CHAPTER § 10.02 Third-Party Payors: Who They Are and What They Do

• Jurisdiction: United States

§ 10.02 Third-Party Payors: Who They Are and What They Do

TPP lawsuits have primarily been brought by three types of payors: private insurers; union health and welfare funds; and public or governmental insurers.¹¹ A short description of each is provided below. For the most part, all three types of TPPs rely on outside entities known as pharmacy benefit managers ("PBMs") to provide prescription-drug coverage to their beneficiaries. Accordingly, a description of PBMs and their relationship with TPPs are also included. This section concludes with a brief overview of the process by which prescription drugs are bought and sold.

[1] Private Insurers

Private insurers provide health plans through which corporate employers provide health benefits to their employees.¹² Private insurers may also administer plans for self-insured corporations or for other smaller TPPs. Some insurers also offer health coverage directly to individuals. Some private insurers are very large and may represent as many as ten million or more insureds. Others are comparatively small in size. Private insurers have been active in suing pharmaceutical companies.¹³

[2] Union Health and Welfare Funds

TPP claims are often brought by union health and welfare funds.¹⁴ Union funds are typically small operations. In some cases, they may not even have employees.¹⁵ Because of their small size, they almost always outsource the management and administration of their prescription-drug and medical-device coverage to pharmacy-benefit managers ("PBMs").¹⁶ Union funds do not typically get involved in coverage decisions, including whether to include a particular drug on their formulary. They leave such decisions almost entirely up to their PBMs.¹⁷ In consequence, union funds rarely (if ever) come into contact with drug or device manufacturers.¹⁸

[3] Public/Government Entities: Cities and States

State governments and municipalities have become plaintiffs in a number of actions against pharmaceutical and device manufacturers. Like unions and insurers, they often provide health benefits for their employees.¹⁹

A state may also operate as a TPP with its provision of prescription-drug coverage to indigent citizens under the Medicaid program.²⁰ When a state acts in this capacity, it is governed by a comprehensive set of federal laws and regulations that do not apply to TPPs in other contexts. For example, the state must comply with certain requirements set forth in the Medicaid Drug Rebate Statute.²¹ This statute has two basic requirements. First, in order for a drug to be eligible for federal funding, the manufacturer must have entered into a Medicaid Rebate Agreement with the Secretary of Health and Human Services, under which the manufacturer agrees to provide the drug to state Medicaid programs at favorable prices.²² Second, once a drug manufacturer enters into a rebate agreement for a "covered outpatient drug," the state must cover that drug under its plan, subject to limited exclusions and restrictions that states may impose.²³

The only time a state can refuse to cover an outpatient drug subject to a rebate agreement is:

with respect to the treatment of a specific disease or condition for an identified population . . . if, based on the drug's labeling . . . the excluded drug does not have a significant clinically meaningful therapeutic advantage in terms of safety, effectiveness, or clinical outcome of such treatment for such population over other drugs included in the formulary and there is a written explanation (available to the public) of the basis for the exclusion.²⁴

The upshot of this regulatory regime is that, in many instances, a state really has no choice but to cover particular drugs.²⁵

Perhaps as a means of overcoming these statutory obstacles, states seeking to recover against pharmaceutical companies for allegedly improper marketing have increasingly focused on the recovery of civil penalties under state Medicaid-fraud stat-utes.²⁶ Using this approach, some states have altogether dropped attempts to prove damages to their Medicaid program in favor of pure penalty claims.²⁷ And although the value of each penalty is generally modest (e.g., $7,500), states have sought to raise the stakes and generate huge verdicts by arguing that they are entitled to recover a separate penalty for literally thousands of alleged violations of the relevant statute.²⁸ This theory is problematic to say the least, and has been met with mixed success.²⁹

[4] Pharmacy-Benefit Managers

As noted above, private insurers, union funds, and even government TPPs often contract with PBMs to administer and manage their prescription-drug coverage.³⁰ The relationship between a TPP and its PBM is defined by contract. Although a comprehensive discussion of these contracts is beyond the scope of this chapter, they have at least three features worth noting here. First, the contracts define the nature of the relationship between the TPP and the PBM. In most cases, the PBM is defined as an independent contractor (and not a fiduciary) for the TPP.³¹ Second, the contracts typically define whether and how the TPP can provide input into the content of the formulary.³² (A formulary is a list of drugs covered by the TPP.) The formulary also indicates whether the TPP has placed any conditions on the use of particular drugs. Third, the contracts set the price to be paid by the TPP to the PBM for each prescription filled and the terms for dividing the savings that the PBM realizes as a result of any rebates it negotiates with drug manufacturers.³³

In many cases, it is the PBM that develops and maintains the formulary (or formularies) for the TPP. Common conditions in formularies include all of the following: (1) the medication will not be covered unless the...