Federal District Court Judge Expected to Rule on Intra-class Conflict Between Payers and Individual Patients in EpiPen MDL

By  Proxima Studio  / Shutterstock.com

By Proxima Studio / Shutterstock.com

In the multi-district litigation (MDL) against EpiPen manufacturers underway in the U.S. Court for the District of Kansas, Judge Daniel D. Crabtree now confronts two critical issues common to the EpiPen litigation, the insulin pricing litigation, and other drug pricing class actions currently pending in state and federal courts. The primary issue is a direct conflict between the two plaintiff groups that comprise the joint plaintiff class proposed by Plaintiffs’ counsel in the EpiPen case: individual patients and third-party payers (including health insurers). Secondary to the issue of conflict are apparent ethical breaches by Plaintiffs’ attorneys who seek to represent individual patients on matters related to the pricing of rebated brand drugs while protecting the conflicting interests of former and current payer clients.

T1DF has been closely interested in the EpiPen litigation because a ruling on this issue of conflict could revive T1DF’s campaign to open a concurrent litigation track against insurers regarding heavily rebated insulin and other diabetes pharmaceuticals. In order to proceed with litigation, T1DF must terminate a tolling agreement signed between the insulin litigation plaintiffs’ counsel and third-party payers. Judge Crabtree has signaled that the question of intra-class conflict brought to the Court’s attention by T1DF in January and June letters may have merit. T1DF’s policy director Charles Fournier was present at the EpiPen MDL class certification hearing held on June 12 (Phase 2) in Kansas City. At that hearing, Judge Crabtree publicly raised the multi-billion-dollar question: Are insurers and other third-party payers co-victims, with patients, of a rebate-driven scheme to inflate EpiPen prices? Or are payers instead co-conspirators in the wrongful conduct they allege against manufacturer Defendants?

The Court’s failure to address this patent conflict and the failure, by attorneys for manufacturer Defendants, to report Plaintiffs’ counsel to the relevant disciplinary bodies and file a motion for Rule 11 sanctions would be unconscionable ethical breaches. Allowing attorneys who represent co-conspirators to control both sides of a class action supposedly filed on behalf of injured patients threatens the very foundation of our judicial system.
— Charles Fournier, T1DF Vice President, Policy and Advocacy

In the EpiPen MDL, Plaintiffs’ counsel are trying to certify a class comprised of individual patients as well as third-party payers (health insurers and other payers, such as self-insured employers and union plans). These attorneys are led by Keller Rohrback managing partner Lynn Sarko. As former counsel for T1DF, Keller Rohrback attorneys have actual knowledge of the direct conflict between individual patients and third-party payers who negotiate and receive large manufacturer rebates on prescription drugs such as EpiPens and analog insulin but base patients’ coinsurance, benefit thresholds, and premium rates on unrebated list prices. Over the last 18 months, these Plaintiffs’ attorneys have acknowledged in EpiPen MDL filings that health insurers directly benefit from and participate in the alleged wrongful conduct—and yet these same attorneys have repeatedly denied that the insurers’ role as co-conspirators with manufacturer Defendants places them into conflict with individual patients. Though purporting to represent individual EpiPen users, these class action attorneys first sought the termination of Mylan’s EpiPens for Schools Program—a program broadly supported by the individual consumers who buy EpiPens—and are now asking that 70% of any damages awarded in the class action go to third-party payers.


Judge Crabtree’s ruling on the motion to certify the proposed joint patient-payer class is expected to address whether insurers and other third-party payers should be deemed co-conspirators.

During the public hearings on June 11 and 12, Judge Crabtree directly questioned Plaintiffs' counsel regarding conflict existing between third-party payers [who participate in the alleged “unlawful conduct”—rebate negotiation] and patients [who now pay premiums, coinsurance, and tiered copays that payers calculate based on full list prices, not the net rebated prices payers obtain]. He asked, based on content in the Plaintiffs’ own brief in support of class certification, whether TPP Plaintiffs should not instead be grouped with manufacturer Defendants as co-conspirators in the wrongful conduct Plaintiffs allege.

When it became apparent, in the course of the June 12 hearing, that intra-class conflict could be a key issue in this litigation, Plaintiffs’ counsel Keller Rohrback quickly requested the appointment of a special master to oversee possible settlement negotiations—a step that would have postponed all deadlines. Judge Crabtree denied that request, noting Plaintiffs’ counsel can manage settlement negotiations on their own. He instead took under advisement the Plaintiffs’ motion to certify a joint class that would contain both third-party payers and patients, anticipating he would rule in a few months’ time. Plaintiffs’ counsel subsequently used a discovery delay caused by non-party Teva Pharmaceuticals to seek delay in submitting their expert reports and to postpone all trial dates by at least three months—suggesting Plaintiffs’ counsel may be concerned their experts’ merit reports would further illustrate that health insurers are the primary plaintiffs and the primary beneficiaries of this litigation, against the interests of the consumer subclass. The Court granted a two-month extension for limited additional discovery and reset the filing date for Plaintiffs’ merit reports to no later than October 16, 2019, thus postponing the Court’s ruling on the motion for class certification and the underlying intra-class conflict issue.

The requested delay may also give the Court time to review in full available records in this case and the related insulin litigation. Paradoxically, the Court’s ability to address the conflict issue efficiently has been undermined by manufacturer Defendants’ counsel’s failure to fully brief the issue of intra-class conflict, to provide expert testimony, and to select the most relevant records from the massive ongoing discovery of non-party PBMs and insurers and the extensive case records T1DF helped create in the insulin pricing and related diabetes pharmaceutical cases. Manufacturer Defendants did not present any expert testimony on the issue of conflict between individual patients and health insurers (manufacturers’ trading partners and possible co-conspirators). Defendants have not addressed third-party payers’ rebate capture, their misrepresentations to health plan beneficiaries, or their unjust enrichment. Defendants’ counsel’s failure to brief substantively a conflict that is now a matter of general public knowledge should, however, be of little consequence. Judge Crabtree’s ruling on class certification and the underlying issue of intra-class conflict can also rely on Plaintiffs counsel’s own admission that insurers derive substantial financial benefit from the alleged wrongful conduct.

EpiPen MDL’s administrative judge already recognized insurer Humana “has a substantial business interest” in earning and retaining rebates.

U.S. Magistrate Judge Teresa James, administrative judge in the EpiPen MDL, already recognized in a February 4, 2019, ruling on discovery costs that health insurance company Humana—specifically identified by Plaintiffs’ counsel as a potential member of a payer-patient joint class—“has a business interest in the underlying claims.” Judge James’s ruling responded to a pleading where Plaintiffs’ counsel argued two points in surprising juxtaposition: On the one hand, Plaintiffs’ counsel argued Humana has a “direct business interest” in the underlying claims. More specifically, they highlighted that Humana benefits from the current practice: “Humana has warned its investors of the risk that “[i]f we do not continue to earn and retain purchase discounts and volume rebates from pharmaceutical manufacturers at current levels, our gross margins may decline” (emphasis in Plaintiffs’ brief), and cited Humana’s 2017 annual report where the publicly traded insurer made the same point to its investors: Humana’s current financial results are predicated on not passing rebates to individuals, that is, on continuing to misrepresent to patients that unrebated list price or gross pharmacy claims expense is “plan cost” and overcharging patients accordingly (directly via inflated coinsurance based on list prices, indirectly via benefit thresholds and premium rates).

As explained by Humana, its Pharmaceutical and Therapeutic (“P&T”) Committee is the group within Humana that would possess responsive materials concerning or memorializing Humana’s deliberative process and considerations concerning rebates and whether or not (and why) certain EAI Drugs will be included or excluded from Humana’s formulary. ECF No. 292 at 6... Humana has a direct business interest in the underlying claims in this litigation. In fact, Humana has warned its investors of the risk that “[i]f we do not continue to earn and retain purchase discounts and volume rebates from pharmaceutical manufacturers at current levels, our gross margins may decline.” Ex. 1 at 30 (“We have contractual relationships with pharmaceutical manufacturers or wholesalers that provide us with purchase discounts and volume rebates on certain prescription drugs dispensed through our mail-order and specialty pharmacies.”), https://humana.gcs-web.com/static-files/c7a3ff1d-4a42-44b1-9284-342d4997366f.
— Class Plaintiffs’ Opposition to Humana Inc.'s Motion for an Extension of Time, for a Protective Order, and for Costs and Fees, page 4, 7 (ECF 783, July 11, 2018)

On the other hand, Plaintiffs’ brief also argued that “[s]hould Plaintiffs prevail in this litigation, Humana—so long as Humana remains in the class and does not opt-out to pursue its own claims—will likely be entitled to a share in the recovery.” Plaintiffs’ counsel would thus convey to insurers and other TPPs a windfall in addition to unjustly earned profits obtained by basing patients’ payments on inflated list prices rather than payers’ net (rebated) cost. Having overcharged patients in the underlying business transaction where insurers, including Humana, negotiate and retain large manufacturer rebates, these insurers would then receive over 70% of any financial recovery from this litigation. TPP Plaintiffs seem thus to be using the EpiPen MDL, allegedly filed to benefit individual patients (nine of the ten remaining named plaintiffs), to renegotiate retroactively the terms of their contracts with manufacturers (contracts that already deliver to payers rebates averaging over 55% of EpiPen’s list price) for the sole or primary benefit of the TPP subclass. In doing so, Plaintiffs’ counsel may compromise patients’ claims against this insurer subclass for rebate pass-through and other claims related to insurers’ role in the gross-to-net drug pricing bubble. Yet in their presentation on June 12 and their subsequently unsealed motion for class certification, Plaintiffs’ counsel alleged “there is no conflict between third party payors and consumers.” 



Judge James’s February ruling expressly determined that Humana has an underlying financial interest in the matter being litigated but only acknowledged in passim that this financial interest derived from retaining manufacturer rebates paid by the EpiPen manufacturers but not passed to EpiPen users. At the public hearing on class certification, Judge Crabtree pursued the logical inference: whether Humana’s (and other payers’) conflicting financial interests with the patient class and payers’ beneficial interest in the wrongful conduct is of such a nature as to make these third-party payers (and current co-plaintiffs) co-conspirators. In answering this question, he must assume that Plaintiffs’ prior statements are true unless contradicted by facts—but facts have since corroborated, rather than contradicted, Plaintiffs’ counsel’s inadvertent admission of intra-class conflict.

Plaintiffs’ most recent narrowly crafted denials of a conflict between named plaintiffs and the plaintiff subclasses they purport to represent (a straw man argument that leaves aside the more pressing question of conflict between the two groups counsel propose to join in a single class) leave uncontradicted Plaintiffs’ prior statements in support of its July 2018 motion, Plaintiffs’ own pleadings, and exhibits and deposition testimony in support of these pleadings. Despite Plaintiffs’ counsel’s cavalier dismissal of this issue and Defendants’ counsel’s failure to adequately brief and support their allegations, the issue of intra-class conflict remains in contention and could be central to the Court’s ruling on class certification.

Plaintiffs’ counsel is merely arguing that there is no conflict because, first, they have not, as counsel for the putative individual consumer subclass, brought a claim against the third-party payer subclass (which counsel also seek to represent), and second, that the nine individual named plaintiffs have agreed with this plan (or at least have not publicly objected on the record). These arguments are, however, of no help to Plaintiffs’ counsel. Direct conflicts between concurrent clients are non-consentable and should result in the immediate withdrawal of current Plaintiffs’ counsel from representing individual patients and third-party payers in this case. To have cultivated ignorance—including, possibly, by tolling PBM/payer claims in the insulin pricing litigation—or even to have misstepped via a lack of discernment is not a defense. The Court’s fiduciary duty towards the absent class would give it the right, and potentially the responsibility, to investigate independently an allegation of conflict. In the present case, the Court does not have to look very far, since conflict between the interests of individual patients and third-party payers/health insurers is the very basis of T1DF’s intervention in the insulin litigation.

Plaintiff’s counsel now involved in the EpiPen litigation previously blocked T1DF’s efforts to sue insurers in the insulin litigation.

The issue of intra-class conflict in the EpiPen MDL is central to T1DF’s dispute with class counsel in In re Insulin Pricing Litigation. Attorneys who seek to represent a payer class in related litigation, who have represented payers for decades and have third-party payers as current clients can’t jointly represent patients and insurers/third-party-payers in a drug pricing case where the injury to patients is primarily caused by insurers’ and other TPPs’ participation in and unjust enrichment from the alleged wrongful rebate scheme.

Keller Rohrback, a lead counsel in this EpiPen MDL, formerly represented T1DF in the insulin pricing litigation in New Jersey federal court. We retained them specifically to pursue a PBM-payer litigation track. (“These are payer cases,” we explained to our prospective counsel in March 2017.) Keller Rohrback filed on T1DF’s behalf against PBMs (as agents of insurers) and against UnitedHealthcare, as the corporate structure of its PBM Optum Rx dictated, but thereafter refused T1DF’s requests to add other third-party payer defendants. T1DF issued a detailed report on rebate capture by insurers in December 2017, including a discussion of the 2003 litigation by third-party payers—who were represented in that action by Hagens Berman—against PBMs to obtain full rebate pass-through to payers. Days later, Keller Rohrback terminated T1DF’s representation and executed—in full awareness of T1DF’s express opposition—a tolling agreement with third-party payers to delay, potentially for years, all insulin users’ claims, including T1DF’s claims, on rebate capture and overcharging by insurers and their PBM agents.

In January 2019, T1DF brought to Judge Crabtree’s attention Keller Rohrback’s role in the related diabetes cases and raised concerns about intra-class conflicts existing between patients and third-party payers in the EpiPen MDL. That letter noted that the EpiPen litigation concerns a similarly rebated prescription drug; while rebates on analog insulin are proportionally larger than those reported for EpiPens, the rebating scheme and insurers’ related overcharging of insureds based on list price are broadly identical. T1DF’s payer-focused litigation campaign was then cited in the EpiPen MDL Defendants’ motion against certifying the joint payer-patient class in support of their allegations regarding intra-class conflict. Defendants suggested in their brief that an all-consumer class “would have sought damages not only from Mylan, but also from their own payors.”

Neither Plaintiffs’ counsel nor Defendants’ counsel took any additional step, either to support substantially or to deny those allegations. Attorneys for manufacturer Defendants and third-party payer Plaintiffs (trading partners and possible co-conspirators) avoided directly addressing the issue during the public class certification hearing. Defendants’ counsel submitted no expert declaration regarding this critical question, although experts on the topic clearly exist, including Dr. Adam Fein and Dr. Craig Garthwaite, the expert retained by Amgen, Eli Lilly and Merck to “describe the relationship of that WAC, which is the price for wholesalers, with the price—or out-of-pocket cost—that consumers incur when acquiring prescription drugs” in Merck & Co., Inc., et al v. HHS, et al, case no. 1:19-cv-01738-APM. On their side, Plaintiffs’ counsel filed their motions and all expert reports (in support of the class certification) under seal and were slow to comply with the Court’s order to file publicly their June 12 presentation.

Manufacturer Defendants’ counsel and Plaintiffs’ counsel instead quarreled about an irrelevant matter: whether “PBMs” were included in the Plaintiff class. Removing PBMs from the proposed EpiPen Plaintiff class—while retaining insurers and other third-party payers—does not cure the central defect, nor does it have any practical significance. First, the direct injury to patients who use heavily rebated pharmaceuticals is caused by insurers and other third-party payers—still included in the proposed joint TPP class—not by PBMs (third-party payers, represented by Hagens Berman, sued PBMs in 2003 to enjoin PBMs to pass rebates to them, and rebate pass-through to payers is now reported at 90–100%). Second, most national PBMs are now vertically integrated with health insurance companies, where the PBM may be an in-house department (Humana Pharmacy Services with Humana, or Optum Rx with UnitedHealthcare—recently augmented by the acquisition of Catamaran); a fully-owned corporate subsidiary (Express Scripts with Cigna); a commonly-owned limited liability company (Prime Therapeutics, a Delaware LLC owned by its members—22 BlueCross BlueShield affiliates); or the health insurer’s parent/holding company (CVS Health with Aetna). MedImpact, a large regional PBM, is still nominally independent, although some have argued that its largest private client, Kaiser Permanente, has substantial control over its operations. These integrated PBM-insurers control over 70% of the pharmacy market, and nearly 100% of the market in Medicare Part D.

Intra-class conflict between the TPP subclass (currently allocated about 70% of the claimed damages) and the patient/consumer subclass is a matter of critical interest and precedential importance for all U.S. patients who must use manufacturer-rebated pharmaceuticals to treat specific medical conditions in six therapeutic classes (including rheumatoid arthritis, severe allergy, diabetes, and asthma) and who have been overcharged by TPPs based on gross pharmacy reimbursements or AWP instead of the much lower net prices TPPs negotiate directly with drug manufacturers or indirectly via their PBM agents. Class conflict is also a fundamental issue in this EpiPen MDL, but one that has not yet been fully briefed by Plaintiffs’ Counsel.
— T1DF Letter to Honorable Teresa J. James, U.S.M.J (June 28, 2019).

T1DF, troubled by repeated requests from EpiPen litigation counsel to seal class certification documents and by an apparent tacit agreement between attorneys for manufacturer Defendants and attorneys for their third-party payer trading partners (and putative Plaintiff class members) not to brief the issue of intra-class conflict, reminded the Court of its gatekeeping role in a further June 2019 letter. The Court placed this T1DF letter in the case record and immediately issued several orders giving parties ten days to cure their defective filings. We now hope that the Court will remediate with equal vigor the injury inherent to individual patients in Plaintiffs’ counsel’s proposal to consign them to a joint class with third-party payers who have exploited patients’ need for a lifesaving medication. Judge Crabtree now has a unique opportunity to put an end to a decades-long miscarriage of justice.

EpiPen Plaintiffs’ counsel have conveniently overlooked how U.S. health insurance actually works: insurers transfer risk back to insureds, profit more when cost basis increases.

T1DF’s June letter also mentioned that the joint-class scheme proposed in the EpiPen litigation is a legacy of an extended insurer-aligned litigation campaign launched in the early 2000s by the Prescription Access Litigation project with support from Hagens Berman name partner Tom Sobol. For over a decade, PAL’s joint insurer-patient classes passed muster with courts, in no small part thanks to partial (and thus misleading) statistical damage analysis from experts. These experts, including Dr. Meredith Rosenthal, have camouflaged underlying conflicts between payer and patient subclasses by avoiding any discussion of rebate accounting or risk transfer between third-party payers and insureds. The 70/30 distribution between TPP and consumer subclasses proposed in the EpiPen litigation is a persistent characteristic of the case approach Dr. Rosenthal appears to have developed in the early 2000s to support the payer-aligned Prescription Access Litigation campaign.

The high-level aggregate approach used by Prof. Rosenthal in the seminal In re: Lupron Mktg. & Sales Practices Litigation case (where the consumer class was allocated only 27% of the total settlement) sidesteps issues of risk transfer between TPPs and the individual plan beneficiaries who use rebated pharmaceuticals. In this aggregate approach, the expert evades the question of whether third-party payers have suffered an actual injury (or, alternatively, whether they have benefited from unjust enrichment)—in other words, the specific issues that would illustrate conflict between payer and consumer subclasses. See, e.g., Declaration of Meredith Rosenthal: Estimate of Units Paid for by Neurontin End Payers that Resulted from Alleged Fraudulent Marketing by Defendants dated August 11, 2008, ECF 1457-6 (Exhibit F), in In re Neurontin Marketing, Sales Practices and Product Liability Litigation, MDL Docket No. 1629 (Master File No. 04-10981). When the Neurontin case settled in November 2014, TPPs received 100% of the settlement award. Although Plaintiffs’ counsel had initially sought 30% of damages for consumers, consumers were excluded from the final settlement. Patients received nothing, not even an injunction for any form of pass-through from TPPs.

This EpiPen MDL is the latest iteration of the Lupron joint-class litigation strategy. An approach that may have been excusable in the early 2000s as a misinformed litigation decision based on incomplete information has been allowed to proceed, virtually unchallenged, through two decades where third-party payers have radically shifted “cost-sharing” risk to insureds while fiercely protecting their practice of characterizing gross pharmacy claims expense as plan cost. In September 2019, Keller Rohrback’s 50-year insurance defense practice, their extensive litigation on behalf of third-party payers, their prior representation of T1DF against PBMs/payers (terminated in December 2017), Keller Rohrback’s subsequent discovery request for Humana’s T&P rebate documents, culminating in the July 2018 discovery dispute in the EpiPen MDL, leave little doubt regarding Plaintiffs’ counsel’s actual knowledge that their third-party payer clients currently benefit—to the detriment of individual patients—from negotiating and retaining rebates while basing patients’ health plan benefit design (coinsurance, benefit thresholds, indexed copay, premium rates) on full list prices. 

Insurers are pass-through risk-shifting non-creative intermediaries with a cost-plus reimbursement model and, since 2009, a direct constraint between their cost basis and profits under the ACA medical loss ratio 80/20 rule. For an insurance company, delivering on securities analysts’ expectation of regular quarterly earnings increases requires increasing its cost basis and thus its opportunity to profit. Insurers incur no injury from a scheme that allows them to capture larger rebates while also increasing their cost basis. Each year, insurers’ premium increases account for net pricing trends, anticipated price negotiations, modeled revenues from manufacturer rebate payments (misleadingly accounted as general revenues instead of drug price offsets) and the accelerated capture of insureds’ deductibles achieved when insurers base their coinsurance payments on inflated gross pharmacy claims expense or other unrebated pricing metric, not payers’ actual net cost. For patients with chronic medical conditions on very high deductible plans, insureds’ out-of-pocket payments beyond their drug’s net cost may also be understood to constitute condition-specific premium payments. 

Insurance is a complicated industry, and it’s not inconceivable that a small local insurer with limited modeling capabilities and purchasing power could be struggling. But most TPPs—and all the largest insurers—sustain no injury from increasing list prices and the related rebating scheme for prescription drugs like EpiPens and insulin. In fact (as Humana’s 2017 annual report makes clear) they directly participate in and substantially profit, at the direct expense of their insured members, from the alleged unlawful conduct. Yet Plaintiffs’ counsel in the EpiPen and insulin cases do not seek disgorgement of insurers’ unjust enrichment. They instead use the size of the injury to patients—an injury caused by joint class member TPPs—to inflate the claimed damages against manufacturer Defendants, and then seek to transfer 70% of any recovered amount to their third-party payer clients. Under this joint payer-patient class scheme, Plaintiffs’ attorneys thus seek to enrich further the nation’s largest health insurers, adding additional manufacturer payments to the rebate payments those insurers already received and retained—and, in the process, could compromise patients’ claims against TPPs for all controversy related to EpiPen pricing. 

Individual patient plaintiffs’ primary claims are against third-party payers. This is a fundamental conflict between two subclasses of plaintiffs in the EpiPen MDL that should preclude certification of a joint class. The mere request from Plaintiffs’ counsel that any award would go primarily to third-party payers should raise significant questions regarding Plaintiffs’ counsel’s capacity to represent patient plaintiffs’ interests. This conflict should similarly preclude law firms that have a long history of representing third-party payers in prior drug pricing litigation from being appointed lead counsel in the insulin litigation or in any other current or near-future litigation involving pharmaceuticals that are heavily rebated to third-party payers.

Plaintiffs’ counsel’s primary defense, in their slide presentation at the June 11–12 hearings, against the suggestion that there exists intra-class conflict, is “Courts Around the Country Certifying Similar Classes with Both Third-Party-Payors and Consumers.” But Courts’ past approval of 75% settlement allocation to TPPs in drug pricing cases with joint payer-patient classes, rather than justifying certification of a joint payer-patient class in the EpiPen MDL, instead seems to document a pattern of attorney misconduct, judicial neglect, and repeated breaches of Courts’ fiduciary duties to unrepresented individual subclass members, i.e. patients. 

While Plaintiffs’ counsel state that they are representing individual patient plaintiffs, they seem instead to be representing third-party payer clients—against conflicting patient interests. Plaintiffs’ counsel’s failure to acknowledge their primary allegiance to these third-party payer clients—and their related conflict of interest—is similarly at the core of T1DF’s intervention in the insulin pricing litigation. Plaintiff’s counsel’s statements to the Court denying that these transactions raise a presumption of conflict breaches attorneys’ duty of candor. Defendants’ counsel’s reluctance to bring these ethical breaches to the attention of the Court and to file a motion for Rule 11 sanctions would likewise be unethical, and would be consistent with the suggestion that manufacturers and third-party payers are co-conspirators in a scheme to defraud patients. The collective silence of attorneys for insurer/third-party-payers and attorneys for manufacturer co-conspirators directly threatens the integrity of this judicial process.

Death of a rebate rule: insurers fight to continue overcharging patients who need rebated prescription drugs.

The stark contrast between what payers want and what patients want—and may want to plead they are legally entitled to receive—can be seen in the recent failure of rebate reform in Medicare Part D and insurers’ rearguard fight in standards maintenance organizations against any step towards auditable net cost accounting rules. In the most striking illustration of this conflict, AARP lobbyists directly opposed AARP members on rebate pass-through in Part D. An overwhelming 86% of AARP members supported the Part D rebate rule, which would have required point-of-sale net pricing to beneficiaries beginning in January 2020. AARP, a joint-venture partner in Medicare plans with insurer UnitedHealthcare, vigorously opposed Part D rebate reform.

The current Part D safe harbor to the Anti-Kickback Statute allows manufacturers to pay rebates to insurer plan sponsors in Part D. That safe harbor does not automatically protect industry actors from claims that their specific characterization and allocation of rebates received could violate the Anti-Kickback Statute. Early in 2019, The HHS Office of the Inspector General proposed—under its authority to prevent fraud and abuse—a new rule to govern the handling of rebates and other price offsets in Medicare Part D. That rule would have mandated that all manufacturer rebates and other price offsets be passed to Part D beneficiaries at the pharmacy point of sale, resulting in dramatic cost-sharing drops for any patient who uses a rebated drug and pays percentage coinsurance (for example, when buying brand drugs like insulin in the donut hole or catastrophic phases of the Part D coverage year). Industry observers including Credit Suisse, in an April 2019 report on Novo Nordisk, anticipated that regulatory termination of plan sponsor rebate retention in Medicare Part D would rapidly change practice throughout the commercial insurance sector, triggering list price resets close to payers’ current net cost.

On July 10, with the final rebate rule already circulating among agencies, the Trump Administration, under tremendous pressure from insurers, AARP, and insurers’ political allies on both sides of the aisle, suddenly terminated HHS’s rebate pass-through plan. With ongoing major drug pricing litigation—EpiPen MDL, insulin pricing cases—tightly controlled by insurer-aligned counsel (Hagens Berman, Keller Rohrback, Lieff Cabraser), insurers continue to contain, as they have done since 1998, all attempts to impose net price accounting on their industry, either directly (via NAIC’s Statutory Accounting Principles or statutory mandate) or indirectly via point-of-sale rebate pass-through.

As T1DF noted in our January 2018 comment on rebate pass-through in Medicare Part D, the 2003 legislation that created Part D was premised on the expectation that patient beneficiaries would have “access to negotiated price.” Patients were supposed to know the net cost of their medicines, including all manufacturer rebates and price offsets negotiated by payers. And patients were supposed to pay based on those net prices. In the 2005 final rule implementing Medicare Part D, however, the legislative intent was subverted and the Anti-Kickback Statute effectively vacated: en bloc, payers went on to exploit that regulatory loophole to base Part D beneficiaries’ payments on gross pharmacy claims expense. Because plan sponsors’ accounting with the Medicare program remained on a net cost basis, the resulting commercial transaction basing patient payment on list price delivered extra dollars not only to plan sponsors but also to the federal government. (Similarly, health insurers and the U.S. Office of Personnel Management (USOPM) jointly benefit from capturing manufacturer rebates received by plans in the FEHB program—the largest insurance marketplace in the U.S.—while some current and former federal employees overpay for insulin and EpiPens.)

Unsurprisingly, 86% of AARP members surveyed this past spring said they supported HHS’s proposal to change Part D pricing so beneficiaries would pay based on net cost at the pharmacy. (Although the survey was conducted by the manufacturer lobby PhRMA, it is hard to imagine a survey design where seniors would say they’d prefer to pay for their for life-sustaining medications based on list prices that, for pharmaceuticals like EpiPens and analog insulin, are now 200% to 400% of payers’ actual net cost.)

Health insurance companies spent the first half of 2019 strenuously lobbying against their covered members’ stated interest—arguing hard against proposed Part D rebate reform in public comments to HHS and in other public-facing platforms:

  • AHIP, the lobbying group representing U.S. health insurers, worked to generate fear that rebate reform might lead to a slight increase in seniors’ Part D premiums, enticing regulators to continue grossly exploiting a minority of beneficiaries with medical conditions including diabetes, severe allergy, and asthma to deliver a negligible, even illusory, benefit to the majority.

  • Humana, having quietly warned investors that regulatory changes on rebate retention could shrink the company’s profit margins, then loudly fought rebate reform in Part D by raising the specter of higher premiums. Humana’s CEO argued rebate reform was “just reallocating dollars,” sidestepping the question of whether the dollars of patients who use rebated brand drugs are being misallocated in the current practice, causing financial injury and medical harm to those specific patients.

  • Prime Therapeutics, owned by 22 BCBS plans, also opposed the rebate rule. Prime’s comment on the rule clarified that Prime operates on “full pass through of rebate dollars” to its health plan clients: plans, but not patients, obtain true net pricing on rebated products like insulin and EpiPens.

  • Meanwhile AARP—which derives about 40% of its annual revenues from its co-branded UnitedHealthcare Medicare plans—also opposed the rebate rule on grounds that only a limited “number of beneficiaries would benefit.” In May testimony before the House Energy and Commerce Committee, AARP directly dismissed the potential benefit of rebate reform in Part D as “juice not worth the squeeze.” (T1DF reminded AARP at the time that the “juice” here is insulin, for which Part D plan sponsors currently overcharge seniors by using list price as the basis for calculating patients’ payments.)

In these public comments from Spring 2019, insurers transparently argued that Part D plan sponsors—like insurers in the commercial market and many large self-insuring employer plans—benefit from their current practice of charging patients for rebated pharmaceuticals including EpiPens and insulin based on artificially inflated list prices, then characterizing rebates as general revenue they now allocate for other purposes.

Meanwhile, behind the scenes, in work groups of the National Council for Prescription Drug Programs (NCPDP)—the HIPAA-named DMSO nonprofit that manages the standards for information exchange among industry actors at the pharmacy point of sale—insurers and their PBM subsidiaries/affiliates fought against revising NCPDP's standards to accommodate the anticipated rebate changes in Part D. T1DF’s Charles Fournier was part of the 15-person NCPDP work group that drafted NCPDP’s comment on the implementation of rebate pass-through (chargeback) in Part D and drafted the Data Element Request Form (DERF) needed for the practical implementation of rebate pass-through and net cost reporting. At NCPDP’s May vote on the DERF, Fournier stressed to NCPDP’s members their responsibility to create standards that facilitate all lawful transactions, including net pricing and net cost reporting to patients at the pharmacy point of sale—rather than using any standard that channels industry partners’ behavior toward payers’ interests at patient expense, or gives patients misleading or partial information. The DERF amending NCPDP’s standards to implement the proposed rebate/chargeback changes in Part D passed in May 2019.

When the Trump Administration abruptly pulled the rebate rule on July 10, payers and their PBM affiliates, led by CVS Health, immediately moved to overturn the changes to the transaction standard that NCPDP had voted through in May. Despite T1DF’s opposition during the next NCPDP workgroup meeting in Philadelphia on August 8, the proposed rollback passed with 98% of votes. As in the EpiPen MDL, manufacturers in NCPDP avoided entering into open conflict with their insurer trading partners over a rebate retention scheme that, until 2015, had also benefited manufacturers by delivering ever-increasing supra-competitive net prices.

Payers versus patients: why the rebate rule controversy matters in the EpiPen litigation.

When we ask how the rebate rule controversy matters to the EpiPen litigation, we don’t have to answer the larger policy question of whether forcing rebate pass-through would drive down U.S. list prices. We only have to know whether rebate pass-through and net point-of-sale pricing that payers so publicly opposed in Part D would result in lower out-of-pocket costs for patients who use EpiPens. Lower cost-sharing based on EpiPens’ substantially lower net (rebated) cost would unquestionably help the patients who use EpiPens. Patients who need rebated brand drugs like insulin and EpiPens pay less money for their medicines when cost-sharing is based on insurers’ actual cost, net all rebates and discounts. If insurers no longer retained and reallocated rebates received on specific drugs, patients who use those drugs would spend less money to access the medicines they need.

Those patients—including patient members of a proposed EpiPen joint class—would, via net pricing at the pharmacy point of sale, be better able to use their medicines as prescribed and would consequently see better health outcomes. Health costs overall would decline thanks to improved therapeutic adherence, resulting in lower health insurance premiums. (Credit Suisse, in its April analysis of Novo Nordisk stock, predicted net pricing to patients via rebate reform would trigger list price drops close to manufacturers’ current realized net and would nevertheless be good for manufacturers’ bottom line because if all U.S. patients paid for medicines based on their insurers’ low net cost, not inflated list prices, more Americans could afford to fill their prescriptions.)

Insurers’ flat-out opposition to point-of-sale rebate pass-through is a clear and highly visible demonstration that rebate retention by third-party payers on pharmaceuticals like EpiPens and insulin is a payers versus patients issue. Insurers make more money (in patient cost-sharing and premiums) when they treat the list price of rebated drugs as “plan cost.” As cost-plus contractors, insurers also make more money if artificially inflating patient cost-sharing makes patients ration their use of drugs, resulting in more medical complications. (Out-of-pocket spending correlates strongly with prescription abandonment, with 69% abandonment when per-script patient cost-sharing hits $250.) When insurers increase patients’ cost-sharing by basing patients’ payments on list prices that are artificially inflated in order to pay huge rebates to insurers, then patients pay more to get their medicines and may, as a result of cost-induced rationing, suffer medical harm or death.

Further evidence of patients’ financial interests versus payers’ is seen in Wall Street’s massive reward to insurers on news that the White House had killed the rebate rule, meaning Part D plan sponsors like UnitedHealthcare, Humana, and Anthem/BCBS would likely continue in 2020 to charge many seniors coinsurance based on list prices. Traders immediately recognized the death of the rebate rule as a financial win for insurers. Major insurance companies’ stock prices shot up, gaining tens of billions of dollars in market cap in less than a day. Anthem gained 5% on $34 billion ($1.7 billion increase); Humana 6.3% on $21 billion (1.3 billion increase), Cigna 15% on $27 billion ($4 billion), UHC 14% on $92 billion ($13 billion).

With regulatory reform stalled at HHS, will Judge Crabtree recognize that Plaintiffs’ counsel cannot represent both payers and patients on a matter where those groups’ interests are publicly adverse?

It is, to say the least, highly unusual to see one co-plaintiff pretend to have no conflict with another co-plaintiff in litigation while, at the same time, publicly opposing the interests of that co-plaintiff in the federal regulatory and HIPAA standard maintenance processes on the very issue at stake in the litigation—in this case, third-party payers’ rejection of net cost accounting as a factor that amplifies the financial harm to patients when list prices are driven upwards by rebate negotiations between TPPs and drug manufacturers.

In the EpiPen MDL, Plaintiffs’ counsel’s insistence that there is no conflict between the third-party payer subclass (which includes national health insurers such as Humana) and the individual consumer class—though Plaintiffs' counsel have themselves filed evidence to the contrary—raises a strong presumption that certifying a payer-patient joint class would leave patients’ interests effectively unrepresented. It would be grossly unjust to entrust oversight over the interests of the individual consumer subclass to counsel with longtime third-party payer clients, who now propose to make insured hens share their henhouse with insurer foxes, and to deliver the majority of any award to the well-fed foxes, not the injured and intimidated hens.

Judge Crabtree is in a unique position to end a pattern of judicial neglect that for nearly two decades has sustained an ongoing injury to both insured and uninsured patient consumers by putting third-party payers in control of litigation on drug pricing where payers themselves derive financial benefit from the injury to patients. As Judge Crabtree wisely asked during the June hearings:

Are insurers and other third-party payers co-victims with patients—or should payers instead be viewed as co-conspirators in the wrongful conduct Plaintiffs now allege?


About T1DF

Oregon-based 501(c)(3) nonprofit Type 1 Diabetes Defense Foundation is America's only legal advocacy organization dedicated to advancing equal rights and opportunities for Americans with type 1 and other forms of insulin dependent diabetes. T1DF accepts no funding from the pharmaceutical, medical device, pharmacy benefit management, or insurance industries, nor from any organization they fund or any investment fund or any other corporate actor with interest in healthcare. We support regulatory frameworks in which manufacturers compete directly on innovation and price to consumers and where drug channel actors can engage in open and efficient price arbitraging, without price discrimination and asymmetries of information. Annual report available here.