Summary: In what is likely to become a bellwether development for health plan fiduciary litigation, a new class action lawsuit was recently filed against Johnson & Johnson (J&J), alleging breach of fiduciary duty under the Employee Retirement Income Security Act of 1974 (ERISA) for mismanagement of its pharmacy benefits plan, resulting in millions of dollars overspent by the plan and plan participants.
Read on for more information and next steps for employer plan sponsor fiduciaries.
J&J Class Action Lawsuit
The J&J class action lawsuit was filed on February 5, 2024 in federal court in New Jersey. The complaint is a dense 74 pages with a slew of allegations against J&J. The suit lists the defendants as J&J in its capacity as an employer plan sponsor fiduciary, J&J’s Pension & Benefits Committee (Committee), as well several members of the Committee, in their individual capacities as plan fiduciaries. As a reminder, fiduciary liability under ERISA §409 can include personal liability to restore losses caused to the plan.
Turning to the complaint allegations, the plaintiffs principally allege “mismanagement of prescription drug benefits,” resulting in millions of dollars overspent by the pharmacy benefit plan. As a result, the plan was required to pay what is purported to be unreasonably more in prescription drug prices, particularly for generic drugs, than it would have paid had it properly managed the plan as ERISA fiduciaries.
Highlights of the plaintiffs’ ERISA breach of fiduciary duty allegations include:
- Failure to conduct a request for proposal (RFP) to obtain competitive bids for pharmacy benefit manager (PBM) services at regular intervals.
- Failure to negotiate favorable terms with PBMs and continually supervise PBM’s actions to ensure that the plan is minimizing costs and maximizing outcomes for beneficiaries.
- Failure to periodically attempt to renegotiate PBM contracts and/or conduct an open RFP process to solicit proposals from other PBMs.
- Failure to adequately negotiate the PBM contract terms given its bargaining power as a Fortune 50 employer.
- Failure to independently assess the PBM’s formulary placement of each prescription drug and closely supervise PBM’s formulary management to ensure the plan is paying only reasonable amounts for each prescription drug.
- Improperly steering plan participants towards their PBM’s mail-order pharmacy even though the mail-order pharmacy’s prices were routinely higher than retail pharmacies charge for the same drugs.
- Failure to contemplate carving out their specialty-drug program from their broader PBM contract to obtain more favorable pricing.
- Failure to protect plan assets.[1]
The complaint contains numerous examples regarding the allegations that the J&J plan overpaid for prescription drugs, particularly generic prescription drugs. One example referenced the plan paying over $10,000 for a 90-pill generic drug to treat multiple sclerosis that can be obtained without using insurance at various online and retail pharmacies for between approximately $28 and $77.
As for the J&J plan participants, the complaint alleges they were subject to higher premiums, cost-sharing amounts (including higher deductibles, copayments, and coinsurance), and even lower wages, as a result of J&J’s breach of fiduciary duty.
ERISA Fiduciary Duty Background
The underlying duties of care and integrity imposed on fiduciaries are heightened based on the common law of trusts. Congress intended to incorporate these principles of heightened duties on employee benefit plan fiduciaries when it enacted ERISA in 1974.
Accordingly, the fundamental ERISA fiduciary duties are set forth in ERISA §404 and require plan fiduciaries to:
- Act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
- Carry out their duties prudently;
- Follow the plan documents (unless inconsistent with ERISA);
- Holding plan assets (if the plan has any) in trust; and
- Paying only reasonable plan expenses.
The allegations against J&J and the other named defendants serve as a potent reminder to ERISA plan fiduciaries that the selection and continual monitoring of plan service providers, including third-party administrators (TPAs) and PBMs, is a paramount plan fiduciary obligation.
Moreover, plan fiduciaries must ensure that plan fees and expenses are reasonable, necessary for the plan’s operation, and not excessive for the services provided. Monitoring plan fees and expenses for reasonableness in light of the services provided generally entails a facts and circumstances analysis. However, this does not mean that plans are necessarily required to select the lowest cost service providers in all circumstances[2], as the plaintiffs allege against the J&J plan.
ERISA Breach of Fiduciary Duty Lawsuits
Until this J&J lawsuit was filed in early February, the general trend around health plan fiduciary litigation involved employer health plan sponsors suing their TPAs for breach of ERISA fiduciary duties alleging improper handling of claims payments, failure to provide claims data, cross-plan offsetting, and other related allegations. Recent health plan transparency legislation and regulatory rules serve as catalysts for these particular lawsuits, including the recent Kraft Heinz v. Aetna suit that was voluntarily dropped by Kraft Heinz in December 2023.
The J&J suit appears to be the first of its kind on the health plan fiduciary side. It somewhat mirrors the playbook of ERISA retirement plan fiduciary breach class actions. In these cases, which have been occurring for well over a decade now, employees file class action lawsuits against their employer retirement plan sponsors for excessive fees and imprudent monitoring of plan service providers.
Next Steps for Plan Sponsor Fiduciaries
As we previously noted, this recent J&J lawsuit is likely a harbinger of a new trend of health plan fiduciary ligation. Since the lawsuit was just filed in early February, it is too early to speculate on the outcome or even the next steps in the litigation process here.
Nonetheless, plan sponsor fiduciaries are advised to consider, in close collaboration with their legal counsel and benefits consultants, the following action items to bolster protective measures and mitigate potential liability:
- Diligently monitor plan service providers on a regular and consistent basis;
- Continuously track plan expenses to ensure that they are reasonable under the circumstances;
- Conduct RFP and/or market check exercises at regular intervals for all plan service providers, including TPAs and PBMs;
- Perform claim audits at regular intervals to monitor both plan service provider performance and plan expenses;
- Work with legal counsel to create a formal benefits committee;
- Conduct committee meetings on a regular and consistent basis, and provide proper fiduciary training for committee members;
- Carefully document all plan fiduciary-related actions and decisions of the committee;
- Obtain fiduciary liability insurance and an ERISA fidelity bond to protect the plan sponsor and other fiduciaries, particularly in light of the individual J&J Committee members named as defendants. The Risk Strategies Management Liability team can help in this space.
Click here for a Department of Labor (DOL) booklet providing more detailed information regarding fiduciary responsibilities under a group health plan.
Risk Strategies is closely watching this lawsuit and will provide updates when available. Reach out to your Risk Strategies team members with any questions or contact us directly at benefits@risk-strategies.com.
[1] This particular allegation is unusual since the J&J plan is funded by a trust, whereas the vast majority of health plans are not. The existence of the trust in this case appears to add a more direct element to a breach of fiduciary duty claim with respect to plan assets since all funds within a plan trust are deemed plan assets.
[2] https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/02-19-1998.
