Opinion ID: 1428164
Heading Depth: 2
Heading Rank: 1

Heading: ERISA Litigation and the Settlement Agreement

Text: Plaintiffs are the trustees and beneficiaries of employee welfare benefit plans (the Plans) that directly or indirectly contracted with Medco to receive pharmacy benefit management services. As a pharmaceutical benefits manager (PBM), Medco was endowed with discretionary authority to manage certain aspects of the Plans for the primary purpose of containing pharmaceutical costs. By way of an indirect contract, insured Plans paid set premiums to their insurance companies in exchange for full payment of their beneficiaries' prescription drugs, and the insurance companies in turn contracted with Medco for plan management services. By contrast, capitated Plans paid set premiums directly to Medco in exchange for full payment of their beneficiaries' drugs. In the case of both the insured and capitated Plans, respectively, the insurer or Medco bore the risk of higher drug cost in paying each beneficiary's claims for prescription medications. Plans that were self-funded, however, did not pay set premiums to either an insurer or to Medco and instead paid the entire cost of the prescription drugs directly to Medco as PBM or through a third-party administrator for a fee. Accordingly, self-funded Plans alone carried the direct risk of higher drug cost. Plaintiffs alleged in their Complaint that Medco breached its fiduciary duties to their Plans under ERISA in its capacity as PBM by (i) managing formularies  lists of preferred prescription drugs  to favor the products of its parent company, Merck & Co., Inc. (Merck), over competing drugs; (ii) implementing programs tending to increase the sales of Merck drugs, including by interchanging lower cost competing drugs with relatively higher cost Merck drugs; (iii) entering into drug purchase contracts with pharmaceutical manufacturers, including Merck, that included price, rebate, and discount terms that were favorable to Medco but more costly to the Plans; (iv) engaging in practices prohibited under ERISA, including the effective transfer of Plan assets to Merck through drug purchase agreements with Merck negotiated by Medco; and (v) generally failing to disclose to the Plans that it was not acting in their best interest but in the interests of Merck. Medco's motion for summary judgment dismissing the Complaint was deferred pending discovery and later withdrawn due to settlement negotiations that culminated in the Settlement Agreement. On July 31, 2003, the same day that it preliminarily approved the Settlement Agreement, the District Court preliminarily granted Plaintiffs' motion for certification of the class, which included all employee welfare benefit plans that contracted with Medco, whether they were self-funded, insured, or capitated. The named plaintiffs in four of the consolidated class action cases, Genia Gruer, Walter Green, Mildred Bellow, and Elizabeth O'Hare (collectively, the Individual Plaintiffs), are individual Plan beneficiaries seeking derivative relief for each of their Plans and their members, as well as for all similarly situated Plans that contracted directly with Medco on a capitated basis or with insurers that contracted with Medco. The fifth named plaintiff, Marissa Janazzo (now Marissa Salsbury) (Janazzo), is a Plan trustee purporting to sue on behalf of the County Line Buick Nissan Employee Welfare Benefit Plan (the County Line Plan) and all similarly situated Plan trustees whose plans contracted directly with Medco or with third-party administrators or insurers that contracted with Medco. Harry J. Blumenthal Jr. and Alan Horwitz, the named plaintiffs in a sixth case, are Plan trustees suing on behalf of their Plan (the Blumenthal Plan) and on behalf of all other similarly situated Plan trustees whose Plans contracted directly with Medco. [1]
The Settlement Agreement defined the class to include all employee welfare benefits Plans that had either direct contracts with Medco or indirect contracts with Medco through insurance companies, third-party administrators, HMOs, Blue Cross Blue Shield entities, or any other intermediaries (collectively, third-party administrators or TPAs), where the contracts were in force at any time between December 17, 1994 and the date of the final approval of the settlement and were subject to ERISA. Under the Settlement Agreement, Medco agreed, among other things, to pay $42.5 million into a settlement fund to be paid to class members. Attorneys' fees, not to exceed 30%, together with expenses, also would come from the fund. In exchange, Plaintiffs agreed to release all claims of the class insofar as they arose under ERISA or were in any way connected to the actions that were the subject of the Complaint against Medco. Plaintiffs further agreed to release those claims against TPAs, as well as Plan sponsors that contracted with TPAs, that were connected to Medco's alleged conduct. Plaintiffs did not, however, release antitrust claims or any contract claims not arising under ERISA. The settlement fund allocates an amount to the settling class members that is based primarily on the amount of each settling Plan's proportionate share of the total drug spend of all settling Plans for the class period. Accordingly, each Plan's proportionate share of the total drug spend varies depending on the nature of the Plan's relationship with Medco. Insured or capitated Plans, which paid set premiums to an insurance company or Medco in exchange for full payment of their members' drug prescriptions, receive an allocation that is reduced by 55% to reflect the fact that they were more insulated from the conduct alleged in the Complaint. Said differently, if a Plan pays for prescription drug benefits on an insured or capitated basis (e.g., a fixed premium or per-member, per-month sum) or if [the] Plan does not participate in any brand-to-brand therapeutic interchange program administered by Medco, [its] proportionate share of the total drug spend will be reduced by fifty-five percent (55%) to reflect the fact that [the] Plan could not have been damaged directly by certain of the conduct that Plaintiffs allege increase[d] costs to Plans. By contrast, Plans that were self-funded and assumed the financial risk of paying for their members' prescriptions in their entirety receive a proportionate share of the total drug spend without any reduction.