J&J Lawsuit Places Employer-Sponsored Health Plan Fiduciary Obligations Back in the Limelight

Executive Summary
A recently filed lawsuit focuses on ERISA fiduciary obligations of employers in their role as group health plan sponsors, particularly the “duty of prudence” in selecting and monitoring health plan vendors. Specifically, the lawsuit involves a prescription drug plan’s benefits and management, including the plan’s usage of pharmacy benefit managers (PBMs). The lawsuit alleges that as a result of fiduciary failures, plan participants and beneficiaries were required to pay increased costs and premiums and thus harmed.

The case is still pending, making it difficult to ascertain the specific employer fiduciary obligation takeaways in the prescription drug context. Additionally, this lawsuit involves the use of a trust for benefit payments, which may differentiate it from other employer sponsored group health plan designs and may limit the application of any court decision. Nevertheless, the lawsuit serves as a helpful reminder for employers—particularly those sponsoring self-insured plans—to review their fiduciary obligations and maintain robust fiduciary procedures. We will continue to monitor the lawsuit.

Background
In early February 2024, a class action complaint was filed against pharmaceutical company Johnson and Johnson (in its capacity as the plan sponsor of their group health and prescription drug plan) and its benefits committee (collectively, J&J). According to the complaint, J&J failed to meet ERISA fiduciary obligations in its selection of a PBM (Express Scripts) and failed to negotiate more favorable pricing terms for the plan and participants in their PBM services agreement. The complaint claims that this resulted in increased costs (e.g. higher plan premiums, deductibles, copayments, cost-sharing) thus harming participants and beneficiaries. The lawsuit raises some interesting and challenging questions regarding an employer’s obligations in selecting, monitoring, and overseeing plan vendors, including PBMs.

Health Plan Fiduciaries and ERISA Obligations
To help understand the allegations, it’s important to have a solid grasp of ERISA and fiduciary obligations. At a high level, ERISA was – in part – enacted to protect the interests of participants and beneficiaries of employer-sponsored welfare benefit plans (employees and their dependents in the group health plan context). ERISA sets levels of conduct for those who manage employee benefit plans and their assets, called fiduciaries. Under ERISA, employers are considered fiduciaries in their role as health plan sponsors and administrators. Certain other individuals (e.g., a person, committee, or entity) or service providers may also be named as fiduciaries in the related plan documents (at least one fiduciary must be named). An individual or service provider could also be considered a fiduciary if they exercise discretionary authority or control over the plan or its assets. Note that merely being named as a contact for the plan does not make an individual a fiduciary.

Fiduciaries have a heightened responsibility to follow certain standards when operating, administering, or making (non-settler) plan decisions, and those responsibilities are generally referred to as “fiduciary obligations” or “fiduciary duties.” Two primary duties are the duty of loyalty and the duty of prudence. The duty of loyalty requires the plan fiduciary to act in the best interests of plan participants and beneficiaries. The duty of prudence requires fiduciaries to act with the same care, skill, prudence, and diligence as a comparably knowledgeable plan fiduciary acting under similar circumstances. The duty of prudence focuses on the decision-making process as opposed to the actual results and outcomes. This focus highlights the importance of recording activities, keeping minutes of meetings and discussions, and maintaining relevant documents, reports, legal opinions, or expert advice that were considered in reaching final conclusions on plan-related decisions.

Additionally, under both duties, plan fiduciaries have an obligation to monitor plan service providers, including third-party administrators (TPAs), PBMs, or other vendors that service the plan. When considering potential service providers, fiduciaries should compare their services, experience, fees and expenses, customer references, or other information relating to the quality of services. Importantly, fiduciaries must understand the terms of any agreements entered with service providers and whether the fees and expenses to be charged to the plan are reasonable. Fiduciaries also must periodically review the performance of their service providers to ensure that they are providing the services in a manner and at a cost consistent with the agreements.

ERISA Fiduciary Compliance Obligations for Fully Insured Plans Versus Self-Insured Plans
For fully insured plans, the carrier and plan sponsor generally share fiduciary responsibility and the carrier plays a significant role in complying with the duties of loyalty and prudence. For self-insured plans, the employer plan sponsor assumes a much higher level of fiduciary duty to administer the plan prudently and in the best interest of plan participants.

PBM Pricing Models
To understand the allegations, it’s important to consider PBM pricing methodologies. PBMs generally receive compensation through one of three methods, as outlined below.

• Pass-Through Pricing. The PBM charges the drug’s acquisition cost (i.e., the amount paid to the drug manufacturer for the drug) to the plan. The PBM receives compensation from the plan via a per-employee or per-month rate.
• Spread Pricing. The PBM receives compensation on the difference (spread) between the PBM’s drug acquisition cost and the PBM’s charge to the employer plan. For example, if the PBM pays a drug manufacturer $20 for a drug, and the PBM charges the plan $30 for the drug, the PBM keeps the difference ($10) as compensation.
• Rebates. PBMs, as bulk buyers, negotiate rebates from drug manufacturers. The PBM retains a portion or all the negotiated rebate as its compensation.

J&J Lawsuit Allegations: Plan Sponsor Failures and Participant Harms
At a high level, the lawsuit alleges that J&J breached its ERISA fiduciary duties in several ways, resulting in the plan – and by extension its participants – overpaying for prescription drugs. Specifically, the allegations include:

• Failure to Use Prudence in Negotiating Contract Pricing Terms. The complaint alleges that J&J overly relied on its PBM’s formulary (generally, the list of covered drugs) development rather than negotiating or assisting in the formulary development itself — allegedly allowing the PBM’s favoring of more expensive brand name drugs over generic drugs, thus increasing the PBM’s compensation and the overall plan’s expenses. Additionally, the complaint alleges that J&J agreed to pay the PBM exorbitant prices for generic prescription drugs that could be obtained without insurance at some pharmacies for a much lower price.
• Failure to Use Prudence in Selection of PBMs. The complaint alleges that J&J did not regularly conduct requests for proposal and failed to consider non-traditional PBMs (those compensated via pass-through pricing instead of spread pricing and rebates) and asserts that these failures incentivize the PBM to overcharge the plan.
• Failure to Use Prudence in Prescription Drug Plan Design. The complaint asserts that J&J overly relied on the PBM’s specialty pharmacy service instead of using a carve-out specialty pharmacy through a third-party vendor — allegedly incentivizing the PBM to direct participants towards PBM-owned specialty drugs rather than lower-cost options.

As a result of those failures, the lawsuit alleges harm to plan participants in the form of increased premium rates and cost-sharing. The complaint alleges that the increase in overall expenses relating to prescription drug costs increases premium rates, to which participants (employees) contribute. The complaint also alleges that the plan’s failure to negotiate lower drug rates caused participants to overpay for drug costs through higher copayments, cost-sharing, and co-insurance. Even though certain drugs were available at a cheaper rate from an unaffiliated pharmacy, J&J plan participants paid more for the drugs through the PBM-owned or affiliated pharmacy.

Potential Impacts
It is still quite early in the litigation process and unless and until the case reaches a final conclusion, it is impossible to ascertain how prescription drug plans and employer fiduciary duties might be affected. Perhaps other lawsuits will follow, particularly considering recently enacted transparency requirements under the Transparency in Coverage Final Rule and CAA 2021 (both generally make information concerning drug prices publicly available). Arguably, these laws provide employers with greater access to healthcare pricing information so that they can make better informed cost-conscious decisions regarding plan benefits.

In any event, employers concerned about possible litigation should ensure they are engaging in prudent fiduciary decision-making processes with respect to the selection of PBMs and other vendors. Employers speculating about the impact this lawsuit might have on their specific plan design should consult with legal counsel for advice and guidance.

As noted earlier, the J&J plan funding is distinct from the typical funding of employer-sponsored group health plans because it is funded through a voluntary employee benefits association (VEBA). A VEBA is a special tax-advantaged trust funded by employer and participant/employee contributions. This is meaningful because any funds held in such a trust – segregated from the employer’s general assets – are considered ERISA “plan assets” and subject to ERISA fiduciary protections, including the duties of loyalty and prudence. As a result, certain aspects of the case, and perhaps any resulting decision, may be limited in applicability. Thus, only time will tell if similar lawsuits will be brought against plans that are funded via a more common plan design, such as through the employer’s general assets.

Employer Takeaways
At the moment, no immediate action is needed as a result of this initial court filing. That said, while this case plays out in court, employers – as ERISA plan sponsors – should carefully consider their fiduciary obligations. At a high level, employers should actively engage in a prudent process when selecting and overseeing plan service providers and vendors, including prescription drug and PBM vendors. Employers should consider that ERISA does not mandate a singular or one-size-fits-all approach to fiduciary decision making. Rather, ERISA requires employers to consider the totality of facts and circumstances of their own situation.

More specifically, in consultation with their legal counsel, employers may consider:

• Establishing and documenting an annual process by which the employer obtains, reviews, and monitors PBM and other vendor proposals, agreements, benchmarking, clinical programs, and vendor performance (and memorializing the process in formal policies and procedures).
• Establishing a process through internal or external resources to actively manage and oversee key aspects of the prescription drug program with a focus on ensuring costs remain reasonable. If necessary, implementing a process whereby beneficiaries may be steered towards more cost-effective options (information could be gathered from other prescription drug vendors and pharmacies and compared against the current vendor’s prices and value).
• Establishing a fiduciary committee for health and welfare benefits, including adopting a charter and delegating fiduciary responsibility to the committee.
• Identifying and reviewing PBM and other vendor contracts to compare related fee and rebate arrangements and formularies. Prudency may require hiring an independent expert, if necessary, to interpret and explain the specific pricing and terms.
• When selecting a PBM, developing a process to review and consider the terms of PBM and other prescription drug options with a focus on value received for the cost (lowest cost choice does not always mean most reasonable and prudent choice).
• Periodically running PBM and other vendor contracts through the RFP process.
• When completing an RFP, consider implementing a transparent PBM pricing model (such as the pass-through model described above).
• Engaging subject matter experts that understand the changing landscape of pharmacy benefits; reliance on medical insurance carriers or PBMs may not be sufficient.
• Contracting arrangements that involve direct to pharmacies or manufacturers or direct to consumer pricing.
• Implementing a formal training program for fiduciaries relating to fiduciary obligations and duties.
• Acquiring fiduciary liability insurance to protect plan sponsors and fiduciaries from fiduciary breach liabilities.

Importantly, with respect to prescription drugs specifically, ERISA does not require that plan fiduciaries always use the lowest cost vendor. For a variety of reasons, employers may choose not to work with non-traditional PBMs, even if they supposedly offer lower drug pricing. There are other considerations that impact the prudent actor analysis, including network access, claims processing, and drug formulary selection, all of which may be significant to plan participants.

We will continue to closely monitor the J&J and other notable court decisions and report on them via our Compliance Corner newsletter.