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Plan Sponsor ALERT: Beware of Rebate Aggregators

Plan Sponsors should be aware of a few recent developments that lead to higher net gross and net drug prices. First, the White House recently withdrew a Notice of Proposed Rule Making (NPRM) that would have altered the entire drug marketplace. The NPRM would have eliminated the “Safe Harbor” that permits Pharmacy Benefit Managers (PBMs) to legally extract billions of dollars in “rebate” from Manufacturers in exchange for securing drugs on the PBMs’ “formulary.” Also, the proposed rule would have encouraged higher utilization of low-cost generic and biosimilar drugs, as PBMs would no longer have an incentive to favor brand-name drugs in their formulary.  Plans should also be aware of little known “rebate aggregators” that further obscure the true dollar amount of “rebates” that the PBMs retain and do not pass through to Plan Sponsors.

Ironically, the announcement to withdraw the proposed rule came just days after the administration lost a court battle to force drug manufacturers to list prescription drug prices on TV commercials. Big pharma has been arguing that PBMs hold the key to reducing the price for drugs that consumers pay at the point of sale – at the pharmacy counter – because they are distributing the product to pharmacies. In fact, PBMs have already benefited from the withdrawal. When the announcement was made on Thursday, July 11, 2019, publicly traded PBMs and insurance companies saw a surge in their stock prices while big pharma including–Merck, Eli Lilly and Pfizer–saw their stocks plunge.

With the Rebate Safe Harbor intact, PBMs will continue to increase their revenue through manufacturer rebates. A little-known vehicle permits PBMs to “retain” more rebates than was previously known. “Rebate aggregators” are entities that are often PBM-owned or affiliated. PBMs “hire” their affiliated “aggregator” as a subcontractor to gather the manufacturer rebates.

Current events in the drug space show that Plan Sponsors who do not understand the role of rebate aggregators will fall victim to crafty contract drafting by PBM attorneys. Typically, PBMs are contractually bound to return the large majority of manufacturer rebates to Plan Sponsors such as governmental entities, self-funded employers, insurers, and managed healthcare organizations. But rebate aggregators make this process murky. One example of a rebate scheme is well documented in Broward County’s Audit Report over OptumRx. It revealed several alarming practices, among other things, complex web of contracts (OptumRx contracted with the Coalition for Advanced Pharmacy Services, which in turn contacted with Express Scripts, Inc.) to maximize rebate retention for the benefit of OptumRx and to the detriment of the Plan. OptumRx purported that it paid Broward County all rebate funds it received, through Coalition for Advanced Pharmacy Services (CAPS), from the drug manufacturers. However, the rebate funds received by Broward County do not account for the funds retained by CAPS. What’s worse, OptumRx has an affiliation with CAPS. OptumRx and CAPS are both subsidiaries of UnitedHealth Group. Therefore, unbeknownst to Broward County, OptumRx improperly benefited from its affiliation with CAPS.

The cancellation of the proposed rebate rule will continue to bring financial harm to Plan Sponsors, independent pharmacies, patients, and taxpayers. Given the recent scrutiny over PBMs, it is foreseeable that more states and Plan Sponsors will examine their PBM contracts to uncover hidden cash flows and demand radical transparency from PBMs.

Plan Sponsors should retain counsel that possesses an in-depth knowledge of the PBM industry and regulatory backdrop. Frier Levitt routinely works with Plan Sponsors to control or eliminate spread pricing, evaluate and confirm rebate compliance, conduct PBM audits to ensure compliance, and negotiate better terms in future PBM contracts. If you are a Plan Sponsor entering a contractual relationship or having a dispute with a PBM, contact Frier Levitt today to speak to an attorney.