SEC Begins to Knock Down Wall of Secrecy Between PBMs and Drug Manufacturers

The Securities and Exchange Commission (SEC) recently made public letters it had sent to pharmacy benefit manager (PBM) Express Scripts in late 2017, along with Express Scripts’ responses thereto. This recent exchange of correspondence again emphasizes 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 are dictated not by their suitability to treat a particular condition, but rather by whether the PBMs receive a rebate from the manufacturer of such drugs. Additionally, the medical community has routinely identified non-formulary drugs as being equally, 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, or 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.

A version of this article was originally published here on the website of Duane Morris.


Jonathan L. Swichar is a Partner of Duane Morris LLP, and co-chair of Duane Morris’ Pharmacy Litigation Group. He regularly represents healthcare providers in the investigation and defense against healthcare-related offenses in regulatory, civil and criminal proceedings. He also represents numerous healthcare providers, including pharmacies, throughout the United States in disputes with insurance companies and pharmacy benefit managers. Specifically, Mr. Swichar represents such providers in connection with, among other things, violations of non-compete agreements, issues in gaining entry into an insurance network, attempts by insurance companies/pharmacy benefit managers to terminate providers from such networks, reimbursement disputes and refusals by insurance companies/pharmacy benefit managers to abide by state “any willing provider” laws.

Bradley A. Wasser is an associate based in Duane Morris’ Philadelphia office and a member of the Pharmacy Litigation Group. He focuses his pharmacy litigation practice in representing health care providers and pharmacies throughout the United States in disputes with insurance companies and pharmacy benefit managers.