CAA Alters Landscape for Self-Funded Plans and Creates Opportunities

A new federal law has brought significant change in the design of pharmacy benefit plans, leveling the playing field between pharmacy benefit managers (“PBMs”) and their employee healthcare benefit plan (“Plan”) clients. For far too long, PBMs have taken advantage of Plans by concealing rebate revenue and spread earned by PBMs on inflated drug costs.  They impose one-sided contractual provisions on Plans that have opaque terms and conditions. Fortunately, the Consolidated Appropriations Act of 2021 (the “CAA”) introduces a major shift in the pharmacy benefits landscape, providing increased transparency on key aspects of Plan design.  The Consolidated Appropriations Act of 2021 (“CAA”) not only safeguards Plans’ rights and also promotes transparency in PBM-Plan agreements.

The CAA amended numerous provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”), the Public Health Service Act (“PHA”), and the Internal Revenue Code (“IRC”). Perhaps the most impactful amendment benefiting Plans and Plan Beneficiaries is the increased transparency of prescription drug costs.  ERISA was amended to expressly prohibit “gag clauses” in PBM-Plan contracts.  A “gag clause” is a PBM tool making it difficult for Plans to access their own benefit data in the possession of PBMs.  Gag clauses allowed PBMs to conceal actual reimbursement the PBM paid to pharmacies.  The CAA banished that tool. The single most impactful amendment requires PBMs to be transparent as to compensation earned under the PBM-Plan contracts.  The CAA amendments expose hidden PBM compensation, and ERISA Plan Sponsors must demand transparency.

PBM-Plan Agreements Under ERISA: Reasonable PBM Compensation is Now the Law

Perhaps the most impactful CAA provision regulates PBM compensation under PBM-Plan agreements.  ERISA prohibits Plan Fiduciaries from contracting on behalf of the Plan if the arrangement constitutes the furnishing of goods, services, or facilities between the Plan and a “party in interest.”[1]  “Party in interest” is defined to include any person or corporation “providing services to such plan.”[2]  Thus, these provisions would prevent a Plan Fiduciary from contracting for PBM services on behalf of the Plan. However, ERISA also codifies specific exceptions from the prohibited transactions rule. Specifically, Plan Fiduciaries may contract with PBMs for “services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor.”[3]  Accordingly, it is the responsibility of the Plan Fiduciaries to ensure that PBM contractual arrangements are “reasonable” under ERISA; which begs the question—what makes a PBM-Plan arrangement reasonable?

Critically, ERISA now expands on the reasonableness requirement, and codifies certain requirements that must exist  for a PBM-Plan arrangement to be considered reasonable.  For example, a PBM-Plan contract cannot be considered reasonable unless the PBM discloses, in writing, the following:

  • A description of services to be provided to the Plan pursuant to the contract;
  • A statement that the PBM, an affiliate, or a subcontractor will provide, or reasonable expects to provide, services pursuant to the contract or arrangement directly to the Plan as a fiduciary;
  • A description of all direct compensation, either in aggregate or by service, that the PBM, an affiliate, or subcontractor expects to receive in connection with the services provided;
  • A description of all indirect compensation that the PBM, an affiliate, or a subcontractor reasonably expects to receive in connection with the services described, including a description of the arrangement between the payer and the PBM, affiliate, or subcontractor, as applicable, pursuant to which indirect compensation is paid;
  • A description of any compensation that will be paid among the PBM, an affiliate, or a subcontractor in connection with the services if compensation is set on a transaction basis (such as commissions, finder fees, or other similar incentive compensation based on business placed or retained), including identification of the services for which such compensation will be paid and identification of the payers and recipients of such compensation (including the status of the payer and recipient as an affiliate or subcontractor); and
  • A description of any compensation that the PBM, an affiliate, or a subcontractor expects to receive in connection with termination of the contract or arrangement, and how any prepaid amounts will be calculated and refunded upon such termination.[4]

In addition, ERISA requires PBMs to furnish, upon written request from the Plan, to furnish any other information related to compensation received by the PBM in connection with the contract that is required for the Plan to comply with its reporting requirements under the CAA.[5]

Opportunities for Plans

The importance of the requirements outlined above cannot be overstated, as they provide Plans with tools and the power to gain greater insight into PBM business operations.  In turn, these requirements allow Plans to negotiate transparent PBM contracts.  To capitalize on the advantages contained in ERISA, Plans must demand full descriptions of direct and indirect compensation, as well as the sources of compensation, that the PBM, affiliate, and/or subcontractor will receive related to performing under the contract.  Indirect compensation refers to fees that are received from a third party, such as commissions, but not directly from the plan sponsor or service provider. It is important for plan sponsors and fiduciaries to understand the nature and amount of indirect fees associated with their prescription drug benefits plans, and to ensure that they are reasonable and properly disclosed. Only by utilizing these rights can Plans ensure they are receiving all financial savings to which they are rightfully entitled.

One common tactic deployed by PBMs that can now be uncovered and prevented is spread pricing.  Spread pricing occurs when a PBM reimburses a dispensing pharmacy at a price lower than the price paid by the Plan to the PBM for the same claim.  For instance, a pharmacy dispenses a prescription to a Plan beneficiary and receives $10 in reimbursement from the PBM for dispensing the drug.  In turn, the PBM charges the Plan $15 for the same prescription claim and  retains the $5 difference (i.e., the spread) as profit.  Spread pricing costs Plans potentially millions of dollars in excess drug spend.  For example, Centene Corporation (“Centene”) and its subsidiary companies which included PBMs and Managed Care Organizations, engaged in multiple  tactics, including spread pricing in their contracts with state Medicaid programs. Centene not only settled with several Medicaid agencies but also reserved over $1 billion for future settlements. 

Another source of compensation PBMs keep hidden from Plans involves manufacturer rebates.  Major PBMs own rebate aggregators including Ascent Health Services (owned by Cigna/Express Scripts), Emisar (UnitedHealth/Optum), and Zinc Health Services (CVS Health/Caremark). PBMs often include terms in their agreements with Plans that mislead Plans into believing they are receiving 100% of rebates.  However, PBMs fail to disclose their use of subcontracted or affiliated rebate aggregators, and the portion of rebates retained by these rebate aggregators.  In turn, PBMs deceive Plans into believing they are receiving 100% of rebates when, in reality, significant portions of rebates are retained by the PBM’s rebate aggregators.  To make matters worse, these rebate aggregators are often owned by or affiliated with PBMs, leading to additional PBM hidden revenues.  Importantly, thanks to the mandatory disclosures under ERISA, Plans have insight into PBM/rebate aggregator relationships and, potentially, an opportunity to discover any rebate dollars being wrongfully retained by rebate aggregators and/or PBMs.

How Frier Levitt Can Help

Frier Levitt’s Plan Sponsor Practice Group provides a host of legal services for health plans and plan sponsors, including reviewing and analyzing PBM contracts, negotiating and drafting PBM contracts, auditing (and where necessary, litigating against) PBMs to verify that they are abiding by the terms set forth in the PBM contracts, and demanding access to Plan data to uncover any hidden cash flows retained by PBMs.  If your organization is a plan sponsor, contact us to learn more about your contractual rights and obligations.


[1] See 29 U.S.C. § 1106(a)(1)(c).

[2] 29 U.S.C. § 1002(9).

[3] 29 U.S.C. § 1108(b)(2)(A) (emphasis added).

[4] See 29 U.S.C. § 1108(b)(2)(B)(i) and (iii).

[5] See 29 U.S.C. § 1108(b)(2)(B)(vi).