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..
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.
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