Developments in the PBM Industry: Class Action Suit and Proposed Regulations

PDF

We have delved into the differing views on the topic of pharmacy benefit managers (“PBMs”) in prior issues, and this article is an addition to the wide-spread discussion of PBMs given the recent litigation and legislative activity in relation to PBMs and the duties with respect to pharmacy benefits.

Case Law

Early last month, a three-count class action complaint was filed against Johnson & Johnson (J&J) in its capacity as an employer and a plan sponsor for breaching its duties under the Employee Retirement Income Security Act of 1974 (“ERISA”) by its own health care policy and advocacy director Ann Lewandowski. Allegedly, among other things, J&J agreed up to a 498% markup for drugs as compared to the respective acquisition costs, resulting in millions of overpayments for drugs by the health plan participants, as well incentives to use the PBM’s own pharmacy. By way of example, J&J plans allegedly paid more than $10,000 for a 90-pill prescription of certain drugs, which would cost as little as $28 to about $77 elsewhere.

Employer Responsibilities

Notably, this case involves the allegation that these inflated costs were covered by plan assets in a Voluntary Employees’ Beneficiaries Association (“VEBA”), which is a tax-exempt trust whereas the assets in the trust are considered plan assets. Therefore, not only would participant contributions be considered plan assets, but also other company funds placed in the VEBA are regarded as such. The issue of plan assets is not as clear-cut in cases not involving a VEBA. Interestingly enough, some commentators compare this lawsuit to those filed against 401(k) plans for paying excessive fees or mismanaging investments.

The predominant focus of this case is the level of prudence to be required of plan sponsors in selecting PBMs and negotiating the contract terms. The grievances in the J&J case are primarily derived from the fiduciary responsibilities under ERISA, which require fiduciaries to act “solely in the interest of the participants and beneficiaries” while the duty of prudence entails exercise of the “care, skill, prudence, and diligence” that would be expected in overseeing a plan of a similar scope. In the context of PBMs, a plan administrator of a group health plan, especially one funded by a VEBA, has a fiduciary responsibility to “vet” the PBM by engaging in a prudent process to select the PBM and negotiate a contract therewith. This includes an inquiry into any direct or indirect compensation that the selected PBM may receive from the arrangement (i.e., directly from the drug manufacturer).

State Law

State PBM laws have repeatedly attempted to curb previously unchecked PBM abuses as detailed in our September issue. The state of New York joined the ranks of other states promulgating PBM rules. On February 6, 2024, the New York Department of Financial Services (the “DFS”) released the draft proposed rules related to the conduct of PBMs in New York. In connection therewith, the DFS announced a pre-proposal comment period, which ended on February 16, 2024. The rules aim at restricting a wide range of PBM practices, including imposing “gag clauses” on pharmacies and removing a drug from a formulary without regard to plan design, in addition to prohibition of the common anti-competitive practices. The contemplated enforcement date is July 1, 2025; however, the existing contract terms that are in violation of the draft rules would be voided after January 1, 2027, which provides employers and plan administrators time to adjust their processes and PBM arrangements accordingly. ERISA and self-insured plans are not expressly excluded from the scope of the draft rules.

As an additional update to state-level activity, on February 20, 2024, a group of 39 Attorneys General wrote a letter to the congressional leaders to emphasize the issues prevalent in the pharmaceutical industry as a result of PBMs acting as middlemen and expressed the states’ frustration to rectify such issues. Specifically, the letter explains the hurdles experienced by states when attempting to regulate PBMs with federal preemption at the top of the list. Furthermore, the letter mentions three pending bills—the DRUG Act, the Lower Costs, More Transparency Act, and the Protecting Patients Against PBM Abuses Act—which are expected to address some of the unsatisfactory practices by PBMs. 

Employer Impact

Unfortunately, as underscored by the lawsuits and legislative practices, the need for transparency in pricing and conflict of interest in the PBM industry remains. The J&J lawsuit is expected to result in employers evaluating the existing and future PBM contracts more closely to truly understand the terms and pricing structures. However, one size does not fit all. Although not immediately, some employers may consider avoiding PBMs and implementing alternative approaches to pharmacy benefits by way of direct contracts with pharmacies in order to ensure greater control over drug pricing.

At this time, all states have taken some action in the PBM space. However, it remains to be determined the extent to which states are able to permissibly regulate PBMs. As evidenced by the J&J case and the MetLife case discussed in a prior issue, litigation activity has been on rise as well, and litigants are expected to continue seeking relief. Regardless of the outcome, we anticipate that the J&J case will attract the attention of stakeholders. As such, it is of utmost importance for employers and plan administrators to be up to date with the recent developments.