Plan Sponsors, Does Your Broker Have Your Best Interest?
Unbeknownst to Plan Sponsors, including self-funded employers, benefits brokers could be receiving compensation or incentives directly and secretly from Pharmacy Benefit Managers (“PBMs”). Economically incentivized brokers will recommend certain PBMs to Plan Sponsors to administer the prescription benefits, even though the recommended PBM could increase the drug spend of the Plan Sponsor as well as out-of-pocket cost of the enrollees. Plan sponsors seeking to avoid this perverse result should align with “fiduciary” brokers and PBMs.
What is a Fiduciary Duty?
Many brokers in the pharmacy benefits industry purport to act as a fiduciary of plan sponsors without committing to such representation. The fiduciary duty is an obligation of loyalty and good faith owed to an entity that is the highest duty known to the law. Brokers and PBMs often explicitly deny that they owe a fiduciary duty in their contracts with plan sponsors. A “fiduciary” must act in the Plan Sponsor’s best interest by securing the best PBM contract terms and conditions for the Plan Sponsor, and then recommending that the Plan Sponsor “audit” the PBM’s performance. One way for Plan Sponsors to confirm whether brokers have conflicts is to have the broker sign “conflict of interest disclosure” statement.
Not having a fiduciary duty is bad, and not having audit rights compounds the problems. The contract between the PBM and Plan often places tight limits on the Plan Sponsor’s ability to access information about their own drug costs. Plans should know of the existence of confidentiality agreements between brokers and PBMs. These often stipulate that if Plan Sponsors hire vendors to audit the PBMs’ data, vendors “shall never include a drug’s average wholesale price, ingredient cost, or member cost share or any other information that could be used to derive the PBM’s proprietary pricing information” in reports they provide to employers. This is not in the best interest of the Plan Sponsor.
Do Brokers receive compensation from PBMs?
Brokers often receive compensation or other forms of incentives from PBMs. It would not be uncommon for brokers to get paid more as the Plan Sponsor’s total drug spend increases. PBMs often pay brokers “per member per month” fees and other consulting fees that prevent brokers from acting on the Plan Sponsor’s best interest.
Brokers earn “revenues” in several different ways, not just through direct fees paid by the Plan Sponsor. Overrides, commissions, bonuses, fees from Third Party Administrators (“TPAs”), fees paid by PBMs, prescription fill fees, shared savings from plan providers, etc. These are all different ways brokers are likely compensated secretly by PBMs. Typically, these revenues are not disclosed to the plan sponsor, which is a conflict of interest that should be avoided. The most common form of revenue not disclosed to Plan Sponsors is override commissions, and bonuses based on the broker’s entire book of business size and retention with the PBM. In other words, brokers’ compensation from PBMs may go beyond an analysis of the broker’s business directly with the Plan Sponsor. For example, brokers are often paid very large, sometimes seven figure bonuses, from PBMs for “retaining” a certain amount of business with that particular carrier. These are called “retention bonuses”, for example the broker would earn a bonus if the PBM retains 98% of the broker’s clients.
By way of example, the Osceola School District Plan filed a lawsuit against a benefits broker, Gallagher, in which the Plan/District accused Gallagher of breaching the pharmacy benefits contract and getting paid more than $2 million in “secret commission from insurance carriers it recommended to the board.” The Judge denied . The Court further stated that “Gallagher sold itself as a company that was well-position to provide consulting and brokerage services to the Board. It also stated that it would (remain) impartial during all business transactions, disclose all compensation received and represent the Board’s best interest in all ongoing transactions.” The Judge ruled the Plan/District’s lawsuit against Gallagher can continue.
It is also worth noting that the Consolidated Appropriations Act (the “CAA”) imposes a host of reporting obligations upon Plan Sponsors. The CAA also requires brokers to disclose “fees” paid to them by plans and insurers, directly or indirectly. We will discuss the CAA requirements in a separate article.
What is the main difference between brokers and attorneys?
Unlike brokers, attorneys including our firm, Frier Levitt, have both an ethical and fiduciary duty to act in the best interest of clients, including Plan Sponsors. For example, it would violate the Rules of Professional Conduct for Frier Levitt to secretly get paid by a PBM in exchange for bringing the Plan Sponsor to the table; or for Frier Levitt to get paid more money, when the Plan Sponsor’s costs rise. Frier Levitt and its attorneys are independent and not subject to financial offerings by PBMs. The law firm has no conflict when it comes to representing Plan Sponsors with respect to the PBM Agreement negotiation, contracting, audit/arbitration/ litigation against major PBMs. Frier Levitt’s attorneys have a license to negotiate PBM contracts. Brokers do not have the same credentials. We do not accept any money from PBMs, unless they are forced to pay us pursuant to a Court Order or Arbitration Award, and always transparent to our clients.
What should Plan Sponsors do?
It is essential that Plan Sponsors, wishing to partner with a broker and PBM, gain more control of drug benefits. Plan Sponsors must exercise extreme vigilance in the selection of the PBM and “broker”. Plan sponsors must strive to gain a thorough understanding of current PBM business practices and how such practices may directly influence the Plan Sponsor’s ability to optimize clinical outcomes and cost control in drug benefit programming. Plan Sponsors should develop sound processes to compare and contrast PBM options on key terms (spread, rebate, audit, contract definitions), leading to the selection of a PBM and broker whose interests are most clearly well-aligned with the Plan Sponsor’s. It is therefore essential that any comparative assessment of potential PBM partners goes beyond rudimentary spreadsheet comparisons provided by broker of a PBM’s proposed pharmacy discount rates, administrative fees, and/or drug rebate projections versus another’s.
How Frier Levitt Can Help
Frier Levitt’s Plan Sponsor Practice Group provides a host of legal services to Plan Sponsors including reviewing and analyzing PBM contracts, negotiating and drafting PBM contracts, and auditing (and where necessary, litigating against) PBMs to verify that PBMs are abiding by the terms set forth in the PBM contracts. If your organization is a plan sponsor, contact us to learn more about your contractual rights and obligations.
