Express Scripts, Pharmacies Collide Over Network Cuts

Stay ahead of developments in federal and state health care law, regulation and transactions with timely, expert news and analysis.

By Mary Anne Pazanowski

The tide may be turning against Express Scripts as it tries to fend off litigation by pharmacies around the country that allege it kicked them out of its network in order to steal their customers and profits.

The pharmacy benefit manager (PBM) rebuffed initial attacks, but pharmacies have begun to gain traction in litigation against it using some novel legal strategies. The stakes are high because it is very difficult, if not impossible, for pharmacies to stay in business if forced to operate outside a PBM network, attorneys representing the pharmacies told Bloomberg BNA.

PBMs are the middlemen between drug makers and plans that provide drug benefits for consumers. They negotiate drug prices with pharmaceutical manufacturers, then pass the savings on to consumers covered by the plans.

Express Scripts Market Value

Express Scripts recently was overtaken by CVS Health as the nation’s largest PBM, but it still filled over 1.4 billion adjusted claims in 2016. Its total revenue for 2016 was $100.3 billion, according to Bloomberg Intelligence analyst Jonathan Palmer. The company reported a net income of $3.4 billion for 2016 in its fourth quarter report released Feb. 14.

Total prescription dispensing revenues for all types of pharmacies, including retail, mail and specialty pharmacies, topped $412 billion in 2016, according to a February report by Pembroke Consulting and the Drug Channels Institute, The 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

PBMs’ Role

Corporations, insurers and government actors hire PBMs to create pharmacy networks that provide the best quality and prices for their employees and plan members’ prescription needs, Express Scripts spokesman Brian Henry told Bloomberg BNA.

These networks consist of both brick-and-mortar retail and mail-order pharmacies, and include pharmacies qualified to provide specialty and compounded pharmaceuticals.

The companies make money by charging plan providers premiums based on those savings. The most successful PBMs are those serving the most consumers, because they can obtain the best prices through volume discounts.

Specialty and Compounding Pharmacies

PBMs include specialty pharmacies in their networks. These pharmacies provide highly specialized, costly medicines—to treat cancer, hepatitis C, HIV and other conditions—that aren’t available at the neighborhood drug store. They aren’t open to the general public and don’t operate the same way as traditional retail pharmacies, Jonathan Swichar, of Philadelphia’s Duane Morris LLP, told Bloomberg BNA.

Specialty pharmacies take on far more responsibility for the patient’s care than do traditional pharmacies, Swichar said. They also ensure the medications get to patients in an unadulterated form.

These pharmacies provide clinical support, or “hand-holding services,” as Swichar called them. Doctors and nurses employed by specialty pharmacies work with patients before and after dispensing to ensure the proper dosage is given, the patient is physically capable of tolerating the drug and the patient understands the importance of taking the drug in accordance with the prescribed regimen.

Providing these highly specialized drugs by mail often isn’t optimal, because many require refrigeration or special handling, Swichar said. Patient privacy concerns also arise with mail order prescriptions, as patients may not want their neighbors knowing they are taking HIV or hepatitis C drugs.

One-third of the pharmacy industry’s overall 2016 revenues came from specialty drugs, Dr. Adam J. Fein said in the Pembroke/Drug Channels report. Fein also reported that PBMs are strategically limiting the number of pharmacies in their networks that are qualified to dispense these expensive medications and “shifting specialty dispensing revenues and profit” to their wholly owned specialty pharmacies.

Compounding pharmacies differ from specialty pharmacies in that they provide customized medications to meet individual patients’ needs. Pharmacists, or people acting under their direction, mix specific compounds designed for particular patients.

‘Remarkably Similar’ Claims

About a dozen cases brought by in-network or formerly in-network specialty and compounding pharmacies against Express Scripts are pending, Swichar told Bloomberg BNA. Most are proceeding in the U.S. District Court for the Eastern District of Missouri, because of a contract term that requires lawsuits to be filed in Express Scripts’s home town, St. Louis.

The complaints’ allegations are “remarkably similar,” according to Swichar, who represents pharmacies in three cases. Express Scripts, the complaints allege, audited the participating pharmacies and found minor issues concerning their compliance with the terms of their provider contracts. The minor problems were trumped up into material breaches, which Express Scripts found justified immediate disavowal of the contracts, the pharmacies claimed.

Express Scripts has denied the allegations. There have been very few complaints that the company is using minor contract quarrels as an excuse for terminating network pharmacy agreements, company spokesman Brian Henry told Bloomberg BNA.

The pharmacies also alleged Express Scripts has used disagreements over mail-order status as an excuse to end a contract. For example, a pharmacy’s network provider agreement may prohibit it from operating a mail order pharmacy or sending medications to states in which it isn’t licensed. If Express Scripts’s audit discovers the pharmacy mailed a number of prescriptions or sent them over state lines, Express Scripts deemed the pharmacy to be in breach of the contract, leading the PBM to end the pharmacy’s network participation, some complaints alleged.

But mailing a few prescriptions is very different from operating a mail-order pharmacy, Brad Wasser, of the Law Offices of David Balto, Washington, told Bloomberg BNA. And some states allow pharmacies that aren’t licensed there to ship medications to their residents. Wasser has spent the last several years representing pharmacies.

Express Scripts’s Henry told Bloomberg BNA the company has very high standards for its network pharmacies. It expects the pharmacies to “live up to their end of the bargain.” If it discovers a pharmacy that represented its business as 100 percent retail actually does a substantial mail-order business, Express Scripts will object. That would be a breach of the provider agreement, Henry said.

The company is working to ensure its network pharmacies are operating in compliance with their agreements, Henry said. But, even when it finds noncompliance, Express Scripts gives those pharmacies a chance to remedy problems before ending their provider agreements, he said.

Anti-Competitive Motive?

A PBM’s contract termination provisions also kick in whenever an independent pharmacy receives a civil investigative demand from a state or federal agency, Anthony Calamunci, of Fisher Broyles LLP in Toledo, Ohio, told Bloomberg BNA. Calamunci represents pharmacy clients in cases against the PBMs.

Pharmacies must comply with a variety of regulations, from the patient privacy rules under the Health Insurance Portability and Accountability Act to state pharmacy licensing rules. Any inkling of a state or federal action may trigger an Express Scripts review, he said.

This is in keeping with Express Scripts’s focus, which is “on delivering great patient care,” Henry said.

The PBM’s job is “to deliver a quality pharmacy network” that offers patients broad access and affordability. In the “rare” instance Express Scripts terminates a network pharmacy, the action is taken “on behalf of its clients” to ensure quality goals are met, Henry said.

But this is just a pretext, the pharmacies alleged in their complaints. Express Scripts’s real motive is to steer the affected pharmacies’ patients to its own wholly owned specialty pharmacy, Accredo, so that it can capture the revenues from specialty drug sales, the complaints said.

Henry denied there is any noncompetitive purpose for independent pharmacy terminations. Patients aren’t being steered to Accredo, he added. Accredo competes for its business the same as any other pharmacy.

But Swichar claimed Accredo isn’t an acceptable substitute for terminated specialty pharmacies. It doesn’t provide the same type of “hand-holding” or clinical support as other specialty pharmacies. Additionally, Accredo fills specialty drug prescriptions by mail, which isn’t a reliable way to dispense these drugs. Mail delays could lead to therapy lapses, he said.

Henry denied that Accredo’s service aren’t up to par with other specialty pharmacies. “Accredo’s clinical model is superior,” he said.

Express Scripts allegedly also has forgiven conduct by Accredo that led it to end other pharmacies’ contracts. Allegations of far more serious regulatory issues lobbed against the Express Scripts-owned firm have been shrugged off, Swichar claimed.

Addressing the litigation in general, Henry told Bloomberg BNA it is “extremely rare” for the company to remove a pharmacy from its network. A very small percentage of pharmacies have been terminated, and an even smaller group has challenged their removal, he said.

“Ninety-nine point five percent of in-network pharmacies” are in compliance with Express Scripts’s standards, Henry said, adding that consumers have never before had more choice as to which pharmacy to patronize.

Most Profitable Pharmacies Targeted

Calamunci told Bloomberg BNA he would like to see the financial figures on the 0.5 percent of pharmacies that Henry said Express Scripts has terminated for noncompliance. Those pharmacies most likely did a large volume of business in high-profit-margin drugs, he said. There are bad actors among specialty and compounding pharmacies, Calamunci acknowledged. New England Compounding Center, a pharmacy accused of dispensing contaminated drugs that caused a meningitis outbreak, provides a high-profile example.

There also are specialty and compounding pharmacies that haven’t lived up to their contractual obligations, he said. Independent pharmacies must read their contracts carefully and understand their rights and obligations, Calamunci advised.

The vast majority of pharmacies targeted for network exclusion, however, had one thing in common: they were highly profitable, he said.

Early Legal Losses

The issues involved in the independent pharmacies’ lawsuits’ aren’t new, but judges are beginning to credit the allegations, and plaintiffs finally are gaining traction after some early losses, Calamunci said.

Express Scripts racked up some victories early on, such as in Linden Care LLC v. Express Scripts, Inc ., 2015 BL 403279 (N.D.N.Y., Dec. 7, 2015). Linden Care lost on a motion for an order requiring Express Scripts to reinstate the pharmacy in its network ( 24 HLR 1659, 12/17/15 ). The parties agreed, however, to arbitrate the claim, and Linden Care voluntarily dismissed the lawsuit soon after the court’s decision.

The U.S. District Court for the Eastern District of Missouri, in March 2015, said Grasso Enterprises LLC didn’t have standing to assert Express Scripts’s “unlawful and blanket denials” of claims for specialty and compounded medications violated the Employee Retirement Income Security Act (ERISA) ( Grasso Enters., LLC v. Express Scripts, Inc., 2015 BL 459366 (E.D. Mo. 3/4/15)).

The U.S. Court of Appeals for the Eighth Circuit affirmed, saying Grasso’s possible entitlement to receive payments from Express Scripts didn’t give it standing ( Grasso Enters., LLC v. Express Scripts, Inc., 809 F.3d 1033, 2016 BL 5673 (8th Cir. 2016)) ( 25 HLR 63, 1/14/16 ).

And, in April 2016, a jury found in favor of Express Scripts in a breach of contract case brought by Alternative Medicine & Pharmacy Inc. ( Alternative Med. & Pharm., Inc. v. Express Scripts, Inc., E.D. Mo., No. 14-cv-1469 ( verdict 4/8/16)).

Pharmacies Gain Ground

Specialty and compounding pharmacies, however, now seem to have found a formula that will help them win the war, or at least give Express Scripts a reason to rethink its business strategy.

Grasso’s second amended complaint, filed in March 2016, alleged “an ongoing and multi-faceted conspiracy between the nation’s largest pharmacy benefit managers, Express Scripts,” CVS Health Corp., OptumRx Inc. and Prime Therapeutics LLC to jointly boycott compounding pharmacies and eliminate them from the market for medications covered by group and individual health plans. It also alleged state tortious interference and unfair competition claims.

The district court in January denied the PBMs’ motion to dismiss the complaint ( Grasso Enters., LLC v. Express Scripts, Inc., 2017 BL 20927 (E.D. Mo. Jan. 25, 2017)) ( 26 HLR 188, 2/2/17 ).

Union City, N.J.-based Prime Aid Pharmacy Corp.'s suit against Express Scripts also is moving forward. The Eastern District of Missouri Jan. 18 denied Express Scripts’s motion to dismiss the specialty pharmacy’s fraudulent misrepresentation, Missouri Prompt Pay Act and equitable accounting claims ( Prime Aid Pharm. Corp. v. Express Scripts, Inc ., 2017 BL 14181 (E.D. Mo. 1/18/17)) ( 26 HLR 167, 1/26/17 ).

The court earlier in January granted Prime Aid’s motion to compel Express Scripts to give it access to documents detailing its relationships with other pharmacies ( 26 HLR 130, 1/19/17 ). The documents could help Prime Aid establish Express Scripts’s policy or practice of terminating pharmacies that compete with Accredo.

And the Eastern District of Missouri Feb. 3 denied Express Scripts’s motion for summary judgment in a suit filed by HM Compounding Services LLC (HMC) ( HM Compounding Servs., LLC v. Express Scripts, Inc., 2017 BL 33064 (E.D. Mo. 2/3/17)) ( 26 HLR 247, 2/9/17 ).

Express Scripts ended HMC’s network provider agreement after, it said, HMC lied on questionnaires required by Express Scripts. HMC said it answered truthfully based on its interpretation of the questions and, therefore, Express Scripts breached the agreement when it ended HMC’s network participation. Judge John A. Ross said a jury will have to work out whether HMC reasonably interpreted the questions and answered them properly.

Other pending cases include: Precision Rx Compounding, LLC v. Express Scripts Holding Co., 2016 BL 275440 (E.D. Mo. 8/24/16). A group of compounding pharmacies allege Express Scripts conspired with other PBMs to boycott the pharmacies, with the goal of driving them out of business. The court denied Express Scripts’s motion to dismiss ( 25 HLR 1282, 9/1/16 ). Dispositive motions are due by Nov. 2, and trial is tentatively set for May 2018.

The court paritally denied Express Scripts’s motions to dismiss in HHCS Pharm., Inc. v. Express Scripts, Inc., 2016 BL 419034 (E.D. Mo. 12/16/16), and Cystic Fibrosis Pharm., Inc. v. Express Scripts, Inc., 2016 BL 416878 (E.D. Mo. 12/15/16). Compounding pharmacies argue Express Scripts improperly ended their network agreements. The court refused to dismiss their claims for breach of the implied covenant of good faith and fair dealing and unjust enrichment, but dismissed their claims for tortious interference with business relationships.

Trone Health Servs., Inc. v. Express Scripts Holding Co., E.D. Mo., No. 16-1250, amended complaint filed 12/21/16. Several independent retail pharmacies have accused Express Scripts of using their customer data to steer patients to its own mail-order pharmacy.

Great Lakes Med. Pharm., Inc. v. Express Scripts, Inc., E.D. Mo., No. 16-1873, filed 11/28/16. Great Lakes, an independent pharmacy, alleges Express Scripts unlawfully excluded it from Express Scripts Medicare Part D network in violation of the federal law’s any willing provider requirement. It claims Express Scripts excluded pharmacies from its networks to steer customers to its wholly owned pharmacies and eliminate competition.

Long Prairie Pharm., LLC v. Express Scripts, Inc., E.D. Mo., No. 17-7, second amended complaint filed 2/14/17. In this case, which was transferred from the U.S. District Court for the District of Delaware, Long Prairie alleges Express Scripts is trying to eliminate Long Prairie as a competitor to Accredo and moved for a preliminary injunction prohibiting Express Scripts from terminating its network provider agreement. Express Scripts has moved to dismiss the complaint.

No Deterrence

The growing number of cases filed against Express Scripts doesn’t seem to have deterred the company’s business strategy, Swichar told Bloomberg BNA.

However, the PBM industry may be forced to change shortly, Calamunci said. He predicted there will be a “dynamic shift” in the industry within the next few years, given litigation on multiple issues, pending legislative proposals, drug pricing investigations and market forces.

Additionally, Express Scripts has been threatened with the loss of its biggest client, health insurer Anthem. Anthem sued Express Scripts in March 2016, alleging it should be getting $3 billion a year more in prescription-drug savings from Express Scripts ( 25 HLR 400, 3/24/16 ). The PBM disputes that claim.

Express Scripts’s share price dropped following the Anthem filing, but the company has increased its profits by moving clients to generic drugs and aggressively negotiating with drugmakers, according to a recent Bloomberg Gadfly report. Routing prescriptions for specialty medications through Accredo also has improved the bottom line, Gadfly reported.

Bloomberg Intelligence’s Palmer also said the Anthem lawsuit has more potential to affect Express Scripts’s bottom line, given Anthem’s demand for nearly $15 billion in damages. So too would the loss of Anthem as a client when the contract expires at the end of 2019, “unless they work something out,” Palmer said.

To contact the reporter on this story: Mary Anne Pazanowski in Washington at mpazanowski@bna.com

To contact the editor responsible for this story: Peyton M. Sturges at PSturges@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Health Care on Bloomberg Law