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A recent study has uncovered a troubling insight: nearly two-thirds of employers with self-funded pharmacy benefits have rebate agreements with guarantees in place for specialty drugs – arrangements often influenced by their benefits consultant or broker.
The reliance on drug rebate guarantees poses an elevated fiduciary risk for employers, especially in light of the Consolidated Appropriations Act (CAA) of 2021, which imposes tighter fiduciary duties on sponsors of group health plans.
The National Pharmaceutical Council study, involving a national survey of 110 employer drug benefit decision-makers, found that 62.7% of employers have rebate agreements with guarantees for specialty drugs.
The person or entity most influential in rebate strategy decisions was often a benefits consultant (37.3%), a human resources/benefits leader (29.1%), or a benefits broker (21.8%), the study found.
These agreements, while offering financial predictability, may obscure the actual net prices of drugs, potentially leading to higher overall pharmacy costs by including higher-cost drugs in formularies, the study said.
That’s why, its authors suggested, employers need to pay heed to the role played by their benefits consultants in presenting drug contracting options and selection of their Pharmacy Benefits Managers, or PBMs. PBMs manage pharmacy benefits, including negotiating price concessions from drug makers. These concessions amount to rebates.
Research has linked higher drug rebates to higher list prices and higher out-of-pocket costs for patients, raising important questions about the equity of this approach, the study noted.
This has led policy makers to increase their scrutiny of PBMs, including investigating whether PBMs favor high-list price drugs with higher rebates over drugs with a lower net cost.
Employees at Johnson & Johnson earlier this year filed a federal class-action lawsuit against their New Jersey-based employer alleging that over the years they have paid millions of dollars more for drugs than they should have.
J&J, the lawsuit said, “failed to exercise prudence before selecting a Pharmacy Benefits Manager, failed to exercise prudence in agreeing to make its ERISA plans and beneficiaries pay unreasonable prices for prescription drugs … failed to actively manage and oversee key aspects of the company’s prescription-drug program, and failed to … protect plan assets and beneficiaries’ interests.”
Fiduciary Challenges Under the CAA
Employers have for decades had a fiduciary responsibility to operate their health plans solely in the best interest of participants and beneficiaries. The CAA created new requirements for covered service providers such as employer consultants and benefits brokers to disclose to plan sponsors any direct or indirect compensation they receive.
While the CAA mandates disclosure of such compensations, consultants and brokers do not share the fiduciary duty imposed on employers.
With that in mind, the study authors advised that "employers may wish to better understand the financial incentives of their consultants and brokers when accepting their recommendations for (drug) rebate contracting strategies and pharmacy benefit design."
No doubt.
Given the heightened fiduciary responsibilities imposed by the CAA, employers will want to navigate these questions carefully, ensuring their decisions align with the best interests of their employees and beneficiaries.
The focus for employers should be on transparency and on exploring alternatives to rebate-centric models – at least for those hoping to live up to their fiduciary duties and stay out of court.
The Mahoney Group, based in Mesa, Ariz., is one of the largest independent insurance and employee benefits brokerages in the U.S. For more information, visit our website or call 877-440-3304.
This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.