Warning signs: Are you working with a self-serving PBM?
Discussed below are some of the most common contractual provisions that plan fiduciaries and benefits advisors must know to avoid and/or expose a self-serving PBM.
Plan sponsors are right to be cognizant of the JNJ lawsuit, its outcome, and its consequences moving forward. The landmark case is the first of its kind and, regardless of its outcome, the pharmacy benefits landscape will never be the same. While the case is certainly significant, plan sponsors should be comforted by the learning opportunity in front of them. The JNJ lawsuit illuminates many issues that have existed in the backdrop of the pharmacy benefits industry for far too long – one such issue being the self-serving pharmacy benefit manager (PBM).
A self-serving PBM discretely deploys tactics that further their own interests at the expense of their employee-plan clients and plan members. PBMs use their service agreements with benefit plans to impose their self-scheming schemes through often overlooked contractual provisions. Inevitably, these self-service provisions increase the plan’s total drug spend and the out-of-pocket costs borne by plan beneficiaries, but allow the PBM to increase its own compensation through hidden channels. When faced with these increasing costs, JNJ’s employees took action against their employer due to JNJ’s alleged inability to adhere to their fiduciary duties and protect the plan from these common PBM schemes.
Plan fiduciaries can learn from the allegations in the JNJ lawsuit and avoid a similar fate. Plan fiduciaries must be aware of the fiduciary duties of prudence and loyalty they owe the plan and its beneficiaries. Adhering to these fiduciary duties requires prudent selection of a PBM, and an understanding of the self-serving contractual provisions PBMs rely on. Discussed below are some of the most common contractual provisions that plan fiduciaries and benefits advisors must know to avoid and/or expose a self-serving PBM.
Spread pricing and the “blank check”
For years, spread pricing was a staple of the PBM industry and while some PBMs claim to have moved to a “pass-through” pricing model, many still rely on spread pricing as a key piece of compensation. Spread pricing exists when a PBM charges a plan-client one price for a prescription claim, but reimburses the dispensing pharmacy at a lower price for the same claim. To illustrate, a self-serving PBM charges the plan $10 for a prescription claim, but only reimburses the pharmacy $7. The remaining $3 (i.e., the “spread”) is retained by the PBM as pure profit. Transparent PBMs focused on lowering its clients’ total drug spend utilize a “pass-through” pricing model, where the amounts paid by the plan match the reimbursement amounts received by the dispensing pharmacy.
Spread pricing becomes egregious when PBM contracts contain a “blank check provision,” which allows PBMs to retain an unlimited amount of spread, causing the plan to pay far more than the actual cost of a prescription claim. A “blank check provision” looks something like the following: “PBM may retain the difference between the amounts charged to Plan and the amounts PBM reimburses Network Pharmacies.” That’s it. One innocuous sentence thrown in the middle of what is often a 40+ page contract, and a plan could be paying millions of dollars in excess of the true cost of its prescription claims. Plan fiduciaries must be on the lookout for spread pricing, but especially the “blank check provision.”
Rebates and rebate aggregators
Through practices similar to spread pricing, self-serving PBMs retain portions of rebates due and owing to their plan clients. It’s becoming increasingly common for contracts between plans and PBMs to state that the plan will receive 100% of rebates on a “pass-through” basis. To an untrained eye, this seems like an ideal arrangement; however, PBMs often include subtle language surrounding rebates that limit the scope of rebates and, in turn, limit the amount of monies owed to the plan. This subtle language is often included in the definition of the term “rebate” itself, and will exclude from the definition of “rebate” other types of manufacturer revenue like “administrative fees.” Thus, by recategorizing portions of the revenue received from pharmaceutical manufacturers as something other than a “rebate,” PBMs can retain additional compensation and reduce what is owed to the plan.
More concerning, however, is PBM use of rebate aggregators. Rebate aggregators serve as intermediaries between PBMs and pharmaceutical manufacturers and are responsible for negotiating rebate agreements with manufacturers, collecting rebates from manufacturers, and passing along the rebates to PBMs for ultimate payment to plans. Critically, the PBMs are all affiliated with one or more rebate aggregators. For instance, the rebate aggregator Ascent Health Services, LLC is owned by the same parent company (Cigna) as Express Scripts, Inc. The rebate aggregator Zinc Health Services, LLC is affiliated with CVS Health/Caremark, and the rebate aggregator Emisar Pharm Services, LLC is associated with UnitedHealth/OptumRx, Inc.
Due to these affiliations, PBMs and rebate aggregators can easily collude to benefit themselves by retaining hidden portions of rebates from benefit plans. PBM contracts with plans enable this type of collusion by including language that confines the PBM’s obligation to “pass-through 100% of rebates actually received by PBM.” Based on this language, PBMs will allow their sister-company rebate aggregators to retain portions of the rebates offered by pharmaceutical manufacturers, and then pass through that smaller amount (i.e., what is left over after the rebate aggregator retains rebates for itself/PBM) to the plan. Pictured below is a snapshot of PBMs and their vertical integration including wholly-owned rebate aggregators.
Exclusive mail order or specialty pharmacies
As highlighted in the J&J lawsuit, self-serving PBMs impose contractual provisions with plans that mandate exclusive use of the PBM’s affiliated specialty pharmacy or mail order pharmacy as the exclusive mail order/specialty pharmacy. This type of mandate allows the PBM to manipulate pricing and reimbursement amounts and enables spread pricing. To illustrate, in the J&J case, J&J’s plan was required to use Express Scripts, Inc.’s (“ESI”) affiliated specialty pharmacy as the plan’s exclusive specialty provider. The complaint identifies instances where ESI charged J&J’s plan $16,398.17 for a drug that was available from other sources for as low as $94.10. That nearly 10,000% mark-up is essentially pure profit for PBM and its affiliated pharmacy. Plan fiduciaries must be wary of exclusive specialty and mail order provisions, as they are often nothing more than a self-serving tactic aimed at increasing PBM profit at the expense of the plan and its beneficiaries.
Restricted audit rights
Amongst the most common self-serving tactics deployed by PBMs is limiting plan audit rights and the plan’s ability to access documents and data. Naturally, restricting the plan’s ability to analyze relevant information is intended to keep the additional compensation the PBM is receiving hidden from the plan. These restrictions often limit the type of information available for inspection, who may perform an audit on behalf of the plan, and the scope and frequency of an audit, amongst other things. Plan fiduciaries must avoid falling for this trap and understand their rights and obligations as a plan fiduciary.
Specifically, plan fiduciaries are obligated to routinely monitor service providers like PBMs to ensure the PBM is performing its duties in accordance with the law and its agreement with the plan. A failure to effectively monitor service providers like PBMs amounts to a breach of the plan fiduciary’s duty of prudence. Therefore, contracts that restrict a plan’s ability to audit their service providers obstruct adherence to the duty of prudence and exposes plan fiduciaries to liability.
In addition, as of December 2020, the Employee Retirement Income Security Act (ERISA) expressly prohibits plans from contracting with entities like PBMs if the underlying contract “directly or indirectly” restricts the plan from “electronically accessing de-identified claims and encounter information or data,” including, on a per-claim basis, financial information, provider information, service codes, and any other data element included in claim or encounter transactions. 29 U.S.C. § 1185m(1). While this section of ERISA allows entities like PBMs to impose reasonable restrictions on public disclosure of this information, it does not allow PBMs to prevent plans from accessing their own data and confirming whether the PBM is engaged in any self-serving tactics. Thus, in addition to their own fiduciary duties, plan fiduciaries are legally prohibited from executing agreements with PBMs that seek to prevent plan access to data or restrict plan audit rights.
Conclusion
ERISA obligates plan fiduciaries to act in the best interest of the plan and plan beneficiaries. Incumbent upon plan fiduciaries then, is an obligation to ensure that plan service providers, like PBMs, conduct themselves in a manner that furthers the interests of the plan and retains only reasonable compensation for their services. Prudent plan administration and selection of a self-serving PBM do not comport with one another. Accordingly, plan fiduciaries must know the tell-tale signs of a self-serving PBM and avoid contracting with PBMs that impose some of the provisions detailed above. In doing so, plan fiduciaries can look at cases like the J&J lawsuit and no longer have to wonder “What if I’m next?”