Your PBM Contract Is Now a Fiduciary Question
A federal court allowed a pharmacy benefit lawsuit against a large employer to proceed this spring, and state financial officers are writing letters. Doug Foreman on what self-funded employers should be able to prove about their drug spend, and when.
For most of my career, the pharmacy benefit manager was something the carrier or TPA picked and the employer never thought about. That is ending, and the reason is not regulation. It is litigation.
What happened
Over the past two years, employees at several large companies have sued their employers under ERISA, claiming the company breached its fiduciary duty by overpaying for prescription drugs through a PBM contract it never scrutinized. The earliest cases, including the one against Johnson & Johnson, were dismissed because the plaintiffs could not show they were personally harmed. But in March a court allowed the case against JPMorgan to move forward. That is the first time one of these has gotten past the motion to dismiss, and it changes the conversation.
Separately, in December a group of fourteen state financial officers sent letters to Fortune 500 companies urging them to audit their health plan payments. And the Department of Labor has proposed a rule that would require PBMs to disclose their compensation to plan sponsors starting January 1, 2027.
What this means if you are self-funded
You are a fiduciary. You always were. What is new is that pharmacy spend is now a place where a plaintiff's lawyer can argue you were not paying attention. Pharmacy is roughly a quarter of what employers spend on health care, so it is not a small line to ignore.
The question a court will ask is not whether you got the best possible deal. It is whether you followed a prudent process. Did you understand how the PBM makes money? Did you compare alternatives? Did you document why you chose what you chose? Can you show it?
What a prudent process looks like
It does not have to be complicated. Get a copy of the actual PBM contract, not the summary. Understand the pricing model: spread, pass-through, or something in between. Know whether rebates come back to the plan and how much. Have an independent party review the contract against market terms at least every few years, and when it renews. Keep the minutes. If you have a benefits committee, this belongs on the agenda.
If you are fully insured
You have far less exposure, because the carrier holds the PBM contract and takes the risk. But as groups get larger and consider level-funded or self-funded arrangements, this is a cost of entry you should price in. Fiduciary process is not free, but it is a lot cheaper than defending a class action.
This is my reading of where things are heading, not legal advice. If you are self-funded and have never seen your PBM contract, that is where I would start. We can help you get it and read it.
This article is for general informational and educational purposes only and does not constitute insurance, legal, tax, or financial advice. For guidance specific to your organization, talk with an FBP advisor.
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