To understand reason #178 as to why our healthcare costs are completely out of control, we’ll turn our attention to pharmacy middlemen. For two decades as a healthcare attorney and benefits consultant, I have watched the healthcare supply chain mutate into a ravenous, grotesque swamp monster - a highly coordinated wealth extracting swamp monster.
Right now, there is a massive legal battle unfolding that exposes exactly how this machine operates. Three major hospital systems, including Mount Sinai and the University of Michigan, are suing CVS Health. They allege that CVS and its various corporate subsidiaries siphoned off $250 million over five years.
This money was intentionally diverted from a federal program designed to help the poorest, most vulnerable patients in our country.
To understand the sheer scale of the waste, fraud, and abuse in the US healthcare system, we have to break down the complicated mechanics of this lawsuit.
In 1992, Congress created the 340B Drug Pricing Program. The concept was incredibly simple and well intentioned. Once again, I am reminded of the old adage: no good deed goes unpunished. Drug manufacturers are required to sell outpatient drugs at massive discounts to safety net hospitals. These are the hospitals that serve large populations of uninsured and low income patients.
When a patient receives a prescription, the hospital bills the insurance company at the standard full-price rate. The insurance company pays that full rate. Because the hospital bought the drug at a steep discount, there is a large margin of profit left over.
Congress mandated that this profit margin must stay with the hospital. The hospital is supposed to use that money to fund charity care, keep its doors open, and serve the community. It is a financial lifeline for hospitals that treat the poorest among us.
The Flow of the Drug
When a patient walks into the pharmacy, the pharmacy dispenses the medication directly from its own standard inventory. The pharmacy does not maintain a separate shelf of 340B discounted drugs.
Once the third party administrator flags that prescription as an eligible claim, the hospital purchases a replacement bottle of that exact same medication at the severely discounted 340B price. The hospital then has that cheap replacement bottle shipped to the pharmacy to restock its shelf.
The Flow of the Money
When the pharmacy dispenses the drug to the patient, the pharmacy bills the patient’s insurance plan. The plan pays the pharmacy the standard full price for that drug.
Because the hospital is the entity restocking the pharmacy shelf with the discounted replacement medication, the contract dictates that the pharmacy must hand that entire insurance payment over to the hospital. The pharmacy is only supposed to keep a flat administrative dispensing fee.
The hospital profit is the large spread between the cheap price they paid to replenish the drug and the high reimbursement they collected from the insurance company (or self-funded plan).
The Alleged CVS Manipulation
The lawsuits allege that CVS manipulated this flow of money to steal the hospital’s profit margin. When the claim occurs, Caremark pays CVS Specialty the full standard network rate on behalf of the payer. Weeks later, WellPartner identifies the claim as a 340B transaction.
According to the complaints, this is when Caremark secretly alters the transaction. Caremark retroactively reduces the reimbursement rate it paid to CVS Specialty. CVS Specialty then hands this new artificially low payment to the hospital. Because the hospital is completely blind to the original transaction, they accept the lower payment. CVS effectively engineers a spread pricing scheme retroactively and keeps the difference as pure corporate profit. They took the margin that Congress intended for the hospital to use for patient care.
When you read the actual complaints filed in federal court by Frier Levitt, the law firm representing the hospitals, the details are staggering. Here are the ten most incendiary points that expose the reality of the PBM industry.
The Racketeering Charge. The hospitals did not just claim a breach of contract. They accused CVS and its subsidiaries of civil violations of the federal Racketeer Influenced and Corrupt Organizations Act. They are literally calling this a coordinated racketeering enterprise.
The Coordinated Concealment. The complaints allege that Caremark, CVS Specialty, and WellPartner worked together in the dark to secretly manipulate the reimbursement rate. Vertical integration weaponized to hide the truth.
The Blocked Audits. When the University of Kansas Health System noticed the numbers did not add up, they demanded an audit. The lawsuits state that CVS refused to permit the contractually required audit and then retaliated by terminating the agreement.
The Theft of Congressional Intent. The lead attorney stated clearly that CVS systematically diverted funds Congress specifically designated to help safety net hospitals care for the most vulnerable Americans.
The Manufactured Spread Pricing. The filings detail how Caremark secretly pays an artificially reduced rate several weeks after the point of sale. This is the definition of opaque spread pricing, engineered after the fact.
The Deliberate Suppression of Data. The plaintiffs allege a deliberate misrepresentation of reimbursement amounts and the suppression of the original claims data over a five-year period.
The For Profit Skimming. Mount Sinai declared the lawsuit was necessary to ensure that funds meant for mission driven hospitals are not wrongly skimmed off by for profit intermediaries.
The Elaborate Cover Up. The legal team emphasized that CVS went to significant lengths to make sure the hospital clients never found out about the original, higher payments. Transparency is the enemy of the traditional PBM model.
The Pursuit of Punitive Damages. Because the hospitals allege intentional fraud and active misrepresentation, they are seeking punitive damages. They want to punish the behavior, not just get their money back.
The Quarter Billion Dollar Extraction. The sheer scale of the operation is terrifying. Just these three hospital systems allege they lost $250 million. If this happened to three systems, imagine the financial impact across the entire United States.
When you hand adjudication, dispensing, and auditing to the same small circle of corporate players, you subject your health plan to a revenue extraction machine optimized to profit on your employees’ illness.
This is why I’ll tirelessly advocate for transparent PBMs, direct contracting, and open access plans backed by reference based pricing. Is that easier? No. But the savings are substantial and the transparency gained is revolutionary for employers and employees alike.
The US healthcare system is drowning in waste. Until employers and patients demand absolute transparency and strip the power away from these opaque intermediaries, the wealth extraction will only continue.
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