Opinion
Master Case No. 4:05-MD-01672 SNL, D.Mo. No. 4:02-CV-01503 SNL, D.Conn. No. 3:04-01822.
July 30, 2008
ORDER
In accordance with the Memorandum filed herein this Date,
IT IS HEREBY ORDERED that Plaintiffs' motion for partial summary judgment (No. 4:02-CV-01503, Doc. #343, filed Dec. 17, 2004) be, and is, HEREBY GRANTED IN PART. ESI is an ERISA fiduciary in controlling and/or disposing of plan assets related to ESI's OptiMed Program. In all other respects, Plaintiffs' motion is HEREBY DENIED. IT IS FURTHER ORDERED that Defendant's motion for partial summary judgment (No. 4:05-MD-01672, Doc. #285, filed Jan. 18, 2008) be, and is, HEREBY GRANTED IN PART and DENIED IN PART. IT IS STILL FURTHER ORDERED that Plaintiffs' motion for class certification (No. 4:05-MD-01672, Doc. #120, filed Mar. 28, 2006) be, and is, HEREBY DENIED in its entirety.
IT IS SO ORDERED.
MEMORANDUM
Express Scripts, Inc. ("ESI") and its related entities are defendants in several interrelated cases consolidated for coordinated pre-trial proceedings by the Judicial Panel on Multi-District Litigation ("MDL"). In the instant matter, Plaintiffs, Gerald Minshew (as a participant in the Goodyear Tire Rubber Company Prescription Drug Plan ("Goodyear") and Jerome Brown (as trustee of the New England Health Care Plan ("NEHC"), bring this putative class action on behalf of Goodyear and NEHC and all other similarly situated self-funded ERISA plans which utilized ESI's services as a pharmaceutical benefits manager ("PBM") during the relevant period. In their complaint, Plaintiffs allege that ESI engaged in a host of improper acts, in breach of its fiduciary duty under ERISA.This matter comes before the Court on the parties' cross-motions for partial summary judgment (No. 4:02-CV-01503, Doc. #343, filed Dec. 17, 2004; No. 4:05-MD-01672, Doc. #285, filed Jan. 18, 2008), and Plaintiffs' motion for class certification (No. 4:05-MD-01672, Doc. #120, filed Mar. 28, 2006). Following careful consideration of the parties' written and oral arguments, the parties' summary judgment motions shall both be denied in part and granted in part, and Plaintiffs' motion for class certification shall be denied in its entirety; the analysis found herewith.
CHOICE OF LAW
The above-styled member cases were originally filed in the United States District Courts for the Districts of Arizona and Connecticut, respectively. Thereafter, this and several other member cases were transferred to this, the United States District Court for the Eastern District of Missouri, and consolidated with the above-styled lead case.
Where a case is transferred, federal and/or procedural questions shall be governed by the applicable law of the transferee court. See Campos v. Ticketmaster Corp., 140 F.3d 1166, 1171 n. 4 (8th Cir. 1998). C.f. Van Dusen v. Barrack, 376 U.S. 612, 639 (1964), and Ferens v. John Deere Co., 494 U.S. 516 (1990). Accordingly, resolution of the subject motions shall be governed by Eighth Circuit precedent.
ERISA
In response to growing concern over the improper administration and management of employee benefit plans; in 1974, Congress enacted ERISA to regulate the conduct of, inter alia, plan fiduciaries. 29 U.S.C. § 1001(a)-(b) (2006). See, e.g., Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 142-43 (1985) (ERISA assigns a number of detailed duties and responsibilities to fiduciaries . . .").
To state a claim for breach of fiduciary duty under ERISA, a plaintiff must ultimately prove that the defendant "was acting as a fiduciary (that is, was performing a fiduciary function) when taking the action subject to complaint." Pegram v. Herdrich, 530 U.S. 211, 226 (2000); Aetna Life Ins. Co. v. Borges, 869 F.2d 142, 146-47 (2d Cir. 1989) ("The question once again becomes whether a particular activity involves plan management or administration.").
To fall within ERISA's comprehensive scope, a plan must have been established by an employer and/or employee organization for purposes of providing certain welfare benefits to participating employees and/or their beneficiaries. 29 U.S.C. § 1002(1). A "plan sponsor" (i.e. the employer, employee organization, and/or the representatives of either) is the administrator of a plan, unless otherwise provided by the plan instrument. Id. § 1002(16). In administering an ERISA plan, the sponsor serves in a fiduciary capacity. Similarly, third parties, e.g., PBMs, who participate in the management and/or administration of an ERISA plan may be deemed de facto fiduciaries for a limited purpose. Id. § 1002(21)(A).
This Court recently stated:
[W]hile Plaintiff urges the Court to exclude third-party administrators from ERISA's preemptive reach; such a holding would contradict its entire purpose. Afterall, ERISA's regulatory scheme would be rendered obsolete if plan sponsors could entirely transfer their duties to third parties, and the latter would be subject to a separate and varying standard of enforcement." In re Express Scripts, Inc., PBM Litigation, No. 4:05-MD-01672 SNL, 2008 WL 1766777, at *9 (D.Mo. Feb. 6, 2008) ("PBM Litigation II").See Mertens v. Hewlitt Associates, 508 U.S. 248, 262 (1993) (Discussing that while ERISA "expand[s] the universe of persons subject to fiduciary duties" . . . "it allocates liability for plan-related misdeeds in reasonable proportion to respective actors' power to control and prevent the misdeeds.").
Courts have applied a functional approach in assessing a PBM's fiduciary status under ERISA, and have drawn a line between the PBMs' ministerial and discretionary duties over the management and/or administration of ERISA plans. E.g., Mertens, 508 U.S. at 262 (ERISA defines "`fiduciary' not in terms of formal trusteeship, but in functional terms of control and authority over the plan.") (Emphasis in original).
See, e.g., Pharm. Care Mgmt. Ass'n v. Rowe, 429 F.3d 294, 301 (1st Cir. 2005) (Duty to disclose conflicts of interests and payments from drug manufacturers "are purely ministerial and simply not sufficient for us to find that the PBMs are acting as fiduciaries under ERISA."), cert. denied, 126 S. Ct. 2360 (2006); Martin v. Feilen, 965 F.2d 660, 669 (8th Cir. 1992) (professionals performing only ministerial accounting functions for plan were not fiduciaries); Consolidated Beef Ind., Inc. v. New York Life Ins. Co., 949 F.2d 960, 964-56 (8th Cir. 1991) (same), cert. denied, 503 U.S. 985 (1992); Kerns v. Benefit Trust Life Ins. Co., 992 F.2d 214, 217 (8th Cir. 1993) (same); Prudential Ins. Co. of America v. Doe, 46 F. Supp. 2d 925, 935 (D.Mo. 1999) (citing Karen A. Jordan, Travelers Insurance: New Support for the Argument to Restrain ERISA Pre-emption, 13 YALE J. ON REG. 255, 303, 327 (1996)); Board of Trustees of Western Lake Superior Piping Industry Pension Fund v. American Benefit Plan Adm'rs, Inc., 925 F. Supp. 1424, 1429-30 (D.Minn. 1996) (Third party administrator was not ERISA fiduciary where it operated under the strict supervisory requirements of employer and plan documents, and where no facts established its discretion over the acts alleged.); Seaway Food Town, Inc. v. Medical Mutual of Ohio, 347 F.3d 610, 617-18 (6th Cir. 2003) (Plan provider was not an ERISA fiduciary in negotiating contract terms with Seaway, and/or when complying with unambiguous provisions in provider contract.); Bickley v. Caremark Rx, Inc., 361 F. Supp. 2d 1317, 1330, 1338 (D.Ala. 2004) (PBM is only a fiduciary with respect to discretionary acts), aff'd on other grounds, 461 F.3d 1325 (11th Cir. 2006); American Drug Stores, Inc. v. Harvard Pilgrim Health Care, Inc., 973 F. Supp. 60, 69 (D.Mass. 1997) ("Selection of service providers and operation of provider networks has `too tenuous, remote and peripheral' a connection with plan administration to warrant preemption.").
Thereupon, a PBM is a fiduciary, subject to the duties outlined under ERISA's remedial scheme, to the extent it (i) exercises discretionary authority or control over plan management and/or the disposition of plan assets; or (ii) retains any discretionary authority or responsibility over plan administration. 29 U.S.C. § 1002(21)(A); In re Express Scripts, Inc., PBM Litigation, No. 4:05-MD-01672 SNL, 2007 WL 4333380, at *5 (D.Mo. Dec. 7, 2007) ("PBM Litigation I") (citing Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101, 113 (1989) (The fiduciary inquiry is not an all-or-nothing determination.)).
ERISA assigns a number of detailed duties and responsibilities to fiduciaries, including "the proper management, administration, and investment of [plan] assets, the maintenance of proper records, the disclosure of specified information, and the avoidance of conflicts of interest." PBM Litigation II, at *9 (quoting Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 142-43 (1985)).
FACTUAL BACKGROUND
For background about the structure of the pharmaceuticals market, and specifically the PBM industry, the Court has relied on the parties' uncontroverted evidence, coupled with the statutory history and express provisions of ERISA.
I. PBMs
"PBMs are the 800-pound gorillas of pharmaceutical reimbursement." In re Pharmaceutical Industry Average Wholesale Price Litigation, 230 F.R.D 61, 71 (D.Mass. 2005). PBMs operate as middlemen; hired to design, manage, and administer prescription drug benefit programs; e.g., establish relationships and negotiate with drug manufacturers and retail pharmacies, determine coverage eligibility and copayments, develop and manage formularies and formulary compliance, and operate mail order prescription and specialty drug dispensaries.
PBMs are in the business of managing pharmacy benefit plans so as to lower overall costs, and the overwhelming use of PBMs highlights their advantages. See PBM Litigation II, at *2 ("Due to Defendants' semblance of size and power, and their promise of mitzvah, plan sponsors presuppose and rely upon Defendants to be better than they at the management and cost-reduction of pharmacy benefits."). While plan sponsors could (and, in some cases, do) manage their own claims, negotiate their own drug prices and pharmacy contracts, create and control their own MAC lists (infra), etc.; sponsors opt to engage the services of PBMs to:
. . . provide health benefit providers with access to an established network of pharmacies, where customers of the health benefit providers can obtain drugs at certain set prices. PBMs can negotiate volume discounts and rebates with drug manufacturers by pooling substantial numbers of health benefit providers. This pooling gives the PBMs tremendous market power to demand concessions from the manufacturers. Rowe, 429 F.3d at 298.
In offering these services to the plans they manage, PBMs operate to generate profits, which they derive from several sources. While the interplay among, and gains from, these sources are not defined to them in exact terms, plan sponsors are aware of, and assent to, the PBMs' general compensation scheme. Specifically, sponsors glean such information from the PBMs competing for the plan's business, industry consultants, and the very terms of the parties' written agreements.
II. PBM CONTRACTS
Despite their several standard-form provisions, PBM contracts illustrate the highly individualized negotiations and agreements from which they originate.
A. Initial Considerations
Both parties have spent a great deal of time debating the potential relevancy of the pre-contractual disclosures and/or understandings to the instant dispute.
Absent evidence of fraud, duress, or mistake; the parties' prior understandings are relevant only insofar as they establish the context, and thereby the meaning, of the parties' written agreements. RESTATEMENT (SECOND) CONTRACTS § 213(1) (2) (1981) (A binding completely integrated agreement discharges prior agreements to the extent that the latter are (i) inconsistent with, and/or (ii) within the scope of, the former.); id. § 214 ("Agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to establish the meaning of the writing.").
In turning to the fully integrated PBM contracts within the scope of the instant motions, the uncontroverted evidence establishes (and/or fails to disprove) that each was extensively negotiated at arm's length. See id. § 209(1). Therefore, in its interpretation of the subject contracts, where the parties have attached the same meaning to the language contained therein, the Court will do the same. Id. § 201(1). In all other respects, the language will be construed in accordance with its plain and ordinary meaning. In that way, the Court will decline consideration of any agreements and/or terms which are purportedly within the scope of the agreement, yet absent from its yield. Id. §§ 209 cmt. a 212(1). See also RESTATEMENT (SECOND) TRUSTS § 38 (same rules apply with regard to trust creation).
B. The Compensation Scheme i. Compensation from Plans
From the plans they manage, PBMs may (depending on the services for which they are retained) derive compensation for, inter alia, claims adjudication services. While the specific contract governs the PBM relationship, PBMs are generally paid a set fee, plus the lesser of:
(i) Net Average Wholesale Price, or Maximum Reimbursement Amount, if applicable; or
(ii) Usual and Customary ("UNC") .
Usual and Necessary ("UNC") represents the retail price charged by the dispensing pharmacy to the general public, on the date the drug is dispensed, as reported by the pharmacy to the PBM.
Average Wholesale Price ("AWP") is a figure reported by commercial publishers of drug pricing data; e.g., the Drug Topics Red Book, the First Data Bank Blue Book ("First Data Bank"), and the Medi-Span Master Drug Data Base; and is intended to represent the average price at which wholesalers sell drugs to physicians, pharmacies, and other consumers.
Historically, when pharmaceutical manufacturers sold their products to wholesalers, they would identify a wholesale acquisition cost ("WAC") and maximum allowable cost ("MAC") for each drug. WAC represented the manufacturer's suggested price to wholesalers, which consisted of MAC for these drugs, less a certain discount. Because the discounts ranged so dramatically, these guidelines were critical in calculating the accurate AWP reported to industry. Following a series of mergers among manufacturers (often incorporating different cost structures and processes), cost information became less available. In response, pharmaceutical retailers turned to commercially-published AWPs.
In accordance with the publishers' reporting schedules, a unique AWP (for each particular drug, based on dosage, packaging, and manufacturer) is loaded onto a PBM's system and serves as the benchmark during claims adjudications. "Net AWP," then, is AWP less the plan-specific, negotiated discount.
Maximum Reimbursement Amount ("MRA") is a "ceiling price" which PBMs establish for pricing certain drugs they deem as "Generics." Under the PBM contracts, the PBM generally retains sole discretion to update and modify MRAs. This discretion has been the cause for some growing concern because MRAs (i) are dependent on several unknowns (e.g., supply, demand, alternatives, etc.); and (ii) may be independently adjusted by PBMs at any time, and without notice to the plans until after claims' adjudication.
The parties interchangeably refer to MRA as "MAC."
That having been said, while PBMs retain substantial control over the adjustment of MRAs, several factors may serve to neutralize the same. To wit, while MRAs are unilaterally adjusted, plans and pharmacies often request regular disclosures in order to monitor the PBMs' margins. Furthermore, PBMs are contractually obligated to use their best efforts to, among other things, lower the cost trend of prescription drugs; and if they fail to do so, or if their efforts are fruitless, the contracts often contain performance guarantees and penalties. Finally, the PBM contracts generally cover a term of one to four years, upon which time their performance could be evaluated, and any re-negotiation subject to a competitive bidding process.
Moreover, the prices charged to a plan depend on three guidelines, i.e. AWP, MRA, or UNC. Information about AWPs, and the specific prices reported by the several publishers, is readily available to the pharmaceutical industry and the public. While Plaintiffs allege that ESI's pricing source, First Data Bank, reported inflated AWPs; the PBM contracts (relevant here) authorized the use of First Data Bank, infra, and plan sponsors fiercely negotiated to maximize their AWP discount. Thus, it appears that (when the contracts were formed) the parties presumably regarded AWP, even as reported by First Data Bank, to be a reliable benchmark. Additionally, even assuming both the net AWP and MRA were inflated, plans are generally charged at UNC, supra note 4. ii. Other Sources
In addition to the compensation received from plans, PBMs receive compensation from retail pharmacies and pharmaceutical manufacturers.
Specifically, in order to gain access to the PBMs' vast clientele, retail pharmacies offer PBMs reduced prices and dispensing fees. PBMs often realize a margin ("spread") between the amounts billed to plans pursuant to the respective PBM contracts, and the amounts paid to pharmacies. In the mail-order pharmacy context, the PBM (operating as the retail pharmacy) makes similar gains on its markup to plans.
Correlatively, PBMs receive payments from pharmaceutical manufacturers. Relevant here, manufacturers pay the PBMs for the performance of certain services, e.g., administrative fees, software fees and data fees. Additionally, manufacturers contract with PBMs to pay "rebates" (here, interchangeably identified as "formulary savings" and/or "reimbursement savings") directly attributable to the plan's use of "preferred" formulary pharmaceuticals. Although plan sponsors often contract for a portion (or the entirety) of such amounts, rebates are owed, and directly paid, to the PBMs.
Oftentimes, PBMs develop proprietary formularies, irrespective of the plans with which they deal; in other cases, plans participate in selecting certain criteria or identifying specific drugs for inclusion (and/or exclusion). In addition to setting a maximum price for (optimally) the plan's most demanded drugs, formularies are used to increase manufacturer rebates and encourage pharmacies to stock and dispense certain drugs. Where the plan participates in a formulary program, PBMs are often paid an additional amount, e.g., a portion of market share rebates, for their performance of services related to encouraging pharmacies, physicians, and members to participate in and/or facilitate the same.
iii. Outcome
Based on their ability to control benefits and/or costs, plan sponsors may select from an array of program options and corresponding price structures. Therefore, each PBM contract may generate a distinct outcome in terms of a PBM's duties and compensation.
More specifically, PBM contracts may differ in regard to the number and/or range of services; e.g., mail pharmacy, claims processing, drug utilization review, formulary management; for which the plans contract. Additionally, the scope of a PBM's duties may turn on the pricing structure selected by the plan. To wit, a plan sponsor may contract for claims adjudication services and elect pass-through pricing, whereby the plan pays whatever the PBM is charged for each prescription drug claim. This structure is often rejected due to the uncertainty and risk it engenders. As an alternative to pass-through pricing, plan sponsors can negotiate and establish a more definitive price (e.g., a percentage off AWP), regardless of the price paid by PBMs. Under this model, the PBM assumes greater risk, presumably at an increased cost to the plan.
Under either pricing structure, where a plan participates in a formulary program, the plan's involvement in developing and/or controlling the formulary bears a direct relation to its savings. For example, a formulary may be "closed," i.e. drug product selection that will be reimbursed is limited to "Covered" and/or "Generic" drugs; or "open", i.e. there are no limitations on the drug products that may be reimbursed under the plan. Moreover, a formulary program may encourage the selection of particular "preferred" drugs. Under a "preferred" formulary program, plans relinquish options and control in pursuit of greater rebates.
The generic-preference program took on different names, e.g., "OptiMed," "Preferred Product List," "Express Preference," "Drug Choice Management."
Based on the foregoing, each PBM contract; tailored with regard to a plan's size, bargaining position, goals, priorities, etc.; gives rise to a wide range of rights and obligations thereunder.
With this elaborate background in mind, the Court turns to the instant matter.
ANALYSIS
Two issues, each of its own moment, are before the Court. Following extensive consideration, the Court will first turn to address the parties' cross-motions for summary judgment, i.e. resolving whether ESI is an ERISA fiduciary under the subject PBM contracts. Latterly, the Court will rule on class certification.
I. SUMMARY JUDGMENT
Although summary judgment motions may be viewed as tools of "great utility in removing factually insubstantial cases from crowded dockets, freeing courts' trial time for those that really do raise genuine issues of material fact," Mt. Pleasant v. Associated Elec. Coop. Inc., 838 F.2d 268, 273 (8th Cir. 1988); courts have repeatedly recognized the severity of summary judgment as a remedy, to be granted only in cases where the movant establishes his right to judgment with such clarity so as not to give rise to controversy. New England Mut. Life Ins. Co. v. Null, 554 F.2d 896, 901 (8th Cir. 1977); Robert Johnson Grain Co. v. Chemical Interchange Co., 541 F.2d 207, 209 (8th Cir. 1976).In passing on a motion for summary judgment, the court should review all facts supported by the record, and any logical inferences arising therefrom, in the light most favorable to the nonmoving party. Buller v. Buechler, 706 F.2d 844, 846 (8th Cir. 1983). See also, e.g., FED. R. CIV. P. 56(e) (2007); Robert Johnson Grain Co., 541 F.2d at 210 (conflicts of evidence must be construed in favor of non-movant). In that way, summary judgment should not be granted "unless all the evidence points one way and is susceptible to no reasonable inferences sustaining the position of the nonmoving party." Hindman v. Transkrit Corp., 145 F.3d. 986, 990 (8th Cir. 1998); see also Mayer v. Nextel West Corp., 318 F.3d. 803, 806 (8th Cir. 2003) (citing Keathley v. Ameritech Corp., 187 F.3d. 915, 919 (8th Cir. 1999)).
Both parties agree that, as a PBM, ESI serves to make prescription drugs safer and more affordable to their client plans. The instant controversy originates from ESI's performance of PBM services, which Plaintiffs allege were inconsistent with the above-stated goals and ESI's fiduciary duties under ERISA. While the allegations of fiduciary breach shall remain a matter for another day, the Court now turns to assess the existence of fiduciary status.
The express terms of the parties' contracts disclaim any relationship fiduciary in nature; notwithstanding, ERISA's functional approach, supra, mandates a subjective inquiry. See Moeckel v. Caremark, Inc., No. 3:04-00633, 2007 WL 3377831, at *9 (D.Tenn. Nov. 13, 2007) ("The central issue before the court is whether Caremark was a fiduciary as that term is defined in the statute and whether Caremark was acting in its capacity as a fiduciary at the time it took the actions that are the subject of the complaint.") (citing 29 U.S.C. §§ 1002(21)(A) 1106(b), and Pegram, 530 U.S. at 223-26).
Therefore, in spite of the disclaimers cited by Defendant, the Court will review ESI's discretion (if any) over the following five functions:
• When determining the price that Plaintiffs pay for Generic Drugs by creating and/or modifying one or more MRA Lists and/or Prices;
• When determining the price paid by Plaintiffs for Brand Drugs (and, in some cases, Generic Drugs), by selecting First Data Bank as the pricing Source from which the AWP of the drug is derived;
• While negotiating with Drug Manufacturers for "Rebates" and other compensation on behalf of the Plaintiffs;
• While negotiating with Drug Manufacturers for additional "Rebates" or "Savings" or other compensation to Plaintiffs, in connection with the plans' participation in the OptiMed program; and
• In generating and retaining interest on rebates or other compensation before sharing them with Plaintiffs.1. Discretion over MRAs
Under the PBM contracts governing Plaintiffs' relationships, ESI had discretion to (and did in fact) periodically adjust MRAs and MRA lists.
As an initial matter, Defendant makes much ado over the uncontroverted fact that the PBM contracts were entered into as between ESI and/or Value Rx, and Goodyear Tire (as opposed to the Goodyear Plan). Furthermore, ESI states that the Goodyear Plan is not self-funded and contains no assets; rather, its obligations (including those owed to ESI) were paid from Goodyear Tire's assets.
Defendant's arguments have no bearing on today's holding. Insofar as it concerns the parties' contractual rights and duties, "any provision in an agreement or instrument which purports to relieve a[n] [ERISA] fiduciary from responsibility or liability for any responsibility, obligation, or duty" is void. 29 U.S.C. § 1110(a). Therefore, if ESI is deemed an ERISA fiduciary in exercising discretion over plan management and/or the disposition of plan assets, pursuant to the PBM contract, see 29 U.S.C. § 1002(21)(A); it will also be an ERISA fiduciary to Plaintiffs, as intended third party beneficiaries of the PBM contracts. E.g., Rotermund v. U.S. Steel Corp., 474 F.2d 1139, 1142 (8th Cir. 1973).
The Court declines to read the cited disclaimers in isolation. It is uncontroverted that Goodyear Tire (the promisee) contracted with ESI (the promissor) for the benefit (i.e. cost-savings) of its employees (participants in the Goodyear Plan). See RESTATEMENT (SECOND) CONTRACTS § 302(1) (A beneficiary is intended where (i) recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties, and (ii) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.). While parties to a contract may generally agree to limit their rights, including those belonging to third-party beneficiaries, Pennsylvania State Employees Credit Union v. Fifth Third Bank, 398 F. Supp. 2d 317, 325 (D.Pa. 2005) (citing Hrushka v. State, 381 A.2d 326, 327 (1977) (in turn citing 4 A. CORBIN, CONTRACTS § 777 (1951)); a disclaimer may be disregarded where it conflicts with the contract's fundamental purpose.
E.g., 1999 Goodyear Contract § 8.8 ("This Agreement is not a third party beneficiary contract, nor shall this Agreement create any rights on behalf of any third party as against either party. Sponsor and ESI reserve the right to amend, cancel or terminate this Agreement without any notice to, or consent of, any Member.").
E.g., id. (citing In re Bacx Corp., No. 96-59066, 1999 WL 33955337 (D.Md. Sep. 8, 1999)); In re Bacx Corp., at *4 ("Where two clauses of a contract are in conflict, the more specific clause will take precedence over the more general clause."). See also Audio Odyssey, Ltd. v. U.S., 255 F.3d 512, 521 (8th Cir. 2001) ("`The proper test for determining third-party beneficiary status is whether the contract reflects the express or implied intention of the parties to benefit the third party.'") (quoting Schuerman v. United States, 30 Fed. Cl. 420, 433 (Fed.Cl. 1994)). Applied to the instant facts, it is apparent that the fundamental purpose of the Goodyear Contract(s) was to provide benefits to participants of the Goodyear Plan. See 1999 NEHC Addendum at 1; 1999 Goodyear Contract at 1.
Proceeding to the gravamen of the matter, ESI's standard pricing policy, in retaining discretion over MRAs, is a business decision outside its relationships (fiduciary, or otherwise,) with ERISA plans. Pegram, 530 U.S. at 226 (citing 29 U.S.C. § 1109(b)) (no fiduciary liability for acts preceding fiduciary status). Accord Shulist v. Blue Cross of Iowa, 717 F.2d 1127, 1131-32 (7th Cir. 1983) (Provider was not ERISA fiduciary with respect to the setting of its rates, in that the parties entered into an arm's length bargain, and the provider (at the time of contracting) owed no duty to, and exercised no control over, the plan.).
In contrast, ESI's exercise of discretion in setting MRAs, exclusive to the particular plans it manages, may give rise to fiduciary status. For, while it should not be held responsible for the plan sponsor's approval of discretion regarding its own pricing policy, the PBM shall not enjoy carte blanche with regard to an exercise of discretion affecting the plan. See 29 U.S.C. § 1002(21)(A); Metropolitan Life Ins. Co. v. Glenn, 128 S. Ct. 2343, 2348-49 (2008) ("At trust law, the fact that a settlor (the person establishing the trust) approves a trustee's conflict does not change the legal need for a judge later to take account of that conflict in reviewing the trustee's discretionary decisionmaking."); Tussey v. ABB, Inc., No. 06-04305, 2008 WL 379666, at *7 (D.Mo. Feb. 11, 2008).
See also Seaway, 347 F.3d 610:
[I]f a specific [contract] term (not a grant of power to change terms) is bargained for at arm's length, adherence to that term is not a breach of fiduciary duty. No discretion is exercised when an insurer merely adheres to a specific contract term. When a contract, however, grants an insurer discretionary authority, even though the contract itself is the product of an arm's length bargain, the insurer may be a fiduciary. Id. at 618 (quoting Ed Miniat, Inc. v. Globe Life Ins. Group, Inc., 805 F.2d 732, 737 (7th Cir. 1986) (in turn discussing Schulist, supra)).
That having been said, the setting and/or adjusting of MRAs; while it would affect ESI's compensation, and ultimately plan assets; is not an exercise of discretion over plan management or plan assets. See 29 U.S.C. § 1002(21)(A). C.f. F.H. Krear Co. v. Nineteen Named Trustees, 810 F.2d 1250, 1259 (2d Cir. 1987) (Remarking, without elaborating, that plan provider may be an ERISA fiduciary in controlling its compensation once a relationship has been established with a plan.) (citing Sixty-Five Security Plan v. Blue Cross Blue Shield, 583 F. Supp. 380, 387-88 (D.N.Y. 1984)); Sixty-Five Security Plan, 583 F. Supp. at 387 (Provider was fiduciary where it had sole discretion in negotiating hospital rates, despite State's ability to set limits on the same, in that rates were a crucial part of the plan's administration.).
The Court further notes that any discretion afforded to ESI was arrested by the Goodyear Contracts' performance guarantees. Under the 1999 Goodyear Contract, all "Generic" retail drugs, i.e. those with corresponding MRAs, would achieve an average of AWP less 53%. Similarly, the 2002 Goodyear Amendment required that MRA would equal AWP less an average of 45-65%, and that "Generics" would achieve an average of 50% off AWP. While Goodyear's sponsors may not prefer this worst case scenario, i.e. the penalty for failing to deliver forecasted MRAs, they expressly contemplated and accepted it as their sole remedy. C.f. Ed Miniat, 805 F.2d at 737-38 (Even where it guaranteed the rate of return in advance, insurer was ERISA fiduciary where it was able to amend, and therefore alter the value of, the insurance policy (a plan asset).) (citing Stock Yards Co. v. Penn Mutual Life Insurance Co., 698 F.2d 320 (7th Cir. 1983)).
Here, Plaintiff's argument that the guarantee was never applied and/or delivered is inapposite; clearly, the remedy for that breach lies within the parties' contracts. By setting an effective maximum MRA, it hardly appears that the plans merely submitted to the mercy and discretion of the so-called 800-pound gorilla.
See also Moeckel, at *12-13, 15 (PBM is not ERISA fiduciary in adjusting MRAs in that (i) the prices paid by the plan were a function of AWP, MRA, and/or UNC; and (ii) there was no discretion over the AWP or the UNC.) (citing Chicago Dist. Council of Carpenters Welfare Fund v. Caremark, Inc., 474 F.3d 463, 472 (7th Cir. 2007)).
2. Discretion over Drug Prices
Next, Plaintiffs state that ESI is an ERISA fiduciary in its selection of First Data Bank as the AWP pricing source. The Court disagrees.
First, a PBM does not exercise discretion in selecting an AWP pricing source to be applied to its entire book of business, without regard to any particular plan. See Moeckel, at *15-16.
Nonetheless, once the PBM contracts were formed, ESI was a fiduciary to the extent (if any) it exercised discretion over the management of a plan or disposition of plan assets. Under the NEHC Contract(s), ESI had no discretion over the selection of the AWP pricing source. Rather, unless commercially unavailable, ESI was to determine AWP "from the most current information provided to ESI by First Data Bank." See Moeckel, at *15-16 (No fiduciary duty where "Caremark's use of First DataBank as the AWP pricing source was in specific adherence to the terms of the contracts between Morrell Co. and Caremark.") (citing Seaway, 347 F.3d at 619) (holding that party's adherence to a contract term does not give rise to fiduciary status). E.g., Rowe, 429 F.3d at 301 (Statutory duty to disclose conflicts of interest and payments from drug manufacturers does not involve discretion, and is purely ministerial); Moeckel, at *16 (citing Marks v. Independence Blue Cross, 71 F. Supp. 2d 432 (D.Pa. 1999) (PBM is not a fiduciary when it negotiates contract terms, and therefore has no fiduciary duty to disclose the full benefits of all potential discounts and savings that it could receive from pharmacies and manufacturers.)).
Under the Goodyear Contract(s), ESI had discretion to select a pricing source from "drug pricing services such as Medispan, Redbook or other source generally recognized" in the industry. (1999 Goodyear Contract.) The uncontroverted evidence establishes that, during negotiations, the parties understood that First Data Bank was (and would continue as) ESI's AWP pricing source. Therefore, the parties generally understood that First Data Bank was included in the possible "sources generally recognized"; and ESI's adherence to this negotiated term cannot be construed so as to assign it fiduciary status. Upon formation, the pricing source was First Data Bank; therefore, as it regarded the selection of a pricing source, ESI had performed its contractual duty, prior to any relationship with the plan. E.g., Moeckel, at *17 (PBM's decision to switch pricing source was not fiduciary in that PBM did not owe any contractual duty to the plan and therefore was not exercising discretion over the plan). Accordingly, where the parties' agreement expressly authorized the same, ESI is not an ERISA fiduciary in selecting and/or maintaining First Data Bank as the AWP pricing source.
3. Discretion over Rebates
Next, Plaintiffs state that ESI exercised discretion in negotiating with the pharmaceutical manufacturers over rebates, and in controlling plan assets, i.e. the rebates due to the plans. Plaintiffs' position is an ineffective attempt at placing the cart before the horse.
Rebates are not per se plan assets. Mulder, 432 F. Supp. 2d at 459. Under the 1999 Goodyear Contract, the plan was entitled to receive 100% of rebates; the 2002 Amendment entitled Goodyear to a lesser portion. Similarly, the 1999 NEHC Addendum entitled the plan to share in the manufacturer-paid rebates. The contracts' further specified the time within which these amounts were to be paid to the respective plans. Once these amounts became payable, they became "plan assets."
Prior to this point; i.e. when ESI was negotiating with pharmaceutical manufacturers for its entire book of business, without regard to any particular plan; the rebates were not plan assets. Mulder, 432 F. Supp. 2d at 460 ("Plaintiff assumes that PCS had discretionary authority or exercised discretionary authority with regard to the plan simply because PCS acted as a middleman between drug manufacturers and Oxford. Plaintiff fails to show how PCS had actual control or authority over the Oxford plan or plan assets. Plaintiff is, in essence, seeking relief for actions that PCS took in accordance with the terms of its agreement with Oxford.").
The fact that ESI conducted negotiations in the absence of plans, does not trigger some duty to represent the best interests of the plans. See Moeckel, at *12-14 (PBM's negotiation with retail pharmacies falls within the administration of its own business and is not fiduciary in nature, where the PBM agreement does not prohibit PBM from negotiating with retail pharmacies on its own behalf, and does not require PBM to negotiate on behalf of the plan.) (citing Am. Drug Stores, Inc. v. Harvard Pilgrim Health Care, Inc., 973 F. Supp. 60, 67-68 (D.Mass. 1997), and Pipefitters Local 636 v. Blue Cross Blue Shield of Mich., No. 05-2580, 2007 WL 128773, at *5 (6th Cir. Jan. 17, 2007)). Accord Mulder, 432 F. Supp. 2d at 457-59.
Next, once the rebates became payable, ESI was contractually required to pay the plan a fixed portion of the same. Thus, ESI did not exercise discretion in the disposition of plan assets. Specifically, See Bickley, 361 F.Supp.2d at 1330-31 (PBM is not ERISA fiduciary as it relates to provider discounts and rebates, where the contract expressly governs the disposition of assets) (citing Seaway Food, at 618) (Where the unambiguous terms of the contract, negotiated at arms' length, establish the PBMs right to retain discounts and/or rebates for its "sole benefit," there is no discretion exercised with regard to the same.).
Accordingly, ESI is not a fiduciary for the purpose of negotiating rebates with pharmaceutical manufacturers. See Chicago Dist. Council of Carpenters Welfare Fund v. Caremark, Inc., 474 F.3d 463, 475, 476 n. 6 (7th Cir. 2007) (PBM is not a fiduciary (i) in negotiating with manufacturers for rebates where PBM is not required to contract with manufacturers on behalf of plan, or (ii) in paying rebates where plans are entitled to a fixed rebate amount.).
4. Discretion over OptiMed
Next, Plaintiffs allege that ESI is a fiduciary in negotiating with Drug Manufacturers for additional "Rebates" or "Savings" or other compensation to Plaintiffs, in connection with the plans' participation in the OptiMed program.
Formulary management entails the interpretation of plan documents and discretion over the entitlement and/or nature of certain services. See Aetna Health, 542 U.S. at 219 ("[A] benefit determination is part and parcel of the ordinary fiduciary responsibilities connected to the administration of a plan.") (citing Varity Corp. v. Howe, 516 U.S. 489, 511-12 (1996) (Administrator is fiduciary with respect to the interpretation of plan documents and the payment of claims.)). Therefore, PBMs may be subject to fiduciary duties in exercising discretion over a plan's formulary.
See Pegram, 530 U.S.at 223 ("Rules governing collection of premiums, definition of benefits, submission of claims, and resolution of disagreements over entitlement to services are the sorts of provisions that constitute a plan.").
Applied to the instant case, while ESI was authorized to designate which drugs were "preferred" and/or "covered," this designation was made in accordance with express limitations imposed by plan sponsors. Additionally, Plaintiffs had regular access to the formulary, to see which drugs were included; retained sole responsibility for program design; and could modify which drugs were included in formulary, upon written notice to ESI. Lastly, ESI was not the final authority on whether plan members would be "switched" from a non-formulary drug to a formulary drug; rather, the prescribing physician retained such control. See Pegram, 530 U.S. at 230-31 (HMO is not fiduciary to the extent that it makes mixed eligibility decisions, e.g., the reasonableness of a certain treatment, acting through its physicians.). C.f. Aetna Health, 542 U.S. at 219-20 (Although his discretion necessarily involved medical judgments, and was a mixed eligibility decision, trustee of medical trust was the "ultimate decisionmaker in a plan regarding an award of benefits," and therefore an ERISA fiduciary.) (Emphasis added).
Thereupon, the Court finds that the plan sponsors and/or the dispensing prescriber was the final arbiter of the formulary content and drug-switching decisions. Accordingly, ESI's discretion in selecting and/or modifying the formulary did not give rise to that of a fiduciary. See, e.g., Caremark, Inc., 474 F.3d at 477 (Even where it had discretion to add and remove drugs, PBM was not ERISA fiduciary in managing formulary and drug-switching programs in that (i) the plan retained the sole authority to a) control and administer the plan, and b) determine the formulary for the plan; and (ii) the PBM lacked the ultimate discretionary authority to administer the programs, i.e. was not the final arbiter of formulary content and drug-switching decisions.) (citing Klosterman v. Western Gen. Mgmt., Inc., 32 F.3d 1119, 1124-25 (7th Cir. 1994)) (Bold in original).
Moeckel, at *21-22 ("Caremark lacked the ultimate discretionary authority to administer the formulary and drug-switching programs and therefore was not an ERISA fiduciary" in that (I) "Caremark developed its proprietary formularies for its own account, and without reference to any client or plan, and then made such formularies available to prospective clients for adoption if they so desired"; (II) the plan sponsor adopted Caremark's formulary as a feature of certain portions of its plan, and (III) pursuant to their contract, negotiated at arm's length, the plan sponsor "retained exclusive control and authority over the JM Plan and its administration, including with respect to its formulary(ies).") (Internal citations omitted). Id. at *23 (No fiduciary status where PBM only implemented interchange criteria selected and approved by plan sponsor as part of the program it selected. "[Plan Sponsor] retained complete authority, and the right of final approval, of the JM Plan's formulary and therapeutic interchange programs at all times. The final decision regarding which drug to prescribe, and thus whether intervention could occur, always rested with the participant's medical provider.").
Accord Mulder v. PCS Health Systems, Inc., 432 F. Supp. 2d 450 (D.N.J. 2006):
[T]he 1992 Contract clearly provides that PCS and Oxford would work together to develop a formulary "acceptable to Oxford . . . tak[ing] into account both [PCS's] own recommendations and any existing formularies now employed by Oxford." Similarly, the 1997 Contract provides that "PCS and [Oxford] have agreed upon [Oxford's] preferred drug list to be utilized under this Agreement . . ." Hence, the PCS-Oxford contract did not delegate to PCS any discretionary authority over Oxford's formulary.
* * *
It is clear that PCS provided services in accordance with the terms of the 1997 Contract and that those actions do not qualify PCS as an ERISA fiduciary.
* * *
Since PCS merely created its DUR and therapeutic intervention services in furtherance of its business and rendered them in accordance with its contract with Oxford, without exercising any discretionary authority with respect to the plan, the Court concludes that PCS was not performing as an ERISA fiduciary. Id. at 457-58, 461 (internal citations omitted).C.f. Glanton ex rel. ALCOA Prescription Drug Plan v. AdvancePCS Inc., 465 F.3d 1123, 1124 (9th Cir. 2006) ("In choosing whether to fill a prescription or shift a participant to a different drug, it exercises discretion over the plans' assets."), cert. denied, 128 S. Ct. 126 (2007).
While ESI was not an ERISA fiduciary in negotiating with drug manufacturers or selecting drugs for the OptiMed program, ESI was an ERISA fiduciary in controlling and disposing of the OptiMed "savings." Relevant here, the contracts' vague reference to "savings" gave ESI discretion in the interpretation of plan documents and claims payments. See Varity Corp., 516 U.S. at 511-12.
Under the relevant contracts, ESI was to be compensated in an amount equal to (or not to exceed) 35% of "total cost savings." The contractual language generally refers to "savings" as amounts intended to result from ESI's implementation of certain formulary compliance programs. ESI's discretion in classifying and distributing "savings" owed to the plan made it a fiduciary over the same. C.f. Caremark, 474 F.3d at 475, 476 n. 6 (No fiduciary duty in paying rebates where plans are entitled to a fixed rebate amount.). 5. Discretion over Interest
Lastly, Plaintiffs state that ESI is an ERISA fiduciary in generating and retaining interest on rebates.
Under the 1999 NEHC Addendum, ESI would bill manufacturers, with whom it had contracts, for rebates due to the plan "within 75 days of the end of each calendar quarter." ESI was then required to pay the plan 85% of billed rebates "no later than 150 days after the end of such quarter." Similarly, the 1999 Goodyear Contract required ESI to pay 100% of all rebates, on a quarterly basis. The contracts, therefore, established when the rebates, and correspondingly, any interest thereon, became "plan assets."
While the contracts were silent on the matter now in dispute, the absence of a contractual provision establishing a party's right will not necessarily preclude the same. Here, the parties agreed that ESI would pay the plan's portion of rebates within a specified time period. Until such time, the rebates (and any benefits therefrom) rightly belonged to ESI. See Moeckel, at *25 ("Caremark cannot be held liable for breach of fiduciary duty for retaining interest earned on its own money and adhering to the specific contract terms.") (citing Fechter v. Conn. Gen. Life Ins. Co., 800 F. Supp. 182, 199-200 (D.Pa. 1992)). While the parties are in disagreement as to whether the plan sponsors knew about ESI's interest-related compensation, it is hard to believe that such sophisticated entities entirely overlooked the time value of money. In any event, the parties' express agreement, setting forth specific payment periods, precludes the plan's right to interest.
II. CLASS CERTIFICATION
Plaintiffs seek to certify the following five classes:
Proposed Class 1: All self-funded welfare benefit plans within the meaning of [ERISA] . . . (i) for which [ESI], and/or one of its affiliates or subsidiaries . . . (excluding National Prescription Administrators) . . . performed [PBM] services, (whether directly or through an insurer, managed care company, or third-party administrator ("TPA)), at any time, from August 1, 1999, thru [the date of certification]; (ii) under a contract which vested ESI with the discretion to set "MAC" or "MRA" prices; (iii) executed prior to March 1, 2003. Excluded from this class are the clients and/or former clients of [National Prescription Administrators] at any time from August 1, 1999 thru [the date of certification].
Proposed Class 2: All self-funded welfare benefit plans within the meaning of [ERISA] . . . for which [ESI], and/or one of its affiliates or subsidiaries . . . (excluding National Prescription Administrators) . . . performed [PBM] services, (whether directly or through an insurer, managed care company, or third-party administrator ("TPA)), whose contract vested ESI with the ability to select the Average Wholesale Price ("AWP") pricing source, at any time, from June 1, 2001, thru [the date of certification]. Excluded from this class are the clients and/or former clients of [National Prescription Administrators] at any time from June 1, 2001 thru [the date of certification].
Proposed Class 3: All self-funded welfare benefit plans within the meaning of [ERISA] . . . (i) for which [ESI], and/or one of its affiliates or subsidiaries . . . (excluding National Prescription Administrators) . . . performed [PBM] services, (whether directly or through an insurer, managed care company, or third-party administrator ("TPA)), at any time, from August 1, 1999, thru [the date of certification]; (ii) under a contract providing that the plan (and/or the insurer, managed care company, or TPA) would receive or retain some portion of formulary savings, market share incentive payments or other rebates; (iii) executed prior to March 1, 2003. Excluded from this class are the clients and/or former clients of [National Prescription Administrators] at any time from August 1, 1999 thru [the date of certification].
Proposed Class 4: All self-funded welfare benefit plans within the meaning of [ERISA] . . . (i) for which [ESI], and/or one of its affiliates or subsidiaries . . . (excluding National Prescription Administrators) . . . performed [PBM] services, (whether directly or through an insurer, managed care company, or third-party administrator ("TPA)), and participated in ESI's OptiMed program, at any time, from August 1, 1999, thru March 1, 2003. Excluded from this class are the clients and/or former clients of [National Prescription Administrators] at any time from August 1, 1999 thru [the date of certification].
Proposed Class 5: All self-funded welfare benefit plans within the meaning of [ERISA] . . . (i) for which [ESI], and/or one of its affiliates or subsidiaries . . . (excluding National Prescription Administrators) . . . performed [PBM] services, (whether directly or through an insurer, managed care company, or third-party administrator ("TPA)); (ii) who shared in formulary savings, market share incentive payments or other rebates; (iii) whose contracts did not expressly allow ESI to retain interest on savings, rebates, or other payments payable to the plan; (iv) at any time from August 1, 1999 thru [the date of certification]. Excluded from this class are the clients and/or former clients of [National Prescription Administrators] at any time from August 1, 1999 thru [the date of certification].
Having found that ESI was not an ERISA fiduciary during four out of five of the acts alleged, Plaintiffs' motion for class certification shall be denied as moot insofar as it relates to Proposed Classes I, II, III, and V. Notwithstanding, for purposes of argument, the Court will address the merits (or lack thereof) of certifying each putative class.
In certifying a class, a district court, "after a rigorous analysis," must be satisfied that the elements set forth in Rule 23 have been sufficiently established. General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 161 (1982). This may require the Court to "probe behind the pleadings" and consider other matters, including the probable course of litigation. Id. at 160. See Sanft v. Winnebago Industries, Inc., 214 F.R.D. 514, 519 (D.Iowa 2003) ("[W]hile a court should `refrain from deciding any material factual disputes between the parties concerning the merits of the claims' . . . `the Court may examine not only the pleadings but also the evidentiary record, including any affidavits and results of discovery.'") (quoting In re Buspirone Patent Litig., 210 F.R.D. 43, 56-57 (D.N.Y. 2002)).
A. CAPABLE OF ASCERTAINMENT
As a threshold matter, the parameters of the putative class must be ascertainable. See Ad Hoc Committee to Save Homer G. Phillips Hosp. v. City of St. Louis, 143 F.R.D. 216, 219 (D.Mo. 1992) ("If a class is so vague that it is not susceptible to ready identification, problems may arise regarding the provision of notification to class members, the binding effect of any judgment rendered in the case and the general concerns of propriety of an overly large class.").
ESI states that the putative classes are not capable of ascertainment in that "[it] has no readily available sources of information that could be used to ascertain which ESI clients are ERISA self-funded plans," as opposed to insured plans. See Kiefer Dep., Jan. 17, 2006:
I don't have the ability and there's no system that I can go to that will allow me to say I want to look at all ERISA plans or all self-funded plans or all fully insured plans. We don't have that technical capability. So to do that, we would have to somehow . . . manually sit down and try and figure out with a bunch of folks in a room which clients might — might fall subject to that. * * * I can't tell you that somebody is covered by ERISA or not. I have to go back and look at each contract, at each period of time, and there may be multiple contracts. Id. at 24: 13-24.
To the contrary, Plaintiffs urge that ESI bears tremendous electronic computer capability and that class membership is ascertainable by way of a "simple mechanical process," i.e. taking a look at the contractual terminology in ESI's accessible records and/or data sources.
"ERISA's definition of an employee welfare benefit plan is ultimately circular: `any plan, fund, or program . . . to the extent that such plan, fund, or program was established . . . for the purpose of providing . . . through the purchase of insurance or otherwise . . . medical, surgical, or hospital care or benefits.'" Pegram, 530 U.S. at 222-23 (citing 29 U.S.C. § 1002(1)(A)). Nonetheless, the distinction between an "insured" plan and a "self-funded" plan turns on liability. As opposed to "insured" or "capitated" plans, which pay set premiums to an insurance company or third party provider in exchange for full payment of their members' prescription drugs; "self-funded" plans pay the PBM an administrative fee, and remain liable on the obligation to pay the claims of their beneficiaries and participants. Merck-Medco, 433 F.3d at 185.
See also, e.g., FMC Corp., 498 U.S. at 54 ("[T]he Plan is self-funded; it does not purchase an insurance policy from any insurance company in order to satisfy its obligations to its participants."); Prudential Ins. Co. of America v. National Park Medical Center, Inc., 413 F.3d 897, 901 (8th Cir. 2005) ("Tyson sponsors a self-funded, or self-insured, health benefit plan (the "Tyson plan") for its employees in which benefits are paid out of Tyson's general assets."); Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 367 (2002) ("`The defining feature of an HMO is receipt of a fixed fee for each patient enrolled under the terms of a contract to provide specified health care if needed.' * * * `The HMO thus assumes the financial risk of providing the benefits promised . . .'") (quoting Pegram, 530 U.S. at 218-19).
ESI's concern is sound; if the parties, and ultimately the Court, are unable to determine the plans' source of funding, the proposed class will fail the requirements of Rule 23, infra. See, e.g., Merck-Medco, 504 F.3d 229:
Self-funded Plans differ significantly from insured or capitated Plans because only self-funded Plans assumed the direct risk of absorbing any increases in prescription drug costs that were caused by Medco's conduct.
* * *
[T]he relationship of the Plans to Medco and its effect on each Plan goes to the very heart of the litigation. While we do not here decide whether the self-funded Plans in fact suffered greater injury, we think it proper to allow them to raise their claims as part of a separate subclass. Id. at 246.E.g., FMC Corp., 498 U.S. at 61-63 (Insured plans may be subject to direct state regulation, whereas self-insured plans are governed exclusively by ERISA.).
Notwithstanding the foregoing, and while the Court declines to simply take Plaintiffs' word for it — i.e. that ESI maintained records segregating the subject plans in a manner conducive to certification (especially given ESI's sworn representations to the contrary) — the sample contracts before the Court contain sufficient language pertaining to the same. Specifically, the contracts obligated the respective plan sponsors to pay PBMs for billed amounts relating to prescription drug claims. (1999 Goodyear/ESI Contract § 3.2(d); 2002 Goodyear/ESI Amendment ex. A; 1999 NEHC/ESI Addendum; 1999 Kroger/Diversified Contract § 4.1, ex. A § 3(c), ex B § 4, ex C; 1997 Old Kent/Diversified Contract; and 1997 CBS/Value Rx Contract §§ 3 5.5.)
See also 29 U.S.C. § 1102(b)(1) (4) (Every ERISA plan must provide for a procedure for establishing and carrying out its funding, and specify the basis on which payments are made to and from thereto.).
Thereupon, the plans' contracts, coupled with Plaintiffs' lists which purport to enumerate the potential class members in part, give rise to a sufficiently ascertainable class. See Chmieleski v. City Products Corp., 71 F.R.D. 118, 149-50 (D.Mo. 1976) (While inclusion in the subclass required a factual determination as to each member in the overall class; subclass was sufficiently definite and certification was not improper where defendants' evidence established the existence of records identifying the names and addresses of potential subclass members.).
C.f. Adair v. Johnston, 221 F.R.D. 573, 577-79 (D.Ala. 2004) (Court would be required to engage in fact-intensive analysis to identify class members and certification was not appropriate, where (i) putative class consisted of policy holders of life insurance policies covered by ERISA and issued by MONY from January 1, 1985 to the present date; (ii) the only evidence offered to identify the class was an SEC filing stating that MONY had 657,547 life insurance policies as of 2002; and MONY submitted evidence that most life insurance policies were not covered by ERISA.).
B. RULE 23(a)(2)'s "Commonality" Requirement
Under Rule 23(a), a party seeking certification must prove, among other things, "commonality," i.e. that the resolution of "questions of law or fact common to the class" shall affect all or a substantial number of class members. Plaintiffs have not met this burden.
The threshold issue as to each of the five proposed classes concerns the Court's ability to address ESI's status as an ERISA fiduciary on a class-wide basis. For the reasons outlined below, the Court finds that it may not.
Defendant rightly asserts that the putative class members compose a potentially massive and heterogenous body. Specifically, each of the proposed member plans received services from one (or more) of three different PBMs, i.e. ESI, and its acquisitions, Diversified Pharmaceutical Services and Value Rx. Plaintiffs assume, without proving, that the provider contracts, and the services offered and provided thereunder, were substantially similar. The parties' contracts, i.e. the language used and services for which the parties were contracting, belie this conclusion.
For, despite the same Plaintiffs' insistence that the questions of law and fact are sufficiently common to the respective classes; it is apparent that each was negotiated by entities of varying size and sophistication, for particular services to be provided pursuant to unique compensation schemes, and formalized using distinct terminology.
The majority of Plaintiffs' "common questions" presume ESI's status as an ERISA fiduciary when taking the actions subject to complaint. However, status as an ERISA fiduciary entails a functional, and thus subjective, analysis. Therefore, to ascertain the existence of discretion and control (and, in turn, fiduciary duty), the Court must, as it has tirelessly done today, comb through and interpret the parties' bargains on an individualized basis. While unduly burdensome, this exercise has proven inescapable. PROPOSED CLASS I: Discretion to Set MRAs
The first proposed class entails self-funded ERISA plans receiving PBM services under a contract which vested the PBMs with discretion to set MRAs. Courts have identified several issues in resolving whether a PBM is an ERISA fiduciary in setting and adjusting MRAs, e.g.:
• Whether, and to what extent, the PBM's exercise of discretion affected the plan;
• Whether (at the time of contracting) the PBMs owed any duty to, or exercised any control over, the plan;
• Whether the PBM contract stated and/or the parties understood (at the time of contracting) that MRAs used to pay the pharmacies were the same as MRAs charged to the plans; and/or
• Whether the PBM contracts contained performance guarantees.
In reviewing the contracts which fall within the potential scope of Class I, the applicability, and resolution of, these questions are not common to the class.
First, the existence of fiduciary status may depend on the parties' compensation scheme. For example, under the 1997 Old Kent/Diversified, the plan agreed "to use the drug price file and ["MAC"] list as selected by and in operation at Diversified." However, Old Kent was not charged on the basis of MAC. Rather, it was charged a fixed amount for each submitted claim. In contrast, under the 1997 CBS/Value Rx Contract, the "MAC Program" was explicitly defined as a list of generic drugs which were bio-equivalent to branded pharmaceuticals, and approved by Value Rx; and the price of Generics charged to the plan was based off "MAC." Thus, while both contracts granted discretion to adjust MRAs, Diversified's exercise of discretion had no arguable effect on the ERISA plan it managed.
Additionally, fiduciary status could turn on the contract's specific provisions. In relevant part, Plaintiffs state that they had no idea that the PBMs were using different MRA levels to calculate the prices paid to pharmacies, as opposed to the prices charged to plans. While the Court expresses no opinion as to PBMs' duty to affirmatively disclose its compensation from other sources, and while Plaintiffs do not seek to certify their claims relating to fraud and/or failure to disclose; the contractual language relating to MRAs establishes the context of the parties' agreements.
For example, contrary to Plaintiffs' representations, some of the contracts disclose that MRAs may be charged at different levels. Specifically, the 1999 NEHC/ESI Addendum defines "MRA" as the "maximum allowable price for a generic drug established by ESI using a variety of factors . . . in its sole discretion."). See also 1999 Goodyear Contract (same). It further states that "ESI contracts with Participating Pharmacies at various rates that are renegotiated from time to time, and charges Sponsor at a uniform rate that may be greater or less than the actual rate paid to Participating Pharmacies. * * * Sponsor acknowledges and agrees that ESI will retain all such . . . provider discounts . . . as ESI's compensation for administering the Prescription Drug Program."
Lastly, some of the contracts limit the extent of discretion (and/or impact of the same) which the PBM was afforded. Under the 1999 Goodyear Contract, MRA was guaranteed to achieve a set percentage off of AWP. Similarly, the 2002 Goodyear Amendment defined "MRA" to equal AWP less an average discount of 45% to 65%, with a guarantee of 50% off AWP for Generic Retail drugs. These guarantees effectively curbed ESI's grant of discretion over adjusting MRAs; therefore, the absence of such contractual provisions, e.g., 1999 NEHC/ESI Addendum, may compel different results.
Accordingly, whether the PBMs were ERISA fiduciaries in adjusting MRAs involves the interpretation of distinct contracts; and gives rise to a myriad of several fact-specific legal questions. Accordingly, certification will be denied as to Plaintiffs' proposed Class I.
PROPOSED CLASS II: AWP Pricing Source
Generally stated, Plaintiff Goodyear moves for the certification of a class consisting of all plans whose PBM contracts vested ESI with the ability to select the AWP pricing source, at any time from June 1, 2001 through today's date. Class II, if certified, must ultimately resolve whether ESI was an ERISA fiduciary in selecting and maintaining First Data Bank as the AWP pricing source. Here, courts may consider, inter alia:
• Whether, and to what extent, the PBM's exercise of discretion affected the plan;
• Whether the PBM contract limited the PBM's selection to an identified and/or exclusive list of pricing sources; and/or whether the parties,' at the time of contracting, understood what sources were properly included in such list;
• Whether the PBM contract required the PBM to act in the sole interest of the plan in selecting the pricing source;
• Whether the PBM contract contained some fixed maximum as to the PBM's classification of fees related to administering the rebate programs;
• Whether the pricing source was selected and/or modified before any relationship with the plan; and/or
• Whether the pricing source was applied across the PBM's entire book of business, without regard to any particular plan.
In turning to the contracts, the 1999 Goodyear Contract gave ESI discretion to select an AWP pricing source. In assessing whether ESI was a fiduciary with regard to the same; following an intensive review of the contract and the surrounding circumstances; this Court held in the negative. To wit, the contract defined "AWP" as the average wholesale price determined by ESI from the most current information provided to it by drug pricing services such as Medispan, Redbook, or other source, generally recognized in the retail prescription drug industry. While First Data Bank was not listed as an agreed-upon source by the parties, extrinsic evidence revealed that the parties generally understood that, prior to contracting, ESI had selected and intended to use First Data Bank for its entire book of business. Thereupon, as stated by this Court, First Data Bank was intended as one of the "other source[s]" from which ESI could determine AWP. Therefore, ESI did not exercise discretion in its selection.
Further probative to a court's analysis is the effect of the exercised discretion. Under the 1999 Kroger/Diversified Contract, Diversified was entitled to fees related to its administration of the Rebate Program. Here, the only provision relating to AWP stated that such fees "are generally 3.5% of the ingredient cost (AWP)" of drugs dispensed. This provision arguably vests Diversified with discretion in selecting the AWP pricing source. Assuming the PBM retained such discretion, the Diversified Contract falls within the scope of proposed Class II. However, this contract called for a fixed fee to be charged to the plans, irrespective of AWP. Therefore, while the PBM's selection of a pricing source may have resulted in a greater number of manufacturer-paid fees, it did not affect the plan's prices. And, while the plan may be effected to the extent that it would receive lesser rebates, some plans may not have been entitled to such rebates. In such latter cases, the plan would arguably be unaffected by the PBM's selection of a pricing source.
To find in the alternative, courts could consider extrinsic evidence to gauge the context of the parties' chosen language.
Accordingly, this Court declines to base the interests of potentially thousands of plans, whose PBM contracts were vastly different in substance and in form, on the assumptions of few. PROPOSED CLASS III: REBATES
Next, Plaintiffs seek to certify all plans operating under a contract which entitled them to "receive or retain some portion of formulary savings, market share incentive payments or other rebates." Here, the underlying issue is whether ESI is an ERISA fiduciary in negotiating with the pharmaceutical manufacturers for rebates, and in controlling plan assets, i.e. the rebates due to the plans. To resolve the same, courts have considered, inter alia:
• Whether the plan participated in a formulary program;
• Whether the PBM contract required the PBM to negotiate with manufacturers on behalf of the plan;
• Whether, in its negotiations with manufacturers, the PBM was negotiating with regard to a particular plan and/or for its entire book of business;
• Whether the PBM contracts specified when rebates were due to the plan;
• Whether the PBM contracts entitled the plan to any portion of the rebates or savings; and if so, whether that portion was a fixed and identifiable amount;
• Whether the PBMs exercised discretion over the amount of rebates paid to the plan; and/or
• Whether the PBM contracts limited the amount of fees which could be collected by the PBMs in relation to administering the rebate programs.
Upon review of the subject contracts, the proposed class does not give rise to common questions. Specifically, the parties' contracts illustrate the myriad of considerations that may affect the PBMs' discretion and/or fiduciary duty.
Notably, the majority of contracts define "rebates" to (essentially) mean — a payment made by a drug manufacturer based upon utilization of a prescription drug product by beneficiaries of a health plan. Most contracts further distinguish between "rebates" and other "fees" paid by manufacturers for the PBM's administration of the rebate programs. Further still, a number of contracts restrict the PBM's discretion (if any) by (i) setting maximum fees, e.g., 3.5% of AWP for each claim; (ii) defining fixed rebate amounts, e.g., 15% of all rebates; or (iii) establishing minimum (per claim) rebates. Further relevant to the Court's analysis are the varying performance guarantees, often included in the applicable contracts. See 1997 CBS/Value Rx Contract (guaranteeing to reduce the plan's overall cost trend).
The foregoing provisions are relevant to the parties' understanding of what was to be included in the "rebates," and/or the parties' corresponding rights and obligations. Accordingly, commonality has not been established with regard to Class III. PROPOSED CLASS IV: Participation in OptiMed Program
Next, Plaintiffs seek to certify all plans which participated in ESI's OptiMed Program at any time from August 1, 1999 through March 1, 2003. Here, the Court must ultimately resolve whether ESI was a fiduciary (i) in negotiating with Drug Manufacturers for additional "Rebates" or "Savings" or other compensation related to; and or (ii) in modifying; the OptiMed Program. To make this determination, courts have considered, inter alia:
• Whether the PBM contract required the PBM to negotiate with manufacturers on behalf of the plan;
• Whether, in its negotiations with manufacturers, the PBM was negotiating with regard to a particular plan and/or for its entire book of business;
• Whether the PBM retained sole discretion over what drugs were "preferred" and/or "covered";
• Whether the PBM contract contained limitations over which drugs would be included and/or excluded from the formulary;
• Whether the formulary was customized for the plan;
• Whether the plan sponsor retained complete discretion over benefits design and administration;
• Whether the PBM was required to gain consent from the plan and/or the prescribing physician before "switching" and/or "intervening";
• Whether the PBM contracts established when Plaintiffs' share of rebates became "plan assets";
• Whether the PBM contract entitled the plan to any portion of the rebates or savings; and if so, whether that portion was a fixed and identifiable amount; and/or
• Whether the PBM contracts limited the PBM's discretion in identifying, classifying, and/or disposing of the plan assets.
Plaintiffs' class description excludes the 1997 CBS/Value Rx Contract from its scope.
In addressing fiduciary status, this class will not give rise to common questions of law and fact. To address the fiduciary duty owed to each plan, the Court must conduct an individualized review of each contract and interpret, as a matter of law, the parties' entire agreement. The subject contracts are representative of the distinct parties involved; each a product of the plan's sophistication, knowledge, understandings, prior dealings, and desired compensation schemes. In that way, the language adopted to formalize the parties' agreement is often distinct, undefined, or absent; and the foregoing considerations (which in no way constitutes an exhaustive list) may not be applicable or commonly addressed by a cursory and/or objective review.
Accordingly, certification of Proposed Class IV shall be denied. PROPOSED CLASS V: INTEREST
Lastly, Plaintiffs seek to certify all plans operating under a contract which (i) entitled them to share in "rebates" and (ii) did not expressly allow ESI to retain interest on such amounts.
It appears that Proposed Class V seeks to certify a subclass of Proposed Class III. In accordance with the foregoing analysis; Plaintiffs' motion, as it relates to Proposed Class V, shall similarly be denied.
An Order in accordance with today's Memorandum shall be forthcoming.