Benefit Managers Lose Challenge to Calif. Law

(CN) - The 9th Circuit defended the constitutionality of California statutes that force pharmacy benefit managers to give insurance companies and other clients regular studies about drug-pricing information.

In 2002, five independent California retail pharmacies filed a class action, alleging that pharmacy benefit managers (PBMs) had not fulfilled their duty under two state laws to conduct fee research. Section 2527 and 2528 would require the PBMs to conduct bi-annual studies of local pharmacies' retail drug pricing for private, uninsured customers, and release these studies to their clients.

PBMs contract with health plan administrations such as insurers or HMOs to provide members with cost-effective prescription drugs.

About two years after the first complaint against 13 such PBMs, the pharmacies sued another five. A contemporaneous suit filed in state court was dismissed and remained so on appeal.

As the federal actions crept forward, the PBMs moved for judgment on the pleadings, claiming that the laws unconstitutionally compels speech in violation of both the U.S. and California Constitutions.

After a federal judge in Riverside disagreed, the PBMs brought a consolidated appeal to a three-judge panel of the 9th Circuit.

"Defendants argue that § 2527 constitutes a content-based compulsion of speech because it forces PBMs to advocate for pharmacies 'in the hope that the insurance companies will provide greater remuneration to [them],'" according to the 36-page majority opinion. "This argument, however, significantly mischaracterizes the nature of § 2527's requirement."

"The statute requires PBMs merely to conduct or obtain the results of studies of the prices charged by pharmacies to their private customers and to report the objective data revealed by these studies to the third-party health plan managers for whom they process claims," Judge Betty Fletcher wrote for the majority. "The 'compelled speech' at issue, therefore, is nothing more than the reporting of the purely statistical facts that these studies yield. The statute does not in any way regulate the content of the speech - content is instead dictated solely by the results of the studies themselves."

With a 1943 decision in West Virginia Board of Education v. Barnette, the Supreme Court struck down as unconstitutional a state law compelling students to salute the flag and recite the Pledge of Allegiance in schools, Fletcher noted. Thirty years later, with Wooley v. Maynard, the high court struck down a New Hampshire law requiring vehicles to bear license plates with the state motto, "Live Free or Die."

In Wooley, the court reasoned that "a state measure which forces an individual ... to be an instrument for fostering public adherence to an ideological point of view he finds unacceptable" invades the sphere protected by the First Amendment.

"The compelled speech here does not in any way resemble the type of political messages at issue in Barnette and Wooley," Fletcher wrote. "Nothing in the statutory scheme forces the PBMs to advocate any position or 'endorse' any 'pledge or motto' that is contrary to their beliefs. ... In fact, § 2527 does not require Defendants to convey any 'message' at all."

"Simply put, PBMs remain free, in reporting survey results under § 2527, to assert any viewpoint they would like," she added. "They may encourage action or inaction on the basis of the statistics, or they may say that the report is worthless, sent only under government mandate."

The statute "in no way chills or hampers PBMs' independent ability to speak their views on the subject of pharmacy reimbursements, even if these views are at direct odds with those of the pharmacies," Fletcher continued.

Judge Kim McLane Wardlaw wrote a nine-page dissenting opinion, saying the law should be struck as unconstitutional in keeping with three decisions to that effect by state courts.

"The Erie doctrine has long required federal courts to 'follow the decisions of intermediate state courts in the absence of convincing evidence that the highest court of the state would decide differently,'" Wardlaw wrote, referring to the 1938 decision in Erie Railway Co. v. Tomkins.

"The failure to follow the intermediate state courts violates the Erie doctrine and offends important principles of federalism and comity," the dissent states.

"Not only am I not convinced that the California Supreme Court would utilize the majority's flawed analysis of the federal right of free speech to interpret the distinct, and more protective, state constitutional right, I find it highly doubtful," she added.

But the majority predicted that "the California Supreme Court would construe the state free speech provision as being coextensive with the First Amendment with respect to § 2527."

"We conclude that Erie does not require us to follow the state appellate court decisions, and that § 2527 does not unconstitutionally compel speech under either the United States or California Constitution," Fletcher wrote.

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