In recent months, two federal courts have dismissed lawsuits alleging that branded drug manufacturers’ discounted subsidies—coverage of co-payments—for branded drugs violate federal racketeering and commercial bribery laws.  The two cases are among a number of similar pending suits, largely coordinated by the healthcare consumer advocacy group Community Catalyst, which concern approximately 20 different branded drugs.  Both cases are significant victories for branded drug manufacturers, who face claims that they have defrauded health plans by offering discounted subsidies directly to consumers—nudging those consumers away from cheaper, generic options preferred by the health plans—in order to preserve market share for branded drugs.

The first action, brought by union health plans against the manufacturer Merck & Co. in the United States District Court for the District of New Jersey, was dismissed on April 29, 2013.  Judge Michael A. Schipp dismissed the action on grounds that the health plans lacked standing—that the health plans failed to allege that Merck’s discounted subsidies caused the health plans’ members to be prescribed or to purchase drugs that they would not have been prescribed or have purchased otherwise.

A second action against the manufacturer Bristol-Myers Squibb, also brought by union health plans under similar legal theories, was dismissed on substantive grounds by Judge J. Paul Oetken of the United States District Court for the Southern District of New York on June 6, 2013.

As Judge Oetken summarized the crux of the dispute between health plans and branded drug manufacturers:  “Insurers are keen to control drug costs, while manufacturers are determined to maintain market share while competing with generics and therapeutic alternatives.  In recent years, manufacturers have launched programs through which they offer to cover the cost of co-payment obligations for their branded drugs.  Insurers, which create tiered co-pay obligations to encourage plan members to select cheaper drugs, oppose these programs and argue that they increase overall drug costs.”

In other words, health plans use tiered co-payment plans to incentivize consumers to purchase less expensive, generic equivalents of branded drugs.  And, against these payment arrangements, branded drug manufacturers endeavor to preserve their market share by countering plan incentives with discounted subsidies.

Federal Racketeering Laws: No Violation

In the action before Judge Oetken, the plaintiff union health plans alleged that Bristol-Myers had issued discounted subsidies in violation of federal racketeering laws for at least two reasons.  First, because Bristol-Myers, according to the health plans, paid consumers directly and then concealed this information from the health plans.  And, second, because Bristol-Myers failed to factor the discounted subsidies into its reported drug prices, which are used as benchmarks by health plans to determine what they must pay for the drugs.

Judge Oetken rejected both arguments, noting that there was no concealment by Bristol-Myers despite the plaintiffs’ allegations to the contrary—that Bristol-Myers’ activity was “open and notorious,” with “information about its terms and conditions … readily available on a number of public websites.”   With regard to the plaintiffs’ “benchmark pricing theory,” Judge Oetken concluded that the plaintiffs had failed to plead, with the requisite particularity, how Bristol-Myers’ discounted subsidies rendered benchmark prices fraudulent, misleading, or inaccurate.

Commercial Bribery Laws: No Violation

The plaintiff union health plans also contended that by virtue of Bristol-Myers’ discounted subsidies, the health plans had been unlawfully compelled by their members to purchase drugs from Bristol-Myers, as a result of their members’ decisions to accept payments from the manufacturer.  According to Judge Oetken, this theory—premised on federal commercial bribery laws—failed because “[t]he bare fact that insureds’ decisions may entail financial consequences for the insurers” did not create the necessary fiduciary relationship, under federal commercial bribery laws, between the health plans and their members.

Plan members were found to have purchased branded drugs in their individual capacities, not as agents of the health plans.  As Judge Oetken explained:  “When an insured walks into a pharmacy and purchases a drug, that insured is given possession of the drug and is expected to be its end user.  The drug has been prescribed to her, not to her insurer, and she is expected to consume it.  To be sure, the insured has entered into a contract with the insurer to help finance the purchase of the drug and this contract may include a tiered incentive scheme designed to encourage the insured to prefer certain drugs, but this does not mean that the insurer is the buyer.”

Our Insight.  Your Advantage.  These recent decisions are certainly good news for branded drug manufacturers such as Merck and Bristol-Myers.  But, given that numerous similar actions are pending in courts nationwide, these recent decisions are likely but the first chapter in a lively legal and policy dispute between health plans, on the one hand, and branded drug manufacturers, on the other.  Moreover, the possibility of new legal theories—for instance, as suggested by Judge Oetken, that health plans could pursue contractual remedies against pharmacies under agreements that prohibit pharmacies from accepting such discounted subsidies—could open this dispute into broader territory.