The pharmacy benefits landscape is changing for large employer groups and affecting all parties in the drug supply chain. Recent federal actions, such as the Federal Trade Commission’s investigation into Pharmacy Benefit Managers (“PBMs”) and Rebate Aggregators (detailed below), indicate an increasing scrutiny on PBMs, their routine abusive practices, and the impact they have on prescription drug costs. Plan Sponsors are uniquely positioned and key to helping reduce total drug spend and out of pocket expenses for their plan beneficiaries/employees. Plan Sponsors must be aware of common PBM tactics as well as the statutory law governing Plan obligations to employees. This three-part series offers Plan Sponsors valuable insights and five key action items to reduce total drug spend.
Gag Clause Attestation Requirement by Year End: Consolidated Appropriations Act of 2021
As part of ongoing efforts to increase transparency and promote fair healthcare pricing practices, group health plans are now required to annually attest to their compliance with the Consolidated Appropriations Act of 2021’s (the “CAA”) gag clause prohibition rule. Gag clauses prevent healthcare providers from disclosing certain information to patients or Plan Sponsors and have been the subject of increasing scrutiny in recent years because they limit transparency and impede efforts to reduce healthcare costs. Under the CAA’s gag clause prohibition, Plans are prohibited from entering into agreements that would restrict the sharing of provider-specific cost information or quality information with plan members.
The first annual Gag Clause Prohibition Compliance Attestation (“Attestation”) is due at the end of this year. It encapsulates the period starting from December 27, 2020, or the plan’s effective date, if later, and spans until the attestation date. Following this, subsequent attestations are due by the year’s end, encapsulating the period since the last declaration.
Plan Fiduciary Duty to Monitor and Audit PBMs: Consolidated Appropriations Act of 2021
Amongst the sweeping changes introduced through the CAA, the most impactful are the disclosure and reasonable compensation requirements discussed in our recent article, “CAA Alters Landscape for Self-Funded Plans and Creates Opportunities”. These requirements obligate service providers like PBMs to disclose all sources of direct and indirect compensation they or any of their affiliates or subcontractors will receive in connection with providing services to the Plan. Further, the CAA prevents Plan fiduciaries from entering into agreements with service providers unless the service provider’s compensation is reasonable. While the mandatory disclosures of compensation required under the Employee Retirement Income Security Act of 1974 (“ERISA”) provide a valuable tool to Plans, Plan fiduciaries cannot simply rely on these disclosures to ensure their arrangements with PBMs are reasonable and compliant with ERISA as amended by the CAA. Rather, Plan fiduciaries must routinely monitor PBMs to ensure they only receive compensation as disclosed—a task that can only be completed through regular PBM audits.
In fact, a failure to routinely audit PBMs to confirm the reasonableness of PBM arrangements may expose Plan fiduciaries to potential liability for breaches of fiduciary duties. Under ERISA, Plan fiduciaries are obligated to discharge their duties solely in the interest of Plan participants and for the exclusive purpose of defraying reasonable expenses of administering the Plan.[1] As such, Plan fiduciaries are obligated to regularly monitor service providers like PBMs to confirm the expenses connected to the PBMs’ services are reasonable. Plan fiduciaries which fail to uncover egregious PBM practices like spread pricing and rebate manipulation can potentially be held liable for breaches of fiduciary duty.
ERISA creates liability for a Plan that fails to comply with their fiduciary obligation (e.g., monitoring/auditing service providers like PBMs) and, as a result, enables another fiduciary, such as a PBM, to commit a breach.[2] Therefore, since ERISA now requires PBMs to expressly state they are providing services to the Plan as a fiduciary, if a Plan fiduciary’s failure to effectively audit a PBM enables the PBM to retain hidden cash flows at the expense of the Plan, the Plan fiduciary could potentially be held liable for breach of co-fiduciary duties. Consequently, while the mandatory disclosures under ERISA are a great starting point for Plan fiduciaries to reduce drug spend, Plan fiduciaries must nonetheless audit PBMs regularly to ensure the Plan is receiving the benefit of its bargain.
How Frier Levitt Can Help
Frier Levitt is at the forefront of federal and state efforts to combat PBM abuses. Our experienced attorneys collaborate with legislators at state and federal levels to shape legislation aimed at addressing PBM abuse for various industry stakeholders. Frier Levitt’s Plan Sponsor Practice Group has a proven track record of obtaining favorable results for health plans and plan sponsors in various areas, including, but not limited to, analyzing PBM contracts and initiating actions against PBMs to access Plan data to ensure PBM compliance or recover savings wrongfully withheld by the PBM. Contact us to learn more.
[1] See 29 U.S.C. § 1104(a)(1) (emphasis added).
[2] See 29 U.S.C. § 1105(a).
