August 22, 2014
ERISA Advisory Council Hears Testimony on PBM Compensation and Fee Disclosure
On Wednesday, August 20, the ERISA Advisory Council (EAC) heard testimony on “PBM Compensation and Fee Disclosure.” The EAC, among other things, is considering whether pharmacy benefit managers (PBMs) should be covered by the regulation of the Department of Labor (DOL) under section 408(b)(2) of ERISA pertaining to compensation of service providers. The DOL chose not to address the disclosure requirements applicable to providers of services to health and welfare plans when it issued its regulation in 2012. The EAC heard testimony from a variety of witnesses who had very different views on how PBMs operate and whether the DOL should extend its disclosure regulations to PBMs or whether education or outreach efforts by the DOL were necessary.
Stephanie Kanwit, a consultant and professor at George Washington University School of Law, speaking on behalf of the PBM Association, stated that PBMs and their compensation arrangements should not be subject to the DOL’s regulation. She stated that to do so would be unprecedented and harmful to plans and their participants. The agreements between PBMs and drug manufacturers and wholesalers are proprietary information and the inadvertent release of such information would result in anti-competitive behavior and drive up prescription drug prices. She also noted that in most cases PBMs allow their plan sponsor clients to verify whether the terms of their contract with the PBM were met if the sponsor uses an auditor with appropriate experience and who is willing to enter into a non-disclosure agreement with the PBM. She also pointed to the efforts of URAC, an accreditation and standards group, to assure that PBMs meet minimum standards and educate the public on PBM practices.
Mike Miele of Arthur J. Gallagher, an insurance brokerage and consulting firm that works with plan sponsors selecting PBMs, told the EAC that sponsors should closely read their contracts with PBMs. For example, he noted that many employers are surprised when changes to the formulary or the classification of certain drugs occur, but such changes are permitted by the contract. However, many sponsors do not have the time or experience to evaluate the contracts, which are very complex. Susan Hayes of Pharmacy Outcomes Specialist, a firm that performs audits of PBM contracts on behalf of sponsors testified that it is often very difficult to get PBMs to provide the information necessary for her to complete the audits. This also adds to the cost of the audits. Both Miele and Hayes provided information to the EAC regarding the nature of PBM compensation practices and fee arrangements including the receipt of rebates and clawbacks. They also expressed concerns about the PBM having conflicts of interest due to these practices and arrangements. Susan Pilch, speaking on behalf of the National Community Pharmacists Association, also testified about PBM compensation practices and stated that the DOL’s 408(b)(2) regulation, particularly its provisions regarding indirect compensation, were well suited for PBM arrangements and should apply with some modifications to PBMs.
The EAC also heard from a number of plan sponsors. Alison Klausner, testifying on behalf of Honeywell, discussed her employer’s contracting processes with PBMs. She noted, among other things, that PBMs will often sub-contract some services to other PBMs. Thus, employers should inquire as to how PBM services will be delivered so that the appropriate contract provisions can be negotiated. Also, in some cases, PBMs will agree by contract to act as fiduciaries or to apply a similar standard. Robert Restivo of General Dynamics and Colleen McHugh, both testifying on behalf of the HR Policy Association, described the challenges of understanding how PBMs are paid and Restivo mentioned difficulty determining whether he has negotiated the best deal on behalf of his plan participants. He supported efforts by the DOL to educate plan sponsors on PBMs. He also noted that his company had success contracting directly with pharmacy networks rather than PBMs. Finally, Keith Bruhsen of the University of Michigan, Paul Bursic of Cornell University, and Linda Nilsen of Princeton University spoke of their efforts to negotiate contracts with PBMs. Mr. Bursic and Ms. Nilsen told the EAC about a coalition of universities and colleges, including their own, and the coalition's efforts to negotiate PBM contracts. They both stated that employers would benefit from more transparency in PBM compensation arrangements.