Drug Companies Agree to Pay $600 Million to Pharmacies

A group of pharmaceutical manufacturers has tentatively agreed to pay nearly $600 million to settle a lawsuit brought by 40,000 independent pharmacies that accused drug makers of a widespread pricing conspiracy, lawyers and others involved in the case said Thursday.

The pharmacies’ class-action lawsuit accuses major drug companies of engaging in “two-tier pricing” by giving big discounts to health maintenance organizations and mail-order pharmacies while charging significantly higher prices to chain drugstores and small neighborhood druggists.

The tentative settlement includes no admission of guilt. But despite the large sum, the agreement appears to be more a symbolic victory than a significant step for pharmacies trying to force changes in drug makers’ business practices.

The agreement, first reported in Thursday’s Wall Street Journal, would provide a cash payment to pharmacies in lieu of a requirement that drug makers change their pricing policies, according to sources who asked not to be named.

Although the total sum of the cash payment would make it among the largest antitrust settlements ever, it provides a relatively small payout to the individual pharmacy owners. If the $600-million figure stands and is divided evenly among the 40,000 pharmacies, each would receive about $15,000, before attorneys’ fees.

And the settlement would appear to have little impact on the prices that consumers pay for drugs. The pharmacies and other critics of drug industry practices have said the discounting hurts people who pay out of their own pocket for prescription drugs, including the uninsured and many Medicare recipients who don’t belong to HMOs.

“Given what’s reported, it is a very modest cash settlement to the pharmacies that would bring no changes in prices for consumers,” said Stephen Schondelmeyer, a pharmaceutical economist at the University of Minnesota.

“The money’s fine, we don’t blink at $600 million,” said Joseph Alioto, a San Francisco lawyer representing about 2,500 pharmacies in California. The former San Francisco mayor filed the first suit on behalf of pharmacies in 1993.

However, Alioto said the settlement doesn’t address the real problem of two-tier pricing and that the pharmacies will seek a court order to stop the practice. “We’re paying $100 for the same bottle of pills that [managed-care companies] are paying $10 for.”

The preliminary accord, which requires the approval of a federal judge in Chicago overseeing the case, does not end the pharmacy industry’s fight over the issue. The settlement includes primarily mom-and-pop operations. Chain pharmacies operated by Rite-Aid Corp., Safeway Inc., Albertson’s Inc. and others, which account for the majority of the 2 billion prescriptions written annually, have refused to participate in the agreement.

“The proposed settlement does not solve the problem of unfair drug pricing practices on the part of pharmaceutical companies,” said Ronald Ziegler, president and chief executive of the National Assn. of Chain Drug Stores.

Phil Schneider, a spokesman for the association, said the chain drugstores will continue to pursue related lawsuits in federal court in Chicago that allege price-fixing and price discrimination. They are also lobbying for legislative reforms pending in a number of states.

The settlement involves about a dozen large drug companies, including Merck & Co. and Bristol-Myers Squibb Co. Eight other drug makers, including Johnson & Johnson and Hoffman-LaRoche, decided not to join the settlement.

Most of the drug companies declined any comment on the litigation and would not confirm the tentative settlement.

In response to the allegations, a spokesman for Eli Lilly & Co. said the firm “has not engaged in any wrongdoing in any of our pricing decisions. Our pricing is designed to allow us to be competitive in the marketplace.”

The dispute over drug discounting has grown as HMOs have become more prevalent and several major drug makers have acquired companies that help to manage prescription drug benefit programs for employers.

Drug makers say the discounts are a legal business practice in which they sell at a lower price to HMOs to ensure that their products are placed on the HMOs’ approved list of drugs, known as formularies.

But pharmacies allege that the drug makers’ discounts mean that pharmacies and their customers are, in effect, subsidizing those discounts given to HMOs. Many small pharmacies are being driven out of business by such practices, they say.