Pharmacies Sued for Making Money on Generic Drugs

Here’s an unusual case that I haven't seen reported anywhere else.

Two small health plans in Minnesota are suing pharmacies for making higher profits on generic drugs than on brand name drugs. Perhaps the attorneys went to the Lake Wobegon School for Pharmacy Management. (“All the pharmacists are strong, all the technicians are good-looking, and all the profits are above average.”)

While I have no idea whether the legal claims have any merit, the case again highlights the risks to the superior profitability of generic drugs for pharmacies and Pharmacy Benefit Managers (PBMs).

THE COMPLAINT

Two small health plans -- Graphic Communications Local 1b Health & Welfare Fund "A" and The Twin Cities Bakery Drivers Health And Welfare Fund – are suing a long list of well-known pharmacies for allegedly making too much money from generic prescriptions. Defendant include CVS Caremark (CVS), Walgreen (WAG), Walmart (WMT), Target (TGT), and others. You can see the full list of defendants here.

The amended complaint states:

“Minnesota law requires that pharmacies pass on the entire amount of this savings to purchasers of generic drugs. The Defendant pharmacies, however, routinely violate this law and instead see the lower acquisition cost of generic drugs as an opportunity to generate higher profits for themselves.”

Specifically, the complaint claims that a Minnesota statute includes the following text:

“Any difference between acquisition cost to the pharmacist of the drug dispensed and the brand name drug prescribed shall be passed on to the purchaser.”

I’d be surprised if the plaintiffs are interpreting the statute correctly given the realities of pharmacy economics.

OH SHURE, THE BIG PICTURE

Regardless of the merits of the case, we are once again seeing another variation on an old familiar theme: the attack on generic profits in drug channels.

I have long argued that pressure on pharmacy profits from generic drugs is increasing as payers and consumers learn more about channel economics and the relative profitability of generics versus brands. When generic dispensing rates (GDRs) were low, no one paid much attention to the costs or margins associated with generic drugs.

But GDRs are almost 70% and rising, which means that pharmacy channel costs and margins for generic drugs will be increasingly seen as a mechanism to control drug spending.

Walmart exploited this opportunity with the launch of its $4 generic program three years ago. The cost-plus trend (such as Caterpillar’s deals with Walmart and Walgreen) stems in part from the perception that reimbursement models based on list prices can provide inappropriately high pharmacy profits on certain prescriptions.

Oh yah, that shure sounds like something for ya to think about then, don’t it?