Back in 2017, the California Department of Healthcare Services (DHCS) approved a new methodology  – National Average Drug Acquisition Cost (NADAC) –  for reimbursing pharmacies for their drug cost. NADAC prices significantly reduced pharmacy reimbursements. See a related blog post.

For technical and financial reasons, the DHCS has not implemented the new reimbursement methodology until 2019. Only in 2020, it started sending notices of recoupment to pharmacies specifying the amounts owed.  For more than 2 years, the DHCS continued to pay pharmacies through the Medi-Cal claims processing system consistent with the rate methodology used prior to the NADAC implementation. This lead to overpayments to pharmacies.

Several pharmacists and patient advocacy groups filed legal actions against the DHCS and worked with legislature to eliminate these chargebacks to pharmacies. Finally, this week, the California Pharmacists Association  (CPhA) announced that Governor Newsom signed the State Budget forgiving $142 million in medication reimbursement clawbacks that the DHCS demanded from pharmacies.

We congratulate all pharmacies working with Medi-Cal patients, CPhA, and all other groups and individuals who were working on this important issue.


Earlier this year, a client reported a very smooth scam. Someone called the pharmacy and represented to be a California Board of Pharmacy inspector who was investigating an anonymous complaint against the pharmacy. The so-called “inspector” asked the pharmacy to provide its account number with Cardinal, which the pharmacy staff did. The scammer then contacted Cardinal and placed a large order for Invokana (the cost of around $90,000). The pharmacy received the order the next day.

Now the scammers called the pharmacy and introduced themselves as representatives from Cardinal. The “representative” explained that Cardinal made an error and erroneously shipped Invokana. They apologized and stated that their driver would arrive shortly to collect the erroneous shipment. For some fortunate reasons, the owner of the pharmacy called Cardinal with a follow up question and learned that the order was placed the day before and that no one from Cardinal called to arrange the collection. The owner of the pharmacy described the “scammer” to be very believable, who definitely knew the industry. (I am still wondering why the driver was not apprehended).

I thought that this was a stand-alone incident. Last week, however, the California Board of Pharmacy issued a Fraud Alert to all pharmacies describing a similar scam scheme:

“Pharmacies, hospitals, and distributors are being warned about scammers using sophisticated techniques to obtain account numbers and other sensitive information and unlawfully divert quantities of pharmaceutical goods in transit. In some cases, scammers pretended to represent the state’s board of pharmacy or employees for a particular distributor or pharmacy.

The callers requested and obtained each pharmacy’s DEA number and account purchasing information for their principal distributor. The scammers then called each distributor – pretending to be the pharmacy – and ordered between $100,000 and $300,000 worth of products. Common products ordered included a variety of HIV medications (Descovy, Triumeq, Odefsey) and Xarelto, Otezla, and Eliquis.

Once the products were delivered, the scammers called the pharmacy – pretending to be the distributor – and advised the pharmacy the order was made in error. The scammers then arranged for a courier to pick up the diverted product.”

The Board directs the pharmacies to the Healthcare Distribution Alliance Pharmaceutical Cargo Security Coalition’s (“Coalition”) report on the issue, which discusses methods being used to divert drug shipments and tips for protecting distributors and pharmacies. We highly recommend that your staff reads the report to be able to identify similar scams.

The report describes several phishing techniques targeting pharmacies:

– scammers represent themselves as Board of Pharmacy representatives asking for wholesaler account information stating that they need it for recall purposes

– scammers may pose as a manufacturer, informing the pharmacy that certain products must be replaced and a credit will be issued through the original wholesaler. The scammer then requests the pharmacy’s account information with the wholesaler in order to issue such a credit.

– scammers may also pretend to be a wholesaler representative and request the pharmacy to update its payment method by providing a new wire account.

The report explains that scammers are often females, very believable and often speak of some urgency or with authority.

The Coalition in its report recommends the following tactics to avoid potential phishing techniques:

  • Validate anything thought to be a suspicious email address:
  • Ensure any business phone number and/or address you are provided, in any type of account or credit modification/application matches a Yellow Pages “Reverse Lookup.”
  • Ask the caller for their name and phone number, hang up and call your wholesaler, manufacturer, or the Board of Pharmacy directly, requesting authentication.
  • All staff should be instructed not to share any confidential information with anyone calling into the pharmacy. It is important to remember that a distributor/manufacturer/Board will rarely, if ever, call you to request this type of private information.
  • Verify all orders. If you see an order that you haven’t placed, then fraud is likely.
  • Confirm wire payment requests before making any payment.
  • The only person that should be permitted to pick up returns should be your  wholesaler’s driver. Call your wholesaler if anyone, other than your regular driver/company, visits your site to pick up and process any return.

This is something we (those who own or work for independent pharmacies) have been waiting for. Finally someone was bold (and brave) enough to bring an action against a PBM on DIR fees. This someone is Aids Healthcare Foundation (“AHF”), a California non-profit, which owns and operates retail pharmacies that serve HIV/AIDS patients. While many were exploring a potential legal action against PBMs on DIRs fees, all ran into a problem that pharmacies contractually agree to such fees (and we have various court precedent enforcing PBM contracts of adhesion).

A little background on the case: AHF-affiliated pharmacies used LeaderNet (PSAO) to contract with Caremark. Sometime in 2019, the pharmacies terminated their relationships with LeaderNet and began contracting directly with Caremark on their own behalf. Instead of assessing a flat network fee – as Caremark did when the contract was administered by LeaderNet – it started to charge pharmacies a variable network fee range (e.g., 3-5%) depending on performance, with the higher performing pharmacies paying the lower fee and vice-versa. Caremark assessed these performance fees after the point of sale on a trimester basis.

Caremark calculated (and still calculates) such variable fees (DIRs) per the Provider Network Performance program’s (PNP) criteria such as:

  • Renin Angiotensin System (RAS) Antagonists Adherence
  • Statin Adherence
  • Diabetes Adherence
  • Specialty Adherence
  • GAP Therapy (Statin Use in Persons with Diabetes)
  • Comprehensive Medication Review (CMR)
  • Completion Rate (MTM), and
  • Formulary Compliance.

After November 2019, Caremark scored AHF-affiliated pharmacies in the aggregate. In other words, Caremark provided one Trimester Report for the entire chain instead of providing individual reports. AHF’s DIR Fees after November 2019 equated to 2.8 mil (!) on average per trimester. Caremark recouped these fees from future reimbursement payments to AHF.

As a result of these extensive damages, AHF took the risk and brought an arbitration for a breach of contract seeking recovery of damages, a declaration of non-enforcement and prohibition of the application of DIRs going forward, and attorneys’ fees and costs.

The arbitrator was presented with the following issues:

  • Did Caremark breach the contract with its application of DIR resulting in AHF being paid less than the contract required?
  • Did Caremark breach the contract by violating the covenant of good faith and fair dealing by implementing DIRs?
  • Was the imposition of the DIR procedurally unconscionable?
  • Is Caremark’s contract with AHF’s pharmacies an unenforceable contract of adhesion?
  • Should the DIRs be enjoined going forward?
  • What, if any, damages has AHF sustained?

Nine witnesses testified at the hearing and over 690 exhibits were entered into evidence. The hearing lasted five days. After the testimony phase, the parties engaged in two rounds of simultaneous briefing.

Unsurprisingly, Caremark’s main argument during the hearing was that AHF – which is an experienced healthcare provider with substantial bargaining power – has agreed to the terms of the contract and Caremark’s manuals. The arbitrator decided otherwise holding that Caremark is one of the largest PBMs and that a pharmacy would lose out on large amounts of business if it did not sign up with Caremark. AHF had no alternative if it wanted to serve Caremark’s members. The arbitrator stated in his decision:

“The growth in the range of the variable DIR’s demonstrates the unequal bargaining power. CVS and its plan partners had no competitive check on how much they increased the variable DIR rates. There was no valid business reason presented for the escalating growth in the percentages recouped, and this growth shows unchecked economic power.”

As a result, the arbitrator found the contracts between Caremark and AHF were adhesive. On the other hand, when AHF was contracting through its PSAO, the DIRs were fixed and thus knowable at the outset and at the point of sale. The arbitrator found these contract terms were not unconscionable. Thus, the fixed rate DIRs are enforceable but the variable DIR calculations were in the discretion of CVS and therefore, unconscionable and unenforceable.

The arbitrator brought an interesting point: some PNP criteria points were not within the control of the pharmacies. For example, pharmacies cannot change prescriptions (besides changes to therapeutically equivalents) and have no control over prescribers in order to comply with the criteria set by Caremark. In addition, some of Caremark’s calculations were arbitrary, such as applying some average of other pharmacies when there was no data available for AHF pharmacies.

Having found the variable DIR provisions to be substantively unconscionable, the arbitrator chose to limit the application of the variable DIR provisions and award damages to AHF in amount of 22 million (DIR fees paid to Caremark) plus attorneys’ fees and cost of arbitration.

While arbitration decision is final and there are usually no means to appeal, Caremark nonetheless filed a motion to Vacate or Correct the Arbitration Award and AHF filed a Petition to Confirm Contractual Arbitration Award in Superior Court of California for the County of Los Angeles. We will be watching the development of this case and will publish an update whenever there is any meaningful progress on the case.









Please join me for our next Roundtable Discussions organized by the American Society of Pharmacy Law.  The topic is PBM and Drug Management Update for Commercial Plan.

Wednesday, May 25, 2022
12:00 – 1:00 pm Central

Pharmacy Benefit Managers (PBMs) are experiencing rapid changes post-Rutledge vs. PCMA. In this roundtable, we’ll review briefly some of the newer states providing laws for PBMs in 2022, update any changes at the federal level, and then discuss overall trends in drug management, both in the pharmacy benefit drugs as well as medical benefit (J code) drugs. This lively session will host different industry subject matter experts and their points of view. No CE will be provided in this session. Bring your questions for this lively discussion with 3 different industry experts.

Speakers: Eric Barker, True Rx Health Strategies
Natalia Mazina – Mazina Law Rx Healthcare Law
Moderated by ASPL President Erin Albert – Apex Benefits


Similarly to a recent California case that denied Optum’s motion to compel arbitration, the 12th Circuit Court has denied a similar motion due to procedural and substantive unconscionability.

In a nutshell, 45 pharmacies brought a legal action against Optum claiming underpayment since 2012 (as in the California case, Mark Cuker represents the pharmacies). To stall litigation, Optum brought a motion to compel arbitration due to arbitration provisions in its contract with the pharmacies.

Some plaintiff-pharmacies, however,  contracted with Optum through their PSAOs. The court held that the arbitration clauses in the PSAO Agreements with either Catamaran or Optum could not bind pharmacies because they never saw them and thus, could not assent to them.

As to the pharmacies that contracted directly, the court found procedural unconscionability because:

(i) the arbitration clause was not properly flagged and buried in the text

(ii) the clause did not inform of the cost of arbitration

(iii) the clause was confusing and riddled with contradictions

(iv) Optum could unilaterally change the arbitration clause without notice.

In addition, the court found substantive unconscionability because Optum’s arbitration provision:

(i) placed limits on discovery and trial

(ii) could potentially result in extremely expensive arbitration  (average of $250,000)

(iii)banned claim joinder exacerbating the high cost of arbitration

(iv) was not mutual

(v) provided for a distant forum (Southern California) (for mostly Illinois pharmacies).

As a result, the court held that Optum had failed to meet its burden of demonstrating an enforceable agreement to arbitrate.

Previously, DEA regulations permitted registrations/renewals to be submitted either through its online portal or via mail delivery to DEA headquarters. Recently, DEA amended its regulations by requiring all registration and renewal applications be submitted only through the secure online portal. DEA believes this rule will mitigate some of the issues associated with paper applications by reducing inefficiencies and facilitating the application process.

In its final rule, DEA clarified that the online portal will be able to accept online batch applications and single payments for batch renewals (applicable if you own multiple locations). Payments could be made with ACH funds, credit cards and other forms of payment that may become available.

DEA also addressed a security concern expressed by one of the commentators by stating that “DEA routinely evaluates the security mechanisms of all of its electronic processes, and expends considerable time and resources to protect the privacy of all registrants and applicants.”

The bottom line is DEA will not accept paper application starting May 11, 2022.

One of the DEA’s latest enforcement cases against pharmacy is the case against Gulf Med Pharmacy. It is a good reminder of what the DEA audit focuses on. It also has a few new points, as explained in this blog post.

Gulf Med Pharmacy was a small independent pharmacy in southeast Florida. The DEA flagged the pharmacy due to its large orders of controlled substances. The DEA alleged that the pharmacy was one of the top ten purchasers of Oxycodone, Hydromorphone, and Hydrocodone in the entire state of Florida.

After the conclusion of its investigation,[1] the DEA issued an Order to Show Cause and Immediate Suspension of Registration to the pharmacy. The pharmacy timely requested a hearing before an Administrative Law Judge (“ALJ”). During the hearing the DEA alleged the following violations of the Controlled Substances Act (“CSA”):

  1.     Cocktail Medications

The DEA presented an expert opinion that the pharmacy dispensed cocktail medications which had no legitimate medical purpose. Cocktail medications are combinations of controlled substances that are widely known to be abused or diverted. For example, the DEA identified the following drug cocktails that allegedly raised red flags and had to be resolved prior to dispensing:

– 120 units of hydromorphone 8 mg, 60 units of morphine sulfate extended release 15mg, and 30 units of diazepam 10 mg.

– 120 units of hydromorphone 8 mg, 60 units of morphine sulfate extended release 30 mg, and 60–90 units of alprazolam 1 mg.

– 120 units of oxycodone 30 mg, 60 units of morphine sulfate extended release 30 mg, and 90 units of alprazolam

According to the DEA’s expert, the cocktail of an opioid, a benzodiazepine, and carisoprodol—commonly known as the ‘‘Trinity’’ cocktail—is a particularly serious red flag because that combination of controlled substances is highly dangerous and is widely known to be abused and/or diverted.

The DEA argued that the pharmacy repeatedly dispensed Trinity cocktail medications without any indication that its pharmacists addressed or resolved the fact that such prescriptions present a risk of abuse or diversion.

  1.    Improper Dosing for Pain Management

(Attention: this is not a commonly seen allegation).

The DEA alleged that the pharmacy repeatedly filled prescriptions for patients receiving a much greater daily morphine milligram equivalent dosage of short-acting opioids than long-acting opioids.

According to the DEA’s expert, for a patient receiving treatment with both long-acting and short-acting opioids, the proper pharmacologic dosing for pain management is to use larger, scheduled doses of the long-acting opioid to control chronic pain with smaller, as needed doses of the short-acting opioid for breakthrough pain.

The expert also testified that this method of dosing reduces the amount of the short-acting opioid that the patient must use in order to obtain the same level of pain control. The expert opined that prescriptions that provide a larger daily dose of short-acting opioids, rather than long-acting opioids, do not make pharmacologic sense and thus are a red flag of drug abuse or diversion.

The expert also noted that each of the short-acting or immediate release opioid prescriptions was scheduled four times a day or every six hours, even though the patient was also prescribed a scheduled, long-acting opioid.

  1.     Long Distances

The DEA presented evidence that some patients travelled on average 45 miles roundtrip to obtain their controlled substance medications.

  1.     Cash Payments

Some of the patients paid cash for their controlled substance medications. But according to the DEA’s expert, when a prescription for a controlled substance is electronically processed through insurance, the insurance company will frequently reject suspicious controlled substance prescriptions that may be related to drug abuse or diversion, such as controlled substance prescriptions for the same patient filled at multiple pharmacies. Such cash payments are especially suspicious when the patient bills insurance for other prescriptions, but pays cash for controlled substance prescriptions.

  1. Inflated Prices

(Attention: this is not a commonly seen allegation).

The DEA presented evidence that for controlled substance medications the pharmacy was charging its cash patients over three times the market rate. The DEA alleged that patients paying inflated prices for controlled substance prescriptions is another red flag of drug abuse or diversion, especially when the price paid is substantially higher than the market price available from other nearby pharmacies. According to the Diversion Investigator’s testimony, filling controlled substance prescriptions at inflated cash prices shows that a pharmacy has knowledge that it is filling prescriptions that are not legitimate, as its inflated prices reflect a ‘‘risk premium’’ that the pharmacy charges to account for the risk it is taking by filling illegitimate prescriptions.


The pharmacy disputed the above allegations by presenting evidence and expert opinions arguing that:

–  the DEA’s position that drug combinations and improper dosing present red flags  was not supported by medical literature.

– patients were traveling from some of the barrier islands. The distance between a straight line and coming from the barrier islands and comparing them to facilities on the mainland was a significant factor that was not considered by the DEA or its expert witness.

– the pharmacy based its cash prices on the cost of acquisition (therefore, it did not inflate its cash prices). It argued that the DEA based “market rate” on the National Average Drug Acquisition Cost (“NADAC”), which often reflects chain pharmacy acquisition cost across the nation. It presented evidence that an independent pharmacy in Florida acquires these medications at higher cost.

– the DEA did not interview any of the physicians or patients to verify the legitimacy of these prescriptions.


At the conclusion of the hearing process, the ALJ rendered an opinion explaining that while the pharmacy staff testified that they resolved red flags (by discussing their concerns with the prescribers and patients), there was no documentary evidence to corroborate this claim. This again, brings us to one of the pillars of compliance: document your conversations with patients and prescribers. The ALJ also noted that the pharmacy’s lack of acknowledgement of any wrongdoing, makes it possible that the alleged conduct continues, jeopardizing public safety. In fact, the pharmacy presented no evidence of any remediation going forward. As a result, the ALJ agreed with the DEA and recommended that the pharmacy’s registration be revoked.

This case is just another reminder of the importance of record-keeping, ongoing conversations with prescribers, flagging “cocktail medications” scrips, and conversations with the patients who are paying cash or travel long distances (anything over 10 miles).


[1] Click here to read more about the investigation and hearing (Federal Register/Vol. 86, No. 243 (2021))


While we are facing less issues in Covid-related prescribing and dispensing, the controversy around ivermectin continues. In my blog post “Risk of dispensing ivermectin,” I stressed the importance of obtaining informed consent prior to dispensing ivermectin.

On the same note, a legal action was filed in Arkansas against a prescriber (among others) for treating patients (inmates) with ivermectin without prior informed consent. The complaint alleges that the county and the prescriber undertook research on the inmates to better understand how ivermectin might help treat Covid symptoms. Allegedly, the inmates experienced side effects, including mental and emotional trauma. According to the complaint, the prescriber sought to obtain informed consent retroactively. This is just another case to stress the importance of obtaining informed consent especially prior to prescribing/dispensing novel medications/treatment. I usually recommend pharmacies to obtain informed consent for any injections, vaccination, and other services which may result in serious side effects.

Cardinal has recently agreed to pay over $13 million to resolve allegations that it violated the False Claims Act for paying “upfront” discounts to physicians in violation of the Anti-Kickback Statute.

As the Department of Justice (USAO) explained in its press release:

“The Anti-Kickback Statute prohibits pharmaceutical distributors from offering or paying any compensation to induce physicians to purchase drugs for use on Medicare patients. When a pharmaceutical distributor sells drugs to a physician practice for administration in an outpatient setting, the distributor may legally offer commercially available discounts to its customers under certain circumstances permitted by the Office of Inspector General for the Department of Health and Human Services (HHS-OIG). HHS-OIG has advised that upfront discount arrangements present significant kickback concerns unless they are tied to specific purchases and that distributors maintain appropriate controls to ensure that discounts are clawed back if the purchaser ultimately does not purchase enough product to earn the discount. According to facts that the company has acknowledged in the settlement agreement, Cardinal Health, Inc. failed to meet these requirements because the upfront discounts it provided to its customers were not attributable to identifiable sales or were purported rebates which Cardinal Health’s customers had not actually earned.”

The USAO called these upfront discounts “cash bonuses,” the purpose of which was to incentivize physicians to continue purchasing from Cardinal. While USAO calls this arrangement illegal and potentially fraudulent, there was no question regarding medical necessity and quality standards.

Due to heightened reporting requirements and recent large settlements against wholesalers for failure to report suspicious orders, many pharmacies  experience issues with their supply of controlled substances (“CS”). I have represented many pharmacies in petitioning  wholesalers to increase the cap on CS supply or not to cut such a supply. Often, such pleas fall on deaf ears.

This may change with a recent decision of a district court which granted an injunction requiring Cardinal to resume supplying controlled substances to MG Pharmacy.

MG Pharmacy – a family-owned Arizona pharmacy – has been having issues with Cardinal since 2013, when Cardinal placed a cap on how much oxycodone the pharmacy was able to order per month (up to 3,500 dosage units).

In 2021, however, Cardinal informed the pharmacy that it would no longer be supplying it with any CS (in addition to some non-controlled substances). Cardinal explained that the pharmacy had filled too many prescriptions for oxycodone from a single prescriber (a nurse practitioner from a nearby pain clinic). In other words, Cardinal had determined that the pharmacy posed an unreasonable risk of diversion and its continuing supply may trigger additional problems for Cardinal (to remind, back in 2017, the DEA fined Cardinal $44 million for failure to report suspicious orders).

In response, the pharmacy filed a motion for temporary restraining order and preliminary injunction alleging breach of contract and tortious interference with business relationships. The court denied the TRO but ruled for pharmacy on the injunction.

During litigation, Cardinal argued that the agreement with the pharmacy allowed Cardinal to terminate the supply at its sole discretion. The court, however, discussed in its opinion the doctrine of good faith and held that the balance of hardship was on the side of the pharmacy. Cardinal had no basis to believe that pharmacy engaged or assisted in diversion (there were no government investigations and Cardinal had no evidentiary proof of diversion). The pharmacy’s orders of CS had been consistent for years and were within the previously set cap.

In addition, the pharmacy was able to show reputational and monetary damages (patients prefer a one stop for all pharmaceutical needs).

While this is the first pharmacy victory (at least that I know of) in obtaining an injunction against its wholesaler for cutting the supply of CS, it could be an important decision for pharmacies arguing unconscionability of wholesaler contracts. The case was decided in Arizona and it is possible that a different court may come to a different conclusion. Nonetheless, this is an interesting and important case in pharmacy litigation.