Pharmaceutical rebates have been a controversial topic in both commercial and federal programs for the last 20 years. This exceedingly complex area is made obscure by agreements between pharmaceutical manufacturers and Pharmacy Benefit Managers (PBMs). As the agreements between them are kept in confidence and often not all in writing, it is thus difficult to uncover the “drug rebate stream” in American health care.
In general, PBMs contract with insurers and third-party payers (Plan Sponsors) – Medicare Advantage plans, Medicare free-standing prescription drug plans (PDPs), and with Federal Medicaid programs – to administer their pharmacy benefit. The latter is exceptionally complex and requires sophisticated data warehouse and claims-processing capabilities. PBMs have become indispensable in providing this service, although, with this corner on knowledge of drug utilization, they are able to predict and influence drug utilization and sales.The latter capability places PBMs at a contracting advantage with manufacturers and payers, also, through the market device known as “formularies”, PBMs can promote or suppress the sales of drugs within highly competitive drug “classes.”
For example, the cholesterol-lowering drugs, also known as the “HMG” or “statin” drug class, are all very similar in effect. If a given statin (i.e., Lipitor or Zocor) is positioned favorably on a formulary, it is offered to the PDP sponsor at a discount. The PBM and PDP in turn limit coverage of HMGs only to the preferred statin, and the patient and physician have an enormous cost incentive only to use that drug. This incentive may take the form of favorable co-payments or other types of acquisition discounts for “on-formulary” drugs.
In return for advancing the market utilization of its drug, the manufacturer is required to pay the PBM a “rebate”, which until recently has been a pure profit for the PBM. Rebates have been identified as 10% of Part D drug costs , amounting to several billion dollars in years past.
This lack of rebate transparency – manufacturer to PBM to Plan Sponsor – was a prominent finding in an OIG report on Part D rebates:
“CMS holds sponsors ultimately responsible for accurately reporting rebates and for ensuring that their PBMs comply with CMS requirements. The lack of transparency raises concerns that sponsors may not always have enough information to oversee the services and information provided by PBMs. In addition, the selected sponsors reported that their PBMs collected fees from drug manufacturers that were not always passed on to the Part D program.”
The OIG goes on to advocate better reporting by Part D Plan Sponsors, greater contractual transparency on the part of PBMs, expanded audit authority, and more precision in identifying other PBM “fees” to the Part D program, which may amount to rebates with different titles (i.e., “disease management programs” whose purposes are to expand utilization of certain drugs. Finally, the OIG recommended that the Part D program share in the rebate stream from manufacturers, to minimize Medicare fraud. This has been done in the Medicaid program for many years.
The first notable whistleblower False Claims Act action against a PBM surfaced in 2005, when Advance PCS, Inc. paid back $137.5 million to government health care programs. This settlement resolved a qui tam action alleging Advance PCS knowingly solicited and received kickbacks from drug manufacturers in exchange for favorable treatment of those companies’ products; paid improper kickbacks to existing and potential customers to induce them to sign contracts with the PBM; submitted false claims in connection with excess fees paid for fee-for-service agreements; and received flat fee rebates for inclusion of certain heavily utilized drugs.
The largest False Claims Act recovery from a PBM occurred the following year, in 2006, when federal and state governments collectively recovered $184.1 million from pharmacy benefits manager Medco Health Solutions, Inc. This settlement resolved a False Claims Act qui tam action that exposed the company accepting kickbacks from manufacturers in exchange for steering patients to certain products; secretly accepting rebates from drug manufacturers; and switching patients away from cheaper products. As conditions of settlement, Medco was required to enter into a consent decree regulating drug switches and mandating greater transparency, and enter into a Corporate Integrity Agreement (CIA) as a condition of continued participation in government health programs. Notably, the CIA expired in late 2011, so the PBM is currently operating under less government scrutiny.
Since the Medco settlement, several False Claims Act qui tam actions have been filed against other PBMs, raising similar fraud concerns. Many of these cases are still pending, but parallel non-False Claims Act actions have provided an early glimpse of some of these actions. For example, in 2008, twenty-nine states used state consumer fraud laws to collectively recover $41 million from pharmacy benefits manager Caremark, after the company allegedly engaged in deceptive trade practices by encouraging doctors to switch patients from originally prescribed brand drugs to different brand name drugs; failed to inform clients that Caremark retained all the profits reaped from these drug switches; and restocked and re-shipped previously dispensed drugs that had been returned to Caremark’s mail order pharmacies. A False Claims Act qui tam action raising many of these same allegations is currently pending in federal court.
Today, False Claims Act actions against PBMs are even more likely, particularly in light of a recent FCA amendment that explicitly attaches liability to companies that wrongfully retain overpayments of government funds. This amendment makes PBM fraud fertile ground for FCA lawsuits, for instance, when a PBM knowingly fails to pass along rebate savings to government health care programs and plans. In addition, as health care dollars increasingly flow through PBMs, the government has shown an increased interest in scrutinizing PBM business practices.
Currently, the five largest PBMs cover more than half the United States population with pharmacy benefits. According to a recent survey from the Atlantic Information Services, the largest PBMs are Express Scripts, Inc.; CVS Caremark; Health Information Designs, Inc.; Medco Health Solutions, Inc.; ICORE Healthcare; Argus Health Systems, Inc.; and OptumRx (formerly Prescription Solutions).