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.





Many pharmacies ask if they need to notify PBMs of a disciplinary action and if so, when? Many fear that PBMs may terminate their contracts with the pharmacy. As a result, only some end up providing notices, while some are terminated for failure to provide a timely notice of a disciplinary action.

If we look at PBM agreements and manuals, virtually all of them require a notice of a disciplinary action. Some even require a notice of any audit or investigation that may potentially lead to a disciplinary action. Most PBM manuals require immediate notice, while some require a notice within 5-14 days.

So what happens if a pharmacy does not notify PBM in fear of being terminated? After all, most manuals provide that PBM may terminate the pharmacy if in PBM’s judgement it “may jeopardize the health of the members.” And a disciplinary action implies that the pharmacy engages or has engaged in some sort of wrongdoing. Therefore, it makes sense to keep quiet.

A disciplinary action usually becomes apparent during a re-credentialing process (most PBMs perform them on a 12-36 month cycle). During re-credentialing, the pharmacy must answer  questions regarding any disciplinary action. It will have to disclose such or deny. If the pharmacy discloses it, the PBM may terminate the pharmacy for breach of contract for failure to promptly notify the PBM (because the notice was not provided at the time the Accusation was filed).

On the other hand, if the pharmacy wrongly denies it, the PBM is likely to obtain this information through its own investigation. (PBMs must validate the credentials of pharmacies to ensure they are in good standing with state and federal laws and meet quality performance standards.) Therefore, if the pharmacy misrepresented any information on its re-credentialing application, the PBM is very likely to terminate the contract with the pharmacy and it will be difficult to get reinstated any time in the future.

This is why, notifying PBMs  is recommended. But when should a pharmacy notify PBMs? When the Accusation is filed or when the disciplinary action is finalized? The answer will depend on the contractual language. Most PBMs provide that the pharmacy must “immediately notify … if any disciplinary action has been taken against the pharmacy.” A disciplinary action arguably begins when the Accusation is filed (some PBMs have argued that it starts with the Board of Pharmacy’s inspection if any alleged violations were discovered).

Some manuals, however, require a notice when the pharmacy “receives notice of any proceedings related to Pharmacy Services that may lead to disciplinary action.” This requirement is too broad and unclear. Any Board of Pharmacy inspection may lead to a disciplinary action. Does it mean that the pharmacy must provide a notice to the PBM as soon as it is inspected by the Board? Not likely, as it would lead to a notice each time the pharmacy is inspected. I doubt that PBMs want to be notified of every inspection. Therefore, a notice when an Accusation is filed or when a settlement is reached is a right time to provide a notice (depending on the exact requirements of each PBM).

However, be careful in how you provide notice. I recommend that your legal counsel write a letter describing the Board’s allegations and mitigating evidence. If you provide a notice after a settlement has been reached, explain that the settlement was entered solely for financial considerations and does not constitute an admission of any quilt.

The main take-away point: make sure you understand your PBM contracts.  If you had a disciplinary action taken against your pharmacy, review all the contracts to determine the notice requirements.

As prescription drug spending continues to increase, governments continue to scrutinize arrangements between pharmaceutical companies, healthcare providers, assistance programs, and patients. For example, recently, two non-profit foundations – Chronic Disease Fund, Inc. (“CDF”) and Patient Access Network Foundation (“PANF”) – have agreed to pay $2 million and $4 million, respectively, to resolve allegations that they violated the False Claims Act by enabling pharmaceutical companies to pay kickbacks to Medicare patients taking their drugs.

The press release issued by the Department of Justice describes government allegations that CDF and PANF “worked with various pharmaceutical companies to design and operate certain funds that funneled money from the companies to patients taking the specific drugs the companies sold. These schemes enabled the pharmaceutical companies to ensure that Medicare patients did not consider the high costs that the companies charged for their drugs. The schemes also minimized the possibility that the companies’ money would go to patients taking competing drugs made by other companies.”

The Department of Justice further explains that CDF and PANF functioned not as independent charities, but as “pass-throughs” for specific pharmaceutical companies to pay kickbacks to Medicare patients taking their drugs. As a result, in additional to paying monetary penalties, the two companies entered into a three-year Integrity Agreement with the federal government.

Based on this enforcement action and previous advisory opinions, pharmaceutical patient assistance programs should not (1) provide manufacturers with the internal information, such as drug utilization; (2) funnel manufacturers’ contributions exclusively to assist with the purchase of their own product (contributions should be evenly spread out). Further guidance on pharmaceutical assistance programs. 

A recent report released by California health officials revealed that drug prices are still on the rise – even despite California’s drug-price transparency laws aimed at curbing drug cost.

In 2017, California passed a drug-price transparency law that requires manufacturers to notify its customers at least 60 days in advance if they plan to increase a drug price by more than 16% in a two-year period. The law also requires manufacturers to provide a report describing reasons for drug price increases. Because of the law, several manufacturers announced plans to postpone or rescind previously planned price hikes.

However, the report showed that since the passage of the law, pharmaceutical companies raised the wholesale acquisition cost (WAC) of their drugs by a median of 25.8%.

Generic drugs saw the largest price increase of about 40%. By comparison, the annual inflation rate during the period was 2%.

Some drugs saw the sharpest increase. For example, Prozac’s price was increased from $9 to $69 (just in the first quarter of 2019, an increase of 667%). Guanfacine rose more than 200% in the first quarter of 2019 (its manufacturer cited costs and “market conditions” as reasons for the price hike).

Other states with similar drug-price transparency laws experience the same increases despite the efforts and oversight of the manufacturers. As a result, many states consider alternative measures to contain drug price hikes. For example, California has passed a law allowing it to manage and negotiate drug prices for Medi-Cal managed-care plans. Drug benefit will be carved out of the Medi-Cal managed care plans and be directly administered under the fee-for-service model.

Another example, Nevada fined several manufacturers for failing to comply with the state’s transparency law requiring detailed disclosure of financial and pricing information.

On the federal level, the Senate is currently considering several proposals to contain drug cost.  One approach is to negotiate Medicare drug prices for approximately 250 brand drugs directly with the manufacturers. Another approach in to set a maximum out-of-pocket cost for Medicare patients and penalize drug companies if prices rise faster than inflation.




As always, the American Society for Pharmacy Law (“ASPL”) gathered pharmacy attorneys and pharmacists for an excellent three-day conference focusing on pharmacy legal issues. Some of the highlights of the conference:

Regulatory updates: Despite various state and federal attempts to lower drug prices, they continue to grow mostly due to high deductible plans, cost-sharing, increased drug utilization, and expanded coverage. There are several bills pending attempting to lower drug costs. In addition, speakers discussed federal bills to promote generic and biosimilar competition, such as CREATES Act, bills promoting faster market entry, bills limiting “product hopping” and “patent thickets.”

DIR fees: PBMs’ retroactive claw-backs continue to grow despite many discussions on the federal level and state actions limiting retroactive claw-backs.

Drug importation: drugs are still prohibited from importation unless the importation fits within the “Personal use exception.”  Several states have enacted drug importation laws (Colorado, Florida, Maine, Vermont). It will take some time to determine the success of such bills.

340b reform: federal government is ready for a 340b reform due to a belief that 340b discounts create additional pressure on manufacturers to increase prices.

HIPAA: data breaches and HIPAA non-compliance continue to cause troubles for pharmacies despite numerous fines assessed by federal government against multiple pharmacies.

CBD updates: Products containing CBD are still not allowed to be sold in pharmacies. Speakers discussed Boards’ and FDA restrictions and possible enforcement actions. The speakers discussed the ubiquitous nature of CBD products and difficulties in enforcing federal and state laws regarding such products.

Online pharmacies: the number of online illegitimate pharmacies continue to increase. About 95% of online pharmacies are selling illegitimate, adulterated or/and misbranded products. The speakers discussed enforcement actions and ways to identify legitimate online pharmacies.

Employment issues: the speakers discussed good business practices to document and analyze employment termination focusing on three major considerations: severity, breadth, and specificity.

Thank you ASPL and the speakers for your dedication to the profession and for keeping us abreast of  the developments in pharmacy law.

Our hearts go to all affected by wildfires raging through California. Thousands are evacuated and in need of medical care and access to medications. While we acknowledge our first responders, we must also show appreciation to our pharmacists responding to the disaster. They are working tirelessly at the front lines helping vulnerable patients, providing medications, and working in shelters. I witnessed many brave pharmacists and technicians working without any compensation, helping day-and-night, delivering medications to their affected communities.

The latest updates on California fires. 

As communities are evacuated, pharmacy personnel may have questions regarding pharmacy relocation, transportation and storage of medications offsite, security of dangerous drugs and devices, etc.

Pharmacists working with other healthcare providers in shelters or at emergency clinics may have questions regarding mobile pharmacies, compliance with California law on emergency pharmacy services, refill too soon issues, and potential legal exposures.

We want to help you make right decisions and stand by you as much as you stand with the affected communities. We offer free legal services if your pharmacy was impacted by the fires or if you are a pharmacist providing emergency services to all affected by the fire. Contact us now.  We are keeping everyone affected in our thoughts.




Only a few exceptions exist to the rule that a pharmacist must dispense pursuant to a valid prescription. Such exceptions are: furnishing emergency contraceptives, hormonal contraceptives, and naloxone hydrochloride. Beginning next year, pharmacists in California also will be able to dispense HIV prevention drugs without prescriptions.

Senate Bill 159 authorizes pharmacists to furnish a 30-day supply and up to a 60-day supply of drugs used for pre-exposure  or post-exposure prophylazis (PrEP) without requiring a prescription from the patient, as long as the following conditions are met:

  • The patient is HIV negative;
  • The patient does not report any signs or symptoms of acute HIV infection;
  • The patient does not report taking any contraindicated medications;
  • The pharmacist provides counseling to the patient on the ongoing use of preexposure prophylaxis;
  • The pharmacist does not furnish more than a 60-day supply of preexposure prophylaxis to a single patient more than once every two years, unless directed otherwise by a prescriber.

In addition, pharmacists dispensing PrEP without prescriptions must complete a training program approved by the Board of Pharmacy.

This bill also expands the Medi-Cal schedule of benefits to include PrEP as covered pharmacist services.

Another interesting highlight of the bill: the plans and insurers would be prohibited from subjecting antiretroviral drugs, including PrEP to prior authorization or step therapy (with some exceptions) and PBMs could not deny coverage for PrEP. The bill also prohibits plans and insurers from covering PrEP that has been furnished by a pharmacist in excess of specified amounts.





During recent audits, several PBMs required pharmacies to have policies and procedures addressing CMS form 10147. Most pharmacies do not have written policies regarding CMS-10147 because it is not required by state or federal regulations or PBM manuals. Nevertheless, drafting a policy addressing when and how CMS-10147 is distributed is a good idea (especially considering that this policy is usually succinct and easy to draft).

So what is CMS form 10147 and what pharmacies have to do with it?

Federal law requires that each Medicare Part D plan sponsor distributes CMS form 10147 (“Notice”) to its members who receive a prescription fill rejection from the plan. This notice is intended to educate Part D members of their rights when a prescription cannot be filled under the Medicare Part D benefit at point of sale.

If a pharmacy receives the plan’s rejection code 569 , the pharmacy must provide the Notice – which is entitled “Medicare Prescription Drug Coverage and Your Rights” – to the beneficiary whose prescription could not be filled.  The notice instructs members to contact their Part D plan to obtain a coverage determination or ask for a formulary or tier exception if the beneficiary disagrees with the information provided by the pharmacist.

This requirement applies to all pharmacies (including retail, LTC, specialty, and mail order pharmacies). For example, a mail order pharmacy must provide the Notice to the member via the member’s preferred method of communication (fax, electronic, or first class mail) as expeditiously as the member’s health condition requires, but no later than 72 hours from the receipt of the original transaction response indicating the claim is not covered by Part D.

Home infusion pharmacy, for example, may deliver the notice in person with delivery of home infusion drugs or through a nurse, as long as the next scheduled visit is within 72 hours of the rejection code.

An LTC pharmacy must fax or deliver the notice to the member, his/her representative, prescriber, or staff at the LTC facility as soon as possible but no later than 72 hours from the receipt of the rejection code.

The only pharmacy that is exempt from the requirement to provide the Notice is Indian Health dispensing facilities.

Most PBMs require the Notice to be in at least 12-point font, physically distributed to beneficiaries (and not simply posted on a wall) and to have an OMB control number.  Deviation from the content of the Notice is not allowed.

If you anticipate any upcoming PBM visits, it is recommended that you have a policy describing how and when you distribute the Notice. The Notice itself can be obtained here.





 CVS has been dominating the news lately: CVS-Aetna merger, CVS’s free drug deliveries, its efforts to curb opioid epidemic, etc. This post is about a recent litigation commenced by CVS against its ex-executive John Lavin to prevent him from working for a competitor, Pill Pack. After Amazon purchased PillPack last year, CVS’s shares dropped and ever since CVS has been concerned about PillPack’s expansion. Further discussion.

During Lavin’s employment with CVS, he signed a non-compete agreement. After 27 years with CVS, Lavin decided to work in the same position for PillPack. Understandably, CVS panicked and filed a legal action seeking a preliminary injunction for violating the non-compete. Lavin’s lawyers argued that the non-compete was so broad that it effectively prevented Lavin from working anywhere in the pharmaceutical industry and therefore it was unenforceable.

The U.S. District Judge concluded that the non-compete was reasonable and issued an injunction against Lavin. The judge reasoned that because Lavin can use certain trade secrets and internal information to harm CVS’s market, the non-compete in this situation was appropriate. Because Lavin was an executive of the PBM branch – Caremark – the judge ruled that the confidential information obtained and learned while at CVS “poses a significant likelihood of harm.” The position at PillPack was substantially similar as it also involved negotiations between PBM and pharmacies, internal pricing and negotiations, and other proprietary information. And therefore, Lavin could use his knowledge to harm CVS’s share of the market. Lavin filed an appeal.

The healthcare industry is closely watching the case and not for the non-compete application but for any clues on PillPack’s future plans. For example, during a deposition in this case, the PillPack’s chief executive did not deny that PillPack is looking into a PBM model to add to its services.

Are non-compete agreements enforceable?

Non-compete agreements are usually provisions in employment contracts prohibiting employees from working directly or indirectly for any competitor for a certain period of time after terminating the employment .

Contractual relationships are typically governed by state law. But most states disfavor non-compete employment contracts and most courts enforce them only when reasonable or “when the restriction does not extend beyond what is apparently necessary for the protection of those in whose favor they are made.” (As the judge in Lavin’s case said in his opinion).

California, for example, is one of the states that rarely enforces non-compete agreements even if they appear reasonable and narrowly drafted. For a discussion on California’s history and enforceability of non-compete agreements, see Dowell v. Biosense Webster,,(2009) 179 Cal. App. 4th 564, 574–75.

Moreover, California Bus. & Prof. Code Section 16600 states:

“Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

There are only three statutory exceptions to this prohibition on non-compete agreements:

  1. One who sells the goodwill of a business, or all of one’s ownership interest in a business entity or substantially all of its operating assets and goodwill, to a buyer who will carry on the business may agree with the buyer not to carry on a similar business within a specified geographic area, if the business will be carried on by the buyer (Cal. Bus. & Prof. Code § 16601) (i.e. a sale of a pharmacy);
  2. Upon dissolution of a partnership or dissociation of a partner, such partner may agree not to carry on a similar business within a specified geographic area, if the business will be carried on by remaining partners or anyone deriving title to the business or its goodwill (Cal. Bus. & Prof. Code § 16602);
  3. And a member of a limited liability company may agree not to carry on a similar business within a specified geographic area, so long as other members or anyone deriving title to the business or its goodwill carries on a like business (Cal. Bus. & Prof. Code § 16602.5).

Section 16600 expresses California’s strong “public policy of protecting the right of its citizens to pursue any lawful employment and enterprise of their choice.” See Dowell v. Biosense Webster, Inc.

Unlike in other states, employers operating in California are not advised to add a non-compete clause in their agreements (unless the three above exceptions apply) because an employer’s use of an illegal noncompete agreement may violates the California Unfair Competition Law. (For further discussion on how an illegal non-compete can violate Unfair Competition Laws, see Application Group, Inc. v. Hunter Group, Inc. (1998) 61 Cal.App.4th 881, 906–908).

So if the Lavin’s case was decided by a California court or if California law was applied, the result would likely have been different.


   The CVS-Aetna merger has been one of the longest mergers in healthcare history. On September 4, 2019, the federal judge issued his final ruling approving the proposed settlement of the federal challenge to the merger. The judicial review took eleven months with multiple applications of the “public-interest” test as provided by the Tunney Act.

The ruling finalizes a merger of the nation’s largest pharmaceutical chain with the nation’s third largest health insurance. Both are the largest providers in Medicare Part D arena. To avoid conflict of interests, the settlement requires CVS to divest Aetna Medicare Part D to WellCare.

The judge concluded – after the first-ever live hearing under the Tunney Act – that the two companies will continue to compete despite the merger and the harm to the public was unlikely. (The judge was also focusing on potential harm to HIV and AIDS patients – no such was found). The Judge explained:

“The court’s function is not to determine whether the resulting array of rights and liabilities is one that will best serve society, but only to confirm that the resulting settlement is within the reaches of the public interest.”  

As a result, welcome another  800-pound healthcare conglomerate.