APRIL 2005 Retail Pharmacy Alert Pharmaceutical Benefits Managers Dealt Potential Blow By Decision Affirming Maine’s Unfair Prescription Drug Practices Act On April 13, 2005, U.S. District Judge D. Brock Hornby dealt a potential blow to pharmaceutical benefits managers (PBMs) operating in Maine and set precedent potentially applicable to other jurisdictions. Judge Hornby entered an order upholding, in its entirety, a magistrate judge’s February 5, 2005, recommended decision rejecting a challenge by the Pharmaceutical Care Management Association (PCMA) to Maine’s Unfair Prescription Drug Practices Act (UPDPA). The PCMA had challenged UPDPA’s mandate for extensive disclosures regarding relationships between PBMs and pharmaceutical manufacturers and the law’s “revenue sharing” requirement as violating the Employee Retirement Income Security Act and the Federal Employee Health Benefits Act; resulting in a regulatory taking of trade secrets, revenues, and contractual rights; violating constitutional rights to due process and freedom of speech; and improperly infringing upon interstate commerce in violation of the Commerce Clause. BACKGROUND Maine’s UPDPA was designed to promote “transparency” in the PBM industry by requiring PBMs to disclose to health plans any conflicts of interest, side payments from drug companies, and details about drug switching programs. Specifically, the UPDPA imposes on PBMs certain fiduciary duties and “required practices,” which are owed to the PBMs’ benefits provider customers, whom the UPDPA labels “covered entities.” 22 M.R.S.A. § 2699(1)(A), (2)(A). The UPDPA requires, among other duties, that PBMs “notify the covered entity in writing of any activity, policy or practice of the pharmacy benefits manager that directly or indirectly presents any conflict of interest with the duties imposed by this subsection.” Id. at § 2699(2)(C). The UPDPA further compels PBMs to disclose the following information to covered entities: 1) “[A]ll financial and utilization information requested by the covered entity relating to the provision of benefits to covered individuals through that covered entity and all financial and utilization information relating to services to that covered entity”; 2) “[T]he cost of both drugs and any benefit or payment directly or indirectly accruing to the pharmacy benefits manager as a result of the substitution,” in the event that the PBM “makes a substitution in which the substitute drug costs more than the prescribed drug”; and 3) “[A]ll financial terms and arrangements for remuneration of any kind that apply between the pharmacy benefits manager and any prescription drug manufacturer or labeler, including, without limitation, formulary management and drug-switch programs, educational support, claims processing and pharmacy network fees that are charged from retail pharmacies and data sales fees.” Id. at §§ 2699(2)(D), (2)(E)(2), (2)(G). While the first category of information must be disclosed only upon request by a covered entity, the latter two categories of information must be disclosed even in the absence of a request. PBMs may designate the information disclosed under the first or third category as confidential. Id. at §§ 2699(2)(D), (2)(E)(2), (2)(G). “Information designated as confidential by a pharmacy benefits manager and provided to a covered entity . . . may not be disclosed by the covered entity to any person without the consent of the pharmacy benefits manager” or in the absence of a court order or an investigative demand made by the Attorney General in an effort to police compliance with the UPDPA. Id. at § 2699(2)(D), (2)(G). In addition to the foregoing disclosures, the UPDPA requires PBMs to pass on, in full, to covered entities “any payment or benefit” that is received “based on volume of sales for certain prescription drugs or classes or brands of drugs within the State,” as well as for drug substitution, including substitution of “a lower-priced generic and therapeutically equivalent drug for a higher-priced prescribed drug.” Id. at 2699(2)(E)(3). A violation of the UPDPA “is a violation of the Maine Unfair Trade Practices Act, for which a fine of not more than $10,000 may be adjudged.” Id. at § 2699(4). ACTION BY THE U.S. DISTRICT COURT On February 5, 2005, U.S. Magistrate Judge Margaret Kravchuck issued a recommended decision rejecting the PCMA’s challenges to the statute. Observing that, “[w]hether and how a PBM actually saves an individual benefits provider customer money with respect to the purchase of a particular prescription drug is largely a mystery to the [health care] benefits provider,” Judge Kravchuk concluded that “it is difficult for a [health care] benefits manager to know whether it is getting a lower net cost for a drug received through a PBM due to lack of transparency in the market.” Relying in substantial part upon testimony offered by Stephen W. Shondelmeyer of the University of Minnesota College of Pharmacy, she explained: For instance, if a drug manufacturer provides a higher rebate to a PBM on a $100 drug than it does on a $20 drug and the PBM shares the rebate with the benefits provider, it may appear to the benefits provider as though it is saving money. However, it is just as likely that the amount of rebate received by the benefits provider does not make up for the higher base price of the more expensive drug, so that the net economic effect to the benefits provider is a loss. This lack of transparency also has a tendency to undermine a benefits provider’s ability to determine which is the best proposal among competing proposals from PBMs. For example, if a benefits provider had proposals from three different PBMs for pharmacy benefits management services, each guaranteeing a particular dollar amount of rebate per prescription, the PBM proposal offering the highest rebate for each prescription filled could actually be 2 APRIL 2005 the worst proposal as far as net cost savings are concerned, because that PBM might have a deal with the manufacturer that gives it an incentive to sell, or restrict its formulary to, the most expensive drugs. In other words, although PBMs afford a valuable bundle of services to benefits providers, they also introduce a layer of fog to the market that prevents benefits managers from fully understanding how best to minimize their net prescription drug costs. Turning to the merits of the claims, Kravchuk’s recommended decision found that the UPDPA was aimed at governing the practices of PBMs, not health plans, and that it did not reach into areas of regulation reserved to the Federal government. She further found that Maine had a substantial government interest in enacting the law, namely, increasing public access to prescription drugs, and that the UPDPA was likely to advance that government interest “because it is designed to create incentives within the market for the abandonment of certain practices that are likely to increase cost without providing any corresponding benefit to the individual whose prescription is being filled and that appear to be designed merely to improve a drug manufacturer’s market share.” IMPLICATIONS FOR RETAIL PHARMACIES AND PBMS Maine’s UPDPA, which had been put on hold pending the outcome of PCMA’s challenge, is the first of its kind. Similar PBM disclosure laws were recently rejected by several states, including California, Florida and New York, and PCMA successfully obtained a preliminary injunction barring enforcement of a similar statute in the District of Columbia. Judge Hornby’s decision may prompt other states to consider (or reconsider) following Maine’s lead with respect to PBM disclosure legislation. Public and private health care benefit plans may embrace Judge Hornby’s decision because it forces PMBs to pass on certain discounts and rebates to health care plans and ensures access to information necessary to ensure that contracts with PBMs are administered in the best interests of health care plans and their subscribers. PBMs, on the other hand, contend that PBM disclosure-fiduciary laws, like the UPDPA, will increase prescription drug costs for consumers, employers, and government. A prior PCMA press statement cited a PricewaterhouseCoopers study that estimated Maine’s UPDPA would increase prescription KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP drug costs for Maine consumers and employers by 10.2 lower their mail-order rates, thus making their mailpercent over the next ten years. order pharmacies more attractive to public and private health care benefit plans and patients. By requiring On its face, Maine’s UPDPA may not appear directly the passing on of discounts and rebates, the UPDPA beneficial to retail pharmacies because pharmacies are will, to some degree, level the competitive playing not provided access to information disclosed by PBMs field between retail pharmacies and PBM-owned mailand discounts and rebates are required to be paid solely order pharmacies. to health plans rather than pharmacies. Furthermore, to the extent findings of PricewaterhouseCoopers are Responding to Judge Hornby’s decision, Stephanie correct, implementation of the legislation may force Kanwit, an attorney representing PCMA, was quoted PBMs to pursue further reductions of compensation as stating, “[t]his is by no means the last word on the paid to retail pharmacies to offset the loss of discounts subject.” PCMA has already filed an appeal to the and rebates. In application, however, the UPDPA may United States Court of Appeals for the First Circuit, benefit retail phamacies on a number of fronts. For which can affirm, affirm in part, or reverse Judge example, when PBMs keep manufactuer rebates, they Hornby’s decision. PCMA has also filed papers with have an incentive to “switch” patients to higher-cost the District Court seeking to have an earlier injunction brand name drugs. The UPDPA limits “switching” and blocking implementation of the UPDPA maintained requires PBMs to pass along manufacturer discounts while its appeal is pending. The case is and rebates, thereby encouraging the dispensing of Pharmaceutical Care Management Association v. generic medications over brand name drugs. Because Rowe, Civil No. 03-153-B-H (D. Me.). retail pharmacies tend to make more profit from the sale of generic medications, the UPDPA’s encouragement of generic dispensing may benefit retail pharmacies. Also, Christopher R. Nestor cnestor@klng.com the UPDPA’s requirement that PBMs pass on certain 717.231.4812 discounts and rebates will likely benefit retail pharmacies competing with PBM-owned mail-order Raymond P. Pepe pharmacies. Currently, PBMs are able to use rebates rpepe@klng.com they earn from community pharmacy dispensing to 717.231.5988 If you have questions or would like more information about K&LNG’s retail pharmacy practice, please contact one of our lawyers listed below: Harrisburg Raymond P. Pepe David R. Overstreet 717.231.5988 717.231.4517 rpepe@klng.com doverstreet@klng.com www w.. k l n g . c o m BOSTON ■ DALLAS ■ HARRISBURG ■ LONDON ■ LOS ANGELES ■ MIAMI NEWARK ■ ■ NEW YORK ■ PITTSBURGH ■ SAN FRANCISCO ■ WASHINGTON Kirkpatrick & Lockhart Nicholson Graham LLP (K&LNG) has approximately 950 lawyers and represents entrepreneurs, growth and middle market companies and leading FORTUNE 100 and FTSE 100 global corporations nationally and internationally. 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