Pinpointing the cause of rising drug costs in America continues to be a hot button issue that reliably resurfaces with every election cycle.
For their part, several plaintiffs’ law firms believe that the manner in which pharmacy benefit managers set cost-sharing amounts (e.g., co-pays) and receive rebates from network pharmacies is at least partly to blame, and have filed litigation against PBMs under the Employee Retirement Income Security Act of 1974 in response.
This article looks at recent ERISA lawsuits filed against PBMs, the success of those claims, and some issues those litigants have encountered along the way.
In UnitedHealth, plan members sued UnitedHealth Group Inc. and its PBM OptumRx, which, among other things, set cost-sharing amounts and negotiated with network pharmacies for reduced drug prices. The plaintiffs alleged that OptumRx’s copayment amounts set for various drugs often far exceeded the amount it paid the pharmacy for the drug, with the difference (a “spread”) forwarded back to OptumRx as an impermissible “clawback.”
The plaintiffs also alleged that the defendants were ERISA fiduciaries, and that by imposing these spreads, the defendants violated ERISA, including ERISA Section 404 (breach of fiduciary duty) and Sections 406(a)(1)(C)–(D) and 406(b) (prohibited transactions).
The District of Minnesota did not buy the plaintiffs’ ERISA-based fiduciary breach theory and dismissed the claim. The court first held that the defendants could not have acted as fiduciaries because they had no discretion in “calculating and relaying” cost-sharing amounts to pharmacies, as those calculations were based on the relevant medical benefit plan’s terms.
The court acknowledged that fiduciary liability can attach where a defendant has discretion over the factors that determine its compensation, but found that the plaintiffs failed to allege facts demonstrating that the defendants possessed such discretion. The court also held that negotiating and setting discounted rates are not fiduciary functions because those actions are akin to decisions related to a benefit plan’s provisions, which are settlor and not fiduciary acts.
Finally, the court held that the plaintiffs failed to adequately allege that the defendants acted as fiduciaries by exercising authority or control over plan assets because (1) the members’ cost-sharing amounts could not be properly considered plan assets, and (2) although the plaintiffs alleged that the defendants’ administrative agreements with the benefit plans constituted plan assets, the plaintiffs failed to adequately allege that the defendants exercised control of those agreements to the plan members’ detriment.
Because the plaintiffs failed to allege facts demonstrating that the defendants acted as fiduciaries and/or that they otherwise misused plan assets, the court similarly dismissed the plaintiffs’ ERISA Sections 406(a)(1)(C)–(D) and 406(b) prohibited transaction claims.
The plaintiffs in Negron similarly allege that Cigna and OptumRx violated ERISA’s fiduciary and prohibited transaction rules by requiring network pharmacies to charge plan participants cost-sharing amounts far in excess of the PBM’s negotiated price with the pharmacy for a particular drug.
Unlike the UnitedHealth case discussed above, however, the District of Connecticut found that the plaintiffs pleaded actionable ERISA claims. Specifically, the court held that the plaintiffs presented a plausible fiduciary status claim because they adequately alleged that the defendants exercised discretion as to setting cost-sharing amounts that violated the ERISA-governed plan’s terms and were able to dictate their compensation as a result, resulting in a potential conflict of interest for the defendants.
In addition, unlike the UnitedHealth plaintiffs, the District of Connecticut held that the plaintiffs plausibly alleged fiduciary status by claiming that the defendants exerted discretionary control over the PBM-plan sponsor agreements and insurance policies to impose the inflated drug charges to the benefit plan members’ detriment.
Finally, because the plaintiffs plausibly alleged that the defendants’ cost-sharing calculations were in contravention of the ERISA-governed plan’s terms, the defendants could not argue that those calculations were part of an overall plan design.
Having found plausible fiduciary status, the court also found that the plaintiffs plausibly alleged that the defendants violated their ERISA Section 404 fiduciary duties and engaged in ERISA Sections 406(a) and (b) prohibited transactions by imposing a clawback scheme similar to that in UnitedHealth.
Since Negron, other federal district courts have similarly held that allegations that a PBM exercises discretion over factors that dictate their own compensation amount through clawback payments are sufficient to plausibly allege fiduciary status. See Mohr-Lercara v. Oxford Health Ins. Inc.
And, although courts continue to conclude that the cost-sharing amounts cannot be considered “plan assets” for ERISA purposes, they have also acknowledged that administrative contracts and insurance policies that allow PBMs to set cost-sharing amounts, might, under certain circumstances, be considered plan assets.
How these courts will rule on the fiduciary and plan asset issues at summary judgment remains to be seen, but, for now, ERISA plaintiffs have been able to formulate allegations against PBMs sufficient to plausibly state ERISA relief claims.
In sum, these results are likely to encourage more PBM-related ERISA lawsuits, and any conflict in the courts’ decisions from Negron and UnitedHealth will likely be resolved in the federal appellate courts, if not the Supreme Court.
Indeed, the Supreme Court is already considering if it will take on the question of whether states may regulate PBM rates in light of ERISA’s preemption rules. See, Pharm. Care Mgmt. Ass’n v. Rutledge; (petition for cert. filed Oct. 22, 2018).
Simply put, plaintiffs’ focus on ERISA-related cases against PBMs shows all the signs of a trend toward expansion, both in the types of plaintiffs and in the causes of action they will file against PBMs in the future.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Michael 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.
Christopher Sheehan is an associate in Jenner & Block’s Complex Commercial Litigation Practice in Chicago. He counsels and represents clients in a wide array of complex, high-stakes commercial disputes and concentrates his practice in defending clients in ERISA civil suits and Department of Labor enforcement actions. He also assists clients in responding to and navigating complex government investigations.