Commitments and Contingent Liabilities

In addition to commitments and obligations in the ordinary course of business, we are subject to various claims, other pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of our business. As described below, many of these proceedings are at preliminary stages and many seek an indeterminate amount of damages.

When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be reevaluated at least quarterly to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a loss is probable but a reasonable estimate cannot be made, disclosure of the proceeding is provided.

Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of loss can be made. As discussed above, development of a meaningful estimate of loss or a range of potential loss is complex when the outcome is directly dependent on negotiations with or decisions by third parties, such as regulatory agencies, the court system and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low estimates.

Significant developments in previously reported proceedings and in other litigation and claims, since the filing of our 2012 Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q for the periods ended June 30, 2012 and September 30, 2012, are set out below. Unless otherwise stated, we are currently unable to estimate a range of reasonably possible losses for the unresolved proceedings described below. Should any one or a combination of more than one of these proceedings be successful, or should we determine to settle any or a combination of these matters, we may be required to pay substantial sums, become subject to the entry of an injunction or be forced to change the manner in which we operate our business, which could have a material adverse impact on our financial position or results of operations.

I. Average Wholesale Price Litigation

The following matters involve a benchmark referred to as Average Wholesale Price (“AWP”), which is utilized by some public and private payers to calculate a portion of the amount that pharmacies and other providers are reimbursed for dispensing certain covered prescription drugs.

The Arizona Action

On November 7, 2012, the Company filed a motion to dismiss the previously reported action filed in Arizona state court by the State of Arizona against the Company, State of Arizona ex rel. Thomas Horne v. McKesson Corporation, (No. CV2012-013707). The briefing on the Company’s motion to dismiss is now complete, and a hearing has been set for March 11, 2013.

The Arizona Administrative Proceeding

On November 9, 2012, the Company received a Revised Notice of Proposed Civil Monetary Penalty from the Office of Inspector General for the Arizona Health Care Cost Containment System (“AHCCCS”) purporting to reinitiate an administrative proceeding against the Company, and seeking civil penalties in the amount of $112 million and an assessment in the amount of $102 million for false claims allegedly submitted to the Arizona Medicaid program (No. 2010-1218). This proceeding was previously enjoined by an Arizona state court which injunction was upheld on appeal. The Company intends to challenge the reinitiated proceeding and proposed penalty and assessment by AHCCCS.

The Kentucky Action

On November 26, 2012, the Company entered into an agreement with the Commonwealth of Kentucky in settlement of the previously reported action filed in Kentucky state court by the Commonwealth of Kentucky against the Company and First Databank, Commonwealth of Kentucky ex rel. Jack Conway v. McKesson Corporation, et al., (No. 11-CI-00935). On December 7, 2012, the court entered an order dismissing with prejudice the claims asserted against the Company in the Kentucky Action.

The Hawaii Action

On January 16, 2013, the court entered an order granting the Company’s unopposed motion to continue the April 15, 2013 trial date to February 17, 2014, in the previously reported action filed in Hawaii state court by the State of Hawaii against the Company and First Databank, State of Hawaii v. McKesson Corporation, et al., (No. 10-1-2411-11-GWBC). Discovery is ongoing.

The Kansas Action

On December 4, 2012, the Company entered into an agreement with the State of Kansas in settlement of the previously reported action filed in Kansas state court by the State of Kansas against the Company and First Databank, State of Kansas ex rel. Derek Schmidt v. McKesson Corporation, et al., (No. 10CV1491). On December 7, 2012, the court held a hearing during which it approved the parties’ settlement. On December 18, 2012, the State of Kansas filed a stipulation dismissing with prejudice the claims asserted against the Company in the Kansas Action.

The Virginia Action

On January 2, 2013, the court entered an order moving the July 8, 2013 trial date to October 28, 2013 in the previously reported action filed in the United States District Court for the Northern District of California by the Commonwealth of Virginia against the Company and two of its employees, Commonwealth of Virginia v. McKesson Corporation, et al., (No. C11-02782-SI). Discovery is ongoing.

The Company has a reserve relating to AWP public entity claims, which is reviewed at least quarterly and whenever events or circumstances indicate changes, including consideration of the pace and progress of discussions relating to potentially resolving other public entity claims. Following our most recent review of the reserve for estimated probable losses from current and possible future public entity AWP claims, the Company recorded pre-tax charges of $16 million and $44 million (total of $60 million) during the first and second quarters of 2013. No additional amounts were recorded in the third quarter of 2013. The Company recorded pre-tax charges of $118 million and $27 million (total of $145 million) during the second and third quarters of 2012. Pre-tax charges relating to changes in the Company’s AWP litigation reserve, including accrued interest, are recorded in our Distribution Solutions segment. The Company’s AWP litigation reserve is included in other current liabilities in the condensed consolidated balance sheets. In view of the number of outstanding cases and expected future claims, and the uncertainties of the timing and outcome of this type of litigation, it is possible that the ultimate costs of these matters may exceed or be less than the reserve.

The following is the activity related to the AWP litigation reserve for the first nine months of 2013 and 2012:



	Nine Months Ended December 31,
(In millions)	2012			2011
AWP litigation reserve at beginning of period	$	453		$	330
Charges incurred	60			145
Payments made	(470		)	(26		)
AWP litigation reserve at end of period	$	43		$	449

II. Other Litigation

As previously reported, on September 28, 2012, the court entered judgment after trial in favor of the Company and its former indirect subsidiary, finding no liability under the False Claims Act in the previously reported action, United States ex rel. Jamison v. McKesson Corporation, et al., (No. 2:08-CV-00214-SA). The time for filing an appeal has expired and no appeal was filed.

In connection with the Company’s execution of an agreement to acquire PSS World Medical, on December 5, 2012, a putative class action complaint was filed in Florida state court, Duval County, by an alleged public shareholder of PSS World Medical against PSS World Medical, members of PSS World Medical’s board of directors, The Goldman Sachs Group, Inc., Goldman, Sachs & Co, and the Company, Baltimore County Employees’ Retirement System v. Gary A. Corless, et al., (No. 16-2012-CA-013015). The suit alleges that PSS World Medical and its board members breached their fiduciary duties by failing to maximize shareholder value and by failing to disclose material information in the preliminary proxy statement, and that the Company and others aided and abetted various fiduciary duty breaches in connection with the proposed merger. In addition to monetary damages in an unspecified amount and other remedies, the suit seeks to enjoin consummation of the merger. The Company has not yet responded to the complaint.

III. Government Investigations

From time-to-time, the Company receives subpoenas or requests for information from various government agencies. The Company generally responds to such subpoenas and requests in a cooperative, thorough and timely manner. These responses sometimes require time and effort and can result in considerable costs being incurred by the Company. Such subpoenas and requests also can lead to the assertion of claims or the commencement of civil or criminal legal proceedings against the Company and other members of the health care industry, as well as to settlements. Examples of such investigations are included in the Company’s 2012 Annual Report on Form 10-K. An example in the third quarter of 2013 is an investigation by the United States Department of Justice through the United States Attorney’s Office for the Middle District of Tennessee. The Company believes that the investigation is focused on distribution procedures with respect to the Vaccine for Children’s Program administered by the Center for Disease Control. In connection with the investigation, the Company has received and has responded to a subpoena seeking information and records from the Company’s Specialty Health business.

In addition, as previously reported, since 2009 the Company has cooperated with and responded to an investigation by the Regie de l'assurance maladie Du Quebec (“RAMQ”), a provincial government agency with administrative authority over the conduct of pharmaceutical businesses in the province of Quebec, Canada. The investigation focused on certain discounts and payments offered to pharmacies in Quebec, as well as payments received by the Company from certain manufacturers. In the third quarter of 2013, the Company engaged in settlement discussions to resolve potential legal claims against the Company and its customers and suppliers arising from the investigation. In consideration of the pace and progress of settlement discussions, the Company recorded a pre-tax charge of $40 million for estimated probable loss from potential legal claims arising from the investigation. The charge was recorded to operating expenses within our Distribution Solutions segment.