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Perplexed and the Fiduciary Committee – PBM Edition

| 5 min read
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I read the Lewandowski v. Johnson & Johnson class action complaint and couldn’t help but wonder – are plans and participants doomed, or can employers take proactive steps to satisfy their fiduciary duties and potentially reduce prescription drug costs under their plans?  Although there is no one-size-fits-all approach, a plan fiduciary should understand what their pharmacy benefit manager (“PBM”) contract entails and confirm that the fees the plan is paying for prescription drugs and PBM services are reasonable.    If the plan fiduciary determines that this is not the case, it should consider whether the plan can negotiate better contract terms and if not, consider issuing a request for proposal (“RFP”) for PBM services.  In any event, the plan fiduciary should document its review of the PBM agreement and its conclusions based on its review. 

The complaint outlined a multitude of factors, listed below, that a plan fiduciary may want to use when engaging in the process of selecting and monitoring a PBM.

  • Traditional v. Pass-Through PBMs: Confirm whether the PBM is a “traditional” PBM or a “pass-through” PBM and, if applicable, consider switching to a pass-through PBM model.  Traditional PBMs typically make their money through a combination of spread pricing, rebates, and owning their own pharmacies.  Pass-through PBMs typically make their money only through administrative fees, usually assessed on a per-member, per-month basis.  While pass-through PBMs still negotiate for rebates and discounts, they pass those amounts to their clients instead of keeping them.  Additionally, pass-through PBMs have no incentive to favor drugs with higher spreads.
  • Rx Drug Rebates: Work with your broker to understand the definition of rebates under the PBM contract.   A traditional PBM may call rebates by other names in the PBM agreement.  Negotiate the amount that the PBM will pass through to the plan (represented either as a percentage or a flat amount per prescription). 
  • PBM Owned Specialty Pharmacies: Find out whether the PBM owns specialty pharmacies and steers plan participants to those pharmacies and then examine whether the PBM’s specialty pharmacies are truly the most cost-effective option.  Also investigate whether the PBM pays its specialty pharmacies excessive amounts that exceed the pharmacy’s acquisition costs.  Some PBMs may do this to hide spread pricing.  In other words, the PBM charges the plan the same amount that it pays its specialty pharmacy but the specialty pharmacy is overcharging the PBM.    If the prices are not reasonable, negotiate plan terms that would allow or encourage plan participants to fill their prescriptions at other specialty pharmacies.
  • Mail-Order Pharmacies: Find out whether the PBM has a mail-order pharmacy and whether the PBM incentivizes participants to obtain their prescriptions through its mail-order pharmacy even if the mail-order pharmacy’s prices are routinely higher than prices at other pharmacies.  If such prices are not reasonable, negotiate plan terms that would allow or encourage plan participants to fill their prescriptions at other pharmacies.
  • Specialty PBM Carve-Out Model: Ensure the PBM agreement does not include an exclusivity provision so that the employer has the right to consider a specialty PBM carve-out model.  Some employers have a traditional PBM manage most of their prescription-drug needs, and a specialty PBM manage their specialty drugs.  Specialty PBMs typically use a pass-through model and can incorporate all aspects of specialty drug management, including claims processing, specialty formulary, and specialty pharmacy network management.  They also may offer savings to the plan. 
  • Drug Prices: Understand how the plan and PBM set prices for groups of drugs.  If relying on a benchmark rather than negotiating a separate price for each drug, identify the benchmark (e.g., the Average Wholesale Price (“AWP”)) and ensure that bundled pricing (e.g., AWP minus 85% for generic drugs, AWP minus 20% for brand drugs, AWP minus 15% for specialty drugs) is reasonable. 
  • Broker and Consultant Conflicts of Interest: If the employer hires a consultant or broker to help solicit bids and select and negotiate with a PBM, understand potential conflicts of interest.  For example, obtain the requisite ERISA Section 408(b)(2) disclosure to determine whether the consultant/broker receives direct or indirect fees from certain PBMs or by including certain provisions in the PBM contract.
  • RFP Processes: Regularly (e.g., every three years) conduct an open RFP process to obtain competitive bids for PBM services.  Confirm that the PBM agreement reflects the best rates and terms available considering the plan’s size, bargaining power, and other characteristics.
  • Audit Rights: Ensure the PBM agreement includes audit rights so that the employer can confirm whether the PBM delivered the contracted pricing and implemented the employer’s plan designs correctly.

If a plan fiduciary reviews these factors when selecting and monitoring its PBM and documents its review, the plan fiduciary will put itself in a better position to defend breach of fiduciary duty claims that come up in this context.