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Legal Matters: U.S. Court Bars Enforcement of Maine Statute Regarding PBMs

Posted 07/21/2004

Pharmacy benefit managers (PBMs) obtained a key legal victory in March when a federal judge temporarily enjoined the state of Maine from implementing a new law that would have restricted certain industry practices and required disclosure of pricing and rebate information regarded as trade secrets by PBMs. The ruling was in response to a lawsuit brought by the Pharmaceutical Care Management Association (PCMA), the trade organization representing PBMs.[1] The PCMA is challenging the Maine law "An Act to Protect Against Unfair Prescriptive Drug Practices," or the Unfair Prescriptive Drug Practices Act (UPDPA), on the basis that the statute is preempted by the federal Employee Retirement Income Security Act of 1974 (ERISA) and that it violates the Takings Clause and Commerce Clause of the US Constitution.

In granting the preliminary injunction to bar enforcement of the law pending the outcome of the lawsuit, the court was persuaded that the PCMA demonstrated a substantial likelihood of success in having the law invalidated. In addition, the PCMA demonstrated that potential harm to its members might result from implementation of the statute. While this is not an ultimate ruling on the legality of the statute, the injunction maintains the status quo while litigation continues. The ultimate outcome of this case undoubtedly will be significant, as other states contemplate regulation of PBMs.

Maine's Unfair Prescriptive Drug Practices Act

The statute that prompted the PCMA's challenge was passed by the Maine legislature and signed into law in June 2003.[2] The UPDPA was self-described as intended to "establish ethical standards and disclosure requirements" for PBMs and address what the statute's sponsor termed "questionable practices," including conflicts of interest, side deals and undisclosed payments made to PBMs, failure to pass through discounts to consumers, and drug switching.[3]

Under the UPDPA, the relationship between a PBM and its clients (eg, health plans or HMOs, referred to as "covered entities") is defined as a fiduciary one, whereby the PBM must perform its duties with due diligence as it would in a financial relationship.[4] The statute also prescribes that a PBM's duties with respect to covered entities are "for the primary purpose of providing benefits to covered individuals and defraying the reasonable expenses of administering health plans."[5] This fiduciary designation therefore imposes a high standard of performance on PBMs.

The statute creates various disclosure requirements for PBMs, including a duty to disclose any activities, policies, or practices that directly or indirectly present conflicts of interest; all financial and utilization information requested by a covered entity relating to the provision of benefits; and "all financial terms and arrangements for remuneration of any kind" between a PBM and a drug manufacturer or drug marketer. Such remuneration includes, without limitation, payments for formulary management and drug-switching programs, educational support and claims processing, and pharmacy network fees charged from retail pharmacies and data sales fees.[6]

PBM practices involving drug substitutions are restricted under the UPDPA. A PBM is prohibited from making a substitution when the cost of the drug to be substituted is higher than that of the prescribed drug, unless the substitution is made for medical reasons that benefit the covered person and the covered entity.[7] Before a substitution for medical reasons may be made, the PBM must obtain the approval of the prescribing health professional and disclose to both the covered person and covered entity the cost of both drugs and any resulting benefit or payment that would be received by the PBM. No restriction applies when the substitution involves a lower-priced drug (eg, a generic) for a higher-priced one.[8]

Any benefit or payment received by a PBM as a result of any drug substitution must be "transfer[red] in full" to the covered entity.[9] Moreover, any payment or benefit derived by a PBM for prescription drugs dispensed in the state based on volume of sales for certain drugs, classes, or brands similarly is required to be passed on "in full" to the covered entity.[10]

Failure by a PBM to comply with the UPDPA would constitute a violation of the Maine Unfair Trade Practices Act, which carries a maximum fine of $10,000. The UPDPA was to apply to all PBMs that enter into management contracts with health plans and other covered entities in the state, effective September 13, 2003. However, enforcement of the statute has been temporarily blocked.

The Federal Court Ruling

Shortly before the UPDPA was to take effect, the PCMA filed suit on behalf of its membership (which includes Medco, AdvancePCS, Express Scripts, Inc, and Caremark Inc) to block the law's enforcement. While the lawsuit challenges the overall statutory scheme and scope of the state's regulation of PBMs, by far the most controversial element of the law was the required disclosure by PBMs of utilization and financial information, including the terms of financial arrangements with pharmaceutical manufacturers.

Regulatory "Taking" of Trade Secrets

The PCMA argued that the confidential terms of PBMs' contracts, as well as other financial and utilization information, constitute trade secrets from which the PBMs derive independent economic value. If information regarded as confidential, such as rebate data, were to become generally known, PBMs would be at a disadvantage in their ability to negotiate rebates and other discounts with drug manufacturers and pharmacies, the PCMA maintained. The economic value of the information would be destroyed upon dissemination. The court agreed that PBMs consider such information highly confidential and strive to maintain its secrecy and found that the PCMA met its initial burden of demonstrating that the information required to be disclosed under the UPDPA are trade secrets. (The court's conclusion on this and other issues were made only for purposes of its decision whether to temporarily bar enforcement of the UPDPA. The issues will be revisited when the court subsequently reviews the merits of the PCMA's challenge to the statute.)

On determining that the information held by PBMs are trade secrets, the court next reviewed whether the UPDPA's disclosure requirements constitute a regulatory taking of property, for which just compensation is due under the US Constitution. The court examined the economic impact of the disclosure requirements, whether the requirements would interfere with reasonable investment-backed expectations that the information at issue would not be disclosed, and the balance between the state's interest in regulation versus the PBMs' interest in protecting their trade secrets.

The UPDPA contains 2 separate disclosure provisions. The first requires a PBM to disclose, at the request of a health plan or other covered entity with which it has a pharmaceutical management contract, all financial and utilization information relating to the services provided by the PBM to the covered entity or to the provision of benefits to covered persons. In addition, a covered entity that receives information under this provision is prohibited from disclosing any information designated as confidential by the PBM. The second provision requires a PBM to disclose to a covered entity "all financial terms and arrangements for remuneration of any kind" between the PBM and any pharmaceutical manufacturer or marketer.

With regard to the first disclosure provision, the court found the requirement sufficiently limited in scope so as not to constitute a taking of property. Moreover, because the provision prohibits a covered entity from disclosing any of the PBM's confidential information received, the court found that the provision likely would sustain a constitutional challenge. In contrast, the court took issue with the statute's second, seemingly broader disclosure provision. Unlike the first provision, this particular disclosure requirement fails to protect against further dissemination of information that "goes to the heart" of what the PBMs contend are trade secrets. The court agreed with the PCMA that PBMs have reasonable investor-backed expectations that their trade secrets would not be subject to "untrammeled and unprotected disclosure."

In balancing the economic interest of the PBMs with the state's interest in regulating public health, the court favored the PBMs. The court weighed the potentially significant economic consequences to the PBMs of unprotected disclosure against the benefits of disclosure, benefits that the PBMs contend are only speculative. Based on the factors before it, the court ruled that the PCMA adequately demonstrated that the UPDPA violates the Takings Clause of the US Constitution. (The court disagreed with the PCMA's other constitutionality argument that the UPDPA violates the Commerce Clause. The court concluded that because the UPDPA's disclosure requirements only applied to PBM contracts that were entered into in the state of Maine, the UPDPA did not impermissibly affect out-of-state commerce. The court also determined that the UPDPA on its face did not discriminate against out-of-state commerce.)

Preemption by ERISA

The other basis of the court's decision to temporarily bar enforcement of the UPDPA was the statute's apparent conflict with federal ERISA policy and regulation of employee welfare benefit plans. Under ERISA, Congress set forth a single uniform federal scheme for governing the operation and administration of employee benefit plans.[11] Among its many purposes, such uniformity was intended to avoid a multiplicity of regulation and conflict in law between federal and state regulatory systems. The PCMA argued that the new and broad regulations imposed by UPDPA relate to employee benefit plans, a regulatory field that is exclusively a federal concern under ERISA. In addition, the PCMA argued that the UPDPA undermines the exclusivity of ERISA's civil enforcement scheme.

The court examined the restrictions and requirements imposed on PBMs by the UPDPA and raised a number of concerns about the potential controversies that may arise. In particular, the court identified an "inherent conflict" between a PBM's fiduciary duties to a covered entity and the interests of patients, for example, with respect to drug substitutions. The statute requires that a substitution involving a more expensive drug be made for medical reasons that benefit the patient and the covered entity. The court believed that the UPDPA's various notice and enforcement provisions "virtually invite litigation" over such situations, among many others. The court thus concluded that the potential issues?fiduciary duty, financial interest, medical necessity, and coverage?that would arise under the UPDPA, as well as the statute's enforcement mechanisms, "intrude too far into the ambit of federal regulation of health benefits by ERISA plans."

The UPDPA was also found to have an impermissible "reference to" ERISA plans. In evaluating the impact of the state statute on ERISA plans, the court noted that the large number of persons in Maine who are served by PBMs?and therefore considered covered under the UPDPA?receive drug benefits pursuant to ERISA-regulated employee welfare benefit plans. The regulatory scheme set forth in the UPDPA is similar to that of ERISA's, which also is premised on defining and imposing fiduciary duties and penalizing noncompliance. Even the definitions used in the UPDPA are similar to ERISA terminology. In the court's view, the UPDPA is a state attempt at mimicking ERISA's regulatory scheme with respect to "an emerging and important player" that is not currently regulated by ERISA. The court found this problematic in light of the national impact and significant economic weight of the PBM industry, its centrality in the delivery and cost of health care benefits, and the vital nature of the health care benefits that the PBM industry affects.

Based on what it viewed as the profound impact of the UPDPA on ERISA plans and the ERISA regulatory and enforcement scheme, the court concluded that the PCMA demonstrated a substantial likelihood of success in its argument that Maine's statute was preempted by ERISA.

Implications for Future State Regulation of PBMs

Maine's UPDPA is the first statute of its kind in the extent to which it seeks to regulate PBMs. The impetus for the UPDPA was the state legislature's perception that the PBM industry operates in a largely insulated and unregulated environment that garners enormous profits at the expense of consumers. This perception likely is shared by a growing number of states considering some form of PBM regulation. Last year, 22 states introduced bills to regulate PBMs, compared with 8 states in 2002.[12] The final outcome of the UPDPA will affect whether similar state regulation will follow. However, even if states ultimately are preempted by ERISA from regulating PBMs, the void eventually may be filled by specific federal oversight in this area.



1. Pharmaceutical Care Management Association v Rowe, Civ 03-153-B-W (D Me) March 9, 2004. Available at: www.med.uscourts.gov/site/opinions/ woodcock/2004/jaw_03092004_1-03cv153_pharma_v_rowe.pdf. Accessed April 1, 2004.

2. c456 A7(LD 554) (2003) (codified at 22 MRSA A72699).

3. Testimony of Sharon Anglin Treat, Maine Senate Majority Leader, March 24, 2003. Available at: www.mainesenate.org/Press/2003-03-24%20LD%20554 %20Unfair%20Prescription%20Drug%20Practices.html. Accessed April 1, 2004.

4. 22 MRSA A72699(2)(A) (2004).

5. 22 MRSA A72699(2)(:wub: (2004).

6. 22 MRSA A72699(2)©, (D), (G) (2004).

7. 22 MRSA A72699(2)(E)(2) (2004).

8. 22 MRSA A72699(2)(E)(1) (2004).

9. 22 MRSA A72699(2)(E)(3) (2004).

10. 22 MRSA A72699(2)(F) (2004).

11. 29 USC A71001 et seq.

12. Brierton J. Regulation of Pharmacy Benefit Managers. Connecticut General Assembly, Office of Legislative Research; Hartford, Conn. January 15, 2004. Available at: www.cga.state.ct.us/2004/rpt/2004-R-0071.htm. Accessed April 1, 2004.

Drug Benefit Trends 16(6):301-312, 2004. ? 2004 Cliggott Publishing, Division of CMP Healthcare Medi

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