PBM Formulary Payments: When the Discount Is on a Different Drug

A PBM formulary kickback can use a cross-product discount to buy preferred treatment for one drug with a price reduction on another. The Justice Department alleged exactly that bargain between AstraZeneca and Medco: Nexium received the formulary position, while discounts on Prilosec, Toprol XL and Plendil supplied the payment. If you work in manufacturer contracting, purchasing or rebate accounting, the important connection may run between the product your team buys and the different product the formulary favors.

Nexium Got the Position, Other Drugs Carried the Discount

The government alleged that Medco solicited payments from AstraZeneca in exchange for making Nexium the sole and exclusive proton pump inhibitor on certain Medco formularies. The resulting false claims, the government said, went to Medicare’s Retiree Drug Subsidy program. Medco provided pharmacy benefit management services to clients receiving those subsidies. Under the alleged bargain, taxpayers faced false subsidy claims and competing drugs lost access to those exclusive formulary positions.

In its announcement of the Medco settlement, the Justice Department described reduced prices on the other AstraZeneca drugs as some or all of the payment for Nexium’s position. The alleged exchange therefore crossed product lines. A purchasing record for Prilosec could carry part of the price of a formulary decision about Nexium.

Different drug. Same bargain.

That is why we look beyond the preferred drug’s rebate statement. The question is what Medco agreed to do for the money, which products delivered the value and which government payments followed. A large discount on a purchasing ledger tells only one part of that story.

The Complaint Described Spreadsheets Connecting the Products

The former AstraZeneca employees who brought the whistleblower case described the connection in their complaint. They alleged that additional Nexium discounts were disguised as deep discounts on other medicines to avoid reducing the best price AstraZeneca reported for Nexium. In their account, hiding the Nexium discount kept its reported Medicaid best price high and the rebates owed to Medicaid low.

The complaint put the additional concessions at $40 million per year from 2007 through 2010. It identified proposed Nexium terms and spreadsheets tracking the Nexium-related value to Medco of discounts on other products.

The complaint also alleged agreements preventing generic manufacturers from selling authorized generic versions of Toprol XL and Prilosec to Medco. According to the whistleblowers, those restrictions preserved the value of the concessions Medco received. The allegation connected the discounted products, the alternatives kept away from the buyer and Nexium’s preferred position.

The whistleblowers described meetings intended to conceal the arrangement:

Yet the complaint said a managed markets account director attended the meetings and retained the value-tracking spreadsheets. That is the useful insider detail: someone could connect the commercial discussions to the numbers.

What a Formulary Position Is Worth

The preferred position can affect the patient’s cost and the restrictions a prescription must clear. The pharmacy and therapeutics committee reviews clinical formulary questions, the sponsor selects the benefit, and manufacturer negotiations may occur through a different entity. Those roles leave different records.

The Government Accountability Office’s September 2023 report on Part D rebates shows how specific the commercial terms can be. In the agreements GAO reviewed, manufacturers offered rebates tied to preferred placement, fewer competing drugs on the same tier and restrictions on competitors. Other terms tied rebates to sales volume or market share.

Those restrictions have practical consequences. GAO found agreements that conditioned rebates on the manufacturer’s drug coming first in step therapy, with competing products subject to prior authorization.

GAO also reported manufacturers’ descriptions of bundled rebates: a rebate on one drug could depend on preferred formulary placement of additional drugs. A manufacturer with strong sales in one category could use that position to seek access in another.

For an insider, the contract’s condition is the important part. A volume target, a preferred tier, a competitor exclusion and a requirement that patients try one drug first describe different promises. In the Nexium case, the government alleged that Medco solicited the concessions in exchange for exclusive formulary treatment. The documents have to connect the money to that promised action.

The Plan’s Saving and the Patient’s Bill

A rebate that lowers the plan’s net cost can leave the patient’s cost sharing tied to the price before the rebate. GAO’s Part D findings make the difference concrete: for 79 of the 100 highest-rebated drugs in 2021, beneficiaries or payers acting on their behalf spent $21.0 billion, while plan sponsors’ spending after rebates was $5.3 billion. Medicare’s low-income subsidies accounted for most of the beneficiary-side amount.

GAO explained that rebates could help lower premiums across the plan while leaving the people using highly rebated medicines paying cost sharing based on the higher gross price. We find that a peculiar bargain for the person taking the drug: the plan can count the discount without using it to calculate that person’s pharmacy bill. The recipient of the rebate matters as much as its size.

The Rebate Definition Decides Which Money Counts

A promise to pass through rebates applies to the receipts the contract defines as rebates. Purchasing discounts, service payments and payments received by an affiliate can fall into different categories. That distinction matters when the value for a formulary decision appears in another product’s purchasing account.

The Minnesota agreement with Caremark promises 100% of defined rebates received by the PBM or an affiliate. Its definition includes specified formulary and market-share payments while excluding described mail and specialty purchasing discounts and specified specialty service revenue. The percentage tells you how much of the defined category passes through. The exclusions tell you which money sits outside it.

The Caremark agreement in Iredell County’s procurement packet includes relevant affiliate and group purchasing organization formulary receipts, while separately excluding manufacturer services and affiliated-pharmacy purchasing discounts. These public contract examples show why the actual definition belongs beside the payment ledger when we examine a formulary arrangement.

The physical medicine and the money also travel separately. Manufacturer rebates or fees can move through an aggregator or PBM after dispensing. The negotiating intermediary need not take ownership of the drug.

Pharmacy reimbursement, manufacturer concessions and an affiliated pharmacy’s purchasing income therefore require separate comparisons. We connect the receipt to the agreement that earned it, the entity that received it and the allocation to the plan. That is how a discount on another product becomes visible in the examination of a formulary bargain.

The Government Payment Has to Match the Bargain

The Nexium settlements concerned claims to the Retiree Drug Subsidy program. That program connection identifies the government payment we need to follow. The bargain can run across contracting, purchasing and accounting records, and we connect those records with you to the government payments.

The comparison also needs the terms that changed. A purchasing team may see the acquisition credit. A contracting team may see the placement condition. Rebate accounting may see the category assigned to the receipt and the amount passed to the sponsor. We work across those records with you to establish what the business promised, what it received and what it reported.

The Nexium complaint illustrates why that work can extend beyond a signed contract. It identified both proposed terms and spreadsheets tracking value across products, alongside allegations that some agreements were deliberately kept unwritten. The commercial explanation and the accounting can supply different parts of the same alleged exchange.

A Later Law Calls for the Cross-Product Explanation

For covered Part D arrangements in plan years beginning on or after January 1, 2028, federal legislation enacted in 2026 requires a written explanation to the sponsor when manufacturer incentives for one drug depend on coverage, formulary placement or utilization conditions for another. The PBM must provide it within 30 days after finalizing the agreement, identify the drugs and manufacturers, describe the terms and have a senior company officer or someone authorized by that officer sign off on it. For an insider working on covered future contracts, the explanation gives another place where the cross-product bargain must appear in writing.

Medco and AstraZeneca Settled Separate Sides of the Deal

AstraZeneca and Medco each agreed to pay $7.9 million in separate settlements. The Justice Department announced AstraZeneca’s agreement on February 11, 2015, resolving allegations that the manufacturer provided the concessions for Nexium’s exclusive position and related marketing. On May 20, 2015, it announced Medco’s agreement for its alleged role soliciting and receiving the concessions.

We see a lopsided result: each settlement was smaller than a single year’s concessions alleged in the complaint. The same alleged bargain produced a manufacturer-side resolution and a recipient-side resolution.

The manufacturer settlement announcement said the former employees who brought the case would collectively receive about $1.4 million from AstraZeneca’s settlement. The whistleblowers came from the manufacturer, but the case reached the intermediary receiving the alleged payment. That is a useful connection for someone who sees only one side of a deal. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

A Rebate Contract Can Leave the Requested Action Unwritten

The Novartis Myfortic case shows another version of the gap between written rebate terms and the action discussed. In its 2015 civil settlement stipulation, Novartis admitted that its specialty-pharmacy agreements set market-share thresholds for Myfortic rebates but did not describe the actions pharmacies contemplated to increase that share. Novartis also admitted discussing specific steps with pharmacies during rebate negotiations. The government’s allegation was that discounts and rebates bought recommendations to prescribe Myfortic instead of CellCept or its generics, causing false claims to Medicare and Medicaid.

The common question is what action the recipient agreed to take for the concession. With Nexium, it was alleged formulary treatment. With Myfortic, it was alleged prescribing recommendations. Reading the rebate schedule alongside the commercial discussions makes that question concrete.

When You Can Connect the Discount to the Decision

If your work in formulary management, manufacturer contracting or rebate accounting lets you connect a discount on one drug to preferred treatment for another, speak with our whistleblower experts about that bargain. We trace the deal across the commercial terms, the money and the government payments to build your strongest case, and bring in PBM fraud whistleblower lawyers who understand manufacturer arrangements. We stay beside you as partners through the case, including the parts that reach beyond your own department.