Gaston Drugs, Inc. v. Metropolitan Life Ins. Co.

• Decision Date: 22 July 1987
• Docket Number: No. 86-3658,86-3658
• Citation: 823 F.2d 984
• Parties: GASTON DRUGS, INC.; Martin James Mullaney d/b/a Mullaney's Prescription Pharmacy and Mullaney's Blue Ash Prescription Pharmacy, Plaintiffs-Appellants, v. METROPOLITAN LIFE INSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 984

823 F.2d 984

GASTON DRUGS, INC.; Martin James Mullaney d/b/a Mullaney's Prescription Pharmacy and Mullaney's Blue Ash Prescription Pharmacy, Plaintiffs-Appellants, v. METROPOLITAN LIFE INSURANCE COMPANY, Defendant-Appellee.

No. 86-3658.

United States Court of Appeals Sixth Circuit.

Argued May 14, 1987.

Decided July 22, 1987.

Eugene F. McShane, Alan C. Witten, argued, Columbus, Ohio, for plaintiffs-appellants.

David E. Beitzel, Altick & Cowin, Dayton, Ohio, William J. Toppeta, John L. Viola, argued, New York City, for defendant-appellee.

Before JONES and RYAN, Circuit Judges; and CELEBREZZE, Senior Circuit Judge.

PER CURIAM.

Plaintiffs appeal from the district court's order denying their motion for a preliminary injunction to enjoin defendant Metropolitan Life Insurance Company ("Metropolitan") from auditing plaintiffs' records, 653 F.Supp. 1104. Finding no error in the district court's disposition of the case, we affirm.

Plaintiffs in this action are Gaston Drugs, Inc. ("Gaston"), an Ohio pharmacy, and Martin James Mullaney, the owner of two other pharmacies, all licensed to sell and dispense prescription drugs in Ohio. Gaston and Mullaney brought suit on their own behalf and on behalf of a proposed class consisting of other pharmacies in Ohio that are participants in the MediMET prescription drug program. After the suit had been filed, Hanson Drug Service, Inc., which operates seven pharmacies in Ohio, was granted leave to intervene. The defendant Metropolitan is an insurance company whose corporate headquarters are in New York.

Plaintiffs commenced this action in order to prevent the defendant from auditing their records relating to their participation in Metropolitan's MediMET third-party prescription drug program. The MediMET program, which was established in 1969, is a plan through which employees of participating employers may purchase prescription drugs at reduced rates. As part of the MediMET program, Metropolitan entered into agreements, known as the MediMET Agreements, with approximately 30,000 pharmacies throughout the nation, including a number within the State of Ohio.

Under a typical MediMET plan, a prescription for a covered drug is submitted by the patient to a participating pharmacist along with a card identifying the patient as eligible to receive benefits under the program. The patient pays a small deductible, and the pharmacist fills the prescription and bills Metropolitan through a universal claim form or electronic means for payment under terms of the MediMET Agreement.

In order to participate in the MediMET program, pharmacists execute a MediMET Prescription Drug Agreement. The terms of the agreement are non-negotiable and participating pharmacists voluntarily enter into them. The MediMET Agreement contains the following provision regarding payment:

Metropolitan will pay Participating Provider an amount determined in accordance with Item F of the Schedule for Covered Drugs dispensed to Eligible Persons less the applicable co-payment amount set forth in Item D of the Schedule which co-payment amount is payable by the Eligible Person for each Prescription Order or refill.

App. 64-65. Item F, which provides the terms of payment to participating pharmacists, bases payment on the "Acquisition Cost Plus Dispensing Fee" formula. "Acquisition Cost" is defined as:

the actual cost of a Covered Drug to Participating Provider as determined by Metropolitan, including trade and volume discounts and other allowances.

App. 64. Under the MediMET Agreement, Metropolitan is allowed to inspect the records of the participating pharmacies:

Metropolitan or its duly authorized agents shall have the right at reasonable intervals and during regular business hours of Participating Provider to review such business records and prescription files of Participating Provider as Metropolitan or its duly authorized agents deem necessary to assure compliance with the terms of this Agreement.

App. 65. The MediMET Agreement also gives Metropolitan the right to unilaterally terminate the agreement with any pharmacy:

This agreement shall remain in full force and effect until terminated by either party effective upon at least (30) days written notice to the other, except that Metropolitan reserves the right to terminate, effective upon receipt of written notice by Participating Provider, for violation of this Agreement or for other good cause.

App. 65. Upon presentation of a prescription to a participating pharmacy, persons covered under the MediMET program sign a "Universal Claim Form" in which they agree to release information pertaining to their claim to Metropolitan. The release specifically provides that:

I authorize release of all information pertaining to this claim to the plan administrator, underwriter, sponsor, policymaker and the employer.

Once the patient has completed the claim form, the pharmacist inserts information into the claim form regarding the drugs dispensed and the cost of the drugs, and submits a copy of the form to Metropolitan for payment. A participating pharmacy may also submit its claim to Metropolitan through the tape-to-tape program. The tape-to-tape program is a system that allows a pharmacist to electronically transfer its claims directly to Metropolitan's computer.

Some of the plaintiffs in this action have admitted that they do not indicate the actual acquisition cost of the drugs on the claim form, but instead indicate the "Average Wholesale Price". ¹ Furthermore, these plaintiffs conceded that the price submitted to Metropolitan based on the "Average Wholesale Price" formula is often not the actual cost incurred.

Pursuant to its contractual rights, Metropolitan has audited a number of Ohio pharmacies under the provisions of the Agreement. In 1975, Metropolitan audited one of the pharmacies operated by plaintiff-intervenor Hanson and found overpayments. The two parties reached a settlement concerning these overpayments. On January 7, 1985, plaintiff Mullaney's pharmacies were audited by Metropolitan. Subsequently, Mullaney received a bill indicating an overpayment of approximately $8,000. Three weeks later he received a letter informing him that payment for future claims would be withheld unless the alleged overpayment was refunded.

On July 16 and 17, 1985, Metropolitan conducted a second audit of plaintiff-intervenor Hanson's records. On August 9, 1985, Metropolitan demanded that Hanson refund $76,975.33 in alleged overpayments. Hanson refused to pay. On October 22, 1985, Metropolitan sent a letter to Hanson threatening termination of the MediMET Agreement unless the amount owed was paid. On November 25, 1985, Metropolitan notified Hanson that it would terminate the MediMET Agreement in thirty days.

On April 10, 1985, plaintiffs commenced this action by filing a complaint in the Court of Common Pleas in Ohio seeking to bar Metropolitan from auditing the records of participating pharmacies. Plaintiffs contended that the audits were barred by an Ohio statute and the terms of the MediMET Agreement. Accordingly, plaintiffs argued that Metropolitan's threats to terminate the agreement with pharmacies that refused to refund overpayments was made in bad faith and that Metropolitan was not within its contractual rights.

After the complaint was filed, Metropolitan moved to have the case removed to federal court. The motion was granted. Plaintiffs then filed a motion for an order enjoining Metropolitan from conducting audits or terminating its agreements with participating Ohio pharmacists. The district court construed the motion as a motion seeking preliminary injunctive relief. A hearing was held on February 20, 1986, and in an opinion issued on July 15, 1986, the district court denied the motion.

The district court's opinion addressed three contentions raised by plaintiffs. Plaintiffs first argued that Metropolitan was precluded from auditing their records by O.R.C. Sec. 3719.13, which provides that:

Prescriptions, orders, and records, required by Chapter 3719, of the Revised Code, and stocks of dangerous drugs and controlled substances, shall be open for inspection only to federal, state, county, and municipal officers, and employees of the state board of pharmacy whose duty it is to enforce the laws of this state or of the United States relating to controlled substances.... No person having knowledge of any such prescription, order, or record shall divulge such knowledge, except in connection with a prosecution or proceeding in court or before a licensing or registration board or officer, to which prosecution or proceeding the person to whom such prescriptions, orders, or records relate is a party.

Ohio Rev.Code Ann. Sec. 3719.13 (Baldwin Supp.1986). Plaintiffs maintained that this statute should be construed broadly to preclude audits of their drug purchases and prescription records. The court rejected this argument, noting that each participating patient in the program signed the Universal Claim Form that allowed Metropolitan access to certain information. The court stated that:

This claim form includes information regarding the cardholder and recipient's name, the pharmacy name, the prescription numbers, the national drug code numbers for drugs provided and the quantity of drugs provided. Plaintiffs have failed to show that any prescription information is sought by the Defendant in its audits that has not already been revealed by the Universal Claim Forms. Furthermore, the Court can find no basis for construing the statute to protect a pharmacy's purchasing records--the administrative regulations interpreting the statutes apply the disclosure limits only to dispensing (prescription) information.... Plaintiffs have failed to show that the material Defendant has sought in its audits are [sic] of the type protected by the statute....

App. 27 (emphasis in...