In re Express Scripts/Anthem Erisa Litig.

Decision Date05 January 2018
Docket Number16 Civ. 3399 (ER)
Citation285 F.Supp.3d 655
CourtU.S. District Court — Southern District of New York

Ramos, D.J.:

This litigation arises out of the relationship between Anthem, Inc. ("Anthem"), one of the nation's largest health benefits companies, and Express Scripts, Inc. ("ESI"), a pharmacy benefits manager ("PBM"), and the impact of their transactions on Plaintiffs, a proposed class of certain Anthem health plans and individual subscribers to Anthem health plans who receive prescription drug benefits through ESI. Plaintiffs assert seventeen causes of action against Anthem and ESI ("Defendants"), including causes of action under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq., the Racketeering Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., and the Patient Protection and Affordable Care Act ("ACA") anti-discrimination provision, 42 U.S.C. § 18116.

On April 24, 2017, both Anthem and ESI moved to dismiss the Plaintiffs' Second Amended Complaint ("SAC") (Doc. 78). Docs. 93, 96. For the reasons stated below, both motions are GRANTED.

A. Anthem and ESI's 2009 PBM Agreement

Anthem is health benefits company that provides health care insurance and insurance administration programs. SAC ¶ 3. Anthem offers health care plans sponsored through an employer (Employee Welfare Benefit Plans regulated under ERISA) or offered directly from Anthem through, for example, the ACA insurance exchanges. Id. Anthem also provides "Administrative Services Only" ("ASO") plans to self-funded employers. Id. In an ASO plan, the health plan reimburses the health care costs of the plan beneficiaries, but pays Anthem a premium to administer the plan (and to negotiate on its behalf for lower rates with health care providers). Id. ¶ 9. ASO plans account for sixty percent of Anthem's business. Id. ¶ 10.

To keep costs of prescription medications manageable, insurers like Anthem frequently use in-house or third-party PBMs to administer prescription medication programs for health plans. Id. ¶¶ 108, 121 ("A critical key to success for health insurers is to provide effective and affordable pharmacy/drug related services and administration for its members ....") (quoting Complaint (Doc. 1), at ¶ 11, Anthem v. Express Scripts, Inc., No. 16 Civ. 2048 (S.D.N.Y. 2016) ). PBMs generally contract with pharmacies, negotiate discounts and rebates with drug manufacturers, review drug utilization, manage drug formularies, and process and pay prescription drug claims. Id.

ESI is the largest PBM operating in the United States. Id. ¶ 109. Over 97% of the pharmacies in the country are in an ESI network. Id. ESI processes nearly 1.4 billion prescriptions each year. Id. ESI provides traditional PBM services and also operates mail-order delivery services for prescription drugs. Id. ¶ 108.

On December 1, 2009, Anthem and ESI entered into a ten year agreement (the "PBM Agreement"). Id. ¶ 103. Under the PBM Agreement, ESI either processes claims of Anthem participants who fill prescriptions at retail pharmacies or fills the prescriptions of Anthem participants directly through its mail-order pharmacies. Id. ¶ 112. ESI also provides administrative services relating to prescription drugs for Anthem, Anthem's health plans, and Anthem participants. Id. ¶ 122.

On the same day, Anthem and ESI entered into an agreement by which Anthem sold three PBM companies, NextRx, LLC, NextRx, Inc., and NextRx Services (collectively, the "NextRx companies") to ESI (the "NextRx Agreement"). Id. ¶ 125.2 The execution of the PBM Agreement was a condition precedent to the signing of the NextRx Agreement. Id. ¶ 126. According to ESI, the purchase price for the NextRx entities was directly tied to the price Anthem would pay for prescription drugs over the course of the PBM Agreement. Id. ¶ 127. Specifically, ESI offered to pay $500 million to Anthem for the NextRx companies in exchange for providing prescription medications to Anthem subscribers at a lower price throughout the ten year PBM Agreement. Id. Conversely, ESI offered to pay a much greater amount for the NextRx companies—$4,675 billion—but allegedly made clear that prescription medication pricing would be higher over the life of the Agreement. Id. ¶ 128.3 Ultimately, Anthem opted for the greater upfront payment of $4,675 billion. Id.

B. Key Terms of the 2009 PBM Agreement

Plaintiffs allege that the PBM Agreement allows ESI to exclusively set prescription drug pricing, subject to certain terms and limitations. Id. ¶ 133. According to Plaintiffs, the PBM Agreement gives ESI discretion over pricing through several different mechanisms:

First, ESI negotiates for rebates and discounts from drug manufacturers. Id. ¶ 116. According to the PBM Agreement, ESI may "contract[ ] for its own account with manufacturers to obtain formulary rebates attributable to the utilization of certain brand medications and supplies by PBM client members."4 Id. ; Declaration of Joe R. Whatley, Jr. in Opposition to Motions to Dismiss (Doc. 110), Ex. C ("PBM Agreement") at Ex. N.

Second, ESI controls the classification of prescription drugs as "brand" or "generic." Id. ¶ 117. Under the PBM Agreement, the name of a drug (e.g., whether it is marketed under a "brand" name or simply the chemical or "generic" name) "does not necessarily mean that the product is recognized as a generic for adjudication, pricing, or copay purposes." PBM Agreement Ex. N. Instead, "ESI distinguishes brands and generics through a proprietary algorithm ("BGA") that ... uses [a variety of] data elements in a hierarchical process to categorize the products as brand or generic." Id. Plaintiffs allege that this impacts pricing because brand medications are generally more expensive than generic ones. SAC ¶ 117.

Third, ESI determines the maximum allowable cost (the "MAC") for each of the prescription medications it provides to Anthem participants. Id. ¶ 118. ESI "maintains a MAC List of drug products identified as requiring pricing management.... ESI also maintains correlative MAC price lists based on current price reference data provided by FDB [First DataBank] or any other nationally recognized pricing source, market pricing and availability information from generic manufacturers and online research of national wholesale drug company files." Id. ; PBM Agreement Ex. N.

Fourth, Plaintiffs claim that ESI establishes the exclusionary formulary list, which excludes certain drugs from ESI's formulary. Id. ¶ 119.5

Fifth, and crucially, Plaintiffs claim that ESI's interpretation of Section 5.6 of the PBM Agreement, if correct, would give ESI additional control over pricing. Id. Section 5.6, titled "Periodic Pricing Review," provides that:

[Anthem] or a third party consultant retained by [Anthem] will conduct a market analysis every [redacted] during the Term of this Agreement to ensure that [Anthem] is receiving competitive benchmark pricing. In the event [Anthem] or its third party consultant determines that such pricing terms are not competitive, [Anthem] shall have the ability to propose renegotiated pricing terms to PBM and [Anthem] and PBM agrees to negotiate in good faith over the proposed new pricing terms. Notwithstanding the foregoing, to be effective any new pricing terms must be agreed to by PBM in writing.

PBM Agreement ¶ 5.6. Plaintiffs allege that the term "competitive benchmark pricing" is "atypical" and "not a standard term within the PBM industry." SAC ¶¶ 18, 142. Plaintiffs point to ESI's 2015 Annual Report, in which it states that it typically calculates prescription medication pricing based on the "average wholesale price" ("AWP"), id. ¶ 139, and ESI's PBM arrangement with the United States Department of Defense, which incorporates AWP as a pricing benchmark, id. ¶ 140. Section 5.6, in contrast, does not reference AWP or alternate pricing benchmarks, like MAC or Wholesale Acquisition Cost ("WAC"). Id. ¶ 142.

Plaintiffs have alleged that ESI used the power it had under these provisions of the PBM Agreement, especially the lack of reference to a well-known pricing benchmark in Section 5.6, to charge Plaintiffs excessive prices for prescription medications. Id. ¶ 133.

C. Negotiations After 2009

In 2012, Anthem and ESI engaged in negotiations over pricing and signed an amended PBM Agreement. Id. ¶¶ 12 n.3, 144.6

In preparation for the next pricing review, in late 2014 Anthem engaged third-party Health Strategy, LLC to conduct a market analysis to ensure that the pricing under the PBM Agreement remained competitive. SAC ¶ 145. In March 2015, Health Strategy reported to Anthem its conclusion that prescription drug pricing exceeded "competitive benchmark pricing" by more than $3 billion annually.7 Id. ¶ 146. Anthem estimated that pricing under the PBM Agreement would therefore cost $13 billion more than "competitive benchmark pricing" over the remaining life of the Agreement, and would cost $1.8 billion more during the post-termination wind down period provided for in the Agreement. Id. ¶ 147.

Thereafter, on March 18, 2015, Anthem informed ESI that it had determined that current prescription drug pricing was not consistent with "competitive benchmark pricing." Id. ¶ 165. Anthem provided ESI with different pricing terms that it believed would be consistent with competitive prices. Id. ESI neither timely disputed Anthem's proposed pricing terms, nor did it make a counter-proposal. Id. ¶ 166. On April 1, 2015, Anthem provided ESI with a formal notice of breach as required under the PBM Agreement. Id. ¶ 167. In June 2015, ESI contacted Anthem about the dispute, but refused to negotiate over Anthem's proposed pricing terms. Id. ¶ 170.

Anthem and ESI representatives met on September 15, 2015, but ESI continued to refuse to negotiate over Anthem's proposed pricing terms. Id. ¶ 171. Over the next few months, Anthem and ESI continued to communicate, but did not...

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