Ontario government fines Costco $7 million after illegal kickbacks

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Alanna Rizza The Canadian Press

Statistics Canada says wholesale sales rose 1.5 per cent to $63.9 billion in July, more than offsetting a 0.9 per cent drop in June. Customers walk out of Costco wholesale location in Montreal on Nov. 17, 2012. THE CANADIAN PRESS/Ryan Remiorz

TORONTO -- Ontario's government has fined Costco more than $7 million after finding that the company accepted illegal kickbacks at 29 pharmacies in warehouses across the province from 2013 to 2015.

The Ontario Ministry of Health announced Friday it would penalize CWC Pharmacies (Ontario) Ltd., a wholly owned subsidiary of Costco Wholesale Canada Ltd., after it found the company received illegal advertising payments before August 2015.

Costco says it approached the ministry in 2015 for confirmation on the legality of the payments, which it had been receiving from generic drug manufacturers for advertising services.

A statement from the ministry says Costco voluntarily stopped receiving the payments until the completion of a government review.

That investigation has revealed that the company received $7.25 million for services that the ministry says violated its terms for accepting rebates. The payments were used to reduce dispensing fees and drug mark-ups, according to Costco.

The government's statement says Costco has "fully co-operated" with its review, and has agreed to pay the fine.

The statement reads that while the company believed that the payments were legal at the time, it has acknowledged that they did not abide by Ontario's rebate laws.

The Ontario government prohibits the operator of a pharmacy from accepting rebates from a drug manufacturer that has a product listed on the province's drug database, according to the ministry.

The ministry defines rebates as "currency, a discount, refund, trip, free goods or any other prescribed benefit," in exchange for putting specific drug brands on pharmacy shelves.

The ministry inspectors found that CWC received "proceeds from fee-for-service arrangements entered into with certain generic manufacturers."

The Costco statement also refers to an Ontario College of Pharmacists decision issued last year on the same payments, which resulted in two Costco pharmacy directors pleading guilty to professional misconduct. They were each fined $20,000 and ordered to pay $30,000 to the college.

Michael Law, the Canada Research Chair in Access to Medicines at the University of British Columbia, said generic drug prices in Canada are historically higher compared to other countries, such as the U.S.

Law said some Canadian provinces have been trying to decrease the cost, such as Ontario imposing laws prohibiting rebates. He said prices have dropped considerably in the last five years, but illegal payments still occur.

Law said pharmaceutical companies sell their drugs to pharmacies, which buy them at a price designated by the province.

"Because those prices are higher than the cost of selling the drug, the drug company would then pay a secret amount back to the pharmacy as a rebate," he said.

Law believes that if rebates still exist, Canadians are still paying too much for generic drugs.

"It means there's excess money in the system," he said.

"The fact that rebates even exist is a sign to me that we're paying too much, at least in some instances."