Costco fined $7.2M for accepting illegal kickbacks

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The Ontario government has fined Costco more than $7 million after an investigation into allegations the bulk food giant asked for illegal kickbacks from a generic drug manufacturer.

The Fifth Estate first reported in March of last year, that the province’s Forensic Investigations Team had launched the investigation.

The Ontario’s Ministry of Health issued a statement Friday announcing the fine.

« Following an inspection, the Ministry determined that [Costco pharmacies] had received $7,250,748.00 for advertising services which the Ministry concluded violated the prohibition on rebates, » the statement said.

« The Ministry takes non-compliance with the prohibition on rebates seriously and will continue to assess compliance with the prohibition by manufacturers, wholesalers and pharmacies. »

It’s illegal in Ontario for a pharmacy to accept rebates, or kickbacks, from a generic drug manufacturer in exchange for promising to stock its brand of drugs. Studies show rebates drive up the price of generic drugs for consumers.

Secretly recorded audio tapes obtained by The Fifth Estate showed a senior pharmacy executive from Costco asking for kickbacks.

« As a minimum, I’d like to see somewhere around 3.6 million of support. That’s a minimum, » the executive can be heard saying.

A salesperson from generic drug manufacturer Ranbaxy Pharmaceuticals first brought forward the allegations against Costco in 2015.

« I feel vindicated, I’m happy but it’s not enough, » said Tony Gagliese.

Tony Gagliese was a salesman with Ranbaxy Pharmaceuticals. He blew the whistle on Costco by filing a complaint with the Ontario College of Pharmacists. (CBC)

According to the ministry, the fine levied is equal to the amount Costco received in kickbacks. Gagliese says the province should have come down harder on Costco.

« If you want to send deterrent, you have to send a strong message. This isn’t a strong message. They are just paying back the money they took. »

In 2018, two pharmacy directors with Costco pleaded guilty to professional misconduct in front of the Ontario College of Pharmacists.

The college accused Joseph Hanna and Lawrence Varga of asking for the illegal payments. They later conceded that the requests could « reasonably be regarded… as unprofessional, » according to the decision from the college’s disciplinary committee.

Each pharmacist was fined $20,000 and ordered to pay $30,000 in costs.

In a statement on Friday, Costco says it co-operated with the investigation and has agreed to pay the fine.

The company says it « honestly believed at the time that the advertising programs referred to were not contrary to Ontario law, » and that it’s « pleased that the rebate order issued by the Ministry provides further guidance on the issue of rebates. »

The company pointed out that the decision of the college said at the time Costco was « operating in an area of legal uncertainty. »

Costco added, it « would never knowingly or intentionally act in a manner which was inconsistent with the laws of Ontario. » 

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Costco pharmacies hit with $7.25M fine after probe of money the chain collected from drug companies

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Costco pharmacies have been fined $7.25 million for violating an Ontario kickback regulation designed to keep down the cost of prescription medications.

The fine, quietly posted Friday on a government website, follows a three-year investigation into “advertising services” Costco was alleged to have charged its drug suppliers to get their medications stocked at the retail chain’s stores.

Costco pharmacies have been fined $7.25 million for violating an Ontario kickback regulation designed to keep down the cost of prescription medications.
Costco pharmacies have been fined $7.25 million for violating an Ontario kickback regulation designed to keep down the cost of prescription medications.  (Toronto Star)

It’s illegal in Ontario for drug companies to give direct or indirect incentives — known as rebates — to induce a pharmacy to stock their products. The province has said these kickbacks artificially inflate the price of drugs.

The Ministry of Health and Long-Term Care determined that Costco’s acceptance of millions of dollars for advertising services from 2013 to 2015 “violated the prohibition on rebates.”

“The Ministry takes non-compliance with the prohibition on rebates seriously and will continue to assess compliance with the prohibition by manufacturers, wholesalers and pharmacies,” read a notice from the executive officer of Ontario’s public drug programs, who is in charge of enforcing anti-rebate legislation.

In a statement, a Costco spokesperson said its pharmacies “honestly believed at the time that the advertising programs” did not break Ontario’s rebate rules, adding that the company used the money “to reduce dispensing fees and drug mark-ups” for its customers.

“(Costco pharmacies) would never knowingly or intentionally act in a manner which was inconsistent with the laws of Ontario,” the statement said.

The Star first revealed in March 2016 that Costco had been accused of squeezing nearly $1.3 million in unlawful rebates from Ranbaxy, a generic drug company.

At the heart of the allegations was a secretly recorded 2014 phone conversation in which a Costco pharmacy director explains to a Ranbaxy drug sales representative how much the company would have to pay to “greatly reduce the likelihood of somebody eating your business.”

That rep, Tony Gagliese, complained to Ontario’s ministry of health and the pharmacists’ regulatory college, alleging Costco was requiring Ranbaxy to pay “renamed” rebates on its Ontario sales through pricey advertising services in order to circumvent the law. The advertising services included Ranbaxy’s logo being printed in clinic handouts and the Wellness Connection, a magazine published by Costco.

Costco approached the ministry in the summer of 2015 for clarity on whether the payments were appropriate, and suspended charging for its advertising services while it awaited feedback.

In its Friday statement, Costco said it co-operated fully with the government’s investigation and is “pleased” the fine “provides further guidance on the issue of rebates.”

The government’s action is not the first time Costco has been sanctioned for the payments.

At a January 2018 hearing before the Ontario College of Pharmacists, two Costco pharmacy directors — Joseph Hanna and Lawrence Varga — admitted to professional misconduct for soliciting more than $1.2 million in improper advertising services from Ranbaxy. Neither Hanna nor Varga personally pocketed any of the money, Costco said in a statement at the time.

The two pharmacists were each fined $20,000 by the regulator.

As part of that settlement, charges that Hanna and Varga allegedly accepted illegal payments from four other generic drug companies were withdrawn.

Costco said in a statement that the regulatory college’s ruling recognized that Costco pharmacies were “operating in an area of legal uncertainty as it related to the payments.”

In the notice announcing the $7.25-million fine, the province said the penalty “will serve as a guide to the pharmaceutical industry regarding compliance with rebate prohibition.”

But the whistleblower who exposed Costco’s rebate demands said the fine does little to deter other pharmacies from collecting rebates.

“It’s weak. The only thing the government is doing is taking the money back that Costco took,” Gagliese said. “If you want to send a strong message to the whole profession, the executive officer should suspend Costco’s ability to bill” Ontario’s public drug plans.

“That would be a strong message. No one would do it again,” he said.

Jesse McLean is a Toronto-based investigative reporter. Follow him on Twitter: @jesse_mclean

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Gondre Is the Buddhist Temple Herb You Can Buy at Costco | Healthyish

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As a kid spending summers in Korea, my mom would drag me away from the video arcade to go mountain hiking. In May, the hills of Gangwon Province are a lush green, blanketed in soybeans, lotus, mugwort, burdock root, and other herbs that form the basis of Buddhist temple cuisine. My mother’s real motive for ascending so many miles of steep mountains was to teach me to how to pick those curative herbs and collect the fresh spring water that nourishes them.

Thirty years after my first foraging trip in Gangwon Province, I was shocked to roll down the aisles of Costco and encounter one of these Korean mountain herbs. Gondre is a leafy green renowned for flavor and health benefits—it forms the basis of one of the most well-known Korean Buddhist temple dishes, a simple bowl of steamed rice and herbs known as gondre rice.

Costco was the last place I expected to find authentic Korean food, much less this beloved temple cuisine dish, but South Korea is steadily exporting the food to the club retailer. A crafty sample lady knew she had my number when she called out, “Healthy Korean rice!” Slowing my hunger-induced rapid cart roll, I gratefully took her small paper cup of tender white rice, which had a spinach-like leaf nestled amongst its grains. Tucking the little spoonful into my mouth, I marveled at the pure, pleasant taste of the gondre bap. (Bap literally translates to “rice,” but also colloquially stands in for “food” in Korean.)

healthyish gondre 1

Photo by Chelsea Kyle

Dried gondre rice, ready to be cooked.

Known scientifically as cirsium setidens, gondre (also written as “gondeure”) has been called the Korean thistle. The wild mountain herb is now grown in large quantities in greenhouses across Korea. Costo’s producer, a Korean company called Hanwoomul that works exclusively with local farmers in Northern Jeolla Province, packages the herbaceous green in a frozen sesame oil-seasoned rice bowl. Amazon offers a standard Korean format: dried gondre that is ready to be reconstituted in soup, steamed with rice, or blanched in water, and most large Korean grocery stores sell a frozen or dried version of the herb.

Hanwoomul reports that gondre’s health benefits include improved digestion and blood cholesterol regulation, and recent studies have confirmed that the herb is rich in fiber, calcium, and vitamin A. Its most promising benefits, however, may come from its flavonoids—in particular, one flavonoid with a proven anti-diabetic effect in mice. The antioxidant’s effects fight cancer, and an herbal drink called taemyeongcheong, which contains gondre, has been shown to prevent acetaminophen-induced liver damage in mice.

In its raw state, gondre is earthy and a little bitter. But usually by the time the average Korean consumer has gondre in her hands, it has already been soaked, blanched, or dried, then packaged in a frozen or preserved format. Gondre gives off a deeply herbal and earthy aroma when cooked, similar to hearty cup of oolong tea. Salt and sesame oil are all you need to complete this minimalist rice bowl, but for an extra umami boost, mix in some soy sauce or soybean paste, or any bibimbap-style toppings you desire.

As Hanwoomul makes an effort to provide information about gondre in English and if club stores like Costco continue to stock it, gondre could be poised to be next big superfood. Perhaps a Gondre Greens smoothie mix isn’t far away. My mother probably wouldn’t drink it, but she’d be tickled that Americans have found a way to drink this healthful vegetable.

Find a gondre recipe here.

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