The three Costco Canada executives went to meet a senior official with Ontario’s Ministry of Health. It was Sept. 1, 2015, and the company was bracing for a possible storm.

A complaint had been filed alleging the retail chain pressured a generic drug company to pay illegal kickbacks in exchange for getting its prescription products stocked on Costco pharmacy shelves. The alleged demand had been captured in a secretly recorded phone conversation.

In meeting with Ontario’s assistant deputy minister of health, the three Costco vice-presidents wanted to know if the province thought the payments it received from drug makers ran afoul of the law.

Three years later, the province still has not come out with an answer.

In the meantime, two Costco pharmacy directors admitted to a pharmacist regulatory college that they committed professional misconduct for soliciting payments that could reasonably be seen as unlawful kickbacks, and were hit with a modest fine.

Still, Ontario’s Health Ministry, which can punish companies that break its anti-kickback laws, remains mostly silent, saying only that it is investigating.

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The province’s inaction on a case where the evidence of wrongdoing appears “clear cut” sends a message to other pharmacies and drug manufacturers that the rules can be flouted, said Chris MacDonald, a business ethics professor at Ryerson University.

“If you don’t enforce it, you’re just engendering disrespect for the law,” he said. “A lot of the investigative work has been done.”

The Ministry of Health would not comment on the investigation, which is being led by the province’s Forensic Investigation Team. Costco also refused to comment on the province’s probe.

It’s illegal in Ontario for drug companies to give direct or indirect incentives to induce a pharmacy to stock their generic drug over a competitor’s. These kickbacks are known as rebates, which the province has said artificially inflate the prices insurers, including Ontario drug programs, and patients pay for their medications.

Costco was charging drug makers for “advertising services,” which included printing companies’ logos on clinic handouts and inside a magazine published by the retailer.

But the payments were just rebates that had been “renamed” in an attempt to circumvent the law, alleged Tony Gagliese, a former sales rep for the generic drug maker Ranbaxy. It was Gagliese who complained to the province and the College of Pharmacists about Costco’s demands for payments for “clinic support or marketing initiatives.” As evidence, Gagliese had a recorded phone conversation of a Costco pharmacy director explaining to him how much Ranbaxy would have to pay in order to “greatly reduce the likelihood of somebody eating your business.”

In August 2015, he filed complaints with the College of Pharmacists and the office of the assistant deputy health minister, who is also the executive officer of Ontario’s public drug programs and in charge of enforcing the anti-rebate provisions.

Within a few months, Ministry of Health agents were at Costco’s headquarters, auditing all the major payments the retailer had received from drug manufacturers over a three-year period, according to a government email and attachment obtained by the Star.

However, the province at the time did not intend to pursue any penalties against Costco, according to a source involved in the government’s decision making on the case.

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The province was already negotiating with drug manufacturers to lower the price of certain popular generic drugs. A price drop would shrink profits for the companies — and lower their motivation to use rebates to get their drugs on pharmacy shelves, the source said. Driving “the cost lower to make less incentive for kickbacks” was seen as a more practical solution than playing “whack-a-mole” trying to stomp out new ways the industry may try to circumvent anti-rebate laws, the source said.

The province decided to let the College of Pharmacists seek formal punishments against the two pharmacists running Costco’s pharmacies, the source said. The regulatory college charged Joseph Hanna and Lawrence Varga for allegedly accepting rebates from Ranbaxy and four other drug makers. Neither man was among the Costco executives who met with the senior Health Ministry official.

As part of their defence, Hanna and Varga’s lawyer argued that the regulator was unjustly targeting a lawful practice that was “widespread within the industry,” according to submissions made at the disciplinary hearing and obtained exclusively by the Star. To bolster his case, the lawyer named four other pharmacy chains that he said billed a drug maker for sponsoring clinics: PharmaChoice, Guardian, Rexall and Walmart.

Making a finding that an advertising payment “is a prohibited rebate and therefore that its acceptance by Costco is an act of professional misconduct … would have significant ramifications on pharmacies throughout Ontario,” Costco’s lawyer warned in a September 2016 submission marked “Confidential.”

Spokespersons for Walmart, Rexall and Guardian said they comply with Ontario’s laws. PharmaChoice did not respond to questions.

In January 2018, Hanna and Varga admitted to professional misconduct for soliciting $1.26 million from Ranbaxy that could reasonably be regarded as a kickback. Costco’s lawyer told the disciplinary hearing that the pharmacists believed the advertising fees the pharmacists charged the drug maker were legal. The advertising fee program was designed to reduce dispensing fees for customers, and neither Hanna nor Varga personally pocketed any of the money, Costco said in a statement at the time.

In the end, each man was fined $20,000 and the charges concerning alleged payments from four other drug makers were withdrawn. Costco would not tell the Star whether it has repaid any of the $1.26 million.

The penalty imposed by the college “was so trivial, such a slap on the wrist,” said Ryerson University’s MacDonald, that the government should pursue stiffer sanctions against Costco.

“It’s to protect the public trust in the system,” he said.

Gagliese, the former drug sales rep who exposed Costco’s demands, said he has grown frustrated waiting for the government to act.

“Who is protecting the taxpayers?” Gagliese said. “There is a pharmacy chain that’s admitted to breaking the law, (and) the government hasn’t stepped in and done anything about it.”

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