1981 was a pivotal year in pharmaceuticals. The National Council of Prescription Drug Plans, which
developed the drug industry inventory codes, which became the National Drug Codes, was pushing to
computerize the automation of the retail pharmacy industry. They introduced a “Universal Claim
Form” that standardized claims form to price and file insurance prescription drug claims.

Before 1980, there were only a few insurers for prescription drugs, and they required the insured
to buy the drugs and then get reimbursed by filing a paper claim by mail. The claims could also be
filed by computers but had to be run in batches to match the specific insurers’ claim form which
limited plan participation to mainly chain pharmacies being computerized and having more customers
and similar insurers and were more to process many forms which independent pharmacies could not.

All Customers then bought directly from hundreds of manufacturers. including wholesalers who had to
carry 100% of the items. The Top 200 drugs were 80% of the prescriptions, while hundreds made up
the 20% of the remaining items that few customers bought direct from manufacturers and had to
obtain from wholesalers. Hospitals followed the same pattern which affected my group purchasing
operation, as we had to wait until a drug was off patent before bidding it to save 50% or more.

I decided to use the Digital Equipment Corporation DEC 360 computer I bought to computerize all
hospital products and order entry I bid all hospital drugs to establish the “best price” and
required manufacturers to service the needs of each hospitals through their “wholesaler of choice”
with every day delivery, on a cost plus basis. This provided the lowest price and best service and
also greatly increased the groups revenues.

Direct manufacturers prices for the Top 200 drugs ranged from $0.60 to $1 a pill. The bid reduced
them on average to a dime each, and everybody seemed pleased. Some even were bid at a penny a pill
price. I asked manufacturers why they did not give them free, who all told me “you can’t track
zeros through computers.” Occasionally, some of the hospital pharmacists worked in their friend’s
pharmacies and told me our hospital prices were 800% lower than retail.

There were few problems. But manufacturers did not trust the wholesalers and delayed millions in
credits needed to enable wholesalers to pay invoices. To resolve this we developed a
“temporary credit” called a “charge-back”, that “set up” massive medicaid fraud.

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