Urias v. Pcs Health Systems, Inc., 1 CA-CV 03-0717.

• Decision Date: 18 August 2005
• Docket Number: No. 1 CA-CV 03-0717.,1 CA-CV 03-0717.
• Citation: 211 Ariz. 81,118 P.3d 29
• Parties: Christina URIAS, Receiver, and Mark D. Tharp, Special Deputy Receiver of Premier Healthcare, Inc., an Arizona insurance company, in receivership, Plaintiffs-Appellants, v. PCS HEALTH SYSTEMS, INC., a Delaware corporation; ADVANCEPCS, a Delaware corporation, Defendants-Appellees.
• Court: Arizona Supreme Court

Page 29

118 P.3d 29

211 Ariz. 81

Christina URIAS, Receiver, and Mark D. Tharp, Special Deputy Receiver of Premier Healthcare, Inc., an Arizona insurance company, in receivership, Plaintiffs-Appellants, v. PCS HEALTH SYSTEMS, INC., a Delaware corporation; ADVANCEPCS, a Delaware corporation, Defendants-Appellees.

No. 1 CA-CV 03-0717.

Court of Appeals of Arizona, Division 1, Department B.

August 18, 2005.

Glover & Van Cott, P.A. By Michael R. Glover, Joyce N. Van Cott, Phoenix, Attorneys for Plaintiffs-Appellants.

Mariscal Weeks McIntyre & Friedlander, P.A. By Timothy J. Thomason, Robert C. Brown, Phoenix, Attorneys for Defendants-Appellees.

OPINION

GEMMILL, Judge.

¶ 1 Premier Healthcare, Inc., an insurer, owed money to PCS Health Systems, Inc. for prescription drug reimbursement payments. PCS had gathered volume discount rebates from drug manufacturers and was obligated to pay eighty-five percent of the rebates to Premier. After Premier was placed into receivership, PCS asserted the right under Arizona Revised Statutes ("A.R.S.") section 20-638(A) (2002) to retain the rebate funds owed to Premier as an offset against Premier's indebtedness to PCS. To decide whether this offset is authorized, we must determine if the obligations were "mutual debts" within the meaning of A.R.S. § 20-638(A). Because we decide that the obligations were "mutual debts" and may be set off in accordance with § 20-638(A), we affirm the summary judgment granted in favor of PCS against Premier.¹

FACTS AND PROCEDURAL BACKGROUND

¶ 2 Premier operated as an Arizona health care services organization offering health insurance plans to employer groups and Medicare-eligible individuals (collectively its "Members"). These plans included certain prescription drugs. To fulfill its prescription drug services obligation, Premier entered into a Managed Pharmaceutical Benefit Agreement (the "Agreement") with PCS. Under the Agreement, PCS provided services that included pharmacy management, claims processing, drug utilization review, and formulary services. The Agreement established a fee schedule for the various services provided by PCS.

¶ 3 The pharmacy management services provided by PCS included access for Premier's Members to pharmacies under contract to PCS that had agreed to perform pharmacy services in accordance with the reimbursement schedule and other "processing parameters" established by Premier. PCS agreed to process claims submitted by its network pharmacies and by Premier Members directly. The Agreement provided that the dispensing pharmacy must collect any applicable copayments or coinsurance or deductibles from the Member and that "PCS will pay the dispensing pharmacy the balance, if any, of the agreed upon reimbursement amount."

¶ 4 Section 3.2 of the Agreement established the method for reimbursement by Premier for pharmaceutical benefits provided to Premier's members:

Drug Reimbursement. When, as part of the Services, PCS reimburses Network Pharmacies or Members in connection with Benefits, Premier shall pay to PCS all amounts disbursed or to be disbursed by PCS. PCS shall establish a payment cycle for reimbursement of Network Pharmacies for Benefits provided to Members.... Following each cycle, PCS shall send to Premier via facsimile an advice specifying the charges applicable to such cycle. Premier shall wire that amount within 48 hours to the bank account designated by PCS and established for that purpose.

PCS generally did not pay claims to the pharmacies until PCS had received payment from its customers such as Premier.

¶ 5 In addition to the pharmacy management services, the Agreement required PCS to provide a "formulary service." This service included development of a drug formulary and the performance of a retrospective review of drug utilization and prescribing patterns in order to obtain rebates from drug manufacturers. Section D of the formulary services component of the Agreement provided:

Rebate Contracts. PCS will attempt to contract with certain manufacturers for volume rebate programs. Premier acknowledges that whether and to what extent manufacturers are willing to provide rebates will depend upon the Plan design adopted by Premier, and other aspects of Premier's drug benefit program, as well as PCS receiving sufficient information regarding each claim submitted to manufacturers for rebates.

¶ 6 In return for the agreement by PCS to attempt to negotiate these rebates, Premier agreed not to participate "in any other formulary or similar volume discount program during the term of the Agreement." Premier also agreed not to enter into any direct contracts with pharmaceutical manufacturers for volume discounts during the term of the Agreement or for one year from termination of the Agreement.

¶ 7 The term "rebate" was defined as "all rebates, reimbursements or other discounts received under a Manufacturer's discount program with respect to pharmaceutical products dispensed to a Member under the Plan," but was not to include "any fees or other compensation" paid by the manufacturer to PCS for its own account for administrative or other fees. PCS was required to report annually to Premier regarding the administrative fees paid to PCS by each manufacturer with respect to the pharmaceutical products dispensed to Premier's members.

¶ 8 The rebate services portion of the Agreement also provided:

On behalf of Premier, PCS will receive the Rebates paid by manufacturers to Premier. PCS will make payments of such Rebates once each calendar quarter as follows: within 60 days of the beginning of each quarter, PCS will pay to Premier all Rebates received by PCS during the prior quarter.

Along with each payment of Premier Rebates, PCS will provide a report which includes the Manufacturer's name, the number of prescriptions and/or amount of dollar purchases for each Manufacturer, and the total amount of Rebates paid by each Manufacturer.

Premier did not control the manner in which PCS negotiated and secured the rebates. Premier was given the right, however, to audit the volume discount contracts from the manufacturers from time to time at its own expense. Premier "acknowledge[d] and agree[d] that PCS will not be responsible in any manner for any failure of any Manufacturer to pay any Rebate."

¶ 9 The fee to be paid to PCS for its formulary services, including "the negotiation, collection and distribution of rebates," was fifteen percent of the rebates collected by PCS. In agreeing to this amount, Premier acknowledged that it "received and considered an estimate of the potential range of Rebates under its Plan." Premier also agreed that PCS could retain its fifteen percent fee from any rebates "collected by PCS on behalf of Premier in connection with this Agreement."

¶ 10 To summarize, the PCS network pharmacies bought pharmaceuticals from manufacturers, provided those pharmaceuticals to Premier Members, and submitted claims at intervals to PCS, which, in turn, invoiced Premier. Premier paid PCS "within 48 hours" and PCS then paid its network pharmacies. PCS gathered information regarding the dollar amount or number of prescriptions attributable to the purchase of pharmaceuticals for Premier Members from various manufacturers and used this information to negotiate rebates or volume discounts from those manufacturers participating in a rebate program. PCS collected these rebate funds and remitted them to Premier at quarterly intervals, minus PCS's fifteen percent fee. PCS maintained separate accounting for the collection and remittance of rebate funds.

¶ 11 This arrangement continued with apparent satisfaction on all fronts until Premier was placed in receivership for insolvency on November 16, 1999. As of that date Premier had paid all PCS drug reimbursement billings except for three billing cycles between October 23, 1999 and November 15, 1999. When Premier was placed in receivership, PCS was holding funds collected from manufacturers under the rebate program and PCS continued to receive additional rebate payments for a period of time thereafter.

¶ 12 The receivership commenced during the fourth quarter of 1999. PCS was not required to remit rebate funds to Premier for the third quarter of 1999, which ended September 30, until sixty days after October 1. Therefore, on November 16, 1999, rebate funds received on behalf of Premier in the third quarter were not yet overdue, and the total rebates to be collected by PCS in the fourth quarter could not yet be determined.² According to PCS, the total amount of rebates it had collected at the time of the summary judgment proceedings was $1,151,918.06. The calculations of Premier's Receiver put this amount slightly higher, at $1,156,044.00.

¶ 13 On November 18, 1999, two days after Premier was placed into receivership, PCS sent its network pharmacies notice of the receivership and informed the pharmacies that PCS had not received funds from Premier for payment to pharmacies for claims submitted from October 23, 1999, to the present. The notice to the network pharmacies further explained:

As you are aware, PCS generally does not pay claims to pharmacies until PCS receives payment from its customers. Nevertheless, with respect to claims that your pharmacy submitted to PCS for Premier members between October 23, 1999 and November 5, 1999 [known as "cycle 923"], PCS will prepay your pharmacy for those claims even though it has not yet received payment from Premier.... PCS believes that certain rights exist that will allow PCS to collect most, if not all, of the money due to pharmacies for this time period. In the event PCS is unsuccessful in these efforts, future reimbursements may be adjusted accordingly to offset amounts not received from Premier.

The total amount paid by PCS to the pharmacies for cycle 923 was $1,089,367.00. PCS informed the network pharmacies that it did not intend to pay the charges for the succeeding cycles unless and until funds were received by...