US pharmacies say they could lose more than $550 million a year due to a massive rollback of prescription drug prices set to take effect on September 26.

The rollback follows the US Court of Appeals for the First Circuit’s approval earlier this month of a settlement agreed in 2007 with two drug-pricing publishers, First DataBank Inc (FDB) and Medi-Span. The judgement stems from a class-action lawsuit brought in 2005 against FDB and the pharmaceutical wholesaler McKesson Corp, on behalf of health plans and consumers who claimed the firms were manipulating the average wholesale price (AWP) - the benchmark on which most branded prescription drugs are reimbursed – in order to boost their profits.

Approving the settlement this month, Judge Patti Saris of the District of Massachusetts noted that typically, a drug’s wholesale acquisition cost (WAC) was understood to be the price paid by a wholesaler to a manufacturer for a drug, and this was then marked up by a fixed percentage to derive the AWP.

However, "beginning in 2001, FDB and McKesson reached a secret agreement to raise the mark-up between WAC and AWP from its standard 20% to 25% for more than 400 drugs. The scheme resulted in higher profits for retail pharmacists that purchased drugs on the basis of WAC but are reimbursed on the basis of AWP,” she said.

Under the 2007 settlement, FDB agreed to a pricing rollback which would reduce the price of some 1,400-prescription drugs by 4%; in a subsequent settlement, Medi-Span made a similar agreement. Both firms then indicated that, in addition to the drugs included in the settlement, they would roll back the AWP benchmark price of other drugs not covered by the settlements, thus creating cost savings on a much wider range of prescription medicines.

Associations representing pharmacists and pharmacy benefit managers have fought in the courts for the last three years to prevent such a roll-back, claiming that it would put many small pharmacies out of business, and poointing out that they were not involved in the alleged price manipulation. However, in its judgement this month the Appeals Court rejected these claims and stated that, in principle, the rollback “makes some sense.”

It should “wash out any remaining inflation for the future and, to the extent it forces prices temporarily below the market level, it will take back some of the windfall profits obtain (even if innocently through another’s fraud) and give some compensation for past overcharges,” said the Court. In her judgement, Judge Saris also approved a $350 million settlement with McKesson.

Steve Berman, a managing partner at Seattle-based law firm Hagens Berman Sobol Shapiro, which brought the class-action lawsuit on behalf of the plaintiffs, said the impact of the settlement was “very significant for all who have paid for brand-name drugs.”

It shows “all payers that the mark-up differences between WAC and AWP are entirely artificial and thus should be adjusted to ensure the lowest payment for prescription drugs,” added Thomas Sobol, another managing partner at the firm.

However, Steven Anderson, chief executive of the National Association of Chain Drug Stores (NACDS), emphasised that pharmacies and patient care should not be harmed by legal proceedings in which pharmacies were not originally involved. Legal actions by pharmacy groups over the last three years had been successful through legal action in preventing reductions to published AWPs, and this has prevented subsequent reductions in reimbursement to pharmacies, he said.

The Appeal Court’s ruling “does not signify the end of the campaign, but rather shifts the urgency for action to other arenas. The fact remains that reduction of AWPs threatens to cut pharmacy reimbursement for drugs below their costs - an untenable position for any healthcare provider and for any business,” added Mr Anderson.