Multiple state attorneys general who have joined forces in civil antitrust litigation against the makers of generic drugs. As part of the probe, they say wholesale distributors — who have not been named as defendants — should have alerted authorities to held the line on anti-competitive behavior by manufacturers and alerted authorities to suspicious activity.
Instead, end consumers paid a steep price as alleged price-fixing conspiracies boosted costs of common drugs as much as 1,000 to 4,000 percent.
“Rather than the wholesalers be the gatekeeper, it was the fox guarding the hen house,” said Michael E. Cole, a Connecticut assistant attorney general who is leading a multistate antitrust case against manufacturers. “The wholesalers should be the sentinel here.”
It’s a telling example of why U.S. health-care costs continue to rise: Financial incentives are skewed toward driving costs higher, and it takes political outrage, determined investigators or the occasional whistleblower to stop abuses.
The role of wholesalers is a peripheral part of the investigation into what state officials have called the largest price-fixing cartel in U.S. history. The case, brought by multiple private plaintiffs in addition to 45 states, the District of Columbia and Puerto Rico, has expanded to include more than 300 drugs sold by virtually every generic manufacturer in the country.
Nearly 20 generic manufacturers — including the biggest, Teva, Mylan and Sandoz — are accused of conspiring to set high prices, divvy up markets and rig bids. Costs jumped for everyday antibiotics, hypertension drugs, asthma medicine and more. The Justice Department is running a parallel criminal investigation.
With generics making up about 90 percent of all prescriptions filled in the United States, the scope of anti-competitive activity would be hard for wholesalers to miss, say economists.
“If they’re looking carefully, it ought to raise a flag,” said Karen Van Nuys, a professor at the University of Southern California Schaeffer Center for Health Policy and Economics. “I think they are conflicted if they are profiting from it, and that makes it more complicated . . . for them to blow the whistle.”
Indeed, growth jumped substantially at all three wholesalers as the alleged corrupt pricing schemes at generic producers reached their peak. From 2013 to 2016, revenue rose at AmerisourceBergen by 67 percent, at McKesson by 55 percent and at Cardinal by 20 percent, according to their annual reports to the Securities and Exchange Commission.
The companies attributed stronger revenue at the time to higher prices, as well as greater volume and other factors.
It remains unclear if state attorneys general will name wholesalers as defendants as a result of their investigation, as they have with the drugmakers. While officials have described a cozy relationship between wholesalers and manufacturers, no evidence has emerged publicly that wholesalers knowingly participated in price-fixing schemes.
“If you’re profiting from the conspiracy anyway, there’s no need to go into the smoke-filled room,” said one lawyer involved in the litigation who requested anonymity to discuss sensitive aspects of the lawsuits. “So it can be hard to find the evidence of collusion between the manufacturers and the wholesalers.”
Still, the hunt for evidence is on.
The states and a host of private industry plaintiffs sent subpoenas to McKesson in June demanding documents and data relating to communications with the generic drugmakers, according to filings in U.S. District Court in Philadelphia.
Cardinal Health declined to comment. AmerisourceBergen said drug prices were available for other players to review, not just wholesalers.
“Awareness and understanding of pricing and trends in this space is not in any way unique to pharmaceutical wholesalers, but is available to any interested party,” said Gabe Weissman, a spokesman for AmerisourceBergen.
McKesson, the nation’s biggest wholesaler, said it attempts to drive down prices while ensuring a reliable supply of drugs.
“However, as a distributor we cannot always shield customers from rising costs from manufacturers,” McKesson spokeswoman Kristin Chasen said. “To say McKesson benefits from price increases ignores the fact that we still have strong incentives to drive costs down to keep our company competitive.”
The wholesalers are crucial links in the flow of U.S. prescription drugs, even if consumers have little idea who they are. The three largest accounted for $511 billion in 2018 sales.
The states’ lawsuit against generic makers quotes from public shareholder filings by McKesson, Cardinal and AmerisourceBergen that show how the companies win greater profits when drug companies charge higher list prices. Their fees for distributing drugs are based on a percentage of their purchases from manufacturers. Investigators also cited a McKesson 2014 investor disclosure that shows another lucrative angle to their business: “We benefit when the manufacturers increase their prices as we sell our existing inventory at the new higher prices,” the company said.
Such supercharged profit margins lie at the core of allegations in a separate lawsuit targeting McKesson and generic drugmakers.
Brought last year by an Illinois outpatient surgical clinic called Marion Healthcare, the lawsuit alleges the generic makers’ activities should have been obvious to McKesson. It cites instances in which there was reduced bidding among manufacturers to sell generic drugs to McKesson, or in which bidders dropped out.
“Its purchasing executives must have known that these observed circumstances were not consistent with the operation of a free and open market,” the lawsuit states. Corrupt activity was the only “reasonable explanation for the lack of aggressive competitive bidding on McKesson’s very attractive, high-volume business.”
It adds: “The more pricing exceeds competitive levels across the industry, the more McKesson benefits by billions of dollars.”
McKesson has a deadline of Feb. 21 to file a motion seeking dismissal of that lawsuit in Philadelphia before U.S. District Judge Cynthia M. Rufe. It will set up a key test of whether McKesson and the other wholesalers will wind up as defendants, instead of plaintiffs, in the litigation against generic manufacturers.
If the wholesalers are able to avoid legal liability and join other class-action plaintiffs, they could be in line to benefit a second time from alleged price-fixing: through possible multimillion-dollar judgments or settlements.