Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

In re Request for Proposals #17Dpp00144

Superior Court of New Jersey, Appellate Division

May 11, 2018

IN THE MATTER OF REQUEST FOR PROPOSALS #17DPP00144, EMPLOYEE BENEFITS: PHARMACY BENEFIT MANAGEMENT CONTRACT. # Page # RFP Section Reference Question (Bolded) and Answer # Page # RFP Section Reference Question (Bolded) and Answer

          Argued December 18, 2017

          On appeal from the Department of the Treasury, Division of Purchase and Property, No. 17DPP00144.

          Maeve E. Cannon argued the cause for appellant Express Scripts, Inc. (Stevens & Lee, attorneys; Maeve E. Cannon and Patrick D. Kennedy, of counsel and on the brief; Wade D. Koenecke, on the brief).

          Beth Leigh Mitchell, Assistant Attorney General, argued the cause for respondent Department of Treasury, Division of Purchase and Property (Christopher S. Porrino, Attorney General, attorney; Beth Leigh Mitchell, of counsel; Roza Dabaghyan, Deputy Attorney General, on the brief).

          Kayleigh M. Scalzo (Covington & Burling, LLP) of the Washington DC bar, admitted pro hac vice, argued the cause for respondent OptumRx, Inc. (Tompkins, McGuire, Wachenfeld & Barry, LLP, and Kayleigh M. Scalzo, attorneys; Jason A. Carey (Covington & Burling, LLP) of the Washington DC Bar, admitted pro hac vice, of counsel and on the brief; William H. Trousdale and Matthew P. O'Malley, on the brief).

          Before Judges Messano, Accurso and Vernoia.

          ACCURSO, J.A.D.

         The central question in this challenge to the award of the more than six-billion-dollar State contract for pharmacy benefit services is whether the winning bidder's statement

reserv[ing] the right to modify Financial Contracted Terms based on changes by the State in formulary or any carve out of services set forth in the Agreement, including but not limited to Specialty Pharmacy services,

         constituted a material deviation from a non-waivable term of the Solicitation for Bids. Although anticipated changes in Plan Design affecting the Contract make the question more difficult than it might otherwise appear, we conclude the bid substantially deviated from a material, non-waivable price term in the Solicitation and thus reverse the decision of the Acting Director of the Division of Purchase and Property and order the Contract rebid.

         Incumbent vendor Express Scripts, Inc., challenges the Acting Director's final agency decision sustaining the Division's award of a three-year contract for Pharmacy Benefit Management to OptumRx, Inc., based on its "reasonable cost Quote totaling $6, 692, 234, 901." The award was the result of an innovative, expedited procurement, specifically authorized by legislation designed to permit the State to secure technical assistance to run an online, automated, reverse auction to select a pharmacy benefits manager or PBM to administer the self-insured, prescription drug plans for the approximately 835, 000 active employees, retirees and dependents participating in the State Health Benefits Plan (SHBP) and the School Employees' Health Benefits Plan (SEHBP). See L. 2016, c. 67.

         The State's Bid Solicitation sought a PBM that could provide "integrated Retail, 90-day Retail, [1] Specialty[2] and Mail Order Drug management" and corresponding pharmacy networks "sufficiently accessible to Plan Members" with the "financial capabilities and contractual arrangements with Participating Pharmacies and Pharmaceutical Manufacturers to support a commitment to deliver quality and lowest net cost pharmacy services." The Solicitation established the State's expectation that the successful bidder be, among other things, "[c]ost effective and transparent by quoting competitive, guaranteed Ingredient Cost Discounts, [3] Administrative Fees[4] and Rebates, [5]practicing effective Pharmacy Benefits Management, [6] and agreeing to be held accountable through Performance Standards and Financial Guarantees."[7]

         This expedited procurement had its genesis in the State's efforts to address the health and sustainability of the State's pension and health care benefits programs, specifically L. 2011, c. 78. Chapter 78, among other things, created a Plan Design Committee in both the SHBP and the SEHBP, each made up of an equal number of members appointed by the governor and by the public employee unions with the responsibility for the design of the various health plans offered by each program, including those for prescription drug benefits, with "the authority to create, modify, or terminate any plan or component, at its sole discretion." L. 2011, c. 78, §§ 45 and 46 (amending N.J.S.A. 52:14-17.27 and N.J.S.A. 52:14-17.46.3). See also Rosenstein v. State, Dep't of Treasury, Div. of Pensions & Benefits, 438 N.J.Super. 491, 494-95 (App. Div. 2014).

         Although the Plan Design Committees voted in 2015 and 2016 to approve a variety of health benefit cuts to members in order to reduce the costs of the programs to the State, the SEHBP Committee balked at $250 million in additional concessions sought by the administration in 2016. The union members on the Committee proposed the online automated reverse auction concept for PBM services as an alternative means of capturing savings in the State's prescription drug plans. The unions projected that procuring a new PBM through a reverse auction could save the State as much as $2 00 million a year. The State projects the annual savings from the contract awarded to Optum will be more than double that amount. Indeed the State contends on the first page of its merits brief that this contract will result "in $1.6 billion in savings to the SHBP and SEHBP over the term of the new [three-year] contract, as compared to the old contract."

         The State's prescription drug plans are self-insured, meaning the State pays for all of the drugs as well as the costs of administering the plans. It uses a pharmacy benefits manager to manage the plans and control the State's costs by negotiating with drug manufacturers and wholesalers as well as with a network of retail, mail and specialty pharmacies to provide members the greatest access to effective medications at the most competitive pricing. The online reverse auction concept was proposed as a way to evaluate the projected costs of competing PBM proposals to the State, all of which have different drug and network discount arrangements, in order to achieve savings in drug costs and PBM services instead of through benefit cuts to employees, retirees and their dependents.

         The Legislation

         On November 3, 2016, Senator Sweeney introduced S. 2749 (2016), a bill providing for the expedited procurement of a pharmacy benefits manager, as well as technical assistance to evaluate the qualifications of bidders in that procurement and electronic review of invoiced PBM pharmacy claims. The bill very broadly authorized the Division, "to the extent necessary, to waive or modify any other law or regulation that may interfere with the procurement of these services." S. Budget & Appropriations Comm. Statement to S. 2749 (Nov. 3, 2016).

         Eighteen days later, on November 21, 2016, the bill unanimously passed both houses of the Legislature. It was signed by the Governor the same day. L. 2016, c. 67. The law, which took effect immediately, provides in pertinent part:

1. a. Notwithstanding the provisions of any other law to the contrary, a contract for the services of a . . . (PBM) for the . . . (SHBP) or the . . . (SEHBP) shall be procured in an expedited process and in the manner provided by this section.
b. The Division of Purchase and Property in the Department of the Treasury shall procure, without the need for formal advertisement, but through the solicitation of proposals from professional services vendors, from qualified vendors the following three services based upon price and other factors:
(1) technical assistance to the State to evaluate the qualifications of bidders on a PBM procurement and to provide online automated reverse auction services to support the Department of the Treasury in comparing the pricing for the PBM procurement. The technology platform shall, if possible, utilize a re-pricing of PBM proposals for the SHBP and SEHBP pharmacy spending utilizing code-based classification of drugs from nationally-accepted data sources of comparisons of the costs of PBM proposals;
(2) real-time, electronic, line-byline, claim-by-claim review of invoiced PBM pharmacy claims using an automated claims adjudication technology platform that allows for online comparison of PBM invoices and auditing of other aspects of the services provided by the PBM; and
(3) a PBM and related services.
d. The division may, to the extent necessary, waive or modify any other law or regulation that may interfere with the expeditious procurement of these services.
e. "Reverse auction" means an automated bidding process conducted online that starts with an opening price and allows qualified bidders to counter offer a lower price, for as many rounds of bidding as determined by the division.
2. This act shall take effect immediately and shall expire after the award of the next PBM contract.
[ibid.]

         The PBM Bid Solicitation

         On February 15, 2017, the Division's Procurement Bureau issued a bid solicitation in accord with L. 2016, c. 67 for a contractor to provide technical and professional services in procuring a pharmacy benefits manager. Two months later, the Division awarded the contract to Truveris, Inc., which created the reverse auction tool employed in the PBM procurement.

         On May 16, 2017, nineteen days after award of the technical service contract, the Procurement Bureau issued the Bid Solicitation for the pharmacy benefits manager, the purpose of which was to award a Master Blanket Purchase Order or Contract, "to that responsible Vendor {Bidder} whose Quote {Proposal}, conforming to this Bid Solicitation {RFP} is most advantageous to the State, price and other factors considered."[8] The Solicitation explained that bidders would participate in an automated reverse auction through the "Reverse Auction Tool which has the capability to project SHBP/SEHBP costs based on the Vendor's {Bidder's} proposed pricing terms." Those pricing terms, specifically, the Administrative Fees, Average Annual Guarantees, Specialty Drug Overall Effective Discount Guarantees, Specialty Drug Minimum Guaranteed Discounts and Rebate Guarantees make up the Financial Contracted Terms that Section 3.7.1A of the Solicitation requires remain in effect for the entire three-year Contract period.

         The Bid Solicitation is almost two hundred pages long and includes a myriad of detailed provisions relating to the intricacies of drug pricing and PBM performance standards. We focus only on those provisions directly relevant to the bid dispute.

         Section 1.1, "Purpose and Intent, " explains the role of the Plan Design Committees created by Chapter 78, as it relates to the PBM procurement. The Solicitation describes them as "responsible for reviewing the SHBP/SEHBP Prescription Drug Plan Designs, [9] and developing any changes therein that are determined to be cost effective and in the mutual best interests of the State, participating Local Employers, employees, retirees, and their Dependents." The discussion concludes by highlighting for bidders that:

the Plan Design Committees may make Plan Design changes during the term of the Blanket P.O. {Contract} that are not contemplated by this Bid Solicitation {RFP}. The State expects that such changes could include, but are not limited to, new eligibility groups, changes in Deductibles, Copayments, Out of Pocket (OOP) maximums, implementation of new clinical and/or health and productivity programs, and similar variables. In the event of such change, appropriate changes to the Contract shall be made pursuant to Section 5.18 of the Bid Solicitation {RFP}.
[Emphasis is ours.]

         Section 5.18 of the Bid Solicitation, "Change in Plan Design, " provides:

During the term of the Blanket P.O. {Contract}, the State shall have the right to make any change to any Plan, including, without limitation, changes in Deductibles, Copayments, Plan maximums, and similar variables.
In the event of such a change, the parties shall meet to discuss the change and discuss the needed Change Orders {Contract Amendments} to the Blanket P.O. {Contract}. For any such Change Order {Contract Amendment}, there shall be no change in the Administrative Fee when the Vendor {Contractor} need only make changes in its Claim administration and other related systems, such as changes in Deductible, Copayment, Plan maximum or similar variable. Similarly, there shall be no change in the Administrative Fee for a change in Plan that requires a change to the open enrollment period, a special open or limited enrollment period, additional communications with Network Providers or reissuance of an Identification Card to some or all Members.
If more substantial changes are made to a Plan or Plans, such that the Vendor {Contractor} must make more substantial changes to its systems, or undertake more work than set forth in the prior paragraph, the parties shall engage in negotiations for a change to the Administrative Fee for a period of 30 calendar days. If no agreement is reached at the conclusion of the negotiations period, the change in the Plan Design will be treated as a change in law and addressed pursuant to section 5.5 of the Standard Terms and Conditions.
The State reserves the right to separately procure services from another Vendor(s) {Contractor(s)} where the Plan Design changes involve substantial change to the current Plans or the creation of new Plans.
[Emphasis in original.]

         Change Orders for amendments to the Contract are controlled by Section 5.4 of the Bid Solicitation, "Change Order {Contract Amendment}, " which provides that "[a]ny changes or modifications to the terms of this Blanket P.O. {Contract} shall be valid only when they have been reduced to writing and signed by the Vendor {Contractor} and the Director." Section 5.5 of the Standard Terms and Conditions, [10] "Change in Law, " provides:

Whenever a change in applicable law or regulation affects the scope of work, the Director shall provide written notice to the contractor of the change and the Director's determination as to the corresponding adjusted change in the scope of work and corresponding adjusted contract price. Within five (5) business days of receipt of such written notice, if either is applicable:
A. If the contractor does not agree with the adjusted contract price, the contractor shall submit to the Director any additional information that the contractor believes impacts the adjusted contract price with a request that the Director reconsider the adjusted contract price. The Director shall make a prompt decision taking all such information into account, and shall notify the contractor of the final adjusted contract price; and
B. If the contractor has undertaken any work effort . . . that is being changed or eliminated such that it would not be compensated under the adjusted contract, the contractor shall be compensated for such work effort according to the applicable portions of its price schedule and the contractor shall submit to the Director an itemization of the work effort .... The Director shall make a prompt decision taking all such information into account, and shall notify the contractor of the compensation to be paid for such work effort.

         Reading Sections 5.18 (Change in Plan Design) and 5.4 (Change Order) of the Bid Solicitation in conjunction with Section 5.5 (Change in Law) of the Standard Terms and Conditions makes the following points clear.

         First, the State reserved unto itself the right to make any change to the design of its prescription drug plans during the term of the Contract, and, in the case of substantial change to the plans or creation of new plans, to separately secure services from another Vendor.

         Second, although the parties must meet to discuss any changes the State makes to its plans during the term of the Contract, and any needed Change Orders that might flow from them, no Change Order will become effective until reduced to writing and signed by both parties.

         Third, there will be no change to the Administrative Fee, that is, the "all-inclusive monthly fee" for PBM services, which "multiplied by the number of participating public employees/retirees" makes up the Vendor's "monthly compensation, " when Plan Design changes require only changes in the Vendor's claim administration and related systems or a change to an open enrollment period or additional communications with Network Providers or reissuance of Identification Cards to members.

         And fourth, although the parties will engage in negotiations for a change to the Administrative Fee for plan changes requiring additional work or more substantial changes to the Vendor's systems, the Director ultimately decides whether the Administrative Fee is to be adjusted and, if so, by how much.

         Although not addressed in Section 5.18 governing Plan Design changes, there is another provision of the Solicitation addressing the effect of Plan Design changes on pricing. Section 4.4.5.2 of the Bid Solicitation, "Price Sheet/Schedule Attachment Instructions, " in Section 4, "Quote -{Proposal} Preparation and Submission, " provides in part that:

The PBM shall not make any modification or adjustment to the pricing set forth herein without the prior written consent of the State, except as follows:
A. Upon a Plan Design change enacted by the State; and
B. Such Plan Design change has a material negative impact on Rebates earned (i.e., a ten percent (10%) or greater reduction in Rebates earned) (collectively, a "Pricing Adjustment Trigger"). If a Pricing Adjustment Trigger occurs, any adjustment shall be limited to an adjustment that is solely necessary to return PBM to its contracted economic position prior to the State making the Plan Design change that resulted in the Pricing Adjustment Trigger.

         Thus, in contrast to the Solicitation's treatment of substantial Plan Design changes on adjustment of the Administrative Fee, which it leaves in the hands of the Director, changes resulting in a ten percent or greater reduction in the PBM's earned Rebates result in an automatic adjustment under the Solicitation to return the parties to their contracted economic positions. We note that besides the lack of any reference to Section 4.4.5.2 in Section 5.18, neither "Rebates earned" nor "Price Adjustment Trigger" is a defined term in the Bid Solicitation.

         Further, Section 4.4.5.2 appears to conflict with Section 5.4, governing amendments to the Contract, as it permits a modification or adjustment of the Financial Contracted Terms without a writing signed by the parties. If so, Section 5.1 of the Bid Solicitation, "Precedence of Special Contractual Terms and Conditions, " provides that Section 5 rather than Section 4 controls interpretation. As neither the Acting Director in his decision nor any of the parties in their briefs to this court relied on Section 4.4.5.2 or even called it to our attention in the context of a Plan Design change, we do not have the benefit of their interpretation of this provision or its significance for the Contract.

         The parties agree, however, that Rebates, and not Administrative Fees, are one of the largest drivers of PBM pricing, which makes this critical provision's placement in a section of the Solicitation instructing bidders on how to fill out their pricing proposals, and the State's failure to include or even reference it in Section 5.18, perplexing. The PBM's main sources of profit are its retention of a portion of any manufacturer Rebates it receives for Specialty and Brand Drugs, its revenue from negotiated discounts and its generic pricing spreads, all of which are included in the Vendor's guaranteed pricing, which, along with the Administrative Fee, make up the Financial Contracted Terms[11] it is obligated to keep "in effect for the entire Blanket P.O. {Contract} period" pursuant to Section 3.7.1 of the Bid Solicitation.

         If we attempt to read Sections 4.4.5.2, 5.18 and 5.4 of the Bid Solicitation in conjunction with Section 5.5 of the Standard Terms and Conditions as we would any contract, "as a whole, without artificial emphasis on one section, with a consequent disregard for others, " Borough of Princeton v. Bd. of Chosen Freeholders of the Cty. of Mercer, 333 N.J.Super. 310, 325 (App. Div. 2000), aff'd, 169 N.J. 135 (2001), it would appear the PBM Contract is designed to limit the Vendor's ability to change its pricing in response to Plan Design changes to those situations in which the change has a "substantial" impact on the Vendor's systems or a "material negative impact" on its pricing. That is, no change is permitted to the Administrative Fee for "insubstantial" changes to the Plans pursuant to Section 5.18 and, change to the other pricing components is permitted under Section 4.4.5.2 only if the design change has resulted in at least a ten percent reduction in Rebates earned. The difference being that the State ultimately controls any adjustment in the Administrative Fee under Section 5.18, while Section 4.4.5.2 permits an automatic adjustment without consent of the State once a Pricing Adjustment Trigger has occurred.

         The Questions and Answers

         Pursuant to the power provided by the Legislature to expedite the procurement, the Division allotted only a one week period for questions from potential bidders about the terms of the Solicitation, during which it received 182 questions. Four of those questions related to Section 5.18, at least one of which, question 174, was from Optum. Those questions and the answers provided by the Procurement Bureau on May 30, 2017, are as follows:

#
Page #
RFP Section Reference
Question (Bolded) and Answer

115

127

Section 5.18(Change in Plan Design)

Can DPB [Division of Pensions and Benefits] provide historical information on the frequency of Plan Design changes and, of such changes, how frequently have they been significant enough to justify a change in the Administrative Fee?

Historically, Plan Design changes have generally occurred on an annual basis. They have rarely been significant enough to justify a change in the Administrative Fee.

116

128

Section 5.18(Change in Plan Design)

In the PBM industry, some changes made by clients such as DPB only affect a handful of medications but could have large impacts on rebates. For example, if DPB decided to exclude all brand medications in a certain therapeutic category which were heavily rebated, rebate guarantees would need to be modified. Can the State confirm that in a situation like described here, the State would engage in negotiations on an item like rebate guarantees?

The State acknowledges that Plan Design changes that exclude certain Brand Drugs will impact Rebate Guarantees. It is expected that the Contractor and the State would discuss any needed amendments to any Financial Guarantees prior to any Plan Design change.

117

128

Section 5.18(Change in Plan Design)

In addition to plan design changes, regulatory changes or marketplace events could impact the PBM's ability to achieve the guarantees. Will the State agree, subject to the PBM's obligation to provide an appropriate justification for any change, that in such a case, pricing terms may be negotiated if a regulatory change or marketplace event has such an impact?

Please refer to RFP Section 3.7.1 (H) and Section 5.5 of the New Jersey Standard Terms and Conditions.

174

127

Section 5.18(Change in Plan Design)

Will the State consider adding the following provision: Vendor may change the pricing (a) any time State-initiated changes are made to the plan specifications, including the benefit plan, formulary, network, or a utilization management program, that adversely impact Vendor's compensation, cost to provide services or ability to satisfy a guarantee under this Agreement; (b) when there are changes in laws or regulations; (c) when the State asks and Vendor agrees to perform any service in addition to the Services; Vendor will provide DPB with notice 30 days prior to implementation of the change describing the change.

The State does not agree to this modification. See “T2679 PBM Revised RFP 53017”.

         The Bureau incorporated its answers to all of the questions asked by potential bidders into the final Solicitation for Bids in Bid Amendment Addendum No. 2.

         The four questions directed to Section 5.18 reveal a concern by potential bidders about the effect of Plan Design changes on their pricing beyond the Administrative Fee, including but not limited to, their ability to satisfy Rebate Guarantees, defined in the Bid Solicitation as "[t]he amount of Rebates that the Vendor {Contractor} guarantees will be paid to the [Division of Pensions and Benefits]." In response to those concerns, the State flatly rejected Optum's request in question 174 that the State modify the Contract terms to permit the Vendor to "change the pricing" whenever the State makes changes to "the plan specifications, including the benefit plan, formulary, network, or a utilization program"[12] that would "adversely impact Vendor's compensation, cost to provide services or ability to satisfy a guarantee under this Agreement."

         The State acknowledged in response to question 116 "that Plan Design changes that exclude certain Brand Drugs will impact Rebate Guarantees."[13] Echoing its statement in Section 5.18 that in the event of a Plan Design change, "the parties shall meet to discuss the change and discuss the needed Change Orders, " the State expressed its expectation that in the event it excluded certain Brand Drugs from the Formulary, it "would discuss any needed amendments to any Financial Guarantees, " that is, the "Financial Contracted Terms" of the Contract, minus the Administrative Fee, with the Vendor "prior to any Plan Design change." The State did not, however, refer potential bidders to Section 4.4.5.2.[14] The Division's answers to the questions posed by potential bidders regarding Section 5.18 made clear it refused to make any modifications to the Section governing Plan Design changes and Section 5.18 remained unchanged in the final revised RFP.

         The State's responses to two questions posed by potential bidders regarding the scope of work as it relates to Specialty Pharmacy are also important to this controversy.

#
Page #
RFP Section Reference
Question (Bolded) and Answer

29

35

Section 3.1.4 (Specialty Pharmacy)[15]

The RFP allows the State to make changes to which Specialty drugs shall be dispensed through the retail network versus a mail Specialty pharmacy, and to change the coverage of existing Specialty Products. Given that the mix of products being dispensed at the mail Specialty pharmacy will impact the overall effective discount that is achieved, please confirm that should adjustments be made to which products are dispensed, and/or where they are dispensed from, that the PBM and the State will work together to adjust the pricing guarantees, if necessary, to ensure the financial terms of the Contract are preserved.

In the event that the State chooses to carve out certain Specialty Drugs to allow dispensing at a Retail Pharmacy, the State and the Vendor {Contractor} shall work together so that the existing financial terms of the Blanket P.O. {Contract} are preserved.

144

35

Section 3.1.4C(Scope of Work, Specialty Pharmacy)

Please confirm that in the event that the State chooses to carve out certain Specialty Drugs to allow dispensing at a Retail Pharmacy, the State and the Contractor shall work together so that the existing economic positions of the parties are preserved.

In the event that the State chooses to carve out certain Specialty Drugs to allow dispensing at a Retail Pharmacy, the State and the Vendor {Contractor} shall work together so that the existing financial terms of the Blanket P.O. {Contract} are preserved.

         Although the State committed itself in response to those two questions to working with the Vendor to preserve the financial terms of the Contract in the event the State "carve[s] out certain Specialty Drugs to allow dispensing at a Retail Pharmacy, " it expressly refused in response to another question to modify Section 5.4 of the State Standard Terms and Conditions "State's Option to Reduce Scope of Work, "[16] which permits the State "in its sole discretion" to reduce the scope of work and assign a corresponding adjusted contract price.

         Specifically, the State refused a potential bidder's request to delete the last sentence of Section 5.4A, which provides "[i]f the parties are unable to agree on an adjusted contract price, the Director shall make a prompt decision taking all such information into account, and shall notify the contractor of the final adjusted contract price." See the State's response to Question 177. Accordingly, taking all three answers into account, should the State choose to carve out certain Specialty Drugs for dispensing at a Retail Pharmacy, the parties will work together to preserve the existing financial ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.