An industry under suspicion: pharmacy benefit managers are under increased scrutiny and are increasingly the defendants in lawsuits for practices that some critics say are unfair to employers - Benefits

Risk & Insurance,  Jan, 2003  by John Otrompke

Litigation is nothing new for pharmacy benefit managers (PBMs) or pharmaceutical manufacturers. Indeed, in an industry that has been criticized recently for being the leading indicator of healthcare inflation, pharmaceuticals players are no strangers to either side of the docket.

Yet with one $42 million arbitrated settlement and another $42 million offer on the table from PBM Medco, and plenty of other dust being kicked up around the country, the question arises as to whether the pharmaceutical industry might be the next sector hit in the wave of fraud and abuse litigation that demolished some areas of the hospital sector throughout the '90s.

Critics complain that PBMs' alignments have changed, and that manufacturers are trying to compensate for dry pipelines with patent protection lawsuits. The PBMs, in the meantime, maintain that their model works for employers and health plans by saving them money, and that they have only one thing in mind: to get back to the business of serving their clients.

Still, more than a dozen lawsuits have been filed against the industry recently, featuring plaintiffs including beneficiaries of benefit plans from Chase Manhattan, Chrysler, Georgia-Pacific, Goodyear, J.P. Morgan, Northwest Airlines, Verizon and Wells-Fargo.

The suits, filed against AdvancePCS, Caremark, Express Scripts and Medco Health Solutions Inc., allege violations of ERISA's fiduciary duty requirements. Other suits deal with breach-of-contract theories, and an on-going federal investigation into the industry also relates to allegations of fraud on the parts of some defendants. These suits allege that the companies have been manipulating the average wholesale price, and failing to disclose the hidden financial rebates from the industry (sometimes characterized as 'market share' rebates), administrative fees, and data sharing fees--some of these fees paid by drug manufacturers.

The federal counts relate to the PBMs' alleged substitution of higher-priced brand-name drugs on member formularies, when lower-priced generics were available. Under ERISA, fiduciaries are supposed to act for the benefit of their clients; some allege that receipt of portions of members' rebates from manufacturers, as well as other manufacturer fees, mean that the PBMs have come to occupy an uncomfortable middle ground.

Caremark and ExpressScripts did not return calls from Risk & Insurance.

Sid Stolz, senior vice president for account services with AdvancePCS, denies that many of the recent allegations apply to his company. "We don't have volume-based contracts with manufacturers; we try to aggregate our 75 million members and negotiate the best price," Stolz says. "All the rebates are owned by the client, and while we may take a percentage of those rebates for our administrative costs, all of our clients have the opportunity to perform an audit."

Rebate Issues

But, according to Jim Sheehan, a U.S. attorney in Philadelphia, Advance-PCS is being investigated under the False Claims Act and the anti-kickback statute, based on the company's alleged receipt of payments from manufacturers to induce referrals to manufacturers' drugs, when federal employees' health benefits were at stake. The federal statutes govern the conduct of companies providing services to the federal public payers, and are more complex than the other, less-protective regulations that govern contracts with private payers.

Stolz says that while brand name drugs are sometimes negotiated onto the formulary when generics are available, the decision might be attributable to the client. "We have a lot of very large health plan payers with their own pharmacy and therapeutics committees. But most employers don't have their own P&T committee. They make take our recommendations carte blanche. That may or may not affect their rebate."

According to a letter from AdvancePCS Chairman David Halbert, "We have always felt that there could be a possibility that the federal anti-kickback laws may eventually be applied to our industry." So when a new draft set of guidelines for compliance programs for pharmaceutical manufacturers was produced by Health and Human Services this year, AdvancePCS sent the agency six letters suggesting changes during the notice-and-comment period.

AdvancePCS also operates a number of other programs and services aside from its drug contracting activities, some of which are actually paid for by the drug manufacturers. For example, AdvancePCS directs 150 pharmacists in the field who contact high-prescribing doctors, Stolz said.

According to Halbert's letter, the PBM's marketing practices are consistent with the discounts and personal services safe harbors under the federal anti-kickback statute. Safe harbor qualification for a marketing practice means that it is immune from government prosecution under the anti-kickback statute, even if it otherwise violates the letter of the law.

Sheehan described the requirements of the federal law on the subject. "There is no 'rebates' safe harbor," he said, "but there is a 'discount' safe harbor, which requires full disclosure, which must be made at the time of the sale, and which must fully and accurately report the discount. Or if the amount is not known at the time, the seller must disclose the existence of the program. When you get into rebates or things like that, it gets a little sticky," Sheehan said.

Medco, meanwhile, which also is being investigated by the Justice Department, recently made a $42 million global settlement offer for all class actions under ERISA based on conduct between December of 1994 and the present.

Earlier in 2002, Medco also announced a $42 million arbitrated settlement in a case brought by Mid-Atlantic Medical Services Inc. (MAMSI), a health plan, based on a breach of contract theory.

"Allegations have been made in lawsuits that some people believe their rebates should be higher than they are," says Jeff Simek, spokesman for Medco. "We believe that our clients, who are entitled to audit their accounts, receive every nickel to which they're entitled by contract," he said.

Simek says that Medco questions the plaintiffs' legal theories. "We don't believe there was a fiduciary duty, and secondly, we question the idea that our business practices are not consistent with responsibility. We believe our business practices are consistent with higher-quality care," he says. "This settlement offer on the ERISA cases is designed to help us focus on serving our clients, and to avert the potential costs of a protracted lawsuit."

In addition to the class action claims under ERISA and the federal government investigation into Medco, the states are getting involved. West Virginia is suing Medco, alleging that the company steered state employees to higher-priced drugs and kept rebates that should have been passed on to the state.

Medco maintains that the West Virginia action is different from the other suits that have been brought against it. Indeed, says Simek, some of the various actions are breach of fiduciary duty claims under ERISA, some are for breach of contract, and the West Virginia suit is a counterclaim brought after Medco tried to sue the state for about $2 million earlier this year.

Other critics of PBMs point out that there is another area where PBMs' loyalty may have shifted in favor of manufacturers. Brand name drugs are sometimes on formularies when generics were available.

AdvancePCS' Sid Stolz says: "Some generics are not available at a lower cost than brand name drugs, at least not in the initial stages. For example, the generic version of Prilosec will probably be at the same price for the first six months," he said.

Efforts to Lower Prices

As a result of concerns like these over the availability of generic drugs and the alleged operations of pharmaceuticals manufacturers, several pieces of legislation have been proposed recently that may play a role in keeping drug costs down.

Probably the most significant was the ground-breaking legislation enacted in Vermont that required any organization giving a gift to a doctor to disclose it to the government.

The list will be made public. "What we're hoping is that doctors will stop receiving these gifts," said Peter Van Vranken, health policy advisor to Gov. Howard Dean of Vermont.

Possibly more significant pieces of legislation have been proposed at the national level, but have not yet been enacted.

The Drug Patent Competition Act of 2002, for example, passed the Senate early last year, but has yet to go to the House. The bill would mandate that brand name and generic pharmaceuticals manufacturers disclose agreements they reach as to the manufacture of generic drugs.

And the McCain-Schumer bill is designed to penalize the filing of so-called "frivolous" patent protection suits by brand name pharmaceutical manufacturers. "The patent-holder might change the color, or they might change the shape of the pill," said Ron Pollack, executive director of Families USA.

"But under federal law, they automatically get a two-year delay in the generics coming to market," he said. A modified version of the bill overwhelmingly passed the Senate, but the House never picked it up, said Pollack.

The various proposed legislation regarding generic drugs would allow employers and other health care payers to more easily cut their health care costs. With fewer patents in existence at any one time, more generic drugs would probably be available.

With the power of the PBMs to make generic drugs more prescribed than ever, employers might see their prescription drug costs, a leading segment of the health care budget, plummeting.


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