'I just see fraud all over this': Insiders detail how clawbacks drive up drug prices, hurt pharmacies

Elie Bahou says he remembers well when the order came down about a decade ago from the front office of his multibillion-dollar employer: Come up with new tactics to make more money.

"We were sitting around one day looking for ways to generate more revenue and the C suite kept pushing us for more and more," Bahou recalled. “That was my employer trying to squeeze more and more and more dollars."

Thus was born a concept you've probably never heard of: clawbacks.

Today, this money-making maneuver by the middlemen in America's drug supply chain is raising the cost of prescription drugs you buy and hurting your community pharmacy’s chances of staying in business — especially in rural and other underserved areas.

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So why should you care?

“Pretty much because you’re getting ripped off,” said Delaware state Auditor Kathleen McGuiness, whose office completed a study in June on the lack of transparency and accountability in drug pricing.

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Another reason that might pique your interest: This type of profit maximization, which so far has escaped substantive public scrutiny, is being quietly investigated by legal authorities in multiple states, sources tell The Dispatch.

Bahou said he helped develop clawbacks during his six years as senior vice president for network relations and contracting at OptumRX, working out of corporate headquarters in Irvine, California, for the PBM subsidiary of UnitedHealth Group. The latter is the nation's biggest health insurer by far, reporting more than a quarter trillion dollars in annual revenue.

“I hate to say this, but I was one of the ones who started this stuff," Bahou said. "United is a very aggressive company.”

Drew Krejci, vice president of corporate communications for Optum, says the company does not engage in clawbacks, so neither the public nor pharmacies suffer.

"It’s just making sure everything is reconciled over a period of time," he said. "So there’s no money that they’re losing.”

The quick take on how clawbacks work

Clawbacks start when you (or your health insurer) pay for prescription drugs at the pharmacy. Under a contract the pharmacy or an organization representing it signs, the PBM decides how much the pharmacy gets to keep.

In pre-clawback days, that was the end of the transaction. Today, however, if the PBM determines it didn't make enough from the deal, the contract allows it to "claw back" additional money from the pharmacy months later to make up the difference.

Pharmacies agree to this, because they have no realistic choice other than to agree to a PBM's terms that permit it to claw back money from pharmacies months after a drug is sold to a consumer.

The nation's health care is highly consolidated. Just three PBMs control more than 75% of the U.S. market, and they stand among the largest corporations in the U.S. CVS Health (parent of CVS Caremark, a PBM) ranks 4th on the Fortune 500; PBM Optum's parent company UnitedHealth Group is 5th; Cigna, parent of the PBM Express Scripts, is No. 13.

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It comes down to this: If you own a pharmacy you either take the deal offered by the PBMs — clawbacks clause and all — or you can’t get prescription drugs for a large percentage of your customers.

And that means you go out of business — which is happening frequently to pharmacies throughout the U.S.

“In what other industry do you get paid for something and they just come back and take back money?” said one 30-plus year pharmacist in northeast Ohio, who spoke only on the condition of anonymity for fear of retaliation against the business by powerful PBMs.

“There’s no rhyme or reason to how much they take back on a particular claim,” said the veteran pharmacist, forced to pay as much as 7% of his annual revenue for PBM clawbacks. “There’s nothing I can do about it anyway.”

Eric Jergens, owner of the Madison Avenue Pharmacy in Springfield, said, “I call them 'pay to play' fees. And I have been absolutely hammered by those.”

About to turn 60, he lamented that his pharmacy is making less now than at any time in his career. “They’ve almost ruined or demolished independent pharmacies over the last several years.”

Scott Knoer, CEO of the American Pharmacists Association and former head pharmacist at the Cleveland Clinic, said a crackdown on PBMs starting in his former home state by lawmakers, the attorney general and Department of Medicaid helped spark the move to clawbacks nationwide.

“PBMs got caught red-handed in Ohio, and rather than get the message, they do what they always do — evade, pivot, adapt, and take even more. This is just the latest PBM maneuver meant to deceive taxpayers and inflate the costs of prescription drugs for us all,” he said.

“I can’t believe that after all we’ve been through in Ohio, big PBMs have the hubris to double down on their medication markups. They either thought they could get away with it, or they are purposely spitting in the face of state officials.”

'It directly affects your premiums'

Bahou is now chief pharmacy officer for Providence St. Joseph Health, a network of 52 hospitals and nearly 1,100 clinics sprawling from Alaska to Texas. That puts him on the other end of the clawback equation; Providence distributes 875,000 prescriptions a year.

Bahru said clawbacks cost Americans millions of dollars on their prescriptions. His colleague, Long Trinh, Providence's regional director for pharmacy operations and compliance in Oregon, called the PBMs' strategy "a likely culprit and contributor to why we are the most expensive country in the world compared to other nations as it relates to health care expenditures."

Scott Pace, former CEO of the Arkansas Pharmacists Association who's now a partner with Impact Management Group, said clawbacks initially came into play on prescriptions where the total cost of the drug was less than the patient’s copay. That difference was "clawed back" from the pharmacy by the PBMs.

A University of Southern California study found clawbacks totaling $135 million in just the prescriptions it examined in 2013. Projecting that clawback total nationwide would have easily topped $2 billion.

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"It directly affects your premiums. As a consumer, it directly affects your pocketbook," Pace said. "It directly affects your choice of health care providers."

Representatives of PBMs say there’s nothing untoward about their arrangement, officially called generic effect rate contracts (along with parallel "effective rate" contracts for brand name drugs and pharmacy dispensing fees). These middlemen between pharmacies and drug makers/health insurers not only dispute that their ploy should be called "clawbacks," which are illegal in Ohio and several other states, they say they outright oppose the practice.

They would not elaborate on how they define "clawbacks" nor respond to additional inquiries about their role in determining drug prices.

“PBMs use value-based pharmacy contracting to encourage the most-efficient purchasing as well as the highest-quality pharmacy care. Increasing the use of lower cost alternatives with a generic effective rate is key part of that strategy,” said Greg Lopes, a spokesman for the PBMs' trade group, the Pharmaceutical Care Management Association.

Controversial PBM strategy widespread

One fact that's not in dispute: Clawbacks affect consumers in all 50 states.

They're collected in Delaware despite a 2019 ban, said McGuiness, the state auditor who's also a pharmacist. “That’s happening pretty much everywhere. It’s a United States problem.”

At the other end of the country, Susan Bonilla confirms the wide reach of clawbacks, although they are dubbed “post-transaction fees” in California.

“This is a nationwide issue,” said Bonilla, CEO of that state’s Pharmacists Association. “That is a routine and a regular practice of the PBMs in California.”

Dozens of pharmacists interviewed by The Columbus Dispatch across several states confirmed the setup.

“We were seeing huge losses in February and March, like hundreds of dollars on claims,” said Theresa Tolle, owner of Bay Street Pharmacy in Sebastian, Florida, and president-elect of the American Pharmacists Association. Patients end up losing too, she said.

A pharmacist in northern Ohio said he was hammered for $80,000 in clawbacks in February for all of 2020.

Clawbacks continue despite bans 

Pharmacy benefit managers say they are not violating state restrictions on clawbacks because the PBMs do not use clawbacks. In fact, the industry's trade group says it opposes the practice, citing support of a 2018 law co-sponsored by Maine Republican Sen. Susan Collins and Missouri Democratic Sen. Claire McCaskill.

However, that Right to Know Drug Prices Act bans health insurer/PBM gag clauses preventing pharmacies from disclosing price information with consumers. It neither mentions clawbacks by name nor concept. The trade group declined to elaborate further on the measure or why they cited a bill apparently having nothing to do with clawbacks.

The 2019 Delaware ban on clawbacks was followed this summer by a bill designed to enhance oversight and transparency of PBMs.It awaits the signature of Gov. John Carny.

The New Jersey legislature unanimously passed a bill in late June that would require PBMs to disclose clawbacks under the state's Medicaid program. Both branches of the New York legislature are considering a proposal that would mandate reporting of PBM clawbacks.

North Dakota's attempt to bar clawbacks is part of a larger PBM reform law being challenged in the 8th U.S. Circuit of Appeals, whose earlier rejection of the statute was overturned by the U.S. Supreme Court. About three dozen states (not including Ohio) have joined the battle to uphold the regulations.

Ohio outlawed clawbacks — saying no PBM "shall retroactively adjust a

pharmacy claim for reimbursement for a prescription drug" — as part of the state budget approved in July 2019. The only exceptions: fixing a technical error or responding to an audit.

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Multiple attempts to contact representatives of Express Scripts, as well as the PBM's parent company, Cigna, went unanswered.

Tracy Ogden, head of corporate communications for CVS Caremark, said, "It has never been our practice to engage in so-called clawbacks and we’ve been — and remain — in full compliance with the Ohio law. Reconciliations transparently described in 'effective rate' contracts signed by pharmacies in our retail network are not clawbacks."

But state Rep. Thomas West, a Canton Democrat, isn't so sure. He and Cincinnati-area GOP Rep. Scott Lipps co-sponsored the anti-clawback provisions that would up in the state budget.

"It doesn’t pass the smell test," West said. "I just see fraud all over this."

Calling the 2019 legislation “a big win in the fight against PBMs and to hold PBMs accountable for drug costs,” West says state officials must determine if Ohio law is being broken.

He also wondered if federal officials should get involved as well, because clawbacks typically happen so long after the original pharmacy drug sale that they don't make it into official drug-pricing records. That could mean false data are being used by government offices at both the state and federal levels about the true cost of Americans’ prescription drugs.

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On July 1, the Federal Trade Commission singled out PBMs among groups targeted for stepped up enforcement. New Chair Lina Khan said, "Several of these industries are highly concentrated and there is widespread concern about unfair methods of competition or unfair or deceptive practices."

Maureen Corcoran, Ohio's Medicaid director, said taxpayers' payments for Medicaid — the federal-state health insurance program for the poor and disabled — could be inflated if states don't take into account clawbacks. The Buckeye State uses a method that dodges the clawbacks dilemma, she said.

Ohio law requires the PBMs and the Medicaid managed care organizations that hire them to make clawback data available to the state upon request. Corcoran said after The Dispatch inquired, the department asked one of the state's five managed care groups if it had the numbers. The company said no.

Who should get the blame for today's high prescription drug prices?

The controversy over clawbacks is a microcosm of the overall debate about drug prices. The key players — including pharmaceutical companies, health insurers, PBMs, drug wholesalers and pharmacies — form a circular firing squad and blame each other for the high cost of prescriptions.

For PBMs, the villains on clawbacks are obscure entities called pharmacy services administrative organizations, or PSAOs for short. For a flat fee of typically of a few hundred dollars a month, these companies facilitate financial transactions between pharmacies and PBMs, and represent pharmacies in analyzing coverage provided by PBM contracts. The PSAOs have no decision-making or price-settling role.

As in the PBM world, these organizations are highly concentrated. The biggest three represent about 77% of independent U.S. pharmacies, according to Pace, the former Arkansas Pharmacists CEO who now works with PSAOs.

And each of those large PSAOs is associated with one of the big three drug wholesalers that together control 90% of that market: Cardinal Health (whose PSAO is LeaderNET), based in suburban Columbus; AmerisourceBergen (Elevate), located northwest of Philadelphia; and McKesson (Health Mart Atlas) of Irving, Texas.

Two factors make the clawbacks issue especially complicated.

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One is that it never involves just a single contract involving a PBM, pharmacy and PSAO. Instead, a pharmacy typically has dozens of such contracts. That makes it difficult to track whether the pharmacy is due money or owes money to achieve the reimbursement rate in the PBM contract, which is based on a drug's average wholesale price.

And the PSAO rolls together drug transactions from all its clients and uses this aggregated total to determine if the PBMs' reimbursement rate has been met. In the case of Elevate, for instance, that aggregation includes more than 5,000 pharmacies that could be anywhere in the U.S.

The PBMs say their contracts technically are with the PSAO working on behalf of the pharmacy, and not the pharmacy itself. Thus the responsibility for any problems with clawbacks falls to the PSAO, they say.

"We don’t have the relationship with the pharmacy," said Krejci, the spokesman for OptumRX. "We don’t know contractual arrangements between the PSAOs and pharmacies. ... No one’s clawing back, you’re getting paid what you should have based on your contract with the PSAO."

None of the pharmacists, pharmacy organizations nor academics interviewed by The Dispatch agree with this central contention from the PBMs. They said that their PSAO was representing them and helping to deal with numerous rate and rule changes the PBMs can impose unilaterally.

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Andy Becker, vice president of pharmacy with West Virginia-based Fruth Pharmacy, said his small chain of drug stores in three states doesn't use a PSAO, yet still gets charged clawbacks by the PBMs.  

In turn, the PSAOs and drug wholesalers are on the pharmacists' side in this one.

Retroactive clawbacks "threaten the viability" of community pharmacies, whose value was underscored during the COVID-19 pandemic, said Francesca Gunning, director of external communications for AmerisourceBergen.

"We are advocating for greater transparency in this process and would like to see a future where independent pharmacists are not faced with PBM restrictions dictating which patients they can or cannot help and where retroactive fees no longer exist."

Bahou discounts the blame PBMs put on other entities.

“I can tell you it’s not true,” he said.

A grant from the nonpartisan, nonprofit National Institute for Health Care Management helped pay for research for this story; the organization had no input on its content. 

drowland@dispatch.com

@darreldrowland