The Rockford File is the story of how one very expensive prescription drug threatened to financially cripple an entire city. That city is Rockford, Illinois, an old industrial town outside of Chicago. Rather than using a health insurance company, Rockford has, for years, paid its own health care costs for its 1,000 employees and their dependents.

When Rockford got hit with the drug bill it was so enormous the mayor at the time set out to understand why.

Larry Morrissey: Everybody's asking the question, "Why is health care so expensive?" Because the fix is in. That's the answer. That's the short answer.

When Larry Morrissey was mayor of Rockford he was hit with a crisis: the city was bleeding money.

Lesley Stahl: You found out that the health care budget was going bust.

Larry Morrissey: Yea, the budget was out of control.

Lesley Stahl: And you had to squeeze other things. Like what?

Larry Morrissey: Hiring police and firefighters. Keeping firetrucks and other equipment on the streets. We started realizing that pharmaceutical costs were skyrocketing.

Lesley Stahl: And I heard that it was just one drug.

Larry Morrissey: One particular drug called Acthar.

Larry Morrissey CBS News

In 2015, two small children of Rockford employees were treated with Acthar, a drug that's been on the market since 1952. It's used to treat a rare and potentially fatal condition called infantile spasms that afflicts about 2,000 babies a year.

Lesley Stahl: Do you remember how much was on the budget for those two babies?

Larry Morrissey: We were spending hundreds of thousands of dollars for these sick baby cases.

Lesley Stahl: Close to $500,000-- is what we heard.

Larry Morrissey: Combined, yeah.

Lesley Stahl: Combined.

Larry Morrissey: Yeah.

"Every company can make profits, but this is profiteering. This is gouging."

The drug works – it's considered the gold standard for infantile spasms. But as he discovered it wasn't always so expensive. In 2001, Acthar sold for about $40 a vial. Today: more than $40,000. An increase of 100,000 percent. He wanted to know how that could've happened. But for two years he kept running into a brick wall.

Lesley Stahl: Why was it so hard to find out what was going on? And why?

Larry Morrissey: It's absolute secrecy. There's an absolute opaque system of pricing for drugs in our country. That's part of the problem.

His investigation got nowhere until last year, when the Federal Trade Commission charged the drug manufacturer, Mallinckrodt, with violating antitrust laws in order "to maintain extremely high prices for Acthar."

Larry Morrissey: And that was the big a-ha.

Lesley Stahl: That's the only way you learned? Otherwise, you wouldn't know.

Larry Morrissey: We may very well not have known.

Rockford, Illinois CBS News

And what they now know infuriates them. So they have hired attorney Don Haviland to sue Mallinckrodt for what they say is price fixing, a charge the company denies.

Don Haviland: Every company can make profits, but this is profiteering. This is gouging.

As he dug into the case, he found out that Acthar's biggest price increases came under the drug's previous owner, Questcor, which Mallinckrodt bought in 2014.

Lesley Stahl: When Questcor started raising the price, were they doing any research and development, anything to make the product better, to tweak it?

Don Haviland: Absolutely nothing. There was no R & D. There was no improvement in the product. There's no improvement in the company. All they did was raise the price.

To keep the price high, the FTC found that they did something else: they bought another drug that was Acthar's main competitor, a drug called Synacthen, that's been sold in Europe and Canada for years. For how much?

Don Haviland: Synacthen cost $33 in Canada. $33.

Lesley Stahl: The Acthar company bought the other drug?

Don Haviland: The competitive drug, yes. That's anti-trust, and that's why the Federal Trade Commission went after them. Because they took the only competitive product, paid a lot of money for it, and put it on the shelf.

Lesley Stahl: So they bought their only competitor, and then never sold it?

Don Haviland: Correct.

Correspondent Lesley Stahl with Don Haviland CBS News

Mallinckrodt admitted no wrongdoing, but in settling the case the Federal Trade Commission forced the company to pay $100 million. Not that much, he says, for a company that makes more than a billion dollars a year on Acthar alone.

Don Haviland: It's a drop in the bucket in this case. $100 million? It's nothin'.

Lesley Stahl: In an email to us, Mallinckrodt said that when the big price increase came, they didn't own the company. It was Questcor, not them. Should they be responsible? They-- they--

Don Haviland: Absolutely. It's their company. They own Questcor. They own the business model. And they're not lowering the price.

In fact, Mallinckrodt has raised the price by about $8,000 a vial since acquiring the company.

Mallinckrodt, which declined our request for an interview, sent us this email, saying that it has invested in new research and development into the drug. When we asked them how much, they told us, "This information is confidential and proprietary."

In our own investigation, we found that, with only about 2,000 cases of infantile spasms a year nationwide, the company made a strategic decision in 2010 to sell Acthar for other diseases.

We were able to find an old press release that said as much: the company was going to "...Expand our existing markets (and) find new therapeutic uses for Acthar." And so the company began to market the drug for several chronic conditions like rheumatoid arthritis that affect adults.

Dr. Peter Bach: What's shocking to me is half a billion dollars spent on this drug for seniors where there's no evidence that it's the right drug for any of them.

We asked Dr. Peter Bach, who studies the cost and value of drugs at Memorial Sloan Kettering in New York, to look into Acthar for us. What got his attention is that by 2015, Medicare was spending half a billion dollars a year on Acthar – tens of thousands of dollars per vial not for weeks, as with babies, but for years.

Dr. Peter Bach CBS News

Lesley Stahl: Is there any evidence that these drugs are effective for the diseases that seniors are taking it?

Dr. Peter Bach: I mean, none that the Food and Drug Administration would consider convincing.

Lesley Stahl: So the Food and Drug Administration has not approved the drugs for these diseases?

Dr. Peter Bach: So the approval for these drugs predate any standard of evidence that we use today.

The FDA approved the use of Acthar to treat these chronic conditions in 1952 -- when drug companies were only required to demonstrate a drug's safety, not its efficacy.

Dr. Peter Bach: And more important, there's many other drugs that work that are really quite inexpensive.

Lesley Stahl: Why did doctors prescribe Acthar for these diseases if there's something cheaper?

Dr. Peter Bach: Many of the doctors who prescribed a lot of Acthar also were getting money from the company that makes Acthar, for speaking, for consulting, for running research studies for the company, adding up to huge sums. And those doctors appear to be the ones who are most likely to also prescribe Acthar.

According to Pro-Publica, an investigative reporting group that tracks how much physicians earn from drug companies, Mallinckrodt paid doctors millions over a nearly two-year period, with the top earner getting more than $350,000.

Dr. Peter Bach: They're using a time-tested strategy, they raise the price to a very high level and they concentrate their energies on a few doctors whom they can get to prescribe the drug. And it works great for their revenue. It doesn't help patients. And in 2015, it added up to half a billion dollars of expenses for Medicare.

Whether or not it's effective for these other conditions, and the company says it is, Medicare is not allowed to negotiate the price of drugs because of a law passed by Congress.

Instead, Medicare largely relies on a little-known business to do the negotiating for them, called pharmacy benefit managers or PBMs, and it isn't just Medicare, it's also cities like Rockford that hire them to negotiate down the price of drugs. But as you'll see, even pharmacy benefit managers can benefit when drug prices are high.

The company negotiating prices for Rockford is Express Scripts, the nation's largest, representing tens of millions of patients. Rockford is also suing that company.

CBS News

Don Haviland: Express Scripts today is the 22nd largest company in America. Bigger than Home Depot, Microsoft, Comcast, household names.

Lesley Stahl: So what are you saying about the role that Express Scripts, played in this particular case?

Don Haviland: So they didn't use their buying power. They didn't use their clout. Their job was to go out and negotiate a lower price from the manufacturer. They didn't do it.

Lesley Stahl: How would they get the price down? What would they do?

Don Haviland: I can give you an example where you've got a high-priced medication, one in particular, the drug was $13.50. It was raised one day 5,000% to $750.

Lesley Stahl: One day?

Don Haviland: Express Scripts says, "We're not gonna pay it." The company refused to lower the price. They went out and got another manufacturer to manufacture it for $1. $1.

Lesley Stahl: They actually asked another company to make the same medication?

Don Haviland: Yep, and that's the one they covered for their patients and payers.

Lesley Stahl: And are you alleging that they could have done this in this case?

Don Haviland: Absolutely.

"The underlying problem we have with prescription drugs in this country is that every single actor has the potential to make money when drug prices go up."

He argues that Express Scripts should've used that same clout to force the cheaper alternative Synacthen to market, the one that sold in Canada for $33 a vial.

We wanted to ask Express Scripts why it didn't. But they told us in this email that "due to pending litigation" they could not discuss the matter. But Don Haviland thinks he knows why they didn't fight for a lower price.

Don Haviland: In a word, the money. It's all about the money. They obviously have a divided loyalty.

Dr. Peter Bach: Express Scripts is a big corporation. It also has parts of it that make money when drugs cost more and when more expensive drugs are sold.

Lesley Stahl: Whoa. Wait, wait, wait, (LAUGH) wait. You're saying that this PBM whose function is to keep drugs' prices low makes money when drug prices are high? Is that what you've just said?

Dr. Peter Bach: Yes. So Express Scripts is many companies, not just the PBM. It also owns a pharmacy that sells expensive drugs. It also owns a company that ships and packs expensive drugs. All of those other parts of Express Scripts corporation make more money the more Acthar goes out the door, the more prescriptions for Acthar are filled and refilled.

The city of Rockford was able to find out one more piece of the puzzle: that Express Scripts, the company it hired to keep prices down, also had a contract to be the exclusive distributor of Acthar.

Rockford's lawyer, Haviland, accuses Express Scripts of cheating the city.

Don Haviland: They serve two different constituents. You've got the manufacturers on one side and the cities of Rockford and patients on the other side.

Lesley Stahl: We have an email from Express Scripts and they say that they don't think there's a conflict of interest. And that Express Scripts does not set the price for medications. That's their response

Don Haviland: We contracted with them for cost containment. And they didn't do it.

But in the Rockford lawsuit, Express Scripts has denied any wrongdoing, and, in its motion to dismiss argues it was not "contractually obligated" to contain costs.

Don Haviland: It is laughable for them to say that. That is their business model. They-- they sell the model of, "We will contain your costs. We will lower drug prices." I welcome that argument in court before a jury of 12. I welcome that argument.

Lesley Stahl: What do you think about this? This is your world. You work in the area of drug prices and why they go up.

Dr. Peter Bach: The underlying problem we have with prescription drugs in this country is that every single actor has the potential to make money when drug prices go up. Remember that for drugs that doctors give to their patients, they make more money when they give expensive drugs than less expensive drugs. It's true of hospitals, too. It's true of pharmacies as well. And so this ever-expanding pie is serving everyone.

Everyone except those who need the drug and those who pay for it like Medicare. Mayor Morrissey says it's been a long and difficult journey trying to untangle the web of interests that cost his city so much money.

Larry Morrissey: The drug companies don't advertise, hey we're raping you. We're taking advantage of you. We're exploiting children and abusing taxpayers. They don't talk that way, right? Although that's what the net effect is of what they're doing.

Lesley Stahl: You almost sound like you're calling them a bunch of crooks.

Larry Morrissey: That's your words. I like those words. I think they're good words. And as long as they can get away with the increase in price, they're going to do it. Until somebody pushes back.

Produced by Richard Bonin and Ayesha Siddiqi.