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A federal trial judge has put on hold a pioneering Maine law designed to make more transparent the business practices of companies that negotiate drug prices on behalf of health plans. But even if U.S. District Judge John A. Woodcock Jr.’s preliminary injunction is made permanent against the companies-called “pharmaceutical benefits managers”-a spate of lawsuits and legislative activity in other states will likely keep PBMs on the defensive for years. Woodcock issued the injunction on March 9, in Pharmaceutical Care Management Ass’n v. Rowe, No. 03-153-B-W (D. Maine). PBMs like Medco Health Solutions Inc., AdvancePCS Inc., Express Scripts Inc., Caremark RX Inc. and Wellpoint Pharmacy Management (the five biggest companies in the industry) have as their customers insurance companies, employers, unions and others who provide health benefit plans. In addition to overseeing drug utilization by plan participants, PBMs “reduce their customers’ prescription drug costs by negotiating price discounts from pharmacies and rebates from drug manufacturers,” according to the complaint filed in the Maine case by an industry group, the Pharmaceutical Care Management Association (PCMA). PCMA claims that in 2001 and 2002, PBMs oversaw about 80% of all spending on prescription drugs in the United States. Their prominence is likely to grow, since they are expected to play a big role in administering the new Medicare drug benefit signed into law by President George W. Bush in December. Maine’s “Act To Protect Against Unfair Prescription Drug Practices,” enacted last year, was prompted by concerns that because PBMs do not disclose the terms of discount and rebate agreements to their customers, they are able to pocket a large share of the savings. PBMs sometimes make deals that favor drug manufacturers at the expense of their customers, alleged state Senator Sharon Treat, the Democratic majority leader of the Maine Senate and the sponsor of the act. “PBMs have a conflict of interest,” Treat alleged. She asserted that they promise their customers to negotiate lower prices, but then enter into contracts with drug manufacturers that reward PBMs for promoting certain medications-usually newer, more expensive ones. Robert I. Garis, professor of pharmacy at Creighton University and the author of a study critical of PBMs, said that while doctors still have final say on what to prescribe, PBMs can influence doctors by way of their patients’ wallets. When pharmacists tell patients that a nongeneric drug roughly equivalent to what their doctors prescribed carries a $50 lower co-pay, for instance, many patients ask their doctors to make the switch, he said. Garis acknowledged that PBM customers include many powerful companies that presumably aren’t pushovers. But he alleged that most consultants who advise companies on health benefits get their information from the PBM industry. Treat echoed that theme: “There’s no parity of bargaining. The PBMs have all the information. The customers don’t even know how to ask the right questions.” The PBM view In its briefs, PCMA claims that much of the litigation that the industry faces comes from individual plan participants and not from its customers, who are generally pleased. In an interview, PCMA General Counsel Stephanie Kanwit said that the industry’s customers are pleased with the discounts PBMs have been able to achieve through their bargaining power, stating that a group of about 50 Maine employers-the Maine Healthcare Purchasing Collaborative-oppose Treat’s law. She said that many customers are interested primarily in keeping their administrative fees low and are willing to see PBMs reap some benefit from rebates in exchange for that. Kanwit argued that there is vigorous competition among PBMs, that their customers are “sophisticated,” and that by contract, customers have the right to audit their PBMs (though not the right to see their contracts with drug manufacturers, she conceded). Fiduciary duty The Maine act would require PBMs to put their customers’ interests above their own by declaring them fiduciaries. They would have to pass on volume discounts to their customers “in full.” The act also mandates that PBMs report to their customers any conflicts of interest and the terms of discount and rebate agreements with drug manufacturers. The act states that PBMs may freely substitute a generic drug for the equivalent higher-priced, brand-name drug. But substituting the costlier drug would not be permitted except “for medical reasons that benefit the [patient] and must benefit the [PBM customer.]” In such instances, the PBM would first have to disclose to the patient and the PBM’s customer the cost of the two drugs and the benefit the PBM would reap from the substitution. A violation of the act carries a fine up to $10,000. Woodcock enjoined enforcement of the act pending trial because he predicted that PCMA would ultimately prevail on two counts. Though Woodcock wrote that he was “disquieted by the notion that the rebate and secret contractual arrangements in this case can constitute a protected trade secret,” he nonetheless held that PCMA had a good chance of proving as much. Since the act requires disclosure of such secrets, it would probably amount to an unconstitutional taking of property without compensation, he wrote. Woodcock drew attention to the fact that the act would not appear to prohibit a PBM’s customer from showing the PBM’s contract information to competing PBMs. Secondly, although conceding that PBMs are largely unregulated and that Maine “fill[ed] in by state law an ever-expanding hole in federal oversight,” Woodcock said that the act would most likely be found to be pre-empted by the federal Employee Retirement Income Security Act (ERISA). “This Court concludes that the provisions of the [Maine act] are virtually bound to collide with the ERISA goal of a ‘nationally uniform administration of employee benefit plans,’ ” he wrote. Other fronts Though Maine’s law is in abeyance, critics of PBMs are proceeding on other fronts. According to Treat, both South Dakota and the District of Columbia have followed Maine’s example by enacting laws that require greater transparency in the industry and other states are considering legislation. Some PBM customers and individuals covered by plans have begun to sue PBMs. Many of those lawsuits have been directed against Medco, which, until last year, was owned by pharmaceutical manufacturer Merck & Co., a connection the litigants claim led Medco to steer patients toward Merck medications. For instance, 10 class actions filed against Medco are pending in the Southern District of New York, according to an October brief submitted by Maine Attorney General G. Steven Rowe in defense of the state law. But Medco has not been the only target. Rowe noted, for instance, that the Association of Federal, State and Municipal Employees have filed suit against the four largest PBMs in a California court. Young’s e-mail address is [email protected].

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