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W. Virginia Charges Merck, Medco

Allegedly Steered State Employees To Higher-Priced Drugs

Jan 1, 2002 | Wall Street Journal West Virginia’s attorney general sued Merck & Co. and its Medco Health Solutions pharmacy-benefits subsidiary, charging that Merck and Medco steered state employees to higher-priced drugs including Merck products and kept rebates from drug companies that should have been passed on to the state.

THE LAWSUIT, FILED in the Circuit Court of Kanawha County, describes Medco’s business as one that increased prescription-drug costs rather than lowered them. Medco is the country’s second-largest pharmacy benefit manager, or PBM, the industry behind the drug cards presented at pharmacies to fill a prescription.

More than 200 million Americans get their drug benefits from a handful of powerful PBMs, which use the aggregation of millions of patients to wrestle discounts and rebates from drug makers and pharmacies.

The two sides were already sinking into litigation. Last month, Medco filed a complaint against West Virginia in the same court. In that complaint, Medco claims that it saved West Virginia so much money that the state is contractually bound to share some of those savings. Medco alleges those amount to $2 million.

The charges by West Virginia strike at the very heart of the way PBMs do their business, and air allegations that have long been denied by the PBM industry.

The West Virginia suit, filed by the state’s attorney general, could portend similar suits by other state attorneys against the PBM industry. Anita Kawatra, a spokeswoman for Medco, said, “This seems to be a disagreement specific to this contract.”

People familiar with the industry said a group of attorneys general has been meeting to discuss the potentially problematic practices of PBMs. In particular, PBMs don’t divulge how much of their revenue comes from rebates and other sources from drug makers and how much comes from simply processing claims.

If PBMs receive a large portion of their revenue from drug makers they may have big brand-name drug makers’ interests at heart rather than their clients, the employers, government agencies and health plans that pay for the bulk of prescription drugs in the U.S.

The suit alleges that Medco, which ran the West Virginia program from June 2000 to July 2002, caused the state’s prescription-drug costs to rise to levels “substantially higher than can be accounted for by drug inflation rates and/or member utilization.” West Virginia alleges that Medco steered the 200,000 state employees in the Medco program to more expensive drugs and that Medco did so because it was receiving millions of dollars of rebates from drug makers. The suit also charges that Medco was supposed to pass along to the state all but 5% of the rebates it received from drug makers but failed to do so and kept a greater portion of rebates. West Virginia seeks damages and restitution. The state earlier sued the PBM it had before Medco.

Ms. Kawatra said that the company still hadn’t been served with the suit, although the company intends to defend itself vigorously. “For two years, we provided high-quality services that delivered a proven record of net plans savings for the people of West Virginia. We are confident we performed in accordance with our contract,” she said.

A spokeswoman for Merck, based in Whitehouse Station, N.J., said: “We haven’t even been served yet so we haven’t had the benefit of reviewing the litigation.”

Also Wednesday, Merck mentioned in a regulatory filing that it is being investigated by the Justice Department regarding certain “marketing and selling activities.”

The wording, which Merck also included in its March annual report, is apparently a reference to an investigation by the U.S. attorney’s office in Philadelphia into whether drug companies failed to offer their best prices to the Medicaid program.

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