It’s the biggest lawsuit you might not know anything about: Generic drug companies stand accused of running a “cartel” that rigged the market and fixed prices, costing patients and taxpayers, according to a complaint that has been joined by almost every state’s attorney general.

The scope just keeps getting bigger: The litigation started by focusing on two drugs but has since expanded to implicate 16 companies and more than 300 drugs, Connecticut Attorney General Joseph Nielsen, who has led the effort, told the Washington Post.

“This is most likely the largest cartel in the history of the United States,” Nielsen told the Post’s Christopher Rowland. Not mincing words.

We’ll run through the juicy details in a minute. But it’s worth stepping back and fully appreciating, if the states’ allegations are true, how thoroughly these drug companies have bastardized a system that is supposed to bring down drug prices.

How the generic drug market works — or is supposed to work — in America

Generics are the primary means of lowering drug costs in America. In the United States, if a company develops a new drug, we reward it by giving it a monopoly. New drugs are protected by patents for several years, and the company can set whatever price it wants, absent the discounts negotiated by health insurers or mandated for government programs.

But after a while, the patent expires. That’s where generics come in: They can start offering their own version of the new drug, medically equivalent but available at a much lower price. As more generic competitors enter the market, the price continues to decline.

This system frequently has the desired effect. When there are multiple generic competitors, the price typically falls to 20 percent or less of what the brand-name version originally sold for. Generic drugs account for 90 percent of the prescriptions filled in the United States but just 27 percent of US drug costs.

Yet according to the states’ lawsuit, this is still a system primed for exploitation, with generic companies teaming up to keep prices higher than they otherwise would be. In other words: Generic drugs, intended to add more competition to the drug market, have instead become the forum for rampant anti-competitive behavior.

The states’ lawsuit alleges that drug companies operate like a “cartel”

The “cartel” that generic drugmakers are accused of creating is remarkable in both its simplicity and its brazenness. The scheme had two primary components:

  1. Divvying up the market: When a new generic entered the market to compete with an existing generic drug, the companies would divide up the customers and they would agree to sell only to their particular slice of the clientele.
  2. Fixing the prices: Generic competitors selling different versions of the same drug would also coordinate to either collectively maintain or even raise the prices of their medications.

What shines through in the complaint is how casual much of the contact between generic drug companies was. They had their own lingo. They called the market the “sandbox.” (Everybody was expected to play nice.) When they were dividing up the market by territory, they made sure each company got its “fair share.”

Deals were negotiated by phone, email, and text, and at industry functions. Sales reps would attend “girls’ nights out” — ostensibly events for women in the industry — and discuss sensitive information, according to the states.

One episode illustrates concisely how the alleged scheme would work. As described in the states’ complaint:

  • One drugmaker, Heritage, was planning to introduce a new generic version of a treatment for severe acne. Another generic version, made by Mylan, already existed.
  • Before Heritage started selling its drug, its representatives reached out to Mylan about how to divvy up the market. Heritage said it planned to make a play for the business of two Mylan clients, a large wholesaler and a large retail pharmacy.
  • Mylan agreed to give up those two customers to Heritage, citing (it’s worth noting) a prior agreement between the companies that allowed Mylan to introduce a different new drug without competition.
  • When Heritage approached the wholesaler about the new drug, the wholesaler gave Mylan a chance to make a counteroffer and maintain the account — a common practice known as right of first refusal.
  • But Mylan, keeping to its agreement with Heritage, declined to make an offer and surrendered the account to its competitor.
  • A similar story played out with the large retail pharmacy. In that case, Mylan did submit a counteroffer — but one that, according to the states, it knew would not beat the offer being made by Heritage. The latter firm therefore still ended up with the account, as had been planned.

What happens next

Most of the companies implicated in the lawsuit have denied any wrongdoing. Proving that the drugmakers conspired to divide up their markets could be difficult, according to experts I spoke with; price fixing might be a little easier lift for the plaintiffs. The states have gotten access to more than 1 million documents, including emails and texts, the Post reported.

The exact damages are difficult to know but likely total in the billions of dollars if the allegations are true. These artificially high prices led to health plans and government programs paying more money. Patients who don’t have insurance or whose coverage requires them to pay a lot of money out of their own pocket were also stuck with the bill.

”If proven, these allegations are hugely significant and could give rise to large damage awards,” says Rachel Sachs, a law professor at Washington University in St. Louis.

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