Pharmaceutical Benefits Managers

Pharmaceutical Benefits Manager (“PBM”) firms administer pharmacy benefits for its clients, including insurance companies, self-insured employers, managed care organizations, and government programs such as Medicare, Medicaid, and federal employee unions. The PBM’s role is to manage client plans according to each plan’s provisions, which may include certain restrictions on where prescriptions can be filled or requiring preauthorization for a prescription. They stand in between you, your pharmacy, and your insurer. By representing large numbers of clients, PBMs are able to negotiate with drug manufacturers for lower prices. Additionally, PBMs provide services such as mail-order pharmacies and online refill requests. By some estimates, PBMs impact over 80% of all prescription drug coverage.

Some individuals are eligible both under Medicaid and under a plan administered by a PBM. If these dual-eligible individuals tell a pharmacy that they are covered under Medicaid instead of under their privately-insured plan, a state Medicaid agency will pay the bill. If that agency discovers the individual also has a privately-insured plan, it must seek reimbursement from that third party private insurer. If the federal government provides funding to the state agency, and that agency later recovers from a third party, it must return a portion of the reimbursement to the federal government.

The potential for fraud lies in the often complex arrangement between the PMB and insurance companies whereby the PBM tries to avoid paying claims and passing them off onto Medicare or Medicaid. Between 2004 and 2008, the three major PBMs have faced six major federal cases involving allegations of fraud, misrepresentation, unjust enrichment, kickback schemes, and/or failure to meet ethical and safety standards to the tune of $371 million in damages.

PBM Fraud may Include:

  • Inducing doctors and pharmacies to substitute more expensive medications or limiting the use of generics simply to increase Medicaid reimbursement amounts
  • Shorting Medicare and Medicaid prescriptions
  • Falsely inflating the price of a prescription drug
  • Retaining a manufacturer rebate when it should have been passed along to Medicare/Medicaid customers
  • Any false statement made to the government that results in Medicare or Medicaid overpaying a PBM may be a violation of the FCA

The retention of rebates from manufacturers has particularly plagued Medicare Part D and has cost the program billions of dollars. Since PBMs drastically increase market share for a manufacturer’s drug, the manufacturer is required by law to pay the PBM a rebate. The government has an interest in ensuring this rebate finds its way to Medicare/Medicaid recipients to lower program costs; however rebates are often not easily identifiable, and the Office of the Inspector General has recently made rebate transparency a priority.


In 2006, pharmacy benefits manager Medco Health Solutions agreed to pay the U.S. government $155 million to settle complaints under the federal and multiple state false claims acts. Medco is the nation’s second largest pharmacy benefits manager and manages drug benefits for over 60 million Americans. Among the many allegations of fraud includes the charge that Medco induced doctors to prescribe more expensive drugs to Medicare and Medicaid patients irrespective of their medical needs. Additionally, it was alleged that the company shorted pills from its prescriptions. Since this conduct caused Medicare and Medicaid to overpay Medco for its services, it was a violation of the FCA.


In 1999, a relator who formerly worked for Caremark, Inc., filed a qui tam action claiming that Caremark violated the FCA by making false statements to avoid liability to state Medicaid agencies. Specifically, the relator alleged that Caremark assigned “dummy codes” instead of actual pharmacy codes to claims for which Medicaid requested a reimbursement for dual-eligible individuals. Caremark’s actions allegedly resulted in substantial losses to the Government and state Medicaid agencies because they had to cover claims that Caremark should have covered. This kind of conduct constitutes a clear violation of the False Claims Act.

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