Pharmaceutical Benefits Managers Get Reprieve in Maine

Maine's legislators passed the law because of concerns that PBMs, by not disclosing the terms of their discount and rebate agreements, could be hiding large profits for themselves from their customers and might make deals that favor drug manufacturers over their own customers. The UPDPA would have created a fiduciary duty in the PBMs on behalf of their drug-purchasing customers and would have required them to disclose their pricing and rebate information. PBMs would have been compelled to pass on volume discounts to their customers and they would have had to report any conflicts of interest to them. Under the terms of the law, PBMs would be allowed to substitute generic drugs for their brand-name equivalents, but they would have to show valid medical reasons for providing their customers with brand-name drugs when generics would normally suffice. If the PBM wanted to have the customer buy the name-brand drug, it would have to tell the patient and the PBM customer why that drug would provide a better medical benefit. Violations of the law would carry a $10,000 maximum fine.

The sponsor of the bill, Senator Sharon Treat, is the Democratic majority leader of the Maine Senate. She asserts that while PBMs promise to negotiate lower prices for their customers, they enter contracts with drug manufacturers that reward them for promoting certain medications — often, the more expensive medications. The State contended at trial that unlike virtually every other area of the health care system, PBMs have largely escaped governmental scrutiny. They are not regulated as financial institutions, health care providers or insurance companies, and have in the past consistently maintained they are not subject to ERISA.

But the plaintiff trade group contended that what the law required of PBMs was disclosure of trade secrets, an unconstitutional regulatory state “taking” without compensation. “Competition and the confidentiality of price negotiations with manufacturers are essential to driving down drug prices. Public disclosure of this information only serves to undermine incentives to aggressive competition and creates a price floor that will harm Maine consumers,” the Pharmaceutical Care Management Association has said. Justice Woodcock, applying the three-part test enunciated in Penn Central Transp. Co. v. New York City , 438 U.S. 104 1978 for defining a regulatory “taking,” agreed. That test asks: 1) what the economic impact of the regulation will be; 2) whether the government action interferes with reasonable investment-backed expectations; and 3) what the character of the government action is.

The court also found that plaintiff was likely to prevail on its argument that Maine's UPDPA is pre-empted by the federal Employee Retirement Income Security Act (ERISA), which provides for nationwide uniformity in the administration of employee benefits plans. The state had contended that because PBMs are not ERISA fiduciaries and don't otherwise fall into an ERISA entity category, the state should be free to regulate them. But, the court noted that when Congress enacted ERISA, its intent was to protect the interests of participants in employee benefit plans and their beneficiaries by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies. 29 U.S.C. ' 1001(b). Achieving this end requires the avoidance of a multiplicity of regulation. Thus, the court asked itself this question: Would Maine's law have a real bearing on the web of relationships among the principal players in the ERISA scenario (eg, the plan, the administrators, the fiduciaries, the beneficiaries, and the employer)? The court found that it would because the UPDPA would impose new and broad regulations on PBMs, which are entwined with and have effects on employee benefit plans, thus colliding with the ERISA goal of a nationally uniform administration of such plans. In addition, those who felt wronged by a PBM could seek redress in state, rather than federal court, jeopardizing the national uniformity of court decisions. Accordingly, the court concluded that the terms of the UPDPA and its enforcement mechanisms would likely ultimately be found to be federally pre-empted by federal law. Because the plaintiff was likely to prevail both on its Constitutional Takings Clause theory and on its federal pre-emption theory, the court issued the preliminary injunction against enforcement of the law.

Conclusion

As the case goes forward, other states are making their own attempts at PBM regulation. For example, South Dakota's Governor signed a bill into law in March that requires PBMs to make certain disclosures to their customers, but it is considered less drastic than the Maine law because it doesn't impose a fiduciary duty on PBMs. A similar law has been enacted in the District of Columbia. In addition, for some time, PBM customers and individuals covered by their plans have been bringing their own lawsuits against PBMs, charging price inflation and resale of returned drugs, among other things. Thus it's clear that the question of who will regulate these entities, if anyone, is far from settled. The movement in the states and among private citizens to reign in PBMs and stop or prevent their perceived abuses, however, is bringing the question to the forefront, and it's not likely to go away soon.

In a decision issued March 9 in the case of Pharmaceutical Care Management Ass'n v. Rowe, No. 03-153-B-W, 2004 U.S. Dist. LEXIS 3758 (D. Maine 3/9/04), U.S. District Judge John A. Woodcock Jr. delayed enforcement of a novel Maine law whose intent is to make the business practices of companies that negotiate drug prices on behalf of health plans more transparent. The preliminary injunction has at least temporarily prevented the state of Maine from implementing Maine's 2003 “Act to Protect Against Unfair Prescription Drug Practices (M.R.S.A. ' 2699), known as UPDPA, against pharmaceutical benefits managers (PBMs).

Facts of the Case

The plaintiff in the case, Pharmaceutical Care Management Association, is a trade group representing PBMs. The role of a PBM is to reduce prescription drug prices for its customers — insurance companies, unions, and other institutions that provide health care benefits — by negotiating discounts on pharmaceutical products. The five largest National PBMS are Medco Health Solutions Inc., AdvanePCS Inc., Express Scripts Inc., Wellpoint Pharmacy Management and Caremark RX Inc.

Maine's legislators passed the law because of concerns that PBMs, by not disclosing the terms of their discount and rebate agreements, could be hiding large profits for themselves from their customers and might make deals that favor drug manufacturers over their own customers. The UPDPA would have created a fiduciary duty in the PBMs on behalf of their drug-purchasing customers and would have required them to disclose their pricing and rebate information. PBMs would have been compelled to pass on volume discounts to their customers and they would have had to report any conflicts of interest to them. Under the terms of the law, PBMs would be allowed to substitute generic drugs for their brand-name equivalents, but they would have to show valid medical reasons for providing their customers with brand-name drugs when generics would normally suffice. If the PBM wanted to have the customer buy the name-brand drug, it would have to tell the patient and the PBM customer why that drug would provide a better medical benefit. Violations of the law would carry a $10,000 maximum fine.

The sponsor of the bill, Senator Sharon Treat, is the Democratic majority leader of the Maine Senate. She asserts that while PBMs promise to negotiate lower prices for their customers, they enter contracts with drug manufacturers that reward them for promoting certain medications — often, the more expensive medications. The State contended at trial that unlike virtually every other area of the health care system, PBMs have largely escaped governmental scrutiny. They are not regulated as financial institutions, health care providers or insurance companies, and have in the past consistently maintained they are not subject to ERISA.

But the plaintiff trade group contended that what the law required of PBMs was disclosure of trade secrets, an unconstitutional regulatory state “taking” without compensation. “Competition and the confidentiality of price negotiations with manufacturers are essential to driving down drug prices. Public disclosure of this information only serves to undermine incentives to aggressive competition and creates a price floor that will harm Maine consumers,” the Pharmaceutical Care Management Association has said. Justice Woodcock, applying the three-part test enunciated in Penn Central Transp. Co. v. New York City , 438 U.S. 104 1978 for defining a regulatory “taking,” agreed. That test asks: 1) what the economic impact of the regulation will be; 2) whether the government action interferes with reasonable investment-backed expectations; and 3) what the character of the government action is.

The court also found that plaintiff was likely to prevail on its argument that Maine's UPDPA is pre-empted by the federal Employee Retirement Income Security Act (ERISA), which provides for nationwide uniformity in the administration of employee benefits plans. The state had contended that because PBMs are not ERISA fiduciaries and don't otherwise fall into an ERISA entity category, the state should be free to regulate them. But, the court noted that when Congress enacted ERISA, its intent was to protect the interests of participants in employee benefit plans and their beneficiaries by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies. 29 U.S.C. ' 1001(b). Achieving this end requires the avoidance of a multiplicity of regulation. Thus, the court asked itself this question: Would Maine's law have a real bearing on the web of relationships among the principal players in the ERISA scenario (eg, the plan, the administrators, the fiduciaries, the beneficiaries, and the employer)? The court found that it would because the UPDPA would impose new and broad regulations on PBMs, which are entwined with and have effects on employee benefit plans, thus colliding with the ERISA goal of a nationally uniform administration of such plans. In addition, those who felt wronged by a PBM could seek redress in state, rather than federal court, jeopardizing the national uniformity of court decisions. Accordingly, the court concluded that the terms of the UPDPA and its enforcement mechanisms would likely ultimately be found to be federally pre-empted by federal law. Because the plaintiff was likely to prevail both on its Constitutional Takings Clause theory and on its federal pre-emption theory, the court issued the preliminary injunction against enforcement of the law.

Conclusion

As the case goes forward, other states are making their own attempts at PBM regulation. For example, South Dakota's Governor signed a bill into law in March that requires PBMs to make certain disclosures to their customers, but it is considered less drastic than the Maine law because it doesn't impose a fiduciary duty on PBMs. A similar law has been enacted in the District of Columbia. In addition, for some time, PBM customers and individuals covered by their plans have been bringing their own lawsuits against PBMs, charging price inflation and resale of returned drugs, among other things. Thus it's clear that the question of who will regulate these entities, if anyone, is far from settled. The movement in the states and among private citizens to reign in PBMs and stop or prevent their perceived abuses, however, is bringing the question to the forefront, and it's not likely to go away soon.