AdvancePCS SETTLES GOVERNMENT CLAIM

Author: Mike Faden

AdvancePCS, the second-largest US pharmacy benefit manager (PBM), has agreed to pay $137.5 million in a settlement involving government charges that include giving and receiving illegal kickbacks. The settlement followed a 6-year investigation by the US Justice Department into the company's business practices.

AdvancePCS also agreed to adhere to a set of business practices that involve greater transparency in its dealings, something critics of PBMs have long demanded. People familiar with the investigation say the agreement is as important as the settlement itself, because it influences the way all PBMs will have to operate in the future.

AdvancePCS, which was acquired by Caremark Rx Inc in 2004, was investigated for business practices going back to 1995, under laws such as the False Claims Act, which is designed to fight attempts to defraud the government. The investigation included whistle-blower allegations by 3 former employees of the PBM.

Among the claims were that pharmaceutical manufacturers paid the company excessive fees for services—in addition to the rebates that are standard industry practice—in return for "favorable treatment" of the manufacturers' medicines in health care plans for government employees and in Medicare contracts. The government was allegedly overcharged as a result. Favorable treatment generally means taking steps to increase the use of certain medicines, such as adding them to a PBM's formulary. The government also investigated claims that AdvancePCS paid other companies to ensure that AdvancePCS was selected as the PBM for federally funded health care plans.

Though AdvancePCS admitted no wrongdoing, the 5-year agreements the company signed are "a form of probation" that commit the company to a wider range of business practices, said John Rector, senior vice president and general counsel at the National Community Pharmacists Association. "They basically have to rewrite their business plan," he said. For instance, AdvancePCS is prohibited from switching health plan participants to a medicine that costs the plan or the participant more than the medicine originally prescribed by the doctor.

The agreements also lift some of the secrecy that has shrouded some of the company's business dealings. AdvancePCS has to tell health care plans how much it gets in rebates from pharmaceutical manufacturers, and it must detail any additional payments. "One of our goals was that health plans would be able to see just how much of a PBM's revenue comes from manufacturers," said Barbara Rowland, an assistant US attorney involved in the investigation. The concealment of those payments has been particularly controversial because PBMs often make much of their profit in this manner, in addition to the fees they charge for administering prescriptions.

Both the private and the public sectors have been increasingly pressuring PBMs to make this information public. Several employers, including Caterpillar, IBM, and Starbucks, are pressuring PBMs not only to disclose drug maker rebates, but also to pass them along to consumers. Legislation forcing this disclosure has passed in some states but failed in others.

But Dan Mendelson, president of Avalere Health LLC, a consulting firm in Washington, DC, said PBM practices have already changed significantly since the 1990s, and knowledge about rebates is more widespread. Also, he noted that the government did not try to stop core PBM business practices—such as negotiating manufacturer rebates. Still, the AdvancePCS agreements are significant. "These are now the rules of the road for everybody," he said.

The AdvancePCS settlement is the first PBM settlement under the False Claims Act, but other similar cases against the 3 largest PBMs are still pending. A federal case against Medco Health Solutions Inc is expected to reach the courts next year. A case against Express Scripts Inc is pending in New York. And AdvancePCS is not off the hook entirely, since the whistle-blowers also filed claims against the company under False Claims statutes in 11 states and the District of Columbia.

Mr. Faden is a freelance medical writer based in Portland, Ore.