Montana v. Abbot Laboratories

• Decision Date: 11 June 2003
• Docket Number: CIV.A. No. 02-12084-PBS.,CIV.A. No. 02-12085-PBS.,CIV.A. No. 02-12086-PBS.,CIV.A. No. 03-10069-PBS.
• Citation: 266 F.Supp.2d 250
• Parties: State of MONTANA, Plaintiff, v. ABBOT LABORATORIES, et al., Defendants. State of Nevada, Plaintiff, v. Abbot Laboratories, et al., Defendants. State of Nevada, Plaintiff, v. American Home Products, et al., Defendants. State of Minnesota, Plaintiff, v. Pharmacia Corporation, Defendant.
• Court: U.S. District Court — District of Massachusetts

Page 250

266 F.Supp.2d 250

State of MONTANA, Plaintiff, v. ABBOT LABORATORIES, et al., Defendants.

State of Nevada, Plaintiff, v. Abbot Laboratories, et al., Defendants.

State of Nevada, Plaintiff, v. American Home Products, et al., Defendants.

State of Minnesota, Plaintiff, v. Pharmacia Corporation, Defendant.

CIV.A. No. 02-12084-PBS.

CIV.A. No. 02-12085-PBS.

CIV.A. No. 02-12086-PBS.

CIV.A. No. 03-10069-PBS.

United States District Court, D. Massachusetts.

June 11, 2003.

Frankie Sue Del Papa, Attorney General's Office, Carson City, NV, Michael J. Vanselow, Minnesota Attorney Generals Office, St. Paul, MN, for plaintiffs.

John C. Dodds, Morgan, Lewis & Boskins, LLP, Philadelphia, PA, James Lloyd Volling, Faegre & Benson, Minneapolis, MN, for defendants.

MEMORANDUM AND ORDER

SARIS, District Judge.

INTRODUCTION

Plaintiffs Minnesota, Montana, and Nevada bring these actions against various pharmaceutical companies, alleging the companies violated state law by fraudulently misrepresenting prescription-drug prices. Defendants have removed the suits from state court on the ground that plaintiffs' claims raise federal questions, because they turn on the meaning of "average wholesale price" in the federal Medicare statute, 42 U.S.C. § 1395u(o), or on the meaning of "best price" in Medicaidrebate contracts between the federal government and each defendant.¹ Plaintiffs argue that any federal issues are not substantial enough to confer jurisdiction, and seek remand to state court. After hearing, the Court ORDERS that State of Minnesota v. Pharmacia and State of Nevada vs. Abbot Laboratories, et al. be remanded to their respective state courts and that State of Montana vs. Abbot Laboratories, et al. and State of Nevada vs. American Home Products Corp., et al. remain in federal court.

BACKGROUND

This background section draws on the allegations in the complaints; defendants hotly dispute many of these allegations.

I. Medicare

Medicare is the federal insurance program that pays for the medical care of persons 65 and older. See 42 U.S.C. §§ 1395-1395ggg (2003). The Medicare program is administered by the Center for Medicare and Medicaid Services ("CMS"), which is under the authority of the Secretary of Health and Human Services. Medicare Part B establishes an insurance program to pay for physicians' services. See id. §§ 1395j-1395w. Medicare generally does not cover the cost of prescription drugs that a Medicare beneficiary selfadministers (e.g., by swallowing the drug). It does cover some outpatient drugs, including ones that are administered by a doctor, and certain oral anti-cancer drugs. Approximately 450 drugs are covered by Medicare Part B.

Through its Medicare Part B program, the federal government reimburses health-care providers like physicians for up to 80 percent of the allowable cost of certain prescription drugs that they administer directly to platients. The remaining 20 percent is paid by the Medicare Part B beneficiary, as a co-payment. The drug-reimbursement rates are based on "the lower of the actual charge on the Medicare claim for benefits or 95 percent of the national average wholesale price ["AWP"] of the drug or biological." 42 C.F.R. § 405.517(b) (2003). See also 42 U.S.C. § 1395u(o) ("[T]he amount payable for the drug or biological is equal to 95 percent of the average wholesale price.").

In setting reimbursement rates, the Medicare program uses the AWPs generated by the pharmaceutical industry. There are no regulations describing how AWPs are to be calculated, nor any regulatory process for approving AWPs. Pharmaceutical companies do not report directly to the federal government, but instead send their pricing information to independent publishing companies that compile the data and publish the AWPs in trade publications, which are then used by the government and private health plans.² The publishing companies do not independently review the figures for accuracy. The figures are not filed with the CMS.

Minnesota, Montana, and Nevada all allege that defendant pharmaceutical companies overstate the AWPs of many drugs in the data they provide to the trade publications. This overstatement in AWP reporting creates a "spread" between the actual cost of a drug to a health-care provider, and the reimbursement paid to the provider by the federal government. It also inflates the co-payments made by consumers; indeed, in some instances the co-payment alone exceeds the cost of the drug to the provider. Defendants actively market this spread to providers, who are encouraged to buy drugs from defendants at highly discounted prices and urged to keep the reimbursement and co-payment spreads for themselves. The pharmaceutical companies benefit through higher sales and larger market share.

Defendants exacerbate the AWP spread through certain marketing practices. For example, some defendants provide "free samples" to health providers, who are sometimes encouraged to bill their customers for the samples as they would any other drug. This free-sample scheme lowers the providers' overall costs while not reducing the amount they receive in reimbursements from the federal government or co-payments from consumers, which remain tied to the reported AWPs. Other fraudulent pricing practices include off-invoice pricing, rebates, and grants. All of these incentives are designed to lower the providers' net cost of purchasing the drugs—with a corresponding increase in the AWP spread.

The AWP scheme harms Medicare beneficiaries or their insurers because it artificially inflates the co-payments for drugs subject to an AWP spread, to the financial detriment of individual patients or their insurers.

II. Medicaid

The Medicaid program is a federal-state collaboration designed to provide medical care for the poor. See 42 U.S.C. §§ 1396-1396v (2003). The federal government sets certain broad standards for the program and provides funds to states that elect to participate. Each participating state determines, within the federal guidelines, its own rules for program eligibility and content of medical care; each state then administers its program, and complements the federal funding with state appropriations.

In Minnesota, Montana, and Nevada, the state Medicaid programs include coverage of certain prescription drugs and use AWP in their drug-reimbursement formulae. See, e.g., Minn.Stat. § 256B.0625, subd. 13(c) (2003) (using "average wholesale price" in formula for drug reimbursement). By overstating the AWPs for many of their drugs, defendants cause these state Medicaid programs to overpay physicians for these drugs.

Under the federal Medicaid statute, each defendant must enter into a rebate agreement with the United States Secretary of Health and Human Services. See 42 U.S.C. § 1396r-8(a)(1). Every rebate agreement requires compliance with 42 U.S.C. § 1396r-8, which (1) requires each contracting company to report its "best price" for prescription drugs, and to make rebates when necessary, and (2) requires that best price be based on the average manufacturer's price, inclusive of discounts provided to certain purchasers.

Under these rebate agreements with the federal government, each pharmaceutical manufacturer is required to file quarterly reports with CMS identifying particular pricing information by drug. Id. § 1396r-8(b)(3). The quarterly report must contain the "manufacturer's best price" for each particular drug. Id. This data is used to calculate the rebates that manufacturers must provide state Medicaid programs that purchase their drugs.

Defendants do not report the actual best prices mandated by the rebate agreements, but instead exclude from best-price calculations certain discounts and other inducements offered to physicians to increase use of certain drugs. Defendants' violation of the best-price terms in their contracts with the federal government harms the state Medicaid programs because it lowers the rebate payments to these programs.

III. Other State Prescription-Drug Programs

Minnesota, Montana, and Nevada all have other prescription-drug programs that use AWP to set reimbursement rates. Defendants' misreporting of AWPs also harms these programs.

DISCUSSION

I. Standard for Removal

A party seeking to remove a case to federal court has the burden of demonstrating the existence of federal jurisdiction. See, e.g., BIW Deceived v. Local S6, 132 F.3d 824, 831 (1st Cir.1997). Furthermore, the removal statute should be strictly construed, and any doubts about the propriety of removal should be resolved against the removal of an action. See, e.g., Danca v. Private Health Care Sys., Inc., 185 F.3d 1, 4 (1st Cir.1999).

II. Analysis of Federal-Question Jurisdiction

A state-court suit that includes at least one claim "arising under the Constitution, laws, or treaties of the United States" can be removed to federal court. See 28 U.S.C. § 1441 (2003) (allowing for removal of suits that fall within the federal district courts' original jurisdiction over federal-question cases); 28 U.S.C. § 1331 (2003) (federal-question statute). "[T]he question whether a claim `arises under' federal law must be determined by reference to the Veil-pleaded complaint.' A defense that raises a federal question is inadequate to confer federal jurisdiction." Merrell Dow Pharm. Inc. v. Thompson, 478 U.S. 804, 808, 106 S.Ct. 3229, 92 L.Ed.2d 650 (1986) (citations omitted); see also Rivet v. Regions Bank of La., 522 U.S. 470, 475, 118 S.Ct. 921, 139 L.Ed.2d 912 (1998) ("[A] case may not be removed to federal court on the basis of a federal defense ... even if the defense is anticipated in the plaintiffs complaint, and even if both parties admit that the defense is the only question truly at issue in the case.") (citation omitted).

Usually, a federal claim creates the federal question. See Merrell Dow, 478 U.S. at 808, 106 S.Ct. 3229 ("The Vast majority' of cases that come within this grant of jurisdiction are covered by Justice...