A new litigation trend is emerging regarding fiduciaries of health plans and their duties to prudently evaluate fees being charged by pharmacy benefit managers (“PBM”). Two Fortune 50 employers, Johnson & Johnson and Wells Fargo & Company, and related fiduciaries of the employers’ health plans, were sued only months apart by a class of participants alleging that the employers and fiduciaries committed breaches of fiduciary duty and prohibited transactions related to their agreement to pay large fees to Express Scripts and Accredo, Express Scripts’ specialty pharmacy.

Specifically, the lawsuits allege that breaches of fiduciary duties occurred because the health plans contracted with Express Scripts to pay fees under the traditional model, where the health plan receives rebates on certain prescriptions and Express Scripts makes a large profit by overcharging the health plans for a variety of prescription drugs. In some instances, the lawsuits allege that Express Scripts charged between a 5,000% to 10,000% markup for certain drugs when compared to the pharmacy acquisition cost for the same prescriptions. For example, the Johnson & Johnson complaint alleges that Express Scripts charged more than $10,000 for a 90-day prescription of generic drug teriflunomide, used to treat multiple sclerosis, which would have only cost $28 from an online pharmacy. Because of that, the lawsuits allege that the fiduciaries did not prudently administer the health plans and did not spend plan assets for the sole purpose of benefitting participants.

Time will tell as to the potential likelihood of success of these lawsuits and the valid defenses the employers may have against the claims, but given the complaints with essentially identical allegations against different employers and fiduciaries, we highlight below certain best practices that will increase protections for the plan.

Carefully review and analyze PBM contracts

These recent lawsuits highlight that trustees should review and analyze PBM contracts to ensure that the plan is not being taken advantage of by PBMs through the form of overblown fees and prescription drug prices. Trustees should work with their plan professionals to identify problematic contract terms and potential savings well ahead of the time to renegotiate with the PBM so the plan can have a clear picture of which parts of the contract should be amended to avoid unnecessarily high PBM fees.

Explore a pass-through model of PBM pricing

One method health plans have adopted to curb PBM fees is insisting on a “pass-through” model rather than the traditional PBM contract method. In the pass-through PBM model, the amount the PBM bills the plan is equal to the amount the PBM pays the pharmacy. In this model, the PBM passes through all discounts and rebates to the plan. The pass-through PBM is only compensated by charging a flat administrative fee, usually assessed on a per-member, per-month basis. The pass-through model has been widely regarded as much more transparent than the traditional PBM model and enables fiduciaries of health plans to more easily assess the amounts being spent on prescription drugs.

Identify PBMs that steer specialty drug prescriptions to their own specialty pharmacies

As noted in both lawsuits, PBMs may have wholly owned specialty pharmacies that the PBM steers participants to use when filling specialty drug prescriptions. This creates a situation where the PBM ensures that it will receive high prices for specialty drugs, thereby increasing the profit for the PBM through its specialty pharmacy. By identifying such business arrangements, a plan can avoid higher fees that result from this form of participant steering by PBMs.

Take more control over the plan’s formulary

More and more fiduciaries are insisting on increased control of their health plan’s formulary rather than simply accepting the PBM’s recommended actions. This more hands-on approach saves plan assets and benefits the participants in the form of lower drug prices, rather than accepting a PBM’s recommendation that might be influenced by the PBM’s desire to increase its own profitability.

Conclusion

We continue to work with your consultants and other professionals to obtain the best results for the plan and its participants. The emerging litigation trend signals that fiduciaries, including the trustees, must be vigilant in their contractual arrangements with PBMs and prioritize the plan and participants over all else when it comes to paying PBM fees.