Part D Rebate Reporting Fraud: Retained Rebates Relabeled as Service Fees

Part D rebate reporting fraud can hide manufacturer rebates by calling them service fees in reports to Medicare. The manufacturer paid the money. The plan or its pharmacy benefit manager received it. The reporting decision determines whether Medicare gets the benefit of the price concession. If you reconcile manufacturer receipts, you may know where the rebate in the contract became a fee in the report, and who decided to call it that.

That is the problem at the center of the Justice Department’s Rite Aid and Elixir Insurance settlement. The government alleged that Rite Aid and Elixir reported portions of manufacturer rebates as bona fide service fees the manufacturers had never negotiated. The money arrived under one arrangement and went into Medicare’s reporting system under another description.

How Part D Rebates Reach Annual CMS Reconciliation

Part D sponsors report manufacturer rebates and other remuneration to the Centers for Medicare & Medicaid Services annually so that Medicare’s payments reflect the price concessions received. The report reaches beyond the prescription paid at the pharmacy counter to the money returned afterward.

Private plans provide the drug coverage. Pharmacy benefit managers negotiate with manufacturers and pharmacies and administer benefits for plans. A manufacturer rebate can reduce what the plan ultimately spends on a prescription even though the pharmacy has already been paid. Direct and indirect remuneration, usually called DIR, captures rebates and other price concessions that affect those costs.

The reporting obligation follows manufacturer price concessions obtained through the pharmacy benefit manager whether the intermediary passes the money to the plan or retains it. A PBM subsidiary’s retained rebate therefore belongs in the annual CMS reconciliation picture. Moving the receipt to a different company within the arrangement does not answer how it should be reported.

The agency reconciles payments after the year ends using actual enrollment, risk factors and allowable drug costs after rebates and discounts. Reinsurance pays part of the costs for beneficiaries who reach the benefit’s catastrophic phase. Risk corridors share unexpectedly high costs or profits between Medicare and the plan. Understating rebates leaves taxpayers paying against drug costs that the concessions should have reduced.

The Government Accountability Office’s explanation of Part D payments explains how rebates affect Medicare’s payments to plan sponsors. Even an accurately paid prescription can lead to an overstated net cost if the later report understates the rebate.

Beginning January 1, 2024, pharmacy price concessions moved to the point of sale and left the DIR measure, as MedPAC’s July 2026 account of Part D spending explains. Manufacturer rebates remained a separate reporting subject.

Part D Rebates Called Service Fees Without Manufacturer Agreement

Part D rebates called service fees without manufacturer agreement were the central allegation against Rite Aid and Elixir. The manufacturer agreement tells you what the payment bought. An accounting label chosen by the recipient cannot supply a service the manufacturer never negotiated.

A bona fide service fee pays fair market value for an itemized service actually performed for the manufacturer. It must be work the manufacturer would otherwise perform or buy, and the fee must not be passed on to the recipient’s client or customer.

An agreement describing the work is one part of that comparison. Evidence that the work happened is another. A valuation addresses what the service was worth. Payment records show whether the recipient kept the fee or used it to fund a customer discount.

The Government Accountability Office’s 2019 examination of pharmacy benefit manager revenue makes the reporting distinction especially clear. Manufacturers’ service payments were reported to Medicare, but the amount above fair market value counted as rebates and other price concessions. Qualifying bona fide service fees did not reduce the plan sponsor’s drug costs.

The auditors also found that the Centers for Medicare & Medicaid Services did not routinely evaluate the manufacturer and plan sponsor’s determination that a payment qualified. The pharmacy benefit manager and manufacturer nevertheless had to hold information documenting fair market value. The report could carry the classification while the explanation for it stayed inside the businesses.

Rite Aid and Elixir’s Rebate Reporting Settlement

Rite Aid and its subsidiary Elixir Insurance faced allegations of misreporting manufacturer rebates from 2014 through 2020. A former employee of Rite Aid’s pharmacy benefit manager brought the qui tam case.

According to the Justice Department, the defendants reported portions of manufacturer rebates as bona fide service fees despite the absence of negotiated fees. The government further alleged that Elixir Insurance knew the retained rebates were not bona fide service fees and reported them that way anyway.

The manufacturer did not have to invent a payment for this scheme to work. The defendants allegedly gave an existing payment the treatment reserved for a different kind of transaction. That is why the manufacturer’s terms matter as much as the recipient’s ledger.

The settlement announced July 10, 2024 required Rite Aid and Elixir Insurance to pay $101 million to the United States.

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

What the Manufacturer Rebate Buys

Manufacturer rebates commonly buy access to a plan’s formulary, the list of drugs it covers, and favorable placement on that list. In the Government Accountability Office’s categorized 2021 Part D rebate data, 92.7% of rebate dollars were associated with formulary access and tier placement. The commercial prize was a place on the covered-drug list.

The price seen at the counter and the cost after rebates can move differently. MedPAC describes manufacturers competing through postsale rebates while sponsors seek lower premiums. A larger concession after the sale can lower the plan’s net cost without giving the patient the same saving at the counter.

The USC Schaeffer Center’s The Association Between Drug Rebates and List Prices, published in 2020, found a roughly dollar-for-dollar association between increases in estimated rebates and list prices.

That separation between payment for work and payment linked to a drug’s price also runs through a 2020 Oregon Law Review policy analysis. Its proposed approach put the services at the center of the fee:

The paper argued for establishing the flat administrative fee up front in the contract. Its distinction is useful to the employee looking at the actual arrangement: what work explains the fee, and what determines its size?

Retained Rebates and Other PBM Revenue

A retained manufacturer rebate, a service payment and a pharmacy reimbursement margin tell different stories about who paid whom. The Rite Aid and Elixir allegations focused on treating particular retained rebates as fees. An accountant can see that decision at a level a market-wide rebate total cannot show.

The Government Accountability Office found that pharmacy benefit managers passed nearly all manufacturer rebates they negotiated for Part D plans through to plan sponsors in 2016. Of approximately $18 billion negotiated, they retained $74.3 million. The report separately identified manufacturer payments for services and revenue from the difference between what a pharmacy benefit manager charges a plan and pays a pharmacy, known as spread pricing.

Affiliated rebate aggregators add another contracting layer. The Federal Trade Commission describes them negotiating manufacturer contracts, including rebates, that pharmacy benefit managers previously negotiated directly. The service-fee question still concerns what the manufacturer paid for.

The Same Service-Fee Label Changes Different Reports

Part D DIR reporting concerns price concessions received through the plan and PBM. Medicaid AMP and Best Price concern the manufacturer’s prices and rebate obligations. Medicare Part B ASP helps determine what Medicare pays for drugs. The service-fee distinction reaches all of them, but the incentive to misclassify the payment can run in opposite directions.

In Medicaid, improperly deducting a genuine service fee from average manufacturer price lowers the reported price and can reduce rebates owed to states. AstraZeneca and Cephalon settled allegations involving that practice. Bristol-Myers Squibb’s 2021 settlement for $75 million covered alleged improper deductions of wholesaler service fees and another source of value in the contracts.

That second allegation concerned price-appreciation provisions. When a manufacturer raised a drug’s price, a wholesaler could gain on inventory already purchased. The contracts returned some of that value to the manufacturer. The government alleged that Bristol-Myers Squibb excluded the returned value from its reported prices. The contract explained money that a service-fee review alone could miss.

In Part B, calling a price concession a service fee can instead leave average sales price too high. In a whistleblower complaint against Regeneron, the whistleblowers alleged that discounts on Eylea purchases through Besse Medical were funded by the manufacturer and passed to customers while being presented as the distributor’s discounts:

The complaint alleged that this arrangement kept manufacturer discounts out of reported ASP. The parallel is the payment’s route through a service agreement and into a government price report. In the Elixir case, the disputed report was the plan’s Part D remuneration report.

What Evidence Is Needed to Prove Fraud?

The useful evidence connects what the manufacturer agreed to pay, what the recipient received, how the amount reached the Medicare report and who knew how it had been classified. For a Part D rebate reporting case, the contract and the report show different parts of the same decision.

The Manufacturer’s Drug Rebate Contract Versus the CMS Report

Comparing the manufacturer drug rebate contract with the CMS report connects the terms of the payment to what Medicare was told. We work with healthcare insiders to connect those documents, the money and the decisions behind the classification.

Whoever negotiated the terms, booked the money or prepared the report may hold the piece that connects them. That inside view can explain why a rebate became a fee and why the government’s calculation of health care costs missed it.

When You Know Why the Rebate Became a Fee

If you know why manufacturer receipts became service fees in a Part D report, speak with our whistleblower experts about that reporting decision. We work beside you to build your strongest Part D whistleblower case around the negotiated terms, the retained money and what Medicare was told. We bring in pharmaceutical fraud whistleblower lawyers who know Part D payment reporting, and we stay your partners throughout the case.