The Urgent Need for a Fiduciary of Pharmacy Benefit Plans
In 1974, legislation from Congress sought to solve the problem of underfunded pensions. The venerable old Studebaker company failed to adequately fund the pensions promised to their retirees. This legislation was a major turning point for American workers. The legislation was an acknowledgement that companies must make good on their benefit promises to employees.
The Employee Retirement Income Security Act of 1974 (ERISA) is a significant U.S. federal tax and labor law that establishes minimum standards for pension plans in private industry. ERISA, signed into law by President Gerald Ford, aimed to protect employee benefit plan participants and their beneficiaries by requiring disclosure of financial information, establishing fiduciary standards, and granting access to federal courts. It is overseen by the Department of Labor, the Department of the Treasury, and the Pension Benefit Guaranty Corporation. Notably, ERISA does not mandate that employers establish a pension plan but regulates such a plan if one is established. ERISA includes provisions for vesting of pension benefits, minimum funding requirements and fiduciary oversight.
At the heart of fiduciary responsibility lies a fundamental element – trust – the fiduciary is entrusted with the care of assets and interests belonging to others. This trust is not merely a moral expectation but a legal obligation, deeply rooted in the principle that fiduciaries must act solely for the benefit of the plan participants and beneficiaries. Further, fiduciaries are required to educate themselves to become familiar with the subject matter entrusted to them. This is referred to as the “prudent expert” standard. Fiduciaries are not permitted to rely blindly on the advice of their consultants!
From 2006-present, there have been over 400 class action lawsuits filed against ERISA retirement plan fiduciaries, alleging their failure to prudently manage the investments and/or administrative expenses of 401(k) and 403(b) plans, for the sole benefit of plan participants and beneficiaries. Excessive investment management fees, advisor compensation and record keeper fees were deducted from participant account balances, because plan fiduciaries did not adequately educate themselves on these financial details and did not require their plan vendors to disclose all revenue sharing and other industry compensation practices. Over $1B in verdicts or settlement payments have been made by or on behalf of these defendant plan fiduciaries (with the total growing every month). This does not include the hundreds of millions expended on attorney fees to defend against these claims.
History is about to repeat itself with respect to the fiduciaries of Pharmacy Benefit Plans.
What is the current spending on prescription drugs in the United States? In 1990, it was $30 Billion. By 2022, it was $633 Billion.[1] Prescription drug spend has grown by 6%-10% a year primarily because of increasing drug prices, uncontrolled utilization of high-cost therapies and the enormous profit margins of pharmacy benefit manager (“PBM”) middlemen. Even if we stick with just a 6% rise in cost, pharmacy spending will reach $1 Trillion annually by 2030.
Who is acting in the best interests of the employees and their dependents when it comes to managing prescription drug benefits? A recent lawsuit against the fiduciaries of a major corporate prescription drug plan, an ongoing FTC investigation of the six largest PBMs, and four pending pieces of PBM reform legislation in Congress all suggest that drug spend is not being managed carefully enough!
The Consolidated Appropriations Act of 2021 (“CAA”) clarified certain fiduciary oversight responsibilities, by expressly requiring prescription drug plan fiduciaries to affirmatively request, obtain and analyze specific information from pharmacy benefit brokers and consultants regarding any “indirect compensation” they received or expected to receive from large PBMs. It is widely understood among industry insiders, that the large PBMs have been paying lucrative and undisclosed “referral fees” to the large pharmacy benefit consulting firms in exchange for their (i) referring 95% of their plan sponsor clients to the large PBMs, (ii) approving one-sided PBM contracts on behalf of their plan sponsor clients, and (iii) remaining silent on dozens of PBM “profit-taking” techniques which boost drug spend by 20%-30% above market. This clear financial conflict of interest is being (and has been) ignored by thousands of plan fiduciaries. The U.S. Supreme Court has clearly warned plan fiduciaries that they cannot rely blindly on the advice of their consultants. See George v. Kraft Foods Global, Inc. [2]
That warning may have been overlooked by the fiduciaries of the Johnson & Johnson prescription drug benefit plan, who were recently sued for not prudently managing that plan, covering more than 100,000 members. See Lewandowski v. Johnson & Johnson, et al. The Complaint in that case is publicly available and includes numerous examples of the plan spending $10,000-$20,000 on a prescription drug claim where the same drug was generally available for less than $300 per claim. How could the plan fiduciaries allow that to happen? Didn’t they review their claim files to monitor the legitimacy of high-cost claims? Did they accept an AWP-19% discount on specialty drugs, not realizing that specialty generics should have a separate discount rate closer to AWP-80%? Did they rely too heavily on a national or regional consulting firm that accepts PBM “referral fees” as described above (and was protecting the PBM, rather than the plan sponsor, plan, or its members)? Did the fiduciaries ever request, obtain, and analyze a written “disclaimer” from their consulting firm, confirming in writing that no “indirect compensation” was being received by the consulting firm from the PBM? Have your plan fiduciaries read this Complaint?
Have you read your PBM contract and pharmacy benefit consultant service agreement recently? If so, you would note that neither of these agreements requires your PBM or pharmacy benefit consultant to act in the best interest of the plan, its members, or the plan sponsor (with very rare exceptions). These contracts are notoriously one-sided in the vendor’s favor. Did an ERISA lawyer with extensive PBM contracting experience carefully review and extensively revise both contracts on your behalf before you signed them?
Some plan fiduciaries are considering suing their PBM and consultant for failure to provide any of the helpful assistance described above, thereby causing years of wasteful and excessive drug spend. It is better to identify and fix contract problems than to wait and see if you get sued for fiduciary breach.
In most cases your pharmacy benefit consultant has no fiduciary obligations to your plan under ERISA and your PBM has very limited fiduciary obligations to your plan. If plan members have not been protected from excessive drug prices and/or administrative fees, who can be sued for those breaches? Do your fiduciaries clearly understand what ERISA requires of them? Remember, relying blindly on the guidance of a consultant (even a prominent national consulting firm) is not adequate under ERISA. The financial conflict of interest mentioned above is real in the healthcare industry. See Section 202 of the CAA and the Johnson & Johnson Complaint which both allude to financially conflicted consultants being a major contributor to excessive PBM profits.
What are companies doing to protect themselves? While some past lawsuits have been focused on the PBMs and drug manufacturers, both of whom have deep pockets, the Johnson & Johnson Complaint may be a tipping point to where plan fiduciaries may be held accountable for not meeting their obligations. Fiduciaries should learn about Section 202 of the CAA and obtain fiduciary training on the important aspects of the PBM contract, how brand and generic drugs are priced, how rebates are hijacked and how PBMs otherwise generate excessive profits.
All the trends point in the same direction – as costs rise into the trillions, the expectation is that companies have a clear, detailed, and transparent view of how their health care dollars are being spent and strong evidence that their selected vendors have not taken unreasonable profits or compensation, at the plan’s expense. The lessons learned in the 300-400 class action lawsuits against retirement plan fiduciaries must now be put to good use by the fiduciaries of pharmacy benefit plans.[3]
Companies looking to do right by their employees and stay in compliance with ERISA should at the minimum look at the following tasks.
1) Identify a group of management level employees to serve on a health benefit plan fiduciary committee.
2) Provide the fiduciary committee with all resources necessary to obtain fiduciary and subject matter training from an independent pharmacy benefit expert.
3) Encourage the fiduciary committee to carefully review the requirements of Section 202 of the CAA and obtain the indirect compensation disclaimers required thereunder to avoid financially conflicted consultants. This full disclaimer should be drafted by your PBM counsel, not the vendor’s counsel.
4) Request and obtain all your pharmacy claims data from the PBM (accompanying each claims invoice), for analysis and modeling.
5) Have your PBM contract and consulting services agreement reviewed by special PBM counsel to obtain a fully independent assessment of the strengths and weaknesses of those key contracts.
The fiduciary role is a powerful one, built on trust and security. Formalizing this role for your Prescription Drug Benefit Plan is the wise, prudent, and necessary decision for every company seeking to do right by their employees.
In conclusion, and according to Jerry Schlicter, the biggest takeaway for those inclined to be part of changing the status quo is to use the following as a beacon to guide you, “for every decision made when managing a plan for the benefit of members that is covered by fiduciary obligations, each decision must stand on its own as prudent, and if you keep the members of the plan in mind and all decisions are in the members’ best interest, you will satisfy the fiduciary standard.”
Franck P. Cushner
Paul B Holmes
[1] Congressional Budget Office, Prescription Drugs: Spending Use and Prices
[2] George v. Kraft Foods Global, Inc – PDF available for download
[3] Note that Kraft Heinz has sued their medical plan TPA for creating roadblocks to meeting their health plan fiduciary obligations. Kraft Foods was a defendant in a previous 401(k) plan breach of fiduciary lawsuit. Lessons were learned.
