How Do Pharma/PBM Contracts Play Role in Rebate Leakage? Part 1

Gaining market access for therapies is key to pharma manufacturers’ success. And it’s not merely access but where on a formulary that access occurs — as well as the formulary tier of competitor products — that’s crucial. To help secure placement, drugmakers enter into contracts with PBMs — and, increasingly, their group purchasing organizations (GPOs) — entities that in turn enter into pharma contracts on behalf of their health plan and employer clients. But these contracts have grown increasingly complex and opaque and can result in pharma manufacturers losing significant amounts of money, according to industry experts. In a two-part series, AIS Health, a division of MMIT, explores the details within the contracts and how those complexities may result in losses of billions of dollars across the pharma industry.

These contracts are proprietary, almost always have nondisclosure clauses and vary by manufacturer, PBM and GPO, so many details around them remain unknown. However, sources tell AIS Health that certain standard items should be included. Those include “definitions, financial terms, requirements to qualify for payments, payment timelines, data sharing, confidentiality,” among other aspects, says Katie Asch, Pharm.D., senior director and U.S. consulting pharmacy practice lead at Willis Towers Watson. In addition, states Jenisha Malhotra, senior manager in Risk & Financial Advisory at Deloitte Life Sciences & Health Care, other items that may be addressed are details around the effective dates of the contract; pricing or incentives, including rebates or discounts; eligible products; responsibilities of the contract signees; and eligibility requirements, including eligible facilities.

According to Stephanie Seadler, vice president of Trade Relations at EmsanaRx, “typically a contract outlines rates. It outlines the discount for each product that pharma has negotiated,” which is usually a flat discount and a price protection clause that “is going to help insulate the PBM from drug price increases. If the manufacturer decided to make an increase, there may be additional compensation to help insulate from that increase.

“There would also be requirements and terms for each product and discount,” she continues. This includes “how many other products can be covered within the class; what tier do the contracted products need to be on; is utilization management allowed, and, if so, what type; are there any limitations to that utilization management?” For instance, prior authorization may be allowed only if it is to the drug’s FDA-approved label, and other requirements for approval are prohibited.

Formulary placement of competitor agents may be outlined. “The contract would outline where competitor products can be on formulary, whether or not they can be covered and then any utilization management requirements for those products as well,” Seadler tells AIS Health.

“Overall contract terms” that will be addressed include “details such as any flat administrative fees, any fees that will be charged for data, how often invoices are going to be sent or paid, aging of claims allowed to be included,” she continues. Additional contract terms include how often the manufacturer can audit the contract, as well as “any exclusions or claims that can’t be included, such as duplicate discounts, 340B, long-term care, Indian Health [Service] or federal supply. Anything where the manufacturer may be paying another discount, those types of claims would be excluded. Contracts with a GPO could also include an administrative fee that goes directly to the GPO for the work they are doing.”

Rebate-specific content will include “language that outlines the quid pro quo of what each party is going to do as part of the contract performance provisions,” explains F. Randy Vogenberg, Ph.D., principal at the Institute for Integrated Healthcare.

“Several items are central to just about any rebate deal,” longtime specialty pharmacy industry consultant Bill Sullivan says. These include formulary information, including whether a rebate will result in preferred formulary placement; what a drug’s benefit tier will be; and whether any competitors will be excluded. Utilization management, such as whether a product will receive expedited UM treatment compared with other therapies; documentation, including how unit sales are measured and by whom; and operationalization, which may address the frequency by which rebates are paid, are also issues that will be dealt with.

Asch adds that “pharma also provides money to payers when members are enrolled in certain programs; while not called ‘rebates,’ these moneys may be reconciled as such but carry less visibility for sponsors.”

“For rebate pricing, contract terms typically include rebate strategy requirements or thresholds,” states Malhotra. “These can include, but [are] not limited to, volume (dollars or units), market share, growth, formulary placement, payment and adjudication schedule (quarterly, monthly, etc.) and any data-reporting requirements.”

Source: ‘Rebates Have Been a Huge Problem’

According to Dae Lee, Pharm. D., senior counsel and pharmacist attorney in Frier Levitt’s life sciences department who co-chairs the firm’s plan sponsor practice group, “rebates have been a huge problem” for his firm’s clients. Rebate-focused contract language will include whether rebates are on a flat-fee or percentage basis. PBMs “could also throw in other administrative fees, and that could also be flat fee or percentage, but the thing is, most of the time, that administrative fee is not captured as rebates. So pharma is paying not only the rebates but also administrative fees to the PBMs.”

Complicating the issue, he tells AIS Health, is that “the rebates can be in the form of whatever the PBMs want to call it. It could be market-share rebates or other forms of rebates. It could be discounts, price concessions, price lockouts. PBMs want to create a bigger net of rebates when dealing with the pharma companies, but on the other hand, when the PBMs have to negotiate with the plans and the plan sponsors to relay the rebates, they make the definition narrower so that they don’t need to pay back whatever they captured as rebates. And obviously the major PBMs portray themselves as pass-through models, but it’s passed through to their advantage — whatever they tailor their agreements with plans and plan sponsors to. It’s really crazy.”

In terms of contract audits, “depending upon the complexity of the contract, whether it’s a PBM or payer customer, and the rebate dollars associated with the specific contract, we typically see pharma companies perform audits on a rotational basis to ensure that they cover their largest and/or higher priority PBM/payer contracts on average once every three years,” says Malhotra. “On average, audits generally take three to six months to complete, and this is largely dependent on cooperation of the payer/PBM and any contract requirements in place around the audit.”

Audits are usually performed by independent third parties on behalf of manufacturers, she explains, adding that “some PBMs/payers have specific requirements around the third parties who perform the audits — for example, ‘approved audit firms.’” Lee says that he, too, has seen this: “One of the more egregious agreements that I reviewed included [a clause that] you can’t choose your own auditor. You have to get an approval from the PBM on whether they agree to have that auditor audit their contract.”

Most of Willis Towers Watson’s clients are employers, notes Asch, and for employer plan sponsors, the company recommends PBM rebate audits be conducted “at least once every contract term, if not more frequently than that. Many employer clients have a contract that passes through 100% of manufacturer rebates, and audits allow employers to validate this is occurring as expected. In addition to the rebate pass-through provision, most plan sponsors’ contracts include a minimum rebate guarantee payment, which can also be audited to ensure it is being measured and paid correctly according to the contract terms. These audits typically take four to five months. Manufacturers may also conduct audits to validate the accuracy of rebate invoices submitted by payers in order to ensure they are aligned with the agreed-upon contract terms.”

In performing an audit, “tallying up the units sold is more complicated than it may seem,” says Sullivan. “Payers may need to rely on their PBM to get the data, and it may be months before a quarter’s worth of claims is finally solid enough to use as a basis to calculate rebates due. If the payer cuts the rebate deal directly, they need to go into the claims records to pull the unit sales themselves, which opens up the issue of potential bias. Auditing is frequently part of the agreement.”

Some Pharma Firms May Not Even Audit Contracts

However, Vogenberg tells AIS Health that “depending on the dollars involved and risk of alienating the PBM, [pharma companies] may choose to not pursue recouping or even auditing the contract.”

Seadler agrees. “There are some manufacturers that may have audit language within their contracts; typically it’s a third-party requirement, and the expense would be on the manufacturer to complete the audit. You’ll find sometimes smaller manufacturers may not audit at all. The larger ones tend to audit more frequently, and before you even get to that audit process, there is a reconciliation that happens upon payment that would help catch potential errors, too.”

This reconciliation process involves a finance executive for the pharma company scrutinizing claims-level detail in a National Council for Prescription Drug Programs (NCPDP)-type format based on PBM-submitted information “to make sure they’re not seeing claims within that file they think shouldn’t be paid on,” she explains. Reconciliation should also occur on the PBM side after it receives payment to see if any claims were excluded that perhaps should not have been. “There’s usually a little bit of back and forth in that process before we even get to an audit.”

A third-party auditor may initiate the process with a letter of intent on behalf of its pharma client. “The third-party auditors will receive the contracts, invoices and claims data for the audit period from the pharma company. After reviewing, they will select a number of claims from the audit period, and they’re going to request to see how that claim adjudicated within the adjudication platform.” Screen prints or side-by-side scrutiny of the adjudication platform may provide additional information beyond the NCPDP data, such as any messaging at the pharmacy point of sale. The auditor then may request claims of competitor products from a similar time frame that fall under the same benefit to make sure those agents were adjudicated in accordance with the contract.

At this point, the auditor may have identified questions on claims, which will involve communication with the PBM around its processes. Following this, the auditor will prepare a report with the findings, which “could be high level, or they could be very specific to some of those claims that they reviewed,” says Seadler. The PBM then will analyze the report to determine whether it agrees or disagrees with the findings, again resulting in some back-and-forth discussions. The auditor will submit a final report to its pharma client, “and if there are findings there, the pharma company and the PBM would negotiate those directly. At that point, the auditor is pretty much out of the picture.” While an audit may take several months, to entirely close one out could take at least a year depending on findings and negotiations between the parties.

According to Lee, however, “‘audit’ is a very broad term, and many of the PBM agreements that I’ve seen, the plan’s and plan sponsor’s audit rights are limited, and sometimes they can’t even do rebate audits. They have two separate audits. One is the annual general audit, and one is the rebate audit. Why would you even create two separate audits? Why are you treating rebates so special?” In addition, “sometimes the auditor cannot even share the notes he took during the audit with the plan sponsor.”

So why are companies signing these contracts?

“Because they don’t know,” replies Lee. “They think, ‘Oh, we’re getting $5 million as rebates every year. I love it — it’s free money.’ Well, it’s not because they’re making five times more, and they should have reduced your drug spending; they should have reduced your beneficiaries’ or enrollees’ premium. They’re dangling a lollipop in front of you, and in the meantime, PBMs are buying the whole candy store. That’s why. It’s shortsighted, and sometimes people who are in charge of that whole PBM procurement process don’t have the industry knowledge, and they just defer to PBM-incentivized brokers or consultants.”

Contact Asch via Ed Emerman at, Lee at, Malhotra through Julie Landmesser at, Seadler at, Sullivan at and Vogenberg at

© 2024 MMIT
Angela Maas

Angela Maas

Angela has an extensive background of editing, reporting and writing for trade and consumer publications. She has written Radar on Specialty Pharmacy since she joined AIS Health in 2005 and has broad knowledge of the various issues at play within the space. She also has written for Spotlight on Market Access since its 2017 launch. Before joining AIS Health, she was managing editor at Employee Benefit News and Employee Benefit News Canada and managing editor at Hem Aware (a hemophilia publication), Lupus Living and Momentum (a multiple sclerosis publication). She has a B.A. in English and an M.A. in British literature from Arizona State University.

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