What Does PBM Reform Mean for Your Plan (Hint Think Fiduciary Duties)?

Speaker A: Hi everybody and um, thanks for joining us for another episode of Compliant with Alliant, our employee benefits podcast. Compliance podcast here at uh, Alliant Employee Benefits. My name is Christine Blanco and I'm the director of the Employee Benefits Compliance Department and I'm joined here today with Laura Miller.

Speaker B: Hi everyone.

Speaker A: Laura is one of our lead compliance attorneys here at Alliant. And today I'm going to borrow um, a fairly dorky joke, um, from our pharmacy people who I love and aren't dorky. Um, but we're going to do some drugs today. So um, we're going to talk a little bit about pharmacy and PBMs, um so and the regulatory, statutory and other landscape that we're seeing and what it means for plan sponsors. So I want to start out with you know, a note that what we're seeing in um from a regulatory and statutory and administrative perspective, um, those developments don't directly regulate uh, employer plan sponsors or plans themselves, but they will have a significant impact on UM plans as it relates to their fiduciary duties. Recall that as a plan sponsor you have a number of fiduciary duties, you know largely to operate the plan in the best interest of the participants and to not internally into agreements that um, are unreasonable and are conflicts of interest. And so the uh, implications, uh, for you know the implications of these developments is really in that area and in your fiduciary capacity. Another quick note that if you don't carve out your pharmacy benefits, so if you have a carved in or a pharmacy benefits in a fully insured arrangement or even a self funded arrangement, um, there's probably maybe less concern here but it is something to pay attention to. It is um, the way that pharmacy um, is trending generally. And if you're in a growing organization you certainly want to understand what this landscape looks like. Um, so with that I'll turn to um, to our first development. So there are a few things we're going to talk about. We're going to talk about a Department of labor proposed rule. We're going to talk about some which is regulatory, ah, nature. And then we're going to talk about the Consolidated Appropriations act of 2026 which is legislative in nature. We're going to talk about some settlements that the three PBMs have been sued by the FTC and um, at least one of them have settled and two of them are in settlement discussions right now that are impactful to this space. And then we're going to cover real quickly just the state of um, state pbm law. And what does that mean, uh, for employer plan sponsors? So with that, um, the DOL proposed rule, I'm going to cover that and then I'm going kick it over to Laura, who's going to pick up on some of the legislative stuff. So we did a webinar on this topic, um, with our pharmacy folks in uh, the first quarter. And so it has a lot of the more detailed sort of pharmacy information that I'm just not as well versed in and certainly would, would not sound overly bright if I tried to dive deep on that. So if you're interested in um, in getting a little deeper on the pharmacy specific components here, please take a listen there. But in fact, the proposed rule that we're talking about that impacts PBMS is rooted in what's called ERISA 408, which is basically um, it's technical. I don't want to get too technical, you're probably somewhat familiar with it. But plan service providers, those service providers that provide services to the plan are required to make advance disclosures of their compensation related to the services they provide the plan. This is uh, all about prohibited transactions under erisa and that any, any one of these arrangements really needs to be reasonable in order to not be considered a prohibited transaction. In order for you as a plan sponsor to figure out whether it's a reasonable and not a prohibited transaction, it's a reasonable arrangement. You need to know what that service provider is getting paid to provide your plan, its services. And that's sort of the underpinning. Those rules have long been in place for pension plans. In 2021 they extended to um, to group providers, including brokers and consultants. And at that time PBMS just didn't pick up, didn't pick that up, didn't deem themselves subject to that. And so we've been sitting there since 2021 with PBMs as, you know, a really big component of the healthcare space. Um, and we, we've learned now with the DOL proposed rule that they very directly extend this requirement to PBMs that they are required to disclo to their plan clients in advance various, um, levels of compensation. It's indirect compensation, direct compensation. And this is, I should back up a little bit. Um, but this is really just a broader move towards transparency that we saw very aggressively began. Right, Laura, in 2021 and really starting to shift the landscape on um, just overall in transparency and healthcare. And so the idea is that plan fiduciaries then have the information they need in advance of deciding whether to go with this PBM or this service provider to decide, well that makes sense. That's reasonable, um, compensation. Um, they need to understand compensation flow, be able to identify as a plan sponsor any conflict of interest and whether it's reasonable. So this rule extends to PBMs and also what they call PBM affiliated brokers and consultants. And there are those brokers and consultants who are PBM affiliated. So you'll want to know whether yours is one of those. Um, I don't want to get too far into the weeds on what because I want to let Laura talk about the caa. But um, what is required is a little bit different from the other 408 disclosures that you should be receiving from service providers. Certainly the same direct and indirect compensation, but there's a very specific requirement of the type of compensation. So spread pricing, any clawbacks, um, manufacturers payments. So very specific to the industry. So you know, the industry has been opaque for a very long time, sort of peeling back those layers and letting plan sponsors see how the money flows. Um, there's also a requirement that um, after those advanced disclosures are made, that there's a semiannual um, disclosure of the amounts that is, that are actually received and whether those gelled with the, you know, the advanced, um, disclosures of the compensation that the PBM would receive. And then there's rights for the plan to audit the PBM as well. There's also this requirement that plans notify the DOL if the service provider is not in compliance. And so, um, what we see a lot of times too is that in a regulatory space, you know, the uh, DOL or an agency will issue rules and then the legislature will come in and issue a similar set of rules and then there'll be this Venn diagram overlap and you don't really know which one is which. It definitely happened with the CAA in 2021. And Laura, I'm going to kick it to you to talk a little bit about um, the CAA 2026 also governing PBM disclosure in a very similar way. So if you'll talk us through that a little bit.

Speaker B: Yeah, exactly. The CAA 2026 really, I feel like doubled down on those proposed rules that we saw. I think one important key piece to note is that the proposed rule, we expect to have some sort of finalization around those regulations, um, later this summer. Right. So this is a very, the proposed rule that Christine just talk talked about, um, is a very near term, um, you know, obligation that is, is coming down the pike. Whereas the, the CAA of 2026. Um, you know, it doesn't take effect until plan years beginning on or after 30 months, um, from February 3rd when it was enacted. So for calendar year plans we're really looking at an effective date of January 1, 2029. So there's a, yeah, there's a, there's a much longer Runway when it comes to the, the CA provisions. And um, you know, that's generally a good thing when we think about just all the sweeping reform that was included in that legislation. So while it did include uh, the compensation disclosure, and I'll touch upon that briefly, um, in just a few more minutes. But first I want to talk about some of the other requirements that were included under that legislation. Um, one of them being, uh, prohibition on PBM contracts that limit the plan sponsors access to prescription drug pricing and PBM compensation information. So really making sure that plans and plan sponsors have access um, to this information. Um, you know, this framework is going to help uh, our employers make more informed decision making, uh, as well as drive cost management strategies as you're talking, you know, with brokers and consultants and figuring out where do you go from here. So I think really the big takeaway is that um, you know, employers plan sponsors really need to begin to review their PBM contracts, ensure that the PBM is going to adhere to all of these relevant regulations, um, and then respond promptly to any sort of requests for this data. Another piece of this is really the um, standardized and detailed drug specific as well as plan level reporting that is designed to support uh, again that overall PBM oversight. Um, so it's really focusing in again on transparency. Um, and so you know, I think really here, you know, we think about the integration of plan level reporting, that drug pricing, um, transparency and then the PBM compensation. It's really forming a new framework for PBM oversight. And with this oversight also comes great responsibility. Right. There's an expectation here that employers are engaged and participating in this. So it's really, you know, making these requirements are really designed to make pharmacy benefits easier to evaluate and benchmark across vendors, which is great. But then we as employer plan sponsors need to pick that up and then carry it across the finish line. Right. Um, so it's, we're really becoming an active participant in, in this process as an employer plan sponsor.

Speaker A: Yeah, I mean in all likelihood. Right. That's going to fall into the category of more information probably than you ever wanted to know and information. Right. So I think all the more important to an advisor, a strategic advisor who's Very well versed, um, in pharmacy. And specifically also how do you deliver pharmacy in a way that's transparent and aligned, um, with what we're seeing in the marketplace. So it'll be all the more important as you start planning, um, like Laura said, certainly the disclosures will start coming to you. They should start coming to you, um, effective. You know, I think it's 2026, right after. Is it plan years? Probably, um, next year under that DOL proposed rule, giving you a bit more information, but then getting ready to what it really looks like in 2020.

Speaker B: And what else is interesting is when we look at the Consolidated Appropriations act, you know, there's. There's all of this information now that. That needs to be available and provided to employers. But you, as the employer, also have an annual notice requirement to provide to participants. Um, so this is a requirement for employers to provide that notice detailing the PBM reporting requirements and your participants. Right. To access summary reports and more detailed data on request. So we're really expanding this out, you know, taking it not just from the PBM M and the employer, but also adding in sort of that, that third leg of the stool to participants themselves, which I think then, you know, as a takeaway for employers, it really is making sure that. That you are engaged, that you're thinking about your fiduciary obligations. Right. Because there is so much oversight not only between you and the PBM, but also for participants. And we know that plaintiffs firms have been active in their litigation in this area, certainly.

Speaker A: Yeah. Uh, the ERISA litigation in the health plan space most definitely started with pharmacy, for sure. And, you know, I mean, just when you generally think about it and you think about your fiduciary duties, you think about your risk as a plan sponsor. Generally, it is where you are doing something or making decisions that directly impact your participants in a way that they'll feel pretty quickly. And there's really no greater place in the medical plan than pharmacy spend and pharmacy design. Yeah. So, um, do you want to talk a little bit about what I usually call, uh, kind of coming in the side door from a regulation and just a change perspective with the FTC settlement?

Speaker B: Yeah, absolutely. So when we think about, um, the settlements really against, uh, all three of your big PBMs. So we've got Express Scripts, um, we've got CVS, Caremark and OptumRx, and as Christine mentioned, um, CVS, Caremark and OptuMrx. They're still in, um, the settlement negotiation process. But we did have that settlement with Express Scripts, which really at a very high level. Right. We don't want to get into the details here but it's requiring some structural changes in how Express scripts um, prices their drugs, how they manage rebates, um, how they work with, with pharmacies and report information um, to their plan. So I think overall what we're seeing is just um, you know this, this litigation is signaling a broader shift towards true net cost drug pricing models. And with the, the litigation that is ongoing with the other two major PBM, CVS, Caremark and OptumRx, we're really expecting similar settlements. So this is something that is, is going to navigate its way and really have an impact for employer plan sponsors. Um, you know overall um, just with the changes that are being made. So we you know are expecting um, you know some different types of uh, contract structures to evolve because of this. There's going to be budget implications um, that come from this as well.

Speaker A: Yeah. You know and I say it comes in the side door because it's you know it's the FTC settling with a single party. Um but the settlements are so significant and uh, likely to be replicated in those other two PBMs who have such a significant share of the marketplace that it almost functions as you know, industry reform when you know normally that kind of posture doesn't do that but it does it here. So it's just another way for um, the government to move a needle a little bit in the industry. So um, that's where we are on those settlements. Um, again to Laura's point most of this is um, from a plan sponsor perspective, fiduciary related. It's just to pay attention to your plan, expect some changes, expect some shifts in cost structure. Um, the final thing we want to talk about with respect to PBMs, UM is the state efforts for PBM reform. Um, all 50 states have some measure of PBM law and um, some of them have been more aggressive than others in regulating um, how PBMs function in their state. This is going to be a really, really, really brief um, review of ERISA preemption. But recall that um, ERISA is a federal law with complete preemption, um, that applies to self funded plans, does not apply to your fully insured plans which are subject to state insurance law. So we're talking you know largely about self funded plans here. And if you're in a pharmacy, carve out that's you know by and large what you are. And so the question really for multi state employers that sponsor self funded plan really becomes well Am I subject to this state law? And that question remains murky and creates a lot of uh, friction for an administration. Um, our first recommendation is always work with a TPA who has an opinion, who has a thought around, you know, or at least some guidance around whether a particular state, um, PBM reform mandate should apply to your plan. They, you know, they're all different but carry a little bit largely, uh, carry the same groups of reform. So bans on spread pricing, 100% rebate, pass, pass throughs some state licensure requirements. Um, they prohibit steerage, um, eliminate some pharmacy gag clauses. So they all kind of fall into these buckets. And some of, some of those provisions are more likely to be preempted by erisa, meaning as a self funded plan, you shouldn't have to implement them. Um, anything that's going to touch the benefit plan so impact the plan structure or the benefits that you offer is potentially preempted by erisa. So that usually can be sort of the work provider, you know, provisions that, any willing provider provisions, anything that, that steers people in a certain direction and just accessibility to pharmacies, any of that, those provisions could potentially be preempted by erisa. But the way that the landscape looks is it's frustrating because you don't know until a court decides whether a state law and that can be, you know, that's really expensive and creates a lot of uncertainty. And the way the landscape has worked is that uh, back the Supreme Court addressed or this ESSA preemption in this context in a case called Rutledge and I am um, forgetting off the top of my head, I think it was in the late 2000 teens, 18, 19, 17 at any rate. Um, and, and so that sort of, you know, opened the door to states go, oh, okay, well maybe we can do this. But in that case the Supreme Court says yeah, this law isn't preempted, but it doesn't mean other laws won't under certain, certain circumstances. And then we had a case go up to the Supreme Court out of Oklahoma called Mulready. Rutledge was from Arkansas. Mulready went up and the Supreme Court took it and then decided not to. Um, and then they left the preemption in place, meaning the law was determined by the Circuit Court of Appeals to be preemptive by ERISA and not applicable to self funded plans. And then what we're seeing to my mind is a trend in ERISA preemption. So the way the laws are working and A recent um, 6th Circuit Court of Appeals case, um, held that um, Tennessee law was preempted by erisa. And so we'll see where that goes. So, um, really not a ton of helpful guidance there other than to say it looks like some of these, the trend is sort of toward preemption, but that will again be based on how the state law is drafted and if it impacts the way you can administer, offer benefits under your plan. And so again, key component, work with TP or your, your PBMs who can, you know, are used to dealing with this and have an advisor who can help you kind of deal, you know, work your way in and out of what is a state patchwork quilt.

Speaker B: Um, and as I think about that um, Tennessee case, you know, that was an any willing pharmaceutical pharmacy case. So you know, it gets back to if, if we had to try and provide sort of a summary as to what state laws are more likely to be preempted versus not it really is, you know, any law that's going to try to directly regulate the administration or the design or network structure of the plan. That's where we see a greater likelihood for preemption like we did in Tennessee, um, and in Mulready, Um, but where the laws are looking at the administration and financial burdens on PBMs, that's where we're seeing them, them stick more.

Speaker A: Exactly. That's exactly right. So yeah, where it's financial and rebate pass throughs and those sort of things, but where the law may say, oh plan sponsor, you have to have this pharmacy in your network and you have to um, you know, frame up your plan this way then, then those laws can get themselves into a little bit of a risk of trouble. Um, and so the landscape is changing. There is so much happening here. Our takeaway is you don't have action items right now other than to be prepared to receive significant amounts of probably complex data that will then implicate your ERISA fiduciary duties. So make sure you're working with somebody, an advisor that is strong and deep in this space that can help you navigate it as it continues to change. So I think with that. Laura, are we good?

Speaker B: I think we're good. I think that is more than enough,

Speaker A: more than enough, uh, drugs for the day. So thanks everybody. We appreciate you joining us us. We'll talk to you soon.