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A Pharmacy Benefit Manager (PBM) is a third party administrator contracted by health plans, employers, unions and government entities to manage prescription drug programs. A PBM acts as a fiscal intermediary between insurers/payors and pharmacies.
A Pharmacy Benefit Manager (PBM) is a third party administrator contracted by health plans, employers, unions and government entities to manage prescription drug programs. A PBM acts as a fiscal intermediary between insurers/payors and pharmacies.
There is an old saying, 'Possession is 9/10ths of the law,' and that applies to PBMs. At the end of the day, the PBM 'possesses the pharmacy’s money.' Most, if not all, PBM contracts give the PBM the right to terminate its contract with the pharmacy with, or without, cause. 'With cause' can include misrepresentations by the pharmacy to the PBM, such as answers in a recredentialing questionnaire; failure by the pharmacy to adhere to the requirements imposed by the PBM on its member pharmacies, and a breach by the pharmacy of terms of the PBM contract. 'Without cause' means exactly what it says. If the PBM simply 'does not like what the pharmacy is doing,' then the PBM can terminate the contract.
PBM Recredentialing
PBMs validate the credentials of pharmacies to ensure they are in good standing with state and federal laws and meet quality performance standards. They will recredential pharmacies every year or couple of years to ensure they meet the PBMs’ participation requirements.
Recredentialing questionnaires inquire about a number of issues, including whether the pharmacy is engaged in mail order or compounding; whether the pharmacy’s marketing reps are W2 employees or 1099 independent contractors; and the collection of copayments.
Recredentialing Questionnaire: Examples of Questions and Certification
Questions Pertaining to Mail Order
Questions Pertaining to Compounding
Question Pertaining to Copayments
Question Pertaining to Marketing
Questions Pertaining to Affiliated Pharmacies
Question Pertaining to Disciplinary Actions
Questions Pertaining to Legal Compliance
Certification
PBM Audit
PBMs audit pharmacies in order to detect any improper payment by the PBM on behalf of the plan and to verify that the patient received the correct medication in the appropriate dose; and to verify that contract adherence. A challenge to pharmacies is the incorporation of the PBM’s policy manuals into its contracts. The manuals can end up having the same importance as the contracts.
PBMs can conduct field/on-site audits at the pharmacy. Audits by telephone are usually used to correct billing for a small number of claims. Desk/mail audits use automated means to review pharmacy claims and encounter data received by the PBM.
Examples of Reasons for Termination by the PBM
Pharmacy is Engaged in Mail-Order
Many PBMs have their own mail-order pharmacy. PBMs do not like their contract retail pharmacies to compete with the PBMs’ mail-order pharmacies. Most recredentialing questionnaires inquire about the extent of the pharmacy’s mail-order business. If the PBM determines that the pharmacy is engaged in mail-order beyond a certain threshold, then the PBM may decide to terminate the contract.
Pharmacy is Engaged in Compounding

PBMs have been 'burned' by some compounding pharmacies. For several years, a number of compounding pharmacies contracted with marketing companies to generate patients who wanted compounded pain and scar creams. The compounding pharmacies would dispense the creams and bill the PBMs an exorbitant amount per month/per patient for the creams. The commercial insurers came down on the PBMs. For these and other reasons, PBMs do not want their contract retail pharmacies to be engaged in compounding in a meaningful way.
Pharmacy is Routinely Waiving Copayments
Federal law, most state laws, and most PBM contracts require the pharmacy to 'take reasonable steps' to collect copayments. Pharmacies are prohibited from routinely waiving copayments. A pharmacy can waive copayments, on a patient-by-patient basis, if the patient submits financial information justifying the waiver.
Pharmacy Markets Through 1099 Independent Contractors
The federal anti-kickback statute (“AKS”) states that a pharmacy cannot 'give anything of value' to a person/entity in exchange for the person/entity referring (or arranging for the referral of) patients to the pharmacy who are covered by a federal government health care program.
If a pharmacy pays percentage compensation to a 1099 independent contractor (individual sales rep or marketing company) that arranges for the referral of government health care program patients to the pharmacy, then the AKS is implicated. On the other hand, it is acceptable for the pharmacy to pay commissions to a bona fide W2 employee. 

Pharmacy Moves Patients From One Affiliated Pharmacy to Another 

Assume that a pharmacy is about to have its contract terminated by a PBM. In an attempt to “stay one step ahead of the posse,” the pharmacy may move its patients to an affiliated pharmacy. This will be repeated a number of times. By including questions on the recredentialing questionnaire about affiliations, the PBM intends to shut this process down.
Response to PBM Termination Letter
The first thing that the pharmacy needs to realize is that the PBM has the superior bargaining position. The PBM 'possesses the pharmacy’s money' and has an unlimited capacity to litigate with the pharmacy. The approach that has the best chance of being successful is for the pharmacy to contact the PBM in order to 'work the problem.' The termination letter will likely give a reason for the termination. The pharmacy should attempt to work with the PBM to address—and resolve—that 'reason.' If the pharmacy is unsuccessful at resolving the termination 'at the lower level,' then the pharmacy’s attorney should reach out to one of the PBM’s in-house attorneys.
Examples of Pending Litigation Against PBMs
Park Irmat Drug Corp. v. Express Scripts, et al (17-cv-00979 E.D. Mo.), was filed in March 2017. Allegedly, Express Scripts and other PBMs suppress competition by independent pharmacies that desire to provide mail-order pharmacy services. The complaint claims that Irmat had disclosed to Express Scripts in a July 2015 recredentialing application that 65% of its business was its mail-order pharmacy operations. The complaint alleges that a month later, Express Scripts renewed Irmat’s credentials to be in the Express Scripts pharmacy networks and, based on that approval, Irmat invested millions of dollars in its nationwide mail-order business. The complaint alleges that in May 2016, Express Scripts sent Irmat a cease-and-desist letter and officially terminated the contract two months later.
Precision Rx Compounding LLC et al., v. Express Scripts Holding Co. et al. (4:16-cv-00069, E.D. Mo.) was filed in January 2016. Pharmacies accused Express Scripts and other PBMs of cutting the compounding pharmacies from the market in violation of federal and state antitrust laws, the Florida Deceptive and Unfair Trade Practices Act, and other statutes, causing more than $100 million in damages. 

Albert's Pharmacy, Inc. et al v. Catamaran Corporation (3:15-cv-00290-UN2, M.D. Pa.), was filed in February 2015. Fifty-five independent pharmacies sued Catamaran, alleging that Catamaran inflated patient costs while simultaneously underpaying pharmacies.
Jeffrey S. Baird, Esq. is Chairman of the Health Care Group at Brown & Fortunato, P.C., a law firm based in Amarillo, Texas. He represents pharmacies, home medical equipment companies, and other health care providers throughout the United States. Mr. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization. He can be reached at (806) 345-6320 or jbaird@bf-law.com.