PBMs — and Employers — Could Go to Federal Prison
How new federal policies just blew up the PBM business model and why employers can no longer look the other way
In my review of an employer’s PBM contract, I found 45 different provisions that were so egregiously disadvantageous, no prudent fiduciary under state or federal law could have signed it in good conscience.
That employer, with about 2,000 employees, had asked me to review the contract with ExpressScripts, their pharmacy benefit manager (PBM). PBMs are obscure middlemen that are part of every health plan. The industry, with only three giant companies controlling almost 80 percent of the market, claims a value prop of getting volume discounts from drug makers that the employers couldn’t otherwise get themselves.
The HR manager, the one who signed the contract, year over year, looked at me plaintively and said, “but what are we supposed to do? They won’t negotiate these terms with us — they don’t need our business.”
She was right that they wouldn’t negotiate. Her PBM serves 118 million lives. They’re not going to get religion to win the business of a few thousand. Instead, they present their contract to an employer, and it’s a take-it-or-leave-it proposition. Most employers don’t think they have a choice.
But this employer did have a choice. The next year, I helped them fire ExpressScripts and hire an honest, fiduciary-minded PBM. Their drug costs dropped 36 percent in the first year — a savings of more than $2 million.
They didn’t have to be experts in the prescription drug supply chain and its many shady characters and money games. They just had to hire an honest PBM.
A similar employer elsewhere in the country, with almost the same demographics, in the same industry — kept their Big-3 PBM. Their drug costs increased by almost 50 percent in one year.
Both clients experienced higher medical (non-Rx) costs that year, so it wasn’t a different risk profile per se that explained their different drug spend. Apart from the PBM, their plan designs and vendor stacks were similar.
But the difference between them on prescription drug costs was mind-blowing.
The Federal Government is Dropping Thermonuclear Bombs
Which is why the past week has been so earth-shattering.
A law just enacted by Congress and an even more detailed, but little-noticed regulatory action proposed last week by the Department of Labor are about to turn the corrupt business model of these too-big-to-compete conglomerates to ash.
These new requirements will force PBMs to expose the panoply of ways they fleece American businesses and their workforce.
The PBM empire will strike back. I know because I’ve seen this movie before.
When I was in the White House working on what became the Trump price transparency rule for health plans, the president was constantly haranguing us to get drug prices lower — a noble cause, to be sure. So of course, the final rule included a section requiring PBMs to post their secret drug prices.
The industry cabal filed a couple lawsuits, both of which were negotiated away by the Biden administration: HHS announced an indefinite delay of the PBM piece of the Trump rule. Later that week — coincidentally, I’m sure — the PBMs pulled their lawsuit. The other lawsuit, filed by the smarmy PBM trade group, got pulled when the Biden administration agreed to keep their pricing information confidential, safely hidden from, you know, the people who pay those prices — employers and patients.
Last week, the Department of Labor not only reversed this travesty, but they doubled down in the most aggressive way possible. Congress then passed a bill a few days later that not only doesn’t conflict with the proposed rule, but it will essentially require DOL to finalize an even tougher version.
The sheer volume of confessions that DOL’s proposed rule would require PBMs to make to their clients is stunning. And glorious.
They have captured every single problem that I could possibly have thought of as needing exposure. There’s no money game, shenanigan, or known corrupt practice they haven’t demanded that PBMs admit to their clients. The new law goes beyond ERISA plans to include small groups, individual market plans, Church plans and government plans.
These policies lay out the playbook for how PBMs, GPOs, PBM-controlled pharmacies, consultants and yes — plan sponsors — can go to federal prison more easily.
CEOs, CFOs, HR leaders — you’ll need to understand how to use these new requirements to prevent that. And trust me, you’ll have fun doing it, because both Congress and DOL have just turned on the lights — watching the cockroaches scramble is a recipe for a good time.
Yes, PBMs (and the Sweet HR Lady Down the Hall) Could Go to Federal Prison.
ERISA is the law that governs most larger group health plans. Most people think ERISA enforcement is boring, civil, and toothless: fines, settlements, a slap on the wrist.
That’s wrong.
ERISA has always had criminal teeth. The new law and DOL’s proposed rule make it much easier for prosecutors to bare them — not just against PBMs, but against employers and other plan sponsors who lie, conceal, or even just look the other way.
The proposed rule doesn’t create new crimes. It removes plausible deniability.
Under current law, willful violations of fiduciary, reporting, or disclosure duties can lead to fines, federal prison time, or both. Fiduciaries like CFOs, CEOs, HR leaders, Benefits Committee members, Directors and others can be held criminally and civilly liable, severally and personally, which means that you can’t say “I was acting in my corporate capacity — sue the company, not me.”
Prosecutors usually pair ERISA charges with wire fraud, false statements, or conspiracy. This has historically been used most in pension cases - but it applies to employer health plans too.
The new law makes PBM compensation disclosure a condition of keeping your plan on the right side of ERISA’s prohibited transaction rules.
If any of the manifold disclosures under the law’s new requirements are false, misleading, or incomplete, your contract with the PBM could be deemed presumptively unlawful.
To be clear, PBMs and plan sponsors wouldn’t go to jail for mistakes. But you can go to jail if you (or your PBM):
Knowingly lie on these new proposed PBM disclosures
Hide spread pricing, rebates, or payments to consultants pretending to be independent
Cover up self-dealing or steering to PBM-owned pharmacies
Look the other way as a plan sponsor, despite criminally egregious red flags
Mislead auditors or regulators.
The new law lists, and the proposed rule spells out in greater detail, exactly what must be disclosed. After that, “we didn’t know” gets a lot harder to claim.
Plan sponsors are ERISA fiduciaries. If you knowingly accept opaque PBM arrangements — and most plan sponsors today are doing exactly that, because they think, like my client did, that they have no other option — you’re no longer able to claim that you were an innocent bystander. You could be deemed a co-fiduciary or a participant in prohibited transactions.
To be clear, these policies are great news for employers and honest consultants who advise them. They will make it infinitely easier for you to be a good fiduciary. But they also make it much harder to claim that you didn’t know better if you’re a bad one.
Below follows a stroll through the highlights of all the rigorous (and occasionally hilarious) new requirements that either DOL or the new law (or both) have imposed on PBMs and their ilk (aka their agents, consultants and affiliates).
Paid subscribers get access, and trust me, you can’t afford not to know.
