October 16, 2001
Discount drugs reportedly traded on 'gray market'
By Emily Richmond
LAS VEGAS SUN
Unscrupulous distributors are diverting discounted drugs intended for nursing homes to secondary wholesalers, who in turn resell the inventory at a steep profit, according to the Nevada State Board of Pharmacy.
The state board's attorney says the "gray market" -- where wholesalers trade pharmaceuticals before supplies ever reach the retail market -- played a role last year in the shortage of flu vaccine at hospitals and health clinics.
Consumers wind up paying more for prescription drugs that are in shorter supply, said Louis Ling, attorney for the state board. Members of the state board, meeting this week in Las Vegas, are considering limiting pharmaceutical wholesalers from selling more than 10 percent of their inventory to other wholesalers in an effort to curtail the gray market.
Hospitals and most medical facilities are prevented by the Food and Drug Administration's Prescription Drug Marketing Act of 1987, designed to keep counterfeit and expired drugs off the market, from reselling supplies. But the so-called "closed-door pharmacies," which serve nursing homes and aren't allowed to sell to the public, are neither hospitals nor health care entities under that law and can resell supplies to wholesalers.
Many drug manufacturers give steep discounts to closed-door pharmacies in exchange for promoting their products to patients. In addition, drug manufacturers are not required to verify that the closed pharmacies deliver the drugs they buy to nursing homes, leading to frauds and scams in Nevada and nationwide, Ling said.
Experts estimate that 50 percent to 80 percent of the nation's closed-door pharmacies are actually fronts for the resale of discounted drugs; they never deliver the medicines to nursing homes, according to the National Association of Boards of Pharmacy.
Scammers obtain permits for closed-door pharmacies, Ling said, then use the permit to order large quantities of drugs, taking advantage of the manufacturers' discounts. The diverted drugs are then resold, often to a wholesaler participating in the scheme. The drugs then often wind up with an unsuspecting and reputable wholesaler, who in turn resells inventory to the retail market.
The owners of the permit and the middlemen each make a substantial profit on the transactions, without ever delivering a prescription to a nursing home, Ling said.
It's a "well-organized effort to reap huge profits by exploiting a drug-pricing policy fraught with inconsistency and inequity," according to the Drug Enforcement Administration, which first posted warnings about the scam in 1999. In many cases, once a closed-door pharmacy comes under scrutiny, the owners simply close up shop and move to another state, Ling said. Putting the sham closed-door pharmacies out of business is one way of solving the problem, Ling said.
Nevada has reduced the number of fraudulent pharmacies by developing a more stringent application process, he said, and applicants are now required to show service contracts with a nursing home or care facility.
Limiting trading between wholesalers is another way to address the problem, one that the board plans to examine, Ling said.
At Wednesday's meeting of the state board, Ling said, he will cite inequities in the flu vaccine market as an example of how unrestricted wholesale trade hurts the public.
Many hospitals and health clinics ran out of the vaccine last year, while chain supermarkets and pharmacies both in Nevada and nationwide continued to have plenty, Ling said.
The Centers for Disease Control and Prevention in Atlanta recommends selling the flu vaccines for about $4 a dose, or $40 for a 10-dose vial. Ling said that, during the height of the shortage, he found online wholesalers reselling the flu vaccines for anywhere from $99 to $149 for a 10-dose vial.
Gary Sasich, a policy analyst with the consumer watchdog group Public Citizen in Washington, said Ling's linking the flu vaccine shortage with the gray market is reasonable. Wholesalers that purchased millions of discounted doses from closed-door pharmacies could then dole out the supplies to the highest bidder, Sasich said. Meanwhile, hospitals and clinics that lacked the buying power were forced to pay the inflated prices, he said.
"This isn't health care, it's simple market theory," said Sasich, who is also a pharmacist.
Sasich said the Nevada board's proposed regulation on wholesale trading was an innovative solution to a serious problem. Whether the proposal has any effect remains to be seen, he said.
"The Nevada board has come up with a perfectly reasonable solution, but people who want to take advantage of the system are very creative," Sasich said. "Regulators tend to be one step behind."
Some wholesalers argue that they are simply taking advantage of "opportunity buying" and should not be punished for the activities of the closed-door pharmacies.
In a letter to the state board, AK Distributors, a Henderson-based pharmaceutical distributor, objected to limits on sales between wholesalers.
The regulation could force AK Distributors to "close our operation and put 16 people out of work," wrote Eugene Braddy, a pharmacist and the company's president.
AK Distributors gets about 70 percent of its business from buying products at a discount rate from other wholesalers, then selling the inventory to other wholesalers, distributors, pharmacies and clinics, the letter says.
Braddy said Thursday that his company keeps careful records, documenting where each shipment originated and only buys from pharmacies that are going out of business.
"Our job is to distribute legitimate, safe products, and that's what we do," Braddy said.
The Healthcare Distribution Management Association, a national organization composed of wholesalers and distributors, has also opposed the proposed changes.
The regulations would put "unprecedented restrictions on commerce in Nevada," wrote Lori Bickel, associate director of the organization's regulatory affairs, in a letter to the state board. "It is not an exaggeration to say that Nevada distributors that currently engage in legal, ethical and accepted business practices may be put out of business by this provision."
But Ling said he will use Dalfens Inc., a now-defunct distributor formerly based in Northern Nevada, as an example of a company that took unfair advantage of the law.
The state board fined Dalfens $1 million last year for failing to keep records of its shipments and sales, including millions of dollars worth of pharmaceuticals bought and sold from other wholesalers, Ling said.
President Gary Dahlberg, whose last known address was listed in Lake County, couldn't be reached for comment. His attorney, James R. Hales, said he is challenging the board's fine. Dalfens is also disputing that it ever did business as a wholesaler under the state's definition, Hales said.
Through its investigation of Dalfens, the state board was able to trace shipments to closed-door pharmacies that have since gone out of business, Ling said. He declined to provide specific business locations, because the investigations are continuing.