Antitrust Law Daily Wrap Up, RICO—SDNY: Insurers Fail to State RICO, Commercial Bribery Claims Against Pharmaceutical Manufacturers over Co-Payment Subsidies, (Jun 4, 2013)

By Tobias J. Gillett, J.D., LL.M.

Two employee welfare funds failed to state RICO and Robinson-Patman Act commercial bribery claims against pharmaceutical manufacturers Bristol-Myers Squibb Co. (BMS) and Otsuka America Pharmaceutical, Inc. over the manufacturers’ practice of subsidizing the co-payments of patients purchasing their branded schizophrenia medication, the federal district court in New York has ruled (American Federation of State County and Municipal Employees District Council 37 Health & Security Plan v. Bristol-Myers Squibb Co., June 3, 2013, Oetken, J.).

The American Federation of State County and Municipal Employees District Council 37 Health & Security Plan and Sergeants Benevolent Association Health and Welfare Fund administer health and welfare benefits for their members. Their prescription drug benefit plans contain a tiered co-payment scheme, with higher co-payments for branded pharmaceutical products than for generic drugs.

BMS and Otsuka jointly market the branded schizophrenia medication Abilify. To encourage patients to select the branded medication rather than generic alternatives, BMS and Otsuka offered a co-payment subsidy. The pharmaceutical manufacturers send patients who enroll online a card, which pharmacists use to enter the patients’ information into their systems. The patients pay the difference between their co-pays and the amount subsidized by the pharmaceutical manufacturers, while their benefit plans wind up paying the full amount of their usual payments for the branded drugs. The plans have no way of knowing whether a third party has paid part of a patient’s co-pay.

BMS and Otsuka also control the reimbursement benchmark used to determine the amount to be paid for the drugs by benefit providers. BMS sets the Wholesale Acquisition Cost (WAC), and either BMS or a reporting agency publishes the Average Wholesale Price (AWP). The employee welfare funds alleged that “when cost sharing is routinely waived, the true acquisition cost for the medical service or product is not the stated or reported price being charged to health benefit providers, but rather the price after deduction for the routinely waived co-payment.”

The employee welfare funds filed suit, asserting claims under the RICO Act and for commercial bribery under the Robinson-Patman Act. BMS and Otsuka filed a motion to dismiss.

RICO. The court explained that a civil RICO plaintiff must allege “(1) conduct, (2) of an enterprise, (3) through a pattern (4) of racketeering activity.” The court observed that the employee welfare funds had set forth three theories of mail and wire fraud to serve as predicate acts for the “pattern of racketeering activity”: “(1) that Defendants caused misrepresentations to be made at the point of purchase (‘misrepresentation theory’); (2) that Defendants committed fraud through the routine and hidden waiver of personal co-pay obligations (‘waiver theory’); and (3) that Defendants committed fraud by causing inaccurate price benchmarks to be promulgated (‘benchmark theory’).”

The court first rejected the “misrepresentation theory.” The funds did not allege that either the drug manufacturers or the pharmacies had provided records falsely stating that insured patients had paid co-pays without a subsidy, nor was there any “active deception” in the pharmacies informing the funds that the patients had satisfied their co-pay obligations.

The failure of the pharmacies to inform the funds of the use of the subsidy also did not constitute an actionable omission, because neither the drug manufacturers nor the pharmacies had a duty to disclose the use of a subsidy or to collect less money from the funds when a subsidy was used. In any case, the funds did not allege that the pharmacists were involved in a RICO enterprise in a manner that would permit the drug manufacturers to be held liable for any misrepresentations by the pharmacists. Finally, a pharmacy’s failure to disclose to the funds that a patient used a subsidy could not “plausibly support a claim for fraud against” the drug manufacturers because the funds “admit[ted] that their reimbursement of the pharmacy is separately governed by contract and does not depend on any point-of-sale representation.”

The court also declined to follow the “waiver theory.” The court observed that, although certain precedent cited by the funds stood “for the proposition that health insurers may create contracts that relieve them of the duty to pay physicians and dentists who routinely waive co-pays,” none of the cases and statutes the funds cited “truly support[ed]” the funds’ “proposition that routine and hidden waiver of personal co-pay obligations is fraud.” Even if it was, the pharmacies offered the waiver, not the drug manufacturers, and the funds did not show how the provision of a subsidy permitting pharmacies to waive the co-pays could be considered fraud. Moreover, the practice did not actually consist of a “waiver,” since the pharmacies still collected the full amount of the co-pays, whether from the patient or the pharmaceutical manufacturers.

Finally, the court addressed the funds’ theory that the drug manufacturers “engaged in an intentional scheme to defraud plaintiffs and the class by reporting benchmark prices to reporting agencies while failing to account for the routine waiver of co-pays,” finding the theory to be inadequately pled. The complaint did not define either the Wholesale Acquisition Cost or the Average Wholesale Price, or the relationship between them. Nor did it specify the relationship between the definitions of the terms as used in the private marketplace and as codified in federal healthcare statutes. The complaint also did not allege “when, where, or how WAC and AWP values are published” or “who publishes them,” and did not “specifically identify and describe any WAC or AWP values that have actually been published and that are allegedly fraudulent.

The complaint was also vague about what reported benchmarks were at issue and whether the industry looked to the net price paid by the retailer to the manufacturer in the course of all transactions between them, or to the sale price when the manufacturer sells the drug to the retailer. Although sparsely pled, the court noted that the funds might be able to sufficiently amend their claims on the “benchmark theory,” and therefore granted the motion to dismiss without prejudice as to that theory, but with prejudice as to the “waiver” and “misrepresentation” theories.

Commercial bribery. The court then proceeded to take up the funds’ claim that the payment of subsidies to “individual insureds to eliminate or reduce their personal obligations under their prescription drug plans’ cost-sharing plans” constituted commercial bribery for purposes of the Robinson-Patman Act. The court noted that the “essence of commercial bribery is the corruption of the duty that an agent owes his principal,” and that courts have “often emphasized the need for a showing of a breach of fiduciary duty.” To the extent that a commercial bribery claim required a breach of fiduciary duty, the court concluded, the funds’ claim had to be dismissed because they could not show “that patients owe the pertinent sorts of fiduciary duties to their insurance companies in selecting medications or obtaining money to cover their co-pay obligations.”

Instead, the funds appeared to allege that the individual insureds functioned as the funds’ “agents, representatives, or intermediaries” because they had “substantial control” in choosing which medication would be paid for, and were “subject to their health benefit providers’ direct and indirect control in seeking payment for the selected medications through the terms of their plans.” The funds based their argument on buyer-seller commercial bribery cases, in which “the seller-buyer line is crossed if the seller or buyer pays a commission to a third party acting as the agent or intermediary of the opposing party.”

The court initially rejected the contention that insureds acted as the funds’ agents or intermediaries. The funds did not refer to any provisions in the insureds’ agreements with their health benefit providers that created any duty for the insureds to act on behalf of the insurer rather than in their personal interests. Moreover, the funds’ alleged control over insureds extended only to “the co-pay scheme and the associated incentive structure.” The control did not extend to directing insureds’ selection of which medication to select, or whether to rely on insurance to pay for a prescription.

Furthermore, the scheme did not fit the mold of a buyer-seller commercial bribery claim. The insurer was not the buyer with the insured acting as an intermediary; rather, the insured bought the drug “subject to a financing scheme for which he privately contracted with the insurer.” Thus, the insured was the buyer, and the insurer was “perpendicular to—rather than an intermediary in—the transaction.” Therefore, even if a commercial bribery claim could be viable in the absence of a fiduciary duty, the funds failed to state a commercial bribery claim because they could not show that the insureds were agents or intermediaries of their insurers, or that they were “buyers in the pertinent sense of that term.”

The case is No. 12 Civ. 2238 (JPO).

Attorneys: Lauren Guth Barnes (Hagens Berman Sobol Shapiro LLP) for American Federation of State County and Municipal Employees District Council 37 Health & Security Plan. Andrew David Schau (Covington & Burling LLP) for Bristol-Myers Squibb Co. Jonathan Paul Bach (Cooley Godward Kronish LLP) for Otsuka America Pharmaceutical, Inc.

Companies: American Federation of State County and Municipal Employees District Council 37 Health & Security Plan; Sergeants Benevolent Association Health and Welfare Fund; Bristol-Myers Squibb Co.; Otsuka America Pharmaceutical, Inc.

Cases: RICO Antitrust NewYorkNews