Employers’ Fiduciary Responsibility In Health Plans

The urgent need for transparency and responsible cost management in health plans

Many in the human resources (HR) community were taken aback by the recent class action lawsuits against Johnson & Johnson and Wells Fargo by their employees. These suits are challenging the employers for a breach of fiduciary duty to the employees under the Employee Retirement Income Security Act (ERISA) law and should be a wake-up call for all health plan administrators.  

The employee claims include:
 

• Breach of duty to manage drug costs – charging participants inflated prices
• Not covering lower cost generics on the plan
• Steering participants to a more expensive pharmacy – specifically for specialty drugs
• Failing to manage service provider costs
• Lack of transparency in drug claims

The notion of an employer’s fiduciary duty under ERISA is well-established in 401k plans. Plan administrators are required to ensure that the plan’s service providers are always working in the best interests of plan participants. A few decades ago, 401k plan service provider practices were something out of the Wild West. Brokers and advisors would often get undisclosed commissions from investment houses, which their clients would be innocently steered toward, resulting in fee structures that were not favorable to plan participants who had no recourse to negotiate the terms. These investment houses, advisors and brokers were well-respected household names. Does this sound at all familiar?

Today, 401k plans have well-established compliance protocols, including governance committees, fiduciary bonds and full transparency in fees and plan options.  Unfortunately, self-insured, employer-based health plans are still in the Wild West today, and the practices of some of the service providers – pharmacy benefit managers and brokers (PBMs) – are far worse than what was seen in the 401k days of yore.

Let’s remind ourselves of the basic fiduciary duties an employer and plan administrator, on a personal level, can be held responsible for:
 

• Duty to act prudently
• Duty to comply with plan provisions
• Duty of loyalty to the plan participants and beneficiaries
• Duty to pay only reasonable plan expenses

It could easily be argued that some PBM practices today are not in the best interests of plan participants and that the plan expenses driven by these practices are anything but reasonable. For example:

1. Rebates: Drug rebates on branded drugs average 48% of a drug’s list price. Very few plans today are passing these rebates through to participants during the deductible period.  Why not? These funds are going to the PBM, which keeps an undisclosed % (~ 13% from data provided to the state of Texas), and the balance goes back to the employer. Why does that happen during the deductible period when the plan should have no role but to monitor the participant’s spending? The PBM, a vendor, is making a profit off vulnerable participants. Many employers incorrectly think this is keeping overall plan costs and premiums down. The reality is that passing through rebates to participants during the deductible is essentially cost-neutral. Consider that a chronic disease patient will meet their deductible 100% of the time. Overcharging for a medication causes the participant to meet their deductible prematurely and plan to pay another claim that they otherwise wouldn’t have paid.  The only winner here is the PBM.

2. Low-Cost Drugs Excluded: The PBM’s drive for rebate dollars often results in the exclusion of lower-cost alternatives from a plan’s formulary. A plan participant in their deductible period often has no choice but to pay for the more expensive drug or to ration their medication at the risk of their health. Don’t believe this is true? The top three PBMs also handle Medicare Part D plans, which are publicly available. Less than one in four new generics are placed on the formulary in the year they are released. The number of generics on the generic tier has dropped from over 90% to less than 50% over the past decade. Speaking of generics, how many of your plans charge more in a copay for a generic medication than the actual cash price charged by the pharmacy? How can that be in the plan participant’s best interest?

3. Specialty Pharmacy/Mail Order: How many plans drive your participants to a PBM-affiliated pharmacy? This especially happens in the case of specialty drugs. Are these less expensive for the employer, let alone the employee, or is it just more lucrative for the PBM’s corporate family? Is the practice even safe? Take the example of requiring a mail-order pharmacy for specialty drugs. These medications are often biologics or injectable, which can easily be damaged or rendered useless by extreme temperatures. Mail-order pharmacies send these through standard shipping channels to reach a patient’s home. FDA temperature control requirements only apply from the manufacturer to the drug wholesaler and then to the pharmacy. It stops there. Even with “protective containers,” a recent New York Times article illustrated some tragic stories driven by PBM greed.  

Are we being good plan fiduciaries if we allow these practices? Ignorance may be bliss, but it’s a lousy defense. What can you do? Here are some simple recommendations:
 

• Consider forming a health plan governance committee.
• Confirm fiduciaries are covered under existing liability policies and indemnified in plan documents.
• Review all service provider agreements to ensure disclosure requirements are being met and that PBM practices, in particular, are working in the best interests of your participants.
• Establish a periodic review process of all vendors and fees.

The courts will, of course, decide the specifics and extent to which an employer can be held liable for the practices of its health plan service providers, but the conversation has certainly taken a turn, requiring companies to take notice and, hopefully, action to protect their employees and their families.  Welcome to the new world.

George J. Huntley is a founding member of the Diabetes Leadership Council (501c3) and currently serves as CEO of both the DLC and its affiliate, the Diabetes Patient Advocacy Coalition (501c4). He has been living with type 1 diabetes since 1983 and has 3 other family members also living with T1D. A passionate advocate for people with diabetes, George is a past National Chair of the Board of the American Diabetes Association and currently serves as Treasurer of Children with Diabetes.