PBMs could be driving up plan sponsors' drug costs

Far too many pharmacy benefit managers (PBMs) thrive on opacity in their business operations, but sometimes public litigation shines the light of day on secretive practices. For example, a New York court recently refused to  release Express Scripts, Inc. (ESI), one of the most prominent PBMs in the nation, from a pending  litigation. The lawsuit, filed by the New York City Transit Authority (NYCTA), claimed that ESI  breached numerous contractual provisions by failing to identify fraudulent prescription claims paid by  the health plan. (See generally New York City Transit Authority v. Express Scripts, Inc., case no. 1:19-cv-05196 (S.D.N.Y. 2022).  Benefits advisors and employers/plan sponsors can learn from the suit.  

According to the lawsuit, NYCTA hired ESI to administer and manage the prescription drug benefits  NYCTA offered to its employees, retirees, and dependents. In the year prior to contracting with ESI,  NYCTA paid $6 million for compounded prescription claims. To the shock and awe of the NYCTA,  in the first year of its contract with ESI, NYCTA paid over $38 million for compounds. In fact, in  June 2016, only two months after the contract term began, an individual’s claim for an erectile  dysfunction compound medication totaled $405,325.43 over three months. Critically, a significant  portion of the compound claims contributing to the substantial increase in spending originated from  just three providers and were largely fraudulent. Disturbingly, ESI conducted its own  investigations into two of the providers and neglected to share the results with NYCTA. ESI  likely approved overpriced compounds because ESI may have earned “spread pricing” on such  claims—this litigation will reveal the truth. Plans should carefully monitor PBM spread pricing.  Similarly, after discovering the third provider had pleaded guilty to federal fraud charges arising out a  workers’ compensation kickback scheme, ESI is alleged to have withheld the information from  NYCTA.  

Relying on numerous contractual provisions between ESI and the NYCTA, the Court issued an order and opinion denying ESI’s motion for summary judgment and found that the contract between ESI  and the NYCTA, at least arguably, imposed a duty upon ESI to flag and investigate potentially  fraudulent claims. These provisions include, without limitation, the following:  

4. ESI’s duty to identify and respond to clear indicia of fraud under Section 4.2 

Contractor shall process Claims incurred during the Term of this Agreement and provide  customer service in a prudent and expert manner, including investigating and reviewing such  Claims to determine what amount, if any, is due and payable according to the terms and  conditions of the Plan documents and this Agreement. 

4. ESI’s duty to maintain network pharmacies under Section 4.16 

ESI “shall be solely responsible for the selection, monitoring, and retention of its Network  Pharmacies” and that ESI “shall exercise due diligence in the selection and retention of  Network Pharmacies…”. 

4. ESI duties to pursue recovery of overpayment under Section 4.7 

With respect to any Overpayment of any Claim made to a Participant, Contractor shall pursue  recovery of such Overpayment in accordance with applicable law and industry standards and,  upon recovery, repay the amount of such Overpayment to the Plan…. Notwithstanding the  foregoing, Contractor shall be liable for all unrecovered Overpayments due to Contractor’s  breach of this Agreement (including, without limitation, Contractor’s failure to meet the  standard of care) … After termination of this Agreement, Contractor shall continue to identify  Overpayments, and pursue recovery on Claims, as required by this section, paid during the  Term of this Agreement and the Run-Out Period. 

4. ESI duties to carry out obligations in non-negligent manner under Section 4.1 

use that degree of care and reasonable diligence that an experienced and prudent plan  administrator of pharmacy benefits under a group health plan familiar with such matters would  use acting in like circumstances, and consistent with industry standards. 

It strains credulity to think that a PBM hired to “manage pharmacy benefits” takes the legal position that it has no duty to effectively manage pharmacy benefits. Particularly in instances, as was the case  between ESI and the NYCTA, when contractual provisions require PBMs to process claims in a  “prudent and expert manner.” The NYCTA litigation demonstrates the importance of meaningful  negotiation of the contractual terms between plan sponsors and PBMs, as well as the importance of  challenging PBM conduct. 

It is well known that many PBMs have created an ecosystem that allows their financial interest to be placed  ahead of the interests of plan sponsors. Plan sponsors, typically an employer or organization offering  a group health plan to its employees or members, routinely contract with PBMs to obtain wider  prescription drug coverage for the plan’s enrollees. Critically, PBMs possess a significant edge in bargaining power when these contracts are negotiated, as in 2021 roughly 80% of nationwide  prescription claims were processed by just three PBMs (i.e., CVS Caremark, Express Scripts, Inc.,  and OptumRx).9 Moreover, the PBMs have created a vertically integrated environment consisting of  plan sponsors, PBMs, rebate aggregators, and pharmacies (pictured below). 

The NYCTA litigation illustrates that plan sponsors must engage in aggressive contract negotiations  to ensure plans are adequately protected from PBM abuse. The NYCTA dispute also screams for  plan sponsors to contract for robust PBM audit rights. PBMs attempt to limit the PBM audit process  by: restricting documents that can be reviewed during an audit; restricting the frequency of when the  PBM may be audited; and restricting the entities that can conduct PBM audits. More troubling, PBMs  often prevent the auditor from sharing notes taken during the audit with the plan sponsor.  

By ensuring the plan sponsor has the strongest audit rights possible, plan sponsors are better able to  uncover egregious conduct, including, but not limited to, alarming spread pricing trends. Spread  pricing is a common PBM tactic which allows PBMs to charge plan sponsors one rate for a specific  drug while simultaneously reimbursing network pharmacies a substantially lower reimbursement rate  for the same drug, allowing the PBM to collect the different as 100% profit. For example, a PBM  may charge a plan sponsor average wholesale price (AWP) minus 15%, but in contracts with  network pharmacies, the PBM will claim the cost for the same drug is AWP minus 20%. The 5%  difference in price (i.e., the spread) between what the plan sponsor pays the PBM and what the PBM  reimburses to the pharmacy is kept by the PBM. As a real-world example, in the NYCTA litigation, it is likely that the dramatic increase in compound expenditure and ESI’s failure to adequately address the  fraudulent conduct was due to the fact that ESI may have been lining its own pockets through the  scheme using spread pricing.

Spread pricing economically harms plan sponsors. In fact, in 2018, an Ohio Department Medicaid  report found that CVS Caremark, the Department’s PBM, was charging a spread of $5.71 per  prescription claims from April 2017 through March 2018. As a result, Caremark pocketed a  staggering $224.8 million for itself – solely based off spread pricing.11 

The industry is taking note of these PBM behaviors. The NYCTA litigation shows that courts are  beginning to recognize such conduct and appear willing to curtail PBM exploitation of plan sponsors.  Moreover, states have begun enacting legislation regulating and prohibiting the outrageous PBM  behavior. For example, 14 states have enacted legislation limiting or prohibiting a PBMs’  ability to utilize spread pricing. Forty-three states require PBMs to obtain some form of licensure  or registration prior to operating in the state.12 Thirty-two states obligate PBMs to remain  transparent about their costs, and provide regular reports of their sources of profits.13 Although the  battle against abusive PBM tactics remains ongoing, recent litigation and legislation, as well as  aggressive and savvy contract negotiations all serve to equal the playing field between plan sponsors  and behemoth PBMs.