Pharmaceutical Care Mgnt. v. District of Columbia

• Decision Date: 19 March 2009
• Docket Number: Civil Action No. 04-1082 (RMU).
• Parties: PHARMACEUTICAL CARE MANAGEMENT ASSOCIATION, Plaintiff, v. DISTRICT OF COLUMBIA et al., Defendants.
• Court: U.S. District Court — District of Columbia

605 F.Supp.2d 77

PHARMACEUTICAL CARE MANAGEMENT ASSOCIATION, Plaintiff, v. DISTRICT OF COLUMBIA et al., Defendants.

Civil Action No. 04-1082 (RMU).

United States District Court, District of Columbia.

March 19, 2009.

Linda Sue Stein, Martin D. Schneiderman, Paul J. Ondrasik, Steptoe & Johnson, LLP, Washington, DC, for Plaintiffs.

Andrew J. Saindon, Office of Attorney General, Washington, DC, for Defendant.

MEMORANDUM OPINION

GRANTING IN PART THE PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING IN PART THE DEFENDANTS' MOTION FOR PARTIAL SUMMARY JUDGMENT

RICARDO M. URBINA, District Judge.

I. INTRODUCTION

This case comes before the court on the parties' motions for summary judgment. The plaintiff, Pharmaceutical Care Management Association ("PCMA"), is a national trade association representing pharmaceutical benefit management companies ("PBMs"). The plaintiff argues that the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001 et seq., preempts Title II of the District of Columbia's Access Rx Act of 2004 ("Access Rx Act" or "the Act"), D.C.Code §§ 48-831 et seq. The defendants, on the other hand, contend that ERISA does not preempt the Access Rx Act because the Act does not regulate ERISA plans and has no connection with ERISA. As discussed in more detail below, by regulating the relationship between PBMs and ERISA plans, the Act impermissibly intrudes upon a field exclusively reserved for federal regulation.

II. BACKGROUND

A. Factual History

At issue in this case is the District of Columbia's attempt to regulate the relationship between PBMs and "covered entities" such as ERISA health plans, government agencies and insurance companies. Compl. ¶ 14. PBMs process claims for pharmaceutical drug benefits for over 200 million Americans. Id. As time passed, PBMs began to expand their services to include, inter alia, (1) establishing networks of pharmacies that provide discounted drugs to plan members; (2) negotiating rebate arrangements with drug manufacturers; (3) reviewing drug utilization to decrease prices and enhance safety; (4) creating therapeutic drug interchange programs; and (5) establishing generic drug substitution programs. Id. ¶ 15.

In response to rising prescription drug prices, the D.C. Council unanimously passed the Access Rx Act, which, in the Council's estimation, would lower the cost of prescription drugs. Mem. Op. (Dec. 21, 2004) at 2. On May 18, 2004, the Access Rx Act took effect. Compl. ¶ 1. Title II of the Act, the only portion that the plaintiff challenges, regulates PBMs by imposing fiduciary duties on them, as well as by requiring disclosure of certain financial information. Id. ¶ 3; Mem. Op. (Dec. 21, 2004) at 2. Specifically, Title II dictates that PBMs owe a fiduciary duty to "covered entities," which they must discharge in accordance with all applicable laws. D.C. CODE § 48-832.01(a). Title II also imposes several disclosure requirements on PBMs. For instance, PBMs must disclose to their customers "information showing the quantity of drugs purchased by the covered entity and the net cost to the covered entity for the drugs. This information shall include all rebates, discounts and other similar payments." Id. § 48-832.01(c)(1)(A). Furthermore, upon request PBMs must disclose to covered entities "all financial terms and arrangements for remuneration of any kind that apply between the [PBM] and prescription drug manufacturer or labeler, including, without limitation, formulary management and drug substitution programs, educational support, claims processing and data sales fees." Id. § 48-832.01(c)(1)(B).

The Act also provides that when dispensing prescription drugs, a PBM may substitute a lower-priced therapeutically equivalent drug for a higher-priced drug. Id. § 48-832.01(d). But, "[i]f the substitute drug costs more than the prescribed drug, the [PBM] shall disclose to the covered entity the cost of both drugs and any benefit or payment directly or indirectly accruing to the [PBM] as a result of the substitution." Id. § 48-832.01(d)(2). The PBM must then "transfer in full to the covered entity any benefit or payment received . . . as a result of a prescription drug substitution." Id. § 48-832.01(d)(3). Finally, the statute only applies to contracts between PBMs and covered entities "entered into in the District of Columbia or by a covered entity in the District of Columbia." Id. § 48-832.02.

B. Procedural History

Because Title II imposes fiduciary duties and disclosure requirements on PBMs, as described supra, the plaintiff moved this court to enjoin the defendants from enforcing the Access Rx Act. Pl.'s Mot. for Prelim. Inj. The court granted preliminary injunctive relief to the plaintiff on December 21, 2004. See generally Mem. Op. (Dec. 21, 2004). The defendants appealed the court's decision to the D.C. Circuit, which remanded the case for this court to determine in the first instance whether the First Circuit's ruling in PCMA v. Rowe, 429 F.3d 294 (1st Cir. 2005) precluded the plaintiff from further challenging the validity of the Act under principles of collateral estoppel. PCMA v. District of Columbia, 522 F.3d 443 (D.C.Cir.2008). Accordingly, the court examines the Rowe decision and its effect on this case.

1. The First Circuit's Decision in Rowe

The First Circuit in Rowe addressed the propriety of a statute in Maine that required PBMs to act as fiduciaries for certain covered entities¹ by "disclos[ing] conflicts of interest, disgorg[ing] profits from self-dealing, and disclos[ing] to the covered entities certain of their financial arrangements with third parties." Rowe, 429 F.3d at 299. To determine whether ERISA preempted the state statute, the court first analyzed the "high stakes" issue of whether PBMs are fiduciaries under ERISA. Id. at 300. The court explained that the state statute's "provisions requiring disclosure of conflicts of interest and payments from drug manufacturers are administrative provisions involving no discretion on the part of the PBMs, . . . are purely ministerial and simply not sufficient . . . to find that the PBMs are acting as fiduciaries under ERISA." Id. at 301. With that hurdle behind it, the court applied a two-part test in examining whether ERISA preempts the state statute. The test first probes whether the statute has a "connection with" an employment benefit plan and then asks whether the statute "references" such a plan. Id. at 302 (quoting Cal. Div. of Labor Standards Enforcement v. Dillingham Constr., N.A., Inc., 519 U.S. 316, 324, 117 S.Ct. 832, 136 L.Ed.2d 791 (1997)).

Turning to the first prong, the court acknowledged that a principal concern under the "connection with" prong is "to avoid a multiplicity of regulation in order to permit the nationally uniform administration of employee benefit plans." Id. (quoting N.Y. State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 657, 115 S.Ct. 1671, 131 L.Ed.2d 695 (1995)). With that in mind, the court observed that the state statute left plan administrators with a "free hand" to "administer or structure their plans in Maine precisely as they would elsewhere." Id. at 303. The court also noted that "[a]lthough the ERISA plans can re-evaluate their working relationships with the PBMs if they wish in light of the [requirements of the state statute], nothing in the [statute] compels them to do so." Id. Therefore, the court concluded that the statute did not have an "impermissible `connection with' ERISA plans." Id.

Moving to the second part of the test, the court explained that an impermissible "reference to" an ERISA plan occurs "[w]here a State's law acts immediately and exclusively upon ERISA plans . . . or where the existence of ERISA plans is essential to the law's operation." Id. (quoting Dillingham, 519 U.S. at 325, 117 S.Ct. 832). The court easily determined that the Maine statute did not reference an ERISA plan under this standard because the statute "applies with respect to a broad spectrum of health care institutions and health benefit providers, including but not limited to ERISA plans." Id. at 304. In addition, due to the statute's broad application, the court reasoned that "[i]f the reference to employee health plans was deleted from the text of the [statute], [it] would still be operable." Id.

Finally, the court addressed a separate ground for ERISA preemption: whether the state statute provides an alternative enforcement mechanism for ERISA claims. Id. at 305 (citing Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 111 S.Ct. 478, 112 L.Ed.2d 474 (1990)). Because PBMs are not fiduciaries under ERISA, the court reasoned that the state statute has "no real bearing on the intricate web of relationships among the principal players in the ERISA scenario." Id. Accordingly, the court held that the statute did "not provide an alternative enforcement mechanism to ERISA's civil enforcement scheme and [was] not preempted." Id.

2. Rowe's Effect on the Plaintiff's Claims and Subsequent Proceedings

In light of the First Circuit's ruling addressing identical issues pertaining to an almost identical statute,² this court determined that Rowe precluded the plaintiff from litigating the validity of the Act, noting that the two cases "are closely aligned in time and subject manner." 477 F.Supp.2d at 94 (quoting Montana v. United States, 440 U.S. 147, 163, 99 S.Ct. 970, 59 L.Ed.2d 210 (1979)). On appeal, the Circuit disagreed, explaining that applying collateral estoppel would "freeze the development of the law in an area of substantial public interest." PCMA, 522 F.3d at 447. The Circuit also noted that practical considerations counsel against the application of collateral estoppel because eight months after this court issued its decision on collateral estoppel, the Department of Labor ("DOL") proposed a rule implementing ERISA that would require PBMs to "disclose certain financial information to the plans they serve." Id. (cit...