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File photo of Shkreli, former CEO of Turing Pharmaceuticals LLC, appearing before a hearing in Washington

• Medicare spent over $500 million on a drug called Acthar in 2015.
• The drug, which has never been tested by the FDA, is the only one in the top-20 for Medicare that isn't considered life-saving.
• Now investors are suing MNK because the company said Acthar's success is not dependent on government money.

Now don't get me wrong, we're no fans of Martin Shkreli.

But we do owe him credit for doing something right. Back in 2014 he complained to the Feds - specifically the Federal Trade Commission (FTC) - about a drug company's anti-competitive behavior.

That company is called Mallinckrodt Pharmaceuticals (MNK), and it was recently forced to pay a $100 million fine for squashing competition to its blockbuster drug, Acthar.

This merits discussion because MNK's problems didn't end with that payment.

MNK recently disclosed that it has joined the ranks of other big drug companies (like Gilead, Valeant and Celgene) being investigated by Justice Department for its patient assistance programs. The pharmaceutical industry spends about $7 billion on these programs a year.

What Washington wants to know is whether or not these programs actually help patients, or just help companies keep drug prices high. Because of that concern, government programs like Medicare and Medicaid already don't accept the help of patient assistance programs.

Mallinckrodt, like most of the other drugmakers, hasn't said much about what its investigation is actually focused on.

But by piecing together government data on the sales of Mallinckrodt's blockbuster drug, Acthar, the company's own disclosures, and examining its relationship with the company that manages its patient assistance program, it's not hard to get a sense of all the things the government should be worried about.

This drug - which isn't considered life-saving and is more than 50 years old - is one of the costliest for US government programs, costing tax payers over a half a billion in 2015.

Also, the main problem Acthar is supposed to treat afflicts infants, but the program that is spending hundreds of millions on it is Medicare Part D - which assists the elderly. Looking at the numbers, you're left with more questions than answers.

What is certain, however, is that if this is the way the entire industry is doing business, you should be worried about it too.

The players club

Before we dive in here there are a few things you should know about Acthar (or more technically, HP Acthar Gel).

• Acthar is mostly used as a treatment for infantile spasms.
• MNK bought Acthar, which is made out of a pig's pituitary glands, back in 2014. Now it's the company's top-selling drug, and could account for up to 40% of the company's revenue in 2017.
• Acthar is typically given for 2-4 weeks and generally requires 2-3 vials at a price of $38,200 per vial.
• It's also one of the top 20 selling drugs for Medicare's Part D program, and it's the only drug in the top 20 that doesn't treat a life-threatening disease.
• In fact, there's debate about whether or not Acthar is effective at treating anything at all. It's been around since the 1950s and was approved before the FDA required the kind of clinical trials it now expects. The drug has 19 different "indications," which means it is used as a treatment for 19 different ailments including Lupus to some dermatological diseases, and multiple sclerosis.

Because of that last point MNK has become something of a flashpoint in the industry. Wall Street short seller Andrew Left once showed up on CNBC with a $1 million check and said that he would donate it to multiple sclerosis research if MNK would test Acthar.

MNK ignored him. They also ignored multiple requests for comment on this story.

Bloomberg

Andrew Left

Another important part of Acthar is its relationship with distributor, Express Scripts, which is also being investigated because of patient assistance programs.

Express Scripts is not a drug company. It is the country's largest pharmacy benefit manager, servicing just under a quarter of health insurance plans (public or private). That means it manages the list of drugs your insurance company (or whoever is paying for your drugs) will pay for. It's a gatekeeper that is supposed to keep costs down.

But that's not all Express Scripts does. It also has an internal mail-order specialty pharmacy called Accredo Health, which takes a percentage off every drug that it sells, and a business that manages patient assistance programs called United BioSource.

Express Scripts doesn't like to talk about its United BioSource clients. It also doesn't like to talk about which United BioSource clients also have agreements to sell through Accredo Health. We asked the company about that a few months ago and they said all of that was confidential.

What we do know, though, is that Acthar is one of the drugs that has a patient assistance program managed by United BioSource - you can check out the form here - and that it is also sold by Accredo Health.

We also know that Accredo is paid based on how much Acthar it can get out the door and into the hands of patients, a fact the company denied, and then confirmed, in e-mails with Business Insider.

United BioSource, Express Scripts says, is paid based on how much staff it needs to figure out who should or should not receive help from its patient assistance program. It doesn't make the rules of those programs and those rules are proprietary to their client, in this case MNK (which would not answer questions about them).

Again, government programs don't allow these programs to pay co-pays for patients because that makes it easier for patients to run up a massive medical tab without thinking about it. Keep that in mind.

AP Images

Can I live?

Now that you know who is running, and helping to sell Acthar, we can bring the government into the mix - because it's doing most of the paying.

MNK sold about $1 billion in Acthar in 2015, and about 65% of that was sold to the government through Medicare and Medicaid.

Acthar was one of the top 20 drugs bought for Medicare Part D patients in 2015 according to the program. Medicare Part D spent about $500 million on the drug, for just 3,104 people.

It is also the only drug of those on the top 20 list that is not considered life-saving.

Of that $500 million, a little over half goes to patients who are low-income subsidized, so the government is shelling out almost the entire $38,000 price of the drug. Medicare spent an average of $162,371 per Acthar patient in 2015.

Digging into those numbers, if only 3,104 people are taking Acthar, that means Medicare is paying for an average of 23.7 doses a year (obviously not the recommended 2 to 4).

For Medicare Part D patients who are not low income subsidized, though, Acthar costs an average of $8,000 out of pocket a year, the Centers for Medicare and Medicaid Services says.

Sure that's not $38,000 but it is still a pretty high price for seniors to pay. Express Scripts told us that the drug's co-pay for Medicare Part D patients that it manages is $2,000.

Medicare

The top 20 drugs bought by Medicare Part D in 2015

So how are under half of them paying for Acthar if they can't use MNK's patient assistance program?

We asked Andrew Miller, of Detroit-based pharmacy benefit manager Meridian, what he thought of this Acthar conundrum. Many of his clients are on government insurance, especially Medicaid. He said that even though Acthar isn't on his formulary (the list of drugs his company will allow insurers to pay for), if a patient needs the drug it can go through an exception process.

Thing is, adults really don't ask for it. The only time he ever needs to make an exception for Acthar, is when it's being used to treat infantile spasms. He's never approved its use for anything adults would need.

"It is rare for any beneficiary regardless of type of insurance (Medicare or commercial) to pay $8,000 out of pocket for most therapies," he said to Business Insider in an e-mail. "Usually when the out of pocket expense is this high there is some sort of copay assistance or manufacturer program option."

So we asked Express Scripts about it, and they were very precise with their answer.

"The Acthar Gel PAP does not pay any OOP [out of pocket] costs for patients with pharmacy coverage," the company told us [emphasis theirs].

However, it will give the drug away for free if a patient qualifies for that. And Accredo is also willing to point patients in the direction of a charity that will help them take care of the co-pay as well.

"As a company dedicated to caring for patients with chronic and complex conditions, we support or work with a variety of charitable organizations that assist patients," the company said in an e-mail. "We cannot advise as to whether any of the many charities we have supported offer a patient assistance program, but we state that we do comply with regulatory requirements in making charitable donations."

So somehow, someway, these drugs are getting paid for. Or, more accurately, they're getting into people's hands.

This game has a cheat

We saw the dirty version of this game being played at another mail-order pharmacy back in 2015. It was called Philidor, and the pharmacy was secretly owned by a drug company called Valeant Pharmaceuticals until October of 2015. The revelation of Philidor's existence brought the entire company to its knees, and since then its stock price has fallen from a high of $260 to $16.

And here's why: Philidor's game, according to internal documents viewed by Business Insider, was to get as much Valeant product out the door as possible, often paying co-pays for patients. Once the patient had the drug, Philidor would just keep sending refills, also charging the patient's insurer.

Sometimes Philidor would get paid and sometimes it wouldn't, but the more drugs it was able to send out, the more claims it could try to get filled.

That's where the money is - in getting the drug out the door and then doing whatever possible to get the claim filled afterward.

This is why Senators like Elizabeth Warren (D-MA) raged about Valeant's patient assistance programs when company executives were in the hot seat on Capitol Hill last year. Former CEO Michael Pearson claimed that he didn't know how much money using patient assistance programs was netting them, which left Warren incredulous.

AP Photo/Jacquelyn Martin

Now, if you listen to MNK tell it - and even some people on Wall Street - the company doesn't rely on government sales for its blockbuster drug's survival. In fact, it will tell you that 60% of its sales are to patients with private insurers.

But the numbers don't actually show that. Ever since MNK bought Acthar in 2014, its sales to Medicare Part D especially have exploded, driving growth.

In 2013 the program spent $262.6 million on the drug. In 2014 that jumped to $391.2 million, and then - again - in 2015 the program spent $503 million on the drug.

So investors are upset. Last month shareholders filed a lawsuit against MNK for allegedly lying about its reliance on Medicare and Medicaid for Acthar's revenue. The SEC is also looking into the matter.

But the question here isn't just who pays for Acthar, it's how the drug is paid for. Every tax payer should be wondering why a drug that has never been properly tested is being sent to 3,104 Americans an average of 23 times a year at a cost of over half a billion dollars.

Nobody wants to be a bag holder.