Michigan Supreme Court Issues Ruling on Michigan’s Generic Drug Substitution Statute

On June 11, 2014, the Michigan Supreme Court issued its decision in Michigan ex rel. Gurganus v. CVS Caremark Corp., and ruled that Michigan law requires a pharmacist to pass on the difference in cost between the wholesale cost of a brand-name drug and the wholesale cost of a generic drug to the purchaser when a generic drug is substituted for a brand-name drug (and only then). The case involved two consolidated class actions and a qui tam action against multiple pharmacies alleging that the pharmacies violated MCL 333.17755(2) by failing to pass on the savings to customers when substituting brand-name drugs with generic drugs. The plaintiffs further alleged that the defendant pharmacies necessarily violated the Health Care False Claim Act (HCFCA), MCL 752.1001 et seq, and the Medicaid False Claims Act (MFCA), MCL 400.601 et seq., by violating MCL 333.17755(2) and then submitting claims for reimbursement to the state.

The trial court granted summary disposition to the defendants because it found that the plaintiffs failed to state a claim upon which relief could be granted. The trial court noted that the plaintiffs did not plead with specificity any transactions involving the defendants that purportedly violated MCL 333.17755(2). The plaintiffs relied on a small set of cost data from a single out-of-state pharmacy during a brief time period to support their allegations of systematic fraudulent activity in Michigan by the defendants. The Court of Appeals reversed the trial court’s decision, finding that the plaintiffs’ general allegations were sufficient to avoid summary disposition. The Court of Appeals then reached several issues related to whether the HCFCA and MFCA created private rights of action. The panel also held that MCL 333.17755(2) applied to all transactions in which a generic drug is dispensed – not just to transactions in which a generic drug is substituted for its brand-name equivalent.

In a unanimous decision (with one Justice concurring only in the result), the Michigan Supreme Court reversed the Court of Appeals and reinstated the trial court’s ruling. The Court reversed the Court of Appeals’ construction of MCL 333.17755(2) and its holding that the plaintiffs’ pleadings were sufficient to survive summary disposition. It vacated the remainder of the Court of Appeals’ decision as unnecessary to the resolution of the case.

The Supreme Court’s ruling is significant for pharmacies and pharmacists in the state of Michigan.

The Court clarified that MCL 333.17755(2) “is clear: when a generic drug is substituted for a brand-name drug (and only then), the pharmacist must pass on the monetary difference between the wholesale cost of the brand-name drug and the wholesale cost of the generic drug.” It rejected the plaintiff’s argument that the statute applied more broadly to situations where there is no substitution and the prescription is for the generic drug and the generic drug is dispensed.

The Court also clarified what “savings in cost” means under subsection (2) of the statute. The relevant portion of subsection (2) states that a “pharmacist shall pass on the savings in cost to the purchaser” in a substitution transaction. MCL § 333.17755(2) defines “savings in cost” as “the difference between the wholesale cost to the 2 drug products.” Based on this language, the Court held that the amount that a pharmacist must pass on to a purchaser or third-party payor is the difference between the costs of the two drugs (i.e., the brand-name wholesale cost minus the generic wholesale cost). Thus, the Court noted that subsection (2) provides a maximum allowable profit regardless of whether the pharmacist dispenses a generic drug or a brand-name drug (i.e., the pharmacist cannot make more from dispensing a generic drug than he could from a brand-name drug).

The Court’s opinion is also worth noting as it relates to the pleading standards facing parties who may be alleging that a pharmacy violated MCL 333.17755(2). Because the plaintiffs’ claims were based on alleged fraudulent activity, the heightened pleading standard for fraud claims applied. The Court noted that the plaintiffs relied on wholesale drug cost data from a single Kroger pharmacy in West Virginia to support their allegations of fraud. It held that the connection the plaintiffs tried to draw between this data and sales in Michigan was “simply too tenuous and conclusory to state a claim for relief.” Given its interpretation of MCL 333.17755(2), the Court also noted that the plaintiffs “fail[ed] to particularly allege a single improper substitution transaction” to which that provision would potentially apply.

Wachler & Associates continually monitors significant developments in healthcare law both in Michigan and nationally. If you have any questions as it pertains to this case or state or Federal False Claims Act implications regarding your practice, please contact an experienced health care attorney at 248-544-0888 or at wapc@wachler.com.