Trading Pain for Gain: Addressing Misaligned Interests in Prescription Drug Benefit Administration

Over the last two decades, Pharmacy Benefit Managers (PBMs), organizations that act as middlemen between health plans and drug manufacturers, have become increasingly powerful players in the healthcare industry. PBMs promise to leverage their expertise and ability to aggregate buying power to negotiate lower drug prices and administer prescription drug benefit plans. In practice, however, PBMs are widely criticized for benefitting from, and contributing to, inefficiencies in the prescription drug market, particularly by imposing restrictions on beneficiary access to drugs in exchange for rebates paid to PBMs by manufacturers. To the extent that the rebates are retained by PBMs, or otherwise do not result in a benefit to the beneficiaries, this practice amounts to trading the pain of plan beneficiaries for the PBM’s own gain. Despite this criticism, regulatory and enforcement efforts directed against PBMs have been anemic. Existing structural and legal protections for beneficiaries are largely ineffectual. While this problem is widely acknowledged, regulators have failed to pass new laws that successfully address the challenges posed by the insertion of PBMs as middlemen into the web of prescription drug benefits and reimbursement. Regulators express frustration with the complexity of balancing the interests of beneficiaries with PBMs’ aspirational goal of cost-control, as well as with addressing the inherent conflict of interest in PBMs’ competing goals of profitability for themselves and cost containment for their clients. Lawsuits alleging PBM mistreatment of beneficiaries are sparse, and a consistent vision of what is and is not permissible to PBMs has not emerged from the case law. But the Federal Anti-Kickback Statute can—and there are indications that it increasingly will—be used to regulate manufacturer-PBM rebate arrangements. The U.S. Department of Justice recently settled a case predicated on an allegation that a pharmaceutical manufacturer, Roche, violated the Federal Anti-Kickback Statute when it paid a health insurance company, Humana, a kickback of lump sum debt forgiveness for formulary placement, conditioned on the exclusion of a competitor. Also, the federal government recently adopted a rule applicable to Medicare Part D plans that radically reconfigures the existing incentives by prohibiting manufacturers from extending rebates other than at the point of sale, and from making the rebates contingent on the plans or PBMs taking various steps with respect to encouragement of use of the drugs. These developments likely presage increased use of the Anti-Kickback Statute to attack rebating arrangements and underscore the need for PBMs to reevaluate their current practices with respect to their relationships with manufacturers to ensure that they are complying with the law. In this Article, we argue that the Federal Anti-Kickback Statute and its state law analogs, state anti-kickback statutes, can be used to effectively protect beneficiary interests against manufacturer-purchased, PBM-imposed restrictions on access to drugs. We also identify key issues that may be hampering effective enforcement, and suggest an analysis that effectively addresses these issues. We demonstrate that current law is best understood to allow manufacturers to extend discounts and rebates to plans (either directly or through PBMs) but not to PBMs, and that those rebates cannot make those payments contingent on PBMs or plans adopting specific preferences for drugs. By embracing these principles, PBMs can protect beneficiary interests, achieve enforcement certainty, and perhaps ward off the ultimate adoption of more radical restrictions