California providers set to receive millions in price-fixing settlement

Clinics and hospitals serving poor residents in California are slated to receive $148 million in brand-name drugs under a proposed settlement in a pharmaceutical price-fixing case.

The 19 pharmacy firms involved do not concede wrongdoing in the settlement. The class-action suit alleges that the companies’ two-tier pricing system unfairly overcharges consumers who use neighborhood pharmacies and some drug-store chains. Those presumably more affluent residents who have access to drugs through high-volume purchasers such as HMOs and insurance mail-order plans receive an unfair discount, the suit maintains.

The settlement provides for $27 million for attorneys’ fees and $1.6 million to administer the three-year program in addition to the drug distribution.

Distribution of the settlement is being organized by the Public Health Trust, a Berkeley, CA-based organization that manages settlements of public health litigation. The trust convened an ad hoc panel of experts to develop criteria for choosing drugs to secure as part of the settlement.

The panel favored drugs with a preventive or curative effect as opposed to hospital-based drugs such as anesthesia, says Marice Ashe, director of the trust. In addition, formulary drugs had to be those that the public health system could not already get inexpensively, eliminating such drugs as oral contraceptives. Representatives from the pharmaceuticals and the San Francisco firm handling the case are in the last stages of negotiating the final list.

"We didn’t get everything we wanted, but it’s very good," says Ms. Ashe.

While the benefits of the suit are being distributed to indigent residents, the case actually is brought on behalf of California consumers generally. The benefits to taxpayers are calculated in terms of lower medical costs for indigent care, says an associate of the firm bringing the class-action suit. Because the drugs chosen also were picked for their potential to save medical costs, the tax benefit is greater than it might have been if the benefits were funneled to tax coffers directly, says Josh Davis, with the San Francisco firm of Lieff, Cabraser, Heinmann & Bernstein.

The drugs will be distributed through 300 public hospitals, public health clinics, and community health centers throughout the state. As with other pharmacy price-fixing cases, the benefits of the settlement must not replace existing pharmacy programs.

Although the settlement is large, it is dwarfed by what California’s public health system already pays in pharmacy costs. The value of drugs to be distributed over three years is roughly equivalent to what the Los Angeles County public health system spends on pharmaceuticals in nine months.

The drugs provided by the pharmaceutical firms will be valued at their wholesale acquisition cost—the price the retail pharmacy pays the wholesaler.

While the proposed settlement does not appear to affect the structure of pharmacy pricing for poor people, Ms. Ashe says the case would not be the place to do that.

"If the allegations are true, it really calls for a policy solution," she says.

Final approval of the settlement is pending the outcome of a Superior Court hearing scheduled for April.

Contact Ms. Ashe at (510) 548-1468 and Mr. Davis at (415) 956-1000. For information on a similar settlement of a pharmacy price-fixing case, see State Health Watch, January 1999, p. 7.