Express Scripts Stole Millions, NY Charges

Lawsuit Alleges Pharmacy Benefit Manager Inflated Cost of Drugs and Diverted Rebates

Express Scripts • Express Scripts Extortion Scheme Widens • Express Scripts Settles Drug Switching Charges For $9.3 Million • Big Savings Available As Major Drugs Go Generic • Company Stole Millions, NY charges • Pharmacy Benefit Managers Scrutinized --- • Consumer Complaints

August 4, 2004
New York Attorney General Eliot Spitzer has sued Express Scripts, Inc., the nation's third largest pharmacy benefit manager, for conducting elaborate schemes that inflated by millions of dollars the costs of prescription drugs to New York State's largest employee health plan, the Empire Plan.

"New Yorkers and all Americans, are facing an ongoing health care crisis – a crisis of access and affordability driven to a large degree by the enormous growth in the cost of prescription drugs, Spitzer said. "Rather than being part of the solution to this crisis by keeping drug costs as low as possible, we discovered that Express Scripts engaged in a series of deceptive schemes. It improperly lined its pockets at the expense of health plans and consumers, driving up the very drug costs it is supposed to lower," said Spitzer.

The lawsuit follows a one-year investigation sparked by audits of Express Scripts conducted by OSC in 2002. The lawsuit alleges that Express Scripts:

• Enriched itself at the expense of the Empire Plan and its members by inflating the cost of generic drugs;
• Diverted to itself millions of dollars in manufacturer rebates that belonged to the Empire Plan;
• Engaged in fraud and deception to induce physicians to switch a patient's prescription from one prescribed drug to another for which Express Scripts received money from the second drug's manufacturer;
• Sold and licensed data belonging to the Empire Plan to drug manufacturers, data collection services and others without the permission of the Empire Plan and in violation of the State's contract; and
• Induced the State to enter into the contract by misrepresenting the discounts the Empire Plan was receiving for drugs purchased at retail pharmacies.

While pharmacy benefit managers (PBMs), including Express Scripts, have been under increasing scrutiny by federal and state regulators and law enforcement agencies, New York is the first to allege that Express Scripts enriched itself at its client's expense through a complicated pricing scheme. The scheme hinged on Express Scripts' ability to manipulate its pricing arrangements with its clients.

Pricing Plans

Express Scripts has two types of pricing arrangements with its clients: "pass-through" and "spread" pricing.

Under "pass-through" pricing (used by the Empire Plan for in-state pharmacies), the amount charged to the Empire Plan for a drug would be the same amount paid by Express Scripts to the pharmacy.

Under "spread" pricing, the plan negotiates a guaranteed price for drugs with Express Scripts. If Express Scripts can negotiate a lower price with the pharmacy, Express Scripts retains the difference or "spread" between what it pays the retail pharmacy for the drug and what it charges the plan.

Express Scripts developed and carried out a scheme through which it paid certain retail pharmacy chains higher prices for generic drugs for members of plans with "pass-through" pricing, such as the Empire Plan. These higher prices were then "passed through" to such plans. Because they were receiving higher prices from Express Scripts for the Empire Plan and other "pass through" plans, these same pharmacy chains accepted lower prices from Express Scripts for the same drugs dispensed to the members of Express Scripts's "spread" plans, where Express Scripts could charge the plan more than it paid the pharmacy.

Thus, Express Scripts employed this scheme to maximize the "spread" that it retained for itself, enriching itself to the detriment of the Empire Plan and its other client plans.

Rebates Diverted

The lawsuit also alleges that in furtherance of its scheme to divert and retain manufacturer rebates that belonged to the Empire Plan, Express Scripts disguised millions of dollars in rebates as "administrative fees," "management fees," "performance fees," "professional services fees," and other names.

The lawsuit further alleges that the drug switches caused by Express Scripts often resulted in higher costs for plans and members.

For example, Express Scripts received funding from brand drug manufacturers to steer members away from less expensive generic drugs when a brand name drug was about to be subject to generic competition.

In the period before the introduction of the generic, Express Scripts would switch members from a brand drug losing patent protection to another made by the same manufacturer that was not facing generic competition. These switch initiatives increased prescription drug costs for plans and members, while simultaneously enriching Express Scripts.

CIGNA's Role

The Empire Plan provides health and prescription drug coverage for more than one million active and retired State and local government employees and their dependants. In 2003, the Empire Plan spent more that $1 billion on prescription drug claims. The State Department of Civil Service (DCS) administers the Empire Plan and, since 1998, has contracted with Connecticut General Life Insurance Company (CIGNA) to manage the Plan's prescription drug benefit. CIGNA, which is also named as a defendant in the State's lawsuit, subcontracts with Express Scripts to administer the operation of the program.

Express Scripts is paid a per claim administration fee for processing the prescription drug claims of Empire Plan members. Express Scripts is also responsible for negotiating the prices of drugs with pharmacies that fill prescriptions for Plan members, and for collecting and passing on to the Plan any rebates that it receives from drug manufacturers as a result of Plan members' use of the manufacturers' drugs.

Express Scripts provides PBM services for approximately 52 million people in approximately 19,000 client groups that include health maintenance organizations, health insurers, third-party administrators and government health programs. From 1998 to 2003, Express Scripts's revenues from its PBM services were in excess of $46 billion.

CIGNA is among the largest insurers in the United States. The CIGNA network of companies collected over $15.7 billion in premiums and fees nationally in 2002.

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