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http://www.nytimes.com/2003/02/13/business/13DRUG.html

New York Will Sue 2 Big Drug Makers on Doctor Discount

By REED ABELSON and JONATHAN D. GLATER

ew York plans to sue two major pharmaceutical companies today, accusing them essentially of paying doctors and pharmacists to choose the companies' drugs over competing medicines.

The state is joining six other states, including California and Texas, in a growing legal attack on a longstanding practice that the states say has cost state and federal governments and consumers hundreds of millions of dollars in recent years.

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The lawsuits contend that GlaxoSmithKline and Pharmacia, the two large drug companies, gave discounts to doctors and pharmacies that bought their drugs. Doctors often buy and dispense injectable drugs like chemotherapy medicines. Pharmacies buy drugs in bulk to fill prescriptions, and sometimes recommend particular drugs to doctors.

The discounts work this way. The drug companies establish a price for the drug that the government and insurance companies use to determine how much to reimburse the doctors and pharmacies for the drugs they buy. The companies then allow the doctors and pharmacies to buy their drugs at much lower prices than the ones reported to the government. The doctors and pharmacies then pocket the difference.

The lawsuits argue that the drug companies, doctors and pharmacists all profit from this arrangement, at the expense of the taxpayer and the patient, who has a higher co-payment.

The lawsuits are expected to be filed this morning in state court in Albany by Attorney General Eliot Spitzer, who is holding a news conference to announce New York's action. A third drug maker, Aventis, has been notified that it may also be sued.

Some cancer doctors have come under fire from members of Congress and private insurers for profiting from providing chemotherapy drugs to their patients, but the states are now taking direct aim at the overall pricing practices of some of the nation's largest pharmaceutical companies.

Regulators say it is easier to pursue the big drug makers for setting the high prices, known as average wholesale prices, than it is to investigate numerous individual doctors.

"What we're trying to do is focus on the entire practice, rather than a particular drug from a particular company," Mr. Spitzer said in an interview on Tuesday.

"What underlies this is a larger failure of the marketplace to properly price drugs," he added.

As an example of the problem, Mr. Spitzer cited Adriamycin, a chemotherapy drug made by Pharmacia. According to his staff, a doctor may pay as little as $7.40 for 10 milligrams of the drug after the discounts from the drug maker. But Medicare would reimburse the doctor $34.42, based on Pharmacia's average wholesale price, and a Medicare patient in New York would make a co-payment of $8.60. The doctor would pocket $35.62, the difference between the amount paid for the drug and the payments received from the patient and from Medicare.

Many of the companies and lawyers who defend pharmaceutical companies argue that their pricing practices are legal, and say that attorneys general are overreaching in their lawsuits. Any changes to the Medicare and Medicaid reimbursement system, they say, should be made by Congress, which has so far chosen not to act.

"The question from the standpoint of the policy makers is whether this is the kind of promotion that they want to, as a policy matter, stop," said James M. Spears, a lawyer with Ropes & Gray in Washington. "That's a question for Congress to answer."

But the state suits pose a worsening problem for pharmaceutical companies as regulators examine health care costs amid a nationwide squeeze on state budgets. Several states, including California, Texas, Minnesota and Nevada, have filed suits against numerous drug makers in the last three years over their prices, and they say they are prepared to expand their activities as they gather more evidence.

In California, for example, the attorney general expects to file new suits in addition to one filed there last month against Abbott Laboratories and Wyeth.

More states are contemplating lawsuits of their own, and state attorneys general have formed a working group to share information and discuss legal strategies. Private lawyers, many of them veterans of the tobacco class-action litigation, have also joined the fray.

Attorneys general are trying to use litigation to force companies to change their practices, not just to win damages, said Jennifer Arlen, a law professor at New York University.

"They're filing cases where they know full well that it's not clear that they can win if they go to trial," she said. "But because they're not seeking damages in many of these situations — they're seeking structured settlements — they're often getting a big bang for the buck by filing their case."

Although the states are sharing information, they have filed separate lawsuits rather than a single, unified suit, and they are using different laws and pursuing different legal strategies. Several drug companies are battling to have the lawsuits consolidated in federal court in Boston.

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While the states are suing on behalf of their individual Medicaid programs, which pay for drugs for the poor, some are also suing on behalf of state residents covered under the federal Medicare program. Medicare does not pay for most drugs, but does cover part of the cost of certain kinds of medicines, like chemotherapy drugs administered in a doctor's office. Patients are responsible for paying 20 percent of the bill.

"They're harmed much more than the states," said Mike Hatch, the attorney general for Minnesota, which sued Pharmacia last year.

Regulators are also concerned that cancer doctors may have a financial incentive to recommend inappropriate or unnecessary chemotherapy because they are able to profit from prescribing particular drugs.

While New York is focusing on Pharmacia and GlaxoSmithKline as makers of anti-nausea drugs, the lawsuits include all of the drugs they make. (Aventis also makes anti-nausea drugs.) Medicaid is significantly overpaying for many drugs, Mr. Spitzer said, although it is unclear exactly how large those overpayments may be. "I sense there is waste everywhere," he said.

The New York suits charge Pharmacia and GlaxoSmithKline with consumer fraud and making false statements to government health plans when they establish the drug prices, as well as with commercial bribery for trying to wield inappropriate influence on doctors' decisions. The suits take advantage of a New York statute that makes it a crime to try to interfere with the fiduciary relationship between a doctor and a patient.

Each drug company benefits if it can enlarge its share of the market by inducing doctors to choose their drugs based on the difference, or spread, between what doctors pay for the drug and the amount they are reimbursed, Mr. Spitzer said. "They gain by marketing the spread."

Pharmacia and GlaxoSmithKline both argue that Congress has chosen to allow the current system of setting prices for drugs to continue. Spokesmen for those companies and for Aventis said they had not seen the suit to be filed today and could not comment on it.

A spokeswoman for Aventis said yesterday that the company voluntarily stopped reporting an average wholesale price in August 2001, but declined to say how the government now sets reimbursement rates for its drugs.

"We really have to wait until we see and then review any additional allegations," she said.

But Mr. Spitzer defended his decision to pursue the litigation, despite inaction by Congress and the government programs. "Regulatory lapses elsewhere don't create a justification for the perpetuation of a system that is broken," he said.

The escalating price of drugs is motivating many states to try to tackle these practices. In California, prescription costs for the Medi-Cal program, which provides health insurance to low-income residents, doubled from 1997 to 2001, even as the number of patients declined by 15 percent.

"The public should be incensed that the pharmaceutical giants are fleecing the Medicaid program," said Collin Wong, the director of the state attorney general's bureau of Medi-Cal fraud and elder abuse.

The Texas lawsuit, which was one of the first to be filed, has turned up some evidence unfavorable to the pharmaceutical companies, said Jeff Boyd, deputy attorney general for general litigation.

Some former drug company employees who were deposed have provided evidence that manufacturers deliberately used the spread between the government's reimbursement and the price paid by doctors to persuade doctors to use their drugs.

Mr. Boyd said he thought some drug companies might try to avoid taking cases to a jury.

"We're hopeful that as some of these dominoes begin to fall, some of these companies will see the writing on the wall and come forward and start trying to negotiate a resolution," he said.

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