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FRANKFORT, Ky. - A Kentucky appeals court panel on Oct. 12 vacated verdicts totaling more than $130.7 million against two drug makers for publishing inflated average wholesale prices (AWPs), saying the Kentucky Medicaid program was well aware of the practice and was complicit in the scheme (Sandoz Inc. v. Commonwealth of Kentucky, ex rel. Jack Conway, et al., No. 2011-CA-000225-MR, AstraZeneca, LP, et al. v. Commonwealth of Kentucky, ex rel. Jack Conway, et al., No. 04-CI-01487, Ky. App.).
(Opinion available. Document #28-121018-012Z.)
In 2004, the Kentucky attorney general sued more than 40 drug companies in the Franklin County Circuit Court, alleging that they provided fraudulent drug-pricing information to publisher First DataBank and that the state Medicaid program relied on that information to determine how much to reimburse pharmacies for prescriptions for Medicaid recipients.
The case against one defendant, Sandoz Inc., went to trial, and a jury found the company liable to the state under the Kentucky Medicaid Fraud Statute, False Advertising Statute and the Consumer Protection Act for misrepresenting AWPs. The jury awarded the commonwealth $16 million in compensatory damages.
The state's case against AstraZeneca LP and AstraZeneca Pharmaceuticals LP also went to trial, and a jury found the related companies liable under the Medicaid and consumer protection statutes for misrepresenting AWPs. The jury awarded the commonwealth $14.7 million in compensatory damages, $100 million in punitive damages and additional civil penalties under the Consumer Protection Act.
Panel: Kentucky Was Aware
In separate rulings, Judge Roger L. Crittenden denied the defendants' motions for judgment notwithstanding verdict (JNOV). Sandoz and AstraZeneca appealed, and their cases were consolidated.
The Court of Appeals panel said JNOV should have been granted because the commonwealth failed to establish causation for damages. "[S]ince the Commonwealth was aware for decades that the AWPs were inflated, it could not have relied upon them as accurate figures, and thus, no damages resulted," the panel wrote.
The panel agreed with the defendants that the commonwealth failed to show that it would have paid less for Medicaid prescriptions if the AWPs had not been false, fraudulent, misleading or unfair.
"The result reached by the jury was clearly unreasonable," the panel said. "Indeed, there was a complete absence of proof on the issue of causation of damages."
"The crux of the Commonwealth's failure to prove causation stems from the Commonwealth's knowledge that AWPs were inflated and that AWPs did not represent actual prices," the panel continued. "Because the Commonwealth was aware AWPs were inflated prices, and was further aware of the degree of inflation, it could not show that the Appellants' conduct was 'a substantial factor' in causing it to over-reimburse pharmacies."
The panel said there was "ample evidence" for a jury to properly determine that Sandoz did submit AWPs in a false, misleading or deceptive manner. It said the manner in which AstraZeneca priced drugs resulted in an "ever-increasing spread between the actual wholesale prices and the AWP, thus creating greater profits for pharmacies."
"However, none of this information was unknown to the Commonwealth and that is the real crux of this case," the panel said. "The protection of spread through inflated AWPs was endemic in the system, and states across the nation were aware that pharmaceutical companies were reporting bloated AWPs."
"Further," the panel continued, "the Commonwealth itself commissioned a private study of AWP and discovered that AWP was significantly inflated; that Kentucky pharmacies were making a substantial profit off the Medicaid program, and that Medicaid reimbursements could be cut significantly and pharmacists would still make a profit. Despite this information, the Commonwealth chose not to implement the suggested reimbursement reductions."
"It is of particular note that the Commonwealth even took affirmative action on occasion to protect spreads due to fear that pharmacies would stop filling prescriptions for Kentucky Medicaid users if the profit margin was not high enough," the panel said. "Clearly, the Commonwealth was aware that AWPs were not the actual prices paid for generic drugs."
"In light of this fact, it is wholly untenable for the Commonwealth to now claim millions of dollars in compensatory damages for harm caused by the false or fraudulent reporting of AWPs to price publishers," the panel said.
"Because the Commonwealth was fully aware of the practices in the industry with respect to AWP, there can be no causation of damages," the panel said. "Frankly, it is appalling that the Commonwealth had actual knowledge of this 'shell game' method of pricing employed by the drug companies, the wholesalers, and the pharmacists. However, even more appalling is the fact that, in spite of that knowledge, it acquiesced, billed accordingly, and now seeks reimbursement by way of compensatory and punitive damages."
Saying the commonwealth was "entirely complicit" in the drug-pricing system, the panel said "basic equitable principles also prohibit the Commonwealth from recovering. In situations such as the present one, where a party's actions are in pari delicto with the tortfeasor, recovery is barred by the principles of equity."
"Here, the Commonwealth's actions were in pari delicto with the drug companies and other players in the Medicaid reimbursement scheme - a scheme in which the Commonwealth systematically participated by submitting those same figures to the federal government as true and accurate," the panel concluded.
Senior Judge Joseph E. Lambert, sitting as a special judge by assignment, wrote the opinion. The other panel members were Judges Sara Walter Combs and Joy A. Moore.
Sandoz is represented by William E. Johnson of Johnson, True & Guarnieri in Frankfort, David V. Kramer of Dressman Benzinger Lavelle in Crestview Hills, Ky., and Vincent R. Fitzpatrick Jr., Joseph Angland, Heather K. McDevitt and Michael J. Gallagher of White & Case in New York.
AstraZeneca is represented by Margaret E. Keane and Holland N. McTyeire V of Bingham & Greenbaum in Louisville, Ky., Joel M. Cohen of Gibson, Dunn & Crutcher in New York and Gerson A. Zweifach, John E. Schmidtlein, Mark E. Haddad and Paul J. Zidlicky of Williams & Connolly in Washington, D.C.
Kentucky is represented by Attorney General Jack Conway and C. David Johnstone and LeeAnn Applegate of the Attorney General's Office in Frankfort and George F. Galland Jr. and Robert S. Libman of Miner, Barnhill & Galland in Chicago.
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