Employer J&J Sued for Breach of Fiduciary Duties and Mismanagement of Its Group Health Plan.
A class action lawsuit was just filed against drug manufacturer Johnson & Johnson (J&J) in its capacity as an employer and plan sponsor.
The suit alleges that J&J breached its fiduciary duties by not taking proper measures to ensure its plan costs were reasonable as well as failing to exercise prudence in selecting its pharmacy benefit manager (PBM) and agreeing to undesirable contract terms. Specifically, the suit accuses J&J of mismanaging its employees’ drug benefits, resulting in employees significantly overpaying for certain drugs.
This lawsuit is an example of the recent uptick in impending lawsuits regarding compliance with recent transparency rules, reinforcing the need for ERISA fiduciary governance.
Executive summary
J&J is the first of many expected and anticipated class action suits against employers for breach of fiduciary duties with respect to their health plans. Plaintiff law firms have been zeroing in on several large employers and investigating whether those employers are acting in the best interest of their plan participants, exercising care and prudence with respect to the selection of service providers and administration of their plans, and ensuring that plan costs are reasonable.
These fiduciary duties apply to any ERISA-covered employer sponsoring employee welfare or retirement benefits; however, more scrutiny in recent years has been placed on ERISA health benefits due to the plethora of transparency laws and regulations.
While the facts cited regarding drug costs in the J&J suit appear egregious and unique, pharmacy contracts are completed based on aggregate discounts and not drug specific discounts. There is no mention of the aggregate impact of the contract. However, given that focus is being placed on fiduciary responsibilities, there’s no better time than the present for employers to ensure they are minimizing risk, following their fiduciary obligations, and stepping up their oversight.
Action steps include considering the formation of a health and welfare benefits committee to monitor ERISA benefits, including the selection of service providers, reviewing contract terms, ensuring appropriate value for the price, and monitoring service providers and aggregate costs. The committee would ensure ERISA fiduciary duties are being met as set forth in the proposed action steps below. Many employers have that committee structure in place for their 401(k) plans.
Being able to demonstrate a process is in place will generally be an effective shield for many plaintiff lawsuits. That is, prudence equals process.
Background on the J&J lawsuit
ERISA plan sponsors as named fiduciaries have a responsibility to, in part, ensure that plan costs are reasonable as well as to exercise prudence in the selection and monitoring of service providers, such as pharmacy benefit managers (PBMs).
This is nothing new and is long engrained in ERISA law. What is new is all the recent transparency laws, such as those imposed under the Consolidated Appropriations Act (CAA), putting greater scrutiny on reasonableness of drug and other health plan costs. If plan sponsors are not evaluating and monitoring these aggregate costs or are not monitoring their service providers who are administering plan benefits, lawsuits such as we are seeing with J&J can arise, just as they have in retirement plans for mismanagement of investments in years past.
As stated in the 74-page complaint against J&J, “This case principally involves mismanagement of prescription-drug benefits. Over the past several years, defendants breached their fiduciary duties and mismanaged Johnson and Johnson’s prescription-drug benefits program, costing their ERISA plans and their employees millions of dollars in the form of higher payments for prescription drugs, higher premiums, higher deductibles, higher coinsurance, higher copays, and lower wages or limited wage growth. Defendants’ mismanagement is most evident in (but not limited to) the prices it agreed to pay [its PBM] for many generic drugs that are widely available at drastically lower prices.”
How much higher? The suit alleges that a particular drug (90-pill teriflunomide) was available at some pharmacies for less than $30; however, under the J&J health plan, the cost was over $10,000. The complaint also alleges that across all generic-specialty drugs on the formulary managed by J&J’s PBM, there was an average markup of 498% above what it costs pharmacies to acquire those same drugs. There is no mention of the aggregate impact of the contract. This suit is selecting specific medications, not accounting for the overall pricing.
As set forth in the complaint: “The burden for that massive overpayment falls on Johnson and Johnson’s ERISA plans, which pay most of the agreed amount from plan assets, and on beneficiaries of the plans, who generally pay out-of-pocket for a portion of that inflated price. No prudent fiduciary would agree to make its plan and beneficiaries pay a price that is two-hundred-and-fifty times higher than the price available to any individual who just walks into a pharmacy and pays out-of-pocket.”
Note the allegation that these inflated costs were paid with plan assets. This is significant. Plan assets are comprised of participant contributions or other monies that are set aside (and protected) specifically to pay for plan benefits, such as plan monies that are held in a trust. Many employer ERISA plans are paid directly out of the employer’s general assets. It is only when plan assets are involved, such as through a trust or employee contributions, that ERISA’s fiduciary obligations are at play.
In J&J, a trust exists. Hence, not only would the participant contributions be considered plan assets, but also company money placed in the trust. So, while the present suit clearly alleges egregious cost discrepancies with protected plan assets (such as employee contributions and other monies held in trust), that will not always be the case for other employer plans.
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