Harris Cnty. v. Eli Lilly & Co.
| Decision Date | 29 September 2020 |
| Docket Number | CIVIL ACTION H-19-4994 |
| Parties | HARRIS COUNTY, TEXAS, Plaintiff, v. ELI LILLY AND COMPANY et al., Defendants. |
| Court | U.S. District Court — Southern District of Texas |
Pending before the court are two motions to dismiss.1 Dkts. 40, 41. Defendants Eli Lilly and Company, Novo Nordisk Inc., and Sanofi-Aventis U.S. LLC (collectively, the "Manufacturer Defendants") moved separately from the pharmacy benefit manager defendants (collectively, the "PBM Defendants"). Id. Plaintiff Harris County responded jointly to both motions. Dkt. 48. The defendants replied. Dkts. 61, 62. Having considered the motions, responses, replies, and applicable law, the court is of the opinion that both motions (Dkts. 40, 41) should be GRANTED in PART and DENIED in PART.
Plaintiff Harris County ("Harris County") is a "body corporate and politic under the laws of the State of Texas."2 Dkt. 20 at 7. The government of Harris County serves nearly five million residents. Id. Harris County also provides health benefits to approximately 38,000 employees, retirees, and their dependents ("Beneficiaries"). Id. One of the benefits Harris County offersBeneficiaries is subsidizing their purchases of necessary pharmaceutical drugs, including diabetes medications like insulin. Id. Harris County also pays for diabetes medications for inmates in its county jails. Id.
The Manufacturer Defendants manufacture, promote, and distribute pharmaceutical drugs, including diabetes medications and the insulins at issue in this case. Id. at 8-11. Together, the Manufacturer Defendants "make 99% of the insulins in the market today." Id. at 27. Specifically, Eli Lilly manufactures, promotes, and sells Humulin N, Humulin R, Humalog, Trulicity, and Basaglar. Id. at 8. Sanofi-Aventis U.S. LLC manufactures, promotes, and sells Lantus, Toujeo, Soliqua, and Apidra. Id. at 9. Novo Nordisk Inc. manufactures, promotes, and sells Novolin R, NovolinN, Novolog, Levemir, Tresiba, Victoza, and Ozempic. Id. at 10.
The PBM Defendants are named in their capacities as both pharmacy benefit managers and mail-order pharmacies which "dispense[] diabetes medications, including diabetes medications at issue in this [case] . . . through [their mail-order] pharmacies." Id. at 15, 18, 20-21. The PBM Defendants "own [mail-order] and specialty pharmacies, which purchase and take possession of prescription drugs, including those at issue here, and directly supply those drugs to patients by mail." Id. at 42. The PBM Defendants administer health plans' prescription drug programs by "develop[ing] the health plan's drug formulary, process[ing] claims, creat[ing] a network of retail pharmacies, [and] set[ting] the prices that the health plan will pay for prescription drugs . . . ." Id. at 41-42. The PBM Defendants also contract with manufacturers to "negotiate rebates, fees and other concessions with the manufacturers that are paid back to the PBM[s]." Id. It is these rebates that are at the center of this case.
According to Harris County, the prices of specific insulins have drastically increased over the past fifteen years, and that increase cannot be accounted for primarily because of inflation orother market forces. Id. at 27-39. The production costs for insulin have decreased, and "the insulins at issue in this case have either been available in the same form" for twenty to thirty years or are "biologically equivalent" to insulins which were available twenty to thirty years ago. Id. at 28. For example, from 2007 to 2018, Novo Nordisk raised the price of Novolog by over $500. Id. at 34. Since 2008, Eli Lilly has increased the price for a package of Humalog pens by over $400. Id. at 32. As a result of the alleged price increases, "as many as one in four people with diabetes are now skimping on or skipping lifesaving doses" of insulin, and health plans are spending "tens of billions of dollars" on diabetes medications. Id. at 31, 36. From 2013 to 2018, Harris County claims that it spent over $27,000,000 on the at-issue diabetes medications. Dkt. 20-1.
Harris County contends that these price increases are the result of purposeful anticompetitive behavior; it alleges that it has been fraudulently overcharged and has overpaid for the at-issue medications because the PBM Defendants and the Manufacturer Defendants conspired to artificially raise the prices of diabetes medications in what Harris County calls the "Insulin Pricing Scheme." Dkt. 20 at 48. In the alleged Insulin Pricing Scheme, "[the] Manufacturer Defendants have agreed with each other and [the] PBM Defendants to raise their publicly reported prices . . . but largely maintain the net price [of each drug] by paying a significant portion of th[e] price back to [the] PBM Defendants" in the form of rebates and fees. Id. at 50. The "Manufacturer Defendants have exponentially raised the reported prices of insulin products in near perfect unison," but their net price has not increased because the extra money allegedly goes to the PBM Defendants as rebates. Id. at 39. In exchange for the rebates, the PBM Defendants provide preferred placement at the highest inflated price of the Manufacturer Defendants' drugs on drug formulary lists. Id. at 5. The Manufacturer Defendants could potentially lose billions of dollars if their drugs are not included on formulary lists because the PBM Defendants have a dominantmarket share and essentially act as gatekeepers in determining "which drugs insurance or health plans will pay for and at what rate." Id. at 49. In short, Harris County alleges that the Manufacturer Defendants have agreed with the PBM Defendants to purposefully inflate the reported prices of diabetes medications while refunding a large portion of the price of each unit sold back to the PBMs in the form of rebates and administrative fees in a quid pro quo to purchase preferred formulary position. Id. at 51. Additionally, according to Harris County, the gap between the reported price and the net price of the at-issue medications creates a "massive slush fund" which the PBM Defendants then use to "extract hidden profits" from others, including health plans like Harris County's. Id. at 50.
The PBM Defendants allegedly benefit from the Insulin Pricing Scheme in several different ways. Id. at 56. They allegedly keep "significant portions of the payments made by [the] Manufacturer Defendants" to the PBM Defendants to buy preferred placement on formulary lists in what Harris County calls the "Secret Payment Game." Id. The PBM Defendants also allegedly charge health plans like Harris County's for diabetes medications based on the inflated reported prices. Id. The PBM Defendants then separately negotiate with pharmacies to reimburse them at a lower price than the inflated reported prices which Harris County allegedly pays for the same medication. Id. Then the PBM Defendants allegedly pocket the difference between the inflated prices Harris County pays for diabetes medications and the lower prices at which the PBM Defendants reimburse pharmacies for the same medications, which Harris County has labeled the "Pharmacy Spread." Id. Additionally, the PBM Defendants allegedly use the inflated prices of diabetes medications to increase their own profits on diabetes medications they sell through their own mail-order pharmacies. Id.
Harris County negotiated contract provisions in contracts with the PBM Defendants which required the PBM Defendants to pay them a portion of the rebates on the at-issue medications, but then the PBM Defendants allegedly relabeled the rebates with vague terms like "administrative fees, volume discounts, service fees, [and] price or margin guarantees" so that they could keep more of the rebate money for themselves. Id. at 57. For example, Express Scripts allegedly keeps up to thirteen times more in "administrative fees" than it pays to health plans as part of the rebate system. Id. at 58.
According to Harris County, the PBM Defendants' alleged behavior is particularly troubling because they allegedly misrepresented to Harris County that they would use their market power and expertise to negotiate with the Manufacturer Defendants to save Harris County money on diabetes medications. Id. at 61. They also claimed that they were giving rebates to health plans like Harris County's in a transparent payment structure when they were instead allegedly keeping most of those rebates. Id. at 65. For example, in an interview with CBS News in 2017, the CEO of Express Scripts said that their rebate and payment structures are transparent and that their clients know precisely how rebates from the Manufacturer Defendants are distributed, which Harris County claims is untrue. Id. at 65. The PBM Defendants also claimed that they chose drugs for formulary placement based primarily on their health and safety—not on the amounts of rebates they received from the Manufacturer Defendants. Id. at 61. Harris County alleges that the PBM Defendants made these misrepresentations specifically so that Harris County would rely on the misrepresentations and pay the inflated reported prices for the at-issue medications. Id.
Harris County filed suit alleging multiple theories of liability.3 Both the Manufacturer Defendants and the PBM Defendants urge the court to dismiss Counts One, Two, Three, and Four of Harris County's complaint, which allege violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968 ("RICO"). Dkts. 40, 41. Both groups of defendants also ask the court to dismiss Harris County's state law claims in Counts Seven, Eight, Nine, Ten, andEleven.4 Dkts. 40, 41.
"Federal Rule of Civil Procedure 8(a)(2) requires only 'a short and plain statement of the claim showing that the pleader is entitled to relief.'" Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955 (2007). At the pleading stage, the court must "accept all...
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