In re Mckesson Governmental Entities Average Wholesale Price Litig..This Document Relates To:san Francisco Health Plan v. Mckesson Corp..

• Citation: 767 F.Supp.2d 263
• Decision Date: 04 March 2011
• Docket Number: Master File No. 08–cv–10843–PBS.,08–cv–11349–PBS.,Nos. 08–cv–10843–PBS,s. 08–cv–10843–PBS
• Parties: In re McKESSON GOVERNMENTAL ENTITIES AVERAGE WHOLESALE PRICE LITIGATION.This Document Relates To:San Francisco Health Plan v. McKesson Corp.,The Board of County Commissioners of Douglas County, Kansas, et al. v. McKesson Corp.
• Court: U.S. District Court — District of Massachusetts

767 F.Supp.2d 263

In re McKESSON GOVERNMENTAL ENTITIES AVERAGE WHOLESALE PRICE LITIGATION.This Document Relates To:San Francisco Health Plan

v. McKesson Corp.,The Board of County Commissioners of Douglas County, Kansas, et al.

v. McKesson Corp.

Master File No. 08–cv–10843–PBS.Nos. 08–cv–10843–PBS

08–cv–11349–PBS.

United States District Court, D. Massachusetts.

March 4, 2011.

James P. Bennett, Paul Flum, Melvin R. Goldman, Lori A. Schechter, Morrison & Foerster LLP, San Francisco, CA, John A. Kiernan, Bonner, Kiernan, Trebach & Crociata, LLP, Boston, MA, for Defendant.Steve W. Berman, Hagens Berman Sobol, Barbara Mahoney, Sean R. Matt, Shapiro LLP, Seattle, WA, Danny Chou, Owen Clements, Erik Rapoport, San Francisco City Attorney's Office, San Francisco, CA, Jeffrey D. Friedman, Hagens Berman Sobol Shapiro LLP, Berkeley, CA, R. Bryant McCulley, McCulley McCluer PLLC, Jacksonville, FL, Edward Notargiacomo, Thomas M. Sobol, Hagens Berman Sobol Shapiro LLP, Cambridge, MA, James L. Ward, Jr., Richardson, Patrick, Westbrook & Brickman, L.L.C., Mt. Pleasant, SC, for Plaintiff.

MEMORANDUM AND ORDER

SARIS, District Judge.

I. INTRODUCTION

In these two proposed national class actions, plaintiffs San Francisco Health Plan (“SFHP”) and the Board of County Commissioners of Douglas County, Kansas (“Douglas County”) allege that McKesson Corporation engaged in a racketeering enterprise to raise the prices of numerous brand-name prescription pharmaceuticals by stating fraudulent “average wholesale prices” beginning in late 2001, in violation of the Racketeering Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1964 and state law.¹

Plaintiff Douglas County seeks to certify a class that consists of public payors as large as a state and as small as a county jail, with some exclusions. The proposed class definition is:

All governmental entities and their political subdivisions, agencies, departments, and divisions in the United States and its Territories, including the States, local governments, and Territories themselves, other than State Medicaid programs, that paid for Marked–Up Drugs ² based on AWP from August 1, 2001 to October 6, 2006 ³ and that used First DataBank or Medi–Span data derived from First DataBank data in determining the AWP of the Marked–Up Drugs.⁴

Plaintiff SFHP seeks to certify a class of “California Public Payors,” comprised of:

All governmental entities, agencies and political subdivisions in the State of California, including the State of California itself, that paid for the brand name drugs listed in Appendix A and whose payments were tied to AWP.

After hearing and a review of the record, the Court concludes that the proposed classes, as defined, fail to meet the Rule 23(b)(3) requirements of superiority primarily because the class definition includes states. Moreover, the proposed class does not meet the predominance requirement because inquiries regarding efforts by public payors to mitigate damages will predominate over common questions if the proposed classes were certified from 2001 to October 6, 2006. There are also significant manageability issues in this sprawling proposed class which includes every public payor in America and its territories including states, workers compensation plans, state employee plans and jails. Pursuant to Fed.R.Civ.P. 23(a) and (b)(2), I certify the following class for liability only:

All non-federal and non-state governmental entities in the United States and its Territories that paid for Marked–Up Drugs based on AWP from August 1, 2001 to June 2, 2005 and that used First DataBank or Medi–Span data derived from First DataBank data in determining the AWP of the Marked–Up Drugs.

Pursuant to Fed.R.Civ.P. 23(a) and (b)(3), I certify a class period of August 1, 2001 through December 31, 2003 for liability and damages.

II. FACTUAL BACKGROUND

The Court has previously written about the allegations against McKesson, see New England Carpenters Health Benefits Fund v. First DataBank, Inc. (“ Carpenters I ”), 244 F.R.D. 79 (D.Mass.2007), and assumes the parties' familiarity with the facts. This discussion is limited to the alleged facts specific to this litigation, referred to as the “Public Payor litigation.” Many of the facts alleged by plaintiffs with respect to liability are disputed by McKesson.

1. Published Prices

Average Wholesale Price (“AWP”) is the pricing benchmark for the vast majority of drug reimbursement payments made by public payors to retail pharmacies. These prices are compiled and published in electronic form principally by two companies: (1) First DataBank (FDB), which had the dominant market position as an electronic source for drug pricing information during the relevant time period, and (2) Medi–Span, another publisher that acquired its source data from FDB.

Drug manufacturers typically sell drugs to wholesalers, like McKesson, on the basis of the Wholesale Acquisition Cost (“WAC”), which is also a published price. Wholesalers then sell drugs to retail pharmacies based on a published price (typically WAC plus a markup). Public payors generally reimburse retail pharmacies for brand-name drugs based on a percentage off of AWP. Higher WAC to AWP markups made the drugs more profitable for pharmacies. Historically, the manufacturer reported the AWP to a publisher, like FDB, at a markup of 20% or 25% above the WAC. Sometimes, the manufacturers only reported a WAC and then suggested a markup percentage so FDB could generate an AWP. Typically, the publishing company played no independent role in establishing AWP, other than applying this formulaic markup to the manufacturer's price.

2. The Scheme

Before 2000, McKesson, a wholesaler, estimated that 80% of the manufacturers used a 20% markup for their drugs. Beginning in late 2001, FDB and McKesson allegedly reached a secret agreement to raise the WAC to AWP markup on all brand-name drugs to the higher 25% markup. The purpose of this scheme was to provide a greater spread to McKesson's retail pharmacy clients. To conceal the scheme, McKesson and FDB agreed to effectuate price changes only when some other WAC-based price announcement was made by a drug manufacturer. This timing camouflaged the increase in the WAC to AWP markup and concealed McKesson as the source of the increased markup.

McKesson was aware that public payors, such as members of the proposed classes, relied on AWP for reimbursement of brand drugs. McKesson maintained a Public Affairs Department to track federal and state developments that affected pharmacy sales, and actively lobbied the federal and state governments. McKesson was aware of the impact that the increased WAC to AWP markup would have on public payors. For example, a McKesson employee asked Bob James, Director of Brand Pharmaceutical Product Management, about the impact of rising AWPs on public payors: “Has anyone researched what impact this will have on Medicaid/Medicare reimbursement in states where its [sic] still based on AWP?” James responded: “[T]his is not our issue. But, I have thought about it a lot. One of the unintended consequences is that Retail Customers will potentially be more profitable.”

III. PROCEDURAL HISTORY

On June 2, 2005, the New England Carpenters Health Benefits Fund (“Carpenters”) filed a putative class action complaint against McKesson and First DataBank. See No. 05–cv–11148–PBS. The factual allegations by Carpenters were substantially similar to those made in the instant case, although the proposed class in Carpenters consisted of consumers and private third party payors (“TPP”), such as health insurance companies. In 2006, the Court approved a preliminary settlement as to defendant First DataBank, and certified a class for settlement purposes. The FDB settlement was made public in October 2006. As to defendant McKesson, this Court certified a consumer class in August 2007 and a TPP class in March 2008. Final approval of a class settlement with McKesson was granted in July 2009.

In its initial Order regarding class certification in the Carpenters case, the Court found that plaintiffs had satisfied the Rule 23(a) requirements with respect to the proposed TPP class, but deferred ruling on the more difficult Rule 23(b)(3) questions of predominance and superiority. Carpenters I, 244 F.R.D. at 89. In 2008, the Court revisited the predominance and superiority issues and certified the TPP class under Rule 23(b)(3), addressing the issue of predominance by limiting the class period, for damages, to August 2001 through December 2003, and only permitting certification for liability and equitable relief for the expanded class period. New England Carpenters Health Benefits Fund v. First DataBank, Inc. (“ Carpenters II ”), 248 F.R.D. 363, 369, 372 (D.Mass.2008).

McKesson petitioned the First Circuit for leave to appeal the Court's class certification order. That petition was denied on November 16, 2007 because McKesson did not “develop its reliance argument” and “the certification order did not ‘turn on’ any question of law preserved by the petitioner.” See New England Carpenters Health Benefits Fund v. McKesson Corp., No. 07–8030 (1st Cir. Nov. 16, 2007).

IV. DISCUSSION

A. Rule 23 Standard

A class may be certified pursuant to Fed.R.Civ.P. 23 only if:

(1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.

Fed.R.Civ.P. 23(a). Plaintiffs seek to certify these classes pursuant to Rule 23(b)(3), which provides that an action may be maintained only if the Court also finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly...