As It Mulls Whether To Grant Cert in ERISA Case on PBM Fiduciary Liability, Supreme Court Seeks Government's Input

In December, the Supreme Court requested that U.S. Solicitor General Elizabeth Prelogar file a brief in John Doe 1 v. Express Scripts Inc., weighing in on whether the Court should hear a case about prescription drug costs. If the Supreme Court adopts the petitioners’ position, pharmacy benefit managers (PBMs) could face significant legal exposure under ERISA for decisions that affect prescription drug prices.  

On

Background of the Case

PBMs act as third-party administrators of prescription medication programs for health plans. Generally, PBMs contract with pharmacies, negotiate discounts and rebates with drug manufacturers, review drug utilization, manage drug formularies, and process and pay prescription drug claims.

This case revolves around a 2009 agreement between Anthem, acting as an insurer or administrator of self-funded health plans, and Express Scripts, a PBM. The 10-year contract between the parties had two parts: First, Anthem agreed to sell to Express Scripts some of its own affiliated PBMs; and second, Express Scripts, in its role as a PBM, set prescription drug prices for the Anthem-administered plans. Express Scripts offered to provide better pricing on the prescription drugs in exchange for a better deal on the PBMs it acquired, but Anthem chose to take more money for the acquisition and accept higher prices for prescription drugs for its plans.  

In 2016, a proposed class of health care policyholders filed a class action against both Anthem and Express Scripts, seeking equitable relief under section 502(a)(3) of ERISA. The policyholders argued that the 2009 agreement between Anthem and Express Scripts resulted in relatively high drug prices for plans and plan participants. According to the policyholders, both Anthem and Express Scripts had an ERISA-imposed duty, as fiduciaries, to keep drug prices low.

There are two kinds of ERISA fiduciaries. A “named” fiduciary, as the name implies, is a fiduciary that is named in an ERISA plan. 29 U.S.C. § 1102(a). By contrast, a “functional fiduciary” is not identified by the ERISA plan, but is rather considered a fiduciary “to the extent (i) he exercises discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, … or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.” 29 U.S.C. § 1002(21)(A). The policyholders argued that both Anthem and Express Scripts exercised discretionary authority in setting the drug prices paid by plans and participants, and should therefore be considered “functional” fiduciaries.

The Southern District of New York dismissed the policyholders’ complaint, holding that neither Anthem nor Express Scripts acted as fiduciaries under ERISA when negotiating and entering into the 2009 contract. The court held that Anthem was not acting as a fiduciary in either making the decision to sell assets or divisions of its company or contracting with a PBM to set drug prices. Likewise, the court concluded that Express Scripts was not acting as an ERISA fiduciary in setting rates pursuant to the requirements in its 2009 contract with Anthem. Instead, the court explained, these activities involved the PBM’s business decisions that do not fall within ERISA’s reach. The Second Circuit affirmed.

Petition for Certiorari

The policyholders filed a petition for certiorari on June 30, 2021, asking the Supreme Court to reverse the lower courts, arguing that both Anthem and Express Scripts should be considered “functional” fiduciaries because they exercised discretion with respect to the drug prices—Anthem by negotiating and entering into the agreement with Express Scripts, and Express Scripts by actually setting the prices. The policyholders argued that the Supreme Court should hear the case because the Second Circuit’s decision created a circuit split on the question of whether health insurers or third-party administrators act as fiduciaries when they control the prices participants or plans pay for benefits or services. In response, Anthem and Express Scripts have argued that no such split exists, and that the Second Circuit properly applied the functional fiduciary test to the facts and determined that neither Anthem nor Express Scripts exercised discretionary authority or control with respect to the 2009 agreement.

Potential Far-Reaching Implications

Whether a PBM acts a fiduciary when setting drug prices or, instead, such activities are business decisions exempt from ERISA, is a question with a potentially significant impact on the health care industry. If the Supreme Court sides with the policyholders, PBMs in the future could face enormous liability under section 409 of ERISA for failing to keep drug costs low.  

Unsurprisingly, this dispute has attracted the attention of various interest groups—some of whom, like insurers and other PBMs, argue that these activities are business decisions outside the reach of ERISA. The Pension Rights Center, on the other hand, filed an amicus brief arguing that these entities acted as fiduciaries with respect to setting drug costs. The Supreme Court recently requested the Solicitor General’s view of the case, and her brief will provide insight into the current administration’s position on the hot-button topic of prescription drug costs, and could influence whether the Court decides to hear the case.

Contacts

Continue Reading