The bigger picture

Pub date December 22, 2006
WriterG.W. Schulz

Considering the potential impacts of the First DataBank litigation, which easily reach the billions of dollars, and the evidence that two companies with big footprints in San Francisco (Hearst, which owns the Chronicle, and McKesson, one of the city’s biggest corporations) may have conspired to cheat consumers, this story has gotten very little press coverage.

And the news reports that have run have missed some major points.

The suit, brought by a group of unions scattered over the northeastern United States, charges that McKesson Corp, and First DataBank, a publication owned by Hearst, conspired to artificially and arbitrarily raise prescription drug prices costing health plans (such as the ones maintained by the plaintiffs’ unions), private insurers and state Medicaid offices approximately $7 billion between 2001 and 2005.

Pharmaceutical industry publications have covered the news, but otherwise, it has been relegated to the business press (the Hearst-owned Chronicle caught up to the story weeks after the plaintiffs proposed a settlement deal with First DataBank and dumped it in the business section).

When such stories are assigned to a business reporter, they can take a different dimension. The business press has a tendency to focus on how this type of litigation might negatively impact Wall Street — rather than emphasizing how class-action suits are a tool for consumers to pursue relief when they believe Big Pharma (or any major corporation for that matter) has broken the law.

Some flaws in the coverage and facts that the press hasn’t played up are listed below:

* A McKesson spokesperson told the Chronicle that the company “would certainly support a move away from [average wholesale price] that created a more logical and stable reimbursement structure for all parties in the health-care system.” But the plaintiffs contend, relying on an untold number of internal e-mails and memos obtained by their attorneys, that McKesson and First DataBank both knew exactly what was going on and actively worked to keep it a secret. McKesson flat-out denies it knew anything about what was happening to First DataBank’s published average wholesale price. But according to one e-mail cited in legal papers, the alleged scheme was so controversial that the two companies scorned drug producers who smelled legal trouble after becoming aware of it and attempted to back away.

* McKesson today is still working to recover from a $9 billion accounting scandal that in 1999 led four executives from a subsidiary to plead guilty to conspiracy and securities fraud and nearly landed two more behind bars before a federal jury deadlocked on three charges with a single holdout vote. U.S. Attorney Kevin Ryan has not yet announced whether his office will attempt to retry the two men.

* In 1998, the Federal Trade Commission blocked attempted mergers by the nation’s four largest drug wholesalers, which would have reduced the number to two. McKesson wanted to acquire the company AmeriSource Health Corp., and a company called Cardinal Health attempted to acquire Bergen Brunswig Corp. AmeriSource and Bergen did, however, ultimately merge with one another bringing the number of major wholesalers to just three. Even though the original deal was stopped, McKesson quietly revealed in 2005 through a Securities and Exchange Commission filing that the FTC had requested documents from the company and was investigating whether it had engaged in anticompetitive practices with other major wholesalers in order to limit competition. At the time that McKesson and Amerisource’s proposed merger was halted in 1998, then FTC-director William Baer expressed serious concerns about two corporations dominating a substantial portion of the drug wholesale market. “If allowed to merge into two firms, the two surviving companies would control over 80 percent of the prescription drugs sold through wholesalers in the country,” he said at the time. “That means higher prices for prescription drugs and a reduction in the timely delivery of these drugs to hospitals, nursing homes and drugstores, which could affect patient care.”

* First DataBank has had its own problems with the FTC. The company was founded in 1977, and Hearst purchased it in 1980. Federal records show that in 1998, Hearst bought another $38 million company that owned one of First DataBank’s only real competitors, Medi-Span. A later investigation by the FTC revealed that Hearst had failed to turn over key documents to the Justice Department’s antitrust division during the sale. As a result, the feds slapped Hearst with a $4 million fine in 2001, at that time the largest pre-merger antitrust penalty in U.S. history. The FTC also belatedly concluded that Hearst’s ownership of Medi-Span gave it a monopoly over the drug database market and not only required that Hearst give up Medi-Span but forced the company to disgorge $19 million in profits generated from the acquisition.

* Anthony Wright, executive director of Health Access California, a health-care reform non-profit based in Oakland, told us that in past years, the state legislature has been more likely to cut the Medi-Cal budget than to look seriously at how the pharmaceutical industry might be manipuutf8g drug prices. He said only after a tough battle in Sacramento this year were Medi-Cal cuts originally supported by both Democrats and Republicans stopped. “From a state perspective, when faced with a budget shortfall, it is easier to look first at simply providing less services than the politically and operationally tougher job of trying to find savings from drug companies or others,” he said. In recent years at least, several state attorneys general, including California’s Bill Lockyer, began probing evidence that the average wholesale price was not only known to be an inaccurate benchmark by industry insiders for drug reimbursements, but that manufacturers, too, had participated in infutf8g those prices in a method similar to what McKesson is alleged to have done. Health-care policy wonks say the average wholesale price has been a problem for decades.

Schemes such as the one alleged in the First DataBank litigation are highly complex, making it difficult for laypersons to identify them. Unfortunately reporters and editors have also been known to avoid such stories like the plague, because they’re seemingly too difficult to summarize and not as sexy as local crime and celebrity gossip — even though billions of dollars could be at stake.