Back in 2020, I wrote a blog post on potential PBM audit issues and disciplinary actions based on purchasing diabetic test strips from unauthorized wholesalers. The problem is still prevalent. In fact, during these past few months, we have seen several manufacturers sending cease-and -desist letters to pharmacies demanding money for lost sales and threatening to report unauthorized sales to PBMs and Board of Pharmacies.

To remind, an “authorized distributor” means a supplier expressly authorized by the manufacturer to distribute test strips. I had cases when distributors had erroneously represented to pharmacies that they were “authorized,” but in fact they were simply licensed to conduct drug distribution business in the state and were VAWD-accredited (which is completely different from being authorized by the manufacturer to distribute test strips). Instead of asking your wholesalers and relying on their representation (which might be false), you should verify manufacturers’ lists of their authorized distributors for nonprescription diabetic test strips. Some states also publish such lists (eg. here is a list published by the California State Board of Pharmacy).

Several of my clients were recently contacted by various law firms representing test strips manufacturers explaining that their records show that the pharmacy dispensed X amount of their products but the pharmacy had purchased less from their authorized distributors. Therefore, the manufacturer concluded that the rest of the products were purchased on a grey market and the manufacturer had sustained certain damages in lost profits. The manufacturer demanded lost profits. Otherwise, it threatened to report pharmacies to PBMs and Board of Pharmacy. As discussed in my blog post on this subject, PBMs may terminate pharmacies purchasing from unauthorized distributors and Boards may commence an administrative action.

So why despite these grave consequences, pharmacies still continue purchasing products from unauthorized wholesalers? As one of my clients explained, purchasing from authorized dealers result in reimbursement below cost. But on the other hand, saving money in this manner may jeopardize your pharmacy business: there could be significant PBM chargebacks, terminations, and even administrative actions. If you dispense for less than your cost, maybe it is a reason to reconsider dispensing the product altogether.


Do you purchase test strips from suppliers authorized by manufacturers to distribute these products? If not, you may face significant chargebacks and contractual termination when PBMs audit your pharmacy’s test strips invoices.

Virtually all PBM  require test strips to be purchased from the suppliers expressly authorized by manufacturers to distribute their products. Most PBM manuals also provide that when “the supplier is not recognized by the manufacturer as an authorized wholesaler of its DME products, including but not limited to diabetic supplier, testing strips, lancets, and glucometers, the supplier’s invoices will be rejected.” Therefore, if PBMs reject such invoices, they find drug shortages, which justifies immediate contractual termination. PBMs argue that such purchases raise well-founded concerns that the pharmacy bought products at deeply discounted prices on the gray market without the proper chain of custody while billing PBMs as for authentic products. Usually PBMs do not accept any documentation on the chain of custody of such test strips and any arguments that the test strips were purchases in compliance with all state and federal laws are fruitless.

The New York Times described the black market for test strips in its article “The Strange Marketplace for Diabetic Test Strips.” According to the article, a test strip is a lucrative commodity with highly manipulated prices. Many entrepreneurial suppliers purchase strips from insured patients who have unused strips and resell them to uninsured patients. But, as the article explains, the biggest profits come from returning strips to pharmacies, which sell them as new and bill the patient’s insurance the full price.

Some states have addressed this issue by enacting legislature mandating pharmacies to purchase test strips only from an authorized list of distributors. California is one of such states. AB 602 – signed into law on July 31, 2017 – classifies any purchases of test strips from unauthorized supplies as unprofessional conduct for which the California State Board of Pharmacy may start a disciplinary action. The law also authorizes a Board inspector to embargo nonprescription diabetes test devices that were not purchased directly from an authorized distributor or manufacturer.

So, who is an “authorized distributor”? It is a supplier expressly authorized by the manufacturers to distribute test strips. Manufacturers usually list such suppliers on their websites.  Some states also publish lists of authorized test strips distributors. In California, such list could be found on the Board of Pharmacy’s website.

Despite PBMs policies, state laws, and Boards guidance, many wholesalers continue to sell test strips without being accepted as authorized wholesalers by manufacturers. To avoid significant recoupments, contractual terminations, and Board of Pharmacy administrative actions, pharmacies must ensure that all test strips are purchased from the authorized suppliers by verifying this information on the manufacturers’ or Board of Pharmacy’s websites.





Last week, I wrote about Walgreen’s settlement with state and federal governments for unlawfully soliciting Medicare and Medicaid beneficiaries to enroll in its Prescription Savings Club.

However, OIG has finalized a final rule extending safe harbors related to coupons, rebates, and other rewards from a retailer if:

  • The reward is offered on equal terms available to the general public and

  • The reward is not tied to the provision of other items or services reimbursed in whole or in part by federal funds.

(OIG has clarified that pharmacies are retailers unlike physicians or hospitals).

The above appears to allow Medicare patients to participate in loyalty programs by Walgreen or any other retail pharmacy, then why Walgreens is facing this huge settlement?

First, the retailer rewards exception creates a pathway for pharmacies to include Medicare and Medicaid patients in their reward programs without violating “the beneficiary inducement” aspect of the Civil Monetary Penalties. But such enrollment must be strictly structured following OIG’s final rule, which could be found here:

The rule defines:

  • the coupons as discounts on merchandise or services, such as a percentage discount on an item or a “buy one, get one free;”

  • rebate is a return on part of a payment. But, a retailer could not rebate an amount that exceeds what the customer spent at the store.

  • other rewards are free items or services, such as store merchandise, gasoline, frequent flyer miles, etc. OIG explains that health care items or services can be “other rewards” but the reward cannot be in the form of a copayment waiver.

A reward program can also be targeted to patients with disease but the reward cannot be tied to other items or services reimbursed by a federal health care program. For example, if a patient accumulates rewards based only on purchases of federally reimbursable items, the reward is tied to the provision of reimbursable items. Similarly, if the reward is a copayment waiver or a reduction, the reward would also be tied to the purchase of a reimbursable item. The bottom line is, a coupon cannot be limited to a reduction in price of a reimbursable item or service.

If a retailer offered a free or discounted item or service covered by Medicare or Medicaid but did not seek reimbursement for that item or service, the reward is likely to be protected. For example, a pharmacy could not have as a “reward” a free box of test strips that a patient could obtain only when filling an insulin prescription. But if a pharmacy offered a rewards program that if a patient spent a certain amount of money in the sore, the patient could obtain a free blood pressure monitor – that reward will be protected if the provider does not bill for that monitor.

Keep in mind, that coupons to transfer prescriptions would not be protected under this exception. But the Final Rule allows pharmacies to waive copayments for the first fill of a covered Part D “generic drug,” as defined in Part D regulations. But this exception will not be available until January 1, 2018.

So it appears that Walgreens’ savings program was tied to the provision of reimbursed services by Medicare and therefore a violation of the kickback and CMP laws and therefore contradicted the OIG’s guidance.