On July 10, 2024, the Department of Justice announced a False Claims Act (“FCA”) settlement against Rite Aid Corporation and its subsidiaries Elixir Insurance Company, Elixir RX Options LLC and Elixir RX Solutions LLC (together, “Rite Aid”). See DOJ Press Release. The Government alleged that between 2014 and 2020, Rite Aid and its subsidiaries, which provide Pharmacy Benefit Manager (“PBM”) services to Medicare Part D Prescription Drug Plans (“PDPs”) offered by Rite Aid, pocketed hundreds of millions in drug manufacturer rebates. These rebates were falsely labeled as various administrative and service fees, when those rebates should have been remitted to Medicare under the PDP contracts with CMS.
By way of background, the FCA, 31 U.S.C. §§ 3729 et seq. is a powerful anti-fraud enforcement statute that allows the government to recover up to three times the losses suffered by government healthcare programs such as Medicare, Medicaid, and TRICARE. The FCA also allows individual whistleblowers (also referred to as “relators”) to bring lawsuits against offenders in the name of the government (also known as qui tam lawsuits), and if the case is successful, the relator can receive between 15% to 30% (and possibly more under state law) of the government’s recovery. The settlement against Rite Aid resolved a similar qui tam lawsuit brought by a former employee of Elixir Rx Options. It should be noted that the allegations discussed herein remain allegations that have not been proven in court, and the settlement is not an admission or finding of liability against Rite Aid.
The DOJ Settlement
Rite Aid and its subsidiaries agreed to pay the Government $101 million to resolve the allegations (summarized more fully below). In addition to the $101 million payment, the Government will be granted a $20 million unsecured claim in Rite Aid’s bankruptcy case pending in the District of New Jersey, although it is unclear how much of that amount the Government will actually recoup. This is just the latest example of government enforcement against the ongoing abuses by PBMs including the unauthorized retention of drug manufacturer rebates. The settlement also has implications for lawsuits brought by plan sponsors and other entities injured by PBM spread pricing practices.
Rite Aid’s Alleged Scheme to Falsely Report Manufacturer Rebates as Sham Service Fees
Under Medicare Part D reimbursement rules, any drug manufacturer rebates that effectively reduce the drug prices paid by the Plan Sponsor must be reported to CMS as a form of direct and indirect remuneration (“DIR”), because Medicare only reimburses Plan Sponsors for amounts “actually paid” for the drugs. Failing to accurately report all forms of DIR fees received by the Plan Sponsor results in the Medicare program paying more than the actual cost of the drugs, giving rise to FCA liability. However, according to Medicare regulations and the CMS DIR Reporting Guidance, certain “bona fide service fees” need not be reported to CMS as DIR fees. “Bona fide service fee” is defined in 42 C.F.R. 423.501 as a fee actually paid by a manufacturer that meets all of the following conditions:
(1) the fee must be paid for a bona fide, itemized service that is actually performed on behalf of the manufacturer;
(2) the manufacturer would otherwise perform or contract for the service in the absence of the service arrangement;
(3) the fee represents fair market value; and
(4) the fee is not passed on, in whole or in part, to a client or customer of an entity, whether or not the entity takes title to the drug.
In other words, bona fide service fees are deemed by CMS as not affecting the price of the drugs that Medicare reimburses, because they are supposed to be for separate, itemized services at fair market value. All such bona fide service fees must be reported on the DIR Summary Report on a separate field, along with a short description of the services for which the payment is received.
However, as alleged in the FCA complaint, Rite Aid falsely represented manufacturer rebates (included as DIR fees) as bona fide service fees (excluded from DIR fees), and thereby caused Medicare to pay more for the drugs than Rite Aid was entitled to receive. The total drug spend of the PDPs should have been reduced by the amount inappropriately categorized as bona fide service fees. The complaint alleges specifically that Rite Aid executives decided to report 20% of drug manufacturer rebates received by its PBMs as bona fide service fees, and then retroactively created false documentation to support the fair market value of those services, when in reality such services, if they existed at all, did not qualify as bona fide service fees. Through this scheme, Rite Aid retained the manufacturer rebates that should have been passed along to Medicare as per the CMS-Rite Aid contract and Medicare regulations.
Implications for Plan Sponsor Litigation Against PBMs for Rebate Spread Practices
Although this case was brought under the FCA, the alleged misconduct is not dissimilar to other reports of PBM abuses relating to drug manufacturer rebates that has generated litigation or enforcement against PBMs. Just as one example, in March of this year, the federal Office of Personnel Management (“OPM”) released an audit report concluding that $21.1 million in drug manufacturer rebates were improperly retained by Express Scripts and its rebate aggregator Ascent Health Services. (Read Frier Levitt’s prior coverage here). The Rite Aid case highlights a common practice of PBMs: to use ambiguous and loose definitions of what qualifies as a “rebate” and what qualifies as administrative or service fees, to argue that a portion of the money paid by drug manufacturers to get their drugs on PBM formularies do not qualify as rebates that must be passed on to the Plan. Defining the term rebates is a critical component of preventing improper rebate retention, as PBMs seek to impose carefully crafted definitions which intend to exclude certain manufacturer payments from the definition of “rebate.” However, these payments are simply rebate payments the PBM arbitrarily categorizes as an “administrative fee,” “data fee,” “communication fee,” or some other illegitimate “fee.” By disguising rebates as sham “fees” and excluding them from the definition of rebates, PBMs assert that their contracts with plan sponsors allow them to retain portions of rebates.
Interestingly, the Government’s theory against Rite Aid—i.e., that the rebates retained by Rite Aid do not qualify as “bona fide service fees”—may be repurposed in Plan Sponsor litigation against PBMs. Of course, the Medicare “bona fide service fee” regulations do not apply to non-Medicare plans, such as self-funded employer plans. However, there may be analogous requirements that a PBM receive “reasonable” compensation for services “actually rendered” found in the terms of the PBM service contracts, or under ERISA fiduciary duty rules. At least one court has ruled that an ERISA fiduciary that controls its own compensation may not retain fees or compensation in excess of bona fide compensation for the services rendered. See Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 600-01 (8th Cir. 2009) (trustee of a retirement plan who retained “revenue sharing payments” that were unreasonable in proportion to the services rendered violated ERISA).
How Frier Levitt Can Help
Frier Levitt attorneys combat abusive behavior by PBMs and rebate aggregators. Our experienced attorneys collaborate with legislators at state and federal levels to shape legislation aimed at addressing PBM abuses for various industry stakeholders. Frier Levitt’s Plan Sponsor Practice Group has a proven track record of obtaining favorable results for health plans and plan sponsors in various areas, including, but not limited to, analyzing PBM contracts and initiating actions against PBMs to access Plan data to ensure PBM compliance or recover savings wrongfully withheld by the PBM. Contact us to learn more.
