This recent exchange of correspondence again reiterates the great lengths Express Scripts and other PBMs have engaged in to conceal information relating to rebates received by drug manufacturers. 

The Securities and Exchange Commission (SEC) recently made public letters it sent to pharmacy benefit manager (PBM) Express Scripts in late 2017, along with Express Scripts’ responses thereto. This recent exchange of correspondence again reiterates the great lengths Express Scripts and other PBMs have engaged in to conceal information relating to rebates received by drug manufacturers. More importantly, by its correspondence to Express Scripts, the SEC is taking a meaningful step toward exposing, and hopefully eliminating, covert PBM-drug manufacturer financial arrangements and how they impact patient healthcare.

Commentators routinely opine that decisions as to which drugs individuals will be authorized to obtain by PBMs is dictated by whether the PBMs receive a rebate from the manufacturer of such drugs. These commentators reason that the drugs being incorporated into PBM formularies are not chosen based upon their suitability for a particular condition, but rather on whether manufacturers of those drugs are willing to provide the PBM a rebate. Additionally, the medical community has routinely identified non-formulary drugs as being equal, if not more effective, than many formulary drugs. However, because manufacturers of such non-formulary drugs do not provide rebates to the PBMs, non-formulary drugs are more expensive to patients even if they are more effective than drugs on the formulary.

In previous SEC filings, Express Scripts has not separately disclosed gross rebates received from drug manufacturers. Instead, Express Scripts lumps its rebates receivable into its trade receivable—the receivables it obtains from its customers—concealing the actual amount of manufacturer rebates it receives. According to the SEC, because drug manufacturers do not appear to be PBM customers, Express Scripts is in violation of Rule 5-02.3 of Regulation S-X. That regulation requires separate disclosure of receivables from customers and others.

In response to the SEC’s inquiry, Express Scripts responded that in future filings it will provide disclosures quantifying separately receivables from customers, rebates from pharmaceutical manufacturers and receivables from others. In the same response, Express Scripts provided its first disclosure through a breakdown of receivables for the period ending December 31, 2016. Express Scripts revealed that over 30 percent of its revenue is from drug manufacturer rebates, with a rebate receivable of just over $2.2 billion out of a total receivable of $7 billion. By the end of September 2017, Express Scripts reported that its rebate receivables were $2.5 billion out of a total $6.8 billion.

While PBMs are not required to reveal the extent to which rebates influence the drug that is dispensed to the individual, the specifics of their lucrative rebates and the actual amount truly passed along to the customers, including health insurance plans and employers, we can expect to see continued disclosure of the total quarterly rebates received. Unfortunately, it does not appear that the SEC’s recent action will require disclosure of specific arrangements between manufacturers and PBMs, but only a calculation of a final benefit to the PBMs as a result of the arrangement.

In light of the efforts in which some PBMs have engaged to keep all aspects of these relationships private, and continued calls from consumers that they be provided insight into the actual criteria being utilized by PBMs in deciding to what extent drugs are made available to them, the SEC’s action is at least a promising first step toward knocking down this wall of secrecy.

Duane Morris attorneys will continue to monitor developments in this area and other related issues, and report on news that might be important to our clients and others in the industry.

For Further Information

If you have any questions about this Alert, please contact Jonathan L. Swichar, Bradley A. Wasser, any of the attorneys in our Pharmacy Litigation Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.