Court Determines that PBM Not A Fiduciary For Most Purposes

August 13, 2008

The United States District Court for the Eastern District of Missouri has found that Express Scripts, a Pharmaceutical Benefits Manager (PBM), was not a fiduciary for most purposes under ERISA. In re Express Scripts, Inc. PBM Litigation, Master Case No. 4:05-MD-01672 (July 30, 2008). Senior U.S. District Judge Stephen Limbaugh’s opinion includes a detailed analysis of the fiduciary status of PBMs under ERISA, which generally follows the limited view of PBM fiduciary duties adopted by another district court in Moeckel v. Caremark, Inc., No. 3:04-00633 (M.D. Tenn. 2007).

Plaintiffs brought a putative class action of behalf of Goodyear, the New England Healthcare Plan (NEHC) and similarly situated self-funded ERISA plans that utilized Express Scripts’ services as a PBM, alleging that Express Scripts breached fiduciary duties under ERISA by a variety of improper acts.

Express Scripts’ contracts provided, as PBM contracts typically do, that Express Scripts was not an ERISA fiduciary. However, such disclaimers are not determinative. ERISA provides that service providers like PBMs may be de facto fiduciaries, and therefore have fiduciary duties, where they in fact exercise discretionary authority or control over plan administration or plan assets. Fiduciaries are required to act in the interest of participants and beneficiaries only when they exercise the discretion creating their fiduciary duties. In other areas, fiduciaries can act in their own interest – for example, in negotiating their own compensation.

Following this analysis, Judge Limbaugh found that Express Scripts was not a fiduciary, and therefore that its actions could not be challenged under ERISA, where it engaged in the following activities:

1) Setting and/or adjusting MRA (Maximum Reimbursement Amount a/k/a MAC), even though it could effect Express Scripts’ compensation and ultimately plan assets, because any discretion afforded was limited by the contract’s performance guarantees;

2) Selecting and/or maintaining a particular pricing source to determine AWP, where the contract expressly authorized the use of certain pricing sources generally recognized in the industry;

3) Negotiating rebates with pharmaceutical manufacturers, because such negotiations affected Express Scripts’ entire book of business, without regard to any particular plan, and because such rebates are not plan assets until actually payable;

4) Generating and retaining interest on rebates, where the parties’ express agreement setting forth when payments were due precluded the plan’s right to interest; and,

5) In selecting and/or modifying the formulary, because the plaintiff plans (or their sponsors) remained the “final arbiters” of formulary content and drug-switching decisions.

However, Judge Limbaugh found that Express Scripts did act as a fiduciary in classifying and distributing “total cost savings” arising from its formulary programs, of which Express Scripts was to retain not more than 35%. The Court denied motions for class certification.

The determination of fiduciary status is a critical issue in PBM litigation. Judge Limbaugh’s opinion highlights that this is a very fact intensive and subjective analysis that will often be governed by the specific assignments of responsibilities contained in the PBM contract. Thus, careful consideration of the impact of contractual terms during contract negotiations (and when considering litigation) is always recommended. Plan sponsors will generally seek clarity as to which provisions of PBM contracts can be enforced under state law and under ERISA, respectively.

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