Medco: Nexium on the Formulary, Discounts on Other Drugs

In the Medco Nexium kickback settlement, Medco Health Solutions Inc. agreed to pay $7.9 million to resolve allegations that it solicited kickbacks from AstraZeneca for Nexium’s exclusive formulary position. The alleged payment came through lower prices on other drugs. For someone in PBM contracting or rebate accounting, that mismatch is the part worth recognizing: the drug winning access and the drugs carrying the discount were different.

The Justice Department announced Medco’s settlement on May 20, 2015. At settlement, Medco was a wholly owned subsidiary of Express Scripts Holding Company. Medco provided pharmacy benefit management services to clients receiving subsidies under the Medicare Retiree Drug Subsidy Program. Former AstraZeneca employees brought the qui tam case under the False Claims Act.

AstraZeneca had separately agreed to pay $7.9 million over the same alleged arrangement. The Medco announcement dates that agreement to January 2015, and the government announced AstraZeneca’s settlement on February 11. These were separate pharmaceutical fraud settlements: one with the manufacturer providing the alleged inducement, the other with the PBM soliciting it.

Nexium’s Position and the Discounts Behind It

The government alleged that Medco solicited payments in exchange for identifying Nexium as the “sole and exclusive” proton pump inhibitor on certain Medco formularies.

According to the Justice Department, Medco received some or all of that value through reduced prices on Prilosec, Toprol XL and Plendil. All were AstraZeneca drugs. Nexium was the product gaining the formulary advantage, while concessions elsewhere in the manufacturer’s portfolio supplied the alleged payment.

That is what makes this case useful to someone who sees only one side of a contract. An analyst reviewing Nexium alone could miss the reductions on the other products. An analyst reviewing those reductions alone could miss what AstraZeneca allegedly received in return. The alleged bargain connects them.

The alleged exchange shows how drug manufacturer rebates to PBMs can buy access for a different drug.

Do Pharmacy Benefit Managers Have a Role in the Prescription Drug Supply Chain?

Yes. Pharmacy benefit managers connect health care plans with the pharmacies their members use. They negotiate manufacturer rebates, adjudicate pharmacy charges, contract with pharmacy networks and provide formulary services. Those functions put the PBM in a position to influence both access to a drug and the money attached to dispensing it.

The 2004 American Journal of Health-System Pharmacy article Examining the Value of Pharmacy Benefit Management Companies describes PBMs bidding therapeutically equivalent drugs against one another to obtain manufacturer rebates. Its example is proton pump inhibitors, the class at the center of the Medco allegation.

The article distinguishes flat rebates from performance rebates. A flat rebate pays the same percentage across levels of market share. Performance rebates increase the PBM’s compensation as use of a product rises. The article also describes contracts specifying preferred or exclusive status, connecting the commercial terms to the drug’s position on the formulary.

The same article describes a PBM charging its client an administrative fee while also earning manufacturer rebates and other revenue. The plan pays the PBM one way, and the manufacturer pays it another.

Why Bigger PBM Rebates Can Favor Pricier Drugs

A larger rebate can accompany a higher list price. The USC Schaeffer Center’s 2020 white paper The Association Between Drug Rebates and List Prices examined branded-drug list prices and estimates of net prices from 2015 through 2018. It found a positive relationship between estimated rebates and list prices and described the incentive created by competition for formulary access:

The paper’s broader pricing analysis helps explain why the size of a concession and the value of a formulary decision belong together. Medco’s alleged bargain made that comparison harder still by putting the concessions on different drugs. A discount visible to the finance team could serve an access commitment negotiated elsewhere in the business.

The Medicare Retiree Drug Subsidy Connection

The government contended that the Medco arrangement violated the Anti-Kickback Statute and caused false or fraudulent claims for Nexium to the Medicare Retiree Drug Subsidy Program. Medco’s clients received support from that program, making the alleged exchange a matter of public money as well as private contracting.

That connection to public healthcare spending is central to PBM fraud and drug rebates. The government tied the concessions to Nexium’s formulary position, then tied the alleged kickback arrangement to claims for that drug. Taxpayers supported the coverage through which the allegedly purchased position generated claims.

Who Inside Sees a Cross-Product Kickback?

Contracting, formulary and finance employees can each see part of a cross-product bargain. We examine how the formulary commitment, the concessions that fulfilled it and the government-paid claims fit together. The Medco allegations give that comparison a concrete shape: Nexium in the access agreement, other AstraZeneca drugs in the price concessions, and Nexium claims in the subsidy program.

A contracting employee may know what the manufacturer was asked to provide. A formulary employee may know which position was promised. Someone in finance may know where the reductions appeared and how they were credited. Those different views can connect a concession’s accounting treatment to its intended commercial return.

The whistleblowers behind this case came from AstraZeneca. They received a combined $1.4 million reward from AstraZeneca’s settlement. Their role illustrates why knowledge from the manufacturer’s side can expose a PBM’s conduct. Our work with an insider is to connect what they know about the bargain to the transactions and claims it affected.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

Medco’s Earlier Payment Allegations

Medco had faced a broader set of allegations in an October 23, 2006 resolution totaling $155 million. That announcement covered alleged manufacturer payments, inducements to health plans, prescription cancellations and short fills.

The recurring point is the PBM’s position among manufacturers, client plans and dispensing operations. Each relationship can carry a different payment and a different incentive. The Nexium case followed one alleged exchange across that business: discounts from a manufacturer for a place on the PBM’s drug list.

You Know What the Formulary Promise Was Worth

If you know how a PBM’s access promise became a discount on another product, talk with our whistleblower experts about the bargain you saw. We build your case with you and bring in pharmaceutical whistleblower lawyers who understand PBM contracting and rebate arrangements. We stay at your side throughout the case.