Medco Settlements.

Introduction

On April 26, 2004, one of the nation's largest pharmacy benefits managers ("PBMs"), Medco Health Solutions, Inc. ("Medco"), reached separate settlements with the Department of Justice ("DOJ") and the Attorneys General of 20 states.1 The settlements are significant in that they include broad "conduct remedies" concerning PBMs' intervention activities and financial relationships with their customers.

Under the settlement with the Attorneys General, Medco agreed to pay $29.3 million to resolve state unfair trade practice allegations against the company. This amount includes $20 million in damages to the states, $6.6 million for state legal fees and costs, and approximately $2.5 million for restitution to patients who incurred expenses related to a switch between different cholesterol drugs. The states will be allowed to choose between receiving payments in cash (to be used to benefit prescription drug consumers), drug cards for low-income elderly residents, or free medication for clinics.

The settlement with DOJ resolves claims against Medco for injunctive relief pursuant to 18 U.S.C. s. 1345. However, the settlement does not address remaining claims that the United States may have for monetary damages, penalties, and restitution, and Medco admits no liability or wrongdoing as part of the settlement.

This memorandum summarizes the key conduct remedies contained in the DOJ settlement. These remedies fall into two broad categories: regulation of therapeutic interchange activities and disclosures to health plan clients regarding payments received by Medco from manufacturers. It is unclear at this stage to what extent these remedies will affect Medco's historic business practices, or how or whether other PBMs may implement the practices that Medco has agreed to in the consent settlement. In any event, the settlement is not likely to end scrutiny on the part of legislators, regulators, and prosecutors of PBM practices and relationships, particularly in light of the critical role that PBMs will play under the Medicare-endorsed prescription drug card program and the future Part D benefit.

II. Restriction Of Therapeutic Interchanges

A. Limits on Circumstances Under Which an Interchange Can Be Solicited

To begin with, the settlement imposes some limitations on the circumstances under which Medco can request a therapeutic interchange. Specifically, Medco cannot solicit a drug switch when:

The net drug cost of the proposed drug to the plan exceeds the cost of the prescribed drug (with "net drug cost" being determined based on what portion and types of rebates Medco has agreed to share with the client under its client contract, and "bundled" rebates similarly being allocated in the manner agreed to in the client contract);

The prescribed drug has a generic equivalent and the proposed drug does not (unless the cost of the proposed drug is lower than all generic equivalents of the prescribed drugs);

The switch is made to avoid competition from generic drugs (i.e., where the patent protection for the prescribed drug is scheduled to expire within six months, or where the effect of the interchange "reasonably is to avoid substitution for, or generic competition against," the prescribed drug, unless the interchange has the effect of decreasing net drug costs); or

The patient has been the subject of an interchange with respect to the same therapeutic class within the last two years.

Further, all proposed drug interchange programs must be approved by the Medco Pharmacy and Therapeutics ("P&T") Committee before implementation. 2

Although these criteria appear somewhat limiting on their face (e.g., they could theoretically preclude switches to clinically-superior products if more expensive), their actual impact may be less clear in that PBMs and their customers have become sensitive to public scrutiny over therapeutic interchange programs, and may have already incorporated some of these limitations (such as the restriction on switching from a less expensive drug to a more expensive drug) into their practices.

B. Procedural Requirements for Therapeutic Interchanges

The consent settlement also imposes procedural requirements relating to therapeutic interchange programs. First, Medco is required to obtain "express verifiable authorization" that a prescriber has approved a proposed interchange for a patient. However, the authorization need not come from the prescriber directly, and it may be communicated verbally rather than in writing (e.g., through a phone conversation with a physician's office staff). Second, solicitations to obtain prescriber approval (whether verbally or in writing) must include certain disclosures, which are discussed in greater detail in the next section. Third, a written communication confirming the interchange must be sent to the prescriber, and the confirmation must also include the required disclosures. However, it does not appear that the confirmation must be sent prior to the substituted drug being dispensed.

Fourth, the consent settlement requires certain patient communications. With respect to interchanges made on Medco mail order prescriptions, Medco must provide both a written notice and a telephonic notice (which may consist of an automated message) to the patient confirming that the prescriber has approved an interchange. The written notice must contain the required disclosures discussed below. The telephonic notice need state only that Medco requested an interchange, that the interchange was approved by the physician, and that further information will arrive by mail. Further, the telephonic notice must give a toll-free number for the patient to call if they wish to speak to a customer service representative, but it need not explicitly inform the patient that they have the right to refuse or reject the interchange. Notably, it appears that neither the written notice nor the telephonic notice must be given to the patient prior to dispensing the new drug. For interchanges involving non-mail order prescriptions, the patient notice requirements are somewhat more lenient - only the written notice is required after the prescriber authorization of the interchange.

The net effect of these requirements is that once Medco has obtained prescriber authorization, it can proceed with therapeutic substitutions without affirmatively seeking a patient's prior consent. However, if the patient or provider elects to decline or reject an interchange after the substituted drug has been dispensed, Medco must dispense the originally-prescribed drug at its own expense and may not charge an additional copayment.

C. Disclosure Requirements for Therapeutic Interchanges

In soliciting approval for and performing therapeutic interchanges, Medco must make disclosures to both the prescriber and the patient in the manner described above. Specifically, Medco must now provide to the prescriber and the patient the following information:

The minimum or actual cost savings for health plans from the interchange (i.e., the amount the plan will save in "Net Drug Cost" annually assuming the patient will use the proposed drug for twelve months);

The differences in copays for the patient;

Whether or not Medco is receiving any "Manufacturer Payments" from a drug manufacturer as a result of the proposed drug interchange or interchange solicitation;

Any material differences in side effects or safety profiles of the two drugs, as determined by Medco's P&T Committee; and

The existence of Medco's policy with respect to the reimbursement of drug interchange-related health care costs (e.g., copays associated with diagnostic tests or office visits in connection with a switch).

As discussed below, the term "Manufacturer Payments" is broadly defined to include any type of compensation or remuneration received from a manufacturer (other than purchase discounts). However, the agreement only requires the disclosure of the existence of the compensation relationship, and not the type or amount of compensation or even the name of the manufacturer. In general, although Medco will be required to disclose information not previously furnished to prescribers or patients, it is not likely that either the content of these disclosures or the manner in which they must be made will be significantly disruptive to Medco's operations.

D. Disclosure to Clients of Compensation from Drug Manufacturers

The consent settlement also addresses relationships between PBMs and their plan customers.3 The settlement requires Medco to make certain disclosures to clients regarding manufacturer payments, although these disclosures are less specific than those being considered by some state legislatures and by the federal government in relation to the new Medicare drug benefit.

The settlement explicitly acknowledges that Medco may receive payments from manufacturers - including certain types of rebates - that are not shared with its clients. To begin with, the agreements define "Manufacturer Payments" as:

Any and all compensation or remuneration Medco receives from a pharmaceutical manufacturer, including but not limited to rebates, regardless of how categorized, market share incentives, commissions, mail service purchase discounts, and administrative or management fees. It also includes any fees received for sales of utilization data to a pharmaceutical manufacturer.

"Manufacturer Payments" specifically exclude, however, "purchase discounts based upon invoiced purchase terms."

The agreements then distinguish "Manufacturer Formulary Payments" (payments that Medco receives "in return for formulary placement and/or access, or payments that are characterized as 'formulary' or 'base' rebates or payments pursuant to Medco's agreements with pharmaceutical manufacturers") from "Manufacturer Additional Payments" (essentially, all other Manufacturer Payments, which the agreements specifically recognize are not provided by Medco to those clients who have contracted to receive only a share of Manufacturer Formulary Payments).

The disclosure requirements are based upon these definitional categories. Medco is required to report to its clients on a quarterly and annual basis:

Medco's total product revenue across its entire client base;

The total drug expenditures for each client;

The dollar amount of all Manufacturer Payments earned by Medco;

The percentage of all Manufacturer Payments earned by Medco that were Manufacturer Formulary Payments; and

The percentage of all Manufacturer Payments received by Medco that were Manufacturer Additional Payments.

Thus, the agreement does not require Medco to disclose on a client-specific basis those manufacturer payments that fall outside of the technical definition of "Manufacturer Formulary Payments." Instead, it has to inform clients only of the ratio of Manufacturer Additional Payments to total Manufacturer Payments, on an aggregate basis across its entire business. Similar disclosures are required to be made to any prospective client prior to Medco's executing an agreement with such plan.

E. Miscellaneous Additional Provisions of the Settlement

Finally, the consent settlement contains additional requirements relating to interchange activities and pharmacy practices.

First, Medco must monitor the effects of drug interchanges on patient health, and report the results of its monitoring to the P&T Committee. This provision appears to contemplate that Medco simply capture and report information based on communications received from patients and prescribers relating to the efficacy or health effects of an interchange. PBMs' ability to monitor overall outcomes may be limited, however, by the fact that PBMs generally do not have access to medical claims data.

Second, the agreements require Medco to reimburse patients for "Drug Interchange-Related Health Care Costs" (i.e., patients' copayments for tests, doctor visits, and other services that are incurred as a result of a drug interchange or a drug interchange solicitation). Medco must inform patients and prescribers of this policy as part of its required disclosures, and implement a procedure whereby patients may request such payment and submit a single page claim form to obtain reimbursement.

Third, Medco agreed to adopt the American Pharmacists Association's ("APhA's") Code of Ethics and Principles for its employed pharmacists, and also accept the APhA Principles of Practice for Pharmaceutical Care "as a framework for the ongoing evolution of its pharmacy practice." Medco agreed that nothing in its standard operating policies or programs will be inconsistent with state pharmacy laws or regulations. Further, Medco must require that "its pharmacists form an independent professional judgment that a drug interchange would be in a patient's best pharmacological interest before soliciting a drug interchange."

Footnotes

1 The states are Arizona, California, Connecticut, Delaware, Florida, Illinois, Iowa, Louisiana, Maine, Maryland, Massachusetts, Nevada, New York, North Carolina, Oregon, Pennsylvania, Texas, Vermont, Virginia and Washington.

2 However, the restrictions on drug interchanges do not apply where the interchange is initiated pursuant to a drug utilization review, for patient safety reasons, due to the unavailability of a prescribed drug, for generic substitution, or for coverage (i.e., where the prescribed drug is not covered under a plan's formulary).

3 Over the last several years, there has been increasing public debate concerning the perceived lack of disclosure by PBMs to their health plan customers of the amounts of rebates and other compensation received from drug manufacturers. Many states are considering (and Maine, South Dakota, and the District of Columbia have enacted) legislation requiring extensive disclosures to plans of rebates and other financial relationships. Transparency and disclosure issues also were raised and debated extensively with respect to the new Medicare drug benefit, and the Office of Inspector General has similarly focused on disclosure issues in its discussions with the industry.

This article is presented for informational purposes only and is not intended to constitute legal advice.

Ms Elizabeth Carder-Thompson

Reed Smith

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