This article is part of Frier Levitt’s D2E Conference Insights series, highlighting key discussions from the inaugural Direct-to-Employer Conference co-hosted by Frier Levitt and the Northeast Business Group on Health (NEBGH).
On May 19, 2026, Frier Levitt and the Northeast Business Group on Health (NEBGH) convened employers, providers, and industry leaders at One World Trade Center for a half-day conference on direct contracting strategies between self-insured plan sponsors and healthcare providers. Session Four closed the program with a candid discussion of pharmacy benefit manager (PBM) relationships, the opaque contractual provisions that quietly drive plan spend, and the fiduciary exposure that follows when those provisions go unchallenged.
The panel was moderated by Matthew J. Modafferi, Esq. of Frier Levitt and featured Jonathan E. Levitt, Esq., Founding Partner of Frier Levitt, Antonio Ciaccia, President of 3 Axis Advisors, and Neil Gilchrist of Beth Israel Lahey Health. The conversation focused on practical due diligence, audit rights, pricing and disclosure provisions, and concrete tactics employers and providers can use to protect their interests and build transparent pharmacy benefit relationships.
The Largest Barriers to Implementing Direct-to-Employer Arrangements
The panelists agreed that the obstacles to direct-to-employer (DTE) arrangements are not primarily legal or technical but are rather structural, informational, and behavioral. The most significant barriers identified by the panel included:
- Changing the status quo. Many employers default to renewal because change feels risky, even when the data shows the status quo is far riskier for both the employers and the plans.
- Education for employers. Plan sponsors frequently lack a working understanding of how PBM economics actually operate. These items include spread, rebate aggregation, formulary placement payments, and clawbacks, which make it difficult to evaluate alternatives like the DTE model.
- “Sham” savings from PBMs. The panel was direct: many of the savings figures PBMs present to plan sponsors are illusory, built on manufactured benchmarks and selective definitions that obscure what the plan is actually paying.
- Lack of access to claims data. Without complete, claim-level data, employers cannot independently verify pricing, rebate flow, or network performance. Several PBM contracts contractually limit the plan’s ability to obtain or use that data.
- Drug manufacturer behavior. The panel noted a recurring industry pattern: brand drug manufacturers do not generally decrease prices. Instead, they raise list prices and then issue “discounts” off those inflated prices, a dynamic that benefits intermediaries far more than plans or patients.
PBM Contracts: The Underscrutinized Terms That Drive Plan Spend
The panel also addressed PBM contract provisions that most often go unchallenged by plan sponsors and that most often determine whether the plan actually captures the savings it was promised. The panel highlighted the following areas deserving immediate attention in any PBM agreement:
1. No Leveling of Wholesale Pricing
Most PBM contracts do not require the PBM to apply a consistent wholesale pricing baseline across drugs, channels, or time periods. Without a leveled pricing methodology, “discounts” cannot be meaningfully measured.
2. Average Wholesale Price (AWP) Is a Made-Up Benchmark — and the Basis for Everything
AWP is not a market price. It is a published benchmark that has no required relationship to any actual transaction between manufacturers, wholesalers, or pharmacies. Yet AWP remains the foundation upon which virtually every PBM contract calculates pricing, discounts, and guarantees. Plan sponsors who do not understand this are negotiating discounts off a number the PBM counterparties effectively control.
3. PBM Veto of the Plan’s Auditor
Many PBM contracts permit the PBM to reject, for any reason or no reason, the auditor the plan selects to review the PBM’s performance. This single provision can neutralize the most important oversight tool the plan possesses. Plan sponsors should insist on the unilateral right to select their auditor, with limited and objectively defined conflict-of-interest exceptions only.
4. “Guaranteed” Savings
Guarantees are typically structured so that they are calculated against the same benchmarks the PBM controls, with carve-outs and definitional exclusions that make a guarantee breach almost impossible to prove. The panel cautioned plan sponsors not to confuse a contractual guarantee with an enforceable economic outcome.
5. The Rebate Provision
Rebate language is one of the most heavily negotiated provisions in any PBM contract. Two recurring traps were highlighted:
- “100% of rebates we receive” pass-through language. This sounds protective, but the operative words are “we receive.” If rebates are routed through an affiliated rebate aggregator (often offshore), the PBM may never “receive” much of the manufacturer remuneration, and the 100% pass-through promise applies to a shrinking pool.
- Re-characterization by aggregators. Rebate aggregators routinely break manufacturer payments into multiple components, including administrative fees, market-share payments, data fees, and formulary placement fees, so that significant portions are not classified as a “rebate” at all, and therefore fall outside the pass-through obligation.
6. Fiduciary Status
Perhaps the single most important takeaway from the session was the panel’s view on fiduciary status. The solution is that the PBM must be a fiduciary to the plan, with corresponding access obligations to claims, contracts, and downstream agreements. Most PBM contracts today expressly disclaim fiduciary status. Plan sponsors negotiating a new agreement, or renegotiating an existing one, should treat the fiduciary provision as a top-tier deal point, not a boilerplate item.
Why Direct-to-Employer Is Happening Now
The panel briefly stepped back from the contract page to address the broader market question: why, after years of being theoretical, is direct contracting suddenly accelerating? Three drivers were identified:
- Lowering costs. Employers facing relentless premium and pharmacy cost increases are running out of patience with intermediated models that have failed to control spend.
- Increased volume for hospitals and providers. Health systems and provider groups see direct contracts as a way to capture predictable, contracted volume in a market increasingly squeezed by payor behavior.
- Stakeholders are realizing the underlying dynamics. Plan sponsors, providers, and even some manufacturers are independently arriving at the same conclusion: the legacy PBM and rebate-aggregator model is no longer defensible on the merits.
What Manufacturers Can Do
The panel turned briefly to the manufacturer side of the equation. The consensus view was that the current generation of manufacturer direct-to-patient programs is, in practice, largely ineffective and structurally unable to bypass the PBM gatekeeping function. Two actionable points emerged:
- Manufacturers need new channels to reach patients and self-funded plans directly in a way that captures real, verifiable economic value.
- Manufacturers should, where possible, stop contracting with PBMs for their own employees. Continuing to rely on the same intermediaries for their own benefit plans undermines the credibility of any reform message they send to the broader market.
What Employers Can Do: Audit, Audit, Audit
The panelists agreed that the most practical guidance for plan sponsors is to exercise meaningful audit rights. Specifically:
- Ask for your data. The data belongs to the plan, not the PBM. Plan sponsors should affirmatively request claim-level data, rebate detail, and all downstream remuneration the PBM and its affiliates have received in connection with the plan.
- Make sure you have claim-level data. Summary-level reports are designed to obscure. Only claim-level data allows the plan to independently calculate spread, validate rebate flow, and identify outlier pricing on a per-NDC, per-fill basis.
- Understand your data. Possessing the data is not the same as using it. Plan sponsors should engage independent, conflict-free advisors, including counsel, to interpret the data, benchmark performance, and identify recoverable losses.
Key Takeaways
- Pharmacy spend may be a smaller line item than medical, but it is the line item with the highest ratio of hidden economics to disclosed economics.
- Most PBM contracts contain a small number of provisions such as auditor veto rights, AWP-based pricing, rebate definitions, fiduciary disclaimers, that disproportionately determine whether the plan ever captures the savings it was promised.
- Fiduciary status is the central legal lever. A PBM that is a fiduciary to the whole plan, with full access obligations, behaves very differently from one that is not.
- Direct-to-employer arrangements are not a silver bullet, but they are a credible response to a model that has stopped serving plan sponsors and patients.
- The plan sponsor’s duty to oversee its PBM is not new, but the tools, data, and legal precedent now available make a failure to exercise that oversight increasingly difficult to defend.
