Bloomberg Law
Free Newsletter Sign Up
Bloomberg Law
Free Newsletter Sign Up

INSIGHT: Exclusive Benefit—An Analysis of PBMs as Potential ERISA Fiduciaries

Oct. 4, 2019, 8:01 AM

In a previous Insight, we provided an overview of recent federal district court litigation involving claims against pharmacy benefit managers as ERISA fiduciaries. Although the body of appellate court law analyzing whether and to what extent PBMs owe fiduciary duties to plan participants is not extensive, it appears that no court has yet concluded that a PBM acted in any fiduciary capacity under ERISA.

The few courts that have addressed the issue, in fact, have reached the opposite conclusion. In this Insight, we discuss notable decisions from the federal appellate courts, and discuss one case currently pending in the U.S. Court of Appeals for the Second Circuit. In these opinions, courts have looked very closely at the specific contractual relationships between plaintiffs and the PBMs to determine whether the PBMs owed any ERISA-based fiduciary duties to the plaintiffs.

Chicago Dist. Council of Carpenters Welfare Fund v. Caremark Inc., 474 F.3d 463 (7th Cir. 2007) involved a series of contracts under which Caremark provided a union welfare fund with access to a network of retail pharmacies, claims processing, a formulary (i.e., a list of preferred prescription drugs) program, telephone customer service, and recordkeeping.

The plaintiff alleged that Caremark had breached its ERISA fiduciary duties by negotiating secret discounts with drug manufacturers and retail pharmacies, while keeping the difference between those discounted prices it pays and the amounts the plan reimbursed as its profit. However, both the district court and the Seventh Circuit concluded that Caremark was not an ERISA fiduciary, and the plaintiff’s claims were dismissed.

The Council of Carpenters PBM contracts contained express provisions stating that Caremark was not a fiduciary as ERISA defines that term. Nevertheless, the plaintiff alleged that Caremark exercised discretionary authority—and therefore owed participants ERISA-based fiduciary duties—as to its negotiations with retailers over drug prices and drug manufacturers over rebates, as well as its formulary management and drug-switching program management.

The union fund’s retail pharmacy pricing was determined by external inputs, which included pharmacies’ pricing data, average wholesale prices, or the maximum allowable cost (MAC) as set by the Health Care Financing Administration (HCFA; now the Centers for Medicare & Medicaid Services). If those external inputs were not available, the pricing was determined by a Caremark calculation made using the same formula that the HCFA uses to calculate the MAC.

The agreements also included rebates, with Caremark paying fixed rebate amounts depending on whether prescriptions were mail-order or retail and whether Caremark was eligible for drug manufacturer rebate programs.

The rebate provisions further prohibited the plaintiff from directly contracting with those manufacturers. And, as to the formulary and drug-switching program, Caremark would take measures to ensure “cost-effective prescribing decisions,” including providing a participants and providers with brochures listing Caremark’s preferred drug brands and/or contacting providers about substituting Caremark’s preferred drugs for non-preferred drugs.

The Seventh Circuit concluded that none of those actions gave rise to any ERISA fiduciary duties. The pricing the fund paid was based primarily on inputs that neither party to the contracts controlled, and the contracts never obligated Caremark to pass through any additional savings it might have negotiated to the fund, thus allowing Caremark to retain any difference for itself. As to the formulary and drug-switching program, the contracts provided that the plaintiff had sole discretion and authority to determine the formulary.

Applying reasoning similar to its pricing analysis, the court also concluded that the rebate-related provisions in the contracts did not obligate Caremark to pass along any additional rebates Caremark negotiated with drug manufacturers.

Although plaintiffs in other cases have made similar allegations, appellate courts generally have not addressed the PBMs’ fiduciary status directly. See, e.g., Bickley v. Caremark RX Inc., 461 F.3d 1325 (11th Cir. 2006) (affirming dismissal for failure to exhaust administrative remedies); Cent. States Se. & Sw. Areas Health & Welfare Fund v. Merck-Medco Managed Care LLC, 504 F.3d 229 (2d Cir. 2007) (addressing disputes following class certification and approval of settlement agreement).

In addition, certain state and local jurisdictions have attempted to mandate PBM fiduciary status through legislation. Proposed statutes require, for example, disclosure of the agreements’ terms between PBMs and drug manufacturers, conflicts of interest disclosures, and pass-through of certain cost savings the PBM is able to achieve to the participant. This would essentially achieve the same result that the private plaintiffs seek through litigation.

However, trade associations representing PBMs have generally had success in challenging such legislation in the courts on ERISA preemption grounds. See, e.g., Pharm. Care Mgmt. Ass’n v. D.C., 613 F.3d 179, 183 (D.C. Cir. 2010) (D.C. statute); Pharm. Care Mgmt. Ass’n v. Gerhart, 852 F.3d 722, 725 (8th Cir. 2017) (Iowa statute).

Recent Second Circuit Case

A more recent case, currently on appeal to the Second Circuit, also involves a district court’s dismissal of fiduciary allegations against a PBM similar to those in Council of Carpenters. In In re Express Scripts/Anthem ERISA Litig., 285 F. Supp. 3d 655 (S.D.N.Y. 2018), the district court concluded that pricing provisions in the relevant PBM agreement did not give the PBM discretion over pricing, as the plaintiffs alleged.

Under the provisions, the health benefits provider contracting with the PBM could perform a periodic market analysis to test whether the PBM was providing “competitive benchmark pricing” to the health benefits provider. If the analysis revealed that pricing was not competitive, the PBM was obligated to negotiate in good faith over new pricing.

The court rejected the plaintiffs’ argument that the PBM’s ability to set pricing pursuant to its own interpretation of “competitive benchmark pricing” amounted to discretion over pricing, concluding that the PBM was only executing the PBM agreement’s pricing scheme.

Similarly, the court rejected the plaintiffs’ argument that the PBM’s ability to maximize the spread between the prices it paid and the amounts it billed to insurance companies and insureds made it a fiduciary, again noting that the PBM agreement contemplated such activity and did not require the PBM to pass on savings to participants.

Common Thread

The common thread in all these cases appears to be appellate courts’ general unwillingness to hold PBMs liable as ERISA fiduciaries for conduct that the PBM agreements either contemplated or expressly permitted, particularly where the conduct is somehow tied to external factors (e.g., pricing reference lists) or subject to the final approval of the party contracting with the PBM.

In Express Scripts/Anthem, the plaintiffs’ arguments on appeal emphasize (1) the lack of fixed pricing formulas as in Council of Carpenters, and (2) the alleged abuse of discretion in a manner that violated the PBM agreement. It remains to be seen whether the Second Circuit will conclude that those circumstances sufficiently distinguish the case from Council of Carpenters.

As of now, there does not appear to be any conflict at the appellate court level as to whether PBMs, operating under contracts such as the ones at issue in the cases discussed above, can be liable as ERISA fiduciaries. More recent district court decisions, such as the one in Negron v. Cigna Corp., No. 16-CV-1702 (D. Conn.), have reached the opposite conclusion based largely on the specific factual allegations made. Courts appear to be reviewing these issues on a case-by-case basis.

Given the differences among and inherent complexity of PBM agreements, it will be difficult to predict in any given case how a district court will rule on the issues. This means that PBM-related cases will likely continue to be filed. For that reason, Supreme Court review of PBM fiduciary liability claims seems unlikely right now.

The increasing number of new lawsuits, with their varying factual circumstances, will result in increased district court, and ultimately appellate court, decisions. If the decisions reach conflicting conclusions, Supreme Court review will ultimately be needed to resolve these difficult issues.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Michael T. Graham is special counsel in Jenner & Block’s ERISA Litigation Practice in Chicago. He has more than 20 years of experience counseling on employee benefits and ERISA litigation and controversy matters. He also advises plan administrators and employers on proper compliance with ERISA claims and appeals procedures, helping them avoid litigation and develop defenses to eliminate or minimize liability exposure should litigation arise.

Amit Patel is an associate in Jenner & Block’s Complex Commercial Litigation Practice in Chicago. He represents clients in their most critical business disputes, including ERISA fiduciary breach claims.