Merck Agrees to Pay $42 Million

By Milt Freundenheim

 NY Times, December 10, 2002

Merck & Company yesterday agreed to pay $42.5 million to settle long-running class-action lawsuits against its pharmacy-benefit unit, Medco Health Solutions.

But lawyers for the plaintiffs were split over whether to accept the agreement. Some lawyers said it was too small, considering that Medco had pocketed billions of dollars in rebates from manufacturers and other fees that they said should have gone to thousands of health plans and millions of consumers. Medco has 65 million holders of its drug cards.

Medco said it did not admit any liability in agreeing to the settlement, which is subject to approval by Judge Charles L. Brieant in Federal District Court in White Plains.

Medco is one of the largest of a handful of pharmacy-benefit management companies, including AdvancePCS and Express Scripts, that negotiate with drug manufacturers to obtain discounts for employers and health plans.

In lawsuits across the country, Medco, AdvancePCS and Express Scripts have been accused of violating fiduciary duties to customers under the federal Employee Retirement Income Security Act by failing to disclose the extent of their financial ties with the manufacturers.

Russ M. Herman, a lawyer from New Orleans who has been active in class-action suits against the tobacco industry, asked Judge Brieant yesterday to delay the settlement process for 90 days so that his partnership, Herman, Mathis, Casey, Kitchens & Gerel, based in Atlanta, could examine 67 boxes of Medco business records.

Mr. Herman said that, based on a preliminary analysis by expert consultants, Medco had held back $2.85 billion in incentive rebates from 1995 to 1999 and $1.29 billion more in rebates and various fees last year. (No figures were given for 2000.) Herman, Mathis represents individual, corporate and municipal clients — including the cities of Atlantic City, N.J., and Paterson, N.J. — in cases against pharmacy-benefit managers.

Anita Kawatra, a spokeswoman for Medco, based in Franklin Lakes, N.J., said contracts varied according to negotiations between Medco and health plans.

Philippe Selendy of Boies, Schiller & Flexner, a law firm for plaintiffs that agreed to the settlement, said the incentive rebates, which rewarded Medco for gaining market share for particular drugs, generally were not supposed to be passed along to the customers.

Linda Cahn, a lawyer for plaintiffs who has been working on the suits since 1997, said the customers often had no way of knowing the terms of the arrangements between Medco and the drug makers. She said pharmacy management companies could "categorize manufacturers' payments in any way they want in order to keep the payments, rather than pass them through to plans."

"It's all a labeling game," she said.

The plaintiffs' lawyers asked Judge Brieant to open Medco records, which were sealed to shield the company's markups and pricing methods from competitors.

"Everything that matters to the validity of the settlement" should be unsealed, Judge Brieant said, so the plaintiffs can decide whether to accept the deal.

Medco lawyers said that within a few days they would give the court a list of items that the company wants to keep secret.

Under terms of the settlement, Medco agreed to notify customers when it makes changes on its preferred list of drugs and when lower-cost generic versions become available. It would also tell them what prices and costs were used to calculate discounts.

Mr. Selendy said the information would put health plans "on notice to evaluate" the contracts and decide what terms to accept.

Mr. Herman said that if the records were not opened, he would advise his clients to reject the settlement or to challenge it. Ms. Cahn said the plan fiduciaries would have no choice but to opt out in order to protect the interests of their plans.

In hearings and statements in the White Plains lawsuits, lawyers for Medco have said that the company sometimes arranged to promote higher-priced drugs as part of a discount package of products by a particular manufacturer.

Medco also disclosed, in a Securities and Exchange filing, that it was under pressure from Merck to gain market share for Merck drugs like Zocor, a highly regarded but expensive cholesterol treatment.

Merck tried to spin off Medco as a separate company earlier this year but withdrew the initial public offering when the interest of investors flagged as the stock market went into a tailspin.

Medco reported after-tax income of $254 million for the first nine months of 2002 on revenue of $24.42 billion. Shares of Merck rose 18 cents yesterday, to close at $58.75 on the New York Stock Exchange.