PBM Fraud and Drug Rebates: What the Contract and the Reported Numbers Conceal

Pharmacy benefit manager fraud can hide manufacturer rebates behind service-fee labels, conceal money owed to a health plan, or use drug discounts to buy prescribing influence. The contract describes one arrangement. The payment records and government reports can describe another. If you work in rebate accounting, manufacturer contracting or pharmacy reimbursement, you may know exactly where the numbers stopped matching. Concealed rebates can leave taxpayers paying more for healthcare through Medicare and Medicaid.

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

Yes. Pharmacy benefit managers negotiate manufacturer rebates, help determine which drugs health plans cover, and negotiate what pharmacies receive for filling prescriptions. Those functions put the PBM between the manufacturer seeking access, the plan paying for coverage and the pharmacy dispensing the drug.

The formulary is the plan’s list of covered drugs. A preferred tier can give a manufacturer’s product an advantage over competing treatments. The pharmacy network determines where a beneficiary can fill a prescription under the plan. A PBM can influence both the product chosen and the business paid to dispense it.

The manufacturer, plan and pharmacy each have their own payment agreement with the PBM. Following one payment leaves the others unanswered.

Manufacturer Rebates

Drug manufacturer rebates to PBMs can buy formulary access, preferred placement or other terms affecting use of a product. A PBM may pass rebates to the plan or retain a portion under the arrangement. The rebate receipt, the amount credited to the client and the amount reported to the government are distinct numbers.

Service and Administrative Fees

A fee can pay for administrative, management or reporting work. The important details are the service agreed to, the work performed, the recipient and the treatment of the money in the client’s agreement and government reporting. Calling a receipt a service fee changes the accounting category.

Spread Pricing and Pharmacy Margin

PBM spread pricing is the difference between what the plan pays the PBM for a prescription and what the PBM pays the pharmacy. Pharmacy margin follows a different comparison: what the dispensing pharmacy receives against what it paid to acquire the drug. When the PBM and pharmacy share an owner, both revenue streams can stay inside the same corporate group.

Affiliate and Rebate Aggregator Revenue

An affiliated rebate aggregator negotiates manufacturer contracts that the PBM might previously have negotiated itself. Its fees introduce another recipient into the payment trail. If a rebate pass-through contract excludes PBM affiliate fees, we examine the agreement’s treatment of that revenue alongside the affiliate’s invoice and the manufacturer payment. The client-facing rebate total may describe only one part of the arrangement.

Drug Rebates Buy a Place on the Formulary

Formulary placement is the main purpose of the manufacturer rebates the Government Accountability Office categorized in its Medicare Part D analysis. In its September 2023 report on rebates and beneficiary spending, GAO found that 92.7 percent of categorized rebate dollars in 2021 were associated with formulary access and tier placement.

That is a payment for access to insured demand. A manufacturer can negotiate a concession to secure coverage, a better tier or a position against competing drugs. The contract’s coverage terms explain what the manufacturer expects to receive for its money.

Pass-through answers a narrower question. In GAO’s study of Part D arrangements in 2016, PBMs passed 99.6 percent of the manufacturer rebates they negotiated to plan sponsors. That figure is Medicare only.

A patient can pay coinsurance on the price before rebates while the plan receives the manufacturer’s discount later.

Elixir Allegedly Changed the Label Before Reporting the Money

Part D rebates called service fees without manufacturer agreement were at the center of the Rite Aid and Elixir settlement. In its July 2024 announcement, the Justice Department said Rite Aid and Elixir Insurance agreed to pay the United States $101 million to resolve allegations involving rebate reporting.

The government alleged that, from 2014 through 2020, the companies reported portions of manufacturer rebates to the Centers for Medicare & Medicaid Services as payments for services the manufacturers had never agreed to buy. It also alleged that Elixir Insurance knew the retained rebates did not qualify as service fees.

The label mattered because Part D sponsors report manufacturer rebates and other remuneration so Medicare’s payments reflect the price concessions. The alleged reclassification affected the reconciliation of what the government owed. A receipt already inside the business acquired a different description on its way into the report.

A former RX Options employee brought the whistleblower case. For a PBM accountant examining rebate reclassification in a service-fee report, the case supplies a concrete comparison: the manufacturer’s agreement, the money received, the fee classification and the report sent to CMS. The government’s allegation turned on what the manufacturer had actually agreed to pay for.

Drug Formulary Exclusivity Paid Through Discounts on Other Drugs

A discount on one drug can allegedly buy favorable treatment for another. The AstraZeneca and Medco cases show why a review confined to the favored drug’s rebate schedule can miss the payment.

The Justice Department alleged that AstraZeneca gave Medco concessions on Prilosec, Toprol XL and Plendil to secure sole-and-exclusive formulary status for Nexium. The alleged arrangement caused claims to the Retiree Drug Subsidy Program. The discounted products and the product receiving the favorable placement were different.

In 2015, AstraZeneca and Medco each agreed to a separate $7.9 million settlement, the same sum for opposite sides of the deal. Former AstraZeneca employees had brought the whistleblower case. The manufacturer paid to resolve the alleged offer of the concessions, and the PBM paid to resolve its side of the same arrangement.

For a contracting employee, the revealing document may be the agreement for the other product. We connect the concession to the formulary decision it allegedly purchased, including arrangements spread across several drug contracts.

Free Product for a Formulary Decision Maker’s Family

An Endo whistleblower complaint alleged that free Lidoderm samples went to a pharmacy director’s mother in return for the director using his influence to obtain preferred formulary status. The director worked for Coventry and later HealthSpring. The complaint connected the alleged arrangement to prescribing for Medicare and Medicaid beneficiaries.

The complaint also alleged that Endo omitted those free drugs from Medicaid Best Price reporting. The same alleged concession therefore appeared in two places: what the company gave to influence access and what it left out of a reported price. The recipient of the free product was outside the ordinary rebate payment channel.

A Specialty Pharmacy Paid to Keep Prescriptions Coming

The government’s 2014 complaint against Novartis described another connection between manufacturer money and pharmacy behavior. It alleged that Novartis threatened to cut BioScrip’s patient referrals or remove it from a distribution network unless the pharmacy met refill targets for Exjade. The complaint then described an increase in the payment attached to each shipment:

The threatened loss of referrals gave the payment its context. The alleged incentive reached the pharmacy employees calling patients about refills. This specialty-pharmacy parallel shows why the rebate schedule belongs beside the instructions about what the pharmacy was expected to do to keep the manufacturer’s business.

Spread Pricing Reaches a Different Part of the Bill

A PBM spread claim compares the amount paid to the pharmacy with the amount billed to the plan for the same prescription. The relevant contract and reimbursement records sit on the pharmacy side of the transaction. A manufacturer rebate ledger answers a different question.

Part D’s payment rules classify the spread retained by the PBM as an administrative cost. Reporting it as a drug cost can change what Medicare pays the plan.

Until January 1, 2024, certain fees assessed later could reduce what a pharmacy kept without lowering the price used to calculate the patient’s coinsurance at the counter. The replacement rule includes pharmacy price concessions in that price, reflecting the lowest reimbursement the pharmacy can receive.

Specialty pharmacy affiliate revenue sits outside the narrow measure of PBM rebate retention. Comparing affiliated and independent pharmacies means examining reimbursement, acquisition costs and later adjustments for the same drugs and payer population.

What Does the FTC Say About Pharmacy Benefit Managers?

The Federal Trade Commission has examined how PBM contracting affects pharmacy reimbursement, access to drugs and the payments manufacturers make for formulary placement. Its June 2022 inquiry into PBM contracting sought documents and data from the six largest PBMs, including material on pharmacy fees, clawbacks, patient steering and manufacturer rebates.

The agency’s questions follow the same money in several directions. A fee charged to an independent pharmacy, reimbursement to an affiliated pharmacy and a manufacturer’s payment for access each describe a different part of the PBM’s business. The inquiry sought to examine those practices together.

What the Reported Drug Price Conceals

A manufacturer drug rebate contract and a CMS report describe different stages of the same transaction. The contract establishes the concession. The payment and reconciliation records show what happened. The reported number determines how that transaction enters a government payment calculation.

Part D Reconciliation

Medicare reconciles Part D payments after the year ends using allowable drug costs after rebates and other discounts. The sponsor’s reporting therefore has to connect the prescription spending to later concessions.

The reporting definition reaches price concessions obtained by a contracted intermediary whether it keeps the money or passes it to the sponsor. A manufacturer’s payment can matter to the government calculation even when the plan never receives that cash directly. Elixir’s alleged service-fee treatment concerned this reporting obligation.

For someone working on reconciliation, the connection runs from claims and pharmacy payments through manufacturer receipts to the final reported cost. We examine where a receipt was excluded, reclassified or assigned to a different entity, and who approved that treatment.

Medicaid Price Certifications

Drugmakers certify their average manufacturer price and Best Price to CMS. Those numbers help set the rebates Medicaid receives for the health care it pays for.

Bundled discounts can make the comparison harder to see. In the Wyeth Protonix case settled in 2016, the government alleged that discounts on the oral and intravenous products were tied together and concealed from Medicaid. It alleged that Wyeth sought hospital use of the oral drug because patients could remain on it after discharge, when payers including Medicaid would pay nearly full price.

The Justice Department’s account of that arrangement connects the discount offered in one setting to the revenue expected in another. For manufacturer price reporting, the contract bundle and the calculation workpapers have to be read together.

What an Insider Can Compare

The useful evidence connects the promise, the payment, the decision and the report. A manufacturer-contracting employee may know what the rebate purchased. A PBM accountant may know why a receipt moved into service-fee revenue. A pharmacy reimbursement analyst may see the difference between the plan’s charge and the pharmacy’s payment.

We work through those connections with you, tracing the receipts, invoices and reconciliation workpapers to the number reported to the government. We connect the payment to the formulary access or pharmacy behavior it purchased.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. The starting point for our work is the discrepancy you understand from inside the business and its connection to government money.

Why a Bigger Rebate Can Accompany a Bigger Price

Research on rebate economics helps explain the incentive behind these contracts. The Association Between Drug Rebates and List Prices, published by the USC Schaeffer Center in 2020, examined branded drugs from 2015 through 2018 and found that increases in estimated rebates were associated with increases in list prices. The relationship was stronger for drugs without generic competition.

The paper describes the formulary incentive sharply:

For a particular arrangement, we bring the question back to the actual agreement: what access the manufacturer bought, what the plan was promised and what the government was told.

When You Know Where the Rebate Went

If you can explain why a manufacturer payment became a service fee or disappeared from a client’s rebate accounting, speak to one of our whistleblower experts about where the rebate went. We bring in pharmaceutical fraud whistleblower lawyers who understand PBM rebate disputes and work with you to build your strongest case from the contracts, payments and reporting decisions. We stay beside you from that first comparison through the case.