6 Ways Legacy PBMs Put Employers at Risk

As employers, choosing the right partner to manage health benefits and coverage is one of the most significant decisions you'll make for the organization as a whole. Beyond influencing spend, the Pharmacy Benefits Manager (PBM) in place will have a material impact on people’s lives, careers, and long-term well-being.   

Finding a PBM to manage your company’s prescription drug program is a nuanced process that leads to long-term and wide-reaching outcomes. While modern PBMs are evolving to align more closely with employer and employee needs, many organizations still rely on status quo, or "legacy” PBMs—typically at the expense of both budget and access to care. 

Employers are increasingly being scrutinized for their role in managing health benefits, and unclear documentation and spending can result in lawsuits similar to those faced by Johnson & Johnson, USPS, and Wells Fargo. In the case of J&J, allegations stated that the company and its associates breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA). The suit claimed that the company failed to properly manage its employees' retirement plans, resulting in excessive fees and poor investment options that negatively impacted the plan participants' retirement savings. Plaintiffs argued that the defendants did not act in the best interest of participants, causing financial losses and subjecting the company as a whole to legal risks. Ultimately, the case was settled when Johnson & Johnson paid $55 million to resolve the claims—a hefty price tag not affordable for every organization.

Similarly, Wells Fargo and Express Scripts were cited for their involvement in prescription drug pricing practices. The lawsuit alleges that Wells Fargo, acting as a trustee, failed to properly manage and oversee the handling of drug rebates and cost, which resulted in inflated fees for patients. The suit accuses Wells Fargo of neglecting its fiduciary duties, contributing to overcharges and allowing Express Scripts to benefit unfairly at the expense of consumers.

Express Scripts, a major pharmacy benefit manager, has been involved in several controversies regarding its pricing strategies and relationships with pharmacies and health plans. The lawsuit adds to the growing scrutiny that PBMs like Express Scripts face, especially as the Federal Trade Commission (FTC) has begun investigating these entities for their opaque pricing practices and potential anti-competitive behavior.

1. Opaque Pricing Exposes Compliance Risks 

Veiled pricing is an unfortunate characteristic of many legacy PBMs, which often operate with complex, tiered, and opaque models that obscure the true cost of prescription drugs. They frequently use spread pricing—charging employers more for a drug than they pay to the pharmacy that provides the drug—and retain a percentage of manufacturer rebates without full disclosure. This lack of transparency makes it nearly impossible for employers to understand the actual costs and savings associated with their pharmacy benefits, or to confidently make choices around coverage.

Employers can end up overpaying for prescription drugs, draining resources that could be used elsewhere in the benefits package or even in other areas of the business. They can also run up against compliance issues, particularly when it comes to regulations around duty of care. 

2. Lack of Transparency Undermines Trust 

Traditional PBMs often resist providing clear, detailed reporting on drug spend and plan performance. This missing transparency makes it difficult for employers to make informed decisions and hold their PBM accountable. Without detailed insights, employers can’t accurately assess whether a PBM is truly optimizing their pharmacy benefits. At best, this leads to decreased trust between PBM and employer—at worst, it results in unnecessary spending and negative impacts to care.

3. Misaligned Incentives Drive Up Healthcare Costs

Traditional PBMs are often driven by profit-growing motives that don't necessarily align with the best interests of employers or employees. They might favor higher-cost drugs with larger rebates over more affordable alternatives, or choose medications that benefit their own affiliated pharmacies. These decisions are made to maximize their own revenue, rather than minimize costs for their clients.

For employers, this translates into higher overall drug spend, which can then lead to increased premiums or reduced benefits for employees, impacting overall job satisfaction and retention. Employees lose trust in both their organization and healthcare options, and end up footing the bill for higher-cost drugs and services.

4. Rigid Contracts Stifle Cost-Saving Opportunities

Legacy PBMs typically offer fixed contracts based on static pricing, such as Average Wholesale Price (AWP) discounts and rebate guarantees. These contracts do not adapt to market changes, leaving employers locked into suboptimal pricing even as more cost-effective options become available.

Rigid or fixed contract models fail to account for the dynamic nature of the pharmaceutical market. Over time, outdated contracts also diminish employers' ability to negotiate better terms. As the market evolves, employers locked into long-term contracts may lose leverage, finding themselves stuck with terms that do not reflect current conditions or cost-saving opportunities. Employers miss out on potential savings from market shifts, like lower-cost generic drugs or biosimilars. Ultimately, this outdated approach erodes the value and competitiveness of the benefits offered to employees.

5. Outdated Practices Erode Employee Satisfaction

The outdated practices of legacy PBMs can lead to reduced access to necessary medications, higher out-of-pocket costs for employees, and a generally poor experience with their pharmacy benefits. This can harm employee satisfaction and, ultimately, retention. Employees may face difficulties in obtaining necessary prescriptions due to restrictive formularies, prior authorization requirements, or the availability of prescriptions being limited to specific pharmacies that may not be convenient or accessible.

For employees managing chronic conditions, the stress of navigating medical financial challenges can lead to a decline in overall well-being, lower productivity, and tanking engagement on the job—and that’s assuming they’re an existing part of your workforce. Benefits packages play a make-or-break role in attracting and retaining talent, and failing to meet modern expectations by allowing out-of-pocket costs to surge or benefits thin out means losing out on attracting and retaining top talent. 

6. Legacy Constraints Stifle Innovation 

Modern PBMs are leveraging technology and innovative strategies to optimize drug spend and improve employee health outcomes. Legacy PBMs, on the other hand, often lack the flexibility and forward-thinking necessary to keep up with these advancements. Employers who stick with legacy PBMs may miss out on opportunities to innovate their benefits packages, leading to higher costs and lower overall employee satisfaction.

For example, modern PBMs use advanced data analytics and AI-driven platforms to provide real-time insights into prescription drug spending. These platforms can analyze an employee's prescription history and recommend cost-effective alternatives, such as generic or therapeutic equivalents, which can be seamlessly integrated into the benefits plan. By providing these insights, employers can lower their overall drug spend while ensuring that employees have access to the medications they need without financial strain.

Modern PBMs are also increasingly offering digital health tools and telemedicine integrations that allow employees to manage their prescriptions and health conditions on their own terms. Some PBMs provide mobile apps that allow employees to order and refill prescriptions. They offer medication adherence support, sending refill reminders and educational content to patients, and overall, prioritize enhancing employees’ healthcare experience over pushing profit margins.

The Case for a Modern PBM 

The risks associated with legacy PBMs are clear: opaque pricing, misaligned incentives, and a lack of transparency and control can lead to higher costs and greater fiduciary risks. In contrast, modern PBMs offer a more transparent, client-aligned approach that prioritizes real cost savings and employee well-being.

It's time for employers to reconsider what the role of a PBM should really look like. Connect with SmithRx today to learn how choosing a modern PBM can cut costs, up-level pharmacy health plans, and ultimately, create a more attractive total rewards package that helps you retain and attract top talent while protecting the best interests of your business.