Updated: Feb 16
Faced with what appears to be an endless increase in prescription drug costs, employers need a clear view into the prices they pay for their employees’ medications.
Pharmacy Benefit Managers (PBMs) are having a moment; albeit, not a very good one. A lack of clarity around their profits from spread pricing, rebate retention, and formulary placement has resulted in bad press and increasing pressure for transparency from state and federal legislators, industry organizations, and health care providers.
The claim made by many PBMs that their practices result in lower prescription drug costs may seem reasonable at first blush, but begins to fade as you consider that: (1) the 2022 Segal Health Plan Cost Trend Survey projects that out-patient prescription costs will increase 8.5% in 2022, inclusive of specialty medications; and (2) a report by the Berkeley Research Group found that in 2020 more than half of total spending on brand medicines went to the supply chain, including PBMs, and not drug manufacturers.
Faced with what appears to be an endless increase in prescription drug costs, employers need a clear view into the prices they pay for their employees’ medications. Ironically, it is the PBM that can provide drug-price transparency and the ability to save money. By agreeing to serve as a fiduciary, a PBM can commit to putting the employer’s best interests ahead of the PBM’s profits when negotiating with pharmacies and drug manufacturers and setting prescription drug prices. The reluctance to make such a commitment by many PBMs could be part of the reason behind escalating drug costs.
Who is a fiduciary?
In the context of health benefits, the answer to this question depends on whether the plan at issue is an ERISA plan or a non-ERISA plan. If the plan is an ERISA plan, and most plans are, there are two types of fiduciaries — a “named” fiduciary and a “functional” fiduciary. A named fiduciary is just that – a person that the plan documents name as the plan’s fiduciary.
A “functional” fiduciary is any person who:
(1) exercises any discretionary authority or responsibility in the administration of the plan;
(2) exercises any authority or control concerning the management and disposition of plan assets; or
(3) renders investment advice regarding plan assets for a fee.
In determining whether a person is a “functional” fiduciary, courts will look beyond the label provided in the contract and examine the actual services provided by the person to the plan. In doing so, courts often reject any contractual “disclaimer” that the person is not a fiduciary to the plan.
On the other hand, if the plan at issue is a non-ERISA plan (e.g., a governmental plan), ERISA will not apply, and the courts will examine whether the person is a fiduciary under the applicable state common law. For example, under New York common law “[a] fiduciary relationship exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation.”
What are the fiduciary duties?
Under ERISA, a fiduciary must: (1) discharge its duties solely in the interests of the plan participants (the “exclusive benefit rule”), which carries an overriding duty of loyalty to the plan participants; (2) act with the care, skill, prudence, and diligence of a prudent man under similar circumstances (the “prudent man rule”); (3) act in accordance with the plan documents but only when consistent with ERISA requirements (the “plan document rule”); and (4) refrain from engaging in specific prohibited transactions.
Similarly, under state common law, a fiduciary typically must:
(1) act as a reasonable and prudent person under similar circumstance (the “duty of care”);
(2) act with honesty with full disclosure of any harmful information (the “duty of candor”); and
(3) and at all times act with undivided loyalty to those whose interests the fiduciary is to protect (the “duty of loyalty’).
In short, both ERISA and common law fiduciaries share the overriding duties of loyalty, transparency, and honesty. Stated otherwise, a fiduciary must refrain from engaging in hidden games that benefit the fiduciary at the expense of those whose interests they are obligated to protect at all times.
PBM reluctance to serve as a fiduciary
If a fiduciary arrangement is in the best interests of their clients (aka employers/plan sponsors), why aren’t PBMs racing to form one? Some PBMs do, but many flat-out refuse to serve as a fiduciary. Perhaps the reason for such reluctance is a concern that serving as a fiduciary would prevent the PBM from engaging in many of the opaque practices (aka games) that PBMs undertake around drug prices, rebates, and formulary placement from which they derive significant revenue.
One questionable pricing game is what I call the “MAC Game.” MAC refers to “Maximum Allowable Cost,” and PBMs typically price generic drugs based on their internal MAC lists. Under the MAC Game, a PBM will create multiple internal MAC lists – using one MAC List to pay pharmacies, a MAC price for a generic drug — and maintaining a different MAC List with a higher price for the same generic drug to bill their clients. This game results in spread pricing, where the PBM uses the client’s money to pay the pharmacy the low MAC price and then pockets the “spread” between that low MAC price and the higher MAC price it bills the client. But as I often ask, how can there be more than one “maximum” price for the same drug dispensed to the same person on the same day? And, if the PBM is operating as a fiduciary, how can it pocket the difference in “MAC” prices at their clients’ and the plan members’ detriment?
Another questionable PBM game is what I call the “hide the data game.” Here, when a PBM client initiates an audit and requests that the PBM produce claims data to the client’s auditor, a PBM might object to the client’s auditor, balk at producing data for the entire audit period, produce an incomplete data set that omits key data elements, or perhaps produce a data set that is missing data for certain date ranges within the audit period. In short, you can negotiate the best prices in the industry, but if you cannot get the data you need to audit your PBM you will never know if that PBM complied with your contract and delivered those prices.
If the PBM had agreed to serve as a fiduciary, such games most likely would be prohibited. But absent a fiduciary relationship, courts will look to the PBM contract, and far too often that contract fails to prohibit the PBM games. Indeed, a PBM might argue, successfully, that their client is a sophisticated purchaser of PBM services (often armed with consultants) and that if the client wanted to prohibit the challenged practice it could have done so by contract. In my experience, courts are inclined to enforce clear contract terms but are reluctant to find that a PBM is a common-law fiduciary or a “functional” fiduciary under ERISA (even when presented with compelling evidence).
The PBM pushback
Faced with a growing demand for transparency, you might think PBMs are re-evaluating their questionable practices. But the opposite is happening: PBMs are sprinting to protect their financial interests through intense lobbying. In the first nine months of 2021, PBMs spent $5.9 million on lobbying, a 20% increase over the prior year. Meanwhile, the PBM Accountability Project has reported that PBMs’ profits increased between 2017 to 2019, due in part to misaligned incentives and complex contract terms.
It seems as though PBM lobbying has paid off once again for the PBMs. On August 20, 2021, CMS announced that it would delay enforcement of the prescription drug reporting and transparency rules that were to take place in early 2022 under the Consolidated Appropriations Act and the Transparency in Coverage Rules (aka TiC Rules).
Is help on the way?
Two recent events, however, suggest that help might not be too far off. First, there is the pending appeal in Doe v. Express Scripts, Inc, a case in which ERISA plan participants filed a class action alleging that:
(1) Anthem, Inc. was an ERISA fiduciary that breached its duties to plaintiffs when Anthem sold its PBM subsidiaries to Express Scripts knowing that Express Scripts would charge the plan participants higher prices for prescription drugs; and
(2) whether Express Scripts was an ERISA fiduciary in setting the prices the plaintiffs and their plans pay for prescription drugs.
The lower court dismissed the case, and the Second Circuit affirmed. Not willing to give up the good fight, the plan participants have asked the United States Supreme Court to take the case and reverse. In considering whether it will take the case (i.e., grant a writ of certiorari), the Supreme Court, on December 13, 2021, invited the United States Solicitor General to file a brief on whether Anthem and Express Scripts were ERISA fiduciaries. That invitation is a promising development, but a final resolution is at best a year away.
Second, on December 31, 2021, New York Governor Hochel signed one of the most comprehensive PBM laws in the country. In brief, the NY law requires PBMs to:
(1) apply for and secure a license to operate in the state;
(2) act in the best interests of health plans at all times with the care, skill, prudence and diligence of a prudent man under similar circumstances (sound familiar?);
(3) hold in trust for the benefit of its health plan clients all funds received by the PBM in relation to its PBM services (including all funds received by the PBM through spread pricing) and to distributed such funds pursuant to the PBM contract or as required by law;
(4) provide to health plans an annual accounting of all “pricing discounts, rebates of any kind, inflationary payments, credits, clawbacks, fees, grant, chargebacks, reimbursements and other benefits received by” the PBM and to ensure that any portion of such benefits is passed through to reduce the reportable ingredient cost;
(5) disclose in writing to the health plan the terms and conditions of any contract between the PBM and any party relating to PBM services provided to the health plan; and
(6) disclose in writing to the health plan any practice that “directly or indirectly presents any conflict of interest with the PBM’s relationship with or obligation to the health plan.”
While the PBM law could benefit from some clarifying regulations, it is to take effect later this year with a January 1, 2023 deadline for securing the required license to operate as a PBM. Only time will tell if a PBM, or perhaps the PBM trade association PCMA, files a lawsuit that seeks to block this important and much-needed legislation.
About the author: David A. McKay is general counsel at Prescryptive Health, Inc., a health care technology company delivering solutions that empower consumers. Prior to joining Prescryptive in 2020, Mr. McKay spent over 20 years representing self-funded plans in audits and litigation against the country’s largest PBMs.