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 U.S. DEPARTMENT OF LABOR 

EMPLOYEE BENEFITS SECURITY ADMINISTRATION 

---------------------------------x 

 : 

HEARING ON REASONABLE CONTRACTS : 

OR ARRANGEMENTS FOR WELFARE : 

BENEFIT PLANS UNDER SECTION : 

408(b)(2)--WELFARE PLAN : 

FEE DISCLOSURE : 

 : 

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 U.S. Department of Labor 

 Francis Perkins Building 

 Room S-4215(A-C) 

 200 Constitution, Ave., N.W. 

 Washington, D.C. 20210 

 Tuesday, December 7, 2010 

 The hearing was convened, pursuant to notice, 

at 9:00 a.m., ROBERT DOYLE, presiding. 

APPEARANCES: 

 PANEL MEMBERS: 

 JOE CANARY 

 PHYLLIS C. BORZI 

 TIMOTHY HAUSER 

 JOSEPH PIACENTINI 

 ALAN D. LEBOWITZ 

 ROBERT DOYLE 
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I N D E X 

 PAGE 

OPENING REMARKS - INTRODUCITON OF PANEL 3 

PANEL 1 

Society of Professional Benefit Administrators 7 

Thomas Doney, President of Cypress Benefit Admin. 

AMERICAN COUNCIL OF LIFE INSURERS 16 

Todd Katz, MetLife 

The Council of Insurance Agents & Brokers 22 

Scott Sinder, Esq., Steptoe & Johnson 

Panel 2 

Pharmaceutical Care Management Association 65 

William J. Kilberg, Esq., Gibson Dunn & 

 Crutcher LLP 

National Community Pharmacists Association 71 

Zachary French, Vice President 

Law Offices of David A. Balto 77

David Balto, Esq., Washington, D.C. 

Panel 3 

The National Coordinating Committee for 121 

 Multiemployer Plans 

Randy G. DeFrehn, Executive Director 

American Benefits Council 130 

Allison Klausner, Assistant General Counsel 

 Benefits, Honeywell Inc. 

U.S. Chamber of Commerce 140 

Eric Keller, Esq., Paul Hastings, Washington, DC 

CLOSING REMARKS
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OPENING REMARKS - INTRODUCTION OF PANEL 

 MR. DOYLE: Good morning. I am Robert Doyle, 

Director of Regulations and Interpretations for the 

Employee Benefits Security Administration at the Labor 

Department. Welcome to the Department of Labor and the 

Employee Benefits Security Administration's public 

hearing on the application of the 408(b)(2) regulation 

to the development of standards for welfare plans. 

 Prior to introducing today's hearing panel 

and an introductory statement from Assistant Secretary 

Phyllis Borzi, I'd like to address just a few 

procedural matters. 

 Notice of today's hearing was published in 

the Federal Register on November 5th with an invitation 

to interested persons to testify on the application of 

the 408(b)(2) regulation to welfare plans. In response 

to that invitation, we received nine requests to 

testify and we've taken those nine requests and divided 

them up into three panels. 

 For purposes of today's hearing, each panel 

member will be allowed ten minutes to present their 

testimony. Following the conclusion of that testimony, 

the government panel members will be afforded the 

opportunity to ask questions. With regard to those 
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questions, I want to emphasize that it's our interest 

to develop the public record as fully as possible, 

therefore no inferences or conclusions should be drawn 

concerning the panel members' views concerning or 

resulting from their questions. 

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 Panel members will testify in the order in 

which they appear in the hearing agenda. To assist us 

today I have a few requests. First, prior your 

testimony, we ask that you identify yourself for the 

court reporter, your affiliation, and the organization 

that you are representing. 

 Second, limit your remarks to the allotted 

time and to assist you we have an electronic timer. 

 At the end of today's hearing we will keep 

the hearing record open until January 7th, that's about 

30 days. And the record will be available to the 

public and we will post all submissions on our website. 

 Finally, I note that today's hearing is being 

transcribed and hearing transcripts will also be 

available on EBSA's website within the next couple of 

weeks. 

 Before introducing the panel, I want to thank 

Fil Williams of the Office of Regulations and 

Interpretations, my office, for his work in organizing 

and handling the logistics for today's hearing. Thank 
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1 you, Fil. 

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 Now, to introduce the panel. To my immediate 

right Alan D. Lebowitz, Assistant Secretary for Program 

Operations, EBSA; Joe Piacentini, our Director of the 

Office of Policy and Research; Tim Hauser, Associate 

Solicitor, Plan Benefit Security Division of the 

Solicitor's Office; The Honorable Assistant Secretary, 

Phyllis C. Borzi; and to her immediate right, my right 

arm, and the person I couldn't do my job without, 

Deputy Director Joe Canary. 

 (Laughter.) 

 MR. DOYLE: With that, I turn to Ms. Borzi. 

 ASSISTANT SECRETARY BORZI: Thanks, Bob. I 

just want to say a few words this morning. 

 First, thank you so much for coming to the 

hearing and for participating in this hearing. I think 

you know that fee transparency is probably one of our 

highest, if not the highest, priority in our regulatory 

agenda. It's very important to make sure that people 

have all the tools at their disposal to be able to 

understand the benefits that they're offered. And, of 

course, for plan sponsors, fiduciaries, to understand 

the choices that they have when they offer people 

benefits. With a growing importance of health benefits 

and other welfare benefits in terms of the wide group 
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of benefits that plan sponsors offer, it's very 

important that we focus on these issues. 

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 As you know, the 408(b)(2) regulation, when 

it was originally proposed in the prior administration 

was designed to cover both pension plans and health and 

welfare plans. Based on the comments that the Agency 

received we went forward and finalized the 408(b)(2) 

regulations a few months ago, but focusing only on the 

pension side. Making clear in the preamble to the 

regulation that we weren't forgetting about the welfare 

plan side, it's just that we wanted to look at those 

issues separately as many of you suggested that we do 

so. 

 So this is the first step in our effort to 

begin to look at these issues. I have spent quite a 

number of years in my career advising plan sponsors 

about the whole range of employee benefits and I have 

to say in my own experience the type of transparency 

and disclosure that my clients had when they were 

selecting health plans was far behind the type of 

disclosure that they had when they were looking at 

401(k) plans and other kinds of financial instruments. 

Some people may say that's fine because the disclosure 

-- and certainly when I went back and looked at the 

comments that some of you filed, that's what you said. 
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And I assume we'll hear some witnesses today saying 

there's plenty of disclosure, there's plenty of 

transparency, we don't need to make any changes. That 

has not been my experience in advising clients. But we 

always walk a line here between trying to protect 

consumers, because that's part of the mission that the 

Employee Benefits Security Administration has, and not 

trying to unduly burden service providers and plan 

sponsors. 

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 So today what we're trying to do is get some 

information out on the public record and this, as I 

said, the first of a series of efforts we will make to 

evaluate the need for transparency -- additional 

transparency and disclosure. 

 So, once again, thanks so much for your 

participation and your help. And why don't we just 

start with the witnesses, Bob? 

 MR. DOYLE: Okay. If we could call the first 

panel. So we'll follow the order of the agenda and 

start with Mr. Downey 

SOCIETY OF PROFESSIONAL BENEFIT ADMINISTRATORS 

By Thomas Doney, President of Cypress Benefit Admin.

 MR. DONEY: Good morning. My name is Tom 

Doney. I'm the President of Cypress Benefit 
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Administrators, a third-party administration firm and a 

member of the Society of Professional Benefit 

Administrators, SPBA. The SPBA is a national 

association of independent third-party administration 

firms which manage client/employee benefit plans. It 

is estimated that 55 percent of all non-federal U.S. 

workers and their dependants, from every size and form 

of employment, are covered by employee benefit plans 

managed by such TPA firms. 

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 SPBA member TPA firms operate much like 

independent CPAs or law firms, providing professional 

outside claim and benefit plan administration for 

multiple client employers and benefit plans. Many of 

these plans include some degree of self-funding and 

SPBA represents a wide range of benefit plans including 

small businesses, large corporations, unions, nonunions, municipalities and association-sponsored plans. 

 

 I agree with the Department's assessment 

noted in the July 16th, 2010 interim final rule on 

ERISA Section 408(b)(2) that a separate and more 

specifically tailored disclosure rule for welfare 

benefit plans is needed. I understand that one of the 

goals of disclosure is to provide comprehensive and 

useful information to plan sponsors when entering 
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service contracts to enable them to assess the 

reasonableness of the fees paid for the services. 

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 While health plans currently disclose much of 

what the Department envisions, there are certain areas 

of the market where transparency does not presently 

exist. A tailored rule would provide a more level 

playing field in the industry and assist plan sponsors 

in understanding what they're actually paying for the 

services rendered. 

 Please understand that I view the role of the 

independent employee benefit consultants -- which 

includes insurance agents and brokers -- as an 

important and valuable asset to companies offering 

employee benefits. There are many examples of good 

work being done by employee benefit consultants, and, 

in my opinion, it's right that the consultant be 

remunerated for the work they do for the clients. 

However, I've also seen examples of payments to 

consultants, particularly from large national insurance 

companies, sometimes in large amounts that are not 

disclosed to clients. 

 Additionally, my concern and that of many in 

my industry is that the prospect of large payments from 

carriers to consultants can skew their recommendations 

to clients with respect to what administrators or 
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carriers the client should be utilizing for employee 

benefit plan administration. 

 My own TPA firm has, in several circumstances 

over the years, provided quotes to consultants for a 

client of theirs that was very price competitive and/or 

significantly less expensive. But the consultants 

never in fact presented our quote to the client to 

assist them in fully considering their benefit options. 

 My conclusion in many of these circumstances 

is that the consultant made the recommendation not 

based on what's best for the client necessarily, but 

rather what administrator or carrier would pay them the 

most for their business. Indeed, in a private 

conversation with an employee of a large Wisconsinbased insurance agency I was told that the consultants 

at the agency were instructed by the managing partners 

to place as much business as possible with one 

particular carrier due to commission and bonus policies 

of that carrier, not because of price competitiveness 

or service charges or advantages. 

 Consultants generally disclose commission 

payments made to them by administrators and insurance 

carriers. The problem, though, as I see it, is that 

it's not necessarily the individual group commissions 

that a consultant receives from the carrier, but rather 
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the additional bonuses and overrides they receive on an 

entire book of business with a particular carrier. 

 For example, a major national insurance 

carrier offers Wisconsin consultants a bonus of up to 

$12 per enrolled employee on an overall block of 

business not specific to one individual employer. 

Additionally, if the consultant retains that level of 

business for a second year and increases that block by 

as little as 25 percent it will get an addition bonus 

of 150 percent of that original amount. 

 So, if a consultant brings ten groups to this 

carrier with 400 employees each, an initial bonus of 

$48,000 is paid to the broker that year. Then if the 

consultant's entire block of business with the carrier 

at the end of year two is 5,000 employee lives, I'm 

saying those ten groups, plus an additional four groups 

with 250 employees each, an additional bonus of $72,000 

is paid on that block. And those bonuses are in 

addition to the typical up-front consulting fee, 

usually somewhere between $2 and $3 per employee per 

month and stop-loss insurance commissions, usually 10 

percent of insurance premiums that is almost always 

paid to them on a self-funding case. 

 In this particular example that I just gave, 

the consultant would have been paid $430,000 in 
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commissions and bonuses over a two year period for 

placing 14 employer cases with a major health insurance 

carrier, $160,000 of which would not typically be 

disclosed to the client. 

 So I can see a client disclosing the stoploss commissions and the per-employee per month fees to 

an individual group, and in fact that often happens 

today; but how does one disclose to one particular 

group a $48,000 or $72,000 bonus that's paid to them as 

a result of having many employer clients with many 

employees placed with the carrier. 

 It's a myth that these types of bonuses and 

overrides are typically not disclosed to individual 

clients because it's difficult to accurately determine 

how much is attributable to a particular employer. The 

easy answer is obviously to say, well, if you've got 

$48,000 for 4,000 employees, just divide the overall 

compensation by the number of overall employees and 

multiply by the number of employees that one employer 

has to get the compensation amount, but bonuses are 

often paid on a sliding scale based on an overall block 

of business that gets calculated from time to time. So 

it's difficult to attribute a certain dollar amount to 

a certain group if the per-employee compensation scale 

changes regularly. And I suspect that a consultant is 
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not particularly motivated to disclose anything to a 

client other than that which can be directly attributed 

to a specific employer such as per-employee, per-month 

fees and stop-loss commissions. 

 So as a way to gain more business the savvy 

consultant could actually tell the employer that he's 

going to charge them a consulting fee and will waive 

all commissions while he reaps the rewards of receiving 

large bonuses from carriers based on an aggregated 

block of business not predicated on an individual 

employer's enrollment. 

 It should be made clear at this point that 

the circumstances wherein a consultant is a part of an 

agency or a consulting firm, and the consultant is 

typically responsible for sharing their commissions and 

bonuses with the agency employer. So not in all 

circumstances does the individual consultant retain all 

payments made by the carriers for the business that's 

written. 

 The point is that the proposed regulations 

that I've seen seem to revolve around the compensation 

one gets from enrolling an individual employer. That 

doesn't come close to telling the entire story when it 

comes to the consultant compensation. I am in no way 

interested in denying an employee benefit consultant or 
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their firm the opportunity to make as much money as 

they reasonably can from the important work that they 

do for employers. I do, however, believe that an 

employer whose employee benefit costs are second only 

to payroll must be completely aware of what they're 

paying, because, in fact, it's the employer who 

ultimately foots the bill, not just for the employee's 

claim costs, but for the administrative fees and 

miscellaneous compensation that's part of their benefit 

plan. 

 I would suggest that in future guidance 

published there be an example of how the Department 

envisions bonuses and commissions for placing business 

across a consultant's entire block being disclosed to 

clients. 

 I believe full disclosure of all compensation 

under both self-funded and fully-insured plans to be a 

critical part of the decision-making process for 

employers and that only when an employer fully 

understands what goes into all of their benefit costs 

will there be a level playing field for TPAs and 

carriers who rely so heavily on consultant 

representation to clients. 

 Other trade groups have asserted that 

additional disclosure rules are unnecessary for fully-
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insured plans because adequate disclosure under ERISA 

already exists, specifically the Form 5500 Schedule A. 

 The Schedule A doesn't serve the goals of 

Section 408(b)(2) to assist plan sponsors in assessing 

the reasonableness of the fees paid for services. The 

Schedule A is issued after the end of the plan year and 

long after the plan sponsor has made a decision to 

select a particular service provider. And candidly, 

not all fees are consistently disclosed to the employer 

making it impossible for them to report correctly on 

Schedule A. 

 I believe that most state insurance laws do 

not require the types of disclosures addressed under 

the 408(b)(2) proposed rules. If there are some state 

insurance laws addressing similar disclosure issues, it 

appears that they are loosely enforced giving that 

fully-insured plans are currently less compliant with 

the spirit of 408(b)(2) than self-funded plans. 

 Finally, I've reviewed the interim final rule 

with respect to the financial disclosures as it regards 

to pension plans in the July 16th, 2010, Federal 

Register. I understand that you're interested in 

pursuing the same or similar rules as regards to 

welfare plans. Many commenters on the proposed rule 

expressed objections to the conflict of interest 
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disclosure obligations requiring narrative descriptions 

of potential conflicts of interest. In the interim 

final rule for pension plans, the Department adopted a 

different approach focusing on more detailed disclosure 

of compensation arrangements and I would like to 

encourage the Department to apply this same approach to 

welfare plans. 

 Thank you for your time this morning. I'd be 

happy to answer any questions you may have. 

 MR. DOYLE: Thank you. 

 

AMERICAN COUNCI OF LIFE INSURERS 

Todd Katz, MetLife

 MR. KATZ: Good morning, Assistant Secretary 

Borzi and the members of the panel. It is a pleasure 

to be here with you today. My name is Todd Katz. I am 

an executive vice president for our insurance products 

at MetLife and I'm here today on behalf of the American 

Council of Life Insurers, the ACLI, to discuss whether 

Section 408(b)(2) rules should apply to products sold 

to employee welfare benefit plans. 

 The ACLI is a Washington, D.C.-based trade 

association representing more than 300 life insurers 

and fraternal benefit society member companies 

operating throughout the United States. ACLI member 
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companies provide life insurance, disability, 

accidental death and dismemberment, long-term care, and 

critical illness, and other coverages that are offered 

to employees through ERISA welfare benefit plans. 

 My testimony today will focus on these nonmedical welfare benefit programs. We thank you for 

holding these hearings today and for giving us the 

opportunity to testify. 

 I want to emphasize at the onset that the 

ACLI supports appropriate disclosure to ERISA welfare 

benefit plan sponsors about the products they purchase 

for their employees, and commends the Department on its 

thorough and deliberate process. 

 The products sold by ACLI member companies 

are typically straightforward insurance contracts where 

the plan sponsor is paying a premium and the insurer is 

responsible for all obligations under the contract 

which primarily are claim payments. We believe that 

disclosure of product pricing, terms, and conditions 

are necessary to permit plan administrators to make 

informed decisions about the products to be included 

within a benefit plan. Augmented disclosures provided 

to plan sponsors, however, are not cost free. They 

should be required only when they add value by 

improving the ability of the plan sponsor to make 
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appropriate decisions for the plan. 

 We believe the current disclosures required 

by the regulatory framework for products sold to ERISA 

plans are more than adequate to provide plan sponsors 

the information needed to make these decisions. While 

concerns about indirect compensation of service 

providers, investment advice, bundled services, and 

conflicts of interest with plan fiduciaries drove the 

decisions to enhance the disclosures provided to 

retirement plans, these considerations are seldom 

present in the structurally simple arrangements for 

non-medical welfare benefits. In short, we believe 

there is neither a need nor a substantive basis nor a 

cost benefit justification for additional disclosure 

requirements under ERISA for these insured welfare 

products. 

 Extensive regulatory disclosures for nonmedical benefit products are already in existence under 

both state and federal law. ERISA requires that 

insurers to disclose information to plan sponsors on an 

annual basis about premiums, brokerage commissions, 

claim payments, claim reserves, and related information 

so that the plan sponsor can complete Schedule A and 

Schedule C to Form 5500. 

 In addition the insurance industry is heavily 
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regulated outside of ERISA. State insurance laws and 

regulations mandate disclosures to both state insurance 

regulators and plan sponsors about welfare products. 

 For example, in addition to requiring that 

the policy forms and premium rates be filed for review 

and approval with state insurance departments, most 

states have adopted comprehensive disclosure 

requirements under broad advertising regulations that 

set forth mandated standards and other requirements 

related to the marketing and sale of non-medical 

benefits. 

 Model regulations promulgated by the National 

Association of Insurance Commissioners have been 

adopted in some form by approximately 42 states. These 

regulations require that insurance companies disclose 

the important policy features such as benefits, 

exclusions, limitations, renewability, termination, and 

premium changes. They require that advertisements be 

truthful and complete and not misleading. And they 

require that advertisements contain fair and accurate 

comparisons to other products and that insurers adopt 

certain procedures and safeguards. 

 As a consequence of both the law and business 

practice, plan sponsors receive comprehensive 

information allowing them to evaluate and select 
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insured welfare products, including the scope of 

insurance coverage that will be provided, claims 

administration and underwriting, the premium or other 

fees that will be paid for the insurance coverage and 

commissions, if any. These disclosures are often 

provided to the plan sponsor at multiple times, 

including in the response to the sponsor's request for 

proposal, or RFP, in marketing materials, in the 

insurance policy or evidence of coverage outlining the 

scope of benefits, and in the annual policy, Form 5500 

and other reporting to the plan sponsor. 

 Because these products are simple and the 

sale and operation are already subject to both ERISA 

disclosures, adding on the disclosure required by 

Section 408(b)(2) would not enhance the ability for the 

plan sponsor to appropriately exercise their fiduciary 

duty. 

 Non-medical benefit products do not pose the 

risk that plan sponsors will not know how much they're 

paying for those services, or the benefits, or who is 

being paid. Indirect compensation typically is not 

received by the insurer providing the products or 

service and since there are no assets to manage, there 

cannot be concerns regarding conflicts at investment 

decisions. 
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 Finally, in contrast to what might be found 

in retirement plan service arrangements, non-medical 

benefit products do not have termination penalties or 

fees leaving plan sponsors free to walk away from any 

arrangement that become unsatisfactory to them. 

 Appropriate disclosure of information 

concerning insurance products is necessary and is very 

beneficial. But adding Section 408(b)(2) type 

disclosures for non-medical benefit products to the 

disclosures already made would not add commensurate 

value for benefit plan sponsors and would add much more 

likely -- and would much more likely be unnecessary and 

redundant. 

 Given the new disclosure requirements would 

unavoidably impose increased expense on plans and 

participants, and potentially decrease the availability 

of benefits, we would respectfully submit that 

408(b)(2) rules not be applied to welfare benefit 

plans. To the extent, however, that the Department 

believes further disclosure is needed, separate rules 

should be promulgated so that they can be narrowly 

tailored to the specific characteristics of, and the 

disclosure rules already applicable to, welfare benefit 

programs. 

 The ACLI would welcome the opportunity to 
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play an active role in the process of developing such 

rules. 

 On behalf of the ACLI, I commend the 

Department for its ongoing and thoughtful attention to 

these issues and welcome any questions later on in the 

discussion. 

 Thank you. 

THE COUNCIL OF INSURANCE AGENTS AND BROKERS 

Scott Sinder, Esq., Steptoe & Johnson

 MR. SINDER: Good morning. My name is Scott 

Sinder. I am a partner with the law firm of Steptoe & 

Johnson and I serve as General Council for the Council 

of Insurance Agents and Brokers on whose behalf I am 

testifying today. And I thank you for the opportunity 

to do so. 

 My testimony will describe the views and 

concerns of the agent/broker community with regard to 

the Department's intention to develop fee disclosure 

regulations for welfare benefit plans under ERISA 

Section 408(b)(2), parallel to regulations it adopted 

this summer governing pension plans. 

 The Council is a trade association 

representing the nation's largest insurance agencies ad 

brokerage firms, which specialize in a wide variety of 
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insurance products and risk management services for 

business, industry, government, and the public. 

Operating both nationally and internationally, Council 

members conduct business in more than 3,000 locations, 

employ more than 120,000 people, and annually place 

more than 80 percent -- well over $200 billion -- of 

all U.S. insurance products and services protecting 

business, industry, government, and the public atlarge. Council members also place the majority of U.S. 

employee benefit insurance products and provide a range 

of insurance-related consulting and administrative 

services. 

 The Council has long been an avid supporter 

of transparency and disclosure in our industry. We 

adopted a formal policy in favor of greater 

transparency in 1998. In 2004, we again, publicly took 

steps to enhance transparency and disclosure, working 

with the NAIC and the National Conference of Insurance 

Legislators to develop model state laws on 

transparency. As I will discuss, Council members are 

committed to disclosure of their compensation and 

routinely disclose information on how they are 

compensated, both directly and when more detail is 

requested by their client-insureds. 

 Although we strongly support efforts for 
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transparency and disclosure in our industry, we do not 

believe it appropriate to develop a new federally 

mandated disclosure framework for welfare benefit 

plans. Our concerns arise from our belief that robust, 

effective disclosure requirements already are in place 

of our industry, and an additional overlay of a new and 

burdensome federal regime is not warranted. 

 I'm going to give you a brief background on 

the industry and our role and then proceed to the 

disclosure discussion. 

 Council members assist employers in designing 

their welfare plans and in effectuating those plans, 

including most importantly the placement of insurance 

products with those plans. Those products include, 

among others, group medical, dental, vision, life, 

accidental death and dismemberment, health, short- and 

long-term disability and long-term care insurance. A 

single multi-state employer's plan easily can include 

15 to 20 separate insurance products. In connection 

with the insurance products they place, Council members 

may also provide a variety of administrative services 

to the purchaser, including assisting plan sponsors 

with plan design, applications for coverage, claim 

forms, claims resolution, and COBRA administration. 

 The relationship among a purchaser of 
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insurance products, the broker or agent placing the 

insurance, and the carrier issuing the product, is 

governed principally by the contractual relationship 

entered into between the purchaser and the broker or 

the agent, and then, of course with the carrier by the 

insurance policies themselves. A well-developed body 

of state agency law and, in most states, statutory 

insurance law provide that the legal relationships 

between the employer on behalf of the plans that 

purchase insurance products and administrative 

services, the agent or broker that places that 

coverage, and the carriers that provide coverage, are 

contractual matters. Thus, for example, whether a 

broker is providing services to the plan instead of the 

carrier, or vice-versa, is determined by the relevant 

contracts. 

 Council members receive compensation in a 

variety of forms, including commissions from the 

carrier, fees from the plan or employer plan sponsor, 

contingent payments or overrides from the carrier when 

business originated by the broker passes certain 

thresholds (e.g., relating the premium income levels 

and client retention), and discretionary travel or 

other non-cash compensation from the carrier. 

 As mentioned, state insurance laws govern 
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whether and to what extent brokers or agents must 

disclose the types and amounts of compensation they 

receive. Under the laws of most states, brokers and 

agents are required to disclose in advance the types of 

compensation they receive. However, brokers and agents 

generally are not required to disclose in advance the 

amount of compensation they expect to receive, in part 

because the actual amount of compensation often cannot 

be known until after placement of the insurance. That 

is the case because the commission rates and forms of 

compensation vary by carrier as well as by program. 

 With respect to commissions, for example, 

welfare plan benefits programs vary in terms of 

carriers, products, price and usage. A single welfare 

plan could offer its participants multiple products for 

multiple insurers in several categories of coverage, as 

mentioned previously, group medical, dental, life, 

long-term care, et cetera. The commission earned by 

the broker will vary with the carrier and the premium 

paid on each particular policy. The premium in turn 

will vary with the take-up rates by plan participants, 

i.e., the extent to which participants choose a 

particular option on the insurance menu. Because 

brokers cannot determine in advance how these factors 

will play out, they cannot provide, upon placement, 
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more than general disclosure about the compensation 

they may receive. 

 As previously noted, brokers and agents 

generally accept contingent compensation, such as 

continent commissions, overrides, and bonuses. The 

level of such compensation explicitly is contingent on 

such factors such as volume, profitability, client 

retention, and premium income levels. The extent to 

which these factors will affect the actual level of 

compensation is not knowable at the outset of an 

engagement for a particular client. Additionally, some 

contingent compensation may be based on a broker's 

overall book of business with the carrier, not the 

premiums earned with respect to any particular plan. 

Thus, it is often not possible for the broker to 

determine with precision the extent to which its 

contingent compensation arises from insurance placed 

for any particular plan. 

 Under the existing disclosure regime, 

insurance agents and brokers already are subject to 

extensive regulation, including disclosure 

requirements, which sets them apart from other service 

providers. First, state law heavily regulates the 

placement activities of insurance agents and brokers as 

a general matter, and most states require compensation 
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disclosures when a broker is providing both placement 

and non-placement-related services. Over 40 states, 

for example, require a broker to have a written 

agreement in place with a client in order to collect 

fees from that client while at the same time receiving 

any type of insurer-provided compensation. 

 The fee disclosure requirements are quickly 

becoming even more relevant in the wake of the passage 

of the Patient Protection and Affordable Care Act in 

all market segments. The MLR carrier cost regime 

created under the statute, for example, is creating 

significant pressure on carrier commissions and some 

segments of the market are already migrating to a fee 

model. Aetna recently announced, for example, that it 

is going to sell all of its group insurance products on 

a net of commission basis and it has instituted plans 

to help smaller agencies implement and use client paid 

fees for their exclusive source of compensation. 

 In addition, as previously discussed, under 

Schedule A of the Department's Form 5500, the 

Department requires comprehensive and robust disclosure 

regarding commissions, fees, any non-cash compensation 

earned by insurance agents or brokers in particular. 

This is in contrast to other service providers. 

 Finally, where agents or brokers or their 
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affiliates act as fiduciaries and need the relief 

provided under Prohibited Transaction Class Exemption 

84-24, they must comply with that exemptions' 

comprehensive fee and conflict-of-interest disclosure 

requirements. 

 In the rule adopted to govern pension plans, 

the Department cited concerns about the adequacy of 

information plans have regarding service providers' 

compensation and potential conflicts-of-interest. The 

rule reflects particular concerns with undisclosed, 

indirect compensation paid in connection with the 

investment of the assets of participant-directed 

defined contribution plans. The Council understands 

the Department's concerns and certainly did not oppose 

the Department's desire to enhance transparency in 

connection with those plans. 

 We disagree, however, with the suggestion 

that the placement of insurance products with welfare 

plans raises the same concerns as those that relate to 

401(k) plan investment services. The two products are 

completely different, both in character and with regard 

to the existence of comprehensive state regulation. 

They have different purchasers, beneficiary concerns, 

and regulatory schemes. Service providers for defined 

benefit plans often manage assets for plan 
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beneficiaries, whereas insurance agents and brokers do 

not. Further, in the 401(k) plan context, services are 

performed on a daily basis; in contrast, insurance 

brokers act only at the plan level by, for example, 

simply selling products on an annual basis. 

 And significantly, as previously explained, 

under existing state laws, disclosure concerning 

relationships and fees already is required under 

existing state regulatory regimes. Imposition of the 

Department's rules for pension plans, which will 

require disclosure of the compensation to be received 

by the service provider, would thus be a duplicative 

burden for welfare plans at a cost the Department 

itself has acknowledged to be "economically 

significant" for welfare plan service providers. 

 For all the above reasons, we respectfully 

suggest that -- if the Department determines to adopt 

new disclosure rules covering insurance services 

provided to employee welfare benefit plans -- any such 

rule should provide that it will be satisfied by an 

insurance agent's or broker's compliance with the 

disclosure requirements imposed by state law. 

Alternatively, if the Department seeks to impose a new 

federal disclosure mandate in this context, we ask that 

it be the sole disclosure standard and that it be 
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deemed preemptive of the current state-imposed 

disclosure regimes under which we currently operate. 

 On behalf of the Council, I again, thank you 

for affording me the opportunity to speak to you today. 

And I'll be pleased to answer any questions. Thank 

you. 

 MR. DOYLE: Thank you. All right. We'll 

start with questions. Mr. Canary, anything? 

 MR. CANARY: Sure. Let me just follow up on 

the last recommendation. If we were to pursue -- 

 PARTICIPANT: Could you pull that microphone 

closer to you? 

 MR. CANARY: Sorry about that. Let me follow 

up on a recommendation you just made about if we were 

to pursue regulatory -- regulations in this area that 

we should say that brokers would satisfy that 

regulation by compliance with state disclosure laws. 

It seemed that, also based on the testimony, there 

isn't necessarily uniformity in the state disclosure 

requirements and some states may not have any laws at 

all that require disclosure. So, following up on that, 

how would that work if we end up with dis-uniformity 

(sic) among the States in terms of accomplishing the 

sort of transparency that would be equivalent for all 

covered ERISA plans? 
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 MR. SINDER: Welcome to the world of State 

insurance regulation. Some States do not have 

significant disclosure, although they all regulate to 

some extent in the negative at a minimum. I suppose 

you could deem that if they are not actively regulated 

you will do so, akin to the FTC's antitrust regulatory 

authority and that would be acceptable. 

 But this issue about the State burden, it's 

significant for us. You know, you are at a moment 

where you have all the provisions and requirements of 

the Patient Protection Affordable Care Act coming into 

play. A lot of the smaller agencies, in particular, 

are feeling that they may not have a future given the 

different dynamics that play the economic dynamics 

there. The imposition of an additional duplicative 

overlay of disclosure is going to add further costs and 

uncertainty into that already very difficult 

environment and that's the nature of our concern. 

 MR. CANARY: So let me follow up on that. I 

know you also mentioned that the organization had 

worked on model disclosure of laws with the NAIC. So 

rather than relying upon the individual State laws, 

would an alternative approach be that the regulation 

would be satisfied if the disclosure requirements in 

the model law were satisfied? 
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 MR. SINDER: So I'm ahead of my clients and 

my members on this, but I will say two things. I think 

we could support that, especially if it were 

preemptive. I mean, this is a significant issue for 

us. You know, you have multi-state plans that are 

subject to the rules, theoretically, of each State in 

which that employer operates. So you already have that 

issue. And then you're going to add another layer. We 

endorse the NAIC model. We worked on it. We were the 

first producer group to be in that position and we 

would support your doing that, but especially if we 

could make that a single rule that would be universally 

applicable. 

 MR. CANARY: So one more question maybe for 

everyone. I got the impression that the Schedule A 

disclosure requirements currently would require 

disclosure of incentive, compensation, and bonuses, but 

I got some sense that there's maybe not comprehensive 

compliance or uniform compliance with those disclosure 

requirements in the industry currently. And, two, that 

it's a retrospective review rather than a perspective 

disclosure that would be used in making a decision on 

purchasing an insurance product. I guess can you each 

speak to the issue as to whether you think the Schedule 

A disclosure requirements really are sufficient for 
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purposes of at least the incentive compensation you 

spoke to? 

 MR. DONEY: I think you answered my question 

-- or you answered your own question. I think you're 

correct in that the point of Schedule A being uniformly 

used is sketchy at best. I know that there are 

requirements with respect to having a Schedule A filled 

out and submitted. But I would further submit that it 

does not happen across the board. 

 And, secondly, I guess my point was that it's 

retrospective. And that it makes it difficult for an 

employer who is making decisions about employee benefit 

plans to make a decision about -- including with whom 

they're going to work as an agent or broker based on 

future potential compensation that is really not 

disclosed up front. 

 So, yeah, I think that those are two issues 

that need to be addressed. 

 MR. CANARY: Mr. Sinder. 

 MR. SINDER: A couple points. The Form 5500 

until, I think, four or five years ago, it had a single 

line on Schedule A for broker/agent compensation and 

there was confusion about how to apply the incentive 

compensation, how it was reported. That has been 

clarified by Department and that's now specifically, I 
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believe, listed. My understanding is that especially 

after that change compliance improved, at least our 

members are making every effort to comply. I can't 

speak to folks beyond our community. I was going to 

say something else. 

 MR. CANARY: Perspective versus 

retrospective. 

 MR. SINDER: Oh, the perspective versus 

retrospective. You know, the point was made that you 

can change brokers, you can change plans. Our view on 

the 5500 is it's part of a relationship. You know, 

we're in a relationship business. You work with 

somebody over years, hopefully, it's not limited to a 

moment in time and then you leave them. If the 5500 

reporting is surprising in any way to the plan 

fiduciaries or to the employers, they respond. So if 

it's inconsistent with their expectations, they will 

change brokers, they will change carriers. And the 

competition in our space for those service 

relationships is intense. So I actually think it does 

serve that purpose, although it is admittedly not a 

prospective disclosure. 

 MR. KATZ: My comments will echo some of what 

you just heard. I think the first part about whether 

there is a compliance or an enforcement issue is sort 
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of separate and our understanding is that the process 

is working, that the information is being provided on 

the Schedule A's and the plan sponsors are getting that 

information. And if that isn't happening, then that 

should be looked at. But that's certainly what member 

companies, we believe, are complying with fully. 

 In terms of the second question about, you 

know, prospective and retrospective and how it works, I 

think it gets to this general question of where is 

value being added in the context of helping plan 

sponsors make good decisions. And so certainly giving 

stuff retrospective is giving them information that 

says what happens. I think what has to happen is the 

overall body of regulations and practice need to be 

looked at in concert to assess whether or not plan 

sponsors are getting enough information or they have 

concerns. And I know some organizations representing 

plan sponsors will testify here today and give their 

perspective. Our belief is that they are and 

especially as we think of more simple products like 

life insurance and disability where the transaction is 

very straightforward it's our belief that plan sponsors 

are well informed in making those decisions and that 

additional levels of disclosures wouldn't enhance that. 

 MR. CANARY: Thank you. 
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 ASSISTANT SECRETARY BORZI: I just have a 

couple of questions. One of the things that I found 

when I was in private practice is -- and this is 

something that is common to the problems that plan 

sponsors have and plan fiduciaries have in the 401(k) 

area -- and that is, not everyone understands fully the 

range of potential sources of compensation for their 

service providers. So I know if you could give us a 

sense, for instance of -- and you gave us some examples 

of compensation for TPAs, but what are the sources of 

compensation for TPAs? And then I'm going to ask about 

brokers as well and then I'm going to ask you about the 

kinds of compensation for these non-health situations. 

 MR. DONEY: Because TPAs are in the realm of 

self-funding and administrative of self-funded medical 

plans, you have to, I think, separate the TPA from an 

insurance carrier, if you will. Both TPAs and -- 

 ASSISTANT SECRETARY BORZI: Although, 

obviously, insurance carriers act as TPAs. 

 MR. DONEY: Exactly. 

 (Simultaneous conversation.) 

 MR. DONEY: That was exactly my point that 

insurance carriers will administer self-funded medical 

plans much like TPAs do and there is that ongoing 

competition for that business. TPAs typically tend to 
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be much smaller entities, independently owned, like my 

own TPA firm that I own, and don't necessarily have the 

advantages of a very large insurance carrier. When we 

compensate a broker or an agent or a consultant, it's 

typically done in two ways. One is, we will compensate 

on a per-employee, per-month basis, some sort of a fee. 

As I said in my testimony, typically $2 to 3 per 

employee per month which they will get on an ongoing 

basis. The second way is generally the broker will 

receive a percentage of the stop-loss insurance that a 

client is buying to protect against very large losses. 

That's typically 10 percent of the premium paid on the 

fully-insured portion of the self-funded medical plan 

for stop-loss. 

 ASSISTANT SECRETARY BORZI: I meant the kind 

of compensation that the TPA itself would get. So what 

are the sources of -- 

 MR. DONEY: Generally a TPA will receive 

administration fees on a per-employee, per-month basis, 

varies widely across the country. We've got clients in 

49 states -- 

 ASSISTANT SECRETARY BORZI: Uh-huh. 

 MR. DONEY: And we see a lot of variation 

there. So if you're administering a medical plan or a 

dental plan, or a disability plan, or any of the above, 
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a TPA will typically receive, per-employee, per-month 

compensation for that. 

 TPAs will generally share with brokers and 

agents the commissions from the stop-loss insurance. 

 ASSISTANT SECRETARY BORZI: Uh-huh. 

 MR. DONEY: The formula is typically the 

broker agent will receive 10 percent, the TPA will 

receive 5 percent on a 15 percent commission. That's 

fairly typical. 

 Many TPAs will receive compensation from 

pharmacy benefit management companies -- 

 ASSISTANT SECRETARY BORZI: Uh-huh. 

 MR. DONEY: -- for administration, 

administrative fees on a per-script basis or on an 

ongoing basis, along those lines. And then, you know, 

TPAs will receive compensation that varies widely based 

on other products or services. 

 ASSISTANT SECRETARY BORZI: Like a provider -

- for putting together a provider panel, selecting this 

network versus -- 

 MR. DONEY: Exactly. 

 ASSISTANT SECRETARY BORZI: -- all these 

rent-a-network -- 

 MR. DONEY: Right. Exactly. And I can tell 

you that my own TPA firm has a division that does 
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claims review and negotiation on behalf of clients and 

will receive compensation on a percentage of savings 

basis if we're successful at negotiating savings for 

our clients. So that's generally what a TPA would be 

worried about. 

 ASSISTANT SECRETARY BORZI: I know this isn't 

your situation, but an insurance company that serves as 

a TPA, a company that has already pre-existing 

relationships in a health plan area, what additional 

forms of compensation do they get? 

 MR. DONEY: You know, I think -- and, again, 

because I'm not an insurance carrier, I couldn't say 

with any real specificity or any assurances, but I 

think in large part, large insurance carriers who want 

to be in the self-funded business and act as a TPA, if 

you will, rely not necessarily on the income for the 

administrative services for self-funded plans -- 

 ASSISTANT SECRETARY BORZI: Right. 

 MR. DONEY: -- but rather ancillary -- the 

opportunity to sell ancillary services life insurance 

and dental insurance and other insurances that -- 

 (Simultaneous conversation.) 

 ASSISTANT SECRETARY BORZI: We call it crossselling. 

 MR. DONEY: Exactly. 
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 ASSISTANT SECRETARY BORZI: So that's what 

happens here. 

 MR. DONEY: I suspect that an insurance 

carrier would be in the TPA business for that exact 

reason for a much wider range of services. 

 ASSISTANT SECRETARY BORZI: Okay. And 

brokers, what are the sources of brokers' compensation? 

 MR. SINDER: You want to break it down in two 

ways. There's insurer provided compensation and client 

provided compensation. 

 ASSISTANT SECRETARY BORZI: Uh-huh. 

 MR. SINDER: On the insurer's side there's a 

couple of categories. You have kind of the upfront 

payments which is either commission which is a 

percentage of the premiums that are paid, or more and 

more typically today in the benefit space, it is a fee 

per employee who is enrolled in a plan. So a per-head 

type of fee as he discussed. 

 There's also kind of the back-end payments. 

These are the contingent or override payments. They 

are not based on any particular client, it's book of 

business. It's overall relationship between the 

producer and that client or that carrier. It can be 

driven by overall volume, retention levels, which 

decrease administrative costs, and profitability; 
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although profitability is less of a factor in benefits 

compensation. 

 On the client side there are fees. And the 

fees can be either for placement services, and, as I 

mentioned in my formal testimony, there's a movement 

now on some of the carriers' part to not compensate the 

brokers at all. Go to a net of commission model where 

the only compensation would be coming directly from the 

employer. And that is a negotiated contract between 

the broker, the agent, and the employer. It can cover 

placement services for actually buying the different 

insurance products and a range of other administrative 

support services. 

 ASSISTANT SECRETARY BORZI: How common are 

these net of commission arrangements? They're fairly 

new in the marketplace. 

 MR. SINDER: Well, they're especially new in 

the insured space. I think that in the property and 

casualty world, you'll remember most of these folks are 

on both sides of that line and for larger clients 

they're doing self-insured plans, for example, they had 

been common for a while. But over the last ten years I 

think you've seen a migration up on it. It's a way to 

control your exposure in a number of ways as the 

employer. 
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 There's also arrangements where you can do a 

fee arrangement and credit commissions that are being 

received toward the fee. So that becomes a -- again, 

it's very disclosed in that context as a contractual 

matter. 

 ASSISTANT SECRETARY BORZI: These are 

retrospective types of compensation arrangements? Are 

they? 

 MR. SINDER: I don't think so, if I 

understand your question. Generally you negotiate this 

at the outset, the beginning of the year, say. 

 ASSISTANT SECRETARY BORZI: The types. But 

the amounts would be -- 

 MR. SINDER: The types, the amounts -- well, 

yeah, the -- if it's a fee deal with the employer, then 

the fee is usually set at the beginning of the year. 

Now, how much the employer pays contrasted with the 

commission that's being paid by the carrier, for 

example, that would, of course, have to play out 

through the year as you see what enrollment levels are 

and the like. 

 ASSISTANT SECRETARY BORZI: Okay. 

 MR. SINDER: The one thing I will note is 

that some of the larger carriers who do the selfinsured business, they also receive a per-head payment 
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as the TPA. And, you know, our view is that the 

brokers really place the products, not so much the 

carriers and so they may try to do some of the crossselling. But if you really dig into some of those 

models, I think what you'll see is that many of those 

carriers have become really servicers for that selfinsured space and they need that TPA revenue to fund 

their activities. 

 ASSISTANT SECRETARY BORZI: Mr. Katz. 

 MR. KATZ: I am going to answer this question 

in the context of the companies that the ACLI 

represents. I really won't be talking about health 

insurance. 

 ASSISTANT SECRETARY BORZI: Yes, I -- 

 MR. KATZ: Although I can talk a little bit 

about dental at the end of this because MetLife does do 

dental. 

 ASSISTANT SECRETARY BORZI: Okay. 

 MR. KATZ: But revenue for insurance 

companies typically comes in two basic forms, premium 

and fees. So premium is very straightforward. That's 

the amount that the employer will pay for the typical 

insurance that they've purchased. And typically that 

is either on a per-thousand or per-unit depending on 

the type of coverage whether it's disability or life -- 
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life insurance. 

 Fees typically are paid for services that are 

outside the construct of insurance. And so for some 

benefits as was just talked about, the insurance 

company may be a TPA and maybe provide services and be 

paid fees for those services. And both the premium and 

the fees would be outlined in detail in the proposal 

and given to the policyholder or their intermediary 

broker consultant in advance. 

 ASSISTANT SECRETARY BORZI: In your testimony 

you mentioned -- you went through a variety of 

components of the premiums and the fees. Are they 

bundled or unbundled when you're disclosing them to the 

potential client? 

 MR. KATZ: Sure. The premiums include the 

cost of insurance and any services that the insurance 

company would need to administer those insurance 

services. So, for example, claim payments or 

beneficiary management and things like that, that's all 

in the concert of the overall premium. And the 

insurance company would need to do those services. 

They couldn't have somebody else do those services in 

the concert of these products. 

 For fee-based services, typically I would 

think about that outside the construct of the insurance 
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company that it's not -- or the insurance product, it's 

a separate product. So the insurance -- so I'll give 

you a great example, as an insurance company may insure 

long-term disability services and charge a premium for 

that, and they may provide administrative services for 

short-term disability services and they may charge a 

fee for those. And they're both explicit and it's 

clear what's covered under each of those. 

 ASSISTANT SECRETARY BORZI: But the purchaser 

would have no way of being able to evaluate the 

reasonableness of what went into your premium; right? 

 MR. KATZ: Typically -- 

 ASSISTANT SECRETARY BORZI: Because you just 

say here's the premium and it includes the following 

things. 

 MR. KATZ: Right. I mean, typically the way 

it works is the purchaser would hire a broker or 

consultant who would lay out the specifications 

required for the given product to a number of different 

insurance companies who would provide bids and they 

would be compared and the outline -- 

 ASSISTANT SECRETARY BORZI: By the broker? 

 MR. KATZ: By the broker, and the broker with 

their client would make a choice as to who they would 

want to do business with. 
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 When you get into the components, just to 

give you the vast majority of the costs in these 

programs are the claim payments. So it's a relatively 

small amount that's covering what I would consider the 

expenses of the insurance company. And the insurance 

company, I think this is the important distinction, 

unlike some of the 401(k) stuff where you could go out 

and maybe buy that stuff on your own, in the welfare 

plan benefits for this, you couldn't do that. 

 ASSISTANT SECRETARY BORZI: Yeah. 

 MR. KATZ: You need an insurance company to 

pay the claim. 

 (Simultaneous conversation.) 

 ASSISTANT SECRETARY BORZI: No. I understand 

that and I'm not necessarily suggesting that we would 

require you to separate out all these things. I'm just 

trying to understand what goes into these figures. 

 MR. KATZ: Yeah, typically an insurer's 

proposal would be an overall price which includes the 

cost to pay any claims, plus any expenses that the 

insurance company would have to administer the program, 

plus any commissions that they're going to pay out to 

any broker. That all would be included in the price. 

 ASSISTANT SECRETARY BORZI: Uh-huh. And the 

brokers' commissions are included in the price too, you 
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said? 

 MR. KATZ: Absolutely. 

 ASSISTANT SECRETARY BORZI: It’s included in 

the premium. Okay. 

 MR. HAUSER: Mr. Sinder, in your testimony, 

if I understood it, I think you indicated that the 

States typically mandate some sort of upfront 

disclosure of the type of compensation a broker 

receives, but not the amount of disclosure which you 

said would be hard to estimate. And I guess the 

question I have is, what is meant by type of fee? What 

precisely do they have to disclose? Does it, for 

example, include from whom they will receive 

compensation? And with respect -- and then if it 

doesn't include amount, which may be hard to estimate, 

most of the fee arrangements you described in answering 

Ms. Borzi's questions seemed determinant in the sense 

that they're percentage based, they are contractual 

arrangements and is there a requirement that you 

disclose what those percentages are, what those 

contracts entitle the broker to, and if not, is there 

any reason why that shouldn't be mandated? 

 Sorry, that's a lot of questions. I follow 

up if you -- 

 MR. SINDER: I'm trying to unpack it in my 
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mind. On the fee side, when I say fee, and what we 

mean by "fees" are payments made by the client, by the 

employer or the plan. It's generally by the employer 

for us. So those are not only disclosed, but they're 

negotiated, as a general matter, because the employer 

is agreeing to bear those costs. They are required to 

be memorialized in a written document if the broker at 

the same time is also receiving any carrier-provided 

compensation. So those would be disclosed by the way 

the business works in conjunction with those fee and 

commission disclosure requirements. 

 For carrier-provided compensation, they're 

generally required to tell them that they're being paid 

by the carrier. In fact, that's the NAIC model rule. 

Then the client is -- and the Council policy is that 

the client is entitled to ask for as much specificity 

as they want and we encourage our members to provide. 

 MR. HAUSER: Okay. 

 MR. PIACENTINI: I guess I want to focus on 

what are the potential effects of different degrees of 

transparency. Maybe I'll start by going back to the 

first example that Mr. Doney talked about, that certain 

kinds of indirect contingent bonuses typically are not 

disclosed. And I guess I'm hearing affirmed that 

they're not required to be disclosed under the NAIC 
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model, at least not in any specificity. So with 

respect to those kinds of payments and I understand 

there are challenges that it's not always easy to 

predict or even after the fact to attribute exactly 

what compensation is resulting from what client. So if 

somehow that was disclosed in more detail what the 

compensation is, where it's coming from, what would the 

effect of that be? Would the consultants now change 

the recommendations that they're making from what they 

would have been? Would the client interpret the 

recommendations differently? Would the compensation 

arrangements change rather than be disclosed? We heard 

that at least one company, maybe some companies are 

moving away from commissions. What would the effects 

be and who would benefit and who would not? 

 MR. DONEY: I think the intent of all of this 

is to make sure that the ultimate consumer who is, in 

our circumstances, the employer benefits most from any 

kind of regulation with respect to disclosure. It's 

difficult to speculate what, you know, the end result 

would be particularly from an employer's standpoint if 

they knew exactly what was being compensated to their 

consultant or their broker or their agent. Because, 

again, to a certain extent it's difficult to attribute 

certain dollar amounts to one specific employer because 
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it's all based on a much larger block of business. 

 So I think the issue here is that many 

brokers and agents are incented to do things that are 

not directly attributable to one particular employer, 

but rather an entire book of business and therefore the 

individual employer has no idea what that ultimate 

compensation is going to be to the broker, although 

they're paying for it. It's built into the cost of the 

premiums and the insurance the insurance company would 

be charging or the fees that ultimately go to what an 

insurance company or administrator is going to be 

paying. A very large percentage of a broker's 

compensation often is predicated on bonuses, retention 

bonuses, overrides and those sorts of things that an 

employer simply doesn’t know exists. 

 And I think to your question, what's the 

effect going to be, I think you're seeing it already. 

There's -- I can tell you in the Midwest Coventry 

Insurance has reduced its broker compensation by 50 

percent, made that announcement that it's -- and I'm 

sure you're aware of that. Aetna is doing premiums net 

of compensation and allowing the broker/agent to 

negotiate their own deal. So I think that you're 

seeing the effect now of the fear of larger disclosures 

coming out and I suspect that that will continue. 
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 MR. SINDER: I'm going to disagree on a 

couple of points. First of all, the overrides and 

contingent compensation generally are less than 10 

percent of an insurance brokerage's revenue from a 

carrier. So that's point one. 

 Point two, these are reported on the 5500 

form. You have rules which say that you need to 

allocate those retrospectively when you can do it 

across the clients that it was paid for. So even 

though it's an aggregation, even though it's hard to 

calculate up front, especially they are reported and 

disclosed. 

 The commission things that you're seeing in 

the market have absolutely nothing to do with 

disclosure. You haven't made any rules, you haven't 

changed anything yet. There has been disclosure for a 

long time at certain levels. New York has recently 

kind of upped its disclosure requirement, but basically 

it's been relatively stable the last few years. The 

commission decreases are attributable, solely, to the 

Patient Protection Affordable Care Act. There is 

tremendous pressure on the carrier community to reduce 

its administrative costs. The Act and the NAIC have 

determined that the agent/broker portion of the 

compensation is on the administrative cost side, the 
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carriers are reacting. 

 Now, you asked what the impact will be of 

disclosure. My view is, if you want to continue to 

have an employer-provided insurance marketplace which 

are tremendous proponents of, you need to be sure that 

the employers can get service for that, that they have 

somebody to help them pick their plans and sort of work 

through this quagmire as well as the regulatory 

overlay, COBRA administration, for example. 

 You're in an environment where you're 

decreasing the compensation that agents and brokers are 

going to get. This is particularly true in the smaller 

marketplace, that under 100 market. At some level 

those are the employers that need the most help. They 

don't have a dedicated HR person, they don't have 

dedicated personnel who can figure this out. They need 

the agents and brokers. And you're in an environment 

where there's downward pressure on the compensation 

they can receive. So my view is, you need to tread 

very carefully. Because if you increase the disclosure 

in a way that's going to increase our compliance costs, 

you're going to see a migration away from servicing 

those small employers that at this moment in time 

probably need more help than they've ever needed 

before. So I think from an impact perspective that's 
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what I'm hearing from our members and that's what we 

worry about. 

 MR. HAUSER: Do you agree with Mr. Doney 

though that for some of these smaller employers there's 

nothing in the current regulatory structure that would 

mandate that they find out from the brokers up front 

who they're getting compensation from or no? 

 MR. SINDER: If there are no fees so the 

employer is not paying anything directly, generally 

there's no requirement that they divulge any more 

specific information beyond who's paying them. 

 MR. HAUSER: Right. Then if I understood 

you, the State law, I guess, entitles people to ask for 

that information. But is there anything that compels 

that they actually give it when asked? 

 MR. SINDER: Well, there is a market out 

there and my general experience as a lawyer with 

clients is when my client asks for something and I 

won't provide it, they find somebody else who will. 

But you can't lose sight of that marketplace dynamic. 

It's a very competitive business. And so you have to 

situate it in that way. 

 MR. HAUSER: And do you think that 

marketplace works as well for these under 100 employers 

that you were talking about as for the larger 
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employers? Or do you think there's a distinction to be 

drawn there? 

 MR. SINDER: I think that the agent/broker 

community competes very vigorously for that under 100 

market. I think you're going to see agencies and 

brokerage firms go out of business. 

 MR. HAUSER: But in terms of the transparency 

of the -- you know, and the clarity of the disclosure, 

do you think there's a difference in the under 100 

folks to get that kind of information as opposed to the 

bigger folks? 

 MR. SINDER: If they want it, I think there's 

ability for them to get it. I think oftentimes they 

can't process it because of their operational 

capabilities, even when they have it. 

 MR. HAUSER: And just one more follow up can 

you think of any reason why -- I'm assuming these 

commission arrangements are, at least from the broker's 

perspective they've been established up front and while 

you can't say what the precise number is, there is a 

percentage or some calculation that, you know, would 

yield a precise number. And certainly if I were a 

broker, I would insist on that in my deals. So is 

there any reason that can't readily be disclosed or do 

you think as a practical matter it is typically 
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disclosed to folks? 

 MR. SINDER: I don' think it does yield a 

number up front. I mean, I think that sometimes the 

contingent commission override is zero. And so I think 

if you're going to do an up front disclosure of the -- 

 MR. HAUSER: I'm sorry, not that the number 

is going to be known up front, because you're not going 

to know that until you know what numbers go into your 

variables. But the formula is established up front; is 

that wrong? 

 MR. SINDER: The formula is established up 

front. Some of the formulas are complicated and I 

think that you have to evaluate in the context of 

looking at -- it's not on product. Most plans, even 

for small employers are cafeteria-style plans where 

you'll have a minimum of six to eight products. Each 

of those has a compensation component to it. And so 

that's when the disclosures get very cumbersome and 

complicated. The degree of precision gets cumbersome 

and complicated. We were asked what if the formula 

changes after you've done the initial disclosure, and 

after placement, is there a follow up disclosure 

obligation? 

 The State regulators do grapple with this. 

These rates, at a minimum, are all filed in all the 
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states along with their constituent components in terms 

of what the different cost metrics are. And in the 

majority of states there's affirmative approval of 

those rates. So the States are blessing the 

compensation arrangements as part of that. There is 

strong pressure from the Department of Health and Human 

Services, in particular, to be sure that every state 

does that rate review and to participate in the 

exchange going forward, every state will. So when you 

talk about that 100 marketplace, there is a lot of 

scrutiny on increases in premiums, you have to justify 

it, and so as a practical matter every state will have 

that review for that space that we're going to focus 

on. 

 MR. HAUSER: Thanks. And does the 

policyholder have a right to see those rate documents 

that are on file with the State insurance departments? 

 MR. SINDER: I think they do under the filed 

rate doctrine. 

 MR. LEBOWITZ: I wonder if I could just 

follow up here just a little bit with more of an 

observation because we have, in recent years, been 

involved in a number of investigations, both civil and 

criminal investigations in the insurance brokerage 

context. And what we've seen is kind of a variety of 
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offenses, bid rigging, false reporting, undisclosed 

compensation of various sorts and number of criminal 

prosecutions and civil actions that have involved our 

agency and others. And it certainly suggests that in 

these cases there's a lack of transparency and that 

many clients of brokerage firms have no idea what is 

going on behind that curtain. Obviously in those cases 

they had no idea what was going on. They were the 

victims of these crimes. But it certainly does tell us 

that there's a need for more -- that some additional 

transparency up front, some additional disclosure up 

front would be helpful in confronting these kinds of 

problems. 

 And it would seem to me, on your point that 

if commissions are being driven down that there may be 

even more of an incentive in some respects at least in 

some hopefully small portion of the industry to try to 

find ways to make up for that compensation that's being 

lost. 

 MR. SINDER: With all due respect, we are, of 

course, very familiar with the bid rigging 

investigations and some of the other issues and I will 

never defend that. Those were impermissible illegal 

acts and I don't think any level of disclosure would 

have prevented or prohibited them. And so we need to 
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police bad conduct and enforce the rules we have. But 

I do think it's a separate question about whether the 

cost of the additional disclosure, the cumbersomeness 

of processing it, and the value of the additional 

disclosure to the prospective clients, is worth that 

cost separate and apart from the bid rigging and some 

of the other bad actions. 

 MR. DOYLE: A couple of questions. I would 

like to start with Mr. Doney. And again a lot of this 

goes to trying to draw lines as to where the problem 

lies -- if there is a problem. I mean, we heard in 

certain areas it seems there's a fair amount of 

disclosure where at least the client gets kind of the 

information they need to assess the product and its 

cost. 

 So I guess the first question is, the 

products Mr. Katz was talking about, the traditional 

kind of insurance, maybe non-health products, do you 

think there're problems in that particular area? 

 MR. DONEY: I honestly could not speak to 

that because I am really exclusively focused on the 

medical/dental area of employee benefits. 

 MR. DOYLE: Okay. So you don't do nonmedical? 

 MR. DONEY: That's correct. 
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 MR. DOYLE: Secondly, the issue that you 

seemed to focus on strikes me as more one of potential 

conflicts-of-interest where consultants are receiving 

commissions or payments that may influence their 

ability to be objective in advising their clients. 

 MR. DONEY: I think that's an accurate 

statement. We have a number of examples of times where 

we know that we had a highly competitive quote, but in 

the end the client never -- or the potential client 

never even saw the quote as a result of the decision 

made by an agent to not show the quote. We further 

know that there are circumstances wherein it's the 

incentive of an agent/broker to build up a block of 

business with one particular insurance company because 

of the backend compensation that they receive in terms 

of bonuses and overrides. 

 And I guess I'm not saying that that's 

necessarily something that shouldn't exist out there. 

And I'm also not saying that the majority of brokers 

and agents that we work with across the country make 

those kinds of decisions. I do think, however, that 

the -- from a competitive level playing field in the 

TPA business, specifically, because it's as I indicated 

sort of typically an independent, smaller entity with 

margins that are generally far lower than larger 
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insurance companies. The TPA business is not in a 

position to be able to pay though the kinds of 

overrides and bonuses that generally can come from 

large insurance carriers. So there's not as level a 

competition that we think should exist out there based 

on the fact that very often an employer just simply 

doesn't know what goes into the compensation for a 

broker. And in some circumstances don't even know that 

the TPA business exists. And that's the point of my 

testimony. 

 MR. DOYLE: And, again, when we focused on 

408(b)(2), we focused on a couple of things, one, the 

ability of the fiduciary to determine the 

reasonableness of the compensation that they're paid 

for the services and to assess potential conflicts-ofinterest. So I'm trying to just kind of get a handle 

on what exactly we're talking about, if we're talking 

about only the circumstances where services are being 

rendered in, again, kind of the non-pension area, or 

services are being rendered and there's indirect 

compensation that the plan fiduciary would want to take 

into account in assessing the reasonableness of the 

overall cost. So obviously -- and conflicts-ofinterest would come up, I guess where there is a 

consultant. 
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 In terms of your practice, okay, because as 

you were going through kind of your direct 

compensation, you also indicated you potentially could 

receive indirect compensation as a result of a variety 

of services, claims paying, PBMs, what have you. So 

what do you do up front? Because these would seem to 

kind of have the same issues some of the brokers do. 

 MR. DONEY: Sure, understood. 

 MR. DOYLE: And speculating. 

 MR. DONEY: When we do a proposal for a 

potential client, we list very specifically all of the 

compensation that we have both on the fees that we 

charge on a per-employee, per month basis as well as 

stop-loss commissions or any PBM remuneration that we 

may be receiving. It's listed very specifically. In 

addition to that, in our administrative services 

agreement which is the contract between ourselves and 

the employer, we have a schedule that shows all of the 

compensation as well. So we fully disclose those kinds 

of situations. 

 MR. SINDER: Can I make one comment? 

 MR. DOYLE: Sure. 

 MR. SINDER: In the pension context, the 

service that's provided to the plan or to the plan 

participants is the management of their assets. And 
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there's no guarantee on how well that management will 

be. And so ultimately the only thing you can evaluate 

is kind of past performance and what you're paying them 

for the management service. 

 On the welfare side, the service that's 

provided to the plan and the participants is the actual 

insurance that's purchased, the product, at the end of 

the day. You know what that costs, and the idea, and 

this is one of the roles of the broker, is that the 

carrier is going to be able to make good on that 

promise, or the TPA is going to be able to manage the 

resources to make good on the promise. In that 

context, at least for the agent and broker, they're 

helping the plan select that provider. But ultimately 

you know exactly what it costs, you know exactly what 

you're getting. 

 On the pension side, you don't really know 

what you're getting and so you're left really to 

evaluate at some level the compensation that past 

performance piece. 

 MR. DOYLE: Right. 

 MR. SINDER: And I think it is a significant 

difference. So there is a lot of knowledge in our 

space about what is being paid and there may be some 

deficits. But they don't go to the core service that's 
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received by those plan beneficiaries. 

 MR. DOYLE: Yeah, I'm not sure I agree with 

that. Certainly with regard to certain products, you 

know, if I'm buying life insurance I guess I know how 

much I'm paying per thousand dollars for life insurance 

and I can easily compare that with other issuers. 

 If I'm paying a consultant or relying on a 

broker to advise me, and I'm assuming in most cases 

that that broker is looking out for my personal 

interests and therefore if giving their recommendation 

is giving me a recommendation based on their kind of 

analysis, I think it would help me to know if that 

broker is being compensated or how they are being 

compensated by the various providers, if at all, with 

respect to which they're taking into account in 

advising me. 

 MR. SINDER: I understand that and they do 

understand as a general matter. I think the question 

is the degree of specificity and how much we're going 

to pay for that. 

 MR. DOYLE: Right. Right. 

 Any other questions? 

 (No response.) 

 MR. DOYLE: Thank you very much, panel. 

 (Pause.) 
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 MR. DOYLE: All right. Good morning panel 

two. Again, we'll follow the order of the agenda and 

that would mean Mr. Kilberg will kick us off here. 

PHARMACEUTICAL CARE MANAGEMENT ASSOCIATION 

William J. Kilberg, Esq., Gibson, Dunn & Crutcher LLP

 MR. KILBERG: Good morning. Thank you very 

much. My name is William Kilberg. I'm a partner with 

the law firm of Gibson, Dunn & Crutcher. I am here 

this morning representing the Pharmacy Care Management 

Association. 

 I have a PowerPoint that I will leave with 

you after this presentation. My testimony will 

essentially be a summary of that larger document. 

 It is our position that mandatory disclosure 

rules should not be applied to Pharmacy Benefit 

Managers or PBMs for three reasons. First, the 

concerns underlying the disclosure obligations relating 

to pension plans are not applicable. 

 Second, PBMs already have a high degree of 

transparency. 

 And third, the Federal Trade Commission and 

the Department of Justice have concluded time and again 

that mandatory disclosure could have profound anticompetitive effects. 
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 The fundamental justification for the new 

rules applicable to service providers and pension 

benefit plans and the data relied upon by the 

Department in formulating those rules was to address a 

demonstrated need for greater transparency in the 

contracting for investment services to define 

contribution plans, specifically the providers of 

pooled investment vehicles. 

 In that context, amounts received or retained 

by service providers reduce dollar for dollar the funds 

that could provide retirement benefits to plan 

participants. Those concerns do not apply to PBMs or 

other service providers to welfare benefit plans. 

 The PBM market is highly competitive with 

more than 60 PBMs which is a 20 percent increase from 

2004 when the FTC identified some 40-odd companies in 

the industry, each competing for business from public 

and private health plans. According to a Price 

Waterhouse study, PBMs typically reduce the cost of 

prescription drugs by 30 percent. 

 The FTC has, on repeated occasions, stated 

that the PBM market is operating efficiently and that 

plans have the information necessary to judge the 

reasonableness of the fees PBMs charge and the quality 

of their services. 
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 Plan sponsors have a variety of tools 

available to them which they can employ when they 

negotiate with PBMs. They retain consultants 

knowledgeable about the economics of the PBM industry 

and how PBMs operate. Smaller companies, often are 

represented in negotiations by third-party 

administrators or insurance companies who act on behalf 

of a number of companies in order to enhance their 

bargaining power. 

 Given the vigorous competition between PBMs, 

plans or plan sponsors can negotiate the arrangements 

they prefer including pricing that best fits their 

individual needs. For example, some plan sponsors have 

negotiated contracts with PBMs for a pass through of 

all or some stated percentage of rebates that PBMs 

receive from drug manufacturers. Similarly, 

arrangements with a PBM that passes through the price 

that the network retail pharmacies charge are common. 

 Plans have negotiated audit rights with PBMs 

to ensure that PBMs are acting consistently with 

governing contractual arrangements. Many plan sponsors 

belong to third-party accreditation programs, like the 

URAC Pharmacy Benefit Management Standard and the 

Pharmacy Coalition of the HR Policy Association that 

have developed transparency standards that call for the 
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disclosure of rebate information, pricing structure, 

audit arrangements and formulary decisions. 

 As members of these organizations, plan 

sponsors have access to and can use those materials in 

negotiations with PBMs. 

 As I indicated, the Federal Trade Commission 

and the Department of Justice have extensively examined 

the PBM industry in recent years and have consistently 

shown that the PBM market is highly competitive. This 

examination of the industry has been thorough, it is 

concluded that market forces are operating to provide 

the transparency sufficient to allow consumers of PBM 

services like ERISA-covered health plans to make 

informed decisions regarding the selection of PBM 

providers. 

 After extensive study of the industry, a 

joint FTC/DOJ task force concluded in 2005 that 

competition in the marketplace would work to advance 

disclosure of information that health plan sponsors 

need to enter into appropriate contractual arrangements 

with PBMs. The FTC has repeatedly warned that 

disclosure of closely-held proprietary financial 

information could well produce anti-competitive results 

that would impede PBMs from lowering the costs of 

prescription drugs to consumers. 
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 In its analysis of the market, the FTC has 

consistently focused on its concerns that once 

proprietary information is disclosed it will be 

difficult, if not impossible to keep it confidential. 

Disclosure of rebates and particular drugs could, in 

the FTC's judgment, result in tacit collusion among 

drug manufacturers. 

 The FTC has objected to numerous State 

statutes that would more closely regulate PBMs. Most 

recently in 2009 a proposed New York State statute 

would have required PBMs to make substantial 

disclosures to health plans during contract 

negotiations and annually thereafter. The FTC opposed 

this legislation indicating first that these 

disclosures might increase the cost of the PBM services 

because they may preclude health plans and PBMs from 

entering in to cost-effective contracts for the 

provision of pharmacy benefits. 

 And, second, they may have the unintended 

consequence of publicizing proprietary business 

information in a way that could foster collusion among 

drug manufacturers. 

 The FTC indicated that allowing competition 

among PBMs is more likely to yield efficient levels of 

payment sharing, disclosure and prices than contract 
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terms regulated by government regulation. 

 And, finally, the FTC concluded that there is 

no theoretical or empirical reason to assume that 

consumers require sellers' underlying cost information 

for markets to achieve competitive outcomes. Similar 

studies by the Congress Budget Office, by Price 

Waterhouse Coopers have come to similar conclusions. 

 Most of the impetus for mandatory disclosure 

comes from the pharmacists and their allies. PBMs work 

to save money by negotiating aggressively all parts of 

the supply chain to push down costs. And PBMs have 

strong incentives to bargain hard with pharmacies, 

especially under variations of the commonly used spread 

model. 

 The pharmacies understandably would like to 

handicap this approach. They are much better off with 

the pass-through model because PBMs' incentives to 

bargain hard are reduced. And pharmacies compete with 

PBMs mail-order pharmacies and are trying to get 

competitive advantage by knowing the PBM's cost 

structure. 

 As the FTC has repeatedly pointed out, 

mandatory disclosure could well have anti-competitive 

effects. The PBM marketplace is highly competitive, 

direct contract negotiations between PBMs and plans 
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have resulted in disclosures more than sufficient to 

allow plans to make reasonable contract arrangements 

with regard to fees and quality of service. 

 Given the number of parties that would have 

access to any mandatory disclosure materials and the 

lack of any enforcement mechanism in ERISA, there is no 

practical way to keep information confidential once it 

is disclosed. This contrasts with PBM disclosures 

under the new healthcare law, PACA, which only require 

aggregated data. It includes strong statutory 

confidentiality protections. 

 In Medicare Part D, no disclosure is required 

to the plans themselves due to the confidentiality 

concerns. And in both instances the FTC testified 

before the Congress to this effect. 

 At bottom then, the Department should not 

mandate a disclosure regime that could result in anticompetitive consequences about which your sister 

agencies have warned repeatedly over the years. 

 Thank you very much. 

NATIONAL COMMUNITY PHARMACISTS ASSOCIATION 

Zachary French, Vice President

 MR. FRENCH: Good morning. My name is 

Zachary French and I'm here today appearing on behalf 
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of the National Community Pharmacists Association. NCP 

represents the interests of America's community 

pharmacists including the owners of more than 23,000 

independent pharmacies, pharmacy franchises and chains. 

Together they have more than 315,000 employees 

including 62,400 pharmacists and dispense over 41 

percent of all retail prescriptions. 

 NCPA feels very strongly that the proposed 

legislation should apply to contracts or arrangements 

involving the provision of administrative services to 

employee welfare benefit plans, specifically pharmacy 

benefit management service contracts. PBMs should be 

required to disclose critical information about their 

primary revenue sources as well as their potential 

conflicts-of-interest. This will give plan fiduciaries 

the necessary tools to assess the reasonableness of PBM 

compensation and any conflict of interest that may 

affect the service provider's performance. 

 In other words, plans really do need to know 

where all the money is buried so that they can make 

well-founded determinations of whether the compensation 

they are paying is in fact reasonable. 

 Over the past few years, due to in large part 

proliferation of acquisitions as well as mergers, the 

PBM marketplace has become extremely concentrated. The 
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big three PBMs commonly known at MEDCO, ExpressScripts, 

and CVS CareMark manage the drug benefits for 

approximately 95 percent of Americans with employerbased health coverage. 

 From 2003 to 2007 these three PBMs saw their 

profits actually triple from just over 900 million to 

$2.7 billion. In a truly competitive market, it is 

reasonable to assume that these types of dramatic 

increases would actually occur? In spite of these 

facts, the PBMs are minimally regulated both at the 

state and federal level in large part due to their 

extremely aggressive lobbying efforts and very 

effective lobbying efforts in the States that have 

actually managed to enact some of the PBM regulations. 

The PBMs have been very successful in claiming that 

such State regulation or legislation is not applicable 

to PBMs serving ERISA plans. 

 One of the PBMs' primary revenue or profit 

streams is derived from rebates provided by drug 

manufacturers to the PBMs for driving brand drug market 

share on drugs purchased on behalf of PBM clients. 

PBMs retain all or a very significant portion of these 

rebates even though they are generated by the welfare 

benefits plans' pharmacy spend. This is a clear 

conflict of interest on the part of the PBMs serving in 
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its role as a service provider to a welfare benefit 

plan. But there are other sources of direct, as well 

as indirect, enumeration that the PBMs earn and they 

have spent a lot of time renaming them so that they are 

either disguised or hidden from the actual plan 

sponsors. These include indirect enumeration such as 

educational sponsorships, data management payments, and 

other euphemistically named programs. 

 The DOL held a hearing on this very same 

issue in 2008. Testimony was provided at that time to 

the effect that there was no evidence of any problems 

in the PBM industry. Well, to the contrary. Between 

2004 and 2008, substantial enforcement actions 

instituted against each of the major PBMs indicating 

fraudulent and deceptive conduct have resulted in over 

$370 million in damages. These cases also shed light 

on some of the questionable and widespread practices in 

the PBM industry including the misuse of kickbacks or 

misuse of rebates, I should say, the existence of 

kickbacks, submission of false claims and even drug 

switching. 

 During the 2008 proceedings on this issue, 

the PBM industry relied heavily on the fact that in 

2003 the Congressional Budget Office estimated that a 

proposed amendment to Medicare -- I'm sorry, the 
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Medicare Modernization Act, that would have required 

some level of transparency by PBMs involved in Part D 

would cost taxpayers $40 billion over ten years. 

 In addition, it was suggested that PBM 

transparency would in some way enable tacit collusion 

among drug manufacturers. In contrast the recently 

enacted Healthcare Reform Legislation now actually 

mandates a certain degree of PBM transparency. And 

this is in the form of really aggregated required 

disclosures of all PBMs that serve any of the State 

insurance exchange health plans as well as in Medicare 

Part D. 

 This federal mandate was scored by CBO as 

cost-neutral. And due to the fact that the federal 

legislation provide for confidentiality between the PBM 

and the plan sponsor, there is virtually no risk that 

such data will become public information and in any way 

impair the negotiation of ability of the PBMs with drug 

manufacturers. Likewise, a similar confidentiality 

provision could be applied to the disclosure under 

debate today. 

 Now, it is true that some large employers, 

employers with the requisite amount of negotiating 

power have been able to demand certain measures of 

transparency from their PBMs. And the PBMs are likely 
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to argue that because of these contractual agreements 

the mandatory disclosures proposed by EBSA are 

absolutely unnecessary. However, the smaller ERISA 

plans do not have the negotiating power or even the 

knowledge base to demand the same disclosure. For this 

reason, it is critical that all of the regulations 

under discussion today should apply to all PBMs serving 

ERISA plans in order to establish at least a baseline 

or minimal level of required disclosure. 

 Now, there is a growing recognition of the 

value of transparency across healthcare, specifically 

PBM transparency. Federal law now dictates that PBMs 

that will serve any of the to-be-created State 

insurance exchanges and Part D plans disclose certain 

aggregated information to the Secretary of HHS and to 

the plan sponsors. Under MMA, the PBMs that serve Part 

D plans are already required to disclose to the 

Secretary the manufacturer rebates and price 

concessions for the purpose of determining whether the 

plans are passing through the direct and indirect price 

concessions they negotiate. 

 A few larger employers, again, with 

significant negotiating power, are now requiring 

various disclosures. However, as encouraging as these 

provisions are, these end roads are simply a starting 
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point and the PBMs serving ERISA plans have a long 

history of using their status as ERISA plans to evade 

regulation. 

 In conclusion, the totality of circumstances, 

the extremely concentrated PBM marketplace, the minimal 

amount of state and federal regulation, and also the 

lack of any verifiable harm to the PBMs by requiring 

transparencies should lead us to consider the potential 

benefits to plan fiduciaries clearly indicating that 

the proposed regulation should apply to service 

providers, to welfare benefit plans, and specifically 

to pharmacy benefit management contracts. Disclosures 

will allow fiduciaries to confirm that the PBM is 

providing the service it was hired to provide, that 

being to secure the lowest possible drug cost for the 

plan. 

 Without transparency the plan fiduciary has 

no way to verify that the PBM is in fact sharing 

manufacturer rebates and at what levels or that the PBM 

is negotiating the lowest possible cost for specific 

drugs. And I'll be happy to answer any questions 

during the question and answer period. Thank you. 

 

LAW OFFICES OF DAVID A BALTO 

David Balto, Esq., Washington, D.C. 
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 MR. BALTO: Good morning. I'm David Balto. 

I'm a senior fellow at the Center for American 

Progress. I appreciate the opportunity to testify 

before you today. I used to be the policy director of 

the Federal Trade Commission and had the privilege of 

being an antitrust enforcer for almost 20 years. I 

brought some of the first cases against PBMs. In my 

private practice I advise plans, consumers, pharmacies 

and even PBMs on competition and consumer protection 

issues. 

 In day one in antitrust school when I became 

an antitrust enforcer they taught us that the three 

things to make a market work effectively were 

transparency, choice and a lack of conflicts-ofinterest. Why is it? It should seem obvious. We need 

transparency so we can make effective choices, so we 

can understand how the market works. We need choices 

so that we can make competitors compete against each 

other so we get the best benefit for our bargain. And 

then last we need a lack of conflicts-of-interest to 

make sure that when someone is acting on our behalf 

that they truly are acting on our behalf. 

 I know from my experience both as a 

government enforcer and in private practice 

representing parties, that in all three of these 
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measures the PBM market fails. And the Department of 

Labor regulations that you're considering are 

absolutely necessary to effectively protect plan 

sponsors in this broken market. 

 Zach has gone and described to you the lack 

of competition. There's been tremendous mergers 

leading to significantly high concentration. By the 

way, later on in day one in antitrust school they 

taught us that rapidly increasing profits are the best 

sign of a market that is not performing effectively. 

And as Zach has demonstrated profits in this market are 

skyrocketing. And let me make this clear to you, those 

profits are undisclosed, indirect compensation. That 

is what they are making money on. They are -- PBMs are 

going and getting rebates and other kinds of funding 

from pharmaceutical manufacturers that is undisclosed 

and we -- PBMs do serve an important function, but to 

fully protect plans we need adequate disclosure here. 

 PBMs were originally intended to be honest 

brokers. Entities that would be independent and 

aggressively bargain for the lowest prices, the highest 

rebates, and to an extent they do that. But also to 

the extent that they're able to hide these forms of 

compensation, effectively play the spread, pretend that 

they're giving -- receiving one thing to the plan 
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sponsors, but actually pocketing something else. The 

market does not work as effectively as possible. The 

PBMs, the three major PBMs, just the three major PBMs, 

have profits of over $3 billion a year. Those profits 

-- a greater portion of those profits should be in the 

pockets of the plans. 

 Now, how do we know the market is not working 

effectively? No other market has the record of 

significant consumer protection violations based on 

deception and fraud. If you look at page 4 of my 

testimony, I've listed the cases, over $370 million in 

damages and fines. There is a multi-state group of 30 

state attorneys general who are investigating the PBMs, 

they continue their investigations. This is what 

they've received to date. What's at issue in these 

cases? Undisclosed, indirect compensation, gaming the 

system, playing the spreads. It's a lack of disclosure 

that enables them to do that. 

 What's the solution that these states have 

turned to? Look at the consent order that 30 states 

have implemented against Caremark. It requires 

disclosure. It requires the disclosure of these kinds 

of rebates. 

 Now, the record increasingly demonstrates 

that for some very powerful plans, especially large 
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buyers such as Tricare, the Department of Defense, 

large state entities like the state of Texas or the 

state of New Jersey, they recognize the benefits of 

transparency. And the speaker for PCMA was correct 

that there are large sophisticated buyers who are 

securing transparency. If you look on page 6 of my 

testimony you will see the benefits of that 

transparency; hundreds of millions of dollars of 

benefits. 

 But the fact that they're able to secure 

these savings doesn't say anything about the vast 

majority of plan sponsors who simply do not have the 

market clout to go and negotiate for the same level of 

transparency. 

 Now, one important distinction I want to make 

between this panel and the panel you just heard from is 

State regulation. All those people on the first panel 

could point to the fact that there is State regulation 

of brokers. But there is really very, very little 

State regulation, if any, of PBMs. There are a couple 

States who have adopted PBM transparency provisions, 

and there are about five or six other States that have 

PBM registration requirements, but PBMs are really a 

segment of the market that goes wholly unregulated. 

 Obviously the PBM industry makes much of 
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things that my former agency has said about PBM 

transparency. And I'd like to really address those 

issues in detail. I would like to go and apologize for 

the past on behalf of my former agency. I used to 

write these comments, these comments oftentimes can be 

valuable when they're based on strong empirical 

evidence. They are not valuable when they are just 

basically on a theoretical model. 

 And what you have basically are comments that 

preceded the enforcement actions by the States based on 

a theoretical model and the enforcement actions, I 

think, really undermine the comments the FTC has 

presented. 

 First, Mr. Kilberg sort of tries to sell you 

a pig in a poke. He says there was this massive 

FTC/DOJ investigation in which 100 Sherlock Holmes went 

out and thoroughly scoured the PBM industry and 

concluded it was competitive. Folks, it was a half-day 

hearing, you know, there were five people who 

testified. I was one of them. There was no extensive 

investigation. In fact, during this period of 

tremendous consolidation of PBMs, the FTC never once 

conducted an extensive investigation of any PBM merger. 

And today we know the FTC has sort of recognized that 

they were sold a pig in a poke. They're reopened an 
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investigation of the CVS Caremark merger recognizing 

the significant conflict of interest and competition 

issues raised by that merger. I guess that's sort of 

buyers' remorse. 

 Second, Mr. Kilberg tries to sell you a 

parade of horribles issued by the FTC. The FTC says in 

these reports that conceivably, theoretically, economic 

theory might teach you. They cite one article that 

says that if the buyers were extraordinarily stupid and 

shared information with competing plans -- I'm sorry, 

competing manufacturers, that it might lead to tacit 

collusion. Well, that's a fun economic article, and if 

you've got about five or six hours for me to debate the 

economic argument, you know, that might be extremely 

boring. But we don't need to. 

 Do we think that Congress, the Department of 

Defense, 30 state attorneys general, two or three 

States are all so stupid that they’ve ignored the 

potential for tacit collusion? Do we think that any of 

the dozens of major plans that have secured 

transparency are just too stupid to recognize this 

concern over tacit collusion? No. The FTC model is 

based on, you know, just this interesting theory. But 

we know transparency has existed for year. And you can 

look at the FTC record and there hasn't been a single 
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case brought against anybody for so-called tacit 

collusion from any of the PBM transparency 

arrangements. 

 Thirty States weren't wrong. Congress isn't 

wrong, the Department of Defense isn't wrong, 

transparency is good. For the Department of Labor to 

propose regulations extending the disclosure 

regulations to PBMs is absolutely the right thing to do 

and will give the plans greater tools so it can 

effectively get the benefit of the bargain that it 

should and it more effectively reduced the costs -- 

increasingly escalating costs of pharmaceuticals. 

 Thank you very much. 

 MR. CANARY: I guess I will start again. I 

just have two questions. I think one issue is the 

extent to which there is State or federal regulation of 

PBM activity in making disclosures to customers. And I 

know there's some sense that that may be minimal. But 

could you identify what it is? Which federal law or 

regulation currently, if any, would govern PBM 

disclosure practices? 

 MR. BALTO: I think that Mr. Kilberg is 

correct that both under PACA and the Medicare 

Modernization Act, there is some kind of general 

disclosure that's necessary. And I think under one or 
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two State's laws there is primarily the State of Maine, 

there is a disclosure requirement. 

 MR. KILBERG: Every state -- even though Mr. 

Balto talks about 30 states because 30 attorneys 

general were involved in two cases, every State other 

than Maine has rejected the kind of disclosure that we 

are talking about here. And in the attorneys general 

settlements, which by the way did not produce damages. 

These were settlements, many of the payments are Sye 

Pray (ph) payments. So put things in a little bit 

better perspective. But in the Caremark settlement, 

for example, that Mr. Balto referenced, which requires 

only the disclosure of certain aggregated data with 

regard to certain types of transactions, there's a very 

strong confidentiality provision that I can read to 

you. It says: 

 "Prior to any disclosure of confidential 

information required pursuant to this document, 

confidentiality agreement must be signed by client 

payors, employees, and each and every agent, 

consultant, attorney, auditor, or any party acting on 

behalf of the client payor who will have access or 

receive Caremark's confidential information, no 

information disclosed shall be made available to any 

other party in the absence of a signed and executed 
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confidentiality agreement between such party and 

Caremark." 

 So even in that context there has been 

serious concern about confidentiality and these kinds 

of disclosures. 

 Just a point with regard to the 

FTC/Department of Justice investigation. It was a twoyear project. The findings of the study were 

researched -- I'm sorry, were reached after 27 days of 

joint hearings. There was testimony from 250 

panelists. There was a transcript of about 6,000 

pages. We can make all of that available to you. It 

was not something that was reached, you know, quickly 

or lightly. This was not theory. This was an 

investigation of an industry, its competitiveness and 

specifically the conflict-of-interest issues. 

 You know, Mr. Balto has testified numerous 

times before the Federal Trade Commission. He does 

have an expertise in that area. He is a former 

employee of the Federal Trade Commission and each time 

they have rejected his views. There's a reason for it. 

The data goes the other way. 

 MR. BALTO: Just to keep the record straight, 

I've testified once. There was a half day of hearings, 

there were six witnesses. It's a short like two or 
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three paragraphs in the report. That was the only -- 

that was the only review of it in that report. 

 MR. FRENCH: I would just add, I didn't give 

you my background as a preamble to my testimony. But I 

served for nearly four years as a senior vice president 

with a large PBM that had nearly 10 million lives in 

its book of business. So, when I talk to you, I'm not 

talking to you about something that's theoretical, 

something that happened in a hearing, but I'm talking 

to you from an actual practical application of it. 

 I will tell you flatly, as senior vice 

president of client services, clinical services, as 

well as sales, when we went out and either renewed a 

client or secured a client, we weren't necessarily 

worried about the confidentiality that's sharing 

information that related to transparency would entail, 

what we were concerned about was lowering the value of 

that deal with an informed buyer. 

 So, I mean to everyone's protestation here 

from a PBM standpoint, that is not a significant issue 

when going out and trying to win business. The reality 

of it -- or retain business -- the reality of it is 

that there are always bilateral confidentiality 

agreements between the PBM and the plan sponsors. This 

is sort of business as usual. So I mean, again, there 
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is virtually no risk in terms of sharing the 

transparency that relates to individual plans pharmacy 

spend on a day-in and day-out basis. It's just there's 

virtually no risk. 

 MR. BALTO: I represent health plans that 

negotiate with PBMs and Mr. French has it exactly right 

that these confidentiality provisions are quite 

typical. 

 MR. CANARY: So a different subject I'd like 

to see if you can elaborate on which I take there is 

probably going to be some disagreement. 

 (Laughter.) 

 MR. KILBERG: Conceivable. 

 MR. CANARY: At least, Mr. Kilberg, the 

outline of topics focused on what should be considered 

compensation for purposes of 408(b)(2) and two things 

you suggested be excluded, discounts and rebates 

received by PBMs or an affiliate with respect to 

acquisition of or contracting for goods and services 

for sale to PBM clients, and then income earned by the 

PBM or an affiliate on investment of its own assets. 

 Could you elaborate on why you think that 

should be excluded? 

 MR. KILBERG: Sure. 

 MR. CANARY: And I think I heard from Mr. 
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Balto, at least, some emphatic sense that that should 

not be excluded. 

 MR. KILBERG: You have the recent Labor 

Department FAQS, frequently asked questions and 

answers, and a line was drawn there, at least 

temporarily until you had an opportunity to investigate 

further with regard to forms of direct compensation and 

indirect compensation. We have no concerns about 

disclosure of fees for direct -- in the form of direct 

compensation. Our concerns go to what we call "spread" 

or cost of goods sold. PBMs earn money in two ways. 

They earn money through fees which are always disclosed 

and they earn money through spread. That is to say the 

difference between the price they pay for drugs, and 

the price at which they sell them. Either because they 

have a negotiated agreement with pharmacy chains for 

the purchase of drugs at a certain price, specific 

drugs and specific prices, or they have arrangements 

with manufacturers, either of generic drugs or brand 

name drugs to purchase the drugs and provide them 

through their own mail -- PBM's own mail order 

pharmacies. They also have arrangements with 

manufacturers that depend upon volume sold and so on. 

All of that goes to the cost of goods sold. We'll sell 

you the drugs for less if more drugs in fact are 
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marketed. That's the -- it is that concern, it is the 

disclosure of the cost of goods sold which animates our 

testimony. 

 MR. FRENCH: I can tell you from personal 

experience that PBMs can create a spread on virtually 

anything. Just as an example, right now there is a 

particular emphasis on generic dispensing rates because 

for every dollar a plan usually invests in GDR, or 

generics, I should say, they get back two. So it's a 

two to one sort of a return. IMS has validated that. 

 PBMs have historically created a spread on 

generic dispensing rates. They do that by guaranteeing 

say 63 percent GDR and if they achieve say 67 percent, 

many of them will pocket that 4 percent spread or 

delta. So if you exclude spread pricing from 

transparency disclosures, they will come up with a way 

to essentially create a spread across any number of 

components that are part of a plan's pharmacy spend 

which I think any definition of transparency would say 

that the plan should receive full benefit of their 

pharmacy benefit spend. 

 All of these revenue streams that the PBMs 

insist are theirs and should be hidden from the plan 

sponsors are generated in large part or exclusively 

from the spend. That is how they make their money. 
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 Administrative fees as well as clinical 

programs are really the only two items that they can 

look you in the eye and tell you that they actually 

generate in a straightforward manner. I know that from 

experience. 

 MR. CANARY: Mr. Balto. 

 MR. BALTO: I think Mr. French has it 

absolutely correct. Look at it from a competition 

perspective. You know, it's one thing for the FTC or 

PCMA to say things about how competitive the market is. 

The market isn't competitive if things aren't 

disclosed. You've got to have disclosure otherwise, 

you know, competition won't work. Disclosing the 

spread is important for two reasons. First, it makes 

it an item of competition. It's something that people 

can recognize and then they can make sure that they're 

getting the full benefit of that. And then second, 

more as important, they can recognize conflicts-ofinterest. So if, you know, the spread doesn't seem to 

be as high for certain drugs as other drugs, maybe 

there's something else going on that they're not aware 

of, there's some kind of kickback or rebate scheme that 

they, you know, that really sets the incentives of the 

PBM to, for example, prefer branded manufactured drugs, 

more expensive drugs, over generic drugs. 
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 MR. CANARY: Thank you. 

 ASSISTANT SECRETARY BORZI: I've got several 

disparate, I guess, questions. The first question, I 

guess, is for Mr. Kilberg, and that is, you've talked 

about the highly competitive marketplace and yet we 

heard Mr. Balto say, and certainly that's -- as a 

consumer that seems to me my anecdotal reading that 

really there are three big PBMs and the rest that 

control, according to Mr. Balto's testimony, 95 percent 

of the employer-sponsored marketplace. Do you disagree 

with that? 

 MR. KILBERG: The 95 percent number is a new 

one to me. I'm not sure what exactly he's referring 

to. There are three large PBMs that together have a 

sizeable portion of the market. And their behavior has 

been reviewed by the FTC, there have been some mergers 

that have been reviewed and so far have past muster. 

The findings of the FTC remain that there is healthly 

competition because you have -- (a) you have so many 

other companies in the industry, the barriers to entry 

have not been that high. Secondly, you have 

competition among these three and a few other fairly 

large PBMs for the -- you know, the largest segments of 

the market. 

 ASSISTANT SECRETARY BORZI: Could you provide 
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us, for the record, a list of all the PBMs that are out 

there and what their market share is? 

 MR. KILBERG: Sure. 

 ASSISTANT SECRETARY BORZI: That would be 

useful, I think. 

 MR. KILBERG: To the extent that I know and 

can find out what the market share is. 

 ASSISTANT SECRETARY BORZI: Yeah. 

 MR. KILBERG: But I will certainly provide 

you with what -- 

 ASSISTANT SECRETARY BORZI: Well, don't you 

represent the trade association? 

 MR. KILBERG: I represent the trade 

association. I don't know what the trade association 

has in the way of that data. But, I'll provide you 

with -- 

 ASSISTANT SECRETARY BORZI: Okay. 

 MR. KILBERG: -- as much information as I can 

obtain. 

 ASSISTANT SECRETARY BORZI: Thank you. 

 The second question is, you talked in your 

testimony, and Mr. Balto actually has in his testimony 

some examples of the kinds of transparencies, the kinds 

of disclosure that at least some of the large 

purchasers, large employers have been able to 
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negotiate, and yet you're overall testimony is that, if 

people are required to disclose this, harm will occur. 

So can you give us some examples of some harm that has 

occurred as a result of these negotiations, these 

transparencies? 

 MR. KILBERG: There hasn't been because, in 

those arrangements that are negotiated, there are 

confidentiality provisions. Generally, the disclosures 

are kept in terms of aggregated data, not individual 

pricing for individual drugs. And you have -- you have 

the opportunity on the part of the purchasers, 

generally employers, to make decisions as to tradeoffs. 

How much of the rebates they want, because there's an 

incentive when you -- you know, when you transform 

everything into simply a fee for service and you take 

all of the rebates, all of the discounts, that you lose 

the incentive that the PBM has to continually drive 

those prices down, because that's how the PBM makes 

money. 

 ASSISTANT SECRETARY BORZI: Uh-huh. Nobody 

is against anybody making money. 

 MR. KILBERG: Certainly not. So, you know, 

many of these are expressed in terms of percentages of 

rebates to be shared and very detailed auditing 

provisions. 
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 ASSISTANT SECRETARY BORZI: Yeah, tell me 

about the auditing provisions. Because how can an 

employer -- I mean, for instance, it's a very common 

provision in contracts between employee benefit plans 

and PBMs that you will deal with the average wholesale 

price. So how do you figure out the average wholesale 

price? How does the client -- how does the plan 

sponsor know that what you tell them the rebate should 

be or the price is, how do they know that that's right? 

 MR. KILBERG: Because they come in and they 

look at your books. They have auditors who come in and 

see exactly what was done. There also are standards -- 

there are organizations that provide the information 

with regard to pricing, maximum allowable cost, average 

wholesale prices, and so on. And so the data is 

available. The consultants know what the data is, the 

large employers certainly do. The TPAs tend to. The 

insurance companies do. I mean you have -- now you 

have these private organizations like URAC and the HR 

Policy Association that are providing similar services 

making much of this information more available to 

smaller employers. 

 ASSISTANT SECRETARY BORZI: So would you say 

that most of the employee benefit plans audit? 

 MR. KILBERG: I don't know the answer to 
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that. I assume that the large ones do. I don't know -

- and I'm sure that the insurance companies do. I 

don't know -- when you say "most" I don't have an 

answer to that. I can try to find out if we have that 

information with regard to percentages and, you know, 

what those audits may consist of. 

 ASSISTANT SECRETARY BORZI: So, I guess you 

wouldn't have a problem if we were to decide that for a 

fiduciary to discharge its duty to determine whether 

reasonable compensation has been paid that they would 

have to audit PBMs? 

 MR. KILBERG: That's really for them to 

decide. Do they want to take on that cost versus, you 

know, the other savings that they may get in 

negotiations with PBMs or the other money that they may 

have. Right now the marketplace -- in our view the 

marketplace works. And, you know, we don't believe 

that you need the government to come in and tell people 

when to audit and when not to audit. We believe that 

there's a value in allowing the parties to negotiate 

their own arrangements and their own tradeoffs. 

 ASSISTANT SECRETARY BORZI: And the comments 

that have been made by Mr. French and Mr. Balto about 

the concerns that they raised, I must say that I had 

concerns myself about your comment about taking off the 
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table any kind of disclosure about indirect 

compensation. Assuming, for the sake of argument, we 

were to take your advice and not require disclosure of 

indirect compensation, how might a plan sponsor 

determine whether conflicts-of-interest were going on 

with respect to the PBM operations? 

 MR. KILBERG: Well, you know, plan sponsors 

are aware of how PBMs operate, the fact that they have 

their own -- you know, if you're buying drugs from PBMs 

through a mail-order pharmacy, you know that the PBM 

has a pharmacy. So I don't believe that's a problem. 

You're not hearing a clamor from plan sponsors, large, 

small, trade associations for this kind of mandatory 

disclosure. You're hearing it from competitors. 

You're hearing it from the pharmacists because the PBMs 

and the pharmacists are in competition with one 

another. And the PBMs are often in a role where they 

audit the pharmacies as part of, you know, one of the 

services they provide. It creates a certain amount of 

tension which I think we've seen, you know, this 

morning. 

 ASSISTANT SECRETARY BORZI: Mr. French, how 

would you respond to that? 

 MR. FRENCH: Well, I don't think it's so much 

about tension as it is about practices. First of all 
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there are very few PBM audits that are actually 

conducted at the behest of plan sponsors on a year-in 

and year-out basis. What's more, because of the 

varying degrees of sophistication, in terms of 

contracting for services in the PBM marketplace, there 

is a very large, let's say, disparity between the 

sophisticated buyer and the average to maybe lowinformation buyer. Down toward that other end of the 

spectrum audits hardly ever come up and they hardly 

every occur, not only because of the lack of knowledge, 

but also because it costs money to do audits. 

 ASSISTANT SECRETARY BORZI: Sure. 

 MR. FRENCH: The PBMs don't make it easy to 

do that sort of business with them. So in fact they 

have restrictions and limitations that are negotiated 

as part of the contracts. And I sat in those 

negotiations to make sure that there were definite 

restrictions put on the health plans relative to their 

ability to audit and receive full transparency. So a 

lot of times what you see is audits being conducted 

based upon, you know, the performance of the PBMs such 

as dispensing accuracy or the pharmacy's dispensing 

accuracy rates, things of that nature. But seldom does 

it go to the heart of transparency because that's the 

crown jewels with the PBM. 
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 So I would say in this regulation you have an 

opportunity to level the playing field for both -- I 

mean, we've heard a lot about HRPA today. If you go 

and look at the 60 companies that are part, or 

subscribe to that association, they're the crème-de-lecrème of corporate America in the United States with 

very, very large employee bases. And they do not 

require that PBMs write transparent deals on each sort 

of percentage of their book of business. All they 

require to receive their certification is that they 

agree, in some cases, to offer transparency. But still 

if you look at the number of what's called traditional 

deals, where the PBMs exploit in a non-transparent way 

spreads, various sources of revenues that are derived 

and leveraged from the plan pharmacy spends those 

traditional deals are still the overwhelming majority 

of the contracts that are written today. Transparency 

in pass-through deals represent a very, very small 

percentage of that. And I believe that goes to the 

sophistication of the sales organization and the 

complexity of the actual contracting process. 

 ASSISTANT SECRETARY BORZI: Mr. Balto, what -

- and then I'll stop because I know my colleagues have 

questions, but for the clients that you've represented, 

what would you say the key elements of transparency you 
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try to negotiate in those contracts are with the PBMs? 

 MR. BALTO: I think what's most vital is 

knowing the relationship between the PBMs and the 

different drug manufacturers, knowing what kinds of 

compensation they receive, knowing the basis for that 

compensation. You know, this is -- you know, each plan 

-- the plans are very -- sophisticated plans are very 

aware of their drug spend, less sophisticated, less 

aware, but, you know, this kind of information is 

information you can readily turn to another PBM on and 

make sure that you're getting the best benefit of the 

bargain. 

 ASSISTANT SECRETARY BORZI: So it would be 

not just the types of compensation but who -- back to 

Tim's question from the last panel -- who you're 

getting the compensation from? 

 MR. BALTO: Yeah, I think who -- yes. Both. 

 ASSISTANT SECRETARY BORZI: Okay. Thanks. 

 MR. HAUSER: I guess this is for you, Mr. 

Kilberg. As I understand the testimony or your 

testimony that the chief reason why we should be 

reluctant to mandate disclosures here is a concern 

unique, maybe to this industry at least in the health 

context about collusion among the pharmaceutical 

companies that if we mandate this kind of disclosure it 
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might end up being anti-competitive because if they 

have access to the internal cost data they'll have a 

better sense of where they can price and how they can 

price and it will make it harder for the PBMs to 

negotiate. And so I guess one question is, well, do we 

have any reason to believe, or what is our evidence for 

believing the pharmaceutical companies don't already 

have a really good idea of what these arrangements are? 

 MR. KILBERG: Because they're not disclosed. 

I can only refer you and suggest that the Department 

might want to talk with the Federal Trade Commission. 

They are concerned about what they refer to as "tacit 

collusion" that's one of the concerns. The other 

concern is interrupting what they see as a competitive 

marketplace now and arrangements and the negotiation of 

arrangements which they think is better, more creative, 

than would otherwise take place under regulation. 

 Let me just say one last thing here. You 

know, there's a lot of talk about rebate spread. These 

are not dirty words. These go to what any supplier of 

goods or services protects, the cost of providing those 

services, the cost of the goods that you're selling. 

That's essential competitive information which every, 

you know, seller of goods or services tries to keep 

proprietary. And that's we're dealing with here. It 
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is not a matter of disclosing the types of compensation 

or from whom rebates are received. That information is 

in the ordinary course disclosed in every contractual 

relationship that I'm aware of in the PBM industry, 

every contract I've seen has disclosed the nature of 

compensation. What they don't disclose is the amounts 

and what the spread is, what the rebates actually are. 

 MR. HAUSER: So going back, I guess, to my 

question though, putting aside -- and if I have other 

questions you can generally -- I assume that one of 

your answers will be because the FTC said so in 

response to all of them. 

 MR. KILBERG: Yep. 

 MR. HAUSER: So putting that aside, do we 

have any reason apart for the fact that there are 

confidentiality provisions in the agreements with the 

customer to assume that the pharmaceutical companies 

don't already know what the rebate structure is and 

what the pricing structure is and the like that the 

PBMs are getting? Or is it entirely based on the fact 

that there are confidentiality provisions in these 

agreements? 

 MR. KILBERG: Because there are 

confidentiality provisions, because it would -- you 

know, each manufacturer would like to know what every 
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other manufacturer is doing in competitive drugs, you 

know, competing in the same illness segment. I'm not 

sure what the terminology is. So I assume that they're 

not anxious to -- they'd each like to have the 

information for themselves, but they're not anxious to 

share it with the others. 

 MR. HAUSER: And when the PBMs are 

negotiating with the pharmaceutical companies, do they 

get similar sorts of confidentiality -- 

 MR. KILBERG: Yes. 

 MR. HAUSER: -- deals from the pharmaceutical 

companies, don't tell our competitor what the deal is? 

 MR. KILBERG: Yes. 

 MR. HAUSER: And so if we were to mandate 

disclosure of some sort but to -- say just 

hypothetically we provided that, the disclosure could 

be contingent on some sort of -- on the PBM's right to 

insist on some sort of confidentiality agreement that 

would prevent the disclosure to pharmaceutical 

competitors or to anybody outside of, you know, say the 

Department of Labor and -- well, that might be it -- 

would that do the trick? Or is there -- 

 MR. KILBERG: You know, it's hard for me to 

answer without knowing precisely what we're talking 

about. I mean, in the -- you know, with regard to the 
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Part D, for example, the information is disclosed to 

CMS, but it is not disclosed to the plans. And that's 

-- you know, that's with regard to a very limited 

market and where you can get some protections. 

 You know, I'd worry about disclosing to the 

Department with Freedom of Information Act requests out 

there. I mean, how would we protect against that? 

 ASSISTANT SECRETARY BORZI: Isn't that the 

same problem with CMS? 

 MR. KILBERG: Could be. But they have 

statutory protection. So I'm assuming that because of 

that statutory protection it has not been at issue. 

But I don't know how we would do this under ERISA. So 

it's hard for me to answer. 

 MR. HAUSER: To the extent that the plan 

customer's costs are being -- or their charges are 

being calculated with reference to the PBM's cost 

structure, you know, based on rebate amounts or the 

cost to the PBM of the particular prescription and the 

like, I mean, presumably in that circumstance -- tell 

me if I'm wrong, but there wouldn't be an issue with 

mandating that there be disclosure of the actual prices 

on which those numbers are based? I mean, if you can 

back it out anyway I assume. 

 MR. KILBERG: I'm not sure I understand. 
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 MR. HAUSER: Well, if the nature of the -- if 

the deal involves pass throughs of savings in one way 

or another, shouldn't there be ready disclosure of the 

calculation -- how those savings numbers were derived? 

 MR. KILBERG: Yes. And in individual 

arrangements where there are pass throughs, there is 

that disclosure. But the data is aggregated and you 

will know with regard to a plan, but you won't 

necessarily know how much came from which drug. 

 MR. HAUSER: And when you say that the plans 

can do these audits, how does the audit work if they 

can't look at kind of a drug company by drug company 

kind of prescription by prescription basis, or am I 

misunderstanding? 

 MR. KILBERG: You know, I'm not sure how the 

audit is done. It may very well be that there's a 

confidentiality agreement with the auditor and so the 

information is not passed through in detail. I don't 

know -- I don't have enough knowledge of how audits are 

done to be able to answer your question. But there are 

protections that are built into this in order to assure 

that that information is held as closely as possible. 

 MR. LEBOWITZ: Can you find out? 

 MR. KILBERG: I certainly can. I can ask. 

 MR. LEBOWITZ: And let us know. 
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 MR. HAUSER: And do you think that it should 

make a difference whether or not the PBM is taking on 

the discretionary fiduciary role or not and the level 

of disclosure that would be mandated. 

 MR. KILBERG: Well, you know, a number of 

States have looked into the question as to whether PBM 

should be fiduciary, not necessarily ERISA fiduciaries, 

but use the fiduciary term, the District of Columbia, 

that lawsuit -- that bill was challenged and was held 

to be preempted. The Maine statute was held not to be 

preempted, so you got this conflict. But that's how 

they went about it, by creating a fiduciary notion they 

created an obligation to disclose which we believe is 

antithetical. 

 MR. HAUSER: And two more questions; one for 

you and one for the others. But I was sure whether you 

finished answering a question Phyllis had asked you, so 

I just wanted to make sure you did, if there was 

anything more you had to say. And I can't recall the 

question, but it was essentially -- it was essentially 

on the one hand these guys are telling us that if we 

want to worry about market, power, and collusion and 

the like, we really should be more focused on worrying 

about the PBM industry than the collusion and market 

power of the pharmaceutical companies. And you started 
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to answer and said, in addition to the fact that you 

read the FTC as not being with the premise of that 

question that you thought there were barriers to -- 

that there weren't significant barriers to entry in 

this marketplace and you maybe had a couple other 

observations why you didn't think market power was a 

big issue here. 

 MR. KILBERG: I made that comment strictly on 

the fact that the number of companies in the PBM 

industry has increased over the years. Even though 

there's been consolidation among some of the big ones, 

there have been a number of smaller companies that have 

entered and are competing, I assume, in other ways. 

Competing with regard to services that they provide, 

providing more administrative services, some may be 

providing more -- you know, more disclosure, for that 

matter, if that's what individuals want. But they 

would be, you know, they would be dealing with segments 

of the market. 

 MR. HAUSER: And then for you, Mr. Balto and 

Mr. French, why isn't -- why isn't the PBM industry 

right in being concerned about a broad disclosure 

regime if we mandate, you know, broad disclosure to all 

of the plans that use PBMs and presumably that's a 

pretty large number of plans, isn't it inevitable that 
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the information is going to get out one way or another 

and be used by the pharmaceutical companies in a kind 

of counter competitive way? 

 MR. BALTO: You know, let me step back and 

say, so the FTC when they talk about this issue they 

cite one economic article. They don't cite any other 

cases where this kind of disclosure, they don't say in 

the cucumber industry this led to this and we brought 

this enforcement action. 

 Second, think about pharmaceuticals for a 

minute. You know, we've got many single brand 

categories, so there's nobody to collude with. I mean, 

you were talking about a situation with the -- and then 

there are other markets, you know, where there are 

dozens and dozens of generic drugs in which it is 

probably highly unlikely that there would be collusion. 

But basically this is all a theoretical argument. You 

know and we have very little evidence here that there 

is a potential -- that there is a potential for 

collusion here. 

 MR. HAUSER: You can continue, but then apart 

from the FTC which you, I guess, view as not having 

done an empirical analysis here. I mean, can you point 

us to anything empirical going the other way? 

 MR. BALTO: That this kind of disclosure does 
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not lead to collusion? 

 MR. HAUSER: Uh-huh. Or in this context? 

 MR. BALTO: No, I can't. I will think about 

that. But the reason -- you know, it's a fun 

theoretical argument, but to believe it you would have 

to -- you know, I mean, everybody is moving towards 

transparency or everybody with power, it seems, want to 

move toward transparency. But your obligation is to 

protect all of the plans, not just those who are 

powerful enough to seek out this greater transparency. 

And there are obviously tools, as Mr. French has 

testified to, in which PBMs and plans can go and 

protection the confidentiality of that information. 

 MR. HAUSER: Do you have anything to add, Mr. 

French? 

 MR. FRENCH: Yeah, I would sort of second 

what David says. I believe that just sort of standard 

bilateral on nondisclosure agreements would be useful. 

But it's kind of strange that a health plan would be 

required to sign a -- sign an actual nondisclosure 

based on them being given information that relates to 

their health spend. So I don't know if the actual 

information that we're talking about is really a basis 

for collusion among the actual manufacturers. I think 

that's something worth looking at. 
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 So at the end of the day we're talking about 

sharing with them revenue streams that the PBM has 

created for itself by sort of slicing and dicing the 

spend of health plans in retaining that money for their 

own usage. I don't think we're talking about anything 

elaborate that goes to the actual nature of spreads or 

trying to invalidate spreads, the point is, if you're -

- if you're using spreads are they reasonable in 

conjunction with that particular plans' health spend? 

I mean, should 50 or 30 or 40 percent of the health 

plan spend go to a retail spread. I don't know. Is 

that reasonable? Those are the types of questions you 

should ask in the specific. 

 MR. LEBOWITZ: I would just follow up for a 

second. Your organization is made up of pharmacies. 

Pharmacies sell a lot of things, not just 

prescriptions. So, I mean, this is part of this 

argument that I get lost in a little bit. If one of 

your customers, one of your member's customers said, 

you know, I'd like to buy that hairdryer, but I won't 

buy it unless you tell me how much you paid for it and 

any kind of deals that you had with the manufacturer or 

the distributor of that hairdryer. I mean, why is this 

argument any different from that? Your member would 

certainly not comply with that request, more than 
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likely. 

 MR. FRENCH: Well, you know, clearly in that 

consumer situation you're making that decision for 

yourself, unto yourself, and whatever the price is, is 

the price. In the pharmaceutical or the pharmacy 

benefit arena, you're being asked to pay a premium into 

a specific plan and you're expecting someone as a 

fiduciary to go out and make decisions that are 

reasonable. I mean, you don't want them going out and 

spending money that otherwise it's not a wise 

investment or allowing companies to be predatory and 

take advantage of the lack of transparency in order to 

otherwise take money from you that you don't get a 

benefit from. 

 So, I mean, you make a cost benefit analysis 

in that sort of analogy that you just gave and it's 

very simple. The PPM marketplace is much more complex 

and it's using other folks' money to result in profits 

for you that is not otherwise disclosed. 

 MR. BALTO: You know, Mr. Lebowitz, it's a 

different -- there you're purchasing something else. 

When the health plans I represent go and purchase 

something from a PBM they're not buying the drugs, 

they're buying the management of money. They're buying 

the, you know, get the drugs at the lowest cost. And 
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you want to know -- the plans want to know, what are 

all the sources of revenue that are there so I can get 

the drugs at the lowest cost? 

 MR. KILBERG: But is that same concern there 

-- 

 (Simultaneous conversation.) 

 MR. LEBOWITZ: Mr. Kilberg, is that what 

you're doing here, you're managing money? 

 MR. KILBERG: I don't believe so. Not 

managing money. We are -- it's hard to say if we're 

selling drugs and services and at a price and prices 

can be compared from PBM to PBM and that's why there 

are, you know, certainly for large employers and for 

insurance companies that aggregate groups of employers 

as do TPAs. There are requests for proposal. And 

these things are hotly competed for. 

 MR. HAUSER: In circumstances where the PBM 

is charging a set price for drugs on a formulary or 

whatever that they set up and an established set of 

fees that are contingent or calculated with reference 

to their cost structure, why shouldn't the disclosure 

answer be different in that context than in the context 

where there's some passive sort of arrangement built 

in. 

 I mean, I guess I'm getting back to Alan's 
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question about why in that circumstance does the 

consumer -- the plan consumer need to know anything 

about what the PBM's cost structure is? 

 MR. BALTO: You mean in a situation where 

there's total pass through of rebates? 

 MR. HAUSER: No, where there's not. If the 

PBM is just saying, here's what we're charging for our 

services, and it's not calculated with reference to 

rebates, costs, anything else, or maybe that 

arrangement just doesn't exist in the real world. 

 MR. BALTO: You mean it's just administrative 

fee only arrangement? 

 MR. HAUSER: And yeah, maybe with flat 

charges for prescriptions that are disclosed in advance 

and the plan signs off on or not, but without knowing 

what the PBM is actually paying for those 

prescriptions. 

 MR. FRENCH: That exists. 

 MR. HAUSER: So why in that context is 

disclosure important or do you think it is? 

 MR. FRENCH: Well, I guess, bear in mind 

nobody is saying disclose the percentage -- percentages 

that you are making off of spreads. They're saying, 

disclose the fact that there are spreads and what the 

amount of the spread is -- the total aggregate amount 
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of the spread is. That's very different than an 

administrative fee where they put it out there and it 

can be compared on an apples to apples basis with 

another administrative fee. 

 So if the administrative fee is $2 and 35 

percent per RX and you're out, which all PBM buyers do 

go out, and shop competitively, in most cases and they 

compare apples to apples. You don't have that same 

sort of clarity when you're talking about spreads or 

even knowing the existence of a spread. Just divulging 

the fact that you have a spread is some degree of 

transparency. 

 MR. PIACENTINI: I'd like to ask a sort of 

different kind of question, I think, although this line 

of questioning brings me here. We've been talking 

mostly about money. So my question is really more 

about the drugs. Is it the case that all of these 

different arrangements in fact end up influencing what 

drugs get dispensed to whom and when and if so, would 

transparency in these arrangements have an effect and 

change what drugs get dispensed to whom and when and 

what would that effect be? 

 MR. BALTO: That's a terrific question. 

Look, those four -- those cases against each of the 

three major PBMs and I'll leave it to Mr. Kilberg to 
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find another industry that has this record of 

significant actions brought against it for conflictsof-interest and deceptive conduct. But those 

specifically involve this, rebates, undisclosed rebates 

and kickbacks that the pharmaceutical manufacturers 

were using to switch members of plans to drugs that 

ultimately were more expensive or sometimes hazardous 

to their health. You know, if the rebates had -- you 

know, if there had been a situation where the rebates 

had been disclosed, you know, at least plans could have 

been able to make intelligent decisions about that. 

And that's why, you know, at least in this one case, 

they've made that a requirement of disclosure. 

 MR. KILBERG: Well, I don't believe that's 

relevant to anything. You know, those cases did 

involve issues of drug switching, those practices have 

been remedied. There are now, pursuant to these 

settlements, very detailed rules that each PBM has to 

follow with regard to its pharmacy committee. They all 

have committees outside physicians and experts to deal 

with, comparisons between drugs and whether one is drug 

is comparable to another. 

 But your question really goes to disclosure 

that already exists, and that's with regard to 

formularies. The formularies have to be -- that's one 
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of the things that you look at when you're determining 

which PBM to deal with whether you have a formulary 

that meets your requirements, how detailed the 

formulary is. Is it one that just has generic drugs 

and certain brand drugs in it? 

 MR. PIACENTINI: I guess I didn't mean to 

limit my question just to the formulary that sort of 

faces the consumer or the doctor. But to go to the 

incentives that are facing the PBM and others sort of 

in the chain. My question is whether there are 

financial influences that mix with clinical influences 

in deciding what drugs end up getting dispensed. You 

know, maybe I'm imagining a problem and if so your 

answers should be short if it's a unanimous, no, that's 

not a problem. 

 MR. KILBERG: Not with regard to dispensing 

of the drug. With regard to what's on the formulary, 

certainly. And whether you have, you know, and that's 

something you do look at and decide whether you want -- 

you may not want to treat certain illnesses. For 

example, you may not want certain specialty drugs or, 

you know, which may be very, very expensive. Those are 

decisions that the plan sponsor makes. Those are not 

decisions that are in the hands of the PBM. 

 MR. FRENCH: If as a contractor for PBM 
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services you are aware that brand manufacturers pay 

PBMs for diving market share of your particular 

product. That should be important to you. And if you 

look at the generic dispensing rate of any given PBM, 

and look at the percentage of rebates they receive, 

you'll get a pretty clear picture of where their 

interests and priorities lie. 

 Historically the big three have garnered most 

of their revenue, not from administrative fees, or even 

from clinical feels, they've garnered them from brand 

drugs. So as brand goes down, so does the total 

rebate, because they're not driving as much market 

share. 

 As generics go up, even though theoretically 

they're supposed to be making more profit per script 

and move overall revenue because allegedly there are 

more generics coming into the marketplace, the fact of 

the matter is that the largest part of their revenue 

streams usually come from drugs that are brand-name 

drugs when you factor in all the revenue streams that 

the manufacturers funnel to them for driving that. And 

I just think that it is in the interest, especially as 

generics become more and more of an interest, that 

alone really should be a catalyst for fuller disclosure 

around these sort of revenue streams. It makes a 
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difference to the fiduciary sponsor of these plans. It 

has to. 

 MR. PIACENTINI: Thanks. 

 MR. DOYLE: Do we have any reason to believe 

that CFTC -- or FTC has changed its view on -- 

 MR. KILBERG: No. They testified most 

recently with regard to the healthcare reform, Bob, and 

have reiterated their view in that testimony that's, 

you know, 2010. And, of course, we have the 2009 

letter to New York State. 

 MR. DOYLE: And their views are drive 

principally out of cost concerns and setting aside the 

collusion in the marketplace. But -- 

 MR. KILBERG: Competitiveness, conflict of 

interest, those are the things that they have 

specifically studied with the Department of the 

Justice. 

 MR. DOYLE: And do we have any reason to 

believe there's not some merit to that? 

 MR. BALTO: Pardon, I'm sorry. I didn't hear 

your entire -- 

 MR. DOYLE: Do we have any reason to believe 

there isn't some merit to that or that we shouldn't 

share the concerns? 

 MR. BALTO: First of all, I disagree about 
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the position in 2010. I mean, the FTC had an 

opportunity, as I document in my testimony, and CBO 

scored in putting the revisions in PACA, the FTC 

certainly had an opportunity to and chose not to, you 

know, weigh in on, you know, and suggest that the PACA 

provisions would lead to an increase in -- lead to the 

kind of cost increases that CBO had identified before. 

 As to the 2009 letter issued by the FTC, that 

was for a provision in the statute which, you know, 

didn't have any protections in a -- and was much 

broader disclosure than what you are considering. 

 And, Mr. Doyle, as to your second question, 

is there any reason not to discount them? Look, I 

think you should recognize them for what they are. 

They're theoretical concerns and, you know, 

infrequently states and, you know, federal regulators 

just do not sign on to the concerns raised by the FTC. 

Your mandate is different than their mandate. 

 I used to be the policy director, I would 

write dozens of these letters and our success rate 

wasn't good enough to get me into the major leagues. 

So, you know, I just, you know, if there was an 

empirical basis to this, you know, I think you -- their 

comments would be taken with a much greater degree of 

credibility. 
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 Can I just mention one other thing? There's 

been a -- you know, although I'm here as a Senior 

Fellow for the Center of American Progress, I 

frequently represent consumer groups and important 

consumer groups such as AARP, Consumer Federation of 

America and U.S. Perg have come out in favor of these 

transparency standards and advocated for the 

transparency standards, for example, under healthcare 

reform. So this isn't just a battle between two 

competitors. When consumers weigh in on this issue, 

they weigh in on the side of transparency. 

 MR. DOYLE: Any other questions? 

 (No response.) 

 MR. DOYLE: I'm almost thinking we need a 

hearing on this issue. 

 (Laughter.) 

 MR. DOYLE: But this won't be it, so thank 

you very much, members of the panel. 

 And we'll take -- let's take a short tenminute break and we'll convene about 11:55. 

 (Brief recess taken at 11:42 a.m.) 

 (Hearing resumes at 11:56 a.m.) 

 MR. DOYLE: All right. If I could have your 

attention. Thank you. 

 All right. We shall proceed with the third 
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and final panel for this hearing. And, again, we'll go 

in the order in which you appear on the agenda. Mr. 

DeFrehn. 

THE NATIONAL COORDINATING COMMITTEE FOR 

MULTIEMPLOYER PLANS 

Randy G. DeFrehn, Executive Director

 MR. DeFREHN: All right. Thank you. Can 

everybody hear me okay? Okay. I usually don't have 

that problem without the microphone, but I thought I 

would ask. 

 Good morning, my name is Randy DeFrehn and 

I'm the Executive Director of the National Coordinating 

Committee for Multiemployer Plans. We go by the NCCMP 

for obvious reasons with a name that long. 

 Multiemployer plans are a product of the 

collective bargaining process where at least one labor 

organization and two or more employers provide health, 

pension, and other permitted employee benefits for the 

sole and exclusive benefit of plan participants. 

Multiemployer plans are required under the Labor 

Management Relations Act to hold their assets in trust 

funds which are the joint and equal responsibility of 

labor and management to administer. 

 Approximately 26 million Americans active and 
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retired workers, their families and survivors receive 

health benefits from the roughly 3,000 multiemployer 

health benefit programs. Our organization is an 

advocacy organization. We are actually the only one 

who was established exclusively for the purpose of 

representing the interest of these plans. 

 We appreciate the opportunity to be here 

today and present testimony and answer questions at 

this hearing. As we noted in our comments on the 

proposed regulations -- excuse me, I have a bit of a 

cold here, so -- the issue of transparency and service 

provider fees is a significant one for all plan 

sponsors. We note that Title I of ERISA requires 

certain annual reporting requirements applicable to 

employee retirement benefit plans and their vendors, 

however, we believe in many cases the disclosure 

requirements are too removed from the decision-making 

process. Therefore we wish to highlight to specific 

areas, compensation of pharmacy benefit managers, and 

transparency in commissions and incentive compensation 

arrangements paid to independent insurance brokers and 

agents. Something you've heard about already this 

morning, don't need to get into a lot of the details, 

and we don't intend to. 

 I think you certainly have heard enough from 
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the last panel, in particular, about some of the pros 

and cons of the issues. However, we are a little bit 

concerned about how those plans -- how those issues 

affect multiemployer plans, their sponsors, and the 

trustees' ability to fulfill their role as fiduciaries 

in purchasing services from these kind of vendors. 

 The financial relationships between drug 

manufacturers and PBMs have a profound impact on the 

underlying economics of PBM pricing and the direct cost 

paid by plan sponsors. However, there is very little 

disclosure of those relationships. Drug manufacturers 

routinely offer rebates to PBMs as well as directly to 

providers in order to incent them to dispense or 

prescribe certain drugs. The specific financial 

details of these arrangements are closely guarded 

secrets by both the PBM and manufacturers. PBMs 

willingly enter into these rebate arrangements seeking 

enhanced financial terms based on the dispensing volume 

and efficacy of a manufacturer's drug versus competing 

drugs. 

 Plan fiduciaries would be well served if PBMs 

were required to disclose all instances in which they 

receive payments from drug manufacturers, retail 

pharmacy providers and, data managers. The disclosure 

need not require detailed financial accounting. 
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However, remembering the sole and exclusive benefit 

requirement of the plan fiduciaries, the disclosure 

needs to be sufficient to allow plan sponsors to assess 

whether and to what extent the deals offered by the 

PBMs are in the best interest of plan participants, 

rather than simply furthering the financial interest of 

the PBM. For most purposes, a plan sponsor's 

bargaining position on behalf of the participant is 

strengthened by simply understanding the extent to 

which the PBM's financial involvement with each of the 

above entities as well as the mechanics for each of the 

program results in revenue to the PBM; and how that 

revenue is used: either to reduce pricing with the 

plan through revenue sharing; or whether it's retained 

by the PBM. 

 PBMs provide revenue sharing arrangements 

with plan sponsors to lower cost and drive particular 

behavior. However, because PBMs do not fully disclose 

the underlying terms it remains uncertain to the plan 

sponsor whether the revenue sharing arrangements, which 

may appear financially attractive, are primarily 

intended to steer participants to more cost effect 

treatments, or treatments for which the PBM and their 

drug manufacturer partners benefit. 

 The primary use of this disclosed information 
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would be for plan sponsors to gauge the willingness of 

the PBM to partner with the plans rather than the 

manufacturers to control costs. For instance, 

requiring a listing of the programs (formulary, generic 

switching, et cetera) in which a PBM is engaged in with 

a specific manufacturer, and for which a PBM receives 

payment is very useful information during a PBM 

selection process as well as in the monitoring of the 

effectiveness of a PBM's performance. For example, a 

plan sponsor looking to maximize generic drug 

utilization will be able to determine if a PBM was 

effectively managing and improving generic drug 

utilization, or if the PBM was disproportionately 

steering plan participants to drugs that resulted in a 

financial advantage to the PBM. 

 There is also a lack of transparency in PBMowned, mail order dispensing programs. PBMs routinely 

quote mail order dispensing fees of $0.00 per 

prescription. Looking at other situations in which the 

408(b)(2) rules apply, this is analogous to a 401(k) 

provider saying that recordkeeping is "free." The fee 

is clearly not representative of the cost associated 

with dispensing any drug via a mail order facility. 

Understanding the base cost of dispensing from a mail 

order facility along with who is absorbing that 
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expense, via transparency and disclosure of mail order 

dispensing fees, would enable more informed plan 

sponsor decision making and allow plan sponsors to more 

effectively address plan design considerations such as 

directing members to mail order versus retail 

pharmacies via communications and copayment 

differentials. 

 The second area in which the NCCMP, among 

others, believes the greater transparency should be 

required is the payment of commissions and incentive 

based "contingent" compensation arrangements to 

independent insurance producers as opposed to captive 

agents for carriers who write business exclusively for 

a single insurer. Under the current ERISA reporting 

and discriminate requirements, commissions are subject 

to disclosure through retrospective reporting to plan 

sponsors. However, the current requirements do not 

provide a level of transparency needed for plan 

representatives to make informed decisions in advance 

of awarding the business. I would also note that the 

importance of improved disclosure of insurance 

commissions will be highlighted in the upcoming 

discussions of the proposed PPA minimum loss ratio 

regulations as brokers and agents seek addition sources 

of noncommissioned income. 
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 As noted by Cynthia Borrelli in a 2008 

article published in the Federation of Regulatory 

Counsel Journal, incentive based and contingent 

commissions have been controversial since at least 

2004. They have been the subject of legal actions and 

investigations regarding kickbacks, price fixing and 

bid-rigging. AIG paid over $125 million in settlements 

with nine states and the District of Columbia over such 

allegations. 

 It will come as no surprise, then, that many 

favor requiring all insurance producers, brokers and 

consultants to disclose, in advance, the basis of any 

percentage commission based on premium volume that will 

be paid to the insurance producer, broker or consultant 

at the time a sale is completed with the carrier. 

 A second form of compensation considered 

common in the marketplace is a "contingent commission" 

which we heard about this morning. Contingent 

commissions may be paid in addition to the percentage 

commissions and typically are based on profit, volume, 

retention and/or business growth. Contingent 

commissions often loosely referred to as "bonus 

commissions," are not payable on a per-risk basis, but 

are allocated based on the performance of the entire 

portfolio of business placed with a particular insurer 
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by a specific producer -- a type of "loyalty program," 

if you will, which benefits the insurer and the broker, 

not the customer. The contingent commission schedule 

is often known to the producer at the beginning of a 

given period of time (usually one year); however 

contingent commissions actually earned are calculated 

some time after the business is placed and loss 

experience is observed and measured. It is in the best 

interest of plan participants and plan sponsors to 

understand the degree to which an insurance producer, 

broker, or consultant derives income from contingent 

commissions. 

 Some insurers also pay so-called 

"supplemental commissions." These commissions are 

similar to the contingent commissions in that an 

incentive structure based on profit, volume, retention 

and/or business growth is generally put in to place at 

the beginning of a given year. However, under a 

supplemental system, rather than paying additional cash 

commissions at the end of the year, the incentive 

structure is used to reflect the flat percentage 

commission for the following year. 

 The National Association of Insurance 

Commissioners has adopted model rules relating to the 

insurance producer or its affiliate receiving any 
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compensation for the placement of insurance or 

representing the customer regarding the placement of an 

insurance contract. In general the model rules prevent 

the producer or its affiliate from accepting or 

receiving any compensation from an insurer or other 

third party for placement of insurance unless, prior to 

the purchase, the producer has both disclosed the 

amount of compensation to be received for that 

placement, or, if unknown at the time, the specific 

method for calculating the compensation (and, if 

possible, a reasonable estimate of that amount); and 

obtained the customer's documented acknowledgement that 

such compensation will be paid to the producer or 

affiliate. 

 According to the NAIC less than one-third of 

the states have adopted the NAIC Model Act as proposed, 

despite the fact that many critics consider that these 

standards are too weak to address key defects in the 

current system. Even those standards however, provide 

a floor upon which to build. 

 As states are inconsistent with respect to 

when disclosure of contingent commissions and broker 

compensation arrangements is required, additional 

protection of plan sponsors is needed at the federal 

level. Because the size and structure of the 
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contingent commissions that insurers offer to 

intermediaries and producers can vary significantly, 

they can lead to abuses such as improper steerage of 

clients to insurers that allegedly fail to provide 

coverage as beneficial as that covered by competitors. 

 While the defenders of contingent commissions assert 

that competition in the marketplace can adequately 

address any such conflicts, the evidence suggests that 

conflicts require that mandating advance disclosure of 

the prospective payments is in the best interest of 

plan participants. 

 We appreciate the opportunity to offer our 

perspectives on these issues and welcome your 

questions. 

 MR. DOYLE: Thank you. 

 MR. DeFREHN: Thank you. 

AMERICAN BENEFITS COUNCIL 

Allison Klausner, Assistant General CounselBenefits, Honeywell, Inc. 

 MS. KLAUSNER: Good morning. My name is 

Allison Klausner and I am the Assistant General 

Counsel, Benefits at Honeywell. Thank you for the 

opportunity to speak to you today on behalf of the 

American Benefits Council, a public policy organization 
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representing principally Fortune 500 companies and 

other organizations that assist employers of all sizes 

in providing benefits to employees. Collectively, the 

Council's members either sponsor directly or provide 

services to retirement and health plans that cover more 

than 100 million Americans. 

 I commend the Department for its hard work on 

the interim final regulations under section 408(b)(2) 

of ERISA. The Council strongly supports transparency 

in arrangements for plan services. To evaluate the 

reasonableness of a proposed service provider 

arrangement and to negotiate effectively with potential 

providers, one must have meaningful information about 

the services that will be provided and the compensation 

that will be earned by the plan service providers. 

 The Council is mindful that additional 

burdens and costs imposed on plan service providers may 

result in increased plan expenses and reduced 

participant benefits. The interim final regulations 

largely strike the right balance between these 

competing considerations in the retirement plan context 

and we encourage the Department to strike an 

appropriate balance in the context of welfare plans. 

 We appreciate the Department's decision to 

proceed deliberately and cautiously in considering 
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whether, and if so, how, to apply the disclosure rules 

to health and welfare benefits. Health and welfare 

arrangements tend to involve remarkably different types 

of services and compensation structures. From 

retirement plans we commend the Department for 

observing on welfare plan fee disclosure and beginning 

the initiative through this hearing. 

 To set the stage for today's testimony, I 

will provide an overview of a typical larger employer's 

health and welfare benefit plans, and mention the type 

of service arrangements that typically are utilized. 

Most large employers do maintain a welfare plan that 

includes a self-insured group health plan. The 

employer will almost invariably maintain a cafeteria 

plan to allow the premiums to be paid on a pre-tax 

basis together with a flexible spending arrangement. 

 A self-insured arrangement, the employer pays 

a fee to one or more third-parties, typically an 

insurer. The third party will generally provide access 

to a network of physicians in medical facilities, 

determine claims and appeals, process payments to both 

providers and participants, address inquiries, provide 

telephone and web-based tools and maintain records. 

 In addition to engaging an insurer as a 

third-party administrator to handle most of the day-to-
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day responsibilities relating to the self-insure group 

health plan, other third parties may be engaged to 

handle other services such as disease management 

services, health risk assessment, and wellness 

programs. Likewise providers may be engaged to provide 

plan design consultation services, audit and 

accounting, COBRA processing, FSA administration, and, 

of course, pharmacy benefit management services. 

 Although enhanced disclosure requirements may 

bring increased transparency, with respect to selfinsured plans, the Council's members are not aware of 

any pressing need and, thus, are not clamoring for new 

disclosure rules. There are two primary reasons for 

this viewpoint. 

 First, while it is common for there to be a 

number of different types of service providers to selfinsured plans, these service providers are largely paid 

on a fee-for-service basis. The service providers tend 

not to receive indirect compensation or to have 

complicated compensation structures. The complexity 

behind DC plan compensation structures as well as a 

concern about potential undisclosed conflicts of 

interest underlie the need for enhanced fee disclosure 

in the retirement plan context, but they don't appear 

to be features that are as prevalent in the welfare 
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plan context. 

 Second, the Council's members' plans are 

sufficiently large to be provide leverage; the leverage 

necessary to negotiate favorable service arrangements. 

 The spiraling cost of health care has created enormous 

pressure to find ways to contain costs and the 

Council's members do report that substantial 

information is obtained and used to evaluate service 

provide arrangements. 

 For the fully-insured plans, large employers 

do maintain a suite of fully-insure welfare benefit 

plan options such as those for group term life, 

accidental death and dismemberment and long-term 

disability. 

 Multiple service providers are typically not 

engaged with respect to the provision of benefits under 

a fully-insured plan, although the insurer may engage 

subcontractors or affiliates to provide certain 

services, ordinarily the employer only pays the 

insurance premiums. 

 There appears to be relatively little utility 

in requiring insurers to provide new disclosures 

relating to the compensation they earn in connection 

with fully-insured plans. Fully-insured plans tend to 

be transparent in the sense that the premium is the 
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only compensation the insurer is receiving and the 

services to be provided are clearly set forth in the 

insurance contract. 

 While the Council's members tend not to 

maintain fully-insured health plans for the vast 

majority of their employees, although they may for some 

populations or locations, it is worth noting that this 

year's health care legislation has changed the 

landscape. For example, with respect to fully-insured 

health care plans, new rules do limit the extent to 

which an insurer can retain premiums where the 

insurer's medical loss ration falls below specified 

thresholds. These rules may limit the extent to which 

insurance premiums can be used to compensation plan 

service providers, such as brokers. 

 Although attention is most often given to 

health plans, both insured and self-insured, there are 

other insured welfare benefit plans. It is important 

to remember that employers maintain other types of 

plans such as severance pay plans. These arrangements 

are almost invariably entirely paid by the employer and 

usually do not have substantial third-party service 

provider involvement. Thus, disclosure appears to be 

ill-suited to this context. 

 Due to challenges of providing affordable 
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health care and welfare benefits coverage in the 

current economic environment, the Council's members are 

keenly aware of the possibility that new disclosure 

requirements affecting welfare plans could increase 

plan costs and reduce benefits without materially 

enhancing transparency. 

 While plan service providers would most 

likely bear the direct cost of any new disclosure 

requirements, it is likely that these costs will be 

borne ultimately by the employer and the employee. 

Thus, before any new disclosure requirements are 

imposed with regard to services provide to health and 

welfare plans, it is critical that the Department 

consider any new disclosure requirements will most 

certainly affect plan costs and the level of benefits 

or both. 

 The Council's members respectfully request 

that the Department carefully and thoughtfully identify 

areas where additional disclosure might provide 

meaningful support in assessing the reasonableness of 

plan service arrangements. The fundamental approach of 

requiring disclosure only where there is a pressing 

need is the approach the Department took in the context 

of the interim final regulations. The retirement fee 

disclosure regulations only apply to service providers 
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who fall within specified categories. These categories 

are meant to identify situations where a service 

provider is in a position to have a material impact on 

the plan. The compensation structure is complex, or 

there are potential conflicts of interest. 

 So, we think about how the regulations would 

apply to health and welfare plans, we recommend that 

insurance companies issuing insurance be exclude from 

the definition of covered service providers as the 

insurer is merely receiving a premium for services 

described in the insurance contract. When considering 

if other health and welfare plan service providers 

should be included as covered service providers, we 

suggest that the Department evaluate whether disclosure 

will enhance the process of negotiating reasonable 

services arrangements. 

 The first of the three categories in the 

interim final regulations covers persons who act in a 

fiduciary capacity. If covered, these persons must 

disclose whether they reasonably expect to provide 

fiduciary services. While we appreciate that rules 

requiring disclosure of fiduciary status may be 

appropriate in certain circumstances, we see little 

utility to requiring disclosure for common services 

where fiduciary status is apparent. There may be 
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situations where disclosure of fiduciary status would 

be appropriate, but we ask the Department to 

specifically identify them. 

 The second category, platform providers to 

participant-directed individual accounting plans, is 

largely inapplicable to welfare plans. 

 The challenge is with the third category of 

covered service provider -- persons who provide 

enumerated services and receive indirect compensation. 

 This is the category where it is critical to carefully 

evaluate whether different types of welfare plan 

services should be enumerated services triggering 

disclosure requirements. We believe the same standard 

that was used to develop the interim final 408(b)(2) 

regulations is appropriate, namely whether disclosure 

would help illuminate complex compensation structures 

or potential conflicts of interest. 

 Apart from striking a careful balance between 

cost and benefit, I want to stress that the Council's 

members are very wary of any additional regulatory 

requirements at this time. This is a period of 

enormous change and new challenges for health plans in 

light of the Affordable Care Act. The new legislation 

represents a sea change in the regulation of health 

care and large amounts of time and resources are being 
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spent digesting and implementing these changes. The 

thought of yet a new challenge on the horizon is 

disconcerting, to say the least. And if the end result 

is to trade reduced benefit levels for transparency, 

the Council's members would much prefer to retain 

benefits rather than be compelled to receive fee 

disclosure information that may have limited value. 

 We suggest that the Department consider 

waiting until the dust has settled on health care 

reform before deciding whether to impose new 

disclosures for health and other welfare benefit plan 

service providers. Health care reform is leading to 

innovation and new ways of structuring plan services. 

Thus, if any new disclosure regulations are to be 

written, it would be wise to have them designed for the 

future marketplace, not yesterday's marketplace. 

 Taken as a whole, the Council believes the 

enhanced disclosure in the contest of health and 

welfare plans is appropriate only if it will provide a 

stronger foundation for negotiating more effectively 

with plan service providers. There does not seem to be 

a strong demand for enhanced disclosure and we 

encourage the Department to carefully identify any 

perceived shortfalls before creating new disclosure 

requirements. 
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 On behalf of Honeywell the American Benefits 

Council's members, I want to thank the Department of 

Labor for its hard work on this area. 

U.S. CHAMBER OF COMMERCE 

Eric Keller, Esq., Paul, Hastings, Washington, DC

 MR. KELLER: Good morning. Thank you for the 

opportunity to testify. My name is Eric Keller. I'm a 

partner and employee benefits attorney at Paul, 

Hastings, Janofsky & Walker here in Washington. I am 

testifying today on behalf of the U.S. Chamber of 

Commerce where I am a member of the employee benefits 

committee. The Chamber is the world's largest business 

federation, representing more than three million 

businesses and organizations of every size, sector and 

region. 

 The Chamber and its members appreciate the 

concern for greater transparency in plan fees and the 

effort to address these concerns. The Chamber fully 

supports transparency of expenses and encourages 

appropriate disclosure of plan fees. However, we do 

not believe the disclosures required for retirement 

plans are necessary for welfare plans. 

 My testimony today will focus on two areas of 

concern. First, there's no demonstrated need for the 

application of feel disclosure rules to welfare plans. 
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 Second, promulgating fee disclosure rules for welfare 

plans will create an unnecessary burden on employers 

and will likely lead to increased plan costs while 

providing little to no benefits for plan participants. 

 Our first area of concern is the lack of a 

need for addition regulation in this area. We are not 

aware of any substantive record demonstrating the need 

for plan fee disclosure in the welfare benefits 

marketplace. In fact, in 2004, the ERISA Advisory 

Council studied welfare plan, the Form 5500 issues and 

did not uncover any glaring deficiencies in he ability 

of plan sponsors to understand welfare plan costs even 

with the very limited role that Form 5500 plays in 

revealing welfare costs. The Council even raised the 

option of completely eliminating the Form 5500 

requirement for welfare plans. Thus, it appears that 

plan sponsors are currently well informed of welfare 

plan costs and additional regulation would be 

unnecessary. 

 Furthermore, the differences in the operation 

between welfare and retirement plans make additional 

disclosure for plan sponsors in the welfare plan area 

unnecessary. That majority of contracts and policies 

for welfare benefit plans or services are between the 

service provider and the plan sponsor and not the plan. 
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 So long as the plan sponsor does not pay fees from 

plan assets, Section 408(b)(2) does not apply. 

 Moreover, in a fully-insured plan, the 

premiums are fully disclosed to plan sponsors and are 

regulated by state insurance law and now indirectly by 

the new medical loss ratio provisions of the Affordable 

Care Act. Commissions and other indirect compensation 

paid to brokers are already fully disclosed on schedule 

A of Form 5500. 

 Service providers to plan sponsors of selffunded welfare plans disclose extensive fee and 

compensation information at multiple stages of the 

building and contracting process. For example, in 

response to RFPs, as part of the contract negotiations, 

and after post-contract implementation as part of audit 

and reporting requirements. Consequently, we believe 

that the way fees are paid and disclosed in the welfare 

plan do not require the additional disclosure 

regulations that apply to retirement plans. 

 Secondly, applying the fee disclosure rules 

to welfare plans in the current environment would 

create an unnecessary burden for plan sponsors and 

likely lead to increased costs. As you are all acutely 

aware, the Affordable Care Act has created a myriad of 

changes that are complex that will take many years to 
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implement for which plan sponsors are currently 

devoting extensive resources to complying. Attaching 

additional regulatory requirements at the present time 

without a justified case for the need, would provide 

little or not addition benefits for participants. 

 In addition, the costs incurred by insurers 

and other plan service providers and complying with 

these new requirements would likely be passed on to 

plan sponsors and participants and further increase the 

health care expenses. 

 In conclusion, the Chamber does not believe 

that it is appropriate or necessary to apply the 

disclosure provisions that apply to retirement plans to 

welfare plans. 

 Thank you for the opportunity to testify this 

morning. 

 MR. CANARY: I'll start. Maybe a scope 

question. So there are certain welfare plans that are 

funded -- engage in investment activity, the multipart 

plans would be a group that clearly has pretty 

extensive investment policies and practices. Is that 

type of activity more akin to pension plan investment 

activity where the 408(b)(2) rule might apply not so 

much as a welfare plan, per se, but because those 

welfare plans are engaged in investments that are 
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similar to what pension plans are doing? 

 MR. DeFREHN: Back in the days when there 

used to be reserves in the welfare plans, you mean? 

Actually, I think you'll see, if you take a good look 

at the types of investment policies for welfare plans 

they're quite different than they are in pension plans 

because of their short-term nature and they're mostly 

held in cash equivalents. There's very few 

arrangements where you'd see the more exotic kind of 

investment arrangements that the welfare plans get 

into, as they can with some of the particularly defined 

contribution incentives. 

 MR. CANARY: Okay. I think I'm not sure you 

all are really coming from a funded welfare plan 

perspective where you would have comments on that 

question. 

 MS. KLAUSNER: Honeywell, itself, does not 

have a multiemployer plan that we have to contribute to 

on the welfare side of the house. And I'd have to 

confer with the Council's members to find out how often 

they have them as well. 

 MR. KELLER: I would have to confer with the 

Chamber on its views. Although I will point out my own 

experience in private practice that most employers that 

maintain funded welfare plans, you know, because of the 
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tax limitations on getting deductions that now they're 

mostly pass-through entities so I share your 

observations in that area. 

 MR. CANARY: Okay. Second to last question 

is, on the disclosures regarding insurance agents and 

their incentive compensation, I think you made a 

distinction between independent agents, and I guess it 

would be captive or exclusive agents or employees of 

the insurance company. Did you mean to suggest that 

the disclosure really should be limited to the 

independent and there isn't a need for similar kinds of 

disclosures you're dealing with in exclusive agent or 

an employee of the insurance company receiving 

incentive comp? 

 MR. DeFREHN: I think there are certainly 

incentive compensation arrangements even within a 

single insurance carrier. But the opportunity for 

direction in order to in a self-dealing way I think 

exists more with the independent broker who can direct 

business to different types of companies and they do so 

in a way that takes the client away from product that 

they think they're buying in more to one that the 

broker would receive the greatest compensation for. 

 MR. CANARY: And I got the impression that 

neither one of you believe that additional upfront 
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disclosure regarding that sort of compensation should 

be required as a regulatory matter? 

 MS. KLAUSNER: I would agree that we are not 

looking at it as necessary for a regulatory matter. I 

think we look at it as part of the process that 

fiduciaries must engage in. And depending upon the 

breadth of the benefit and issue, the number of lives 

perhaps being covered, the benefit being provided would 

determine, you know, what process is engaged in. How 

much detailed information is necessary to make an 

appropriate choice as to what insurance carrier, 

perhaps, to use to pay the benefit when it becomes due. 

 Which insurance carrier perhaps can actually process 

claims and maintain records and interface with your 

systems? You know, which insurance company you have 

the confidence in if you're dealing with something that 

is relatively simplistic, you might be able to do it 

with a little transparency. You know you're buying a 

$1,000 benefit for a dollar that may be all you need, 

you know, basic information. If it's something more 

complicated, you might need to engage in a process 

whereby you in fact get more information. 

 But, again, that's a matter of satisfying 

your fiduciary requirements as opposed to filling out a 

checklist that you ask for certain information through 
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a disclosure document. 

 MR. KELLER: I'd agree that there is no 

additional need for disclosure in this area. 

Particularly in the premiums for brokers, indirect 

compensation, that's typically an area where the plan 

sponsors, it's part of doing its due diligence and 

exercising its fiduciary obligations would ask, you 

know, questions regarding the premium rating that the 

agent is going to receive. And that's information 

that, you know, is already currently available in the 

marketplace and would be disclosed as part of any 

competitive bidding situation. 

 MR. CANARY: Thank you. 

 ASSISTANT SECRETARY BORZI: I have a few 

questions. First, Ms. Klausner, I think both you and 

Mr. Keller talked about how increased transparency 

wasn't necessary for fully insured plans because you 

just play the premium. How do you know that the 

premium that you're paying is reasonable? 

 MS. KLAUSNER: We do go out there and bid. 

We put it out for an RFP or an RFI and identify what 

opportunities are out there. And like with other 

discussions that we've had with the Department on fees, 

we're not only concerned with whether or not, you know, 

we're getting the lowest premium for the thousand 
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dollar life insurance benefit or per thousand dollars. 

 We're concerned as well about their ability to 

interface with our systems, to in fact maintain the 

records to pay the benefits when they're due, and of 

course, to be a company that will be around and 

available to pay benefits, you know, in the future, you 

know, through rating agencies or other mechanisms. So 

it's not a matter of knowing whether or not the fee 

that we're paying and the premium is the only fee 

they're getting, it's a matter of whether the fee we're 

paying will in fact purchase the benefit that we intend 

to have for our participants for our employees, and 

whether or not that benefit will in fact be available 

at the time that it needs to be paid. 

 ASSISTANT SECRETARY BORZI: Yeah, I was more 

thinking about in the health benefit context rather 

than these other benefits? 

 MS. KLAUSNER: In a health benefit context, 

you know, like I said, we have relatively few fully 

insured plans. And I think the Council's members have 

relatively few, again, compared to the fact that we 

are, you know, a big player, you know, in the selfinsured market. 

 And, again, our concern is to say, you know, 

we have a plan design and we need to know that there is 
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somebody out there. And, you know, we start with, and 

I think I mentioned this at a couple of other 

fiduciary-related hearings, the first place to look is 

the plan design. And that is something that is in the 

purview of the plan sponsor. So the plan sponsor comes 

up with a design. We need to then have it bid out as 

to whether or not somebody can support paying benefits 

under that plan design. And as to whether or not, you 

know, they, the insurer, you know, build the ability to 

be profitable and pay our plan design benefits. 

Whether they go out and buy tires from, you know, the 

ABC Company or, you know, the XYZ Company or whether 

they do it in-house as long as they can do it and do it 

well, then we're comfortable regardless of whether our 

premium is the only fee or whether or not there are 

other compensation arrangements underneath. 

 ASSISTANT SECRETARY BORZI: Mr. Keller, the 

Chamber obviously represents millions and millions of 

small businesses as well. And I can see how Honeywell 

can do this, but can you speak for a minute to how the 

small business owner knows that the premium that 

they've been quoted is reasonable? 

 MR. KELLER: Well, the clients for whom I 

have represented over the years which include many 

small businesses, I mean they will frequently work with 
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their broker. The broker goes out and obtains quotes 

from a variety of insurers based on the design of the 

policy or the plan that the employer wants and it just 

as with a larger employer that has a self-funded plan, 

it's a competitive process. And the premium, you know, 

quoted, you know, sometimes vary, but if -- you know, 

if the client is interested in analyzing why a 

particular premium is more for a particular policy 

level of coverage, I mean, they could make inquiries as 

to that. But, I mean, it's just as with any other 

aspect of the employer going out and buying a service, 

typically the employer is not going to call the broker 

and say, hey, I want one quote. I mean I -- and even -

- and we all -- certainly there are some businesses 

that aren't as sophisticated. 

 ASSISTANT SECRETARY BORZI: I understand, but 

how do you know that the five quotes that you get are 

reasonable? 

 MR. KELLER: Just with anything in the 

competitive marketplace. I mean, you would -- I guess 

I think you're asking like, how do you go behind the 

curtain to know like what's the margin that -- 

 ASSISTANT SECRETARY BORZI: Yeah. I mean, 

basically what you're saying to me is you just -- 

whatever is bundled in the premium, you have no way of 
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unbundling it so you just have other ways to compare; 

is that right? 

 MR. KELLER: Well, you certainly could ask, 

you know, what's the loss ratio. You could as ask for 

that type information. I mean, I think it's something 

that in a smaller employer they'll probably rely 

typically on their broker, but the broker will go out 

and solicit bids from multiple insurers. 

 ASSISTANT SECRETARY BORZI: So presumably the 

rule on the Affordable Care Act that requires 

disclosure of minimal loss ratios, the MLR -- 

 MR. KELLER: Absolutely. 

 ASSISTANT SECRETARY BORZI: -- is going to be 

very helpful in getting the kind of information the 

plan sponsors need. 

 MR. KELLER: Absolutely. 

 ASSISTANT SECRETARY BORZI: Okay. Let's 

switch briefly to the self-insured marketplace. Ms. 

Klausner you said that generally you pay a fee for 

service in the self-insured marketplace. And I think 

I'm quoting you correctly, that the service providers 

that you deal with quote/unquote, "tend not to have 

indirect compensation." Obviously some of them do, 

like PBMs. So tell me, you know, your company is one 

of the biggest in the marketplace, so tell me how you 
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get information from PBMs and what kind of information 

do you think as a plan sponsor you need to be able to 

make the comparisons? And tell me about your 

experiences in getting it. 

 MS. KLAUSNER: Our experience is that with 

our current provider, before we engaged in going out 

for a bid, with our current provider when we would just 

renegotiate for, you know, the next contract term, we 

actually do in fact ask the information. We ask what 

are all the rebates, and we ask for all the pass 

throughs, and by all the different varying names that 

they come through with. Once we understand as many of 

them as we can, we determine whether or not we're going 

to negotiate for all of those to be passed through to 

ourselves. 

 So, similar to the defined contribution plan 

fee discussions that we've had given Honeywell's size 

and the number of lives that are covered, we have been 

able to successfully go down the path whereby number 

one, services are unbundled, even in the PBM arena; and 

number two that there is either no revenue sharing or 

that any revenue sharing is in fact incorporated into 

the fee structure so that ultimately it is clear and 

comes back to the plan or to the employees. 

 ASSISTANT SECRETARY BORZI: And do you audit 
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the PBMs? 

 MS. KLAUSNER: We have the ability to audit 

and we do, do some auditing at a high level to make 

sure that we do believe there's a reasonableness in the 

calculation of things such as rebates. 

 ASSISTANT SECRETARY BORZI: So what kinds of 

things do you audit? 

 MS. KLAUSNER: We audit, as somebody else 

mentioned on the last panel, at the aggregate level. 

Part of the concerns are ensuring that we marry all of 

these ideas with things like HIPPA. I mean, we do 

recognize that obviously there's confidentiality 

provisions and BAAs and, you know, just so many 

different layers that get built into. By the time it 

comes back to me, the employer, I mean, we just have, 

you know, a high level of confidence that the 

information has been processed correctly and that 

rebates have passed through correctly. 

 ASSISTANT SECRETARY BORZI: Are there people 

who specialize in auditing PBMs? 

 MS. KLAUSNER: Well, this has been an area 

which has proved to be complicated and complex to in 

fact put into place. And the primary reason that I am 

aware of in the industry, you know, from an industry 

perspective, not necessarily a Honeywell perspective, 
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is that PBMs are reluctant to have auditors who may in 

fact have engaged or will engage in litigation against 

them. And, therefore, you know, there is a balance 

that is difficult to strike in negotiating -- 

 ASSISTANT SECRETARY BORZI: It's virtually 

impossible to find an auditor then? 

 MS. KLAUSNER: I'll stick with, we're 

challenged. Well, you're challenged to find an auditor 

that is sophisticated enough to really be able to work 

through the varying type of -- I'll just call it -- 

rebate situations, or, you know, wholesale situations 

where data and dollars are passed back and forth. So 

it is an area of challenge. And I think that at the 

end of the last panel, Mr. Doyle, you suggested that 

the PBM needed its own hearing and I do agree. As I 

said in my testimony, as a general matter, the 

Council's members don't see that in the health and 

welfare community we need a whole lot of regulation to 

help us make sure that plan designs are in fact 

supported through reasonable contracts. Because that's 

why the goal was here, do we need regulation to allow 

for us to have reasonable service arrangements and 

contractual provisions to support those arrangements? 

And it may not be wholesale that we need them and there 

might be areas that the Department can specify. And 
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although I haven't delved into it enough to know for 

certain, perhaps PBM is an area in which you might want 

to look a little more closely. 

 ASSISTANT SECRETARY BORZI: So do you, when 

you put out your RFIs for service providers, do you 

have a question that you regularly ask about whether or 

not they get other forms of compensation? 

 MS. KLAUSNER: Yes, but I'll actually go back 

one step and to identify that because there are so many 

dollars involved, not through a funded situation, but 

still so many dollars that get moved around in terms of 

supporting PBM as well as, you know, other health care 

that we start with actually an RFP for a consultant. 

 ASSISTANT SECRETARY BORZI: Ah, and so it's 

your consultants who ask those questions? 

 MS. KLAUSNER: Well, we developed together as 

a partner, you know, the actual RFP and the questions 

and the scoring methodology. But some of the things 

that are included in this was in our defined 

contribution RFP that we did a handful of years ago was 

that there were questions that were geared toward the 

provider, the winning provider would agree to be able 

to satisfy, you know, the 408(b)(2) rules as they are 

today and as they begin to be developed, and as we 

reasonably interpret them so that the goal to be that 
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we partner towards compliance, not just generally, but 

under 408(b)(2) rules. 

 So, yes, we do have a consultant who will 

first have to agree, of course, to, you know, look at 

the whole marketplace that's reasonably large enough to 

support a client like Honeywell and then we help them 

develop the RFP and then everything, of course is 

scored blind and we have all kinds of confidentiality 

provisions. The goal is really, again, process, 

process, process. And we make extremely clear to all 

those who hear about it, as well as all those who are 

involved in it, that, you know, the bottom line fee, 

the bottom line number is not necessarily the winning 

factor. It is a factor, but it is not the winning 

factor. 

 ASSISTANT SECRETARY BORZI: Again, focusing 

on the PBMs, how tough is it for you to get them to 

give you some of this information and allow you to 

audit? 

 MS. KLAUSNER: It is a challenge. It is 

absolutely a challenge. I will also say that part of 

the challenge is that it had historically been so 

complex before some of the litigation that was settled 

over the last number of years. So, again, like with, 

you know, the Affordable Care Act and the goal toward 
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saying that if regulation is appropriate in certain 

areas, let's let some of the current dust settle so we 

can identify what would be most appropriate allowing 

some of the new legislation to work its way through the 

marketplace to innovate and then see what we need. 

 Well, the same thing with the PBM industry. 

You know, there was all the big litigation. There were 

the settlements. We're still going through a process 

of change. And one thing that we have to be very 

cognizant of is that we don’t want to not only squash 

innovation in terms of delivery of pharmaceutical 

benefits, we don't want to squash the innovation of 

pharmaceuticals as a whole. 

 And I'm not here to testify on, you know, the 

pharmaceutical business, but, you know, in discussions 

it's become very apparent that, you know, the reason 

the United States is set up one way and you know, 

other, you know, Canada or some of the European 

countries are set up another way have varying reasons. 

But the outcome may impact pharmaceutical innovation. 

And if our ultimate goal is to ensure that people have 

health care we want to be very cognizant of not only 

having plan designs, have reduced benefits or plan 

designs and not have increased costs, we want to make 

sure that there's actually health care. 
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 And that brings me to like a comment back to 

your fully insured. Perhaps, you know, the members of 

the Chambers of Commerce do not know everything that 

goes into whether or not the premiums for a fully 

insured plan are correct or reasonable. But they can 

get some information from general survey to know that 

they're in the ballpark and a reasonable ballpark. And 

if we put too much emphasis on creating disclosure and 

too much emphasis on increasing costs, we may move some 

of these insurers out of the marketplace and find again 

that we're in a situation where the law requires 

everybody to have health insurance, but there is no 

health insurance to be obtained. 

 ASSISTANT SECRETARY BORZI: Sure. 

 MS. KLAUSNER: And, again, just very 

sensitive and I don't know where that line is drawn but 

be very cognizant of the impact of additional 

regulations on the ability to have health care which is 

the ultimate reason why we want to have reasonable 

contracts. 

 ASSISTANT SECRETARY BORZI: Okay. Mr. 

DeFrehn, I take it that -- well, I know that a lot of 

the multiemployer plans are very large as well. Have 

you had the same series of experiences with the PBMs? 

I take it from your testimony no. 
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 MR. DeFREHN: Well, I've seen -- excuse me. 

In the multiemployer space there's been a lot of 

consolidation in the purchasing of pharmaceutical 

benefits over the last 20 years. There are large 

purchasing coalitions that are all over the country. A 

number of individual international unions have gone 

back to their individual local unions and aggregated 

those groups and asked them to join in, in a kind of 

vertical coalition. And what I've seen there is that 

it's pretty consistent that the information necessary 

for the consultants -- the same kind of consultants 

that Allison is using -- to do the kind of adequate job 

in evaluating exactly what they're paying for is 

extremely difficult to come up with a good number. 

It's like grabbing the balloon in one place, you might 

get ahold of it here, but it's going to pop up 

somewhere else. And it's very difficult to really take 

a look at all of the different sources or income 

without at least having some requirement for them to be 

able to get that information whenever it's requested. 

 I think just one final comment along that 

line. I think Allison had mentioned in her testimony 

about looking at specific services when we were talking 

about application of these rules to welfare plans 

broadly. I don't necessarily believe that it is 
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necessary to have them apply to all types of welfare 

plans broadly, but I do think that in areas where there 

are instances where there is substantial indirect 

compensation and where there's substantial opportunity 

for self dealing and other conflicts of interest, I 

think those areas in particular are important to focus 

your attention on and I think we would all be in 

agreement there that we need to make sure that we are 

getting what we think we're paying for. 

 ASSISTANT SECRETARY BORZI: Okay. I think 

I'll stop because I want to give my colleagues some 

time as well. I know, I'm the one who has to leave. 

 MR. DOYLE: I was going to say, feel free if 

you have to go to your next meeting. 

 MR. HAUSER: Maybe this will be my last 

question on PBMs. I sure hope so. 

 (Laughter.) 

 MR. HAUSER: If either of you or anybody on 

the panel can explain to me what is meant by the 

auditing as done on the aggregate basis, because I 

think that's what Mr. Kilberg said on the previous 

panel 2, I guess I don't understand what that means. 

When you say the auditing is done in the aggregate 

basis does that mean there isn't a sample taken, for 

example, of the invoices on the prescription drugs, 
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that you don't see the actual contracts? How does one 

audit something on an aggregate basis in this context? 

 MS. KLAUSNER: I think at a starting point we 

wanted to make clear that they are not necessarily 

going down to, you know, the local pharmacy's receipts. 

 Okay. So we're not looking at the local pharmacy 

receipt for, you know, Allison Klausner who needed X 

drug on December 7th. So, you know, that already is 

going to be an aggregated number leading up. So what's 

happening is, you know, the whole -- all of the use for 

Lipitor or some other, you know, drug that's used, you 

know, at a large level will be looked at in the 

aggregate to determine whether or not they've 

dispensed, you know, I don't even know the numbers, you 

know, 100,000 pills in the month and they’ve dispensed 

them at the mail order level and then there's 

contractual relationships with wholesale suppliers or 

drug manufacturers that they take at, you know, a 

monthly level or a drug-type level as opposed to going 

down into receipt by receipt down to, you know, this 

particular pharmaceutical distribution house, you know, 

in Illinois sent out certain drugs versus the one 

that's located in, you know, Arizona, or the one in 

Maine. 

 So there's a much higher level. We're not 
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going down to the participant experience and building 

up. 

 MR. HAUSER: Do you have anything to add, 

anyone else? 

 ASSISTANT SECRETARY BORZI: I'm sorry, I'm 

going to have to leave. Thank you so much. 

 MS. KLAUSNER: Thank you, Ms. Borzi. 

 MR. HAUSER: And maybe just one more question 

for you, Ms. Klausner. As I understood the American 

Benefit Council's point of view, and the Chamber's too, 

I guess, a lot of it was that you don't think there is 

much indirect compensation in this context and so we 

don't have the same concerns as in the pension world. 

Second, that with the Affordable Care Act, people have 

their hands full and that imposes a lot of complexity 

already, don't add to that. But in those circumstances 

-- well, putting aside for the moment health plans, 

when we're talking about life insurance plans, 

disability plans, all the different kinds of plan 

arrangements that aren't governed by the Affordable 

Care Act, and don't have new obligations imposed upon 

them, in those contexts and in circumstances when we 

know there are species of indirect compensation, for 

example, with respect to brokers and agents, and the 

like, why shouldn't we mandate simple disclosure of 
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what the indirect compensation is in those 

arrangements? Does ABC have a view on that? 

 MS. KLAUSNER: I think I'd have to consult 

with the Council, you know, to ensure that I represent 

the Council as a whole. But, again, on the larger 

employer level, even in the fully insured life 

insurance or the AD&D context, we're not necessarily 

even using a broker. You know, we have already 

developed relationships and resources where we can go 

out and do an RFI and find out, you know, how many 

cents per dollar to get, you know, life insurance on a 

very large body of lives. And, you know, then we can 

determine, obviously, very simply, you know, how many 

pennies difference each insurer is going to offer us 

and then determine again, once again, how it till fit 

into our total benefits scheme in terms of being able 

to provide the benefit and the simplicity. 

 On the small employer market, you know, I do 

have emphasize that although they may use a broker and 

the broker might get some form of a fee or the broker 

may have a smaller window into the availability of 

opportunities to purchase the life insurance or the 

AD&D, we don't want to be in a position where our 

friends who are small employers are priced out of the 

market because there's so much added burden as a result 
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of making sure that disclosure meets a certain 

requirement. 

 MR. HAUSER: Well, obviously we don't want to 

price people out of the market, but just in focusing on 

that small market for a minute, I mean, if -- we've 

seen -- we have certainly -- I don't know what counts 

as evidence in this area, but we have certainly seen 

circumstances in which small employers, mid-sized 

employers have used RFIs and have appealed to brokers 

and those brokers received undisclosed compensation 

from various carries and their decision making seems to 

have been affected by that compensation they were 

receiving, both in terms of who they were including in 

the bid process and in the way they presented the bid 

to the ultimate plan consumer. And so, I guess the 

question is, if we know, if we've seen examples of this 

kind of disclosure, or this kind of problem, what is it 

that you think kind of argues against mandating just a 

flat disclosure -- and it's something apparently 

Honeywell negotiates for when it's dealing with its 

people, it wants that disclosure. So why would we -- 

and that doesn't drive people away or keep them from 

competing for Honeywell's business. So why should we 

have a concern that just requiring that when a plan is 

dealing with a broker, an agent, a consultant, someone 
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putting together an RFI that they disclose if they've 

got money in it that's coming from a third party and 

not in addition to what's coming from the plan. And if 

there is something empirical that would tell us what 

those numbers look like, or that they're actually even 

approaching a level where they might drive somebody out 

of the plan business, I would invite you to offer it to 

us. But go ahead, what -- 

 MR. KELLER: Well, I'd have to consult with 

the Chamber to get its views. But I think as a general 

matter, you know, all these issues go to the consumer 

behavior of the fiduciary. So the fiduciary, the plan 

sponsor is making their decision in terms of what 

policy to procure. And just like any other purchasing 

decision, companies know that to be a good purchaser 

you should ask the right questions. You should 

understand who you're dealing with, what their 

background is, what's their experience. 

 We create tips all the time for every 

conceivable situation and certainly I am sympathetic to 

the fact that your inclination is, why wouldn't we do 

the same here? But it is an area where there is 

already information available to the purchaser, even a 

small purchaser, who wants to know what his market 

rates for my area, or my life size, and it's just like 
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any other component of their business, we don't 

regulate, you know, when they want to go out and buy a 

truck, who they've got to -- what type of disclosure 

the agent who is selling him the truck has got to give. 

And so, at what point in terms of creating regulations 

are we just creating more regulations than really are 

necessary for the perceived need. 

 MR. HAUSER: Well, I agree with that, but, 

you know, when I bought my car recently there actually 

was a fair amount of mandated disclosure. And it's 

just a question of what kind of disclosure should be 

required? And I guess the argument on the small 

employer side of it is, well, Honeywell's in a position 

to insist upon this level of disclosure. The small 

employer may not be. You know, a small plan, they're 

dealing with a broker, they think they're getting 

advice that's in their interest and that isn't 

influenced by anybody else, but they're not really in a 

position to get disclosure of what these numbers are, 

whether it's something to be worried about or not. 

And, you know, yes they know approximately what the 

market price is, but they don't -- they're looking for 

guidance on how to select. And as Ms. Klausner pointed 

out, it's not just about price, it's about price, it's 

about the level of services, it's about many things. 
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And if the person that's advising them on how to weigh 

all of those many things has a financial incentive 

that's being paid by somebody other than the plan, why 

shouldn't we just require them to disclose that and 

what's our basis for believe it would cost anything 

much? 

 MS. KLAUSNER: I mean, one of the -- my 

reaction in listening to your description about what 

might be the ill that we're trying to remedy is that 

disclosure may not be the right remedy for that ill. 

So if I'm a small employer and I get information that, 

you know, Eric the broker is only charging me 70 cents 

because he can get his other 20 cents from the 

insurance carrier if I in fact pick it, because it's 

his brother-in-law and he can spin some wonderful 

story, so long as the insurance product that he's 

providing for me to consider is as good an insurance 

product as the other ones for which there is no, you 

know, relationship in terms of self-dealing, I'm not 

sure I as a small employer care. I think the ill is 

that the broker needs to be held to a standard of 

integrity. And whether that integrity is something 

that is held under a fiduciary standard or a business 

standard is not one that, you know, I as Allison, or I 

as Honeywell, or I as a member of the American Benefits 
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Council can really opine on. 

 MR. HAUSER: But what's the Chamber and ABC's 

view on holding brokers to fiduciary standards? 

 MS. KLAUSNER: That is something I would 

absolutely have to go back and discuss. But for the 

context of this hearing, for this hearing where we're 

asking whether or not we should be mandating disclosure 

for purposes of making sure we can satisfy the 

reasonable contractual relationship, the arrangements 

for the service product through a reasonable contract, 

will disclosure help us get there? Because as a small 

employer I may not even understand, because, again, the 

same sophistication that I may not have and it does not 

mean that small employers hire less sophisticated 

people, but there's going to be less resources to tap 

in expertise for everything. 

 MR. DOYLE: I think we're struggling kind of 

with the same issue here. And I take your example at 

the end of the day, the small employer may not care 

that, you know, the broker is getting X amount of 

dollars or whatever in commissions in a related kind of 

party-type deal. 

 But I guess we're struggling with whether -- 

if I'm a small employer, I might be able to use that 

information, at least, and that's kind of the approach 
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we took under 408(b)(2), whether it makes a difference 

at the end of the day, at least if I had the 

information I could think about it. I could think, you 

know, there is some, maybe they're getting a commission 

from one company and while its product may be good or 

at least even better than one that they're not getting 

the same amount of commission from or no commission 

from, at least I could factor that into my analysis of, 

you know, is there something more to that 

recommendation or not? 

 MS. KLAUSNER: So perhaps an alternative to 

consider is not mandating disclosure, but instead 

educating small employers on how to satisfy their 

fiduciary duties. 

 MR. DOYLE: Well, that is definitely an 

option. I think one of the beauties or benefits of 

pursuing the 408(b)(2) framework is that it doesn't put 

the burden solely on the small employer who may be 

suffering from a lack of leverage or even knowledge 

about what they should be doing as a prudent fiduciary. 

 But it kind of shares that burden with the service 

provider and maybe a consultant or broker in this case, 

to participant in that process. 

 In any event, and, again, kind of following 

up if we take kind of a narrow view and I don't know 
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that a whole, broad disclosure regime makes a lot of 

sense or is necessary with respect to a lot of products 

in the welfare plan area, but I am struggling with the 

conflict of interest issues that do come up, 

particularly in the mid- to small-employer communities 

that are wholly reliant on brokers, accountants, what 

have you, in terms of the operation of their plans and 

whether there's something more we can or should do in 

that regard. 

 Maybe I'll turn to Randy a little bit, and 

say, you know, again, if we were to focus on specific 

areas where there might be challenges for the plan 

sponsor, what would those be? 

 MR. DeFREHN: I think you already said them, 

Bob, it's the areas where there are areas of 

substantial indirect compensation and opportunities for 

conflict of interest. Those are the two biggest areas 

and I think we've been talking about them today. It's 

the commissioned and non-commissioned kind of other 

compensation that we just went through and the PBMs 

where things are just really fuzzy. But those are the 

areas I would focus on rather than saying, you know, 

broadly speaking all welfare plans have to go through 

the same kind of -- 

 MR. DOYLE: Well, I'm tempted to follow up on 
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the commission because I mean, I think -- at least 

we've tried to do a lot of work on the Schedule A and 

I'm assuming since you're saying "commission" you kind 

of agree with some of the earlier parties that 

testified that, you know, prospective rather than 

retrospective -- 

 MR. DeFREHN: Yeah, that's exactly the -- 

 (Simultaneous conversation.) 

 MR. DOYLE: -- helpful -- 

 MR. DeFREHN: You can't make a decision -- 

 MR. DOYLE: But I am curious, what do 

fiduciaries ask now? I mean, they know most of the 

time when they're engaging an agent or broker that 

there are going to be commissions and all, do they not 

make those inquiries or -- 

 MR. DeFREHN: It's size driven. I think we 

will all agree with that. The larger funds, the larger 

companies are all sophisticated enough and employ 

enough experts to be able to get down into the weeds. 

The middle-size groups are trying to balance the cost 

against, you know, what they get and they're trusting 

their advisors even more. 

 When you get into the smaller group, people 

are completely in the hands of the experts and they 

have an insurance dealer/broker they've dealt with, 
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they buy their auto insurance, their homeowners 

insurance with him, so obviously this guy is an expert 

in all aspects of insurance, therefore I can turn over 

my -- you know, my business and I know this guy is 

going to take care of me. I have no idea what 

questions to ask. And as a place with 15 employees or 

30 employees or even 150 employees most of these guys 

are worried about running the business and not worried 

too much about it because they know this guy is going 

to take care of them. 

 If we at least put out there up front, oh, by 

the way, yes, I do get paid commissions which help 

offset your costs or may not, but may be additional 

revenue. But there are other areas as well that I 

thought that you should know about that if I work with 

this company, this company, and this company they also 

give me other forms of compensation. And I find out 

that the only ones that are on my bid list are the 

three companies that give him some other kind of 

compensation it may raise some red flags. 

 MR. DOYLE: Joe, any questions? 

 MR. PIACENTINI: I think I'll ask just one. 

I think I'll ask just one. So I've heard from at least 

two of the witnesses that, you know, there is a lot of 

concern about the cost of disclosure. And it sounded 
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like you were talking mainly about the administrative 

costs of the disclosures, just having to get the 

information and hand it over that there is some cost of 

that. And I understand that. 

 Across the day we've heard some people say 

that there are other perhaps larger financial stakes on 

the table. You know, if we talk about the size of PDM 

rebates or the size of broker commissions, these are 

larger amounts probably than these administrative 

costs. So what I'm inferring then is that you think 

either that in fact those things are not a problem or 

that those things can be a problem but that disclosure 

wouldn't fix it. 

 MS. KLAUSNER: I think I'll go back to 

perhaps restating what I had intended to try to convey 

before which is on the larger employer market those 

things aren't important. However, we have the leverage 

and the expertise to actually ferret it out without 

regulation. Just understanding our fiduciary 

obligations to understand, you know, what it is that 

we're purchasing, you know, how those views are coming 

together, how all the costs are moving and what product 

or what's actually provided as a benefit. 

 MR. PIACENTINI: So the market can fix it -- 

 (Simultaneous conversation.) 
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 MS. KLAUSNER: The market on the large side. 

On the large side. On the smaller side, I think we're 

finding that the question is whether or not you're 

improving the opportunity to have benefits. And on the 

health insurance side, specifically, as opposed to the 

out-of-the-life AD&D goal, whatever, you know, we'd 

like to see how the medical loss ratio rules take care 

of some of that issue. Again, understanding that as a 

general matter for every dollar you spend 85 cents need 

to go to providing health care and I realize there's a 

lot of gray there and a lot that needs to be worked 

out. But let's let that work out. So if a company 

understands that they have a plan design that's 

intended to cover certain things, fully insured, and 

that for their premium every 85 cents will go there, 

they know 15 cents is going to helping the insurance 

company or anybody who they work with to make this 

process smooth will go to other things, or profit. I'm 

not sure they need any other information. 

 MR. KELLER: I mean, if the concern is 

margin, what's the margin? Because it seems to me 

that's part of the -- we're talking about medical loss 

ratio. We're talking about how much of the premium 

dollars are effectively being used to deliver benefits 

rather than being kept as profit. And so if your 
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question is, you know, how far should we go in terms of 

making sure that insurers, other folks in this space 

aren't making too much money off, I mean, it seems to 

me that's not -- that's not really because even in the 

retired plan context, if you have a TPA or somebody 

like that who pays -- you pay a flat fee based on the 

number of participants, it's not like we pull it behind 

the curtain and ask, well, how much are you really 

making based on that administrative fee? I mean, we 

don't -- so, I mean, I understand the focus on 

understanding in terms of like loss ratios and things 

like that and maybe it's because it's of the Affordable 

Care Act and the new focus on that, but to say that now 

we want to know what is the line of the questions were 

on the PBM side in terms of other products, am I being 

gouged, am I being charged too much for this service? 

 I mean, I understand the concern, but we 

don't even do that in the retirement plan context. We 

don't go into each specific service that the TPA has 

entered and say, are you gouging this person. I mean, 

it's all based on disclosure of what the fees are and 

is it reasonable based on the marketplace? 

 MS. KLAUSNER: If I could just comment to 

just show another side unlike perhaps the Chamber's 

members. You know, Honeywell, as well as I think 
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substantially if not certainly close to all of the 

Council's members do actually pull back the curtain on 

the defined contribution side and ask for, you know, 

all of the different services that are being provided, 

you know, what is the fee, and if we don't need that 

service, can we drop that fee? 

 On the smaller employer side, where it's more 

of a bundled service on the DC side, they might have to 

look at more in the aggregate because again it's just, 

you know, less flexibility and less leverage. So, 

again, that's sort of the same distinction that I think 

we're finding, perhaps imperfect comparison on the 

self-insured which tends to be the large employer 

market and the fully insured health care which tends to 

be the small to mid-sized market. 

 MR. DOYLE: Okay. Thank you. I have one 

follow up. I mean, we have a fairly broad 

representation of the plan sponsored community here and 

at the risk of asking you to just disagree with your 

own testimony, to some extent, if there are areas 

whether it be PBM or the brokers or the consultants who 

are receiving multiple compensation from various 

parties, if there is a specific area where you believe 

that the Department in a very narrow defined way can 

provide some assistance to ensure that fiduciaries get 
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the information they need to take into account 

conflicts of evaluate the reasonableness of the 

compensation I invite you to share those with us. I 

mean, I think we have an opportunity to do something 

constructive, and I don't think it's our interest in 

doing something that's not constructive or that's going 

to result in unnecessary costs or burdens or cause 

entities to go out of business or redefine the 

industries. But if in some small way there's something 

we can do to facilitate the process of selecting 

service providers more by plan fiduciary as I think 

we'd like to do that and we invite your input. 

 MS. KLAUSNER: I think if you look at it, you 

know, from, you know, the smallest concern to, you 

know, the areas in which it's worthy of evaluating -- 

you know, I mentioned severance pay plans, like let's 

not forget that if we use the concept of welfare plans 

we could be very, very broad. So I don't think anybody 

has expressed an interest no matter where you fall in 

this world. 

 MR. DOYLE: Exactly. 

 MS. KLAUSNER: And then we've talked about, 

you know, the health care, you know, the more simple 

health care environment of, you know, fully insured 

versus self-insured and we've expressed why that might 
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not be, you know, favorably, you know, received. 

 The one area that you discussed, you know, at 

great depth both in the panel that preceded us as well 

as, you know, in this panel is in the PBM industry. 

And I think that it's unique in that there is multiple 

levels in the distribution channel to get to the point 

of actual receipt of benefits by an employee or 

participant. 

 If I need, you know, something nonpharmaceutical in health care there could be levels, 

but generally, you know, I go to a facility and they 

use the x-ray machine and perhaps they owe somebody on 

the lease for the x-ray machine, or they own it and 

they have to pay it back. So I think that the multiple 

levels of the distribution -- 

 MR. DOYLE: Well, I invite you to think about 

it and if you have thoughts, please share them with us. 

 With that I'm going to thank this panel. 

 I'm going to remind everyone that we are 

going to keep the hearing record open for those who 

want to supplement either their testimony from today or 

others who have not had the opportunity to testify, we 

welcome whatever input they would like to share with 

us. We will leave that record open until January 7th

and we will post all the submissions on our web site so 
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that it will be public. 

 With that, I want to thank everyone who has 

participated and thank you for your attendance. 

 And we are now officially adjourned. 

 [Whereupon, at 1:09 p.m., the meeting was 

adjourned.] 
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C E R T I F I C A T E 

 This is to certify that the foregoing 

proceedings of a meeting of the Employee Benefits 

Security Administration, U.S. Department of Labor, held 

on Tuesday, December 7, 2010, were transcribed as 

herein appears, and this is the original transcript 

thereof. 

 ___________________________ 

 LISA DENNIS 

 Court Reporter