Critical Industry Information that May Affect Your Distribution Services Agreement

Brand Rx manufacturers are under pressure industry-wide to help reduce the cost of healthcare.  Unfortunately, healthcare seems to be primarily defined as the drugs patients take versus the total cost of healthcare.  Where possible, brand Rx manufacturers are being challenged around their drugs’ cost.  Case and point, there is a class-action lawsuit aimed at the very source of compensation between a brand Rx manufacturer and wholesaler.  While these Fee-for-Service agreements have provided stability in governing the interaction between both parties, they are also problematic in how the distribution services compensation is calculated.  

The lawsuit states “Beginning no later than 2004, Defendants and the pharmaceutical industry’s wholesalers began executing and implementing distribution services agreements (‘Service Agreements’).  Service Agreements provide for a new trade structure known as ‘fee-for-service.’  Service Agreements generally obligate manufacturers to pay a fee to wholesalers (also referred to herein as ‘distributors’) in exchange for services the wholesalers provide (the ‘Service Fee’).  The Service Fee is typically an amount equal to a set percentage of the wholesalers’ gross purchases of the manufacturers’ products.”

“Defendants use these Service Fees to artificially lower their reported AMPs, which enables them, in violation of law, to materially underpay rebates to the state Medicaid programs.  Each of the Defendants execute this fraud through one of two schemes: a) the ‘Discount Scheme,’ or b) the ‘Service Fee Scheme’.”

So what is the problem? Paying more fees to continue to fund a model that is close to being unsustainable, especially when product is being sold at “WAC-minus” pricing.  So what is the solution? Migrate current agreements to a cost-per-unit model that is a true value-based agreement. 

This has been the cornerstone of Linear B Exchange's approach.  In our white paper, "A Practical Roadmap to Evolve FFS Agreements to a Cost-per-Unit Model," we outline a strategy to achieve this objective.  While Linear B Exchange cannot help manufacturers with the past, we can help you protect your organization from future lawsuits related to these types of claims.  

To view the lawsuit, please click the following link: http://www.impetusforchange.org/storage/class-action-lawsuit/Case%20208cv05135ER%20Doc%2045.pdf.  You can also access the lawsuit at http://www.paed.uscourts.gov/us01001.asp, and login to PACER. While your organization may not be named, this lawsuit has the potential to open Pandora's Box for additional class-action lawsuits.  The most troublesome situation is the wholesaler “Cost Minus” business model for selling brand Rx drugs downstream; this practice will inevitably lead to additional trouble in the industry, from a sustainability standpoint to potential government rebates issues.

If you are interested in learning more about Linear B Exchange and would like a courtesy copy of our white paper, "A Practical Roadmap to Evolve FFS Agreements to a Cost-per-Unit Model," (an organizational value of $1,000)  please e-mail Alex at alefrancois@linearbx.com.

Please note, our white paper, "A Practical Roadmap to Evolve FFS Agreements to a Cost-per-Unit Model," is intended for branded Rx pharmaceutical manufacturers, and we reserve the right to decline sending an individual a copy if they’re not a branded Rx pharmaceutical manufacturer.