On September 8, 2026, the U.S. District Court for the District of Rhode Island issued a significant ruling in Blue Cross and Blue Shield of Alabama, et al. v. CVS Pharmacy, Inc. The consolidated action involves thirteen Blue Cross and Blue Shield health insurers that accuse CVS of causing them and their self-funded clients to overpay for prescription drugs through an alleged fraudulent pricing scheme. While the Court’s ruling focused on the threshold question of diversity jurisdiction, its central holding has broader implications for health plans and plan sponsors because the plans and the self-funded clients who bear the cost of CVS’s alleged overcharges are the “real and substantial” parties to the controversy who should be seeking to recover the overcharges.
The Alleged Scheme: CVS’s Inflated U&C Prices
The complaint alleges that CVS Pharmacy, Inc. (CVS) engaged in a decade-long scheme to overcharge Blue Cross and its clients for generic prescription drugs by submitting artificially inflated usual and customary (U&C) prices. Under industry standards and contractual lesser of provisions, health plans reimburse pharmacies at the lower of a negotiated price or the U&C price, which is supposed to reflect the actual cash price offered to the general public. This pricing mechanism is intended to ensure that plans and their members do not pay more for a prescription drug than an uninsured cash customer.
Beginning in 2008, CVS created the Health Savings Pass (HSP) program, which anyone (even uninsured, cash-paying customers) could join for a nominal fee. Internally, CVS categorized HSP transactions as “cash discount” sales and described the program as a “cash program,” yet it refused to report HSP prices as U&C prices. CVS’s own internal analysis showed that doing so would cost the company over $547 million per year. To avoid the financial hit, CVS knowingly decided not to report the HSP cash discounts in their U&C prices – resulting in third party payors, like self-funded employer health plans, paying more for drugs dispensed at Caremark’s network pharmacies.
CVS’s alleged scheme exploited a fundamental information asymmetry. Health plans and plan sponsors rely on pharmacies to submit accurate U&C prices during the adjudication process, yet they have limited visibility into a pharmacy’s actual cash pricing practices. CVS allegedly took advantage of this gap to inflate U&C prices, overcharging plans on millions of transactions for years before the conduct came to light. CVS even instructed its sales personnel not to disclose the scheme to health plan clients.
In 2020, Blue Cross (through thirteen subsidiaries) filed numerous lawsuits against CVS for this scheme in federal court, which were consolidated in the District of Rhode Island. Blue Cross invoked the Court’s diversity jurisdiction, asserting that none of the Blue Cross plaintiffs resided in the same state as CVS (i.e., Rhode Island). Recently, in September 2026, the Court ruled that Blue Cross failed to establish diversity jurisdiction and ordered jurisdictional discovery to resolve the issue.
The Court’s Ruling: Plans and Their Self-Funded Clients Bear the Real Harm
The September 2026 court order addresses a critical jurisdictional question: who are the “real and substantial” parties in this case? The Court concluded that Blue Cross’s more than 42,000 self-funded clients, employers and other entities who use their own funds to provide health coverage and hire Blue Cross primarily for administrative services, must be treated as “real and substantial” parties for diversity jurisdiction purposes.
The reasoning is straightforward: it is the self-funded clients, not the insurance company, who actually bore the cost of CVS’s alleged overcharges. As the Court explained, Blue Cross merely provided them with administrative services and those self-funded clients are the ones that were allegedly overcharged. In other words, the real financial harm flows directly to the plans and plan sponsors who fund the prescription drug benefits.
Therefore, if any of the 42,000 self-funded plans reside in Rhode Island (where CVS is headquartered), that would remove complete diversity of citizenship. Blue Cross would then be unable to maintain its lawsuit against CVS as to the claims associated with those plans.
What This Means for Plans and Plan Sponsors
The Court’s ruling and the underlying allegations carry an important message for health plans and plan sponsors because they are the ones who pay when pharmacies and PBMs manipulate drug pricing and courts recognize it. Relying on third-party administrators, like Blue Cross, to recoup losses on their behalf may not succeed because it is the plans, not the administrator, who are the “real and substantial” parties such that Blue Cross may be unable to establish jurisdiction to bring claims on the plans’ behalf.
This case is a stark reminder that plans and plan sponsors must be proactive in protecting themselves. They should routinely audit pharmacy reimbursement claims, demand transparency in pricing data, and scrutinize membership and discount programs that may serve as pretexts to avoid reporting true U&C prices. And, more importantly, plans cannot rely on third-party administrators to seek legal redress and recoup losses on the plans’ behalf. Failure to act may result in any such “representative” lawsuits being dismissed, which is the likely outcome in the Blue Cross case.
How Frier Levitt Can Help
The Blue Cross v. CVS litigation underscores the financial exposure that health plans and plan sponsors may face when pharmacy pricing goes unchecked. Whether you are a plan sponsor evaluating your PBM contracts, a health plan seeking to audit pharmacy reimbursement practices, or a stakeholder navigating the evolving landscape of pharmacy pricing regulation, Frier Levitt can help. Contact Frier Levitt to evaluate your pharmacy benefit arrangements, audit your PBM and pharmacy reimbursement data, and ensure that your health plan is not overpaying due to inflated or inaccurate U&C pricing.
Senior Associate
