Legacy PBMs Are Siphoning Money From Government Programs. Self Funded Employers Should Assume They Are Next

State governments are finally saying out loud what pharmacies and plan sponsors have known for years. Legacy pharmacy benefit managers are not merely administering prescription drug benefits. Rather, they are using complexity as a profit center, using claims data, rebate arrangements, network contracts, affiliated pharmacies and retrospective reconciliations to move money in ways that most payers cannot see until it is too late.

The most recent warning comes from government programs. In Iowa Medicaid, auditors found that PBMs used an effective rate pricing model that allowed payments to pharmacies to be recalculated after the fact. The result was not a clean pass-through arrangement. Instead, the result was a system that allowed the payer to see one cost, the pharmacy to receive another amount and the PBM to retain the difference, or the spread. The auditor reported that available data showed about $100 million in spread collections over three years for just a single PBM. That number should raise alarms for every self-funded employer in the country.

But the Iowa Medicaid audit is only part of the story. The larger and more immediate risk is what legacy PBMs may be doing to private plan sponsors. At the state level, Medicaid programs have investigators, subpoenas, public oversight, statutory authority and political pressure. Whereas many self-funded employers lack that and do not have the time or resources to combat adverse PBM practices. Instead, self-funded employers are working with and relying on just a PBM contract, a consultant report, a few dashboards and a promise that the arrangement is competitive. That is not enough.

The Same PBM Playbook Shows Up In Employer Plans

That said, self-funded employers should not view Medicaid PBM investigations as a government-only problem. The same legacy PBMs that serve Medicaid managed care programs also serve employer-sponsored health plans. Thus, the same claims systems, pharmacy networks, specialty pharmacy channels, rebate aggregators, group purchasing organizations, mail order pharmacies and data reporting structures are often used.

That matters because PBM misconduct is rarely obvious on the face of a monthly invoice. It is buried in definitions, reconciliation schedules, network guarantees, brand effective rates, generic effective rates, specialty pricing, rebate exclusions, administrative fees, inflation payments, pharmacy audit recoveries, manufacturer credits, coupon programs and ownership structures.

A plan sponsor may believe it has a pass-through PBM contract when, in reality, the contract may allow the PBM to retain value through exceptions and affiliated entities. A plan sponsor may believe it is receiving all rebates when the definition of rebate excludes other manufacturer payments. A plan sponsor may believe pharmacy reimbursement is fixed when the PBM has the ability to reconcile payments after the claim has been adjudicated. A plan sponsor may believe specialty drugs are being managed for cost when members are being steered into PBM-owned channels.

All these common examples are why the word transparent has become nearly meaningless in PBM contracting. Transparency does not mean receiving a report and trusting the broad promises of a PBM without access to the complete data set the report is based on. Rather, transparency means the plan can verify every dollar paid by the plan, every dollar paid to the pharmacy, every dollar received from the manufacturer, every dollar retained by the PBM, and every dollar routed through an affiliate. Anything less is managed opacity.

Why Self-Funded Employers Face The Greater Risk

Government programs are large targets, but self-funded employers may be more exposed. The reason is simple. Employer plan sponsors often rely heavily on their PBM, broker, consultant or third-party administrator to tell them whether the arrangement is fair. That is a dangerous delegation.

Self-funded employers are spending plan assets. Those assets are not the PBM’s money. They are not the consultant’s money. They are not the carrier’s money. They are employer and employee dollars held and spent for the benefit of plan participants. When a PBM extracts undisclosed spread, retains manufacturer revenue, overcharges for specialty drugs, manipulates formularies or hides pharmacy payment data, the issue is not just overpayment. It becomes a fiduciary problem.

The legacy PBM defense is predictable. They will say the contract allowed it and that the pricing terms were disclosed to the self-funded employers. They will say the plan sponsor had choices. They will say rebates lowered premiums. These defenses may sound reasonable, but plan fiduciaries should not confuse contract language with fiduciary compliance.

ERISA does not reward willful blindness. Hiring a PBM does not end the fiduciary inquiry; it starts it. Plan fiduciaries must prudently select service providers, monitor them, understand compensation, evaluate conflicts, and act solely in the interest of participants and beneficiaries. A contract that permits hidden compensation may be evidence of the problem, not the solution.

Breach Of Fiduciary Duty Is The Real Employer Risk

For plan sponsors, the next wave of PBM disputes will not be limited to breach of contract claims. The more serious claims will be introduced as a breach of fiduciary duty. Plaintiffs will ask whether plan fiduciaries knew or should have known that the PBM was retaining excessive compensation. They will ask whether the fiduciaries reviewed claims-level data. They will ask whether the plan had a real audit right. They will ask whether rebates and other manufacturer payments were actually passed through to the employers. They will ask whether specialty pharmacy steering increased plan costs and whether participants paid more at the pharmacy counter because fiduciaries accepted a conflicted arrangement.

Those are uncomfortable questions. They are also fair questions.

The old model was to focus on headline discounts and rebate guarantees. That model is no longer sufficient. Now, it is clearer than ever that a higher discount is meaningless if the starting price is inflated. Or that a larger rebate is more harmful than helpful if it drives formulary placement toward expensive drugs. Finally, a low administrative fee is likely a distraction if the PBM earns more through spread, affiliates or retained payments.

In the traditional fiduciary world, process matters. A fiduciary is expected to ask hard questions, document the answers, challenge conflicts, compare alternatives and monitor performance. That standard should apply with full force to PBM relationships. The prescription drug benefit is no longer a side issue. For many employers, it is one of the most expensive and least understood parts of the health plan.

What Plan Sponsors Should Demand Now

Self-funded employers should move from trust to verification. That starts with contract language, but it cannot end there. Plan sponsors should require full claims data showing what the plan paid, what the pharmacy received, what the member paid, what network applied, what drug was dispensed, whether the pharmacy was affiliated with the PBM and whether any later reconciliation changed the economics of the claim.

Plan sponsors should demand complete disclosure of PBM compensation, including spread, rebates, fees, credits, pharmacy audit recoveries, data fees, service fees, group purchasing organization revenue, rebate aggregator revenue and payments to or from affiliates. The plan should not accept narrow definitions that allow money to be renamed and retained.

Plan sponsors should prohibit retrospective pharmacy payment reconciliations unless every adjustment is disclosed at the claim level and credited back to the plan. They should require real audit rights, not ceremonial ones. The auditor must be able to review source data, affiliate payments, manufacturer contracts, pharmacy contracts and reconciliation records. The PBM should not be allowed to block review by labeling ordinary financial information as confidential business information while spending plan assets.

Plan sponsors should also revisit specialty pharmacy arrangements. Specialty drugs are where many of the largest dollars sit. If the PBM owns or controls the specialty pharmacy, the plan needs to know whether utilization management, formulary and dispensing decisions are driven by patient need or by PBM margin.

The Bottom Line For Employers

The lesson from recent government scrutiny is straightforward. If legacy PBMs can create enough complexity to frustrate state oversight, self-funded employers should assume their own plans are just as, if not more, vulnerable. A plan sponsor that waits for a public investigation, a whistleblower, or a lawsuit is already behind.

Legacy PBMs have built a business model around controlling the data, defining the terms, owning the channels, and keeping the spread between what is charged and what is paid and government programs are finally beginning to expose the harmful model. With the spotlight on these tactics, self-funded employers should not wait to learn the same lesson with their own money.

The prudent course is clear, audit the PBM, review the contract, demand the data, follow the money and most importantly, document every step. That is not aggressive. That is basic fiduciary hygiene.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.