PBM’s Under Fire

Pharmaceutical Manufacturer Concocts New Patented Drug 

PBMs have been under increased scrutiny as a potential contributor to runaway healthcare costs.

INSIGHT: PBMs Facing More Than ERISA Suits as RICO, Antitrust, State Law Claims Grow

Nov. 18, 2019, 3:00 AM

In their third Insight in a series on litigation involving pharmacy benefit managers, Jenner & Block attorneys look at non-ERISA causes of action PBMs have faced and should anticipate in the future. These non-ERISA ride-along theories offer a more flexible range of potential damages, enhanced statutory damages, and fewer pleading challenges.

Plaintiffs suing pharmacy benefit managers (PBMs) in an attempt to respond to out-of-control prescription drug costs have often struggled to convince courts that PBMs are proper ERISA fiduciaries, but the law is still developing. As plaintiffs continue to innovate and search for viable causes of action in this area, we expect to see various non-ERISA causes of action as ride-along claims to the ERISA claims.

A Web of Relationships

PBMs contract with employers or health plans to interface with drug manufacturers and pharmacies to process plan participants’ claims for prescription drugs. They offer employers and health plans the chance to reduce prescription drug spending by negotiating volume discounts, rebates, and other favorable arrangements with manufacturers and pharmacies.

They typically manage utilization programs designed to push patients into the most cost-effective treatments. They may also advise on other aspects of prescription benefits plan design and utilization.

Ideally, PBMs use their negotiating power to lower the cost of prescription drugs and pass their savings to patients and plan sponsors. However, some argue that PBMs are unnecessary middlemen with little incentive to control drug prices, who drive up the administrative overhead for the healthcare system, increase consumer costs, and unfairly deny benefits.

PBMs have been under increased scrutiny as a potential contributor to runaway healthcare costs. In May 2018, the Trump administration released a blueprint to lower drug prices and reduce out-of-pocket costs that placed some of the responsibility for rising drug costs on PBMs. The blueprint argues that increases in drug list prices often benefit PBMs by increasing the administrative fees they receive, but that this increased list price hurts consumers who must meet plan deductibles or coinsurance requirements.

Plaintiffs Respond

As we discussed in our previous Insights, the current PBM litigation wave seeks to hold PBMs liable as ERISA fiduciaries, arguing that they mismanage health plan assets and fail to achieve cost savings, in violation of a purported duty to act in the plan participants’ best interests.

As plaintiffs continue to refine their theories and search for the best avenue of relief from PBMs, we will undoubtedly see them develop or revisit non-ERISA ride-along theories that offer a more flexible range of potential damages, enhanced statutory damages, and fewer pleading challenges as compared to ERISA claims.

Antitrust Claims

First, we can expect growing antitrust claims against PBMs, including arguments that their contracts with pharmaceutical manufacturers and pharmacies contribute to drug monopolies.

Section 1 of the Sherman Act (and many comparable state antitrust statutes) prohibits every (1) agreement or conspiracy that (2) unreasonably restrains competition. 15 U.S.C. § 1.

Section 2 of the Sherman Act prohibits monopolization, attempted monopolization, and conspiracies to monopolize. 15 U.S.C. § 2. Successful antitrust plaintiffs are eligible to recover treble damages in addition to attorneys’ fees, making antitrust claims a particularly attractive area for plaintiffs’ firms. 15 U.S.C. § 15(a).

Plaintiffs in PBM lawsuits are already beginning to explore antitrust theories. For example, in ongoing litigation involving the EpiPen pricing, the plaintiffs were able to successfully plead that the pharmaceutical company defendants took advantage of their monopoly power to impose excessive increases on the EpiPen’s list price, and then used those profit margins to offer high rebates and discounts to PBMs in exchange for exclusive or preferred placement on the PBMs’ drug formularies.

This arrangement is alleged to have further enhanced the EpiPen’s purported monopoly by excluding insurance coverage for rival products. In re: EpiPen (Epinephrine Injection, USP) Mktg., Sales Practices & Antitrust Litig., 336 F. Supp. 3d 1256, 1288 (D. Kan. 2018).

We can anticipate increased scrutiny of the close relationships between PBMs, pharmacies, and manufacturers—and of agreements that particularly advantage the largest players—in the coming years.

RICO Claims

Second, we can anticipate that plaintiffs will bring RICO claims against PBMs. To state a federal RICO claim (or a comparable claim under similar state statutes), a plaintiff must allege four elements: (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity (18 U.S.C. § 1962). Like antitrust plaintiffs, successful RICO plaintiffs are eligible to recover treble damages in addition to attorneys’ fees (18 U.S.C. § 1964(c)).

In the PBM context, a class action plaintiff recently survived a motion to dismiss its RICO claims by alleging that a PBM and the pharmacies in its network engaged in a scheme to defraud patients by overcharging them for prescription drugs. Negron v. Cigna Health & Life Ins., 300 F. Supp. 3d 341, 367 (D. Conn. 2018).

In addition to bringing ERISA breach of fiduciary duty claims, the Negron plaintiffs also pleaded that an insurer and its PBMs agreed to a contractual structure where plaintiffs were overcharged for prescription drugs (often being forced to pay purported “copayments” that dramatically exceeded the actual cost to the PBM), and that the insurers and PBMs then “clawed back” the overcharge, solely for their own benefit and to the plaintiffs’ detriment, in the form of reimbursements from the pharmacies. The district court agreed that these allegations stated a claim for a RICO violation.

As in the antitrust context, the complicated web of cooperative arrangements between PBMs, pharmacies, and manufacturers gives rise to suspicions among plaintiffs and their lawyers that these players may cross the line into illegal behavior that harms consumers.

Common Law Claims

We also anticipate growth in state law-based common law claims, under such theories as fraudulent misrepresentation, breach of the covenant of good faith and fair dealing, unjust enrichment, promissory estoppel, fraud, and tortious interference with prospective economic advantage.

We expect that at least some plaintiffs’ firms will take “kitchen-sink” pleading approaches in a search for the most viable claims.

Conclusion

PBMs sit at the center of a web of complex contractual relationships, itself in the center of an industry that faces ever-growing criticism for its failure to control costs. Legislators, the public, and plaintiffs’ firms are eager to assign blame for those costs, and we should anticipate that they will bring a wide range of claims as the law develops.

In the meantime, PBMs should be prepared to defend wide-ranging complaints that assert multiple causes of action, and the courts will ultimately decide how PBMs will be allowed to function going forward.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Michael T. Graham is special counsel in Jenner & Block’s ERISA Litigation Practice in Chicago. He has more than 20 years of experience counseling on employee benefits and ERISA litigation and controversy matters. He also advises plan administrators and employers on proper compliance with ERISA claims and appeals procedures, helping them avoid litigation and develop defenses to eliminate or minimize liability exposure should litigation arise.

Caroline L. Meneau is an associate in Jenner & Block’s Complex Commercial Litigation and ERISA practice groups. She represents plan sponsors, fiduciaries, and service providers in ERISA litigation. She also counsels companies on employee benefits and ERISA controversies.

 

 

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