Medical Arts Pharmacy v. Blue Cross & Blue Shield

• Decision Date: 21 July 1981
• Docket Number: Civ. No. B-79-77.
• Citation: 518 F. Supp. 1100
• Court: U.S. District Court — District of Connecticut
• Parties: MEDICAL ARTS PHARMACY OF STAMFORD, INC., et al., Plaintiffs, v. BLUE CROSS & BLUE SHIELD OF CONNECTICUT, INC., Defendant.

518 F. Supp. 1100

MEDICAL ARTS PHARMACY OF STAMFORD, INC., et al., Plaintiffs, v. BLUE CROSS & BLUE SHIELD OF CONNECTICUT, INC., Defendant.

Civ. No. B-79-77.

United States District Court, D. Connecticut.

July 21, 1981.

COPYRIGHT MATERIAL OMITTED

Kenneth D. Wallace, Stamford, Conn., for plaintiffs.

H. Kennedy Hudner, Lissa J. Paris, John C. Yavis, Jr., Francis J. Brady, Murtha, Cullina, Richter & Pinney, Hartford, Conn., for defendants.

RULING ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

EGINTON, District Judge.

In Group Life & Health Insurance Co. v. Royal Drug Co., 440 U.S. 205, 99 S.Ct. 1067, 59 L.Ed.2d 261 (1979), the Supreme Court held that certain provider agreements entered into between an insurer and a large number of licensed pharmacies were not exempt from examination under the antitrust laws. The basis of the Court's holding was that these agreements did not constitute the "business of insurance" within the meaning of § 2(b) of the McCarran-Ferguson Act, 15 U.S.C. § 1012(b). The Court specifically did not consider whether the agreements in fact violated the antitrust laws. Id. at 210 & n.5, 99 S.Ct. at 1072 & n.5. The instant case presents this court with an opportunity to address that question: that is, whether provider agreements entered into between plaintiffs, a class consisting of approximately 650 licensed pharmacies in the State of Connecticut, and defendant Blue Cross & Blue Shield of Connecticut, Inc. ("Blue Cross") are illegal under the antitrust laws.

I

Blue Cross is a Connecticut nonprofit, nonstock corporation which, among other things, offers various service benefit contracts to its subscribers. Since 1967 Blue Cross has maintained a prescription drug program under which subscribers can obtain prescription drugs from licensed pharmacies at little or no cost to the subscriber other than the premium payment.

The prescription drug program operates through the use of two distinct types of contracts. The first contract, between Blue Cross and its individual subscribers (the "subscriber contract"), determines the level of benefits for each insured. The second contract, entitled the "Prepaid Prescription Drug Agreement by and between Blue Cross & Blue Shield of Connecticut, Inc. and Participating Pharmacy" (the "pharmacy agreement"), sets forth the terms under which a participating pharmacy will provide prescription drugs to Blue Cross' subscribers.

Under the subscriber contract, a subscriber may obtain prescription drugs from either a participating or nonparticipating pharmacy. If the subscriber selects the former, he will receive the needed drug with no out-of-pocket expense, or in a minority of subscriber contracts, at a fee of $.75 (the "co-pay" amount). Blue Cross then reimburses the pharmacy at the rate set in the pharmacy agreement. If, on the other hand, the subscriber selects a nonparticipating pharmacy, he is required to pay the full price charged by the pharmacy. The subscriber may then obtain reimbursement from Blue Cross, although the amount of reimbursement cannot exceed the amount Blue Cross would reimburse a participating pharmacy under the pharmacy agreement.¹ From 1975 through 1979 approximately 9% of Connecticut's population was eligible for Blue Cross prescription drug benefits. Blue Cross estimates that it accounted for approximately 9% of the prescription drug sales in Connecticut over that same period.

Under the pharmacy agreement, a participating pharmacy agrees to furnish prescription drugs to Blue Cross subscribers at no cost or at $.75 if the co-pay is applicable, and Blue Cross agrees to reimburse the pharmacy at the rates set in the pharmacy agreement. Blue Cross instituted this contract unilaterally and offered all pharmacies in Connecticut the opportunity to participate; currently all but two participate.

Prior to September 1, 1977, Blue Cross reimbursed participating pharmacies by paying them their "actual acquisition cost" ("AAC") of each drug dispensed to a Blue Cross subscriber plus a professional fee to provide for their overhead and profit. Blue Cross relied on a pharmacy's supply invoices to validate its AAC. This reimbursement method caused difficulties because Blue Cross found that it could not accurately verify a pharmacy's AAC. Although the pharmacy agreement obligated pharmacies to pass on to Blue Cross the various discounts they received from their wholesalers and manufacturers when purchasing drugs, many pharmacies apparently did not. Often, a pharmacy's invoices from its suppliers did not reflect discounts, free goods, or rebates. Consequently, the appropriate reductions to the pharmacy's AAC could not be discovered readily in an audit.

In September, 1977, Blue Cross switched to the "maximum billable amount" ("MBA") method of reimbursement. This method differed from the prior AAC method in that Blue Cross determined ceiling amounts for the drug element of its reimbursement rates. That is, Blue Cross placed a limit on how much it was willing to pay for any given drug. The MBA concept was designed to produce payments to pharmacies approximately equivalent to an average pharmacy's AAC, and at the same time presumably reduce Blue Cross' underwriting and administrative burdens.² Blue Cross continued to pay participating pharmacies a set professional fee to provide for overhead and profit.³

The MBA reimbursement levels are established in one of two ways: the most frequently dispensed drugs that may be purchased directly from manufacturers are reimbursed according to Blue-Cross formulated lists;⁴ all other drugs are reimbursed according to "Red Book" average wholesale price ("AWP") rates.⁵

II

Plaintiff Medical Arts Pharmacy filed this action in March, 1979, less than one week after the Supreme Court's decision in Group Life & Health Insurance Co. v. Royal Drug Co., supra. The complaint charges that the pharmacy agreements are an illegal price-fixing arrangement within the proscriptions of section 1 of the Sherman Act, 15 U.S.C. § 1. It also alleges violations of the Connecticut Unfair Trade Practices Act, Conn.Gen.Stat. §§ 42-110a et seq.

Shortly after commencement of the suit, Medical Arts Pharmacy moved for class certification. After limited class-related discovery and thorough briefing, this court, pursuant to Fed.R.Civ.P. 23(b)(3), certified a class comprising licensed pharmacies in the State of Connecticut, who had, on or before June 30, 1980, entered into a pharmacy agreement with Blue Cross.

The action is presently before the court on cross-motions for summary judgment. The gist of plaintiffs' motion is that the pharmacy agreements fix prices for prescription drugs, and, as such, are per se illegal under section 1 of the Sherman Act. Defendant quite naturally denies that the pharmacy agreements are a per se section 1 violation and, through its cross-motion, asserts that even under a rule of reason analysis the agreements do not violate the antitrust laws.⁶

III

Before proceeding directly to a discussion of the legal claims raised by these motions, it should be noted that the same issues raised here were recently considered by District Judge Peckham in Sausalito Pharmacy, Inc. v. Blue Shield of California, 1980-81 Trade Cas. 77,722 (N.D.Cal. May 12, 1980) ("Sausalito I") and Sausalito Pharmacy, Inc. v. Blue Shield of California, 1981-1 Trade Cas. 75,604 (N.D.Cal. Mar. 16, 1981), appeal docketed, No. 81-4198 (9th Cir. Apr. 17, 1981) ("Sausalito II").

Sausalito I & II involved a section 1 challenge by a group of participating pharmacies against a number of insurance companies and plan administrators who underwrite and administer prescription drug plans substantially similar to the one at issue here. In Sausalito I, plaintiffs moved for summary judgment on the issue of liability, arguing that the pharmacy agreements were per se illegal under the Sherman Act. The court denied the motion, principally on the ground that the pharmacy agreements were "arrangements for the purchase of goods and services" and, hence, did not constitute a form of "price-fixing" that was per se unlawful. Sausalito I at 77,724 quoting Group Life & Health Insurance Co. v. Royal Drug Co., supra, 440 U.S. at 214, 99 S.Ct. at 1074. In so ruling, the court stated that the relative novelty of these arrangements also counselled against "precipitous" invocation of the per se rule. Sausalito I at 77,724.

In Sausalito II, defendants moved for summary judgment, contending that even under a rule of reason analysis there was no basis for antitrust liability. The court agreed and granted the motion, holding that while a variety of approaches could be taken in analyzing the pharmacy agreements under the rule of reason, "no matter which is taken ... the conclusion that the agreements do not violate the rule of reason is inescapable." Sausalito II at 75,607.⁷ This court concurs generally with Judge Peckham's rulings in Sausalito I & II. However, in the absence of precedent in this district and circuit, the court believes it important to issue its own opinion as to the matters raised herein.

IV

Section 1 of the Sherman Act prohibits every contract, combination, or conspiracy in restraint of trade. A section 1 plaintiff must establish both elements: first, that defendant entered into a contract, combination or conspiracy; and second, that such was in restraint of trade. Oreck Corp. v. Whirlpool Corp., 639 F.2d 75, 78 (2d Cir. 1980).

Blue Cross' initial argument that plaintiffs have failed to show a contract, combination, or conspiracy need not long detain the court. Its somewhat disingenuous attempt to characterize the pharmacy agreements as unilateral activity cannot survive even the most superficial analysis. While it may be true that Blue Cross made a unilateral offer about which it refused to bargain, it is undisputed that Blue Cross and each of the plaintiffs have entered into a bilateral contract which establishes the requisite section 1 joint action. The question,...