Prescription for fair play: insurers and consumers are using litigation to recover overcharges from pharmaceutical firms that illegally keep generics off the market.

Key Points

* Illegal restriction of generic competition is a common form of overcharge abuse in the drug industry.

* To recover overcharges, insurers may file an independent lawsuit, join a class-action suit or join a group of "opt-out" insurers.

* Recovering overcharges can significantly improve an insurer's bottom line.

Over the past few years, third-party payers, such as large employer-based benefit plans, health maintenance organizations and traditional insurers, have increasingly found a new profit source--recoveries from prescription-drug overcharge litigation. The overcharges arise from various abuses that result in restricting generic competition, promoting off-label use for prescriptions and marketing defective products. But the repercussion is always the same: greater costs to end payers.

Illegal restriction of generic competition is one of the most common forms of overcharge abuse. A generic drug rated "AB equivalent" by the U.S. Food and Drug Administration contains the same active ingredients, but not necessarily the same inactive ingredients, as the brand name drug it copies. Generic drugs typically sell for substantially less than brand drugs. Once the cheaper generic becomes available, the laws of most states and the pharmacy reimbursement policies of most third-party payers result in virtually automatic substitution of the generic drug when the brand drug is prescribed. In this way, competition from generic drugs creates an efficient market and results in substantial savings to end payers, including consumers and insurers.

Federal law and regulations grant a 180-day period of exclusive marketing to the first generic manufacturer to submit an application for a new generic drug approval. This exclusive period was designed to encourage generic competition. However, some brand drug manufacturers have abused this regulatory scheme through baseless patent litigation and settlements that delay generic competition and preserve their brand drugs' monopolistic positions in the market.

The Cardizem CD Case

In 1998, in the In Re: Cardizem CD Antitrust Litigation, Blue Cross Blue Shield of Wisconsin (now a subsidiary of WellPoint Inc.) and Aetna Inc., took the lead to end the increasingly common practice whereby brand name pharmaceutical companies paid their would-be generic competitors to delay the introduction of lower cost generic drugs to the market. Generic drug company Biovail Inc.'s efforts to market a generic version of Cardizem CD had been stymied by the refusal of Andrx Inc., the generic company with 180-day exclusivity, to begin selling its FDA-approved version of the drug. The reason: The brand manufacturer was paying Andrx $10 million every quarter it waited.

The lawsuits alleged that the defendants, brand manufacturer Hoechst Marion Roussel and generic manufacturer Andrx, illegally restrained trade for Cardizem CD and its generic bioequivalents, in violation of the antitrust, unfair competition and/or consumer protection laws.

Cardizem CD is widely prescribed for treatment of chronic chest pains, high blood pressure and prevention of heart attacks and strokes. At the time, there was a market estimated at more than $700 million annually in the United States for Cardizem CD and its generic bioequivalents. The defendant drug companies' conspiracy to prevent the sale of the generic version of Cardizem CD denied consumers and third-party payers the opportunity to use a significantly less costly generic equivalent.

Actions were filed in 11 states and the District of Columbia under state antitrust and related laws, by consumers and health insurers who were indirect purchasers of Cardizem CD and unable to use the federal Sherman Act antitrust laws. In every case, defendants removed the cases to the federal courts situated in the district where the state court actions were filed. In June 1999, the Judicial Panel on Multidistrict Litigation centralized all but two of these cases before the United States District Court for the Eastern District of Michigan.

In late 1999, the defendants moved to dismiss the claims on various grounds. The plaintiffs cross-moved for a partial summary declaratory judgment holding that the Hoechst-Andrx agreement was per se illegal under the antitrust and/or consumer protection laws of each state in which the plaintiffs bad asserted claims. The court granted the plaintiffs' motion for partial summary judgment and denied the defendants' motions to dismiss. These decisions were both affirmed, after interlocutory appeals, by the U.S. Court of Appeals for the Sixth Circuit. The finding of per se illegal activity was a highly significant development, as agreements of this type had been a long-standing practice by many in the drug industry.

Beginning in March 2002, the parties engaged in protracted negotiations using the services of a nationally recognized mediator, eventually achieving an $80 million cash settlement in January 2003. In its opinion approving the settlement, the court found the gross cash settlement of $80 million represented more than 85% percent of the total amount which the plaintiffs' expert economist had estimated all United States end-payers were overcharged.

Overcharge Recovery Options

A third-party payer has choices when deciding how to pursue a prescription drug overcharge recovery. It can file its own lawsuit, wait for a potential class settlement, or join a group of "opt-out" insurers. The right choice depends on the facts of the underlying case and the circumstances of a particular third-party payer. First, the payer must consider the likelihood of a fending of liability and the amount of the potential recovery. Next, it should consider economic and other resources that it would be required to commit to pursuing a recovery.

Hiring counsel and filing an independent lawsuit offers the greatest control over the course of the recovery effort. Filing a separate lawsuit also requires the greatest commitment of resources, including those related to identifying and retaining competent counsel; potentially disbursing attorney fees, costs and expenses; and producing documents and witnesses for depositions.

At the other end of the control and risk continuum is participating as a class member in a potential class recovery. This option requires the least commitment. In exchange, the third-party payer has no influence over the recovery process other than the opportunity to make a claim (or object) at the end of the claims procedure. Class counsel, sometimes with the assistance of class representatives, evaluates offers and presents class members with a "take it or leave it" settlement in exchange for a fixed percentage of fees, often in excess of 30%.

Opt-out group recoveries are often an appealing middle ground. Typically a number of large insurers, along with groups of small and midsize companies, retain counsel to pursue a recovery either through litigation or negotiation. Generally, because of the stature of the group's largest participants, defendants recognize the group's credibility and are willing to work toward a resolution separate from the class litigation. Sometimes these groups settle their claims with the drug manufacturer without filing suit, by suspending applicable statutes of limitations while a representative suit proceeds to determine disputed factual issues of liability or damages. In the event of settlement, proceeds are quickly distributed without the administrative and temporal delays required by court approval and appeals common to a class settlement. In addition, fees are negotiated between client and counsel and are ordinarily lower than typical class fees, resulting in a greater and faster recovery for the client. Finally, these opt-out settlements are client-driven, with opportunity for the clients to have input over the structure and amount of the settlement at all stages.

Regardless of how third-party payers recover overcharges, the results have substantially improved the payers' bottom lines.

Contributor Gerald Lawrence is managing attorney for the Pennsylvania office of Lower Dannenberg Bemporad & Selinger PC. The firm filed and served as lead counsel in the In Re: Cardizem CD Antitrust Litigation. The firm is currently representing plaintiffs in similar cases.