California Sues 39 Drug Makers for Bilking Medicaid

LOS ANGELES – California's attorney general said on Thursday the state has filed a lawsuit accusing 39 pharmaceutical companies of bilking the state's Medicaid program of hundreds of millions of dollars by inflating drug prices.

Attorney General Bill Lockyer said he has added companies including Amgen Inc. (AMGN) and GlaxoSmithKline Plc (GSK) to a previous complaint accusing Abbott Laboratories (ABT) and Wyeth (WYE) of hiding the true costs of their drugs so that payments from Medi-Cal (search) — California's health insurance program for the poor — would be artificially inflated. Medi-Cal is the name for California's Medicaid program for the indigent, which is financed by the state and federal government.

"We're dragging these drug companies into the court of law because they're gouging the public on basic life necessities," Lockyer said.

The action was prompted by a whistle-blower lawsuit filed in California by a small pharmacy, Ven-A-Care, alleging that pharmaceutical manufacturers provided false and misleading drug pricing information.

By defrauding the state into paying higher reimbursement rates, the drug makers created a financial incentive for doctors and pharmacists to use their products, the lawsuit alleges.

"Usually, prices go down when there is market competition, but our evidence is just the opposite," Lockyer said. He explained that the most egregious price inflation occurred when companies wanted to provide an inducement to sell their product and gain market share from other drugs.

The attorney general estimated that each company named in the lawsuit could be liable for up to $40 million.

About a dozen other states have filed similar lawsuits, and the cases have been consolidated at a federal court in Boston, Lockyer said.

Steve Brozak, an analyst with WBB Securities (search), said the California probe could prompt the federal government to broaden and intensify its own ongoing probes of whether drugmakers are overcharging for drugs taken by Medicaid patients.

He noted that the federal government next year will begin reimbursing patients for prescription drugs taken by patients in the separate Medicare insurance program for seniors and the disabled.

"The California action increases the perception that drugmakers are gouging the government, even as the federal government prepares next year to become the single biggest payer for drugs in the country's history," Brozak said. "The danger is that perception could eventually energize the U.S. government to protect itself by imposing price controls on prescription drugs."