Pharmacy Owners: Do You Know What’s In Your Pharmacy Services Administrative Organization (PSAO) Agreement?

Do you understand your PSAO agreement?  Have you asked an attorney to look it over?  Few people read the fine print, but knowing the terms buried within might help you foresee changes to your PSAO payments before they catch you by surprise.

What’s a PSAO?

Pharmacy services administrative organizations, or PSAOs, are cooperative networks for independent pharmacies.  Independent pharmacies, especially small businesses, have difficulty competing against large, national chains in the pharmaceutical marketplace.  When the independent pharmacy signs an agreement with a PSAO, it joins a network of independent pharmacies, aggregating their buying and selling power to enhance their ability to compete. 

The PSAOs negotiate contracts on behalf of the group, including contracts with health plan pharmacy benefit managers (PBMs) representing insurance companies.  The PSAO/PBM contracts allow the independent pharmacies to bill insurance companies for their products – an ability they otherwise may not have.

After signing an agreement with the PSAO, the independent pharmacies are often left in the dark about the deals PSAOs are making with PBMs and others.  The PBMs often have greater negotiating leverage, which may drive the price of the independent pharmacies’ products down.  The independent pharmacies may be required to honor the prices negotiated by the PSAOs and the prices may be retroactive.  This means that independent pharmacies may have already received payment for the sale of their product only to find out, after-the-fact, that they were overpaid based on retroactive application of the new sale price.

How do independent pharmacies receive payment from the PSAOs?   

The PSAOs collect receivables for the independent pharmacies and send payments to them.  In some situations, the PSAOs conduct audits after-the-fact and reconcile the amounts already paid with the amounts that should have been paid.  If there are discrepancies, the PSAOs may deduct from future payments, often taking independent pharmacies by surprise.  The deductions can be dramatic and result in serious cash-flow problems for the pharmacy.

In one recent example, Epic Pharmacy Network (Epic) clawed back reimbursements paid to pharmacies.  Jackson LLP first became aware of the problem in the Fall of 2018 when Epic sent notice to participating pharmacies alerting them that the would not pay the full amounts the pharmacies expected.  Epic told pharmacies that their reimbursements for 2018 had been excessive based on the amount negotiated with a PBM.  Epic signed the contract with the PBM in April 2018 and obligated the participating pharmacies to sell their products at a certain price.  The prices were made retroactive to January 2018, meaning that participating pharmacies that sold the products from January through April likely sold them at a higher price.

Epic reconciled the payments already made to its participating pharmacies and determined that some had been paid too much.  In response, Epic withheld the overpayment amounts from future payments.  Participating pharmacies took a major hit, with payments reduced anywhere from five– to seven-figure amounts.  Many of the participating pharmacies impacted were entirely unaware of the issue until immediately before their payments were reduced. The result: confusion and immediate cash-flow problems.

PSAOs provide a valuable service for independent pharmacies, but it’s important to understand how this service works and your rights under the PSAO agreement to keep from being caught by surprise.  With this knowledge, you can better predict the risks you may face and plan for them.

What should I look for in my PSAO contract?

If you’ve signed a PSAO agreement but don’t know what it means, you’re not alone!  The agreements likely are drafted by the PSAOs and may seem complex.  Below are some key points to read and understand.

Do you have the right to receive information about the contracts PSAOs negotiate on your behalf?

Independent pharmacies will be obligated to the contracts the PSAOs sign on their behalf, but may not know the terms of those contracts or even that they exist.  Before signing your PSAO agreement, take note of the rights you will have, or not have, to ask questions and receive information about the PSAO’s contracts with other parties that will have a direct impact on your business.

Do the PSAOs have the right to adjust your payments?

Independent pharmacies receiving payments from PSAOs may be surprised to learn that those payments may be adjusted after-the-fact. Before signing your PSAO agreement, it’s important to know if the PSAO can adjust your payments and request reimbursement from you, and if so, what this process entails.  Doing so will help you control the risk and better manage your cash flow.

How can you get out of your PSAO agreement, and how can the PSAO get out of its agreement with you? 

If you decide to move in a different direction, or if you have a dispute with the PSAO, be aware of your termination rights and obligations.  It’s also important to know if the PSAO can terminate the agreement if they choose to do so and how much notice you are entitled to receive.  Before signing your PSAO agreement, make sure you understand these provisions.

What happens if you have a dispute with your PSAO?

Although you never plan to have a dispute, sometimes they do arise.  Before signing your PSAO agreement, find out the requirements for handling disputes.  Many contracts have provisions requiring you to participate in dispute resolution before filing a lawsuit or requiring you to bring a lawsuit only in certain states or jurisdictions.  Understanding these provisions will help you understand your options if you cross this bridge in the future. This may seem overwhelming, but an attorney can walk you through your PSAO agreement.

This blog is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between our firm and the reader and should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.