Pharma manufacturers depend on contracts with PBMs — and, increasingly, their group purchasing organizations (GPOs) — to ensure favorable formulary positioning with PBMs’ health plan and employer clients. But as those contracts have grown more complex and less transparent, drugmakers may be at risk of 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.
Revenue leakage — unintended revenue loss because of process inefficiencies — can be a huge financial drain on pharma manufacturers. It also may potentially result in compliance risks with the Anti-Kickback Statute and its discount safe harbor protections, “so it always has to be clearly defined as to what the rebate or any monies between pharma and the PBM being exchanged; there has to be a reason,” explains Stephanie Seadler, vice president of Trade Relations at EmsanaRx.
Katie Asch, Pharm.D., senior director and U.S. consulting pharmacy practice lead at Willis Towers Watson, adds that other issues can be “significant impacts to plan sponsors’ budgets and…a downstream impact to the benefit cost (e.g., premium and/or member copays/coinsurance) they pass on to their employees,” difficulty to predict costs and budgets, potential “legal disputes if amounts paid versus expected are not aligned according to the contract terms,” as well as damage to the “relationships between payers and their customers, leading to loss of business.” The “key issue,” asserts F. Randy Vogenberg, Ph.D., principal at the Institute for Integrated Healthcare, “is maintaining Medicaid best price provisions under U.S. law, in addition to any other contractual best price provisions with other customers.”
According to professional services firm ZS, “every year, pharma organizations collectively lose more than $15 billion in bottom-line revenue due to duplicate rebates, misuse of copay benefits, chargebacks abuse and myriad other shortcomings.”
And an article by Enable, a business-to-business rebate management company, notes that “statistics show that current software systems allow for revenue leakage of about 2 to 5% of a business’ revenue which can equate to thousands, millions, and even billions in lost revenue. For example, if you’re a million-dollar company, that means you’re losing up to $50,000 per year — and that number will only grow as your business does.”
Rebates in particular can be a significant contributor to loss of revenue. “Pharma companies, depending on their size and contract portfolio, may pay significant dollars in rebates to payers and PBMs for product positioning on formularies,” Jenisha Malhotra, senior manager in Risk & Financial Advisory at Deloitte Life Sciences & Health Care, tells AIS Health. “Discrepancies between published formularies and payer claim adjudication systems can result in ineligible claim requests or inaccurate rebate tier invoicing, which can create high potential for revenue leakage and impact to script volume. Further operational inefficiencies and poor contract management processes can create problems as well.”
Deloitte sees three main reasons for revenue leakage or over-/inappropriate billing, says Malhotra: “The first is due to products not listed on the formulary, the second is the application of inaccurate rebate based on product formulary positioning, and third are product restrictions. In addition, miscalculation of rebates, administration fees and price-protection dollars can cause leakage as well.”
“Duplicate rebates and delayed chargebacks can occur, but a good audit should spot those,” says longtime specialty pharmacy industry consultant Bill Sullivan. “Adjustments in a prior period…would likely slip through. Any copay benefit determinations should not negate a rebate, but the covered member would potentially be overcharged if the right benefit tier was not coded properly.”
Seadler asserts that the preaudit upfront reconciliation occurring between PBMs and pharma companies should help identify claims that shouldn’t be paid. The biggest opportunity for rebate leakage, she says, is the 340B Drug Pricing Program, “which is still a significant industry issue, and the reason for that is the data’s not good; it’s really difficult to identify a 340B claim at any level. There are some NCPDP identifiers, but the pharmacy doesn’t always use them. You can also look at NPI [i.e., National Provider Identifier] level, so if you know a pharmacy is 100% 340B, every claim that came through that pharmacy should be excluded.” Pharma companies also are enlisting 340B-experienced consulting firms to get more insight into this area, and by using this “triangulation method,” they are drilling down on potential 340B issues.
In a March 22 Drug Channels blog, Adam Fein, Ph.D., CEO of the Drug Channels Institute, said that the institute estimates that the “gross-to-net bubble” — the growing difference between a drug’s gross sales at list price vs. its sales at net price, which includes rebates and other concessions — “reached $204 billion for patent-protected brand-name drugs in 2021. If we include brand-name drugs that have lost patent protection and face competition from generic equivalents, the bubble was even higher, at $236 billion.”
“That’s crazy,” asserts 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. “So that means $200 million in rebates. Where is that going? I’m fairly confident that a significant portion of it is being kept in the pocket of PBMs. And…those big PBMs are vertically integrated, meaning they have plan/plan sponsors, like Cigna/Express Scripts, United/OptumRx and CVS Health/Caremark. And then each owns their own pharmacies, mail-order specialty pharmacies, but in between their PBM and pharmacy, there are also rebate aggregators that are owned, affiliated with those PBMs.
“Caremark launched a rebate aggregator called Zinc,” he continues. “Optum [worked with the] Coalition for Advanced Pharmacy Services — in short, CAPS — and they recently launched Emisar [Pharma Services], which is based out of Ireland for some reason. Express Scripts has had a rebate aggregator called Ascent Health based out of Switzerland. I’m still trying to figure out why they set up those rebate aggregators outside of the United States. Is it because they can’t be touched by the United States law? Possible. Tax reasons? Possible.”
Complications in these situations arise, he says, when “unbeknownst to the plan sponsor,…these vertically integrated PBMs and plan sponsors make it easy to make more profits through rebates and not report rebates as rebates, like when it comes to Medicare Part D sponsors. They have an obligation to report rebates to CMS,” but the question of what a “rebate” is may be an issue. “They can tailor it to their advantage, and there have been instances where PBMs don’t report the rebates collected to the plans — nonaffiliated, nonvertically integrated plans and plan sponsors.”
Asch agrees that “GPOs, rebate aggregators and manufacturer administrative fees (MAFs) kept by payers may introduce opacity into the flow of funds.”
According to a longtime industry expert who declines to be identified, “PBMs and their rebate aggregators not only obtain ‘rebates’ from drug manufacturers (which rebates will get passed through in large part to plans), but they also obtain ‘other payments’ labeled with names other than ‘rebates,’” such as “prompt payment discounts,” “health management fees” and “data sales fees” “that the PBMs and/or rebate aggregators retain entirely for themselves, meaning these ‘other payments’ don’t get passed through to plans. All such ‘other monies’ directly or indirectly increase the costs of drugs, since they reduce the profits pharma would otherwise make and lead to pharma therefore raising the prices of their drugs.”
As a result, continues the source, the “‘rebate’ and ‘other payments’ create a vicious two-step process: Pharma raises its prices, [then] PBMs and rebate aggregators extract ‘rebates’ to lower the prices of drugs for the plans (and others) that are the PBMs’ clients. PBMs and rebate aggregators also extract ‘other payments’ to make more money in the process. As a result, pharma raises its prices, causing the entire process to begin again.”
Beyond the Big Three PBMs, says the unidentified source, “mid-size and smaller PBMs — like Prime Therapeutics, Elixir, Navitus, Capital Rx, etc. — all have arrangements with one of the Big Three to use its rebate aggregator. For example, Navitus has a contract with Prime, which has a contract with ESI’s rebate aggregator, Ascent, which has contracts with the drug manufacturers. Thus, between Navitus and the drug manufacturers are at least two — and maybe three — ‘intermediaries’ (Prime, ESI and Ascent) who likely are shaving off ‘other payments’ that Navitus likely doesn’t even know about, or benefit from, and that Navitus’ clients therefore can’t know about, let alone benefit from.”
So, contends the source, not only does this mean “that more money is being ‘wasted’ on intermediaries, but ‘transparency’ has gotten far worse. Before, auditors had to get access to the contracts that a PBM, like Navitus, might have executed with manufacturers. Now, if an auditor really wants to find out what’s going on, the auditor would need to gain access to:
- “Navitus’ contract with Prime and all the docs reflecting money flows between those entities (invoices to, payments from, etc.),
- “Prime’s contract with either ESI or with Ascent, and all the docs reflecting money flows,
- “If Prime isn’t directly contracting with Ascent, ESI’s contract with Ascent, and all the docs reflecting money flows, and
- “Ascent’s contracts with drug manufacturers.
“Good luck to that auditor! I’d place a very large bet, all of the above will not be made available, meaning there will be gaps in almost all entities’ knowledge about what is taking place,” concludes the source.
Lee points to the 2017 situation involving Broward County, Fla., which “contracted with Optum, Optum collected rebates, and the audit report showed that Optum did not relay the rebates collected by their rebate aggregator, CAPS,…but CAPS also subcontracted their rebate aggregation to ESI, Express Scripts…to capture more manufacturer rebates,” and Express Scripts “may have had more profitable relationships with certain manufacturers.” This subcontracting was done without disclosing the action to Broward County, he explains. “So whatever the amount of the rebates collected by Express Scripts and by CAPS were not reported to Broward County, and Broward County audited and got pissed off and confronted Optum, and they entered into a settlement agreement,” through which Optum paid $833,772. Those monies, says Lee, are “the residents’ tax money.”
He cites a confidential situation involving a Medicare Part D sponsor client that had a contract with a PBM. “Medicare Part D sponsors have an obligation to CMS to report DIR [i.e., direct and indirect remuneration] fees — DIR meaning the rebates. There’s manufacturer rebates, there’s pharmacy rebates, but I’m talking about the manufacturer rebates. And they found out that the PBM retained a lot more rebates than what was in the contract.” When the client asked about it, the PBM said it had used a rebate aggregator, but the contract required the disclosure of this relationship, and the PBM failed to do so.
“And we found out they kept over $6.5 million — maybe $6.3? — that should have been relayed to our client,” he continues. “Then we uncovered all the rebate aggregator relationships,…and we recouped $6.25 million on behalf of the Medicare Part D sponsor. And then we had to notify CMS. But that PBM is owned by a publicly traded company,…and when it comes to rebates, there are regulations in the CMS level, in the federal Medicare Part D level. There are some regulations at the Medicaid level, but there are no regulations in the private space. So think about it. They’re playing games at the Medicare Part D level. That means the same or a worse situation is happening in the private space, like commercial insurance space.”
Seadler maintains that transparency needs to be addressed within this environment. “And so while they [i.e., employers] are getting some rebates, they are not getting everything. They’re also not getting the data to help validate what they’re getting. I think that’s changed a lot with the GPOs because it’s easy for the PBM to say, ‘The GPO is a third party. We don’t own those contracts, and because we don’t own them, we can’t give the data and the transparency because they’re not ours.’ It’s time to rethink what that looks like.”
“Eventually that will require pharma to consider contracting with PBMs differently than before,” she continues. “Historically, it may have seemed easier from an administrative perspective to have everybody kind of swoop up into these three GPOs — fewer contracts and less administrative burden. Now the GPOs have the upper hand as all the smaller PBMs consolidate in order to remain competitive.”
While rebates’ purpose is to reduce patient spending on premiums and out-of-pocket costs, “that’s not what’s happening. It’s all a profit driver for PBMs,” Lee contends. So “how big of a problem is rebate leakage? It’s huge. It’s a $200 billion problem that we have. But at the same time, do I think that getting rid of PBMs is the answer? No, I don’t think that’s the answer.”
Instead, he suggests better regulations and monitoring of the entities. “PBMs serve a purpose in terms of managing and administering pharmacy benefits. Cutting them out completely” isn’t the way to fix the issue, he says. In addition, “plan sponsors need to stop deferring the contract terms to PBM-incentivized brokers, PBM-incentivized consultants, and they need to take control over the contract terms in the PBM agreements.…Just because you’re getting some rebate doesn’t really mean that you’re getting the whole rebate that you negotiated. And at the same time, just because you’re receiving rebates doesn’t mean the PBMs aren’t implementing other profitable tactics.”
So what are some must-haves if commercial regulations were to be implemented? In an “ideal world,” replies Lee, “if I can create a rule, I would ask for claim-level detail and rebates associated with it, and I would also demand that PBMs seek plan sponsor approval before subcontracting with other parties. And I would demand to know the service fee charged by those subcontractors and also demand to know the administrative fees paid out by manufacturers to PBMs.”
Meanwhile, drugmakers have started taking steps to detect revenue leakage. According to Malhotra, “pharma companies are increasing their activities in reviewing and scrubbing prescription level claims data for claims that are ineligible for rebates. This could include, but not limited to, issues such as duplication, aberrant quantities, claims outside contract time frame, claims from unknown pharmacies, claims for products not on formulary and claims from high 340B utilization pharmacies. Additionally, they conduct ongoing reviews of formulary placement and restrictions of products in scope to avoid overpayment for incorrect positioning.”
Another issue, says Vogenberg, is that “it’s part of the supply chain game and terminology used by firms like PBMs, but manufacturers can determine there may be leakage yet not be able to prove it contractually.”
Lee asserts, though, that it’s not an issue of pharma companies detecting leakage: “They already know it. They’re getting the public scrutiny” around rising drug prices. “But the rate of that drug price increase has been slowing down at the same time. In the meantime, the gross-to-net bubble has been increasing at a faster pace. But the public doesn’t really know about PBMs’ role; instead, they point their fingers to the pharma companies. But pharma companies are in a bit of a jam. How are they going to procure their place in the formulary without dealing with the PBMs? Maybe they could go to the plans directly, but how are they going to do that? It’s unrealistic. It’s just a loss of revenue.”
Ultimately, says Lee, PBMs “had good intentions to start with, and then they saw the opportunity to make money. And I guess it was too tempting to let it go.”
Contact Asch via Ed Emerman at email@example.com, Lee at firstname.lastname@example.org, Malhotra through Julie Landmesser at email@example.com, Seadler at Stephanie@emsanaRx.com, Sullivan at firstname.lastname@example.org and Vogenberg at email@example.com.