Skip to page content
Employee Benefits Security Administration
Bookmark and Share

2014 Issue Statement for the ERISA Advisory Council

PBM Compensation and Fee Disclosure

Issue Chair: Jim Singer
Issue Vice-Chair: Mark Schmidtke
Drafting Team: Christine Hwang and Dennis Mahoney

Description of Issue

Section 408(b)(2) of ERISA exempts from the statute’s prohibited transaction requirements “[c]ontracting or making reasonable arrangements with a party in interest for office space, or legal, accounting, or other services necessary for the establishment or operation of [an employee benefit plan], if no more than reasonable compensation is paid therefor.” One of the issues under this provision is whether and under what circumstances benefit plan administrators have sufficient information from service providers to determine whether their compensation is reasonable. Pursuant to this provision, in 2010 the Department held hearings titled “Hearings on Reasonable Contracts or Arrangements for Welfare Plans under 408(b)(2)-Welfare Plan Fee Disclosures” and heard testimony from various sources regarding the need for and potential scope of mandatory compensation and fee disclosures from providers who offer services to employee welfare benefit plans.

A significant portion of the testimony in 2010 related to services provided by Pharmacy Benefit Manager (“PBM”) organizations. PBMs provide prescription drug services to health care benefit plans. Much of the testimony in 2010 was contingent on current and expected regulation under the then newly enacted federal Affordable Care Act (“ACA”) as well as on pending regulations of PBMs in various states. In 2012, the Department issued final regulations under 408(b)(2) but excluded welfare plans from the regulations, explaining that “there are significant differences between service and compensation arrangements of welfare plans,” and “the Department should develop separate, more specifically tailored, disclosure requirements under ERISA section 408(b(2) for welfare benefit plans.” Now that nearly four years have passed since the Department’s hearing and two years have passed since the issuance of 408(b)(2) regulations that excluded welfare plans, the Council is examining the current status of the need for and potential scope of compensation and fee disclosures by PBMs under Section 408(b)(2), whether such information is necessary for plan administrators to determine if reasonable compensation is being paid for PBM services under the statute, and how mandatory compensation and fee disclosures might impact the provision of prescription drug services to participants and beneficiaries of health care benefit plans and the costs of plan administration. Except as background and as it may relate to PBM compensation and fee disclosure, this Scope Statement is not intended to include an examination of whether PBMs are fiduciaries under ERISA.

Objective and Scope

The Council is examining this topic and intends to draft recommendations to the Secretary of Labor for consideration. Our study will focus on:

What are the scope and types of services provided by PBMs to health care benefit plans?

Do PBM services vary from plan to plan or are they consistent across all types and sizes of health care benefit plans?

What alternatives to PBMs do health care benefit plans have with respect to the provision of prescription drug services and how do the costs of such alternatives compare to PBM services?

What types of direct compensation do PBMs receive in connection with health care benefit plans?

What forms of indirect compensation do PBM’s receive (e.g., rebates from drug manufactures, retail pharmacies, and data managers, educational sponsorships, etc.)?

Do these types of direct and indirect compensation vary from plan to plan or are they consistent across all types and sizes of health care benefit plans?

What factors influence the type and amount of compensation that PBMs receive in connection with health care benefit plans?

What are the “spreads” between the compensation charged to health care benefit plans and (1) the price the PBM paid the drug manufacturer and others for the drug; (2) the price that the PBM sells the drug to the retail pharmacy chain; (3) the price the PBM pays for generic disbursement rates; and (4) the price setting related to average wholesale price (AWP), maximum allowable cost (MAC) and other industry pricing markers.

What role do PBMs play in computing AWP, MAC and other industry pricing markers?

How are these pricing markers used either uniformly or differently with various plans as a basis for drug pricing?

What types of information are currently disclosed to health care benefit plans regarding PBM compensation (direct and indirect)?

Does PBM compensation create a conflict of interest between the interests of the PBM and the interests of the health care benefit plan, and if so, to what extent? For example, are PBMs incentivized to structure formularies to encourage the use of brand drugs with higher rebates or spreads?

What contractual provisions do well-informed health care benefit plan administrators include in their PBM contracts to ensure their ability to determine reasonable compensation?

To what extent are well-informed plan administrators able to use PBM compensation information to obtain more favorable terms for the health benefit plan?

What information is disclosed by PBMs under a “transparency” contractual arrangement and how does disclosure impact a health care benefit plan administrator’s ability to determine reasonable compensation?

Are audits of PBMs effective in terms of monitoring indirect compensation and taking into account the cost of the audit? How difficult is it to find an auditor who can effectively audit a PBM? How difficult is it to get meaningful disclosures from PBMs? How does auditing “in the aggregate” work?

How do confidentiality agreements impact a health care benefit plan administrator’s ability to determine reasonable compensation of PBMs?

Can a plan administrator of a health care benefit plan effectively monitor the direct and indirect compensation received by PBMs in connection with the health care benefit plan?

Are PBMs paying indirect compensation to Third Party Administrators and/or consultants of the health care benefit plan?

What compensation disclosures are currently required from PBMs under the ACA and/or state laws?

Is it cost effective for a plan administrator of a health care benefit plan to monitor the direct and indirect compensation received by PBMs in connection with such plan?

What recommendations do the witnesses have on the application of 408(b)(2) to the disclosure of compensation received by PBMs?