Understanding the Truth About PBMs and Manufacturer Rebate Revenue

PBMs market themselves as “transparent” and purport to “pass through” all rebates to Plan Sponsors. However, recent litigation has brought that into question. We have seen alarming instances where PBMs secretly use little-known Rebate Aggregators that are often PBM-owned or affiliated in the Manufacturer Rebate arena. Plan Sponsors hire PBMs to administer and manage pharmacy benefits for their members and beneficiaries. In turn, PBMs negotiate Manufacturer Rebates with drug companies on brand-name drugs in exchange for placing a particular drug on a PBMs’ drug formulary. If that sounds like a questionable quid pro quo arrangement, that is correct. Unbeknownst to Plan Sponsors, PBMs delegate collection of Manufacturer Rebates to Rebate Aggregators who keep a large portion of the Manufacturer Rebates without telling Plan Sponsors. In fact, it is extremely difficult to grasp the true rebate dollars collected by PBMs and Rebate Aggregators, in part because publicly traded PBMs carefully guard this revenue and do not report in their quarterly SEC filings. This is even true for Plan Sponsors in the public sector such as State Medicaid agencies and municipalities.

PBMs continue rebate schemes even in the federal payor space. Medicare Part D Sponsors are required to submit Direct and Indirect Remuneration (“DIR”) reports to CMS disclosing the total amount of rebates, inclusive of Manufacturer Rebates and Pharmacy Rebates, retained by PBMs regardless of whether such rebates were passed to Part D Sponsors. Sponsors are legally obligated to populate the DIR fee data into the CMS reports. Oftentimes, Sponsors receive this data from PBMs, who have performed the rebate collection on behalf of the Part D Sponsors. PBMs and Rebate Aggregators are mandated to provide the following information to Part D Sponsors, who in turn provide the same to CMS:

  1.  The total number of prescriptions that were dispensed.
  2.  The percentage of all prescriptions that were provided through retail pharmacies compared to mail order pharmacies.
  3.  The percentage of prescriptions for which a generic drug was available and dispensed (generic dispensing rate), by pharmacy type (which includes an independent pharmacy, chain pharmacy, supermarket pharmacy, or mass merchandiser pharmacy that is licensed as a pharmacy by the State and that dispenses medication to the general public), that is paid by the Part D sponsor or PBM under the contract.
  4. The aggregate amount and type of rebates, discounts, or price concessions (excluding bona fide service fees as defined in §23.501) that the PBM negotiates that are attributable to patient utilization under the plan.
  5. The aggregate amount of the rebates, discounts, or price concessions that are passed through to the plan sponsor, and the total number of prescriptions that were dispensed.
  6. The aggregate amount of the difference between the sum the Part D sponsor pays the PBM and the amount that the PBM pays retail
    pharmacies, and mail order pharmacies.1

Using the DIR reports, CMS will ultimately conduct the reconciliation of the risk corridor, reinsurance, coverage gap discount program, and low-income cost-sharing subsidy under Medicare Part D. Simply put, in the event that PBMs and Rebate Aggregators secretly retain significant amounts of Manufacturer Rebates, Part D Sponsors will likely bear financial responsibility to CMS. Even with the foregoing, the rebate arena is highly secretive and current laws do not necessarily require tracking and disclosure of rebates. Competent healthcare litigation counsel can help uncover these hidden dollar arrangements, bringing relief to Plans.

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, a complex web of contracts (OptumRx contracted with the Coalition for Advanced Pharmacy Services (“CAPS”), which in turn contacted with Express Scripts, Inc. (“ESI”)) 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 CAPS, from the drug  manufacturers. However, the rebate funds received by Broward County do not account for the funds retained by CAPS. Ironically, OptumRx and CAPS are both subsidiaries of UnitedHealth Group. All Plan Sponsors should take the opportunity to exercise their right to audit PBMs to ensure this scheme is not depriving Plans of precious resources.

Another example of a rebate scheme is described in a report issued by 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 Public Employees’  Health Plan (“PEHP”) and its PBM, ESI. In the report, the Auditor noted, among other things, that the average drug prices increased 8 percent from 2016 to 2017 but rebates retained by ESI were not keeping pace with drug prices. To make matters worse, ESI did not allow PEHP access to claim-level rebate information through regular reporting or auditing. The PEHP was prohibited from verifying the total rebates that ESI procured on behalf of PEHP. Plan Sponsors are cautioned to negotiate robust auditing provisions in PBM contracts to prevent such schemes.

Another example of a self-serving rebate arrangement designed by a PBM is evident in a whistleblower complaint initiated by a former employee of Novartis Pharmaceuticals Corporation’s former employee. In the lawsuit2, the complaint alleges that Novartis directed the relator “to carry out the company’s practice of swapping commercial rebates and other incentives in return for” Medicare Part D business with ESI. Furthermore, the complaint notes that, as a result of the illicit swapping of rebates, “ESI’s commercial plans received a 10% rebate rate, while ESI’s Part D plans received the minimal 6.375% rebate rate.” Again, tight Plan Sponsor contracts with PBMs can prevent the siphoning of rebate revenue. It is not hard to imagine that rebate abuse is more prevalent in the private sector since there are no Medicare and Medicaid reporting requirements unless such disclosure is contractually required under the PBM-Plan Sponsor agreement. What’s worse is that PBMs play wordsmithing games in Plan Sponsor contracting. Plan Sponsors get zero information  directly from Rebate Aggregators, Plan Sponsors have no “direct contractual privity” with Rebate Aggregators, and in fact Plan Sponsors seldom know of the existence of these secretive entities. PBMs use complex contractual verbiage to limit the scope and extent of rebate sharing in order to maximize their profit. Therefore, unless demanded  by and through strong contractual terms, PBMs are not obligated to disclose the rebates they receive from rebate aggregators, even those that the PBM wholly owns. Moreover, depending on the contractual terms, Plan Sponsors may not have the right to conduct rebate audit on PBMs. It is critical to have a carefully drafted contract, reviewed by experienced healthcare counsel.

The current laws do not require sufficient disclosure by PBMs of their rebate aggregation and do not require that rebates take into account patient care. The current administration withdrew a Notice of Proposed Rule Making (NPRM) in 2019 that would have altered the drug marketplace. The NPRM sought to eliminate the “Safe Harbor” that permits PBMs to legally extract billions of dollars in Manufacturer Rebates with little or no transparency. 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. With the Rebate Safe Harbor intact, PBMs will continue to generate massive revenue through Manufacturer Rebates. The cancellation of the proposed rebate rule will continue to bring financial harm to Plan Sponsors, independent pharmacies, patients, and taxpayers.

Plan Sponsors should consult with industry experts who have an in-depth knowledge of the PBM industry and who understand PBMs’ lingo to uncover self-serving rebate arrangements. Otherwise, Plan Sponsors will end up losing precious resources as victims of PBMs’ revenue schemes.

1 42 CFR 423.514(d) (emphasis added).

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