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Costco Pharmacies receive $7.25M penalty for accepting drug rebates

Authored byAlice Tseng

On February 1, 2019, the Ontario Ministry of Health and Long-Term Care (“Ministry”) announced that CWC Pharmacies (Ontario) Ltd. (“Costco Pharmacies”), a subsidiary of Costco, was ordered to pay an Administrative Monetary Penalty (“AMP”) of $7.25M for accepting payments from certain generic manufacturers which violated the prohibition on drug rebates.

In Ontario, the Ontario Drug Benefit Act and the Drug Interchangeability and Dispensing Fee Act prohibit pharmacies from accepting rebates from drug manufacturers “for” drugs that qualify as a listed drug product or as an interchangeable product, respectively, on the Ontario Drug Benefit Formulary/Comparative Drug Index. The Rebate Order at issue states “for” means that the benefit is linked directly or indirectly to listed or interchangeable products sold or offered for sale to the pharmacy. The definition of “rebate”, which is set out in the legislation, limits the permissible payments from a manufacturer to a pharmacy to only those made in accordance with ordinary commercial terms (i.e. distribution service fee, volume discount and/or prompt payment discount). The Ministry concluded that the fee-for-service payments received by Costco Pharmacies for “advertising services” were not provided in accordance with ordinary commercial terms and accordingly violated the prohibition on rebates. The $7.25M AMP imposed on Costco Pharmacies equals the amount in prohibited payments it received for the advertising services and follows disciplinary action taken by the Ontario College of Pharmacists in 2018 against two directors of Costco Pharmacies relating to this rebate activity.

The Rebate Order is important because it marks the first enforcement action on rebates taken by the Ministry in almost a decade and the announcement specifically says that both the announcement and the Rebate Order are intended to “serve as a guide for the pharmaceutical industry for complying with the rebate prohibition”.

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