Article: Ohio system alleges contractor fraud; Benefits handler for teachers testifies about missed rebates

Tuesday, November 15, 2005

Ohio system alleges contractor fraud

Benefits handler for teachers testifies about missed rebates

By James McNair
Enquirer staff writer

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The woman who handled health-care benefits for the Ohio teachers retirement plan testified Monday that Medco Health Solutions pocketed millions of dollars in pharmaceutical rebates, contrary to her understanding of the contract with the New Jersey-based benefits firm.

Lynn Hokanson was the first witness in a jury trial expected to last up to six weeks. The State Teachers Retirement System of Ohio alleges that Medco, of Franklin Lakes, N.J., committed fraud, breach of contract and other violations of state law by overcharging members $152 million through withheld rebates, excessive fees and overpriced drugs from 1993 through 2001.

The system wants full repayment and punitive damages. Medco denies the claims.

Hokanson said she worked for the retirement system when it gave three-year pharmacy benefits contracts to Medco in 1993, 1996 and 1999. She retired in 2004 but returned to train a replacement.

Going over selected passages of contracts and letters with Robert Heuck, one of three outside lawyers, Hokanson said it was her belief that all three contracts called for Medco to pass along 100 percent of rebates paid by pharmaceutical companies whose products were placed on a drug formulary for system members.

In documents flashed on a projector for jurors to see, rebates went by an assortment of names as years went by, including "formulary rebates," "market share rebates," "manufacturer rebates" and "access rebates."

Hokanson said she regarded them all as the rebates that the system was entitled to in its contracts with Medco.

"Did you realize that Medco was putting at least half of the rebate money into its pocket?" Heuck asked.

"No," she said.

"No one from Medco told you in the 1990s that Medco was putting at least half of the rebate money in its pocket?"

"No, no one told me," she said.

Although Hokanson said the the system had suspected that Medco was earning manufacturer rebates off the backs of retired teachers, she said it wasn't until 2001 that Medco admitted it. While the system was earning rebates on member drug purchases, she learned, Medco was earning other rebates based on overall volume. Hokanson said Medco told system representatives in 2001 that it kept the rebates instead of charging dispensing fees for mail-ordered prescriptions.

"I was shocked," Hokanson said. "I had thought for the last three contracts that there was no dispensing fee."

Documents obtained after the lawsuit was filed in 2003 show that Medco received rebates totaling $21.1 million from 1998 through 2001, the last year it worked for the system

Heuck showed jurors how they worked. A 1999 deal with drug maker AstraZeneca Plc gave Medco a 15 percent "market-share rebate" in exchange for Medco's not filling prescriptions for AstraZeneca's heartburn medication Prilosec with less-expensive generics.

In another such arrangement, Heuck showed excerpts of a rebate deal with Eli Lilly & Co. that gave a place on the retirement system's formulary to the Indianapolis drug maker's Axid despite the availability of cheaper generics.

Hokanson said the assurance of receiving 100 percent of manufacturer rebates eased the system migration to Medco's 1992 drug-benefit plan that rolled out the drug formulary and gave Medco additional authority.

The trial in Hamilton County Common Pleas Court continues this morning.

E-mail jmcnair@enquirer.com

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