Corcoran et al v. CVS Health Corporation

Northern District of California, cand-4:2015-cv-03504

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6 Exhibit Q 6 Christopher Corcoran, et al. v. CVS Pharmacy, Inc. Civil Action No. 15-CV-3504-YGR Rebuttal Expert Report of John D. Jones, BS Pharm, JD, FAMCP JDJ-RPhJD Consulting, Inc. jdjonesrphjd@icloud.com Date: January 27, 2017 CONFIDENTIAL INFORMATION SUBJECT TO PROTECTIVE ORDER 6 INTRODUCTION I have been engaged by Williams & Connolly LLP on behalf of CVS Pharmacy, Inc. ("CVS") to provide expert testimony in this matter. At the request of counsel, I have reviewed the expert reports submitted on behalf of Plaintiffs by Dr. Robert Navarro and Dr. Joel Hay, dated December 9, 2016. Below I provide my responses to the opinions set forth in those reports. MATERIALS CONSIDERED In preparing this report, I have considered pleadings and discovery materials supplied to me by Williams & Connolly, LLP, as well as documents that are available to the public. A list of documents I considered in forming the opinions set forth in this Rebuttal Report is attached as Exhibit A. REBUTTAL OPINION #1: DR. NAVARRO'S OPINION REGARDING THE PURPOSE OF INSURANCE IS INACCURATE. Dr. Navarro claims that the purpose of insurance is to enable beneficiaries to "obtain the lowest possible prescription costs." Expert Report of Robert P. Navarro ("Navarro") ¶¶ 13–14. Based on this, he opines that any arrangement that would result in a transaction in which an insured patient does not receive the "lowest price[] possible" or "pay[s] more for a prescription than he or she would in the absence of insurance, defeat[s] the purpose of [insurance.]" Navarro ¶¶ 14, 26. That opinion is incorrect. Insurance serves many purposes. Insurance assists patients in managing risk; in the absence of insurance, the cost of medical care can be prohibitive. Specific to pharmaceutical care, the cost of brand drugs (some of which have no generic equivalent) may be particularly 1 6 expensive. 1 Insurance that includes a pharmacy benefit component typically renders access to such drugs affordable. Another purpose that insurance serves, separate from but related to managing risk, is to reduce the overall cost of care. Again, brand drugs are typically the most expensive. Health Plans and PBMs balance these various, and sometimes competing, interests in different ways with the goal of delivering the best overall benefit structure. 2 In my experience, some Health Plans and PBMs contract with pharmacies to provide greater discounts on the most expensive branded drugs and provide pharmacies more incentives to dispense lower cost branded drugs including a higher margin. Some Health Plans and PBMs may structure benefits such that a patient pays an affordable co-pay that will save them considerable money on expensive drugs, but may not save them much or anything when applied to some of the least expensive drugs. In some cases, the "package deal" that a PBM or Health Plan reaches through negotiation with a pharmacy may include rates for generic prescriptions that are not as good as what a customer could receive through a different, non-insurance pharmacy benefit. For example, customers may be able to obtain lower prices on a particular generic prescription by obtaining a cash discount card or joining a membership program, and using that pharmacy benefit rather than using their insurance. 3 This phenomenon is well understood in the industry. Indeed, Medicare Part D even provided a mechanism for beneficiaries of Medicare Part D plans to get "credit" for 1 Facts about Generic Drugs, U.S. FOOD & DRUG ADMINISTRATION (June 28, 2016), available at http://www.fda.gov/Drugs/ResourcesForYou/Consumers/BuyingUsingMedicineSafely/Understa ndingGenericDrugs/ucm167991.htm. 2 For example, Bill Strein stated that plans tend to focus on the "overall value proposition" when designing their benefit structures. Deposition of William Strein ("Strein Dep.") 57:6–58:1. 3 The structure of HSP reflected this reality insomuch as even insured customers could join and benefit from the program. HSP FAQs at 1. 2 6 purchases they made using cash discount cards and membership programs in calculating the "true out-of-pocket" (TrOOP) costs that count toward a beneficiary's Medicare Part D plan out- of-pocket threshold. 4 Dr. Navarro is thus mistaken in concluding that it would "defeat[] the purpose" of insurance if "an insured patient [] pay[s] more for a prescription than he or she would in the absence of insurance." Navarro ¶ 26. The value, or lack thereof, of prescription drug insurance cannot be assessed on the basis of one, isolated prescription purchase (or even one category of prescription purchases). Insurance has multiple purposes, and if a PBM or Health Plan decides to balance those purposes in such a way that a particular beneficiary's costs are not reduced for a particular transaction as compared to prices associated with other pharmacy benefit programs (such as discount cards or membership programs), that can certainly be an appropriate outcome within the broader deal designed to reduce a beneficiary's overall risk and/or costs. 5 REBUTTAL OPINION #2: DR. NAVARRO'S OPINION REGARDING THE GENERAL DEFINITION OF "U&C" IS INACCURATE. Dr. Navarro claims that "Usual and Customary" (U&C) is understood in the industry to mean "the price that a pharmacy charges to individuals using cash, as opposed to insurance." Navarro ¶ 29. That definition is inaccurate for two reasons. First, "using cash" is not actually a distinguishing factor insofar as Dr. Navarro uses that phrase as meaning, for a given prescription, 4 Letter to Part D Sponsors re: Lower Cash Price Policy, Center for Beneficiary Choices (Oct. 11, 2006), available at https://www.cms.gov/Medicare/Prescription-Drug- Coverage/PrescriptionDrugCovContra/Downloads/QADiscountsandTrOOP_100606.pdf; Am I Allowed to Use a Drug Discount Program Instead of My Medicare Part D Plan?, Q1Medicare.com, available at https://q1medicare.com/q1group/MedicareAdvantagePartDQA/FAQ.php?faq=Am-I-allowed-to- use-a-Drug-Discount-Program-instead-of-my-Medicare-Part-D-plan- &faq_id=603&category_id=139. 5 See Strein Dep. 57:6–58:1. 3 6 100% of the cost was paid by the member. For example, an insurance beneficiary may be required to pay the entire cost of a prescription out of his own pocket if, for example, a plan deductible has not yet been satisfied; 6 this does not render him a "cash customer" for purposes of U&C. Likewise, on a purchase with a cash discount card, no PBM or third-party payer is necessarily paying the pharmacy for a portion of the prescription; yet, the fact that the customer bore 100% of the purchase with the cash discount card does not mean the person is "using cash" or a "cash customer" as those phrases are understood for purposes of U&C. Second, defining U&C with respect to whether a customer is using "insurance" does not give recognition to the entire spectrum of types of transactions. A "cash customer" for purposes of U&C is generally understood in the industry to be someone who purchases a prescription without applying any form of prescription benefit at all (including, but not limited to, insurance). For example, cash discount cards are a form of prescription benefit, and prices paid by customers using a cash discount card are not treated by industry participants as U&C prices. 7 This was the universal understanding of the health plans and PBMs I worked with for over 20 years. Yet the prices paid by customers using cash discount cards would appear to count as "cash"—and thus as U&C—under Dr. Navarro's definition, because cash discount cards unquestionably are not insurance. Dr. Navarro further claims that U&C "should include discounted prices that are offered to members of the general public." Navarro ¶ 29. This also misstates industry custom and practice. Whether pharmacies are required to include "discounts" when submitting U&C varies from contract to contract. The PBM-pharmacy contract may specify what "discount" means for 6 Expert Report of John Jones ("Jones") at 5–6 (explaining function of a deductible). 7 Deposition of William Barre 24:4–24. 4 6 purposes of the particular agreement. It is my experience that, unless a contractual U&C provision expressly references discounts, and explicitly requires the pharmacy to include them when submitting U&C, the industry expectation is that discounts will not be included in U&C submissions. For example, both OptumRx and Catamaran generally preferred for pharmacies to submit applicable discounts as U&C, and therefore typically negotiated express language to that effect in their contracts with pharmacy providers. Dr. Navarro's report contains nothing to indicate that others in the industry had a contrary understanding. Dr. Navarro claims that a U&C provision that fails to incorporate discounts would somehow "increase[] the cost and reduce[] the access to affordable medications." Navarro ¶ 37. That is incorrect. In my experience, when a PBM or pharmacy demands a pricing concession on some component of reimbursement, there is a trade-off for doing so. Thus, assuming that it were true that including applicable discounts into U&C would reduce the cost of certain prescriptions (and thus reduce the prescription margin to the pharmacy), I would expect the pharmacy to account for that in its negotiation of other provisions. For example, the pharmacy might not concede as aggressive a discount rate on branded drugs, making them more costly and less affordable. 8 Another common offset to a reduced prescription margin is for the contracting pharmacy to insist on a greater degree of market exclusivity, thus decreasing access to competing pharmacies. This has a direct impact on patient access to drugs through a broad network of pharmacies. In short, PBMs and pharmacies negotiate total package deals (e.g., brands and generics, specialty drugs and non-specialty drugs, etc.); mandating that all pharmacies and PBMs embrace a single definition of U&C that includes discounts would not necessarily reduce overall 8 See Deposition of Elizabeth Wingate ("Wingate Dep.") 172:23–173:6. 5 6 costs or increase access to insured customers, it would simply limit the flexibility of PBMs and pharmacies to negotiate the best overall deal for their members. REBUTTAL OPINION #3: DR. NAVARRO'S AND DR. HAY'S OPINION THAT MEMBERSHIP PROGRAMS ARE "DISCOUNTS" AND MUST BE INCLUDED WHEN SUBMITTING U&C PRICES IS INACCURATE. Dr. Navarro claims that membership program pricing constitutes a "discount[] . . . available to the general public" and that it must therefore be submitted as U&C pricing unless the contract explicitly excludes discounts from U&C prices. Navarro ¶¶ 37–38, 57. 9 This misstates industry practice; as I explained in my report dated December 9, 2016, the industry practice is that membership program pricing is not included as U&C (as reflected in industry literature, PBM testimony, and my own experience with how multiple PBMs have handled the issue). 10 Dr. Navarro's erroneous understanding appears to stem from at least three sources. First, he has acknowledged that he has no prior experience in the industry with respect to membership programs and no knowledge (outside of this litigation) regarding how any particular pharmacy or PBM actually handled this issue. 11 Second, as discussed above, he is incorrect that U&C is presumed to include discounts unless expressly excluded. See supra 4–5. Finally, his assumption that membership program pricing constitutes a "discount" to the retail price charged to cash customers is off the mark. 9 Dr. Hay appears to reach a similar conclusion, although he offers very little explanation (and no support) so it is difficult to be certain. Hay ¶¶ 10, 62. To the extent Dr. Hay is offering an opinion on this issue, my responses in this section pertain to his report as well. 10 Jones Report at 19–23. 11 See, e.g., Deposition of Dr. Robert Navarro ("Navarro Dep.") 197:3–12. 6 6 My experience with actually interpreting and negotiating U&C provisions is that industry participants understand "discounts" for purposes of U&C to refer to reductions to the retail price (either percentage or absolute) that apply automatically, to any person, assuming the person meets the relevant requirements and does not use prescription benefits. 12 A "senior" discount is the primary example that industry participants would be familiar with. Membership program pricing, by contrast, is not considered by industry participants to be a "discount" to retail pricing. As I explained in my initial Report, membership programs as well as cash discount cards are a form of prescription benefit. The HSP program is a generic drug membership program that does not reflect a uniform discount off of the retail price of individual drugs. Nor does it represent the pharmacy's "everyday" or "lowest" price available to the "general public," since it does not reflect either the undiscounted or discounted retail price available to customers without prescription benefits; the HSP program is itself a prescription benefit program. 13 Accordingly, the industry understanding and practice is that membership program pricing is not included in U&C. This is uniformly supported by the testimony of several key employees at the largest PBMs in the United States (i.e., Caremark, Express Scripts, Medco, MedImpact, and OptumRx). Dr. Navarro cannot diminish the importance of this testimony as being drawn from "a handful of PBM employees," Navarro ¶ 38, because these were the employees of the largest PBMs who were responsible for pharmacy network contracting and thus would have had actual knowledge and experience on this question. Neither Dr. Navarro nor Dr. Hay identify anyone with similar 12 That complies with the term's plain meaning as well: A discount is "a reduction made from a regular or list price" of an item. Discount, MERRIAM-WEBSTER.COM (Jan. 2017), available at https://www.merriam-webster.com/dictionary/discount. 13 Jones Report at 14–16. 7 6 qualifications at any PBM or pharmacy who disagrees. More generally, they have not identified any PBM or pharmacy that has treated membership program pricing as a "discount" that must be included as part of U&C. Nor have they cited any publications that reflect industry participants expressing an understanding that membership programs are a "discount," or that they must be included in U&C. Dr. Navarro claims to find support in the positions taken by Medicare and Medicaid agencies, Navarro ¶¶ 41–43, 60, but this, too, is incorrect on several levels. With respect to Medicare, Dr. Navarro is factually mistaken; CMS has explicitly not taken a position regarding whether membership program pricing must be considered as U&C, 14 which leaves resolution of that issue to the PBM servicing each Part D plan who negotiates with its assembled pharmacy networks. With respect to fee-for-service Medicaid, 15 definitions or regulations are imposed by state Medicaid programs, and thus cannot be assumed to reflect the industry practices and understandings that apply to commercial insurance contracts that are negotiated by industry participants. Dr. Navarro cites a very small number of states that he considers to support his position, but regardless of whether he is correct about those states, a position taken by a few states does not mean the position is standard as to all state Medicaid programs, and neither regulates nor reflects contractual arrangements negotiated by industry participants. 16 14 "If the pharmacy charges a fee to join their discount generic program, CMS does not have a stated policy as to whether the prices charged under that program would meet the definition of a usual and customary charge to the public." Dep't of Health & Human Servs., Office of Inspector General, A Comparison of Medicaid Federal Upper Limit Amounts to Acquisition Costs, Medicare Payment Amounts, and Retail Prices at 7 n.26 (Aug. 2009). 15 "Managed Medicaid" relies on the same insurer and PBM contracts with network pharmacies that apply to the commercial agreements; state Medicaid authorities do not administer or impose the terms of those agreements. 16 Navarro ¶¶ 42–43. 8 6 As explained previously, Dr. Navarro is mistaken that a PBM's decision to exclude discounts from a U&C definition necessarily increases overall costs or decreases access for plan members. See supra 5. Nor does the industry's well-established practice of excluding membership program prices from U&C increase costs or decrease access for plan members. CVS employee Beth Wingate testified that had PBMs demanded that the U&C definition be revised to include HSP, she would have negotiated other terms in the contract—such as a lower AWP discount on brand drugs, GER on generics, and/or greater network exclusivity—to offset the loss to CVS that would result; 17 this is consistent with my experience regarding how pharmacies and PBMs negotiate agreements. Alternatively, CVS and other pharmacies might have decided not to offer membership programs at all; in that case, cost and access for beneficiaries of insurance programs would be unchanged, but customers without insurance who otherwise would have joined the membership programs could face increased costs and/or reduced access. REBUTTAL OPINION #4: DR. NAVARRO'S OPINION THAT HEALTH SAVINGS PASS ("HSP") WAS NOT A "BONA FIDE" MEMBERSHIP PROGRAM IS INACCURATE. As previously discussed, key employees from the largest PBMs have confirmed that those PBMs were aware of membership programs generally, and HSP specifically, but did not expect the pricing associated with those programs to be submitted as U&C. Dr. Navarro claims that these PBM witnesses predicated their testimony "on the assumption that the HSP [sic] was a bona fide, restrictive membership program," but that "several significant factors [] indicate the HSP program failed to meet these conditions." Navarro ¶ 50. Dr. Navarro is incorrect both in 17 Wingate Dep. 172:23–173:6. 9 6 his characterization of the PBM witnesses' testimony regarding the prerequisites for a membership program, and also his assertion that HSP failed to meet those prerequisites. To begin with, Dr. Navarro errs in stating that the PBM witnesses conditioned their testimony on whether "membership requirements to access the benefit of these programs are weak, nominal, or nonexistent." Navarro ¶ 39. The PBM witnesses required only that a customer actively enroll in the membership program. 18 Most did not even require that the program include an annual fee; the one exception was Medco, which for a several-month period of time included such a requirement. None of the PBM witnesses testified that HSP's status as a membership program turned on whether the membership requirements were "restrictive" or "weak." Notably, Dr. Navarro offers no definition of what these terms mean, and identifies no membership programs that satisfied them. Despite my long involvement in both contracting pharmacy networks and working with industry competitors to shape health care policy, I am not aware of any "gold standard" for defining membership programs accepted across the industry. However, if a PBM had doubts about whether a membership program was "bona fide"—whatever that might mean to the PBM—I would expect based on my experience that the PBM would inquire and investigate. 19 PBMs are extremely sophisticated entities and invest significant resources in monitoring activity in the marketplace. I am not aware of any indication that PBMs lacked knowledge of the HSP 18 See, e.g., Declaration of Amber Compton ("Compton Decl.") ¶ 9. Medco is the one exception: It required active enrollment and a fee (which, for a short period, had to be more than "nominal"). But, even as to Medco's added requirement that customers pay a fee, Dr. Navarro acknowledged that HSP required both enrollment and payment of a fee. Navarro ¶ 47. 19 My expectation is consistent with the PBM testimony. See, e.g., Declaration of Franceen Spadaccino ("Spadaccino Decl.") ¶ 8 (PBMs used "secret shoppers" to investigate membership program pricing.). 10 6 program, or had any doubts or concerns about whether the CVS HSP membership program was, in fact, a membership program. Dr. Navarro takes issue with the amount of the annual fees that HSP members paid to join or remain in the program; he contends the fee was "nominal," and thus was "a weak commitment device by which to define a group whose prices are supposedly not generally available." Navarro ¶ 51. But it does not matter whether the annual fee was "nominal" or "non- nominal." Even membership programs that charged no annual fee at all were generally understood to be properly excluded from U&C. 20 PBMs knew what the HSP membership fee was, yet have testified without exception that they considered HSP to be a membership program. And even if the amount of the annual fee did matter, Dr. Navarro identifies no methodology for determining whether a fee is "nominal" or not. Several named Plaintiffs in this case testified that they themselves considered $10 or $15 dollars a significant or impactful amount of money. 21 CVS's expert Dr. Salve has explained that the annual fees that HSP charged ($10 or $15, depending on the time period) could easily exceed the potential savings that a customer would obtain by participating in the HSP program, depending on the number of prescriptions the customer would fill. 22 CVS itself in designing the program recognized that "the enrollment fee will limit sign-up." 23 That is consistent with my experience. 20 The Rite-Aid program, for example, did not include a membership fee. See CVSC-0001525. Amber Compton, the Vice-President at Express Scripts, Inc. who is responsible for negotiating provider agreements with retail pharmacies, identified the Rite-Aid program as being one generic drug membership program that was not being reported as U&C. Compton Decl. ¶¶ 8–11. 21 E.g., Deposition of Zulema Avis 191:12–16; Deposition of Debbie Barrett 254:8–11; Deposition of Toni Odorisio 212:12–15. 22 Expert Report of Dr. Michael P. Salve ¶ 14. 23 CVSC-0222983. 11 6 Dr. Navarro also takes issue with whether members had the option to obtain a refund of their annual fee if they cancelled their membership. Navarro ¶ 51. As with other aspects of his report, he provides no support as to why this would matter to industry participants. None of the PBM witnesses identified this as being relevant to their conclusion that CVS was not required to submit its HSP prices as U&C. A money-back guarantee does not obviate the requirement to pay the fee to join (and to continue paying fees annually to remain a member). Plus, under some state laws, enrollment fees are required to be refundable. 24 Dr. Navarro also takes issue with the fact that CVS offered value in the form of ExtraBucks to customers who joined the HSP program. Navarro ¶¶ 46, 52. But again, this does not change the fact that a fee was required to become a member in the first place and to gain the program benefits (including ExtraBucks). I am not aware of any evidence that members could offset annual fees with ExtraBucks; to the contrary, it is my understanding that ExtraBucks could not be used for pharmacy purchases at all—including payment of the HSP annual fee. 25 Dr. Navarro contends that based on the data analyses performed by Dr. Hay, there may have been some members of the HSP program for whom CVS did not collect an annual payment. Navarro ¶ 52, Hay ¶ 42. It is my understanding from the Rebuttal Report of Brett Barlag that there are significant flaws in Dr. Hay's analysis on this point.26 Putting that aside, I see considerable evidence in the record that CVS viewed the annual fee to be an integral feature of the HSP program and made reasonable efforts to collect it. Internal CVS documents clearly establish that CVS intended the annual fee to be mandatory; an operational overview of the 24 See Md. Ins. Code § 14-608(b) (Maryland); S.D. Codified Laws § 58-17E-24 (South Dakota); RCW 48.155.060 (Washington). 25 https://m.cvs.com/mt/www.cvs.com/mobilelanding/ecphr/ (last visited Jan. 24, 2017). 26 January 27, 2017 Rebuttal Report of Brett E. Barlag ¶¶ 4–18. 12 6 program in September 2008 stated unequivocally that "[f]or anyone to enroll in the new Health Savings Pass they must pay the enrollment fee. . . . There are no enrollment fee waivers." 27 At the outset of the program, pharmacists were required to collect fees from new members when they joined, 28 and were explicitly prohibited from waiving the fee. 29 Within a year of rolling out the program, CVS identified that there were some members who had not paid a fee; CVS subsequently sent letters to those members informing them that they would have to pay the membership fee or their membership would be revoked. 30 The system for collecting annual fees was subsequently revised to reduce the possibility of non-collection, whether from human error or otherwise; CVS's PBM began to automatically apply the membership fee when the member filled his first prescription, and on the first fill following the member's annual anniversary. 31 I did not see any evidence that CVS intentionally sought to enroll members without charging them a membership fee, and neither Dr. Navarro nor Dr. Hay identifies any such evidence. Dr. Navarro's suggestion that CVS could have imposed more stringent protocols or policies to ensure payment of membership fee is beside the point. Navarro ¶ 51. In any event, business programs do not need to be perfectly designed or implemented. In my experience, implementations of programs in pharmacy rarely are done flawlessly and often require follow-up 27 HSP Operational Overview at 12. 28 Some documents indicate that there may have been reversals of the fee paid when the member and pharmacist were performing a price check to determine whether the patient's prescription was covered. Mar. 11, 2009 Email re: HSP Fee Collection Effort. It is my experience that price checks at the pharmacy are common and the reversal of the membership fee if the prescription was not covered under the program does not reflect on the legitimacy of the program. 29 HSP Operational Overview at 12. 30 May 6, 2009 Operational Update; Aug. 26, 2009 Operational Update. 31 Sept. 28, 2009 Email re New In-Store Enrollment Process; Apr. 20, 2009 Business Request for Change in Enrollment Process; June 20, 2013 ScriptSave SOW for HSP at 2. 13 6 attention and adjustments over time to assure that they are working optimally and as intended. The evidence I reviewed indicates that is what CVS did here. Dr. Navarro contends that "CVS did not adhere to any sort of strict separation between offering the HSP prices to members and non-members," but that instead "HSP prices were offered to the general public." Navarro ¶ 48. Relying again on data analyses performed by Dr. Hay, Dr. Navarro claims that the prices paid by HSP members ($11.99) were also a common price point for non-HSP members, and that this demonstrates that HSP prices were offered to non-HSP members. Navarro ¶¶ 53, 54; Hay ¶ 40. Again, there are serious flaws in their analyses. Most obviously, Dr. Navarro and Dr. Hay simply ignore that, as of January 1, 2011, the price for HSP prescriptions became what at the time was the same price as CVS's minimum retail price, which was $11.99 for a prescription of any quantity. It does not violate industry standard to establish a minimum retail price, or to set a membership program price at the same amount as the minimum retail price. In my experience many pharmacies establish a minimum retail price reflecting their cost of doing business and minimum acceptable profit margins. Often, the pharmacy's contracting position with PBMs is established based upon the minimum retail price (proprietary to that pharmacy). If the minimum retail price was $11.99 for all cash prescriptions and the HSP price was $11.99, it would only mean that HSP was priced at the lowest price acceptable to the pharmacy for all prescriptions of that strength and quantity. It also reflects a significant aspect of the value proposition of joining HSP: An HSP member could with certainty obtain a 90-day supply of HSP-eligible drugs for $11.99 (the HSP price); a cash customer, by contrast, might be able to obtain only a lower quantity of the same drug for $11.99 (the minimum retail price). 14 6 Neither Dr. Navarro nor Dr. Hay point to any evidence of policies or practices at CVS that would enable non-members to obtain HSP pricing. As a matter of process, HSP transactions were adjudicated using specified plan codes, after which a response transaction (including a price, if the PBM verified the eligibility of the member and the drug) was returned to the pharmacist. 32 CVS relied upon PBMs to collect membership fees and to adjudicate claims only for eligible members. 33 I am not aware of any evidence that CVS submitted transactions of non- HSP members using the HSP plan code, or that the PBM processed transactions of non-HSP members. Accordingly, I would expect that most if not all of the instances in which a non-member was charged the same price as an HSP member for a particular prescription would be explained by the fact that the non-member was being charged the minimum retail price. This is confirmed by the analysis of Brett Barlag, who has demonstrated that when the minimum retail price was increased to $11.99, but the HSP price remained $9.99, extremely few cash customers were charged the HSP price ($9.99), and many were charged the minimum retail price ($11.99). 34 Dr. Navarro contends that because HSP was a "weak" membership program, the HSP price constituted an "everyday price" that was available to "all customers who walk in the door." Navarro ¶ 56. "Everyday price" and "prices available to all customers who walk in the door" would be understood in the industry to refer to the retail price that a pharmacy's computer system would provide automatically if a person had no prescription benefits. The industry standard is that the same automated process that generates a U&C price for a third-party claim 32 Oct. 21, 2008 Pharmacy Team Huddle Guide at 7. 33 Aug. 8, 2008 Operational Update; June 20, 2013 ScriptSave SOW for HSP. 34 January 27, 2017 Rebuttal Report of Brett E. Barlag, Figure 7. 15 6 also generates the retail price that would be supplied to the pharmacist if a patient sought to fill a prescription without any prescription benefit. CVS's system follows this industry standard, and Dr. Navarro and Dr. Hay have identified nothing to the contrary. Although Dr. Navarro fails to identify any industry publications or sources that support his contention that membership program pricing should be included in U&C, he claims that his conclusions are supported by the "findings of previous court cases regarding U&C prices," specifically the court decisions in United States ex rel. Garbe v. Kmart Corp. Navarro ¶ 33. 35 Those court decisions were rendered in 2015 (in the District Court) and 2016 (in the Court of Appeals), so obviously they could not have factored into the decision-making or understanding of industry participants prior to those dates. Furthermore, in my experience, where PBMs and pharmacies share a common understanding of a matter governed by private contract—as the record establishes was the case here—they have little reason to consider what courts or other outside parties unrelated to the contracting process might say about the matter. As to the industry understanding of U&C generally, the district court concluded that in the context of private contracts that govern the relationships of PBMs and pharmacies, "individual payers may further define U&C price specifically in their. . . payer sheets, electronic prescription claim instructions, or contracts" and "[i]t would be nonsensical to find that these definitions would not control the specific contacts or agreements with these specific payers." U.S. ex rel. Garbe v. Kmart Corp., 73 F. Supp. 3d 1002, 1015–16 (S.D. Ill. 2015). That is consistent with my experience. And as to the specific question of what the actual industry practice or understanding was with respect to whether membership program pricing should be included as U&C, the court decisions in United States ex rel. Garbe are silent. The court decisions—like Dr. Navarro's 35 U.S. ex rel. Garbe v. Kmart Corp., 824 F.3d 632 (7th Cir. 2016); U.S. ex rel. Garbe v. Kmart Corp., 73 F. Supp. 3d 1002 (S.D. Ill. 2015). 16 6 report—do not identify any PBM or pharmacy that took the position during the relevant period (or even now) that membership program pricing should be included as U&C. Dr. Navarro contends that various statements by CVS employees in documents and/or testimony support his conclusions that CVS should have submitted HSP prices as U&C. Navarro ¶ 46. He is incorrect. Dr. Navarro identifies a few occasions during the program design period when CVS employees referred to the HSP program as a "cash card" or "cash offering," Navarro ¶ 46, but these references are consistent with membership programs bearing many similarities to "cash discount cards," which, as discussed previously, are not generally considered to be discounts that must be included in U&C. Dr. Navarro also claims that there is a document in which "CVS informed its pharmacy supervisors that the HSP program was comparable to the Wal-Mart $4 cash generic prescription program," Navarro ¶ 46, but what the documents actually reflect is an explanation of how the HSP program offered comparable value to Wal-Mart's fixed price list, not that the structure or availability of the HSP program was comparable. The HSP program as implemented was a membership program, and CVS documents clearly identified key structural differences between the HSP program and the Wal- Mart fixed price list. 36 Dr. Navarro claims that various documents reflect an understanding by CVS that "HSP [p]rices [w]ould [l]ower U&C [p]rices." Navarro Section III.C, ¶¶ 58–61 (emphasis added). However, none of the documents cited by Dr. Navarro support this assertion. The documents reflect an understanding on CVS's part that there was a risk to third party pricing, particularly if the program was designed in such a way that it cannibalized a significant amount of CVS's cash 36 Sept. 29, 2008 Operational Overview Presentation at 5 (comparison to Walmart and Walgreens), 14 (Q: What do I tell a customer who says they can get the prescription at Walmart without paying an enrollment fee?). 17 6 business. 37 That is a reasonable and prudent concern; the possibility existed that PBMs and health plans might re-negotiate their contracted reimbursement rates to match the pricing being offered through HSP. Or PBMs might attempt to achieve the special pricing by adjusting the maximum allowable cost ("MAC") lists. But none of the evidence I have reviewed suggest any belief on the part of CVS employees that any PBM or health plan would interpret the U&C definition in their existing contracts to encompass HSP pricing. 38 Finally, Dr. Navarro states that the HSP program was intended to "attract patients." Navarro ¶ 44. Dr. Navarro offers no explanation of how he comes to this conclusion. Internal CVS documents explicitly demonstrate that after careful consideration, HSP was specifically designed with the goal of retaining existing customers at risk of taking their business elsewhere, not attracting new ones. 39 Documents showing the financial impact of the HSP program on cash prescription margins illustrate that the program was intended to strike a balance between retaining "at risk" business and eroding margins on cash prescriptions through over-promotion of the program. It was specifically targeted at patients who expressed their intent to take their business to competitors offering a generic list program. 37 CVSC-0222986. 38 The fact that a CVS employee might have sought to have the Medco Provider Manual revised to make explicit HSP pricing was not within the scope, Navarro ¶ 63, is not surprising. Parties often try to obtain language changes, sometimes to more clearly reflect a common understanding that presently is only implicit. As the declarations demonstrate, Medco and CVS had a common understanding (consistent with the general industry understanding) that membership program pricing is not included in U&C. 39 Oct. 21, 2008 Pharmacy Team Huddle Guide at 5; Apr. 9, 2008 Cash Card Discussion with Larry at 1; Apr. 4, 2008 Cash Card Offering Recommendations Presentation. 18 6 REBUTTAL OPINION #5: DR. NAVARRO'S OPINION THAT PBMS COULD NOT DETERMINE WHETHER A PHARMACY SUBMITTED ACCURATE U&C PRICES IS INACCURATE. Dr. Navarro claims that, "aside from reliance on U&C prices that were assumed to be accurate. . . PBMs would not be able to determine whether cash patients were receiving membership prices." Navarro ¶ 55. That is incorrect. My experience was that PBMs were well aware that pharmacies had membership programs, understood the terms on which they were offered, and understood that pharmacies did not submit membership program pricing as U&C. This is confirmed by the testimony of PBM employees in this case as well as by documents demonstrating PBM awareness of these programs. If there were a PBM that had come to a different conclusion than the rest of the industry and decided that membership program pricing should, in fact, be included as U&C, it would have been a simple matter for the PBM to check the claims data submitted by CVS for drugs on the publicly available HSP formulary and to confirm whether CVS was submitting as U&C for those drugs the publicly available HSP price. More generally, if the PBM had questions regarding the method CVS was using to calculate and submit their U&C pricing, they would simply ask CVS, as a business partner, to explain it. Finally, PBMs could use "secret shoppers" to visit CVS stores and obtain price quotes without being HSP members; this would confirm whether "everyday" customers were receiving the same prices that CVS submitted as U&C. 40 40 Spadaccino Decl. ¶ 8. 19 6 REBUTTAL OPINION #6: DR. HAY'S OPINION THAT IT IS APPROPRIATE TO DETERMINE U&C BY APPLYING A RETROACTIVE 1ST PERCENTILE FEE SCREEN IS INACCURATE. As an alternative to his purported recalculation of U&C prices to include CVS's HSP price, Dr. Hay contends that it would be appropriate to apply a "non-HSP 1st percentile fee screen." Hay ¶¶ 14, 46–52. Dr. Hay states that "[a] 1st percentile fee screen means submitting as the U&C price the price paid by cash customers in the first percent of transactions ranked from lowest to highest price for a specific GCN, QTY and Year," and that this approach is "appropriate. . . under the industry standard because it represents CVS's actual lowest cash price available to the general public." Hay ¶¶ 50, 51. Dr. Hay's proposed "fee screen" is completely inconsistent with actual industry practice. Nothing resembling the process he proposes is actually used by industry participants for purposes of determining U&C. Dr. Hay cites nothing to indicate that anyone in the pharmacy-, PBM-, or prescription drug insurance-industries has ever evaluated U&C by applying a "1st percentile fee screen" or anything similar. In my experience, if any of the health plan or PBM employees I have worked with or known had proposed or applied a "1st percentile fee screen" to challenge network pharmacies' U&C submissions, my opinion is that the network pharmacies would have immediately terminated and/or renegotiated their contracts. There would be good reason for a pharmacy to do so: No industry participants viewed the "price paid by cash customers in the first percent of transactions," Hay ¶ 50, as the pharmacy's "everyday" price available to anybody who walks in off the street, because the lowest 1st percentile of transactions are likely to represent unusual situations such as compassionate concessions or customer-service accommodations that did not apply to someone who simply walked in off the street and paid the retail price quoted by the pharmacy. 20 6 6 Exhibit A 6 Materials Considered I considered the following materials, in addition to those I considered for my Declaration and Report, in drafting this Rebuttal Report: Articles and Public Materials • Facts about Generic Drugs, U.S. FDA, fda.gov (June 2016) • Letter to Part D Sponsors, Center for Beneficiary Choices, cms.gov (October 2006) • Am I Allowed to Use a Drug Discount Program Instead of My Medicare Part D Plan?, Q1Medicare.com. • Discount, Merriam-Webster.com (January 2017) • Department of Health and Human Services, Report, "A Comparison of Medicaid Federal Upper Limit Amounts to Acquisition Costs, Medicare Payment Amounts, and Retail Prices," (August 2009) Statutes • Md. Ins. Code § 14-608(b) • S.D. Codified Laws § 58-17E-24 • RCW 48.155.060 Court Filings • United States ex rel. Garbe v. Kmart Corp., 824 F.3d 632 (7th Cir. 2016) • United States ex rel. Garbe v. Kmart Corp., 73 F. Supp. 3d 1002 (S.D. Ill. 2015) CVS Documents and Resources • Telephone Interview of Scott Tierney (Jan. 13, 2017) • CVSC-0041391 • CVSC-0030906 • CVSC-0222986 • CVSC-0212860 • CVSC-0178349 • CVSC-0033636 • CVSC-0222779 • CVSC-0020500 • CVSC-0001228 • CVSC-0020596 • CVSC-0020889 • CVSC-0001800 6 • CVSC-0021256 • CVSC-0021740 • CVSC-0022394 • CVSC-0022527 • CVSC-0231922 • CVSC-0231137 • CVSC-0231080 • CVSC-0225927 • CVSC-0225928 • CVSHSP0002914 • CVSHSP0030669 • CVSHSP0010587 • CVSHSP0010755 • CVS_HSP_0001277392 • CVS_HSP_0001022348 Reports and Depositions • Expert Report of Robert P. Navarro • Materials of Exhibit B to Report of Robert P Navarro • Expert Report of Joel W. Hay • Expert Report of John Jones • Expert Report of Dr. Michael Salve. • Rebuttal Report of Brett Barlag • Deposition of William Strein • Deposition of Zulema Avis • Deposition of Debbie Barrett • Deposition of Toni Odorisio