This is something we (those who own or work for independent pharmacies) have been waiting for. Finally someone was bold (and brave) enough to bring an action against a PBM on DIR fees. This someone is Aids Healthcare Foundation (“AHF”), a California non-profit, which owns and operates retail pharmacies that serve HIV/AIDS patients. While many were exploring a potential legal action against PBMs on DIRs fees, all ran into a problem that pharmacies contractually agree to such fees (and we have various court precedent enforcing PBM contracts of adhesion).

A little background on the case: AHF-affiliated pharmacies used LeaderNet (PSAO) to contract with Caremark. Sometime in 2019, the pharmacies terminated their relationships with LeaderNet and began contracting directly with Caremark on their own behalf. Instead of assessing a flat network fee – as Caremark did when the contract was administered by LeaderNet – it started to charge pharmacies a variable network fee range (e.g., 3-5%) depending on performance, with the higher performing pharmacies paying the lower fee and vice-versa. Caremark assessed these performance fees after the point of sale on a trimester basis.

Caremark calculated (and still calculates) such variable fees (DIRs) per the Provider Network Performance program’s (PNP) criteria such as:

  • Renin Angiotensin System (RAS) Antagonists Adherence
  • Statin Adherence
  • Diabetes Adherence
  • Specialty Adherence
  • GAP Therapy (Statin Use in Persons with Diabetes)
  • Comprehensive Medication Review (CMR)
  • Completion Rate (MTM), and
  • Formulary Compliance.

After November 2019, Caremark scored AHF-affiliated pharmacies in the aggregate. In other words, Caremark provided one Trimester Report for the entire chain instead of providing individual reports. AHF’s DIR Fees after November 2019 equated to 2.8 mil (!) on average per trimester. Caremark recouped these fees from future reimbursement payments to AHF.

As a result of these extensive damages, AHF took the risk and brought an arbitration for a breach of contract seeking recovery of damages, a declaration of non-enforcement and prohibition of the application of DIRs going forward, and attorneys’ fees and costs.

The arbitrator was presented with the following issues:

  • Did Caremark breach the contract with its application of DIR resulting in AHF being paid less than the contract required?
  • Did Caremark breach the contract by violating the covenant of good faith and fair dealing by implementing DIRs?
  • Was the imposition of the DIR procedurally unconscionable?
  • Is Caremark’s contract with AHF’s pharmacies an unenforceable contract of adhesion?
  • Should the DIRs be enjoined going forward?
  • What, if any, damages has AHF sustained?

Nine witnesses testified at the hearing and over 690 exhibits were entered into evidence. The hearing lasted five days. After the testimony phase, the parties engaged in two rounds of simultaneous briefing.

Unsurprisingly, Caremark’s main argument during the hearing was that AHF – which is an experienced healthcare provider with substantial bargaining power – has agreed to the terms of the contract and Caremark’s manuals. The arbitrator decided otherwise holding that Caremark is one of the largest PBMs and that a pharmacy would lose out on large amounts of business if it did not sign up with Caremark. AHF had no alternative if it wanted to serve Caremark’s members. The arbitrator stated in his decision:

“The growth in the range of the variable DIR’s demonstrates the unequal bargaining power. CVS and its plan partners had no competitive check on how much they increased the variable DIR rates. There was no valid business reason presented for the escalating growth in the percentages recouped, and this growth shows unchecked economic power.”

As a result, the arbitrator found the contracts between Caremark and AHF were adhesive. On the other hand, when AHF was contracting through its PSAO, the DIRs were fixed and thus knowable at the outset and at the point of sale. The arbitrator found these contract terms were not unconscionable. Thus, the fixed rate DIRs are enforceable but the variable DIR calculations were in the discretion of CVS and therefore, unconscionable and unenforceable.

The arbitrator brought an interesting point: some PNP criteria points were not within the control of the pharmacies. For example, pharmacies cannot change prescriptions (besides changes to therapeutically equivalents) and have no control over prescribers in order to comply with the criteria set by Caremark. In addition, some of Caremark’s calculations were arbitrary, such as applying some average of other pharmacies when there was no data available for AHF pharmacies.

Having found the variable DIR provisions to be substantively unconscionable, the arbitrator chose to limit the application of the variable DIR provisions and award damages to AHF in amount of 22 million (DIR fees paid to Caremark) plus attorneys’ fees and cost of arbitration.

While arbitration decision is final and there are usually no means to appeal, Caremark nonetheless filed a motion to Vacate or Correct the Arbitration Award and AHF filed a Petition to Confirm Contractual Arbitration Award in Superior Court of California for the County of Los Angeles. We will be watching the development of this case and will publish an update whenever there is any meaningful progress on the case.