The law aims to open up the “black box” of prescription drug pricing, but it also puts both self-insured and fully insured employers closer to the compliance line, with potential civil monetary penalties that can reach $10,000 per day for reporting failures and $100,000 per violation for knowingly providing false information.

At the core of the law are three major requirements that directly affect how employer health plans interact with PBMs:

• Full rebate pass-through: PBMs must pass 100% of rebates, discounts and other compensation back to the health plan.
• Detailed reporting: PBMs must provide semiannual reports outlining drug spending, utilization and compensation structures.
• Audit rights: Plan sponsors have the statutory right to audit PBM records at least annually.

These provisions are designed to give employers clearer insight into prescription drug costs, but they also create new fiduciary responsibilities.

How this affects employers

Self-insured employers, which contract directly with PBMs, will feel the most immediate impact. They must ensure they receive required reports, review them and make summary information available to plan participants. They must also document compliance efforts.

Employers that purchase fully insured plans are not off the hook. While carriers and PBMs handle much of the administration, the law still applies to the plan sponsor in certain cases, particularly around participant disclosures and ensuring compliance upstream.

The law does not clearly assign liability for penalties in all situations. As a result, PBMs and insurers may attempt to shift risk to employers through contract language.

Specifically, some PBM agreements may include indemnification provisions that require the employer to cover penalties — even if the PBM failed to meet its reporting obligations.

New risks

Employers should pay close attention to several emerging risks:

• Contractual liability: PBMs may try to transfer penalty exposure to plan sponsors.
• Reporting gaps: Failure to obtain or share required data could trigger fines.
• Notice requirements: Employers must inform plan members about available prescription drug data.
• Fiduciary exposure: Plan sponsors must act prudently in overseeing PBM arrangements.

Employers may avoid penalties if they can demonstrate a “good faith effort” to comply. That makes documentation critical.

What employers should do now

With most provisions taking effect in 2029 for calendar-year plans, employers have time to prepare:

• Review PBM contracts and renegotiate any indemnification clauses that shift compliance risk.
• Establish a compliance process to retain PBM reports and allow employees to request copies.
• Keep records of communications and efforts to obtain required data.
• Ensure summary benefit information and required notices include information on the new law.
• Work with us to better understand compliance issues.
• Notify participants about their right to access PBM plan-level summary data. We can help you integrate this into your next open enrollment or summary plan documents update.

Why this matters

The new PBM mandates are intended to reduce drug costs and improve transparency, but they also introduce a compliance burden that many employers are not equipped to handle alone.

Employers should not assume their PBM or insurance carrier is managing all aspects of compliance. Ultimately, plan sponsors bear fiduciary responsibility for their health plans.

That makes it critical to work closely with a knowledgeable benefits advisor like us who can help review contracts, interpret reporting requirements and ensure that your plan remains compliant as these rules take effect.

Health plans contract with PBMs to tamp down pharmaceutical costs, but reports have shown that they often send enrollees to pharmacies they own and which overcharge for medications sometimes by thousands of percent.

PBMs have been drawing increasing flak from states attorneys general as well as Congress and state houses, where multiple measures that would rein them in are in play.

If the lawsuit is successful, it could leave both self-insured and insured employers exposed to lawsuits by disgruntled employees who are forking out significantly more than they should.

The case

The class action, filed Feb. 5 in the US District Court for the District of New Jersey, accuses J&J of breaching its fiduciary duty under ERISA when it mismanaged its employee health plan by paying its PBM, Express Scripts Inc., inflated prices for generic specialty drugs that are widely available at a much lower cost.

The employees suing J&J cite a number of examples of how the company’s plan overpaid for prescription drugs. One of the most egregious examples cited in the lawsuit was an instance when the plan paid more than $10,000 for a 90-pill generic drug to treat multiple sclerosis, which can be purchased without insurance on different retail and online pharmacies for $28 and $77.

“The burden for that massive overpayment falls on Johnson and Johnson’s ERISA plans, which pay most of the agreed amount from plan assets, and on beneficiaries of the plans, who generally pay out-of-pocket for a portion of that inflated price,” the plaintiffs wrote.

“No prudent fiduciary would agree to make its plan and beneficiaries pay a price that is two-hundred-and-fifty times higher than the price available to any individual who just walks into a pharmacy and pays out-of-pocket,” they added.

It further accuses J&J of agreeing to terms under which plan beneficiaries were financially incentivized to obtain their prescriptions from the PBM’s own mail-order pharmacy, even though that pharmacy’s prices are routinely higher than the prices at other pharmacies.

The case accuses the company of:

• Failing to regularly put PBM services out to bid.
• Failing to negotiate favorable terms with PBMs and continually supervise PBM’s actions to ensure that the plan is reducing costs and maximizing outcomes for beneficiaries.
• Failing to periodically attempt to renegotiate PBM contracts.
• Failure to independently assess the PBM’s formulary placement of each prescription drug and closely supervise PBM’s formulary management to ensure the plan is paying only reasonable amounts for each prescription drug.
• Improperly steering plan participants towards their PBM’s mail-order pharmacy, even though that pharmacy’s prices were routinely higher than what retail pharmacies charge for the same drugs.

The fallout

Legal observers say employers that offer their employees group health insurance that includes one of the nation’s large PBMs, could be targeted.

The driving argument would be that employers have been warned through news reports of how PBMs have been accused of not being transparent about their negotiated prices, and how they often pocket rebates that could be used to lower the plan’s and enrollees’ outlays.

Most at risk are employers that are in self-insured or level-funded plans. It’s not clear yet how much liability insured employers may have, but they too could be accused of choosing health plans for their employees that contracted with PBMs that allegedly overcharge for medications.

PBMs are intermediaries, acting as go-betweens for insurance companies, self-insured employers, drug manufacturers and pharmacies.

They can handle prescription claims administration for insurers and employers, facilitate mail-order drug delivery, market drugs to pharmacies, and manage formularies (lists of drugs for which health plans will reimburse patients.)

Express Scripts, which provides network-pharmacy claims processing, drug utilization review, and formulary management, among other services, is the best-known PBM. CVS Caremark and UnitedHealth Group’s OptumRx are other major players.

PBMs typically contract with both insurers (or self-insured employers) and pharmacies. They charge health plans fees for administering their prescription drug claims and create formularies that spell out the prices pharmacies receive for each drug on the list.

Commonly, the price the plan pays for a drug is more than the pharmacy receives for it. The PBM collects the difference between the two prices.

It can do this because the health plan does not know what the PBM’s arrangement is with the pharmacy, and vice versa. Also, the plan doesn’t know the details of the PBM’s arrangements with its competitors.

A PBM could charge one plan $200 for a month’s supply of an antidepressant, charge another plan $190 for the same drug, and sell it to a pharmacy for $170. None of the three parties knows what the other parties are paying or receiving.

Additionally, PBMs have been accused of pocketing the rebates that drug manufacturers offer, instead of passing them on to the end users: the patients who are prescribed the medications. Those rebates can be significant.

In the crosshairs

In theory, the PBMs should pass these rebates back to the individuals who are prescribed the medication so that they can reduce their out-of-pocket costs. However, if most of those costs are born by the insurer, those rebates would conceivably be transferred to the insurer that is paying for the drugs and the insurer could pass some of those savings on to enrollees.

But, because these arrangements are also confidential, the extent to which these savings are passed back to health plans is unknown.

As pressure on PBMs has grown, federal and state lawmakers, attorneys general in various states and state regulators have been taking action.

In 2022, 12 states enacted 19 measures that included a variety of restrictions and requirements for PBMs, according to the National Academy for State Health Policy.

A number of state attorneys general have filed lawsuits against some of the country’s largest PBMs. Ohio Attorney General David Yost has managed to wring more than $100 million in settlements with PBMs in the last three years, after filing lawsuits accusing them of violating state antitrust laws and overcharging state agencies like the Ohio Bureau of Workers’ Compensation and the Ohio Department of Medicaid.

And in Washington D.C., a bipartisan bill introduced in the U.S. Senate would require PBMs to file an annual report with the Federal Trade Commission about fees charged to pharmacies and reimbursements sought from drug companies.

The bill also authorizes state attorneys general “to conduct investigations, to administer oaths or affirmations, or to compel the attendance of witnesses or the production of documentary or other evidence.”

The Pharmaceutical Care Management Association, a trade association for PBMs, has sued the Department of Health and Human Services, Internal Revenue Service and Department of Labor, all of which were instrumental in rolling out transparency regulations in 2020, which took effect Jan. 1, 2021.

The rules specifically require health plans (including PBMs) and health insurers to disclose on their websites their in-network negotiated rates, billed charges and allowed amounts paid for out-of-network providers, and the negotiated rate and historical net price for prescription drugs.

PBMs were included in the transparency rules because numerous reports have found that some of them rely on opaque contracts with pharmacies and drug companies, and that they allegedly fail to pass on rebates and lower drug prices they negotiate to their enrollees.

The lawsuit comes as PBMs are feeling the heat over their practices. At least seven states and the District of Columbia are investigating them, mainly focusing on whether they fully disclose the details of their business and whether they receive overpayments under state contracts.

Also, attorneys general in four states have sued PBMs, mostly alleging that they misled state-run Medicare programs about pharmacy-related costs.

What the PBMs are saying

The PBMs allege in their lawsuit that the rule will not benefit consumers because their knowing what the contracted drug prices are won’t have an effect on them as there are no actions they can take knowing this information.

The trade association said: “The rule offers consumers no actionable information because net prescription drug prices are not charged to consumers and never appear on a bill.” Instead, the information will likely confuse consumers, it alleges.

The trade body in its court filing said PBMs maintain that their business model hinges on their ability to negotiate confidentially and keep the details of their manufacturer contracts as trade secrets that are not available to other drug manufacturers or otherwise disclosed to the public.

“Confidentiality, in turn, allows PBMs to bargain from a position of strength to reduce drug prices,” it wrote. “Government-enforced information sharing will raise costs by reducing PBMs’ ability to negotiate deeper discounts on drug prices.

“The regulation threatens to drive up the total drug price ultimately borne by health plans, taxpayers and consumers by advantaging drug manufacturers in negotiations over price concessions,” it added.

The proposal would have barred drug companies from paying rebates to PBMs that participate in Medicare and other government programs. According to the administration, the proposed rules were shelved because Congress had taken up the issue to control drug costs.

The spotlight has been harsh on some of the country’s largest PBMs, which have been accused of pocketing a substantial portion of the rebates for themselves while passing on only a sliver of the rebates to the insurance companies that hire them and the health plan enrollees that pay out of pocket for the drugs.

Rebates had become a popular target of criticism in Washington after drug companies lobbied aggressively to cast them as the reason for high prices. PBMs negotiate drug discounts in the form of rebates, often keeping some of that money for themselves.

However, many pundits say that the rebate system put in place by large, national PBMs incentivizes drug companies to keep list prices high, which in turn defeats the purpose of the PBMs – that is, to reduce the out-of-pocket costs that health plan enrollees pay for their prescription drugs.

Like insurers and PBMs, some of which have sought to undermine the practice with accumulator adjustment programs, the Trump administration believes such coupons may be driving up health care spending by getting patients to opt for higher-priced name-brand drugs over generics.

The Centers for Medicare & Medicaid Services proposal unveiled in January would have essentially blocked drug manufacturer rebates from going to PBMs and health plans that serve Medicare and Medicaid patients, starting next year.

Now that the push to eliminate rebates has come to end, the focus looks like it’s shifting to how drug companies price their products. We will keep you posted if any legislation surfaces in this area.

Attention is growing regarding the role that rebates play in actually increasing the price of brand-name drugs, which is adding a heavier burden on health plan enrollees. Calls are growing to jettison rebates altogether. The problem is that insurers often get to keep the rebates and not pass them on to their enrollees.

A study by Benfield, a division of benefit consulting firm Gallagher Benefits, found that 69% of employers surveyed would welcome an alternative to rebates, such as discounts or point-of-sale rebates, in which patient payments reflect a post-rebate price.

Employers acknowledged focusing on rebates as a revenue stream rather than focusing their attention on other important factors such as reducing employee coinsurance or deductible payments, or providing access to the most effective medicines.

The issue of rebates even has the attention of the Trump administration.

When Department of Health and Human Services Secretary Alex Azar testified before the Senate Health Education Labor & Pensions Committee in 2018, he said: “We may need to move toward a system without rebates, where PBMs and drug companies just negotiate fixed-price contracts. Such a system’s incentives, detached from these artificial list prices, would likely serve patients far better, as would a system where PBMs receive no compensation from the very pharma companies they’re supposed to be negotiating against.”

How rebates work

Drug rebates are redeemed after the transaction has taken place, but it’s not the end user (the plan enrollee) who is receiving the rebates. Instead, the PBM, the insurer or sometimes the employer receives the rebate.

The big debate is that these rebates do nothing to help the enrollee, who is often having to pay a higher cost-sharing burden for medications.

Under the current system, drug makers set a list price for their products, then negotiate with some PBMs over how much of a discount they will provide off that list price.

The size of the rebate depends on a number of factors, like how many drugs are used by the health plan enrollees, and how much of the medicine cost is covered under the drug formulary.
Companies that offer bigger rebates are often rewarded with better access, like smaller copayments.

What happens if rebates are jettisoned?

Nobody can accurately predict what would happen if rebates were eliminated.

Their elimination could potentially increase expenditures for brand drugs if payers do not find an alternative tool that reduces drug costs (for example, negotiating lower prices to begin with).

A report by Altarum, a not-for-profit health care research and consulting organization, estimated that $89 billion in rebates went to payers in 2016. Altarum found that state Medicaid plans received $32 billion of the total, followed by Medicare Part D plans ($31 billion), commercial health plans ($23 billion), and other payers ($3 billion).

Eliminating rebates will have the most significant effect on patients. Medicare and commercial insurance rebates totaled $54 billion in 2016, according to the Altarum report. The big unknown is exactly how much of that total directly benefited patients and how much flowed to the insurers and the Centers for Medicare & Medicaid Services.