Pharmacy Benefit Manager Allegedly Misleads Investors About Healthy Client Relationship

July 11, 2016

courtroom juryOn May 4, 2016, Melbourne Municipal Firefighters’ Pension Trust Fund (Melbourne) filed a securities class action lawsuit against Express Scripts and several of its senior executives alleging that the company made false statements about its strong relationship with its biggest client, Anthem.

Unhappy Health Care Client Leads to Unhappy Investors.

Express Scripts is America’s largest independent pharmacy benefit manager (PBM). The company not only administers the prescription benefits of its customers’ health insurance plans, but also designs pharmacy networks and negotiates drug prices. The contract between Express Scripts and Anthem includes a provision for “competitive benchmark pricing,” which obligates Express Scripts to negotiate in good faith if Anthem proposes new pricing terms.

Anthem, which represents about 14% of Express Scripts’ annual revenues, shocked investors when it publicly threatened to find a new PBM if Express Scripts continued negotiating drug pricing in bad faith. According to investors, this revelation of a fractured relationship caused Express Scripts’ share price to fall about 7%—a loss of $3.9 billion in shareholder equity.

The final blow was dealt on March 21, 2016, when Anthem sued Express Scripts for breach of contract regarding its bad faith negotiations. Investors realized that Anthem would either (1) renegotiate its contract with Express Scripts, decreasing its revenues by billions of dollars; or (2) find a new PBM altogether, decreasing its revenues by 14%. Express Scripts’ share price fell again by 2.6%.

Company Made Material Misstatements and False Assurances, Allege Investors.

According to the Melbourne complaint, Express Scripts had warned in its filings with the Securities and Exchange Commission (SEC) that its finances would be materially adversely affected if one or more of its clients did not renew their contract. The company failed to warn, however, that “with respect to Anthem, such risks had already materialized,” according to the complaint. The complaint also identifies other instances of alleged material misstatements, including a conference call in which the company assured investors that it was “delivering great service to Anthem and its members.”

Health Care Companies Must Promote Healthy Client and Investor Relationships.

This securities lawsuit reminds public health care companies that they have much more to worry about than allegations concerning false claims or kickbacks. In addition to strengthening its operations and finances, health care companies and executives must focus on fostering healthy client and investor relationships. Health care organizations may avoid increased costs of public allegations concerning fraud through greater internal reporting and self-policing efforts.