Cut Pharmaceutical Costs, But Mind the Legal Dangers

Health plans and physicians have every right to hold down the cost of pharmaceuticals, as long as patients aren’t harmed. But not everyone agrees on what actions are acceptable.

Many managed care organizations believe that cost containment can be achieved in part or whole by restricting the drug choice of both health care practitioners and patients. Properly implemented programs that focus on both optimal patient outcomes and costs should not increase the liability of managed care organizations. However, programs that emphasize cost and financial incentives at the expense of patient rights and optimal patient outcomes can create legal problems.

Drug cost-containment efforts by managed care organizations can include formularies, drug utilization review (DUR) and inducements to persuade health care practitioners to prescribe and dispense drug products preferred by the plan. Many organizations employ a combination of all these methods.

Therapeutic substitution

Drug product substitution can take the form of generic substitution or therapeutic substitution. Every state allows generic substitution in some manner.

Therapeutic substitution is the act of dispensing a drug product with a different active ingredient from the one prescribed, but in the same pharmacologic or therapeutic class and with similar therapeutic effects. Therapeutic substitution performed by a pharmacist in collaboration with the prescriber pursuant to established procedures is often called therapeutic interchange. Regardless of terminology, the practice raises questions of the pharmacist’s authority under state law.

In institutional settings and in pharmacies in staff-model health maintenance organizations, one of two methods of therapeutic substitution is often employed: concurrent consent or prior consent, also called concurrent authorization and prior authorization. Under the concurrent-consent method, the physician must agree to each substitution. This is accomplished through a variety of mechanisms, including notifying the prescriber at the time each prescription is dispensed, or by the prescriber making a notation on the prescription specifically authorizing the substitution.

Prior consent

Under the prior-consent approach, the physician generally agrees to follow the institution’s or managed care organization’s policies, including adherence to the formulary, when contracting with the organization. If a nonformulary drug product is prescribed, pharmacists often have authority to engage in therapeutic substitution, although there is usually a mechanism through which the pharmacist communicates the substitution to the prescriber.

The legality of the concurrent- and prior-consent approaches in institutional pharmacies and staff-model managed care plans depends on state law. Concurrent authorization is legal in all states when the prescriber specifically authorizes the particular drug substituted.

Legality is much more suspect when the prescriber merely authorizes the act of therapeutic substitution and not the specific drug product, or when the prior-authorization method is utilized. It can be argued that pharmacists have the legal authority to engage in therapeutic substitution in these situations since the prescriber knows when joining the organization that a nonformulary drug will be replaced by a particular formulary drug, and this is really no different from authorizing substitution for each prescription order. A prescriber who objects to a substitution can override the policy. Alternately, it can be argued that these methods of authorizing substitution are tantamount to the prescriber delegating prescriptive authority to someone not authorized by law to prescribe.

State attorneys general and boards of pharmacy differ in their views of the legality of prior authorization, ranging from absolutely illegal to legal in conformance with policies and protocols to having no idea. Managed care organizations and pharmacists engaging in some type of prior-consent therapeutic interchange should be familiar with state laws and obtain board of pharmacy approval for their protocols.

At the pharmacy

The issue of therapeutic substitution in community pharmacy settings has become significant in recent years with the proliferation of formularies and plan protocols. Therapeutic substitution with prior approval is clearly illegal in most states. Even California, which recently granted community pharmacists expanded scope-of-practice authority for patients in managed care plans, expressly prohibits therapeutic substitution.Nonetheless, some states now allow the practice pursuant to protocols developed between the prescriber and the pharmacy, and many other states are considering the issue.

Formularies and product selection

When a managed care plan restricts the drug product choice of a health care provider or patient through a formulary, DUR or drug product switch, negligence issues arise if patient injury results. For example, a patient who fails to improve after using a substituted drug product might contend that better outcomes would have resulted if the health care plan had allowed prescribing or dispensing another drug.

Establishing negligence

On this basis the plaintiff might bring a negligence action against the prescriber, the pharmacy and the managed health care organization. To succeed, the plaintiff must establish that the defendants owed the plaintiff a duty to observe a certain standard of care, that they breached that duty and that the breach caused the injury. They also must establish the extent of the injury and damages.

The standard of care a health care provider or plan owes a patient is objective. The plaintiff must establish that the defendants failed to provide care that a reasonable and prudent health care provider or managed care organization would have provided. This means that individual health care practitioners and managed care plans have a legal duty to base all drug product decisions, whether formulary or substitution decisions, on good professional judgment. Sound decision making includes considering patient quality-of-care issues as well as cost. Courts will not allow providers to make substandard decisions based on cost and then use cost containment as a defense.

Since drug therapy standards are anything but static, individual practitioners and managed care plans should continuously monitor their formularies and substitution practices to ensure that they conform to the latest acceptable standard of medical practice. This can best be achieved by a pharmacy and therapeutics committee composed of pharmacists and physicians who continuously review published drug studies and related medical literature. In addition, every plan must allow individual practitioners to override the plan’s formulary and use nonformulary drugs when appropriate.

If the plaintiff can establish that the plan acted substandardly in selecting the drug product or denying an alternate product, the plaintiff must then prove that the negligent selection actually caused the negative outcome. In other words, the plaintiff must show that the negative outcome would not have occurred had the alternate drug been prescribed and dispensed. This will probably create a hurdle for the plaintiff, requiring considerable expert testimony.

Higher-risk drug categories

In the great majority of cases a generic or therapeutic substitution will be completely appropriate and not result in any adverse consequences for the patient. Some situations have higher risk than others, however, and require a higher degree of professional scrutiny. Such is the case with drugs falling into these categories:

  • Generically equivalent drugs that may not be bioequivalent, including drugs that the Food and Drug Administration has assigned a “B” designation in the Orange Book, and drugs deemed not bioequivalent by other compendial sources.
  • Drug products marketed before 1938, for which bioequivalency may never have been established. Examples include amobarbital, aspirin with codeine, atropine sulfate, chloral hydrate, codeine, digoxin, ephedrine, levothyroxine sodium, morphine sulfate, nitroglycerin SL, phenobarbital and potassium chloride oral preparations.
  • Drugs with narrow therapeutic windows such as digoxin, warfarin sodium and theophylline.

Where a patient has been stabilized on a particular drug product that fits into one of the previous categories, substituting a generic equivalent could result in blood level variations significant enough to affect safety and efficacy.

The appropriate standard of care in such instances would seem to require that a substitution not be made without the consent of both the prescriber and the patient after they have been specifically advised of the bioequivalency issue and attendant risks. The patient should then be monitored and if warranted have blood levels retitrated on the basis of laboratory tests.

Therapeutic substitution may present more legal risk than generic substitution, since when performed independently, the former is tantamount to prescribing. Most therapeutic substitutions, however, are really therapeutic interchanges where the drug choices have been predetermined by protocol.

High-risk patients

Individual practitioners and plans must be especially cognizant of high-risk patients such as diabetics and those who have multiple diseases or are taking multiple drugs. Mechanically restricting the patient to the least expensive generic drug or therapeutic alternative might present clinical problems in these patients that would not be experienced by healthier patients.

Expensive drugs

A burgeoning problem faced by managed care plans is whether to include newly approved biotechnology and other drugs that may cost thousands of dollars more than traditional drug therapies. To some, the issue becomes whether a patient is entitled to the latest and most advanced drug therapy available. Generally, a patient is not entitled to the latest technology. The important question is no different from that addressed previously: Is the newer drug technology superior to the traditional therapy and has it been generally accepted by practitioners? A standard of care may have been set, and the managed care plan should be aware of it.

Clearly, individual health care practitioners who negligently prescribe or dispense a drug to a patient will be liable for their acts. The liability of the managed care organization is not always so clear.

HMOs’ vicarious liability

A managed care organization will be vicariously liable for the negligent acts of its employees through the doctrine of respondeat superior. Whether an individual health care practitioner is considered an employee of the managed care plan will probably depend upon the degree of control the organization can exercise over the individual. Where individual providers or provider groups contract with the managed care organization to provide drugs and services, their status as employees for liability purposes will depend upon a case-by-case analysis of the facts. A similar analysis will probably be applied to determine if the managed care organization is liable for the acts of a prescription benefit manager when it has contracted with the PBM to establish, administer and manage the prescription drug program.

In some cases the managed care organization might be vicariously liable regardless of the degree of control over the provider or PBM. This can occur when the patient reasonably perceives that the provider or PBM is part of the organization under a theory called “ostensible agency.”

Corporate negligence doctrine

A managed care organization might be held liable for negligence for its own acts when through its policies it is a substantial factor in bringing about the patient’s harm. This is called the corporate negligence doctrine, which is currently undergoing some degree of expansion by the courts. Traditionally, insurers have argued successfully that they cannot be liable for medical care decisions made by practitioners since they simply dictate reimbursement decisions and do not practice medicine. Ultimate legal responsibility, they contend, resides with the treating physician and therefore they are not a substantial factor in causing the harm suffered by the plaintiff.

Some courts have determined, however, that an insurer’s reimbursement decision does, in fact, affect the medical standard of care practiced by individuals and thus is a substantial factor. In Wilson v. Blue Cross of Southern California, the insurer denied coverage to a psychiatric patient for treatment and hospitalization, despite the opinion of the treating physician that the patient required three or four weeks of additional hospitalization. The patient could not afford the care, was discharged and subsequently committed suicide. The court found that the insurer was liable on the basis that the insurer’s decision to deny coverage was a substantial factor in causing the suicide. Although Wilson was a utilization review decision, it can be expanded to argue that the policies and procedures implemented by a managed care organization to establish restricted drug programs must conform to the proper medical standard of care.

Breach of contract

When a managed care organization denies a patient coverage of a particular drug, resulting in that patient’s injury, it could be argued that the plan has breached a covenant of good faith and fair dealing — in other words, acted in bad faith. Generally, an action for bad faith can only be sustained by the insured when the insurer has withheld benefits due under the policy and when the withholding was unreasonable or without proper cause.

Courts have held that bad faith can arise when an insurer fails to investigate a claim thoroughly. In Hughes v. Blue Cross of Northern California, the insurer denied coverage for psychiatric hospitalization, employing “a standard of medical necessity sufficiently at variance with community [medical] standards to constitute bad faith.” Blue Cross took this action on the recommendation of a psychiatrist who failed to investigate the claim thoroughly and demonstrated little interest in the opinions of the treating physicians.

Bad-faith claims

Based upon Hughes, it can be said that if a managed care plan undertakes to deny, restrict or substitute a patient’s drug therapy as prescribed by the patient’s physician, in a manner that is at variance with accepted community medical standards, the plan might be liable for a bad-faith breach of contract.

One difficulty in a plaintiff bringing a bad-faith claim against a managed care organization is establishing damages. Damages from a bad-faith action must be based upon interference with property rights, as opposed to personal injury. Personal injury damages can be recovered, but only as incidental damages to the financial loss caused by the bad-faith breach. There could be a question of whether financial loss is incurred when a plan denies a patient coverage for a particular drug that causes injury, but then pays for the medical costs of the injury.

Traditional application of the bad-faith doctrine might also be difficult if the managed care organization specifically excludes or fails to include coverage of certain drug products based upon their cost. The organization will argue that the enrollee, by agreeing to join the plan, has agreed to the terms of the contract, including the exclusion of certain drugs. Courts might sympathize with the enrollee, however, viewing the contract as one of adhesion. Adhesion occurs when there is unequal bargaining power between the parties and the patient is more or less forced into the contractual provisions with no opportunity for negotiation. One also has to question the legality of such contracts on social policy grounds. If the terms in the contract are in contravention of the accepted standard of medical practice, and are followed by the organization, this could amount to negligent behavior. The law does not allow a party to contract away its negligent behavior.

Kickbacks, fraud

Managed care organizations with therapeutic substitution programs must heed the federal Medicare/
Medicaid anti-kickback statutes and state anti-kickback laws, as well as state consumer fraud laws. Programs implemented by manufacturers that pay pharmacists or the managed care organization to substitute or switch a drug product present a significant legal risk.

Pay not for referrals

Federal law prohibits the payment or receipt of payment of any kind, directly or indirectly, in exchange for patient referrals or for recommending a product for payment made in whole or part by a federal or state health care program. Any pharmacy that receives payment from a manufacturer for switching a Medicaid patient to that manufacturer’s product runs the risk of violating this law. Even if the manufacturer’s program is couched in terms of payment for pharmacist counseling, the payments would be considered suspect. The Office of Inspector General, which enforces this law, has reported that it considers such payments on the basis of counseling as “duplicative.” This conclusion is reached on the basis that counseling is required and expected as a minimum standard of care and should not be compensable as an additional activity.

The law allows for various “safe harbors” for payments that might otherwise be deemed prohibited. But none of these safe harbors specifically include payment for cognitive services.

Avoiding fraud

Every state has laws that prohibit sellers from deceiving the consumer or omitting material facts about the sale. Most states also have laws specifically prohibiting pharmacists from accepting or paying kickbacks for referrals. Attorneys general from several states have taken legal action against manufacturer programs designed to encourage product switching on the basis that the programs violate these state laws prohibiting kickbacks and deceptive trade practices.

Paying pharmacists for ‘cognitive services’

An unfortunate backlash of these programs has been the perception by some health care organizations, legislators and government officials that all incentive programs to pharmacists should be prohibited. Recent legislation in California was introduced to do just that. It is important, however, to differentiate programs whose true intent is product promotion from legitimate and valuable programs aimed at reducing costs, improving patient outcomes, protecting patients’ rights and compensating pharmacists for legitimate cognitive services. These programs are gaining acceptance by insurers and employers.

Patient confidentiality

Managed care has raised concerns about the patient’s legal right to confidentiality. Patient information seems to be commonly shared among managed care organizations, drug manufacturers, prescription benefit managers and various health care providers. It can be argued that patients, in an express or implied manner, agree to the release of their medical information when they enroll in the managed care plan. This argument is correct when the information is shared with the health care providers directly involved in the patient’s care. It is less correct when the information is sold or given to organizations whose interest is more financial gain than patient care. The legality of releasing patient medical information primarily depends on state law. Many states have implemented or are in the process of implementing additional laws and regulations to protect patient privacy.

A complicating factor confronting a plaintiff in an employee benefit plan who brings a legal action against a managed care organization is the Employee Retirement Income Security Act. Congress passed ERISA to protect employees and regulate employee benefit programs. By enacting ERISA, Congress intended to minimize the effect of conflicting state laws. It inserted a preemption clause saying that ERISA shall supersede any state laws that “relate to” any employee benefit plan.

A plaintiff in an employee plan who brings an action against the managed care company for negligence, vicarious liability, breach of contract and similar claims usually must base these claims on state law.

Few lawsuits — so far

The lay press and broadcast media have recently been scrutinizing managed care organizations and highlighting incidents where managed care has failed patients. This has heightened patient perception and awareness, causing many patients to become suspicious of managed care, which in turn could increase the liability exposure of managed care organizations. To date, however, there have been few legal actions of any type directed at the drug cost-containment programs of managed care organizations.

The risk of liability for drug programs can remain minimal providing organizations design the programs not just on the basis of cost savings, but also on the achievement of optimal patient outcomes.

The author is a professor of pharmacy practice at the University of the Pacific School of Pharmacy in Stockton, Calif.

Drug product selection: high-risk drug categories

  • Generically equivalent drugs that may not be bioequivalent in the Orange Book
    Example: Drugs labeled by FDA as category “B”
  • Drug products marketed before 1938 without established bioequivalency
    Example: Codeine, digoxin, ephedrine, phenobarbital
  • Drugs with narrow therapeutic windows
    Example: Digoxin, theophylline, warfarin sodium


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