Nevada takes steps to curtail drug ‘gray market’

By Emily Richmond

Monday, Oct. 22, 2001 | 9:54 a.m.

In an effort to block drugs intended for nursing homes from reaching the retail market, the Nevada Board of Pharmacy voted last week to limit pharmaceutical wholesalers from selling more than 10 percent of their inventory to other wholesalers.

Nevada is the first state in the nation to enact such a regulation, which is an attempt to curtail the so-called "gray market," in which closed-door pharmacies supposed to serve nursing homes instead divert their inventory through a complicated chain of distributors and secondary wholesalers.

Closed-door pharmacy frauds have plagued many states, including California, Delaware and Ohio, said Carmen Catizone, executive director of the National Association of Boards of Pharmacy.

"Nevada is taking a big step forward for all of us," Catizone said. "It will be interesting to see how other states respond."

The Prescription Drug Marketing Act of 1987 blocks hospitals, pharmacies and private physicians from selling drugs to wholesalers.

Closed-door pharmacies -- which are not allowed to sell to the public and can only fill prescriptions for nursing homes or other care facilities -- were exempted from the law, which also requires distributors and wholesalers to maintain records of a shipment's origins.

The closed-door pharmacy exemption has become a dangerous loophole, state officials say. The drugs bypass safeguards and wind up on store shelves at higher prices, according to the Louis Ling, the state board's attorney.

Drugs that were supposed to be stored at room temperature were found inside a heated cargo truck during the height of summer, Ling said. Some shipments took a convoluted route through five states and as many as 20 wholesalers with no origin noted, he said.

"You're looking at an industry that's built on fraud," Ling said of the gray market.

Many drug manufacturers offer large discounts to closed-door pharmacies in exchange for promoting their products with patients.

Some scammers gain permits for closed-door pharmacies but never actually fill a single prescription, according to Keith McDonald, a member of the state board's staff. The proprietors order millions of dollars worth of pharmaceuticals and immediately sell them to various wholesalers. If regulators catch on, the proprietors simply move to another state, making them difficult to stop.

Nationwide as much as 80 percent of the country's closed-door pharmacies are believed to be involved in the gray market dealing, experts say.

Congress held hearings last summer to discuss possible revisions to the 1987 act. Stricter records requirements, which were supposed to take effect Oct. 1, have been put on hold by the Food and Drug Administration pending the outcome of the congressional review.

It could be years for any changes to take effect at the federal level, said Gary Sasich, a policy analyst with the consumer watchdog group Public Citizen in Washington.

"The Nevada board deserves credit for tackling the problem head on, instead of just sitting back and waiting for the feds to solve it for them," Sasich said.

At a legitimate wholesale business, pharmacy board inspectors will find records and shelves full of items, Ling said. Nevada inspectors have paid surprise visits to some closed-door pharmacies and turned up nothing more than a desk and telephone in an otherwise vacant storefront.

Several wholesalers spoke out at Wednesday's meeting of the board, saying the regulations unfairly penalize them for the actions of closed-door pharmacies. Gene Braddy, president of AK Wholesalers in Henderson, said about 70 percent of his company's business involves sales to other wholesalers.

"This is a hardship for my business and may possibly force us to close our operation," said Braddy, who added he employs 16 people.

The regulations approved Wednesday also require wholesalers to keep copies of their business records on the premises and have a certain amount of stock available for inspection at any time.