“Testimony submitted to the Council revealed that drug pricing methodologies and PBM compensation are complex and evolving, including rebates, price spreads, discounts, and other payments from retail pharmacy chains and manufacturers.”
“Substantial evidence was submitted to the Council from ERISA plan sponsors and others that many PBMs do not fully disclose compensation in a manner which is readily understandable to even the most sophisticated plan sponsors and consultants.”
See ERISA, Section 408(b)(2).In 2012, the U.S. Department of Labor (“Department”) issued regulations requiring providers to disclose direct and indirect compensation to pension plans (“Section 408(b)(2) Regulations”).The Department reserved the question of whether the Section 408(b)(2) Regulations should apply to welfare plans.
After receiving testimony and information from multiple sources, including representatives of PBMs, plan sponsors, plan consultants, plan auditors, pharmacy groups, governmental agencies, and other interested persons, the Council recommends that the Department should consider making Section 408(b)(2) Regulations applicable to welfare plan arrangements with PBMs, and thereby deem such arrangements reasonable only where PBMs disclose direct and indirect compensation, including compensation paid among related parties such as subcontractors, in a manner consistent with current Section 408(b)(2) Regulations.
The Council also recommends that the Department should consider issuing guidance to assist plan sponsors in determining whether to and how to conduct a PBM audit of direct and indirect compensation.
ERISA Advisory Council Recommendation
The Department should consider making Section 408(b)(2) Regulations applicable to welfare plan arrangements with PBMs, and thereby deem such arrangements reasonable only where PBMs disclose direct and indirect compensation, including compensation paid among related parties such as subcontractors, in a manner consistent with current Section 408(b)(2) Regulations.
Findings Related to Recommendation
- Plan sponsors of group health plans who testified at the Council hearings were unanimous in their view that they face many challenges managing pharmacy benefits on a cost effective basis. However, plan sponsors uniformly testified that PBM services are a valuable part of this effort.
- Testimony submitted to the Council revealed that drug pricing methodologies and PBM compensation are complex and evolving, including rebates, price spreads, discounts, and other payments from retail pharmacy chains and manufacturers. Substantial evidence was submitted to the Council from ERISA plan sponsors and others that many PBMs do not fully disclose compensation in a manner which is readily understandable to even the most sophisticated plan sponsors and consultants.
- Testimony before the Council indicated that some forms of PBM compensation have the potential for creating conflicts of interest. Sponsors of ERISA health plans may or may not be aware of these potential conflicts.
- ERISA group health plans that contract directly with PBMs frequently use consultants to assist in negotiations with the PBM. Testimony was submitted to the Council that it is common for consultants to receive indirect compensation. The payment of indirect compensation to consultants who are advising plan sponsors in negotiations with the PBM may create the potential for conflicts of interest that may be adverse to the plan sponsor. Sponsors of ERISA health plans may or may not be informed of such indirect compensation.
- Plan sponsors testified that disclosure of PBM compensation would better enable them to comply with their obligations to determine reasonable compensation under Section 408(b)(2). Nondisclosure creates the potential for impediments to plan sponsors’ ability to comply with 408(b)(2).
- Voluntary efforts to address PBM direct and indirect compensation disclosure through accreditation and certification are not currently providing a workable alternative to most plan sponsors. In 2010, the Pharmaceutical Care Management Association (PCMA) testified before the Department that “many plan sponsors belong to third-party accreditation programs, like the URAC Pharmacy Benefits Management Standards and the Pharmacy Coalition of the HR Policy Association.” The Council heard testimony from representatives of the HR Policy Association that their certification program is no longer functioning. With respect to compensation disclosure, the URAC PBM guide is not available to the public and does not provide detailed guidance on the disclosure of direct and indirect PBM compensation.
- The Council received testimony that for plan sponsors to understand the reasonableness of PBM fees, plan sponsors need to know what services are being outsourced by the PBM and what is paid for the outsourced services.
- A plan sponsor witness testified that a PBM contract should clearly define contract terms such as rebates, revenue, transparency, AWP, MAC (Maximum Allowable Cost) list pricing, audit guidelines, and termination rights. Define whether 100% of the rebates are reduced by fees paid by the PBM to other entities in the supply chain. Pricing may differ based upon the delivery channel (retail/mail) and supply levels (30 days vs. 90 days). The PBM may be purchasing the drug in lots of 50,000 plus at substantially lower prices.
- A plan sponsor witness testified that a PBM contract should include transparency provisions that illuminate all of the entities in the supply chain, whether they are the PBM’s subsidiaries or affiliates or whether they are the PBM’s subcontractors or agents. A plan sponsor witness testified that a PBM contract should include a most favored nations pricing clause.
- A plan sponsor witness testified that a PBM contract should include termination “without cause” language to protect the plan from being locked into a longer term unfavorable contract.
- A plan sponsor witness testified that a PBM contract should include language that plan participants are not required to pay a full copay where the drug cost plus dispensing fee is less than the plan copayment. This avoids the potential for PBM “clawback,” which was described as occurring when a plan participant may be charged a higher rate at the pharmacy than the participant’s plan is required to pay for a certain drug, where the participant is paying the entire cost of the drug, such as in the case of a high deductible plan where the deductible has not been met.
- A plan sponsor witness testified that the PBM contract should include audit language with the right to audit for no less than 24 months and specify the documents to be produced in the audit.
- A plan sponsor witness testified that the PBM contract should include limits on the number of times per year that a PBM may make changes to the formulary or preferred-drug list, along with requiring prior notification of any changes.