Sunday, January 12, 2003

BY ED SILVERMAN
Star-Ledger Staff

Nearly two dozen states are investigating the pricing practices of pharmacy benefit managers, including Merck & Co.'s Medco unit, according to the Connecticut attorney general and several other law enforcement sources.

The investigation, still in the early stages, could send a jolt through an industry that plays a crucial role in distributing nearly half of all prescriptions nationwide.

States such as New York and Maine are looking at whether Medco and other companies -- which buy prescription drugs at discounts on behalf of employers, unions and insurers -- keep rebates that should be passed to their clients.

The states also are investigating allegations that pharmacy benefit managers pressure doctors to switch prescriptions to drugs that may not necessarily be the most affordable.

"The stakes are enormous in terms of the financial and health implications," said Richard Blumenthal, attorney general for Connecticut and co-chair of a pharmaceutical-pricing task force created by a national group of attorneys general.

An executive at Medco, the nation's largest pharmacy benefit manager, disputed that the company has done anything wrong.

The issue for the states is whether the pharmacy benefit managers -- which function as middlemen between drug makers and their clients -- are passing along the best prices for medicines to their own state agencies and consumers.

Toward that end, the states are examining consumer fraud and antitrust violations, according to Blumenthal and other sources. The focus is mostly on the four biggest companies, which provide coverage to more than half of all Americans.

Because the investigation began only recently, many states do not want to publicly identify their participation.

The recent flurry of state activity reflects growing anxiety about the rising cost of health care, especially prescription drugs. Prices rose an average of nearly 17 percent in 2001, the last year for which such data is available, according to IMS Health, a market-research firm.

The topic is of growing importance because these companies provide prescription-drug benefits to about 200 million Americans, according to a report about pharmacy benefit managers released yesterday by the General Accounting Office. Proposals to add a drug benefit to Medicare would add 40 million elderly and disabled citizens to their rosters.

The GAO report noted these companies refused to disclose the amount of money they received from drug makers to promote specific drugs.

Pharmacy benefit managers say they are part of the solution to rising drug costs. They cited the same GAO report, which said the average price for 14 brand-name drugs was about 18 percent less than what consumers without coverage would have paid.

"We save our clients substantial amounts of money," said David Machlowitz, Medco's general counsel. "And we're confident our business practices are lawful, and we're happy to have a dialogue with government officials at any time on any subject."

He added Medco had not been contacted by any state attorney general. Spokesmen for the three other large pharmacy benefit managers -- Advance PCS, Express Scripts and Caremark -- also said they have not been notified and declined further comment.

The multi-state investigation is an outgrowth of a task force on drug pricing that was created recently by the National Association of Attorneys General. That effort has since spawned several lawsuits by individual states against drug makers.

Four years ago, the U.S. Attorney's Office in Philadelphia began a similar investigation into Medco, which is based in Franklin Lakes, and Advance PCS. That investigation is still under way.

One state already has taken action.

In November, West Virginia filed a lawsuit accusing Medco of pocketing more than $6 million in rebates that should have been passed along to a state agency that hired Medco to provide drug benefits. The suit also claimed Medco steered people to Merck drugs.

Meanwhile, a lawsuit in U.S. District Court in White Plains, N.Y., filed by small businesses and members of health plans alleges Medco improperly withheld rebates and switched patients. The suit also contends Medco violated its fiduciary duty to its customers under the Employee Retirement Income Security Act.

This lawsuit has generated interest among law-enforcement agencies because Medco has largely succeeded in keeping enormous amounts of confidential data under wraps. A court order issued in 2000 has allowed thousands of pages of documents to remain sealed.

Last week, however, a federal judge allowed a few documents to be made public. The data showed Merck used Medco to increase the market share of some of its most important drugs, such as its Zocor cholesterol pill.

For example, Zocor accounted for 41 percent of cholesterol drugs sold by Medco's mail-order unit in 1999. Nationally, Zocor's market share was 22.4 percent. The average wholesale cost of a Zocor prescription was $276.77 vs. $212.87 for Lipitor, a rival.

Last month, James Sheehan, an assistant U.S. Attorney in Philadelphia, and Emily Granrud, a member of the New York attorney general's antitrust bureau, attended a court hearing in White Plains where disclosure of Medco data was discussed.

Ed Silverman can be reached at esilverman@starledger.com or (973) 392-1542.