Drug reimbursement shenanigans

In the drug industry, there are different types of abusive practices that occur:

  1. Drug companies encouraging off-label use (and/or “recreational” use) of their drugs, potentially harming patients’ health.
  2. Drug companies encouraging doctors to increase dosages and drug use, potentially harming patients’ health.
  3. Drug companies encouraging waste to increase the volume of drugs sold.
  4. Pharmacy benefits managers (PBMs) selling out their clients (payors) in exchange for kickbacks from drug manufacturers.
  5. Drug manufacturers using “specialty” pharmacies to bilk payors, tricking the payors into reimbursing expensive drugs that they would otherwise not reimburse.  Unlike traditional pharmacies, captive pharmacies can go the extra mile to obtain (possibly improper) drug reimbursement for the drug manufacturer.

This blog post will look at #4 and #5.

In the lawsuit between Isolani versus Russell Reitz / R&O, Isolani’s lawyers filed an exhibit showing which payors were paying for expensive Valeant drugs.  I found this exhibit interesting.  In my opinion, any smart PBM or payor should have caught onto the shenanigans that Valeant was up to.  Valeant had an unusual strategy in that it would sometimes give away free or heavily-discounted drugs.  Here’s a recap of my post “Valeant: Is giving away cheap drugs a good business model?“:

If a payor simply refused to reimburse Valeant, the patient would still get the drug for free or a very low price.  Valeant did this to make the process easy for patients and doctors.  When a doctor prescribes an expensive Valeant drug to a patient, neither the doctor or the patient had to worry about the payor refusing to pay the drug manufacturer.  The patient would receive the drug regardless of whether their insurance company approved reimbursement, with extremely low out-of-pocket costs for the patient.  This made it easier for doctors to recommend expensive drugs to their patients.  Valeant’s system works as long as a few payors pay inflated amounts of money for Valeant’s drugs.  I’m not actually sure if this strategy is a good one; Horizon (HZNP) has struggled with a similar business model.

What I found interesting is that R&O’s reimbursement records show that some parties like Optum RX sent very little money to R&O while others sent a lot.  I can come up with a few different explanations:

In my mind (though I could be wrong), any party giving money to Valeant (via R&O/Isolani/Philidor) either:

  1. Failed to figure out that R&O was being controlled by Philidor, which was affiliated with Valeant.  Or…
  2. May have been receiving “rebates”.

Regardless, payors should not be too happy with their PBM if the PBM approved reimbursement to pharmacies affiliated with Philidor.

Results of my examination

I took a look at the document that Isolani’s lawyers filed as an exhibit.  You can find this file on my public Dropbox folder as 12.pdf.  The PDF contains 400+ scanned pages of company records.  TheSkeptic21 sent me an OCRed version of this PDF.  I used Excel to find instances where certain sequences of characters appeared in the OCRed version.  Here is a summary of the Excel regular expressions (“phrase”) I looked for:

Phrase Count
Preferred 20015
CRK- 13725
caremark 9541
ADV 7984
cat-? 4076
BCBS 3473
aetna 3088
PRM 3075
ESI 2925
ESI???*** 2925
medco 2822
ILDR 2153
AGS 1770
claimcr 1129
feprx 963
wellpoint 940
humana 925
express*scripts 637
ESl 588
reg- 585
regence 566
healthnet 371
MDP 324
wellcare 274
Highmark 273
BIN 246
Net card systems 244
blue 222
catamaran 200
publix 142
Med*mpact 115
now*through 68
Futurescripts 41
VRx*Pharmacy 24
NVT 19
Prime 18
Navitus 16
Nike 16
cigna 15
Prime*therapeutics 14
wellmark 6
ChampVA 6
optum 6
ESlMedcRO 1

*Disclaimer:  There are issues with my methodology.  See Appendix B of this post for details.

As you can see, “ORX” and “optum” appear 7 and 6 times respectively.  Optum did virtually no reimbursements with R&O.  The Reuters news article linked to earlier suggests that Optum RX sent cease and desist letters to Philidor as well as R&O.  The court exhibit supports the notion that Optum RX figured out what was going on.  Catamaran is a company that merged with Optum RX.  The character sequence “catamaran” shows up 200 times.

However, not everybody in healthcare industry was sending cease and desist letters to Philidor and R&O.  Other court exhibits between Reitz-versus-Isolani and Reitz-versus-VPNA shows that millions of dollars of reimbursement checks were sent to R&O’s physical location (for a timeline, see “(Valeant) Shipping drugs knowing that you probably won’t be paid“).  I would guess that many of the smaller payors did not figure out the situation that was going on.  But what about large PBMs like Express Scripts?

Really… what was Express Scripts doing?

Express Scripts runs an excellent blog where they talk about issues that affect payors.  Here are some key posts:

The Glumetza post calls Valeant out on its use of captive pharmacies:

As we have repeatedly demonstrated, Express Scripts will always leverage market competition to lower drug costs and keep medicine within reach of the patients who need it. We did it by removing Valeant’s captive pharmacies from our network, and we’re doing it again by excluding Valeant’s Glumetza from our formulary.

So here’s the part that doesn’t add up.  Why does Express Scripts show up so frequently in the records for R&O?  Their blog does an excellent job of describing abusive practices that occur in the business; I would encourage you to read the two posts I linked to above.  I think that there are a lot of smart people at Express Scripts.  So I wonder about Express Script’s past relationship with Valeant.

I would also point out that many of the large PBMs have paid settlements over their business practices, though without admitting wrongdoing.

By the way, Express Scripts owns a specialty pharmacy

Express Scripts has paid a settlement over its specialty pharmacy Accredo (“Express Scripts to Pay $60M to Settle Novartis Kickback Scheme”), which it acquired when it purchased Medco.  If you search ESRX transcripts (e.g. earnings, investor conferences), you will see that company insiders have spoken highly about Accredo both before and after the Medco acquisition.  A Jan 11, 2016 transcript shows:

Stepping back and looking at specialty a little bit more broadly, it’s very clear that at Accredo, our specialty pharmacy is a strong, high performing asset. ( snt.io/A7hhsmc ) Transcript: Express Scripts Holding Co at JPMorgan Healthcare Conference 01.11.16

I would hope that Accredo has changed its “secret sauce” since its acquisition by ESRX.  (To be fair, it may have.  I have no evidence either way.)  I would hope that Accredo won’t attract settlements going forward.

*Disclosure:  No positions in VRX or ESRX or UNH.


Appendix A: the specialty pharmacy test

When it comes to so-called specialty pharmacies, there’s a simple test: does the specialty pharmacy have a legitimate medical purpose?  Originally, specialty pharmacies solved medical needs such as:

  1. High complexity.  Complex treatments for conditions (e.g. AIDS, cancer, etc.) that require a multitude of drugs.  The specialty pharmacy provides a much-needed service in looking for potentially problematic drug interactions.
  2. Drugs with difficult storage and/or shipment issues.

If the pharmacy doesn’t specialize in helping patients, its “specialty” may be in bilking payors.  Philidor and R&O would easily fail this test given that they handle drugs that aren’t very complicated from a medical perspective.  To be fair, Express Script’s Accredo pharmacy does pass this test.

Appendix B: methodology problems

The OCR (optical character recognition) did not work very well on the PDF that contained scanned images of company records.  For example, the uppercase I in “ESI” was sometimes confused as a lowercase L.  As well, there may be other problems with my methodology.  Please do not expect these counts to be accurate; there are issues with OCR.  A more accurate (and very time consuming) solution would be to manually transcribe 400+ pages.

2 thoughts on “Drug reimbursement shenanigans

  1. Pingback: US health insurers – Glenn Chan's Random Notes on Investing

  2. Pingback: US healthcare is worse than a free market system – Glenn Chan's Random Notes on Investing

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