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Fiduciary Liability in Providing Pharmaceutical Benefits
How far does ERISA’s fiduciary duty of prudence extend? What level of oversight of and negotiation for medical service costs and prescription drug pricing is considered prudent for a plan administrator? With drug costs and prescriptions both growing each year, plan fiduciaries may soon need to reconsider how they monitor their health and welfare plans’ service providers and associated fees.
Case Breakdown
In a federal class action complaint filed on February 5, 2024 , a participant in the Johnson and Johnson (J&J) Group Health Benefits Plan (the “Plan”) alleged that J&J (as the Plan sponsor) and the Pension & Benefits Committee (the “Committee,” as the Plan administrator) breached their fiduciary duties under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) by allegedly causing participants to significantly overpay for drugs.
As well as enshrining protections for employee retirement savings plans, ERISA also aims to apply its fiduciary standards to group health insurance plans offered by certain employers or welfare trust funds. ERISA’s fiduciary standards generally apply to any individuals who have discretionary control over a plan and/or its operations. Plan administrators are nearly always considered fiduciaries under ERISA and, as such, have a duty to administer the plan in the sole interest of the plan’s participants and beneficiaries. As an example, the duty to act prudently as prescribed in ERISA is often interpreted as requiring a fiduciary to select and engage with a service provider (in this context, a pharmacy benefit manager or “PBM”) objectively and with the interests of the participants and beneficiaries at the forefront.
J&J’s Plan, as administered by the Committee, provides certain pharmaceutical benefits to participants and beneficiaries by negotiating prices for specific covered drugs and other pharmaceutical items, and then paying for a portion of those covered items after adjustment. Participants and beneficiaries then pick up the remainder of the cost based on applicable deductible, copayment, and coinsurance rules outlined in the Plan. The Plan is funded through a VEBA, a “voluntary employee benefits association” – meaning that both J&J, as the employer, and the participating employees contribute funds into the account. Critically, although the drug pricing is generally administered by the PBM through a formulary, the plan’s fiduciaries are generally responsible for reviewing and monitoring all aspects of the contract (including drug pricing) to ensure that the terms and costs are reasonable and in line with generally accepted industry standards, meaning J&J had to review and approve all drug pricing proposals for the Plan. As prescription drug costs rise, the rates paid by a plan for drugs can have a dramatic impact on the cost to administer a plan, which in turn has a direct effect on the amount a plan charges participants and beneficiaries for monthly premiums, copayments, coinsurance, and the like.
Among other drugs, specifically mentioned by Plaintiffs in the complaint is abiraterone acetate. As described in the complaint, abiraterone acetate is a “generic drug used to treat prostate cancer.” The drug, which costs $82.80 for a pharmacy to acquire a 90-tablet supply from the manufacturer, was billed to the J&J Plan at $5,375.26 per 90-tablet supply. For reference, the complaint lists the price of the same prescription and quantity at certain retail pharmacies, without insurance: $105.87 at Rite Aid, $111.19 at Walmart, $115.30 at Wegmans, and $90.50 at Cost Plus Drugs online pharmacy, meaning the Plan paid a price approximately sixty times higher than the cost of the drug to an uninsured person at a retail pharmacy. This is far from the only example of cost inflation cited in the complaint, and it speaks to a wider practice between the Plan and its PBM of negotiating what appear to be grossly overpriced drug costs for the Plan to pay.
Plaintiffs’ primary argument in the Complaint is that the Committee (and by extension, J&J) had a fiduciary duty to monitor the Plan’s expenses and seek out the lowest available price for covered drugs and services in order to keep Plan costs low (which, Plaintiffs argue, is in the best interests of the participants and beneficiaries). Thus, Plaintiffs allege that paying more than sixty times the amount charged by a retail pharmacy for a generic drug is a breach of the Committee’s fiduciary duties under ERISA. Furthermore, Plaintiffs allege that the breach would not have occurred but for the Committee’s mismanagement of the Plan; in other words, had the Committee taken the time to properly negotiate drug prices, or seek a different PBM or pharmacy provider, no breach would have occurred.
It is still quite early to tell where the lawsuit will head from here. Defendants have not yet responded in substance to the Complaint, the facts alleged might not be accurate, and the legal obligations might not be as Plaintiffs describe them. According to a letter Defendants filed with the Court on March 21, 2024, as well as Plaintiffs’ response letter dated April 4, 2024, both sides anticipate motions to dismiss the claims alleged in the Complaint. Our office will continue to monitor any developments as the case progresses.
R&R Analysis
Whether your plan operates as a Taft-Hartley Fund or is sponsored by a single employer, if your plan is governed by ERISA the Lewandowski case serves as an important reminder to continually monitor your service providers and applicable fees. While ERISA fiduciary lawsuits have in the past been aimed primarily at retirement plan sponsors, this case could usher in a wave of health plan suits, in both the single- and multiemployer spaces. It is important to note, however, that most single-employer-sponsored group health plans are not “funded” at all (that is, plan costs are paid directly from the employer’s general assets, rather than through VEBAs); on this basis, it has been argued that, even if this case did move forward, its outcome may not apply to other health plans funded solely by employers . However, ERISA’s fiduciary duties are universally applicable, and a plan sponsor’s responsibility to administer the plan for the benefit of participants remains regardless. Nevertheless, with employee contributions complicating the trust fund pool, certain claims in the complaint have more weight against J&J than they would against the average health plan sponsor – essentially, an underlying current throughout the complaint is that not only did J&J mismanage the Plan, but also mismanaged employee funds.
On the other hand, is it reasonable to expect J&J (or any company or group which provides benefits to its employees or covered members) to research each and every drug cost, comparing every potential PBM’s payment plan line by line? Such a task would surely greatly increase the time needed to negotiate plan particulars, and drive up plan costs at the same time – meaning that even if a line-by-line comparison leads to negotiated savings for certain generic drugs, a plan may not be better off at all when it comes to overall cost savings.
Nevertheless, with prescription drug prices skyrocketing and plan spend increasing, plan administrators may wish to take a closer look at where their negotiated rates stem from, before plan participants investigate first.
___________________________
1. Lewandowski v. Johnson and Johnson et al., Docket No. 3:24-cv-00671 (District of New Jersey, 2024) (hereinafter referred to as “Lewandowski”).
2. An amended complaint was filed on May 10, 2024, primarily to address assertions of lack of standing and make certain other edits. The remainder of this article references the original complaint, as filed on February 5, 2024.
3. The Group Health Benefits Plan is comprised of the Salaried Medical Plan, which covers current employees, and the Salaried Retiree Medical Plan, which covers retired employees. See Lewandowski, paragraphs 1 and 12.
4. Importantly, ERISA does not apply to most governmental or church plans. See https://www.dol.gov/general/topic/health-plans/erisa.
5. https://www.dol.gov/general/topic/retirement/fiduciaryresp.
6. https://www.newfront.com/blog/j-and-j-case-practical-considerations-the-core-four-erisa-fiduciary-duties-part-2.
7. Lewandowski at paragraph 102.
8. https://www.nfp.com/insights/jj-lawsuit/.
Case Breakdown
In a federal class action complaint filed on February 5, 2024 , a participant in the Johnson and Johnson (J&J) Group Health Benefits Plan (the “Plan”) alleged that J&J (as the Plan sponsor) and the Pension & Benefits Committee (the “Committee,” as the Plan administrator) breached their fiduciary duties under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) by allegedly causing participants to significantly overpay for drugs.
As well as enshrining protections for employee retirement savings plans, ERISA also aims to apply its fiduciary standards to group health insurance plans offered by certain employers or welfare trust funds. ERISA’s fiduciary standards generally apply to any individuals who have discretionary control over a plan and/or its operations. Plan administrators are nearly always considered fiduciaries under ERISA and, as such, have a duty to administer the plan in the sole interest of the plan’s participants and beneficiaries. As an example, the duty to act prudently as prescribed in ERISA is often interpreted as requiring a fiduciary to select and engage with a service provider (in this context, a pharmacy benefit manager or “PBM”) objectively and with the interests of the participants and beneficiaries at the forefront.
J&J’s Plan, as administered by the Committee, provides certain pharmaceutical benefits to participants and beneficiaries by negotiating prices for specific covered drugs and other pharmaceutical items, and then paying for a portion of those covered items after adjustment. Participants and beneficiaries then pick up the remainder of the cost based on applicable deductible, copayment, and coinsurance rules outlined in the Plan. The Plan is funded through a VEBA, a “voluntary employee benefits association” – meaning that both J&J, as the employer, and the participating employees contribute funds into the account. Critically, although the drug pricing is generally administered by the PBM through a formulary, the plan’s fiduciaries are generally responsible for reviewing and monitoring all aspects of the contract (including drug pricing) to ensure that the terms and costs are reasonable and in line with generally accepted industry standards, meaning J&J had to review and approve all drug pricing proposals for the Plan. As prescription drug costs rise, the rates paid by a plan for drugs can have a dramatic impact on the cost to administer a plan, which in turn has a direct effect on the amount a plan charges participants and beneficiaries for monthly premiums, copayments, coinsurance, and the like.
Among other drugs, specifically mentioned by Plaintiffs in the complaint is abiraterone acetate. As described in the complaint, abiraterone acetate is a “generic drug used to treat prostate cancer.” The drug, which costs $82.80 for a pharmacy to acquire a 90-tablet supply from the manufacturer, was billed to the J&J Plan at $5,375.26 per 90-tablet supply. For reference, the complaint lists the price of the same prescription and quantity at certain retail pharmacies, without insurance: $105.87 at Rite Aid, $111.19 at Walmart, $115.30 at Wegmans, and $90.50 at Cost Plus Drugs online pharmacy, meaning the Plan paid a price approximately sixty times higher than the cost of the drug to an uninsured person at a retail pharmacy. This is far from the only example of cost inflation cited in the complaint, and it speaks to a wider practice between the Plan and its PBM of negotiating what appear to be grossly overpriced drug costs for the Plan to pay.
Plaintiffs’ primary argument in the Complaint is that the Committee (and by extension, J&J) had a fiduciary duty to monitor the Plan’s expenses and seek out the lowest available price for covered drugs and services in order to keep Plan costs low (which, Plaintiffs argue, is in the best interests of the participants and beneficiaries). Thus, Plaintiffs allege that paying more than sixty times the amount charged by a retail pharmacy for a generic drug is a breach of the Committee’s fiduciary duties under ERISA. Furthermore, Plaintiffs allege that the breach would not have occurred but for the Committee’s mismanagement of the Plan; in other words, had the Committee taken the time to properly negotiate drug prices, or seek a different PBM or pharmacy provider, no breach would have occurred.
It is still quite early to tell where the lawsuit will head from here. Defendants have not yet responded in substance to the Complaint, the facts alleged might not be accurate, and the legal obligations might not be as Plaintiffs describe them. According to a letter Defendants filed with the Court on March 21, 2024, as well as Plaintiffs’ response letter dated April 4, 2024, both sides anticipate motions to dismiss the claims alleged in the Complaint. Our office will continue to monitor any developments as the case progresses.
R&R Analysis
Whether your plan operates as a Taft-Hartley Fund or is sponsored by a single employer, if your plan is governed by ERISA the Lewandowski case serves as an important reminder to continually monitor your service providers and applicable fees. While ERISA fiduciary lawsuits have in the past been aimed primarily at retirement plan sponsors, this case could usher in a wave of health plan suits, in both the single- and multiemployer spaces. It is important to note, however, that most single-employer-sponsored group health plans are not “funded” at all (that is, plan costs are paid directly from the employer’s general assets, rather than through VEBAs); on this basis, it has been argued that, even if this case did move forward, its outcome may not apply to other health plans funded solely by employers . However, ERISA’s fiduciary duties are universally applicable, and a plan sponsor’s responsibility to administer the plan for the benefit of participants remains regardless. Nevertheless, with employee contributions complicating the trust fund pool, certain claims in the complaint have more weight against J&J than they would against the average health plan sponsor – essentially, an underlying current throughout the complaint is that not only did J&J mismanage the Plan, but also mismanaged employee funds.
On the other hand, is it reasonable to expect J&J (or any company or group which provides benefits to its employees or covered members) to research each and every drug cost, comparing every potential PBM’s payment plan line by line? Such a task would surely greatly increase the time needed to negotiate plan particulars, and drive up plan costs at the same time – meaning that even if a line-by-line comparison leads to negotiated savings for certain generic drugs, a plan may not be better off at all when it comes to overall cost savings.
Nevertheless, with prescription drug prices skyrocketing and plan spend increasing, plan administrators may wish to take a closer look at where their negotiated rates stem from, before plan participants investigate first.
___________________________
1. Lewandowski v. Johnson and Johnson et al., Docket No. 3:24-cv-00671 (District of New Jersey, 2024) (hereinafter referred to as “Lewandowski”).
2. An amended complaint was filed on May 10, 2024, primarily to address assertions of lack of standing and make certain other edits. The remainder of this article references the original complaint, as filed on February 5, 2024.
3. The Group Health Benefits Plan is comprised of the Salaried Medical Plan, which covers current employees, and the Salaried Retiree Medical Plan, which covers retired employees. See Lewandowski, paragraphs 1 and 12.
4. Importantly, ERISA does not apply to most governmental or church plans. See https://www.dol.gov/general/topic/health-plans/erisa.
5. https://www.dol.gov/general/topic/retirement/fiduciaryresp.
6. https://www.newfront.com/blog/j-and-j-case-practical-considerations-the-core-four-erisa-fiduciary-duties-part-2.
7. Lewandowski at paragraph 102.
8. https://www.nfp.com/insights/jj-lawsuit/.
