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IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
PRIME THERAPEUTICS LLC, DIVISION ONE Appellant, No. 84030-4-I v. PUBLISHED OPINION WASHINGTON STATE OFFICE OF INSURANCE COMMISSIONER,
Respondent.
DWYER, J. — Recognizing the economic challenges faced by retail
pharmacies, particularly those in rural and underserved communities, our state
legislature enacted legislation regulating the pharmacy benefit managers that
contract with such pharmacies. In so doing, our legislature established
regulatory oversight of pharmacy benefit manager reimbursement decisions and
an appeals process whereby pharmacies can seek review of such decisions. In
subsequent amendments to the legislation, our legislature broadened the
categories of reimbursement decisions within the law’s regulatory reach.
Here, Prime Therapeutics, a pharmacy benefit manager (PBM), appeals
from eight final orders of the Office of the Insurance Commissioner (OIC), which
concluded that the PBM failed to comply with regulatory requirements in
reimbursing claims submitted by Cle Elem Pharmacy. Prime Therapeutics
asserts on appeal, as it did during administrative proceedings, that the pertinent For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/2
statute is inapplicable to those reimbursement claims. Because the PBM’s
preferred interpretation of the statute contravenes both the administrative code
and the statute’s plain language, this contention is unavailing. We additionally
conclude that Prime Therapeutics’ assertion that the statute contravenes our
state and federal contract clauses is without merit. Accordingly, we affirm the
OIC’s final orders.
I
A
Prime Therapeutics is a PBM that acts as an intermediary between the
pharmacies with which it contracts and pharmaceutical manufacturers to
administer the prescription drug benefit portions of health care plans. See H.B.
REP. ON ENGROSSED SUBSTITUTE S.B. 5857, at 2, 64th Leg., Reg. Sess. (Wash.
2016). Cle Elem Pharmacy, a retail pharmacy with fewer than 15 retail outlets in
Washington, contracts with Prime Therapeutics. According to Prime
Therapeutics, the parties’ agreement provides that claims submitted by Cle Elem
Pharmacy may be reimbursed pursuant to a maximum allowable cost (MAC) list
or a reimbursement rate calculated from the Average Wholesale Price (AWP).1
Pursuant to the contract, the “‘MAC’ means the list delineating the maximum per
unit reimbursement as established and solely determined by Prime for a multiple
source prescription drug . . . at the time a claim is processed.” The AWP is “the
1 Neither during administrative proceedings nor on appeal did Prime Therapeutics submit
the portions of the parties’ contract setting forth the terms for reimbursement decisions. Instead, the PBM submitted only the definitions for MAC and AWP provided in the agreement.
2 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/3
average wholesale price of a Prescription Drug Service at the time a claim is
processed as established in Prime’s price file for that date of service.”
From May 2019 through March 2020, Cle Elem Pharmacy filled 11
prescriptions for the drug Levorphanol for the same patient. After confirming
available prices with three national drug wholesalers, the pharmacy obtained the
drug for the lowest of the three prices. Cle Elem Pharmacy then submitted the
11 reimbursement claims to Prime Therapeutics.
After receiving the claims, Prime Therapeutics reimbursed Cle Elem
Pharmacy significantly less for each claim than the amount that the pharmacy
had paid to obtain the drugs. The pharmacy filed appeals of the reimbursement
decisions to the PBM, and Prime Therapeutics agreed to increase the
reimbursement amount paid on two of the 11 claims. Those claims, the PBM
explained, were paid from the “MAC list.” However, Prime Therapeutics asserted
that the remaining nine claims were “not paid pursuant to the MAC list,” but
instead “reimbursed pursuant to the parties’ contractual reimbursement rate,
calculated based off of the agreed-upon AWP price.” Following a further appeal
on one of the claims, the OIC ordered Prime Therapeutics to reimburse the
pharmacy for the underpaid amount.
In June 2021, Cle Elem Pharmacy submitted to the OIC a small pharmacy
benefits appeal, challenging Prime Therapeutics’ reimbursement of the remaining
eight claims. Prime Therapeutics asserted that the statute governing
reimbursement decisions and appeals resulting therefrom, former RCW
3 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/4
19.340.100 (2016)2, did not apply to Cle Elem Pharmacy’s claims. According to
the PBM, this is so because it reimbursed those claims pursuant to the parties’
contract, rather than pursuant to a “predetermined list price (also referred to as a
MAC price).”
Administrative law judges (ALJs) with the Office of Administrative
Hearings thereafter held adjudicative proceedings to determine whether the
pertinent statute applied to Cle Elem Pharmacy’s eight remaining claims. The
ALJs issued eight initial orders concluding that the pharmacy, pursuant to former
RCW 19.340.100, was entitled to reimbursement from Prime Therapeutics for the
full amount of each claim. The initial orders also imposed on Prime Therapeutics
a civil penalty of $1,000 for each claim, as authorized by former chapter 19.340
RCW.
Prime Therapeutics filed a petition for review of each of the eight initial
orders. In August 2021, the OIC’s reviewing officer issued eight final orders
affirming the initial orders. In each final order, the reviewing officer concluded
that, pursuant to former chapter 19.340 RCW, Cle Elem Pharmacy is entitled to
reimbursement for the full amount of each of the eight claims. The reviewing
officer additionally upheld the civil penalty of $1,000 imposed in each of the initial
orders.
Prime Therapeutics filed a petition for review of the agency’s final orders
in the superior court. The appeal was ultimately transferred to this court for direct
review.
2 Former RCW 19.340.100 (2016) has been recodified as RCW 48.200.280.
4 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/5
B
The history of our state legislature’s efforts to regulate PBMs informs our
understanding of the issues in this case. Both the impetus for this legislation and
our legislature’s later amendments to expand its regulatory scope illuminate the
circumstances our legislature sought to address.
In 2014, our legislature sought for the first time to regulate PBMs by
setting reimbursement standards and providing an appeals process for
pharmacies to challenge PBM reimbursement decisions. S.B. REP. ON
ENGROSSED SUBSTITUTE S.B. 6137, 63d Leg., Reg. Sess. (Wash. 2014); H.B. REP.
ON ENGROSSED SUBSTITUTE S.B. 6137, 63d Leg., Reg. Sess. (Wash. 2014).
Public testimony evidenced the economic challenges faced by Washington
pharmacies, especially those in rural and underserved communities, which were
described as being in a “desperate state.” S.B. REP. ON ENGROSSED SUBSTITUTE
S.B. 6137, at 3. See also H.B. REP. ON ENGROSSED SUBSTITUTE S.B. 6137, at 2-4.
Testimony indicated that “[t]he growth of the [PBM] business has resulted in
business practices . . . that have made it hard for pharmacies to stay in
business.” H.B. REP. ON ENGROSSED SUBSTITUTE S.B. 6137, at 4. Pharmacists
reported taking “huge financial losses on some drugs” because “they are
consistently reimbursed less [than] they paid for the drugs.” S.B. REP. ON
ENGROSSED SUBSTITUTE S.B. 6137, at 3.
In response to such testimony, our legislature enacted a bill restricting
PBMs to setting a “maximum allowable cost” only for drugs falling within certain
categories. The legislation additionally required PBMs to establish a process
5 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/6
whereby pharmacies could appeal PBM reimbursement decisions for such drugs.
ENGROSSED SUBSTITUTE S.B. 6137, § 10(2)(a), (3), 63d Leg., Reg. Sess. (Wash.
2014). The 2014 legislation defined “maximum allowable cost” as “the maximum
amount that a [PBM] will reimburse a pharmacy for the cost of a drug.”
ENGROSSED SUBSTITUTE S.B. 6137, § 10(1)(b). It provided that a pharmacy “may
appeal [to the PBM] a maximum allowable cost if the reimbursement for the drug
is less than the net amount that the . . . pharmacy paid to the supplier of the
drug.” ENGROSSED SUBSTITUTE S.B. 6137, § 10(3). Thus, pursuant to the 2014
legislation, when a PBM reimbursed a pharmacy for the cost of a drug for which
the PBM had set a “maximum allowable cost,” the pharmacy could appeal from
that decision through an internal appeals process. ENGROSSED SUBSTITUTE S.B.
6137, § 10(1)(a), (3). The legislation required that, if the PBM denied the
pharmacy’s appeal, the PBM was required to provide the reason for the denial
and demonstrate that the pharmacy could obtain the drug “at a price that is equal
to or less than the maximum allowable cost” set by the PBM. ENGROSSED
SUBSTITUTE S.B. 6137, § 10(4)(c).
Our legislature again addressed the issue of PBM reimbursement
practices in its 2016 legislative session. Testimony indicated that pharmacies
continued to be reimbursed by PBMs in amounts substantially less than the
6 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/7
purchasing costs for many prescription drugs.3 S.B. REP. ON FIFTH ENGROSSED
SUBSTITUTE S.B. 5857, at 3, 64th Leg., Reg. Sess. (Wash. 2016); H.B REP. ON
FIFTH ENGROSSED SUBSTITUTE S.B. 5857, at 5, 64th Leg., Reg. Sess. (Wash.
2016). Testimony noted “tremendous losses,” particularly for small pharmacies,
which are “often the only pharmacies available for miles.” H.B. REP. ON FIFTH
ENGROSSED SUBSTITUTE S.B. 5857, at 5. Our legislature thus adopted
amendments and additions to the prior law that (1) provide enforcement authority
to the OIC, (2) expand the PBM reimbursement decisions that are subject to
regulation, and (3) when certain conditions are met, require PBMs to uphold
reimbursement appeals of pharmacies with fewer than 15 retail outlets in the
state. FIFTH ENGROSSED SUBSTITUTE S.B. 5857, § 4(1)(a), (3), (6), 64th Leg., Reg.
Sess. (Wash. 2016).
Pertinent here, the 2016 legislation expanded the categories of PBM
reimbursement decisions from which a contracting pharmacy may appeal. The
legislation adopted in 2014 required a PBM to provide an appeals process for
reimbursement decisions applicable to drugs for which the PBM had set a
“maximum allowable cost.” ENGROSSED SUBSTITUTE S.B. 6137, § 10(3)
(emphasis added). In contrast, the current law, adopted in 2016, provides that a
pharmacy “may appeal its reimbursement for a drug subject to predetermined
3 A summary of public testimony on the proposed legislation states:
Despite the [2014] law, [pharmacies] continue to be paid below costs for the product and we cannot sustain the business this way. The [PBMs] are not following the law with the appeals process or listing of market prices. They continue to deny requests for reimbursement of the cost of the drugs. The PBMs are not updating the costs of the drugs to reflect the market prices [pharmacies] must pay. S.B. REP. ON FIFTH ENGROSSED SUBSTITUTE S.B. 5857, at 3.
7 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/8
reimbursement costs for multisource generic drugs.” FIFTH ENGROSSED
SUBSTITUTE S.B. 5857, § 4(3) (emphasis added). In elsewhere setting forth which
drugs a PBM may place on a cost-limiting “list,” the 2016 legislation provides that
a “list” is “the list of drugs for which predetermined reimbursement costs have
been established, such as a maximum allowable cost or maximum allowable cost
list or any other benchmark prices utilized by the [PBM].” FIFTH ENGROSSED
SUBSTITUTE S.B. 5857, § 4(1)(a) (emphasis added).4
Thus, in 2016, our legislature expanded the scope of regulation of PBMs’
reimbursements to contracting pharmacies, particularly those pharmacies in rural
and underserved communities, which sustain more significant economic loss due
to under-reimbursement. Our legislature did so by broadening the categories of
PBM reimbursement decisions encompassed within the law. Whereas only
reimbursement for drugs subject to a “maximum allowable cost” were previously
regulated, ENGROSSED SUBSTITUTE S.B. 6137, § 10(3), current law regulates
reimbursement for all drugs subject to “predetermined reimbursement costs.”
FIFTH ENGROSSED SUBSTITUTE S.B. 5857, § 4(1)(a). This includes drugs subject
to a “maximum allowable cost or maximum allowable cost list or any other
benchmark prices utilized by the [PBM].” FIFTH ENGROSSED SUBSTITUTE S.B.
5857, § 4(1)(a) (emphasis added).
Prime Therapeutics asserts that the reimbursement decisions at issue
here are not encompassed within the scope of this expanded regulation.
4 In contrast, the 2014 legislation, which provided an appeals process only for
reimbursement decisions for drugs for which a “maximum allowable cost” had been set, defined “list” as only “the list of drugs for which maximum allowable costs have been established.” ENGROSSED SUBSTITUTE S.B. 6137, § 10(1)(a), (2)(a).
8 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/9
II
Prime Therapeutics first contends that former RCW 19.340.100 does not
apply to the eight reimbursement decisions from which Cle Elem Pharmacy
appealed. This is so, according to the PBM, because it reimbursed the
pharmacy according to a contractually-agreed upon rate calculated based on the
AWP, and, thus, there is no list “for which predetermined reimbursement costs
have been established.” We disagree. The administrative code definition of
“predetermined reimbursement cost” applies to the challenged reimbursement
decisions, and the plain language of the pertinent statute demonstrates a clear
intent to encompass those decisions within the legislation’s regulatory reach.
Prime Therapeutics’ assertions to the contrary are without merit.
Judicial review of a final administrative decision is governed by the
Washington Administrative Procedure Act (WAPA), chapter 34.05 RCW.
Chandler v. Office of Ins. Comm’r, 141 Wn. App. 639, 647, 173 P.3d 275 (2007).
“Reviewing courts may grant relief only if the party challenging the agency order
shows that the order is invalid for one of the reasons set forth in RCW
34.05.570(3).” Chandler, 141 Wn. App. at 647. As relevant here, we may grant
relief due to a “violation of constitutional provisions” or when “[t]he agency has
erroneously interpreted or applied the law.” RCW 34.05.570(3)(a), (d).
We review de novo “an agency’s interpretation or application of the law.”
Chi. Title Ins. Co. v. Off. of Ins. Comm’r, 178 Wn.2d 120, 133, 309 P.3d 372
9 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/10
(2013). Additionally, we “interpret agency regulations as if they were statutes.”
Shimmick Constr. Co. v. Dep’t of Lab. & Indus., 12 Wn. App. 2d 770, 778, 460
P.3d 192 (2020). Pursuant to the WAPA, “[t]he error of law standard ‘allows the
reviewing court to essentially substitute its judgment for that of the administrative
body, though substantial weight is accorded the agency’s view of the law.’”
Premera v. Kreidler, 133 Wn. App. 23, 31, 131 P.3d 930 (2006) (quoting Franklin
County Sheriff’s Office v. Sellers, 97 Wn.2d 317, 325, 646 P.2d 113 (1982)). In
other words, although we “‘accord[] deference to an agency interpretation of the
law where the agency has specialized expertise in dealing with such issues,’” we
are “‘not bound by an agency’s interpretation of a statute.’” Chi. Title Ins. Co.,
178 Wn.2d at 133 (quoting City of Redmond v. Cent. Puget Sound Growth Mgmt.
Hearings Bd., 136 Wn.2d 38, 46, 959 P.2d 1091 (1998)).
Washington state law regulates PBM reimbursement decisions and
establishes a process whereby pharmacies may appeal from such decisions. To
this end, former RCW 19.340.100 restricts which drugs a PBM may place on a
“list” of drugs and the PBM’s obligations in maintaining and providing
transparency of that “list.”5 A “list” is defined as
the list of drugs for which predetermined reimbursement costs have been established, such as a maximum allowable cost or maximum allowable cost list or any other benchmark prices utilized by the
5 For instance, a PBM “[m]ay not place a drug on a list unless there are at least two
therapeutically equivalent multiple source drugs, or at least one generic drug available from only one manufacturer, generally available for purchase by network pharmacies from national or regional wholesalers.” Former RCW 19.340.100(2)(a). The PBM must also ensure that all drugs on a list are “readily available for purchase” by Washington pharmacies and “are not obsolete.” Former RCW 19.340.100(2)(b), (c). The PBM must provide for transparency regarding the list to contracting pharmacies and regularly update any list, including “all changes in the price of drugs.” Former RCW 19.340.100(2)(d)-(f).
10 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/11
[PBM] and must include the basis of the methodology and sources utilized to determine multisource generic drug reimbursement amounts.
Former RCW 19.340.100(1)(a) (emphasis added).
Pursuant to authority granted by the statute, the OIC has adopted a rule
defining “predetermined reimbursement cost.” See RCW 48.200.900 (“The
insurance commissioner may adopt any rules necessary to implement this act.”).
Thus, consistent with the statute, the administrative code provides:
“‘Predetermined reimbursement cost’ means maximum allowable cost, maximum
allowable cost list, or any other benchmark price utilized by the [PBM], including
the basis of the methodology and sources utilized to determine multisource
generic drug reimbursement amounts.” WAC 284-180-130(17).
In addition to restricting the drugs for which a PBM may set predetermined
reimbursement costs, the statute requires that a PBM establish a process by
which a pharmacy “may appeal [the PBM’s] reimbursement for a drug subject to
predetermined reimbursement costs for multisource generic drugs.”6 Former
RCW 19.340.100(3). A pharmacy “may appeal a predetermined reimbursement
cost for a multisource generic drug if the reimbursement for the drug is less than
the net amount” that the pharmacy paid to the drug supplier. Former RCW
19.340.100(3). If a pharmacy with fewer than 15 retail outlets in Washington can
demonstrate that it is unable to purchase a therapeutically equivalent
6 “‘Multisource generic drug’ means any covered outpatient prescription drug for which
there is at least one other drug product that is rated as therapeutically equivalent under the [pertinent FDA publication]; is pharmaceutically equivalent or bioequivalent, as determined by the [FDA]; and is sold or marketed in the state during the period.” Former RCW 19.340.100(1)(c). Prime Therapeutics does not dispute that Levorphanol, the drug at issue here, is a “multisource generic drug.”
11 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/12
interchangeable product from a supplier doing business in Washington at the
PBM’s list price, then the PBM “shall uphold the appeal of [the] pharmacy.”
Former RCW 19.340.100(3); see also WAC 284-180-505(4). In other words, the
PBM must reimburse small pharmacies, as defined by the statute, at the price
paid by such pharmacies for those drugs if the pharmacy demonstrates that it
could not find the drugs at a lower price than it ultimately paid.
However, if the PBM does not uphold the pharmacy’s appeal in this “first
tier appeal,” see WAC 284-180-505, the PBM must provide a reason for the
denial and the “national drug code of a drug that has been purchased [by other
Washington pharmacies] at a price that is equal to or less than the
predetermined reimbursement cost for [that drug].” Former RCW
19.340.100(4)(b); see also WAC 284-180-505(5). In short, for a drug subject to
“predetermined reimbursement costs,” the PBM must show that the pharmacy
could have obtained the drug at a lower price in order to deny the reimbursement
appeal. If a pharmacy’s appeal to the PBM is denied, the pharmacy “may
dispute the decision and request review by the commissioner” within 30 days.
Former RCW 19.340.100(6).
Here, in each of the eight final orders, the OIC reviewing officer found that
Cle Elem Pharmacy had shown that it was unable to purchase a drug
therapeutically equivalent to Levorphanol at Prime Therapeutics’ list price. The
reviewing officer further found that, in responding to the pharmacy’s appeal of its
reimbursement decisions, “Prime Therapeutics did not produce a name of a drug
12 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/13
wholesaler in Washington where [the pharmacy] could acquire the drug or its
therapeutic equivalent at the price [the PBM] reimbursed.” Instead, Prime
Therapeutics denied the appeal “because the claim was reimbursed according to
the [parties’] contract.”
Indeed, Prime Therapeutics asserted, as it does here, that it “reimbursed
these claims according to the contract, not according to a predetermined list
price,” which the PBM defined as “a MAC price.” However, the reviewing officer
concluded that Prime Therapeutics
denied the appeal based on the belief that because it did not reimburse the pharmacy using the maximum allowable cost (MAC) list, the claim was not appealable under RCW 19.340. However, this is not a lawful basis for denial under RCW 19.340, as the definition of “list” specifically references “any other benchmark prices utilized by the [PBM] . . .” in addition to the maximum allowable cost list or maximum allowable cost.
“[B]ecause the definition of ‘list’ contemplates other benchmarks used instead of
the MAC list,” the reviewing officer concluded, “the fact that the AWP less 30
percent was the basis of the reimbursement is not a sufficient basis to deny the
appeal under RCW 19.340.100.”
On appeal, Prime Therapeutics contends that the challenged
reimbursements do not constitute “predetermined reimbursement costs” pursuant
to former RCW 19.340.100 and, thus, that the statute is inapplicable to those
reimbursements. The PBM asserts that, pursuant to the parties’ contract, claims
can be reimbursed based either on a MAC list or a reimbursement rate
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calculated from the AWP.7 According to Prime Therapeutics, reimbursement
rates calculated from the AWP are not “predetermined” because the AWP is
subject to change at the behest of drug manufacturers, and such changes are
outside of the PBM’s control. We disagree. Although the AWP itself is subject to
change, the formula from which reimbursement rates are calculated is itself
predetermined. Pursuant to both the administrative code provision defining
“predetermined reimbursement cost” and the plain language of former RCW
19.340.100, Cle Elem Pharmacy is entitled to full reimbursement of the eight
claims at issue here.
“The goal of statutory interpretation is to discern and carry out legislative
intent.” Bennett v. Seattle Mental Health, 166 Wn. App. 477, 483, 269 P.3d 1079
(2012). We consider the context of the entire statute is effectuating such intent.
Cannabis Action Coal. v. City of Kent, 180 Wn. App. 455, 469, 322 P.3d 1246
(2014), aff’d, 183 Wn.2d 219, 351 P.3d 151 (2015). When a statute’s meaning
“is plain on its face,” we “must give effect to that plain meaning as an expression
of legislative intent.” Dep’t of Ecology v. Campbell & Gwinn, LLC, 146 Wn.2d 1,
9-10, 43 P.3d 4 (2002). “We discern a statute’s plain language by considering
the text itself, amendments to the statute, and related statutory provisions.”
Columbia Riverkeeper v. Port of Vancouver USA, 188 Wn.2d 421, 437, 395 P.3d
1031 (2017). Moreover, the “‘[r]ules of statutory construction apply to
administrative rules and regulations, particularly where . . . they are adopted
7 Although Prime Therapeutics did not provide the relevant terms of the contract, the
record indicates that the PBM reimbursed Cle Elem Pharmacy for the eight claims at issue in an amount calculated from the formula “AWP – 30%.”
14 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/15
pursuant to express legislative authority.’” City of Kent v. Beigh, 145 Wn.2d 33,
45, 32 P.3d 258 (2001) (alterations in original) (quoting State v. Burke, 92 Wn.2d
474, 478, 598 P.2d 395 (1979)).
Here, both the administrative code and the pertinent statute contravene
Prime Therapeutics’ preferred interpretation of “predetermined reimbursement
cost.” First, the relevant code provision explicitly defines “any other benchmark
price utilized by the [PBM]” as a “predetermined reimbursement cost.” It
provides: “‘Predetermined reimbursement cost’ means maximum allowable cost,
maximum allowable cost list, or any other benchmark price utilized by the
pharmacy benefit manager.” WAC 284-180-130(17) (emphasis added). To
“mean” is “to serve or intend to convey, show, or indicate” or to “signify, denote,
[or] express.” WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY 1398 (2002).
Accordingly, the plain language of WAC 284-180-130(17) provides that “any
other benchmark price” is necessarily a “predetermined reimbursement cost.”
Prime Therapeutics’ preferred interpretation of former RCW 19.340.100
conflicts with the code provision defining “predetermined reimbursement cost.”
The PBM asserts that, in order to be subject to former RCW 19.340.100, a
reimbursement must qualify as both a “benchmark price” and a “predetermined
reimbursement cost.”8 In other words, the PBM contends not all “benchmark
price[s]” constitute “predetermined reimbursement cost[s].” Prime Therapeutics’
interpretation requires that benchmark prices are simply a subset of
8 Prime Therapeutics does not dispute that reimbursement rates calculated from the
AWP constitute “benchmark price[s].” Rather, the PBM asserts simply that, even as “benchmark price[s],” they are not “predetermined reimbursement cost[s].”
15 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/16
predetermined reimbursement costs, where some benchmark prices could
nevertheless not qualify as predetermined reimbursement costs. The
administrative code, however, indicates that the two are equivalencies—any
benchmark prices also constitute predetermined reimbursement costs.
“We give great deference to [an agency’s] interpretation of its own
properly promulgated regulations, ‘absent a compelling indication’ that the
agency’s regulatory interpretation conflicts with legislative intent or is in excess of
the agency’s authority.’” Litchfield v. KPMG, LLP, 170 Wn. App. 431, 441, 285
P.3d 172 (2012) (internal quotation marks omitted) (quoting Silverstreak, Inc. v.
Dep’t of Lab. & Indus., 159 Wn.2d 868, 884, 154 P.3d 891 (2007)). Here, our
legislature expressly provided that the OIC “shall have enforcement authority
over [former] chapter 19.340 RCW” and “may adopt rules to implement [that]
chapter.” FIFTH ENGROSSED SUBSTITUTE S.B. 5857, § 5(2), (3). Prime
Therapeutics’ preferred interpretation of the pertinent statute contravenes the
definition of “predetermined reimbursement cost” properly adopted by the OIC.
Absent an indication that the administrative code provision conflicts with our
legislature’s intent in enacting that statute, we defer to the OIC’s determination
that benchmark prices necessarily constitute predetermined reimbursement
costs.
Thus, we next consider the plain language of former RCW
19.340.100(1)(a) to determine whether the OIC’s definition of “predetermined
reimbursement cost” is consistent with legislative intent. The statute provides:
“List” means the list of drugs for which predetermined reimbursement costs have been established, such as a maximum
16 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/17
allowable cost or maximum allowable cost list or any other benchmark prices utilized by the [PBM] and must include the basis of the methodology and sources utilized to determine multisource generic drug reimbursement amounts.
Former RCW 19.340.100(1)(a) (emphasis added). “[P]redetermine[d]” means “to
determine beforehand.” W EBSTER’S, supra, at 1786. “[S]uch” means “of a kind or
character about to be indicated, suggested, or exemplified,” W EBSTER’S, supra, at
2283, while “as” means “for instance” or “by way of example.” W EBSTER’S, supra,
at 125. Thus, the statutory language “such as” indicates that the three categories
following the term “predetermined reimbursements costs” are encompassed
within that term. Consistent with the definition set forth in the administrative
code, the pertinent statutory provision also indicates that “any other benchmark
prices utilized by the [PBM]” constitute “predetermined reimbursement costs.”
Prime Therapeutics nevertheless asserts that reimbursement rates
calculated from the AWP are not “predetermined” pursuant to the statute.
According to the PBM, reimbursement rates calculated from the AWP are not
determined beforehand because the AWP, which is set by drug manufacturers, is
subject to change. “Predetermined” does not, however, mean “unchanging” or
within the control of the PBM itself. Moreover, Prime Therapeutics disregards
that the formula provided in the parties’ contract, which sets forth the method for
determining reimbursement rates from the AWP, is itself predetermined.
Although the input to the formula—the AWP—may fluctuate, the formula itself
does not. The formula is thus a “benchmark” and is “predetermined.”
Additionally, our legislature’s amendment in 2016 of the definition of “list”
demonstrates intent to expand the reimbursement decisions subject to the
17 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/18
statute’s regulatory reach. As discussed above, the 2014 legislation defined “list”
as only “the list of drugs for which maximum allowable costs have been
established.” ENGROSSED SUBSTITUTE S.B. 6137, § 10(1)(a), (2)(a). However, the
amended version of the law, adopted in 2016, significantly expanded that
definition to encompass additional categories of reimbursement decisions.
Pursuant to the amended definition, a “list” is “the list of drugs for which
predetermined reimbursement costs have been established, such as a maximum
allowable cost or maximum allowable cost list or any other benchmark prices
utilized by the [PBM].” FIFTH ENGROSSED SUBSTITUTE S.B. 5857, § 4(1)(a). We
may consider amendments to statutory language in analyzing the plain language
of a statute. Columbia Riverkeeper, 188 Wn.2d at 437. Here, those
amendments, consistent with the text of the statute itself, indicate an intent to
expand the reimbursement decisions subject to regulation to include those based
on “any other benchmark prices utilized by the [PBM].”
Thus, the OIC’s definition of “predetermined reimbursement cost,” set forth
in WAC 284-180-130(17), is consistent with the language employed by our
legislature in former RCW 19.340.100. We nevertheless recognize that the
administrative code definition can reasonably be read as more limiting than the
statutory definition of “list” set forth above. Whereas the administrative code
states that “‘[p]redetermined reimbursement cost’ means . . . any other
benchmark price utilized by the [PBM],” WAC 284-180-130(17) (emphasis
added), the statutory language could be read to encompass not only the three
18 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/19
categories of “predetermined reimbursements costs” explicitly listed, see former
RCW 19.340.100(1)(a), but also any other category of reimbursement decision
subject to “predetermined reimbursement costs.” In other words, the language
“such as” can be interpreted as including the listed categories without indicating
that those categories are exclusive. Pursuant to such a reading, “[MAC] or
[MAC] list or any other benchmark prices utilized by the [PBM]” qualify as
“predetermined reimbursement costs,” but other categories of reimbursement
decisions may also fall within the statute’s scope. Thus, the statute can
reasonably be read to be more inclusive than the definition of “predetermined
reimbursement cost” promulgated by the OIC.
However, any possible misstatement in the wording of the administrative
code provision does not affect the propriety of our ruling here. As did the OIC’s
reviewing officer, we address only whether the reimbursement decisions
appealed from by Cle Elem Pharmacy are subject to “predetermined
reimbursement costs.” Thus, we do not consider whether reimbursement
decisions subject to a MAC, MAC list, or any other benchmark prices utilized by a
PBM could also constitute “predetermined reimbursement costs” and, thus, be
encompassed within the statute’s regulatory reach.
Here, whether we rely solely on the plain language of the statute or on the
definition promulgated by the OIC, we arrive at the same conclusion—the
reimbursement costs calculated by Prime Therapeutics on the basis of the AWP
constitute both “benchmark prices” and “predetermined reimbursement costs.” It
is for another day to consider whether a PBM’s reimbursement decision that
19 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/20
does not fall within the ambit of the three categories listed in former RCW
19.340.100(1)(a) can nevertheless constitute “predetermined reimbursement
costs” and be thereby subject to regulation.
The administrative code provision defining “predetermined reimbursement
cost,” though perhaps less inclusive, is consistent with the statutory language
setting forth the categories of reimbursement decisions subject to former chapter
19.340 RCW. Prime Therapeutics’ interpretation of the statute, which severs the
term “predetermined” from the term “any other benchmark prices,” is neither
mandated by the words used nor consistent with our legislature’s purpose in
enacting that legislation. Furthermore, the PBM’s preferred interpretation is
inconsistent with our legislature’s intent to broaden the category of
reimbursement decisions subject to regulation.
The eight final orders challenged by Prime Therapeutics, under the facts
presented to the OIC, were properly decided whether we tether our review to the
plain language of the statute or to the pertinent administrative code provision.
We conclude, as did the OIC reviewing officer, that the challenged
reimbursement decisions are subject to former RCW 19.340.100. We find no
error in the reviewing officer’s conclusion that the reimbursement decisions at
issue here fall within the language of “predetermined reimbursement costs” in the
pertinent statute.
20 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/21
III
Prime Therapeutics additionally contends that former RCW 19.340.100, as
applied in the final orders, unconstitutionally impairs the terms of the parties’
contract. Again, we disagree. Given the highly regulated nature of the
pharmaceutical industry generally, and our state’s regulation of PBMs
specifically, the challenged statute does not impair any reasonable contractual
expectations. Moreover, even were that not so, the statute serves the legitimate
public purpose of maintaining access to pharmacies in rural and underserved
communities. Accordingly, the statute is constitutional.
Both our state and federal constitutions prohibit our state legislature from
enacting laws that impair existing contractual obligations. U.S. CONST. art. I, § 10
(“No State shall . . . pass any . . . law impairing the obligation of contracts.”);
WASH. CONST. art. I, § 23 (“No . . . law impairing the obligations of contracts shall
ever be passed.”). As has our Supreme Court, we “read our state contracts
clause as coextensive with the federal constitution’s contracts clause when
neither party has argued to the contrary.” Wash. Food Indus. Ass’n v. City of
Seattle, No. 99771-3, slip op. at 34,
http://www.courts.wa.gov/opinions/pdf/99771-3.pdf (Wash. Feb. 9, 2023) (lead
opinion).9 The prohibition against impairment of contractual obligations,
however, “‘is not an absolute one and is not to be read with literal exactness.’”
9 Although we cite here to the lead opinion, our Supreme Court was unanimous in its
holding regarding the contract clause claim of error. Wash. Food Indus. Ass’n, No.99771-3, slip op. at 3 (lead opinion).
21 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/22
Tyrpak v. Daniels, 124 Wn.2d 146, 151, 874 P.2d 1374 (1994) (quoting Home
Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398, 428, 54 S. Ct. 231, 78 L. Ed. 413
(1934)). Rather, it “must be accommodated to the inherent police power of the
State ‘to safeguard the vital interests of its people.’” Energy Rsrvs. Grp., Inc. v.
Kan. Power & Light Co., 459 U.S. 400, 410, 103 S. Ct. 697, 74 L. Ed. 2d 569
(1983) (quoting Blaisdell, 290 U.S. at 434).
The “threshold inquiry” in determining whether legislation
unconstitutionally impairs a contract is “‘whether the state law has, in fact,
operated as a substantial impairment of a contractual relationship.’” Energy
Rsrvs., 459 U.S. at 411 (quoting Allied Structural Steel Co. v. Spannaus, 438
U.S. 234, 244, 98 S. Ct. 2716, 57 L. Ed. 2d 727 (1978)). “To determine whether
there is a substantial impairment of a contractual relationship, we consider ‘the
extent to which the law undermines the contractual bargain, interferes with a
party’s reasonable expectations, and prevents the party from safeguarding or
reinstating his rights.’” Gonzales v. Inslee, 21 Wn. App. 2d 110, 139, 504 P.3d
890 (2022) (quoting Sveen v. Melin, ___ U.S. ___, 138 S. Ct. 1815, 1822, 201 L.
Ed. 2d 180 (2018)). If the legislation constitutes a substantial impairment, “the
inquiry turns to the means and ends of the legislation.” Sveen, 138 S. Ct. at
1822.
Specifically, we ask whether the legislation “is drawn in an ‘appropriate’
and ‘reasonable’ way to advance ‘a significant and legitimate public purpose.’”
Sveen, 138 S. Ct. at 1822 (quoting Energy Rsrvs., 459 U.S. at 411-12).
“[L]egislation does not unconstitutionally impair contractual obligations where the
22 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/23
legislation constitutes an exercise of the police power in advancing a legitimate
public purpose.” Optimer Int’l, Inc. v. RP Bellevue, LLC, 151 Wn. App. 954, 966,
214 P.3d 954 (2009). Such legislation “may advance a legitimate purpose by
remedying a general social or economic problem, and [it] need not only be in
response to an emergency.” Wash. Food Indus. Ass’n, No. 99771-3, slip op. at
35-36 (lead opinion). Thus, even if legislation constitutes a substantial
impairment of contractual obligations, we must uphold that legislation if its
“adjustment of ‘the rights and responsibilities of contracting parties [is based]
upon reasonable conditions and [is] of a character appropriate to the public
purpose justifying [the legislation’s] adoption.’” Energy Rsrvs., 459 U.S. at 412
(alterations in original) (quoting U.S. Trust Co. of N.Y. v. New Jersey, 431 U.S. 1,
22, 97 S. Ct. 1505, 52 L. Ed. 92 (1977)).
Here, Prime Therapeutics asserts that former RCW 19.340.100, as
applied in the OIC’s final orders, constitutes a substantial impairment of its
contract with Cle Elem Pharmacy. According to Prime Therapeutics, this is so
because the contract “sets forth how reimbursement rates will be calculated and
the processes for any appeal of those rates.” Br. of Appellant at 23-24. We
disagree.
First, Prime Therapeutics has not demonstrated that former RCW
19.340.100 interferes with its reasonable contractual expectations. See Sch.
Dists.’ All. for Adequate Funding of Special Educ. v. State of Washington, 170
23 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/24
Wn.2d 599, 605, 244 P.3d 1 (2010) (“In Washington, it is well established that
statutes are presumed constitutional and that a statute’s challenger has a heavy
burden to overcome that presumption; the challenger must prove that the statute
is unconstitutional beyond a reasonable doubt.”). When an industry is heavily
regulated, such “pervasive regulation” puts the parties on notice that the
government might further intervene in contractual relationships. Gonzales, 21
Wn. App. 2d at 140.
We find the decision of a federal court upholding similar state legislation
against a contract clause challenge to be persuasive. See Pharm. Care Mgmt.
Ass’n v. Rutledge, 240 F. Supp. 3d 951 (E.D. Ark. 2017), aff’d in part, rev’d in
part and remanded on other grounds, 891 F.3d 1109 (8th Cir. 2018), rev’d and
remanded on other grounds, ___ U.S. ___, 141 S. Ct. 474, 208 L. Ed. 2d 327
(2020). There, in concluding that the pertinent legislation had not substantially
impaired reasonable contractual expectations, the court reasoned that “PBMs
cannot be surprised by legislative efforts to protect public health and welfare by
protecting pharmacies.” Pharm. Care Mgmt. Ass’n, 240 F. Supp. 3d at 963. This
is because “the pharmaceuticals industry is already highly regulated,” and the
predecessor statute in Arkansas had already regulated PBMs within that state.
Pharm. Care Mgmt. Ass’n, 240 F. Supp. 3d at 963. The court further reasoned
that PBMs have “been on notice of the national controversy caused by MAC
methodology because other jurisdictions have enacted similar laws regulating
PBMs.” Pharm. Care Mgmt. Ass’n, 240 F. Supp. 3d at 963.
24 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/25
The same is true here. Prime Therapeutics is undoubtedly aware of the
highly regulated nature of the pharmaceutical industry in general, and of our
state’s regulation of PBMs in particular. Multiple states had already enacted
legislation regulating the relationship between PBMs and pharmacies when our
state legislature, in 2014, first sought to address the economic challenges faced
by Washington pharmacies due to PBM reimbursement practices. S.B. REP. ON
ENGROSSED SUBSTITUTE S.B. 6137, at 1. PBMs were thus on notice of such
regulation when our state legislature, two years later, expanded the scope of
those reimbursement decisions subject to our state’s law. See FIFTH ENGROSSED
SUBSTITUTE S.B. 5857. Because the challenged statute did not disrupt Prime
Therapeutics’ reasonable contractual expectations, it did not substantially impair
the parties’ contract.10 See Pharm. Care Mgmt. Ass’n, 240 F. Supp. 3d at 962.
Furthermore, even if the application of former RCW 19.340.100 in the final
orders substantially impaired the parties’ contract, the statute is nevertheless
constitutional because it serves a legitimate public purpose. “[L]egislation does
not unconstitutionally impair contractual obligations where the legislation
10 Further complicating Prime Therapeutics’ assertion of substantial contractual
impairment is the fact that the PBM has not provided the relevant portions of the contact that, it claims, have been substantially impaired by former RCW 19.340.100. Although the excerpts provided include the contractual definitions of “‘Average Wholesale Price’ or ‘AWP’” and “‘Maximum Allowable Cost’ or ‘MAC,’” the excerpts do not include the reimbursement terms purportedly impaired by the challenged legislation. Without the specific contractual terms alleged to be impaired, we cannot assess to what extent the law may undermine the contractual bargain. Nw. Grocery Ass’n v. City of Seattle, 526 F. Supp. 3d 884, 896 (W.D. Wash. 2021) (“[T]he court cannot properly assess whether the statute ‘substantially impairs’ Plaintiffs’ members’ contracts, as Plaintiffs have provided no specific allegations of contracts or contractual terms which the Ordinance might impair.”). However, even were we to hold that the contract has been substantially impaired, we would nevertheless uphold the statute’s constitutionality. As explained infra, the legislation advances a legitimate public purpose and is, therefore, constitutional.
25 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/26
constitutes an exercise of the police power in advancing a legitimate public
purpose.” Optimer Int’l, Inc., 151 Wn. App. at 966. When the state is not a party
to the contract alleged to have been impaired, we generally defer to “‘legislative
judgment as to the necessity and reasonableness of a particular measure.’”
Energy Rsrvs., 459 U.S. at 413 (quoting U.S. Trust Co. of N.Y., 431 U.S. at 22-
23). “Moreover, ‘[i]n determining whether . . . particular legislation tends to
promote the welfare of the people of the State of Washington, we must presume
that if a conceivable set of facts exists to justify the legislation, then those facts
do exist and the legislation was passed with reference to those facts.’” Optimer
Int’l, Inc., 151 Wn. App. at 970 (first alteration in original) (quoting State ex rel.
Faulk v. CGS Job Ctr., 117 Wn.2d 493, 504, 816 P.2d 725 (1991)).
Bill reports from the proposed 2014 and 2016 legislation evidence the
financial distress facing Washington pharmacies due to PBM reimbursement
practices. Public testimony showed that small pharmacies in rural and
underserved communities were, in particular, finding it difficult to stay in
business. Our legislature, in response, expanded the scope of the
reimbursement requests that are subject to regulation and, in the 2016
legislation, set forth specific provisions for the protection of small pharmacies in
such communities. See former RCW 19.340.100(3).
Prime Therapeutics’ suggestion that the challenged legislation is simply
intended to provide a benefit to pharmacies themselves is supported by neither
the record nor legislative history. Moreover, the fact that legislation “may
incidentally benefit pharmacies in the process of protecting the public’s ability to
26 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. No. 84030-4-I/27
access pharmacies does not render the law an insignificant or illegitimate use of
the state’s police power.” Pharm. Care Mgmt. Ass’n, 240 F. Supp. 3d at 963.
Because former RCW 19.340.100 serves a legitimate public purpose, the
legislation is constitutional even were it to substantially impair Prime
Therapeutics’ reasonable contractual expectations.
Affirmed.
WE CONCUR: