Employers who provide employee health insurance containing prescription drug benefits are paying closer attention to the costs associated with these benefits. In particular, employers are exploring ways to control costs by altering the plan’s drug formulary, the part of the plan that establishes what drugs are covered and sets different cost “tiers” for various brand-name drugs and their generic equivalents. Employers faced with increasing prescription drug costs often ask insurers for less costly alternatives. When the insurance plan applies to a union-represented workforce and is incorporated into a collective bargaining agreement, this can spell trouble.

A recent opinion of the United States Court of Appeals for the D.C. Circuit is a case in point. The employer in Caterpillar Inc. v. NLRB, 2011 U.S. App. LEXIS 11163 (May 31, 2011), provided a collectively bargained prescription drug benefit to its employees under a union contract. Over the years, the details of the plan had been modified, without objection by the union.

Under the plan, employees who chose generic drugs paid a $5 co-pay; those choosing brand-name drugs paid a $20 or $35 co-pay. In an effort to promote the use of less expensive generic drugs, the employer issued a notice stating that employees who chose a brand-name drug rather than the generic would be required to pay the full retail price of the brand name drug, unless their physician specified the brand-name drug.

The union filed an unfair labor practice charge alleging a unilateral change without bargaining. The company argued that it was not required to bargain because: (1) the change to the plan was in line with prior changes and so did not alter the “status quo;” and (2) the change was merely administrative, and so was not material, substantial and significant. The NLRB disagreed. The Board concluded the union had not waived its right to bargain by acquiescing in prior changes and found the change to be material, substantial and significant; employees who previously could choose a brand-name drug and pay only $20 were suddenly faced with full retail cost, unless they obtained a certificate from their physician. On appeal, the D.C. Circuit agreed with the NLRB.

The NLRB and the court relied in part on the fact that the $5, $20 and $35 co-pays were spelled out in the insurance contract, and that contract was adopted under the union labor agreement. The outcome might have been otherwise had the plan and contract reserved the right to make adjustments of this sort during the contract term, and if the collective bargaining agreement had adopted the plan “as amended from time to time.” The lesson for companies who want the flexibility to change their benefit plans during the term of a union contract is to include appropriate language authorizing such action in the labor agreement. And, with government-mandated health care around the corner, employers currently in negotiations are reminded to address the need for flexibility at the bargaining table. See Health Care Reform and Collective Bargaining: Mid- Term and Long-Term Strategies for Bargaining over the Impact of the PPACA on Employers, Jay Sumner, November 2010.

Photo credit: Andriy Solovyov