McKesson: The Wholesaler Markup Sent to First DataBank

In the McKesson AWP settlement, the wholesaler agreed to pay more than $190 million over allegations that inflated pricing reports caused Medicaid to overpay for prescription drugs. The alleged false information went to First DataBank, a private price publisher whose benchmarks state Medicaid programs used to set reimbursement. A submission to a publisher could change what taxpayers paid at the pharmacy.

The Department of Justice announced the resolution on April 26, 2012. This drug pricing fraud case reached into the wholesale distribution business, where companies handle inventory, credit and delivery between manufacturers and their customers. McKesson also supplied pricing information. That input, and what happened to it after publication, was the center of the government’s case.

How a Wholesaler’s Markup Became a Medicaid Payment

The government alleged that McKesson reported inflated markup percentages for a wide variety of brand-name drugs, causing First DataBank to publish inflated average wholesale prices. Most state Medicaid programs used First DataBank’s drug prices to set payment rates. The alleged chain ran from the wholesaler’s report, through the publisher’s benchmark, to the government’s reimbursement.

Wholesale acquisition cost is the manufacturer’s list price to wholesalers or direct purchasers, before discounts and other price reductions. Average wholesale price was commonly built by applying a markup to that list price. The list price, the published benchmark and the pharmacy’s purchase price could therefore describe different numbers for the same drug.

A federal court’s account of the industry’s pricing practices in 2007 described historical formulaic markups of 20 or 25 percent between wholesale acquisition cost and average wholesale price. Competition and consolidation had reduced actual wholesaler margins to 2 to 3 percent, while those old formulas remained. A number called an average wholesale price had become detached from what wholesalers actually earned.

That history explains the opening for average wholesale price fraud. A reimbursement formula could faithfully use the published number and still pay too much because the information behind the number was wrong. In McKesson’s case, the Department of Justice alleged that the wholesaler inflated the markup information it supplied to the publisher.

Average manufacturer price follows a different reporting path. Manufacturers report it to the government for the Medicaid rebate program. McKesson’s challenged input went to First DataBank for publication as average wholesale price.

Why the Spread Mattered to the Buyer

The spread is the gap between what a buyer pays for a drug and what the buyer receives in reimbursement. A higher published benchmark can make a supplier’s product more profitable for the pharmacy buying it. That gives the seller a way to compete using money supplied by the payer.

The department described that commercial incentive in its McKesson announcement: falsely increasing reimbursement to retailers could bring the wholesaler more business. The alleged advantage came from what the customer could collect after purchasing the drug. Under the government’s account, taxpayers financed the extra reimbursement, while the supplier gained a reason for the customer to buy from it.

The distinction is visible inside a business. Purchasing sees the invoice price. Reimbursement staff see the published benchmark and the payment. Sales staff may explain the margin to a customer. Connecting those views can expose a pricing strategy that an invoice alone leaves unexplained.

A later compounding-ingredient pricing case shows that same incentive explicitly. In its complaint against Professional Compounding Centers of America, the government alleged:

That complaint also alleged that senior managers instructed sales representatives to highlight the spread to pharmacy customers. The commercial pitch connects the reported price to the buying decision. McKesson’s federal announcement described the same business incentive at the wholesaler level.

The Federal Settlement and the Separate State Track

The McKesson settlement resolved claims for the federal share of Medicaid overpayments.

The Department of Justice’s announcement left state governments able to negotiate with McKesson over their own shares of the alleged Medicaid overpayments.

The Private Settlements Required a Price Rollback

Separate private class proceedings addressed pricing claims involving McKesson, First DataBank and Medi-Span. A federal court approved amended class settlements on March 17, 2009, before the federal Medicaid settlement.

The approved terms called for First DataBank and Medi-Span to reduce the multiplier used to convert wholesale acquisition cost into average wholesale price from 1.25 to 1.20 for 1,442 National Drug Codes. That relief reached the number used in reimbursement formulas. The terms targeted the published pricing input, while the later federal settlement addressed alleged overpayments of public money.

The AWP Campaign and the Move Toward Acquisition Cost

McKesson’s resolution came after a substantial campaign against inflated drug-price reporting. By the date of its announcement, the Department of Justice said federal and state governments had recovered more than $2 billion from manufacturers accused of reporting inflated average wholesale price information to price publishers. The McKesson case extended that pricing-input story to a wholesaler.

Public Citizen’s 2018 review of pharmaceutical settlements found that overcharging government health programs was the most frequently cited violation in its review covering 1991 through 2017. Most settlements in that category were state matters, mainly involving falsely elevated average wholesale prices used for Medicaid reimbursement. The study attributed part of the later decline in state settlements to those investigations reaching their conclusions.

Reimbursement policy also changed. The 2016 Medicaid covered outpatient drug rule moved pharmacy payment toward actual acquisition cost and a separate professional dispensing fee. Public Citizen identified that change as a reason the opportunity for average wholesale price fraud might shrink. The practical change was to look more closely at what pharmacies paid to acquire drugs, instead of estimating their costs from a published list benchmark.

What Evidence Is Needed to Prove Fraud?

Proving a markup case means connecting the pricing submission to the government payment, and that is the work we do with you.

A pricing specialist may understand how the submission was prepared. A pharmacy purchasing employee may know the price actually paid. Someone working on reimbursement may see which benchmark reached the payment calculation. Their knowledge concerns different parts of the same transaction, and the value lies in connecting them.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know How the Markup Was Chosen

If you worked on pricing submissions, pharmacy purchasing or reimbursement and know how an inflated benchmark reached a payment, speak to one of our whistleblower experts about how the markup was inflated. We bring the pricing decision and the payment trail together with you, and bring in pharmaceutical fraud whistleblower lawyers who understand benchmark reporting. We stay at your side to turn your knowledge of the business into your strongest pharmaceutical whistleblower case.