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Class Action Settlements: AWP/McKesson

McKesson Corporation is the largest wholesale provider of prescription drugs in the United States and a major supplier of drugs to pharmacies in this country. Pharmacies normally purchase drugs from wholesalers like McKesson who get them from the manufacturers. The price that wholesalers pay to the manufacturers is based on a published price called the wholesale acquisition cost, or WAC. The reimbursement that pharmacies receive from insurance companies is based upon a benchmark price called average wholesale price, or AWP.

A pharmacy’s profit is determined by the difference between what it pays the wholesaler and what it is paid by the insurance company or government. This is referred to as the WAC to AWP spread.

In June 2005 and February 2006, a number of class action lawsuits were filed against McKesson alleging that it and defendant FirstDatabank, an electronic drug price publishing company, had conspired to raise the price of prescription drugs.

The AWP is used by insurance companies to determine the price of the drugs it purchases. There is generally a mark-up of 20 percent to 25 percent to the WAC. The lawsuits claimed that McKesson had arbitrarily raised the WAC-to-AWP spread on more than 400 brand name drugs by 5 percent in order to enrich its pharmaceutical retail chain clients on every prescription sold. The plaintiffs contended that the prices were artificially inflated in violation of the Racketeer Influenced and Corrupt Organizations ACT (RICO).

The suit against McKesson was settled on November 21, 2008, for $350 million, making it as one of the largest drug litigation settlements in history. Consumers who had paid graduated co-payments were entitled to an allocated amount of $20,900,000, and cash paying consumers in the eligible class could be reimbursed from the amount of $40,425,000.

The effect of the litigation on the pharmaceutical industry is the possible use of alternative drug pricing mechanisms, although drug prices are established by the drug companies themselves so that no real objective or independent system may be considered credible.