Merck-Medco Managed Care

Documents Detail Big Payments by Drug Makers to Sway Sales

By Milt Freudenheim
The New York Times
March 13, 2003


Merck-Medco Managed Care, one of the largest managers of prescription drug plans, was paid more than $3 billion in rebates in the late 1990's from drug makers seeking to promote sales of certain drugs, according to documents filed in a long-running class-action lawsuit.

The documents, which open a window on the secret deals that drug plan managers have with pharmaceutical companies, state that Medco received the rebates as incentives to promote some of the world's most expensive drugs.

Medco, a unit of Merck & Company, then persuaded doctors to prescribe those drugs to patients at the expense of similar medicines that often cost less, according to the documents, which were filed by plaintiffs in the case.

Medco promoted Merck's own drugs especially vigorously, the documents say.

For example, in a three-month period Medco persuaded doctors to switch more than 71,000 prescriptions from Lipitor, a cholesterol treatment from Pfizer , to Zocor, a competing, more costly drug from Merck, according to Merck-Medco records referred to in the court documents.

Medco also promoted the Vioxx analgesic of Merck ahead of Celebrex from Pharmacia, as well as Prilosec, an ulcer treatment Merck formerly marketed in a joint venture with Pharmacia, ahead of Prevacid, a competing drug made by a joint venture of Abbott Laboratories and Takeda Chemical Industries of Japan, according to the documents.

The Merck-Medco records are cited in documents that have been under court seal and heavily edited at Medco's request. Company officials yesterday did not dispute the figures in unedited versions of the documents. Photocopies of these versions were sent to The New York Times by unidentified people who said in a note that they wanted shareholders and Medco plan members to be aware of the information.

Anita Kawatra, a spokeswoman for Medco, declined to elaborate on the figures in the court documents, which are still under seal. But she said:

"The level of rebates that we share are negotiated with clients. They are clearly disclosed in our client agreements." She added that the company's lists of preferred drugs and its programs for persuading doctors to change patients' medicines "are approved by an independent committee of doctors and pharmacists and by our clients, who save money on the whole."

Drug plan managers are hired by employers to manage prescription drug benefit plans. They use the collective buying power of a plan's membership to extract discounts and rebates from drug makers, and then establish co-payments and drug prices for patients in ways that promote certain medicines.

Employers use drug plan managers in an effort to reduce their health care costs. But the plaintiffs in the lawsuit and other critics of the drug plan managers say that while the plan managers sometimes save money for employers, the deals they strike with drug makers actually help to drive up health care costs for employers and consumers.

The drug plan managers, which are also called pharmacy benefit managers, would play a central role in proposals by President Bush and by members of Congress for a Medicare prescription drug benefit.

The Merck-Medco records include filings by the plaintiffs' lawyers and statements from expert witnesses, including Daniel R. Fischel, a professor of law and business at the University of Chicago Law School.

Medco retained most of a total of $3.56 billion in rebates from the drug companies in 1997, 1998 and 1999, according to Mr. Fischel's statement and other court documents. The plaintiffs also say that Medco did not inform most of its customers about the rebates that it kept. Mr. Fischel declined to comment on any material in the case that remained sealed.

Ms. Kawatra questioned Mr. Fischel's credentials. She said he was "a paid witness who has no firsthand knowledge of our business practices" and was not cross-examined by Medco's lawyers.

Pharmacy benefit managers have generally refused to disclose details of the rebates they receive, which they say are proprietary information. They say the deals are essential to obtaining discounts from drug manufacturers, and end up saving money for employers and consumers.

The rebates received by Medco were analyzed by economists hired by the plaintiffs in a consolidated lawsuit filed on behalf of several employers' health plans in Federal District Court in White Plains. The court documents say the analysis was based on Medco's internal electronic records and spreadsheets.

Merck agreed last December to pay $42.5 million to settle the suit, subject to approval of the judge, Charles L. Brieant. Court aides said yesterday that a date had not been set for a hearing on the merits of the settlement.

Some plaintiffs' lawyers have attacked the settlement, arguing that it is too small in view of the large payments to Medco from drug manufacturers.

These lawyers said much more of that money should have been passed along to thousands of health plans and millions of consumers. Roughly 65 million people hold Medco prescription drug cards.

Merck did not admit to any liability in agreeing to the settlement. It has been trying to spin off Medco, renamed Medco Health Solutions, as a separate company.

In lawsuits across the country, Medco and two other large drug plan managers, AdvancePCS and Express Scripts, have been accused of violating fiduciary duties to their customers under the federal Employee Retirement Income Security Act by failing to disclose the extent of their financial ties with manufacturers.

Mr. Fischel said in court documents that Medco received several types of rebates from drug manufacturers. The rebates rewarded Medco for placing certain medicines on preferred drug lists, and was also related to certain goals, including growth in sales and market share.

He also said that a Medco internal report in December 1999 showed that Medco customers used a higher percentage of Merck products than the national sales patterns in six medical categories. They included Zocor and Mevacor for cholesterol, Prilosec for ulcers, the pain reliever Vioxx, the blood pressure drugs Prinivil and Vasotec, Fosamax for osteoporosis and Pepcid for heartburn.

But Ian Spatz, a Merck vice president, said "the share of Merck products dispensed by Medco Health is largely consistent with the share dispensed by other pharmacy benefit managers" that have contracts with Merck.

Some types of rebates were partly shared with sponsors of health plans and some types were not shared, Mr. Fischel said in his statement. He also said that most of the rebate money was retained by Medco: "The rebates Medco passes through are smaller than those that Medco retains for its own account."