US Pharm. 2006;10:71-76.

It seems to be a reccurring theme: Pharmacy benefit managers (PBMs) establish themselves as the best way to hold down soaring pharmaceutical drug prices by managing the costs for employer groups or others that provide a prescription drug benefit for employees. These groups agree to pay the PBMs for the cost of drugs dispensed by pharmacies, along with a management fee. But after awhile, it occurs to the purchasers of this benefit that they may not be getting the best deal from the selected PBM. The PBMs get rebates from manufacturers and enjoy other areas of profit that they do not share with the purchasers. For years, PBMs have fought against any potential regulations that would make their billing practices more "transparent." Nevertheless, every year or so parties to these agreements end up in litigation with claims against the PBMs for breach of contract or failure to honor fiduciary duties. This column has addressed these issues several times over the past five years.1

Along comes a new case that illustrates the extent that state governments and pharmacies are allowed to go to in reviewing PBM practices.2 The litigation was spearheaded by a large number of individual- and chain-owned pharmacies claiming that TFI Managed Care Services, a California PBM, and many other PBMs, failed to live up to the duties required by the California statutes on economic audits and adjustments to costs and fees on a periodic basis.3

Background
There is a long history behind this battle. In 1981, the California Pharmacists Association had a bill introduced in the state legislature that would require PBM reimbursements at customary charges made by pharmacies rather than the rates unilaterally set by PBMs. After intense lobbying by both the pharmacy representatives and those representing the PBMs, the bill that passed required PBMs only to conduct or obtain the results of biannual studies of a statistically significant sample of California pharmacies' retail drug pricing for pharmaceutical dispensing services to private uninsured customers. The PBMs then had to supply copies of those studies to "clients" on whose behalf the PBMs perform studies. The legislation came to be known as the "Prescription Drug Claims Processors Act," which is the legal name in California for regulating what everybody else calls PBMs. The act intended to regulate the relationships between the pharmacies, the PBMs, and their clients, referred to as the "third-party payors," which encompass a large variety of groups, including health insurance companies, self-insured employer groups, and union health and welfare plans. 

As the court envisioned the act, it stated:

A customer goes to a pharmacy with a prescription and presents both an insurance card and a copay to get the prescription. The pharmacy fills the prescription from inventory. The pharmacy then submits a claim to a PBM for reimbursement. The pharmacy usually has a contractual relationship with various PBMs to assist in performing claims processing services. A PBM coordinates certain aspects of the reimbursement relationship between pharmacies and third-party payors. The PBM processes the pharmacy's claim for reimbursement and pays the pharmacy reimbursements in the amount it unilaterally sets. The PBM, which handles claims for several third-party payors, then submits the claim to the payor and gets paid.

Legal Issues in the Trial Court
One of the more interesting aspects of this case is that the pharmacies were trying to get the state to enforce the law, because the pharmacies had very limited authority of their own to make the PBMs play by the rules. Frustrated by the apparent lack of cooperation from the state regulators, the pharmacies filed a lawsuit claiming that they were injured by the defendant PBMs for not doing the required audits and surveys and passing that data on to the third-party payors under contract to establish and maintain a prescription drug benefit.

However, the pharmacies could not point to any direct economic damages, because no one knows what would have resulted if the PBM had done what it was supposed to do. Being able to point to a specific "injury in fact" is one of the most basic notions of jurisprudence. In addition, there is a requirement that the plaintiffs must have legal "standing" to bring the lawsuit in the first place. Standing is a concept used to decide if the plaintiff actually has some proximity to the intent of the laws. In other words, the pharmacies had to claim that they were an intended beneficiary of the statues in question.

To illustrate the point, assume your state requires that all semi-trucks driving on state-owned roads must have an annual inspection and be certified as safe. Assume one of your loved ones is run over by a truck. You sue the truck owner for damages caused by the death of your loved one. During the course of the litigation, you discover that the truck was not certified as safe at the time of the accident. While the absence of a required registration might be an issue of contention, it would not serve as your only basis for a claim against the truck owner, because there is no indication that any one individual should be protected by that statute. Put slightly another way, there is "no private right of action" contemplated by the law. In this instance, one should conclude that while there is an injury in fact, you do not have standing to claim injury as a result of the truck being uncertified.

To get around these barriers, the pharmacies claimed they suffered a "procedural injury" as a result of the PBMs' failure to follow the mandates of the state statutes. At this stage, the PBMs argued that the alleged third-party payors' use of the information to the benefit of the pharmacies was too remote to create standing. They went one step further by speculating that if the studies were done and sent to the third-party payors, there was no requirement to use them in the event that they even read them.

On July 10, 2004, the judge at the trial level agreed with the PBMs and threw the pharmacists' complaint out the door. 4 The pharmacists showed their tenacity by taking their case to the next level, seeking a reversal from the federal Ninth Circuit Court of Appeals. Two years later, in June 2, 2006, the appeals court published its findings.

Court of Appeals' Findings
The appeals court noted that "to satisfy the injury in fact requirement, a plaintiff asserting a procedural injury must show that the procedures in question are designed to protect some threatened concrete interest of his that is the ultimate basis of his standing."4 Furthermore, the plaintiff must "establish ‘the reasonable probability of the challenged action's threat to [his or her] concrete interest.'"4 In applying these standards to the case at hand, the court noted that the statute under review requires "prescription drug claims processors to conduct or obtain the results of a study or studies identifying the fees, separate from ingredient costs, of all, or of a statistically significant sample, of California pharmacies, for pharmaceutical dispensing services to private consumers."5 Another provision calls for the study report or reports obtained in accordance with the act to be transmitted by certified mail by each prescription drug claims processor to the chief executive officer or designee of each client for whom it performs claims processing services no less often than every 24 months. The act goes on to state that violations of these provisions may result only in imposition of a civil remedy. Any owner of a licensed California pharmacy shall have standing to bring an action seeking a civil remedy pursuant to this section as long as his or her pharmacy has a contractual relationship with, or renders pharmaceutical services to, a beneficiary of a client of the prescription drug claims processor, against whom the action is brought.6

The appeals court concluded that under these provisions, the legislature intended to give the pharmacies the ability to enforce PBMs' obligations to provide certain studies to PBM third-party payor clients. However, before proceeding, the law still requires the pharmacies to show that the procedures are designed to protect some threatened concrete interest.7

The pharmacies argued that the act requires the PBMs to make studies available to third-party payors. They go on to claim that these studies would reflect the true market rate of return for pharmacy prescriptions. The pharmacies concluded that "the legislature intended that by supplying those involved in the transactions with accurate information regarding free market pricing for the drugs, the market and third-party payors could make informed decisions about fair reimbursement rates to be paid or received for the provision of pharmaceuticals to plan participants as compared to the rates PBMs were currently imposing on pharmacies." The pharmacies also claimed that recipients of the studies could use the information to evaluate what should be actual market prices, negotiate fairer reimbursement rates, lobby for legislative intervention if necessary, and ascertain payments made to PBMs against those amounts the PBMs pass on to pharmacies.

In a response, coming as no surprise, the PBMs reasserted their claims that were used successfully at the trial level to the effect that use of the information in this manner, to the benefit of the pharmacies, was too remote to create standing. Even if the third-party payors actually received the studies, there exists no requirement that they use them, if they even read them.

To reconcile these conflicting viewpoints, the appeals court dug deep into the legislative history of the act and concluded that the legislature intended that making these studies publicly available would presumably "require claims processors to present objective data on the range and percentiles of usual and customary charges of pharmacists in the hope that at a time in the future this information will become the basis for reimbursement."8 This court concluded that the "concrete injury is a lack of information, the denial of which then adversely affects the possibility such information will improve reimbursement rates at some point." In stark contrast to the trial court findings, the appeals court opined that the procedural injury claimed threatens a concrete interest of the pharmacies and is thus sufficient to create injury in fact for purposes of standing and getting a fair hearing on their complaints.

There were a few more wrangling issues, but the bottom line is that the trial court's dismissal of the complaint was overturned. The case will now go back to the trial court judge for further proceedings and, eventually, a trial on the merits of the parties--unless they settle their differences.

Analysis
This is a case about not knowing what you don't know and finding a way to cure your lack of information. To give rise to a procedural injury as a substitute of an injury in fact is a rarely used litigation strategy, because it does not work very often. The federal appeals court went to great lengths to help the pharmacies find a way to address their concerns. The validity of these claims may have been overshadowed by the arrogance of the PBMs. It takes a certain amount of moxie to walk into a federal courthouse and explain to an all-powerful judge that your clients have been ignoring a law for the past 25 years or so because they have no obligation to follow its mandates because they are litigation-proof. 9 The alternate argument also lacked credibility. The PBMs asserted that even if they have some obligations under the law, these plaintiffs do not have the necessary legal status to bring suit against them because they can't show directly how they were harmed by the lack of the PBMs' efforts to record, collect, and disclose their findings to the organizations that they work for. Neither claim was very persuasive or compelling.

The other thing to consider is what forms of retaliation they might suffer in going for the gold in this lawsuit. Here the major PBM players, with their "take-it-or-leave-it" philosophy, could easily nullify their agreement with a pharmacy by departicipating any pharmacy involved in this lawsuit at any time, for any reason, or for no reason at all. The PBMs could also threaten to audit the pharmacy claims for reimbursement and come up with insufferable overpayment amounts. As the lifeblood of any pharmacy, these implicit understandings could be used as powerful deterrents to engage in holding the PBMs up to a legally mandated standard of conduct. The resolve of the pharmacies in California to stand up to the giants of their income for rendering pharmacy services should serve as encouragement to pharmacies across the country that the pendulum of unfair and oppressive terms imposed by PBMs may be starting to swing the other way. At the very least, it should be viewed as a sign that there may be a way to find a better balance of trying to keep health care costs in line but not at the expense of the providers who act in good faith to take care of their patients. Maybe the PBMs will not be forced into operating in complete transparency, but the days of absolute opaqueness are hopefully growing shorter.

REFERENCES
1. Vivian J. PBMs on Trial Again. US Pharm. 2006;31:52-66, available at: www.uspharmacist.comindex.asp?show=article&page=8_1685.htm; PBMs Under Legal Scrutiny. US Pharm. 2005;30:43-47, available at:  www.uspharmacist.com/index.asp?show=article&page=8_1643.htm; Drug Benefit Insurance. US Pharm. 2005;30:56-60, available at: www.uspharmacist.com/index.asp?show=article&page=8_1552.htm; Any Willing Provider Laws. US Pharm. 2003;28:09, available at: www.uspharmacist.com/ index.asp?show=article&page=8_1142.htm; State Prescription Benefit Programs. US Pharm. 2001;26:07, available at: www.uspharmacist.com/oldformat.asp?url=newlook/files/Phar/ACF234C.htm&pub_id=8&article_id=745.
2. Beeman & Pharmacy Services v. TDI Managed Care Services, 449 F 3d 1035, 2006 US APP Lexis 13764, 9th Cir (June 2, 2006).
3. California Civil Code §§ 2527 and 2528.
4. Appeal from the United States District Court for the Central District of California. D.C. No. CV-02-01327-VAP, D.C. No. CV-04-00407-VAP. Virginia A. Phillips, District Judge, Presiding. Jerry Beeman & Pharm. Servs. v. TDI Managed Care Servs. , 2004 U.S. Dist. LEXIS 13207 (C.D. Cal., July 10, 2004).
5. California Civil Code section 2527(c). This provision states in full: On or before January 1, 1984, every prescription drug claims processor shall have conducted or obtained the results of a study or studies which identifies the fees, separate from ingredient costs, of all, or of a statistically significant sample, of California pharmacies, for pharmaceutical dispensing services to private consumers. The study or studies shall meet reasonable professional standards of the statistical profession. The determination of the pharmacy's fee made for purposes of the study or studies shall be computed by reviewing a sample of the pharmacy's usual charges for a random or other representative sample of commonly prescribed drug products, subtracting the average wholesale price of drug ingredients, and averaging the resulting fees by dividing the aggregate of the fees by the number of prescriptions reviewed. A study report shall include a preface, an explanatory summary of the results, and findings, including a comparison of the fees of California pharmacies by setting forth the mean fee and standard deviation, the range of fees, and fee percentiles (10th, 20th, 30th, 40th, 50th, 60th, 70th, 80th, and 90th). This study or these studies shall be conducted or obtained no less often than every 24 months.
6. California Civil Code section 2528.
7. Citing to Idaho Conservation League v. Mumma, 956 F.2d 1508, 1514 (9th Cir. 1992) "The personal injury requirement will be met only if the alleged harm is ‘distinct and palpable and not abstract or conjectural or hypothetical.'"
8. Staff Comment to the report of the Assembly Committee on Finance, Insurance, and Commerce (cited in ARP Pharm. Serv., Inc. v. Gallagher Bassett Serv., Inc., 135 Cal. App. 4th 841, 850, 38 Cal. Rptr. 3d 67 (Cal. Ct. App. 2006) (vacated and request for rehearing granted)). As the Department of Insurance noted in the Enrolled Bill Report, even if "the bill is fairly innocuous in its impact… it may help identify areas for cost-containment in the future."
9. "Litigation-proof" means immune from liability.

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