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Just as millions of older Americans line up for new prescription drug benefits, a federal appeals court has handed states a major victory in efforts to require middlemen to disclose any special favors they receive in negotiating large drug contracts. The 1st U.S. Circuit Court of Appeals for the first time has ruled that Maine has the authority to regulate the pharmacy benefit management industry at the state level. The court rejected a host of constitutional and federal pension law challenges to the Maine statute that requires full disclosure of rebates, secret side deals, conflicts of interest and discounts paid to the pharmacy benefit management industry. Pharmaceutical Care Mgmt. Assoc. v. Rowe, No. 05-1606. Pharmacy benefit management (PBM) companies act as go-betweens to negotiate large contracts between pharmaceutical manufacturers and the pharmacies, public and private health plans and self-insured companies that purchase drugs. The PBM industry began just 20 years ago in response to the spiraling cost of drugs. They use the market power of combined health programs and small local pharmacies to negotiate better prices from drug manufacturers. Potential circuit split The decision is a blow to a nearly identical industry challenge of a District of Columbia law requiring similar disclosure. That suit comes up for oral argument on Jan. 19 in the U.S. Circuit Court for the District of Columbia. Pharmaceutical Care Mgmt. Assoc. v. District of Columbia, No. 05-7007. A decision there favorable to the industry would create a potential split between the circuits. In April, a federal judge granted a request by Caremark Rx Inc. to dismiss Employee Retirement Income Security Act (ERISA) claims in a suit by the Chicago carpenters union. That case is pending on appeal before the 7th Circuit. Chicago District of Carpenters Welfare Fund v. Caremark Rx Inc., No. 05-3476. Lutz Prager, a U.S. Department of Justice attorney representing D.C. on the appeal said the 1st Circuit decision should apply in the D.C. Circuit as well. “We take the position that the 1st Circuit’s decision operates as issue preclusion here as well. There is no difference in the two statutes.” He acknowledged that there is always a chance of a circuit split, “but we hope there isn’t,” he said. “For us this is like a green light for state legislatures,” said John M. Rector, general counsel for the National Community Pharmacists Association, which supports the Maine law and more disclosure by the PBM industry. Rector said his group has prepared a model PBM regulation bill. PBM companies have long been criticized for lack of openness and deceptiveness in drug pricing, and accused of unfairly profiting at their customers’ expense. Money is a critical factor with prescription drug expenses totaling nearly $180 billion in 2003, or one dollar out of every 10 spent on national health, according to the Federal Trade Commission. Stephanie Kanwit, special counsel to the PBM industry association leading the legal challenge against Maine and the District of Columbia, said, “We are going to file a petition for rehearing by the entire six-judge 1st Circuit.” She pointed out one of the three judges on the panel, Timothy Dyk, was a visiting judge from U.S. Court of Appeals for the Federal Circuit. The association argued that the Maine law forces PBM companies to disclose valuable trade secrets by forcing them to reveal pricing, discounts and rebates, thus reducing competitive advantage. They argue that the statute is pre-empted by ERISA, that the state violated constitutional due process rights and the commerce clause, that it amounts to an unconstitutional taking without compensation, and is “compelled speech.” The 1st Circuit rejected all claims. “In no way does the [Maine law] circumscribe the ability of plan administrators to structure or administer their ERISA plans,” wrote Judge Juan Torruella in rejecting the ERISA challenge. Kanwit argued that state regulation will create higher prices for consumers, not cheaper drugs. With mandated disclosures, “the market is going to create a situation where they all have perfect knowledge [of pricing] and that means fewer discounts. They are really creating a price floor,” she said. Charles Dow, spokesman for Maine Attorney General Steven Rowe, called the higher-costs argument “bogus.” “It just doesn’t make sense,” he said. “Apply good, old-fashioned common sense. How could it benefit [health] plans when some practices are to switch from low-cost to high-cost drugs?” In recent years the industry has beaten back disclosure legislation in 12 states, including seven in 2005 that would have regulated PBM companies, according to the Pharmaceutical Care Management Association (PCMA). The states include California, Florida, Iowa, Kansas, Maryland, Minnesota, Mississippi and New York. Only Georgia, Maryland, North Dakota and South Dakota have joined Maine in some form of PBM regulation. In California, Republican Governor Arnold Schwarzenegger has twice vetoed legislation similar to Maine’s. Now the Democratic state attorney general, Bill Lockyer, is looking at it from a law enforcement perspective, according to Tom Dressler, Lockyer’s spokesman. “We have antitrust people working with other AGs on this and we have got False Claims Act people working on it. Beyond that it would be improper to talk about it,” he said. Despite the legislative defeats, some 20 state attorneys general pushed ahead with litigation in 2000 in federal court in Pennsylvania challenging pricing practices and accusing the firms of lying to doctors and substituting higher-priced drugs for generics. As a reward, PBM companies allegedly received rebates from drug makers, U.S. v. Merck-Medco Managed Care, No. 00-737 (E.D. Pa). In a partial settlement in 2004, Medco paid more than $29 million and agreed to adhere to new standards preventing the switching of patients’ prescriptions if it resulted in higher costs. They also promised to inform doctors and patients of any financial incentives to Medco to substitute a drug. The intense private litigation has grown around the country in recent years over allegations that PBM companies negotiated rebates from drug manufacturers and discounts from retail pharmacies, but did not pass on the savings to health plans and consumers: In 2004, New York Attorney General Eliot Spitzer sued Express Scripts Inc. for breach of contract, accusing the PBM of inflating the cost of generic drugs at the expense of the state’s largest health plan, diverting millions of dollars in manufacturer rebates that belonged to the state health plan, and allegedly misrepresenting discounts it received for drugs at retail pharmacies. New York v. Express Scripts Inc., No. 4669-04 (N.Y. Sup. Ct.). A Massachusetts class action alleges racketeering and antitrust violations against 42 defendant drug manufacturers and four PBM companies in 22 states. In re Pharmaceutical Industry Wholesale Price Litigation, MDL No. 1456. A 1997 class action in New York claiming violations of ERISA fiduciary obligations resulted in a partial settlement in 2004 of $42.5 million. A 2003 Wisconsin class action alleged breach of contract in discount pricing and was settled in 2004, but terms were not disclosed. In California, a 2004 state court case alleges fixing prices on Merck drugs in violation of state law. The suit has not yet sought class action status. Alameda Drug Co. Inc. v. Medco Health Solutions Inc., No. CGC04-428109. Also, the state’s public employee union, representing 3,500 locals and 1.3 million workers, sued the nation’s four largest PBM companies in 2003 in Los Angeles County Superior Court alleging that they did not disclose enough detail to clients about rebates they receive. AFSCME v. AdvancePCS, No. BC292227. The U.S. Department of Justice in June joined Arkansas, Florida, Tennessee and Texas in a whistleblower suit against Caremark Rx Inc. alleging the company did not appropriately repay Medicaid and other insurance programs, U.S. ex rel. Ramadoss v. Caremark Inc., No. 99-0914. Still, the PCMA’s Kanwit said that the industry position is bolstered by a Federal Trade Commission report to Congress that concluded in 2004 that proposed federal disclosure legislation for the PBM industry was more likely to undermine competition than promote it.

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