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A federal appeals court in Manhattan has vacated a trial judge’s approval of a $42.5 million class action settlement that covers 815,000 healthcare plans and 51 million U.S. workers and their families. A three-judge panel of the 2nd U.S. Circuit Court of Appeals unanimously ordered Southern District Judge Charles L. Brieant to consider whether four individual health plan members had standing to bring claims that the prescription drug provider, Medco, had engaged in practices that had inflated their costs. Writing for the panel, Judge Roger B. Miner directed Judge Brieant on remand to examine whether the individual named plaintiffs had standing. The panel also instructed Judge Brieant to determine whether a fifth plaintiff, who was a plan trustee, in fact represented a plan that had contracted with Medco. “Despite the issue of constitutional standing having been brought to the attention of the District Court by various parties on numerous occasions throughout the litigation,” Miner wrote in Central States Southeast and Southwest Areas Health and Welfare Fund v. Merck-Medco Managed Care, 04-3300, “the District Judge repeatedly failed to rule on whether any of the Plaintiffs had Article III standing to bring the class action and to enter into the Settlement Agreement.” The settlement was designed to settle charges that Medco, which contracts with health plans and insurance companies to provide prescription drugs, had favored the drugs produced by its parent company, Merck & Co., to the financial detriment of the plans it was servicing. The challenge to the settlement was brought by three large self-insured plans that argued they were being short-changed by the settlement’s excessive allocation of funds to plans that had purchased medical coverage for their employees through insurance companies. While the insurance companies may have experienced inflated costs because of Medco’s alleged improper practices, the challengers contended, the plans themselves did not. By contrast, self-insured plans absorbed the injury directly, and the 55 percent discount the settlement provided for payments to plans with insurance coverage was insufficient to rectify the imbalance, the three challengers asserted. The challengers were self-funded health-benefit plans operated by the Teamsters, the Iron Workers union and the Sweetheart Cupcake Co. Most individuals pay a flat co-payment amount for drugs they obtain under their health plans, Miner wrote. Only workers in plans paying a percentage of their drugs’ actual costs, he observed, would have been injured had Medco’s practices inflated the costs of a plan’s drugs as the plaintiffs alleged. As a consequence, Miner wrote, “serious questions remain as to whether the individual Plaintiffs have demonstrated how Medco’s alleged wrongdoing caused any injury to an individual or entity other than the Plans that Medco contracted with.” Judge Rosemary S. Pooler and Eastern District Judge Frederic Block, sitting by designation, joined in the opinion. The three challengers were represented by Kenneth P. Ross and Robert F. Coleman Associates. W. Scott Simmer of Robins, Kaplan, Miller & Ciresi represented Group Hospitalization and Medical Services, which had sought to intervene in the suit. Linda J. Cahn represented the Blumenthal Plan, which opted out of the settlement. The plaintiffs were represented by Arthur N. Abbey of Abbey Gardy and Philippe Z. Selendy, of Boies, Schiller & Flexner.

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