Plan sponsors are far tootrusting of pharmacy benefit managers (PBMs) when it comes tounderstanding drug manufacturer rebate revenue. Rebateadministration is one of the main services that PBMs offer togovernmental entities, self-funded employers, insurers, and managedhealth care organizations (collectively, "plan sponsors"). PBMsreceive two types of rebates: manufacturer rebates and pharmacyrebates. Manufacturer rebates are cash payments made bypharmaceutical manufacturers to PBMs that are theoreticallydesigned to act as drug discounts. Pharmacy rebates arepoint-of-sale fees or post-sale chargeback (e.g., audit recoupment)that PBMs retain from their member pharmacies. Unfortunately,rebates became a lucrative revenue source for non-transparent PBMsat the expense of plan sponsors, manufacturers, patients,pharmacies and taxpayers.

Most PBMs market themselves as "transparent" and purport to"pass thru" all rebates to plan sponsors. However, recentlitigation has brought that into question for some of them. We haveseen instances where PBMs secretly use little-known rebateaggregators that are often PBM-owned or affiliated in themanufacturer rebates arena. Plan sponsors hire PBMs to administerand manage pharmacy benefits for their members and beneficiaries.In turn, PBMs negotiate manufacturer rebates with drug companies onbrand-name drugs in exchange for placing a particular drug on PBMs'drug formulary. That sounds like a questionable quid pro quoarrangement. Unbeknownst to plan sponsors, PBMs delegate collectionof manufacturer rebates to rebate aggregators who keep a largeportion of the manufacturer rebates. In fact, it is extremelydifficult to grasp the true rebate dollars collected by PBMs andrebate aggregators, in part because publicly traded PBMS carefullyguard this revenue and do not report it in their quarterly SECfilings. This is even true for plan sponsors in the public sector.Amazingly, PBMs continue rebate schemes even in the federal payorspace. Medicare Part D Sponsors are required to submit direct andindirect remuneration (DIR) reports to CMS disclosing the totalamount of rebates, inclusive of manufacturer rebates and pharmacyrebates, retained by PBMs regardless of whether such rebates werepassed to Part D sponsors. Sponsors are legally obligated topopulate the DIR fee data into the CMS reports. Oftentimes,sponsors receive this data from PBMs, who have performed the rebatecollection on behalf of the Part D Sponsors. Indeed, PBMs andrebate aggregators are mandated to provide the followinginformation to Part D sponsors, who in turn provide the same toCMS:

1) The total number of prescriptions that were dispensed. 2) Thepercentage of all prescriptions that were provided through retailpharmacies compared to mail order pharmacies. 3) The percentage ofprescriptions for which a generic drug was available and dispensed(generic dispensing rate), by pharmacy type (which includes anindependent pharmacy, chain pharmacy, supermarket pharmacy, or massmerchandiser pharmacy that is licensed as a pharmacy by the stateand that dispenses medication to the general public), that is paidby the Part D sponsor or PBM under the contract. 4) The aggregateamount and type of rebates, discounts, or price concessions(excluding bona fide service fees as defined in § 423.501) that thePBM negotiates that are attributable to patient utilization underthe plan. 5) The aggregate amount of the rebates, discounts, orprice concessions that are passed through to the plan sponsor, andthe total number of prescriptions that were dispensed. 6) Theaggregate amount of the difference between the amount the Part Dsponsor pays the PBM and the amount that the PBM pays retailpharmacies, and mail order pharmacies.¹

Using the DIR reports, CMS will ultimately conduct thereconciliation of the risk corridor, reinsurance, coverage gapdiscount program, and low income cost-sharing subsidy underMedicare Part D. Simply put, in the event that PBMs and rebateaggregators secretly retain significant amounts of manufacturerrebates, Part D sponsors will likely bear financial responsibilityto CMS. Even with the foregoing, the rebate arena is highlysecretive and current laws do not necessarily require tracking anddisclosure of rebates. Competent health care litigation counsel canhelp uncover these hidden dollar arrangements, bringing relief toplans. One example of a rebate scheme is well documented in BrowardCounty's Audit Report over OptumRx.² It revealed severalalarming practices, among other things, a complex web of contracts(OptumRx contracted with the Coalition for Advanced PharmacyServices (CAPS), which in turn contacted with Express Scripts,Inc.) to maximize rebate retention for the benefit of OptumRx andto the detriment of the Plan. OptumRx purported that it paidBroward County all rebate funds it received, through CAPS, from thedrug manufacturers. However, the rebate funds received by BrowardCounty do not account for the funds retained by CAPS. OptumRx andCAPS are both subsidiaries of UnitedHealth Group. All plan sponsorsshould take the opportunity to exercise their right to audit PBMsto ensure this scheme is not depriving plans of pressureresources.

Related: What brokers need to know about PBMs andtransparency

Another example of rebate scheme is described in a report issuedby Office of the Legislative Auditor General for the State of Utah,which revealed troubling findings regarding manufacturer rebates.The auditor examined the relationship between the state's publicemployees' health plan (PEHP) and its PBM, ESI. In the report, theauditor noted, among other things, that that average drug pricesincreased 8% from 2016 to 2017, but rebates retained by ESI werenot keeping pace with drug prices. To make matters worse, ESI didnot allow PEHP access to claim-level rebate information throughregular reporting or auditing. In other words, PEHP was prohibitedfrom verifying the total rebates that ESI procured on behalf ofPEHP. Plan sponsors are cautioned to negotiate robust auditingprovisions in PBM contracts to prevent such schemes.

Yet another example of a self-serving rebate arrangementdesigned by a PBM is evident in a whistleblower complaint initiatedby a former employee of Novartis Pharmaceuticals Corporation. Inthe lawsuit³, the complaint alleges that Novartisdirected the relator "to carry out the company's practice ofswapping commercial rebates and other incentives in return for"Medicare Part D business with ESI. Furthermore, the complaint notesthat, as a result of the illicit swapping of rebates, "ESI'scommercial plans received a 10% rebate rate, while ESI's Part Dplans received the minimal 6.375% rebate rate." Again, tight plansponsor contracts with PBMs can prevent the siphoning of rebaterevenue.

Also: Employers rethinking their dependence on PBMs foraddressing drug costs

It is not hard to imagine that rebate abuse is more prevalent inthe private sector since there are no Medicare and Medicaidreporting requirements unless such disclosure is contractuallyrequired under the PBM/plan sponsor agreement. What's worse is thatPBMs play wordsmithing games with plan sponsor contracting. Plansponsors get zero information directly from rebate aggregators,plan sponsors have no "direct contractual privity" with rebateaggregators, and in fact, plan sponsors seldom know of theexistence of these secretive entities. PBMs use complex contractualverbiage to limit the scope and extent of rebate sharing in orderto maximize their profit. Therefore, unless demanded by and throughstrong contractual terms, PBMs are not obligated to disclose therebates retrieved they receive from rebate aggregators, even thosethat the PBM wholly owns. Moreover, depending on the contractualterms, plan sponsors may not have the right to conduct rebate auditon PBMs. It is critical to have a carefully drafted contract,reviewed by experienced health care counsel.

The current laws do not require sufficient disclosure by PBMs oftheir rebate aggregation and do not require that rebates take intoaccount patient care. The current administration withdrew a noticeof proposed rulemaking (NPRM) in 2019 that would have altered thedrug marketplace. The NPRM sought to eliminate the "safe harbor"that permits PBMs to legally extract billions of dollars inmanufacturer rebates with little or no transparency. Also, theproposed rule would have encouraged higher utilization of low-costgeneric and biosimilar drugs, as PBMs would no longer have anincentive to favor brand-name drugs in their formulary. With therebate safe harbor intact, PBMs will continue to generate massiverevenue through manufacturer rebates. The cancellation of theproposed rebate rule will continue to bring financial harm to plansponsors, independent pharmacies, patients, and taxpayers.

Plan sponsors should consult with industry experts who have anin-depth knowledge of the PBM industry and who understand PBMs'lingo to uncover self-serving rebate arrangement. Otherwise, plansponsors will end up losing precious resources as victims ofcertain PBMs' revenue schemes.

Jonathan E. Levitt, Esq. is the Co-Founder of Frier Levitt,a boutique life sciences and healthcare law firm and Dae Y. Lee,Pharm.D., Esq., CPBS is a pharmacist attorney in FrierLevitt's Life Sciences Department. Pharmacy Benefits Specialists™nationwide.

¹ 42 CFR 423.514(d)(emphasis added).

² Audit of PharmacyBenefit Management Services Agreement, Office of the CountyAuditor.  https://www.broward.org/Auditor/Reports/Documents/2017_1212%20Agenda%20Review%20of%20Pharmacy%20Benefit%20Management%20Services%20by%20StoneBridge/2017_1212%20Exh1_OptumRx.pdf

³ United States ofAmerica ex rel. Joseph Perri v. Novartis Pharmaceuticals Corp. etal., case number 2:15-cv-06547, in the U.S. District Court for theDistrict of New Jersey.