Costco Under Investigation for Pharmaceutical Scheme

Many people have been looking to Costco as a surefire way to invest their money for years, however, this year has been a bit difficult for the company. They announced that they were ending their deal with American Express, they are pulling cigarettes from stores and changing the way they do business. Now, they are now under investigation for a kickback scheme dealing with pharmaceuticals.

The kickback scheme being investigated has to deal with Costco allegedly trying to charge a drug company more than a million dollars to be able to get their products on the shelf. The kickback scheme could cost the wholesale retailer a significant amount of money.

The Ontario College of Pharmacists began to investigate Costco after a company that manufactures generic brands of medication, Ranbaxy, filed a complaint against the wholesaler. The complaint accused Costco of unlawfully using $1.3 million worth rebates.

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Ranbaxy secretly recorded a phone call with a Costco director in which the Costco rep said that the company would likely have to pay a significant amount of money to even stay afloat. However, Costco said any payments from the drugmaker were simply “advertising fees.” They said the payments were not part of any decision to place specific drugs on its shelves. Ranbaxy tells a different story.

In Ontario, it is illegal for companies selling drugs to receive any kind of rebate from the drugmakers. However, outside of Ontario, it is not uncommon to see pharmacies getting rebates of up to 80 percent from drug companies.

This is a bit different from how things works in America. To give you a better idea it works something like this: pharmacy buys a pill for $1, the pharmacy gets 80 cents back. This means that they are only paying 20 cents a pill (and likely charging clientele much more than that). For a company like Costco, these payments amount to millions upon millions of dollars every year.

Costco in Ontario, however, should not be allowed to do this, but they found a loophole. Tony Gagliese, a sales rep with Ranbaxy, said that Costco renamed the rebates to make it seem like marketing or clinic support to get around the law against allowing rebates on drugs in the province of Ontario. Gagliese claimed in his complaint that Costco said that whichever company paid the most would gain the most listings for marketing.

Of course, Costco claims any rebates collected were by locations outside the Ontario province. However, the company did pay Costco $1.266 million for advertising within the wholesale retailer’s clinics. “Advertising services were not in connection with the purchase and sale of any specific drug product,” Costco’s lawyer said.

“Costco has clearly improperly characterized rebates as marketing services and clinic services,” Gagliese wrote in his complaint. “I am now certain beyond a shadow of a doubt that Costco Senior Management had a role in the development of this plan to enrich Costco financially.”

The wholesale company will continue to be a part of an ongoing investigation in Ontario with Ranbaxy. If there is anything to merit the complaint, Costco will likely be investigated for its dealings with all of the other pharma companies it deals with for business in that province as well.

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Photo: Flickr: Global Panorama