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Ohio sues opioid makers, distributors — while giving them large tax breaks
Canton Repository - 8/12/2019
Ohio Gov. Mike DeWine has said he has no doubt that drug makers and distributors are responsible for Ohio's opioid crisis as he called on them to settle state lawsuits against them, presumably for a large sum.
But throughout the opioid epidemic and to this day, state leaders have supported a tax break that has been worth more than $4 billion since 2006 that has gone in large part to companies that make or ship prescription drugs -- including opioids -- through warehouses in Groveport, Lockbourne and Washington Court House. The subsidy is now growing at a clip of more than $500 million a year.
"We all know that there have been shocking and countless damages caused by the opioid epidemic," said Zach Schiller, research director for Policy Matters Ohio, who has been raising questions about this and other tax breaks. "But at the same time we're pointing the finger at them, we're inviting them to the trough."
Drug makers and distributors, including Cardinal Health in Dublin, have come under intense scrutiny since The Washington Post and The Gazette-Mail in Charleston, West Virginia, sued to have the U.S. Drug Enforcement Administration release a database showing that manufacturers and distributors inundated the country with 76 billion oxycodone and hydrocodone pain pills from 2006 through 2012. An increase in the number of opioid deaths paralleled the swelling sales.
The release of the data prompted DeWine to call an Aug. 2 press conference and say, "What is now public in the past two weeks, what these pharmaceutical companies have done, there can be no doubt in anyone's mind that they are responsible. ... There is no doubt that they knew these drugs were addictive; there is no doubt they lied to the public ... for a long period of time."
Yet the companies continue to enjoy one of Ohio's biggest tax breaks, and the DEA database shows that while distributors were shipping tax-free drugs out of state, they shipped almost 700 million opioid pills into Ohio from warehouses just across the state line.
Cardinal Health, AmeriSource Bergen and McKesson all are defendants in a 2018 lawsuit filed in Madison County by DeWine while he was attorney general. It accuses the companies of "intentionally, unlawfully, recklessly and/or negligently" allowing addictive opioids to be diverted from legitimate medical purposes.
Cardinal and AmeriSource have "qualified distribution centers" in Franklin County, while McKesson had one in Washington Court House from 2008 through 2014. To qualify for the tax break, such a center must have at least $500 million worth of products shipped to it in a year and it must ship at least half of those products out of state. Suppliers don't have to pay Ohio's 0.26% Commercial Activity Tax on the portion of goods shipped out of state.
DeWine spokesman Dan Tierney said, "This law was adopted during the (Bob) Taft administration when Ohio moved to a Commercial Activities Tax. The law addressed concerns that the tax disproportionately and adversely affected distribution operations and was adopted to help keep Ohio distribution jobs in Ohio."
Told about the tax break, Ohio Attorney General Dave Yost said the state might want to look at it.
"Tax incentives are a matter of contract," he said. "It may be appropriate to discuss whether language should be included in the future to allow the state to exit such an agreement upon a showing of behavior of the incentive that creates substantial harm to Ohio. Ultimately, this would be a decision for the (DeWine) administration."
But DeWine seemed lukewarm about repealing the incentive on the basis of some recipients' wrongdoing.
"Gov. DeWine filed suit against opioid distributors as attorney general, and he believes the data and evidence show they distributed far more prescription opioids to countless Ohio communities than could ever be safely consumed," Tierney said. "However, I would point out that the tax law you identified applies to all eligible distributors, not just pharmaceutical distributors."
There are distributors of other goods, such as Best Buy, among the six facilities that currently qualify for the tax break. However, pharmaceutical distributors shipped 98.3% of the merchandise that enjoyed the tax break in 2018, according to the Ohio Department of Taxation.
Technically, the tax break goes to drug makers -- many of which Ohio also is suing -- that ship to the distribution centers. But Franklin, Summit and Cuyahoga counties are part of a massive federal lawsuit in Cleveland that says the distributors and manufacturers "worked together in an illicit enterprise."
In any case, the distributors themselves say lowering the tax burden on suppliers is a boon to the distributors' business.
"The qualified distribution center tax benefit helped us make important improvements to our Washington Court House facility, which has allowed us to continue to provide Ohio pharmacies and hospitals with the life-saving medicines that their patients need," McKesson spokeswoman Kristin Chasen said. "In addition to the important medicines that we deliver every day, operations at this location ... provide more than 150 well-paying jobs and other economic benefits to the area. We have choices on where we locate our facilities and invest in them, and we are proud to operate in Ohio."
McKesson, however, has said that it failed to properly track and report suspicious orders of addictive opioids at the facility while it received its Commercial Activity Tax exemption.
In 2017, the company agreed to suspend shipments of controlled substances through the Washington Court House center after admitting to improperly handling them between Jan. 1, 2009, and Aug. 1, 2013. The U.S. attorney's office for the eastern district of Kentucky issued a statement saying controlled substances ran through that warehouse and into communities in West Virginia, Ohio and Kentucky -- the first, second and fourth states in per-capita overdose deaths in 2017, the U.S. Centers for Disease Control and Prevention reported.
"McKesson's failure to report suspicious orders fueled the opioid epidemic in eastern Kentucky," acting U.S. Attorney Carlton S. Shier said in the 2017 statement. "Opioid abuse has devastated our community, and the investigation of drug distributors, like McKesson, is one aspect of the United States' multifaceted fight against this epidemic."
The DEA database shows that from 2006 through 2012, McKesson shipped 232 million oxycodone and hydrocodone pills into Ohio from its warehouse in New Castle, Pennsylvania, about 13 miles from the state line. At the same time, McKesson shipped 315 million such pills from its Washington Court House facility into hard-hit West Virginia, the database shows.
The Ohio Department of Taxation won't disclose which pharmaceutical distributors are the largest beneficiaries of the distribution center exemption, saying that amounts to confidential business information.
It seems likely that the Cardinal Health National Logistics Center in Groveport is one of the biggest recipients of the tax break that's been worth at least $4.3 billion so far. It was the first to qualify for it in 2007 and it has never shipped less than 93% of its merchandise out of state since. From 2012 onward, the facility has shipped all the drugs passing through the facility to other states, according to documents filed with the Ohio Department of Taxation.
Meanwhile, Cardinal -- which also has been penalized and sued by governmental authorities over its handling of opioids -- has shipped vast amounts of the drugs into Ohio from Wheeling, West Virginia. According to the DEA database, Cardinal shipped 461 million oxycodone and hydrocodone pills from the Wheeling facility into Ohio between 2006 and 2012. Another 258 million such pills went to Ohio pharmacies from the Cardinal distribution center in Findlay during the same period. Nine million more came into Ohio from a Cardinal warehouse in Simpsonville, Kentucky.
Cardinal spokeswoman Brandi Martin said the Groveport facility "provides a critically important function to the nation as it provides a safe and secure channel to deliver health-care products and medications from hundreds of our suppliers directly to our distribution centers across the country for shipment to customers in a timely manner. Maintaining Qualified Distribution Center status, along with many other companies who receive this benefit, allows Cardinal Health to operate efficiently, produce jobs and generate tax revenue for Ohio."
AmeriSource Bergen is under investigation by five separate U.S. attorneys' offices, including one in West Virginia. Since 2014, it has enjoyed Ohio's distribution center tax break even though the DEA database shows that from 2006 through 2012, it shipped 315 million oxycodone and hydrocodone pills from its Lockbourne distribution center to Ohio pharmacies. The database also shows that AmeriSource was also the biggest supplier to hard-hit Jackson County, where pharmacies got 5 million of the pills from the company, or 21 pills a year for every person in the county -- in addition to the 36 pills per person shipped by Cardinal and McKesson.
AmeriSource spokeswoman Kate Traynor said the company is "responsible for getting approved drugs from pharmaceutical manufacturers to DEA-registered and state-licensed pharmacies" and others, including state regulators, are to blame for the lax handling of the pills.
"We believe litigation brought by the state, which runs regulatory bodies and health care entities that are themselves part of pharmaceutical supply chain, is unconstructive and misguided," she said in an email. "As such, we will continue to vigorously defend ourselves."
Ohio's legislative leaders seem willing to review the tax break, with Senate President Larry Obhof, R-Medina, saying he supported a review of all of them and House Speaker Larry Householder, R-Glenford, saying he wanted to especially scrutinize "special interest" tax breaks.
The Democratic leader in the House said those tax breaks received by companies the state is suing deserve special scrutiny.
"It is our duty as elected officials to ensure the responsible stewardship of taxpayer money, and to learn that for years the state gave big pharmaceutical companies billions of dollars in tax giveaways during the time those same companies were engaged in activity that fueled our opioid epidemic breaks that fundamental promise," Rep. Emilia S. Sykes of Akron said.
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