PBMs or Pharmacy Benefit Managers are under the gun these days. PBMs are third party administrators for many types of drug care plans, especially those covering employers. PBMs earn revenues in a variety of ways. First, they collect administrative and service fees from the original insurance plan. Second, they can also collect rebates from the manufacturer. Third, and more controversial, they can resell drugs at a price higher that than the price negotiated with the manufacturer or “spread pricing.” In this situation, there is generally a lack of transparency in how pricing decisions are made.
There have been a number of surveys showing that the healthcare cost increase in 2025 will be anywhere from 5% (a recent Mercer study) to 7% or more (Kaiser Family Foundation and International Foundation of Employee Benefit Plans (IFEBP)). It appears to be largely driven by pharmacy costs. "I would say the headline here is healthcare costs are making a big jump, thanks largely to pharmacy costs overall," said Ellen Kelsay, CEO of the Business Group on Health.
The Business Group on Health annual Employer Health Care Strategy Survey found that the healthcare cost trend will jump to 8% in 2025, growing from 6% in 2022 and that actual healthcare costs have increased by 50% since 2017. More specifically, the median percentage spent on pharmaceuticals grew to 27% in 2023 compared to 21% in 2021. Multiple factors are driving this increase, including the significant demand for GLP-1s as well as greater use of high-priced cell and gene therapies.
The PBM market tends to be monopolistic. Three firms control about 80% of the market. Further, PBMs tend to push drugs that provide high rebates, as they can maintain approximately 9% of the rebate as revenues, not providing the full benefit of the rebate to the ultimate user/payer.
In addition, spread matters to PBMs for revenue generation. As the Brookings Institute explains: “The prices that PBMs charge payers for pharmacy claims often differ from the prices that PBMs pay the pharmacies that fulfill those claims. The difference between these prices, which is commonly called the ‘spread,’ is retained by the PBM.”
It has been reported that mail order fulfillment is more desirable to the PBMs as they can charge differently than local pharmacies, and mail order is more profitable for the PBMs.
Given this backdrop, PBMs are now under the microscope. In Lewandowski v. Johnson & Johnson et al., No. 3:24-cv-00671, currently pending in the District Court of New Jersey, Lewandowski claims that Johnson & Johnson violated ERISA by overpaying for prescription drugs. In fact, the law suit argues that by failing to demand lower prices from its PBM for the group medical plan, the higher drug prices have resulted in lower wages and higher health insurance costs for employees.
This argument harkens back to pre-pandemic times when the total compensation package was driven by healthcare costs while wages stayed relatively stagnant, equating back to 1980 wage levels.
Johnson & Johnson filed a motion to dismiss the case stating that Lewandowski failed to state an injury-in-fact. The company argued that the cost-sharing obligations associated with the substantial medical (non-drug-related) expenses would have still resulted in the same out-of-pocket amount for the prescription drugs each year. Lewandowski in response argued that the pharmacy overpayments were passed on to employees in the form of higher monthly premiums.
We’ll see how this plays out. A recent ruling by the 3rd Circuit Court of Appeals in Knudsen v. MetLife Group, Inc., No. 23-2420 3rd Circuit Court of Appeals, 9/25/24) supports the Johnson & Johnson arguments. In this case, it was alleged that the company misappropriated $65 million in PBM drug rebates instead of placing it back in the plan and allegedly caused the increased out-of-pocket costs. The Third Circuit held that Plaintiffs lacked standing to lead the suit because they couldn't show they were owed the rebate savings. The court stated that “[p]laintiffs must show that the purported violative conduct was the but-for-cause of their injury in fact, namely, an increase in their out-of-pocket costs above what they would have been if MetLife had deposited the rebate monies into the Plan trust."
If the courts bite on Lewandowski’s argument, there could be a rise in cases of violating fiduciary responsibilities concerning healthcare plans. This area is extremely complex, and even many insurance agents do not understand its complexities. HR professionals need to be aware and able to document their due diligence in at least understanding the pricing structure and drivers of health care costs.
Source HR Executive 10/18/24, Jackson Lewis 1016/24, Fierce Healthcare 8/20/24, Brookings 9/7/23