Com. v. TAP Pharmaceutical Products, Inc.

• Decision Date: 03 November 2005
• Citation: 885 A.2d 1127
• Parties: COMMONWEALTH of Pennsylvania by Gerald J. PAPPERT, in his capacity as Attorney General of the Commonwealth of Pennsylvania, Plaintiff v. TAP PHARMACEUTICAL PRODUCTS, INC.; Abbott Laboratories; Takeda Chemical Industries, LTD.; AstraZeneca PLC; Zeneca, Inc.; AstraZeneca Pharmaceuticals LP; AstraZeneca LP; Bayer AG; Bayer Corporation; GlaxoSmithKline, P.L.C.; SmithKline Beecham Corporation; Glaxo Wellcome, Inc.; Pfizer, Inc.; Pharmacia Corporation; Johnson & Johnson; Amgen, Inc.; Bristol-Myers Squibb Company; Baxter International Inc.; Aventis Pharmaceuticals, Inc.; Boehringer Ingelheim Corporation; Schering-Plough Corporation; Dey, Inc., Defendants.
• Court: Pennsylvania Commonwealth Court

885 A.2d 1127

COMMONWEALTH of Pennsylvania by Gerald J. PAPPERT, in his capacity as Attorney General of the Commonwealth of Pennsylvania, Plaintiff v. TAP PHARMACEUTICAL PRODUCTS, INC.; Abbott Laboratories; Takeda Chemical Industries, LTD.; AstraZeneca PLC; Zeneca, Inc.; AstraZeneca Pharmaceuticals LP; AstraZeneca LP; Bayer AG; Bayer Corporation; GlaxoSmithKline, P.L.C.; SmithKline Beecham Corporation; Glaxo Wellcome, Inc.; Pfizer, Inc.; Pharmacia Corporation; Johnson & Johnson; Amgen, Inc.; Bristol-Myers Squibb Company; Baxter International Inc.; Aventis Pharmaceuticals, Inc.; Boehringer Ingelheim Corporation; Schering-Plough Corporation; Dey, Inc., Defendants.

Commonwealth Court of Pennsylvania.

Argued June 8, 2005.

Decided November 3, 2005.

Donald E. Haviland, Jr., Philadelphia, for plaintiff.

John C. Dodds, Philadelphia, for defendants.

BEFORE: COLINS, President Judge, and McGINLEY, Judge, SMITH-RIBNER, Judge, FRIEDMAN, Judge, LEADBETTER, Judge, COHN JUBELIRER, Judge, and LEAVITT, Judge.

OPINION BY President Judge COLINS.

The Plaintiff, the Commonwealth of Pennsylvania, through its Attorney General, has a filed a Corrected Amended Complaint¹ on behalf of the Commonwealth, and in its asserted status of parens patriae, on behalf of citizens of Pennsylvania, who, according to the Amended Complaint, the Defendants have injured through allegedly improper conduct that has caused entities of the Commonwealth and some of its citizens to pay inflated prices for certain pharmaceuticals the Defendants manufacture, market, and sell. Before the Court are the Defendants' preliminary objections to the Amended Complaint. In their Joint Brief, the Defendants contend that this Complaint, like the original, fails to plead facts with sufficient detail under the Rules of Civil Procedure, Pa. R.C.P. No. 1019(a) and (b). The Defendants also contest the legal merits of the various causes of action the Plaintiff has brought against them, including claims of unjust enrichment, misrepresentation or fraud, violations of the Unfair Trade Practice and Consumer Protection Law (UTPCPL),² and civil conspiracy. The Defendants' objections also include challenges to the Commonwealth's standing under the UTPCPL and the Commonwealth's standing as parens patriae. Finally, the Defendants contend that the "filed rate" doctrine, the "state action" doctrine, and federal preemption bar the Commonwealth's action.³

The Commonwealth brings this action in its sovereign capacity and its proprietary capacity⁴ as a purchaser and end-payor for certain drugs manufactured, marketed, and ultimately sold to persons covered by the state-related programs listed in footnote 4 and to Commonwealth citizens.

As noted in this Court's earlier decision in this matter, TAP I, the present controversy primarily arose around the use of a pricing standard known as the Average Wholesale Price (AWP). The Commonwealth's claims are based generally on its assertion that all the Defendants knowingly inflated this self-reported AWP for inclusion in a pharmaceutical publication upon which the Commonwealth relied. The Commonwealth alleges that the reason the Defendants inflated the AWP, which in some cases reflected a price hundreds of times higher than what would constitute an actual average wholesale price, is that the Defendants would generate revenue by virtue of direct purchasers paying more for their products and such systematic inflation would also result in increased market share.

As stated above, AWPs are used by the Commonwealth to establish a basis for reimbursement to the middleman—such as physicians who administer drugs to patients directly (such as intravenous cancer drugs), and pharmacy benefit managers who buy in quantity for resale to consumers. The AWP, according to the Amended Complaint, achieves the goal of increased market share by creating a monetary incentive to the middleman to choose a particular drug, based not on superior performance, but rather on the increased revenues to the middleman that result from the so-called spread, which is described as the difference between the actual cost to the middleman and the amount of reimbursement he or she receives, in this case from the Commonwealth programs. Because the reimbursement rate is based on the inflated AWP, the middleman receives a windfall of sorts, and the greater the windfall, the more likely the middleman is to choose such drugs.

In specifics, the Commonwealth avers that three of its largest drug purchasing or reimbursement programs are (1) Medicaid (run by the Department of Public Welfare (DPW)), (2) PACE (run by the Department of Aging), and (3) PEBTF (run for the benefit of state employees, retirees, and their dependents). All of these programs, the Commonwealth attests, pay for prescription drugs using a formula that includes AWP to determine reimbursement.

Thus, DPW, in accordance with 55 Pa.Code § 1121.56, must use the lower of two formulas: (1) the "Estimated Acquisition Cost" (EAC), which under the regulations, 55 Pa.Code § 1121.1, is the current AWP for the most common package size minus 10%, and (2) the state MAC, which the Commonwealth alleges "is similar to the federal upper limit price," (Amended Complaint, paragraph 55). The Commonwealth contends that the AWP for the drugs and time at issue was the starting point for determining reimbursement, and that for those drugs for the 2003-2004 fiscal year, the Commonwealth incurred approximately $1.5 billion in reimbursement expenses.

With regard to the Department of Aging's PACE program, the Commonwealth avers that Aging uses a formula providing for reimbursement of 90% of the average wholesale cost (not specifically AWP) that exceeds the co-payment, plus a dispensing fee. The Commonwealth avers that, although the applicable statutory provision does not specify AWP, it references AWP by directing the formula to reflect drug prices published in whichever national drug pricing system the Department uses as the average wholesale price, 72 P.S. § 3761-502.⁵ The Commonwealth avers that it incurred $506 million in PACE reimbursement expenses during the 2003-2004 fiscal year.

PEBTF engages a pharmacy benefit manager, to which PEBTF pays a reimbursement based upon AWP minus a discount, plus a dispensing fee, minus a rebate. PEBTF obtains the AWP from one of two sources depending on particular contract obligations. PEBTF reimbursed its benefits manager approximately $247 million for drugs prescribed for its beneficiaries for the 2003-2004 fiscal year.

As to the Bureau of Family Health Programs,⁶ which is run by the Department of Health, but which is administered under a memorandum of understanding by the Department of Aging, the Commonwealth avers that it reimburses using a formula that reflects 90% of the average wholesale cost that exceeds the co-payment, plus a dispensing fee.

The Commonwealth further points out that the AWP plays a significant role in budgeting strategies, and that it affects administrative decisions, we presume such as eligibility standards based on income and the scope of coverage.

Much of the Commonwealth's claim for relief is based upon its averments that the AWP was intended as a device to ensure that doctors or pharmacies are recompensed, but not enriched, for services to end users encompassed under the various above-noted drug plans and programs; that the Defendants knew, or should have known, how inflated AWPs affect the Commonwealth's reimbursements to intermediaries, such as doctors and pharmacies, and cause the Commonwealth to pay higher reimbursement amounts and result in economic harm to the Commonwealth, its businesses, and its consumers. This imputed knowledge on the part of the Defendants of the Commonwealth's use of AWP and the results of its deviation from actual average wholesale, according to the Commonwealth, created an obligation on the part of the Defendants not to manipulate the AWP.

Further implicating the Defendants, the Commonwealth contends the Defendants had sole control over confidential data that would show the true acquisition costs of their drugs, thus leaving the Commonwealth in the dark as to how the Defendants established the AWP they reported to the publishers of AWPs. As noted above, by using inflated AWPs, the Commonwealth avers that the Defendants were able to generate greater revenue in two ways: first, direct purchasers paid more for their products, and second, the Defendants obtained an increased share of the market, because intermediate purchasers such as doctors and pharmacies would be more inclined to use their products if the benefit to themselves increased by the spread between actual acquisition costs and the reimbursement rate based on AWP.

The Commonwealth pleads that the Defendants used five distinct methods or incentives to encourage the use of their drugs: (1) creation of the spread; (2) providing free goods and drug products with the knowledge that the dispenser would charge the Commonwealth and its consumers for the free goods the dispensers received from the Defendants; (3) providing other financial incentives to induce sales; (4) in reporting the AWP, the Defendants failed to have these figures reflect the value of the free goods, rebates, discounts, and other incentives that would reduce the actual wholesale price of a drug; and (5) engaging in efforts to conceal and fraudulently suppress their wrongful conduct to maintain the alleged scheme and conspiracy.

The Commonwealth breaks down its claims against the Defendants into two primary groups. The first group involves drugs that generally require a physician to administer them in the office (prescriber-dispensed drugs), in which case, the prescriber (typically a physician) buys or obtains the drugs from the manufacturer or distributor and bills the Commonwealth at the AWP-based reimbursement rate. Because the prescriber reaps the benefit of the difference between his or her cost to buy and the...