Merck-Medco Managed Care, Inc. v. Rite Aid Corp., Civ. L-96-499.

• Decision Date: 13 August 1998
• Docket Number: No. Civ. L-96-499.,Civ. L-96-499.
• Citation: 22 F.Supp.2d 447
• Parties: MERCK-MEDCO MANAGED CARE, INC. v. RITE AID CORPORATION, et al.
• Court: U.S. District Court — District of Maryland

22 F.Supp.2d 447

MERCK-MEDCO MANAGED CARE, INC. v. RITE AID CORPORATION, et al.

No. Civ. L-96-499.

United States District Court, D. Maryland.

August 13, 1998.

COPYRIGHT MATERIAL OMITTED

James P. Tallon, Andrew W. Feinberg, and Daniel D. Edelman, of New York City, and Scott Patrick Burns, and John B. Isbister, of Baltimore, MD, for plaintiff/counter-defendant Merck-Medco Managed Care, Inc.

Lewis A. Noonberg, and Leonard L. Gordon, for defendant/counter-claimant Rite Aid Corporation and defendant Eagle Managed Care Corporation.

Michael F. Brockmeyer, and Jay I. Morstein, of Baltimore, MD, for defendant Epic Pharmacy Network, Inc.

Jacob A. Stein, Glenn A. Mitchell, and David U. Fierst, of Washington, DC, for defendant Giant Food, Inc.

Ward B. Coe, III, Elise R. Davison, and Pamela M. Conover, of Baltimore, MD, for defendant NeighborCare Pharmacies, Inc.

Paul M. Sandler, and Joseph J. Coppola, of Baltimore, MD, for movant National Prescription Administrators, Inc.

MEMORANDUM

LEGG, District Judge.

This is an antitrust suit. In September, 1995, the State of Maryland awarded to the plaintiff, Merck-Medco Managed Care, Inc. ("Medco"), a contract to manage the prescription drug benefits program for State employees and retirees (the "Maryland Plan" or the "Plan"). Under the terms of the award, Medco was required to assemble an extensive statewide network of pharmacies agreeing to fill prescriptions at a steeply discounted rate.¹

The Maryland Plan was scheduled to go "live" on January 1, 1996. By mid-December, 1995, however, the State had grown concerned about Medco's ability to put together a satisfactory network in time. On December 20, 1995, the State issued an "ultimatum" to Medco, requiring Medco to submit a certified list of participating pharmacies within three days. Because Medco failed to assemble a network satisfactory to the State, the State terminated Medco's contract on December 27, 1995. Ultimately, the State rebid the contract, and awarded it to one of Medco's competitors.

The defendants own or represent approximately one-half of the retail pharmacies in Maryland.² On February 20, 1996, Medco filed the instant suit, alleging that the defendants, concerned that the Plan's deeply discounted rate would squeeze their profits, jointly agreed to sabotage the Plan by boycotting Medco's network. In its complaint, Medco claims that the group boycott restrained trade and, therefore, violated Section 1 of the Sherman Act³ (Counts 1 and 2), and the Maryland Antitrust Act⁴ (Counts 3 and 4).

Medco's complaint also advances two ancillary claims. In Count 5, filed under the Lanham Act,⁵ Medco claims that a newspaper advertisement, taken out by Rite Aid to criticize the award to Medco, was false and misleading. In Count 6 of the complaint, Medco claims that the defendants tortiously interfered with Medco's contractual relations with the State of Maryland.

In opposing the suit, the defendants denied the existence of a conspiracy, contending that the decision of each not to participate in the Maryland Plan was individual and unilateral. Rite Aid also filed a four-count, non-compulsory counterclaim challenging Medco's business practice of submitting bids that list Rite Aid as a network participant without first obtaining Rite Aid's consent.⁶

Following extensive discovery, the parties filed cross-motions for summary judgment.⁷ The Court held four hearings on the cross-motions.⁸ Having carefully considered the record and the arguments of counsel, the Court concludes that Medco's evidence does not tend to exclude the possibility of independent conduct on the part of the defendants. The evidence is, therefore, insufficient to support a reasonable inference of a conspiracy to violate the antitrust laws. Stated otherwise, a jury would be required to speculate in order to find the existence of a conspiracy among the defendants. Accordingly, by separate Order, the Court shall grant the defendants' motion for summary judgment on Medco's antitrust claims (Counts 1 through 4 of the complaint).

The Court also concludes that there is insufficient evidence to support a jury verdict on either Counts 5 and 6 of Medco's complaint, or Rite Aid's counterclaim.⁹ Accordingly, also by separate Order, the Court shall grant summary judgment on these claims and close the case.

I. Background

a. The Parties and the Industry

In 1995, four of the defendants were engaged in the retail pharmacy business, as follows:

Rite Aid, one of the largest U.S. drug store chains, operated some 180 pharmacies in Maryland, employing almost 2,700 people.

Giant owned 116 supermarkets in the Mid-Atlantic region.¹⁰ Each of Giant's 76 Maryland stores included a pharmacy section.

NeighborCare operated 20 pharmacies, all of which were in Maryland. NeighborCare does not sell "front end" goods, such as beauty aids, tobacco products, magazines and groceries. Instead, NeighborCare focuses on sales of pharmaceuticals, and most of its facilities are located within hospitals or medical centers.

EPIC is an umbrella organization that represents the interests of independently owned, or "non-chain," retail pharmacies. One of EPIC's principal objectives is to obtain for its members some of the economies of scale (e.g. group buying and advertising) enjoyed by chain drug stores. In 1995, EPIC's membership included over 200 independent pharmacies in Maryland. Some of these pharmacies sell "front end" goods, while others sell only pharmaceuticals.

The fifth defendant, Eagle, is a wholly owned subsidiary of Rite Aid. Eagle is a Pharmacy Benefits Manager ("PBM") and, as such, competes directly with Medco. In partnership with EPIC, Eagle was an unsuccessful bidder for the Maryland contract.¹¹

The plaintiff, Medco, is a wholly owned subsidiary of international drug manufacturer Merck & Co., Inc. Medco is the second largest PBM in the United States.

PBMs were created in response to the rising cost of pharmaceutical products. Before PBMs, drug dispensation tended to be relatively disorganized from an economic standpoint. Employers provided pharmaceutical benefits to their employees through insurance indemnity plans. A covered employee would take his prescription to a local retail pharmacy, pay the pharmacy directly, and submit the receipt to the insurance company. The insurer would reimburse the employee for a percentage of the drug's retail price.¹² According to industry analysts, this system was decentralized, inefficient, and resulted in high drug prices. Plaintiff's Exh. 2, Expert Report of Daniel S. Levy ("Levy Report"), at 3.

PBMs sought to address these problems by administering pools of claims. A PBM such as Medco will contract with a "plan sponsor," usually a large employer or a group. For a fee, the PBM creates and manages a drug benefits program for the sponsor's employees or members. In a variety of ways, PBMs can reduce the sponsor's costs.

For example, a PBM will put together a network of participating pharmacies. In exchange for the privilege of being included in the network, a pharmacy must agree to dispense drugs at a discount, often a substantial one. For each prescription filled, the PBM reimburses the pharmacy under a formula based on the drug's average wholesale price ("AWP") less a percentage, plus a dispensing fee. In connection with the Maryland Plan, for instance, network pharmacies were to be reimbursed at a rate of AWP minus 15% plus $2.00.

PBMs can also reduce claims processing costs. For each prescription filled, PBMs handle the "paperwork" through a centralized computer system, which enables PBMs to maintain detailed records for each beneficiary, monitor each patient's drug usage, and prevent patients from taking ineffective or incompatible drugs.¹³

Finally, PBMs can also lower costs through the use of "formularies," or lists of preferred or recommended drugs. Drug manufacturers competing for market share have a strong interest in seeing their products included in these formularies. The manufacturers may offer significant discounts for the privilege of being listed. General Accounting Office, Pharmacy Benefit Managers: Early Results on Ventures with Drug Manufacturers, 1995 WL 788179 (GAO Report) at 7.

As more and more companies have entered the PBM business, competition among them to sign up plan sponsors has increased. With respect to price, the PBM that can offer the greatest discount gains a decided edge in winning contracts. Over time, PBMs have insisted on ever steeper discounts, often presenting pharmacies with difficult economic choices whether to join a network or not.

Many considerations will influence a pharmacy's decision. These include the size of the discount, the number of "lives" covered by a particular plan, the pharmacy's market share in the region, the PBM's reputation for prompt payment, and whether a particular network is "open" or "closed."¹⁴ "Open" networks permit any pharmacy to enter or exit at any time. By contrast, in a "closed" network, the membership is fixed at a certain date and other pharmacies may not join afterward.¹⁵

Pharmacies are more willing to accept a steep discount in order to gain entrance into a closed network, especially when the network is small, because the discount is likely to be offset by an increase in customer volume. In open networks, by contrast, the prospect of increased volume is more difficult to evaluate because newcomer pharmacies may enter the plan after it becomes operational, diluting market share. See Deposition of Ann Cooper at 75.¹⁶

The relationship between PBMs and retail pharmacists has been strained from the beginning. Around the country, pharmacists complain that PBMs have done little more than add another expensive link to the distribution chain. PBMs are also slow to pay, have eroded their profit margins, and burdened them with more paperwork, pharmacies argue. Third-party Plans Flourish, Chain Drug Review, Mar. 14, 1994, 1994 WL 12763972, at 2.

As an...