Plan sponsors are far too trusting of pharmacy benefit managers (PBMs) when it comes to understanding drug manufacturer rebate revenue. Rebate administration is one of the main services that PBMs offer to governmental entities, self-funded employers, insurers, and managed health care organizations (collectively, "plan sponsors"). PBMs receive two types of rebates: manufacturer rebates and pharmacy rebates. Manufacturer rebates are cash payments made by pharmaceutical manufacturers to PBMs that are theoretically designed to act as drug discounts. Pharmacy rebates are point-of-sale fees or post-sale chargeback (e.g., audit recoupment) that PBMs retain from their member pharmacies. Unfortunately, rebates became a lucrative revenue source for non-transparent PBMs at the expense of plan sponsors, manufacturers, patients, pharmacies and taxpayers.

Most PBMs market themselves as "transparent" and purport to "pass thru" all rebates to plan sponsors. However, recent litigation has brought that into question for some of them. We have seen instances where PBMs secretly use little-known rebate aggregators that are often PBM-owned or affiliated in the manufacturer rebates arena. Plan sponsors hire PBMs to administer and manage pharmacy benefits for their members and beneficiaries. In turn, PBMs negotiate manufacturer rebates with drug companies on brand-name drugs in exchange for placing a particular drug on PBMs' drug formulary. That sounds like a questionable quid pro quo arrangement. Unbeknownst to plan sponsors, PBMs delegate collection of manufacturer rebates to rebate aggregators who keep a large portion of the manufacturer rebates. In fact, it is extremely difficult to grasp the true rebate dollars collected by PBMs and rebate aggregators, in part because publicly traded PBMS carefully guard this revenue and do not report it in their quarterly SEC filings. This is even true for plan sponsors in the public sector. Amazingly, PBMs continue rebate schemes even in the federal payor space. Medicare Part D Sponsors are required to submit direct and indirect remuneration (DIR) reports to CMS disclosing the total amount of rebates, inclusive of manufacturer rebates and pharmacy rebates, retained by PBMs regardless of whether such rebates were passed to Part D sponsors. Sponsors are legally obligated to populate the DIR fee data into the CMS reports. Oftentimes, sponsors receive this data from PBMs, who have performed the rebate collection on behalf of the Part D Sponsors. Indeed, PBMs and rebate aggregators are mandated to provide the following information to Part D sponsors, who in turn provide the same to CMS:

1) The total number of prescriptions that were dispensed. 2) The percentage of all prescriptions that were provided through retail pharmacies compared to mail order pharmacies. 3) The percentage of prescriptions for which a generic drug was available and dispensed (generic dispensing rate), by pharmacy type (which includes an independent pharmacy, chain pharmacy, supermarket pharmacy, or mass merchandiser pharmacy that is licensed as a pharmacy by the state and that dispenses medication to the general public), that is paid by the Part D sponsor or PBM under the contract. 4) The aggregate amount and type of rebates, discounts, or price concessions (excluding bona fide service fees as defined in § 423.501) that the PBM negotiates that are attributable to patient utilization under the plan. 5) The aggregate amount of the rebates, discounts, or price concessions that are passed through to the plan sponsor, and the total number of prescriptions that were dispensed. 6) The aggregate amount of the difference between the amount the Part D sponsor pays the PBM and the amount that the PBM pays retail pharmacies, and mail order pharmacies.¹