$50 Million Prescription Drug Coverage Lawsuit Proceeds Against Stop-Loss Insurer and Pharmacy Benefits Manager

Two self-insured health plan participants diagnosed with a rare health condition incurred prescription drug expenses of over $50 million, leading the employer plan sponsor to file this lawsuit against the plan’s pharmacy benefits manager (PBM) and stop-loss insurer. Initially, the stop-loss insurer had covered the excessive claims, but in later years it refused, asserting that the drugs were not covered under the terms of the plan. The employer sued the PBM, which had processed and approved the claims, for breach of contract and breach of fiduciary duty under ERISA, and sued the stop-loss insurer for breach of contract and violation of several state laws. All parties asked the court to rule in their favor without a trial, but the court ruled only on limited issues, determining that a trial was necessary to resolve factual questions.

Regarding ERISA fiduciary status, the PBM argued that it authorized drugs mechanically according to a checklist of criteria and did not act with the discretion necessary for fiduciary status. The employer pointed to several factors indicating that the PBM had discretionary authority, including a contract provision stating that the PBM was the named fiduciary for purposes of ERISA’s claims procedure rules. But because the specified rule related only to appeals of adverse benefit determinations, and most of the claims involved no adverse benefit determination (and thus no appeal), the court determined the PBM was not a named fiduciary under that provision. (The PBM was, however, a fiduciary with respect to the one claim that involved an appeal.) Other contract provisions potentially addressing the PBM’s authority and discretion presented open questions to be addressed at trial along with factual questions about the PBM’s actions.

The court also ruled that, at trial, the deferential abuse of discretion standard of review should be used in reviewing the drug approvals. The plan document conferred discretion on the decisionmaker to construe plan terms and make benefit determinations, and the stop-loss policy contained a “plan mirroring” feature effectively incorporating this provision. Thus, so long as approving a benefit was not an abuse of discretion, the benefit was paid according to the plan’s terms and should be covered by the policy. The court noted that other courts have endorsed this approach in similar situations (see, for example, our Checkpoint article), and explained that the standard of review is the same regardless of whether the employer was the decisionmaker or delegated that authority to the PBM.

EBIA Comment: It remains to be seen which party will ultimately bear the cost of these expensive drugs. But this case reminds self-insured plan sponsors to be mindful of plan operations and ensure that they thoroughly understand the terms of their agreements with other parties. For more information, see EBIA’s Self-Insured Health Plans manual at Sections XVII.C (“Coordinating Stop-Loss Insurance Coverage and Plan Coverage”) and XXIII.B (“Contracting With Service Providers”). See also EBIA’s ERISA Compliance manual at Sections XXVIII.B (“Who Is a Fiduciary?”) and XXXVI.C (“Standard of Judicial Review Applied to Benefit Decisions Under ERISA Plans”).

Contributing Editors: EBIA Staff.