Prohibited transactions, exemptions and enforcement for pharmacy benefit managers under ERISA

Dec 14, 2020

Here’s an opportunity to provide additional support to your current roster of clients.
The reach of pharmacy benefit managers (PBMs) has expanded significantly and they have garnered increased visibility in recent years as their earnings have increased along with the rise in health care costs, particularly prescription drug costs.
PBMs serve as intermediaries between health plans and drug companies to administer the prescription drug portion of a health plan.
As the healthcare landscape rapidly changes, a shift has been made from a model where PBMs were more of a “middleman” claims administrator to one where PBMs assert more control over a number of aspects of retail prescription drug transactions.
Traditionally, PBMs generated earnings through claims processing and service fees. PBMs are now engaged in numerous aspects of price negotiations and patient care, including deciding how much network pharmacies will be paid, developing drug plan formularies, approving or disapproving prior authorizations, conducting drug utilization reviews and operating their own mail-order and specialty pharmacies. In some instances, PBMs can be affiliated with the health plans for which they provide services, raising potential prohibited transaction and self-dealing concerns under ERISA.
While the Department of Labor (DOL) typically has not provided clear or comprehensive guidance to hospital systems seeking to use affiliates to provide services to medial plans, there is limited guidance in the form of individual prohibited transaction exemptions (PTEs) that apply only to specific in-house providers. These individual exemptions, while applicable only to specific in-house providers, nevertheless offer additional insight into the DOL’s perspective on affiliated service providers in the context of prescription drug plans.
The required retention of an independent fiduciary to provide oversight to the health plan as a condition to a granted exemption has increasingly become more common. PTE 2006-12 was granted to Retail Clerk Welfare Trust and Welfare Plan’s third party pharmacy benefits manager to provide relief from ERISA’s self-dealing prohibitions under Section 406(b) with regard to the purchase of prescription drugs from pharmacies maintained by contributing employers or their affiliates. Other examples include PTE 2002-05 and PTE 2000-44. Retention of an independent fiduciary was a requirement in each of the granted exemptions, highlighting the increasing importance of an independent, unaffiliated party involved in these transactions.
In addition to increasing regulatory oversight, PBMs have been the subject of notable litigation, particularly regarding the extent to which state statutes regulating PBMs preempt ERISA, and whether PBMs are fiduciaries under ERISA.
A major criticism of PBMs has been the lack of transparency into the structure and scale of pricing and payments from drug companies to PBMs. Several ERISA lawsuits have been brought recently against PBMs that provide prescription drug services for their plans claiming the PBM is a fiduciary under ERISA and breached its fiduciary duty to the plan with respect to the PBM’s handling of prescription drug costs¹. Plan sponsors typically have little to no knowledge of the rebates and discounts the PBM negotiates with manufacturers or of the spread retained by the PBMs. Rebated savings are often retained by the PBM instead of passed through back to the plan.
Even when not required under an exemption or settlement, an independent fiduciary can provide increased transparency into the PBM landscape by assessing the reasonableness of fees charged and providing an unbiased assessment of the cost and quality of PBM arrangements, among other things.
Contact Sruthi Mylavarapu at 202-471-3505 or John Matelis at 202-471-3504 for more information on how Newport can work with you to help your clients in these types of matters.
¹ See e.g., Chicago Dist. Council of Carpenters Welfare Fund v. Caremark, Inc., 474 F.3d 463 (7th Cir. 2007); In re Express/Anthem ERISA Litig., 285 F. Supp. 3d 655 (S.D.N.Y. 2018)

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