portions never went into effect, but the rest of the package did.

After complaining about the ethical and potential legal violations to his superiors, Foster was placed on administrative leave in November 1999 and later fired. He has since taken another sales post with an undisclosed drug company in the Houston area, Androphy said, but he has filed another complaint against Pfizer over his termination.

In announcing the settlement, Pfizer, which purchased Warner-Lambert in mid-2000, after the alleged violations, said the government declined to pursue claims of similar conduct involving several other large pharmacies or health plans. Whistleblower suits are filed by individuals but prosecuted by the federal government.

Androphy said other allegations remain active, but he declined to specify them as part of the confidentiality required in whistleblower cases.

In general, he said, kickback cases often hinge on whether the money promised for health programs is spent that way. "There is a gray area if only some of the money is given or spent in part and how it is spent," he said.

What turned the Foster case in his favor, Androphy said, was a "smoking gun" memo by Parke-Davis that clearly conditioned the incentives on Ochsner listing Lipitor as an unrestricted formulary that was given preferred status. Such donations are generally permissible, and not considered discounts, as long as they come with no strings attached.

In addition to paying $49 million in the case, Pfizer agreed to abide by a corporate integrity program, although spokeswoman Mariann Caprino declined to detail what changes this would require.

"Pfizer operates within the highest ethical guidelines applicable to the industry under the AMA (American Medical Association) and PhRMA (Pharmaceutical Research and Manufacturers of America) codes." she said.

The size of the settlement, more than double the rebate to Medicaid, sent a message to the industry, Androphy said: "If you violate the law, you will have to pay more than just what you deprived the government of."

Laying the groundwork

Officials at the federal Department of Health and Human Services, under which Medicare and Medicaid fall, have begun laying the groundwork for revamping the system.

A nonbinding code of conduct for the drug companies, open for public comment until Dec. 2, would cast a suspicious eye on longstanding industry practices, such as holding educational seminars with marketing themes in places such as the Bahamas; funding scholarships; paying for other conferences; or handing out gifts.

While calling the PhRMA code "a good starting point," the draft code said adhering to it "will not necessarily protect a manufacturer from prosecution or liability for illegal conduct."

Reeb, of the inspector general's office, also advocates dropping the wholesale price closer to the open market price.

A department analysis found that in 1999, Medicare could have saved 15 percent, or $425 million, on 24 of the most prescribed drugs if payments had been calculated under the Medicaid rebate formula. The savings would have been even more using other benchmarks, he said.

The Medicare drug budget ballooned from $3.9 billion that year to $6.5 billion in 2001.

Even with the rebates, another study by inspector general Janet Rehnquist concluded that Medicaid could have saved from 17.2 percent to 72.1 percent, depending on the category of drug, if the wholesale prices were set closer to market prices. In 1999, Medicaid paid $17.9 billion for medications.

Reeb and Rehnquist noted that physicians and pharmacists have come to rely on the spread between what they pay for drugs and the higher government reimbursements as vital income for their practices, but they rejected this as a reason for leaving the wholesale prices untouched.

Dr. Irvin Bonder, president of the Morris County Medical Society, said it was "nonsense" that doctors were profiting from a price spread.

"There are very few medications we actually charge for, and I don't know of anyone doing what they say," he said.

Pharmacists, however, openly defend profiting from the spread.

Slashing the wholesale price "would just drive everyone out of business and nobody would be there to give you your drugs," said Joseph Roney, president of the New Jersey Pharmacist's Association in Princeton.

Any move to replace the wholesale price with what is known as the actual acquisition cost would be fair only if it included allowances for basic operating expenses, overhead and a profit margin, Roney said. "What you would wind up with is a complicated, goofy formula that still did not figure out the actual acquisition cost."