February 11, 2024

New Lawsuit Alleges Mismanagement of Prescription Drug Benefits by ERISA Fiduciaries

A lawsuit filed on February 5, 2024 against Johnson and Johnson and its health plan fiduciaries (U.S.D.C. – New Jersey, 24-cv-00671) is a good reminder that the fiduciary duties that exist under the Employee Retirement Income Security Act of 1974 (“ERISA”) do not just apply to qualified retirement plans.  They apply to ERISA health and welfare plans too.  There is likely a very strong “rest of the story” to the allegations in this lawsuit and Defendants will no doubt vigorously dispute and defend this case, but the allegations in this new Class Action Complaint give employers and their plan fiduciaries much to think about.

ERISA provides that anyone who exercises discretionary authority or discretionary control respecting management of an ERISA plan, or exercises any authority or control respecting management or disposition of plan assets, is a “fiduciary.”  Thus, the persons who select and monitor a plan’s service providers are likely fiduciaries.  Examples of service providers for a group medical plan would include a plan’s network, third-party administrator, pharmacy benefit manager, and consultant/broker.

A fiduciary of an ERISA plan has significant fiduciary duties including the “duty of prudence,” which requires a fiduciary to act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”  Generally, this duty likely requires fiduciaries to engage in a prudent process to evaluate and monitor service providers.  Fiduciaries are typically very good at doing this on the qualified retirement plan side, but are not always as good or thorough on the health and welfare plan side (or at least not as good at documenting their good work).

The Plaintiffs in the Johnson and Johnson case allege the Defendant fiduciaries breached their fiduciary duties and mismanaged the plan’s prescription-drug benefits, which cost the plans and their employees millions of dollars in the form of:

  1. higher payments for prescription drugs;
  2. higher premiums;
  3. higher deductibles;
  4. higher coinsurance;
  5. higher copays; and
  6. lower wages or limited wage growth.

Among the allegations in the Class Action Complaint, Plaintiffs allege that someone with a 90-pill prescription for one generic drug could fill that prescription without insurance for between $28.40 – $77.41, and yet, they allege, the Defendant fiduciaries contractually agreed to have the plan pay $10,239.69 for the same 90-pill prescription.

At its core, the lawsuit appears to be fundamentally about whether the Defendant fiduciaries should have done a better job of evaluating, selecting, and monitoring their pharmacy benefit manager and the related contracts.  Among other things, Plaintiffs allege that prudent fiduciaries:

  1. negotiate with their PBMs to minimize or eliminate any portion of rebates or other financial concessions from manufacturers that the PBM retains instead of passing through to the plan;
  2. ensure their PBM contract is written with sufficient precision that the PBM cannot hide or obscure these rebates without passing them through to the plan;
  3. select carefully among PBMs, analyzing their member base and each PBM’s offerings to decide which PBM and which payment model will be most beneficial and most cost-effective for their plan;
  4. negotiate favorable terms with PBMs and continually supervise their PBM’s actions to ensure that the plan is minimizing costs and maximizing outcomes for beneficiaries;
  5. retain sufficient control over their plans’ formularies to prevent the PBM from making formulary decisions that serve the PBM’s interests but not the plan’s interests;
  6. periodically attempt to renegotiate their PBM contracts and/or conduct an open RFP process to solicit proposals from other PBMs and ensure that they have the best possible deal for the plan and plan beneficiaries;
  7. ensure that any consultant that they hire to help them select and negotiate with a PBM does not have conflicts of interest that would prevent it from offering objective advice to the plan and operating a truly open RFP process;
  8. would not hire a consultant who was receiving kickbacks or other forms of compensation from the PBM it was selecting or negotiating with;
  9. exercise, and are required to exercise, independent, prudent, and impartial fiduciary judgment even on matters for which they receive advice from their consultants;
  10. will replace brand-name drugs on the formulary when lower-cost, FDA-approved generics become available; and
  11. are aware of the conflicts of interest that PBMs have in making formulary decisions.

The same “hindsight is 20/20” arguments that have been successfully made on the qualified retirement plan side (in defense of fee and investment-performance litigation) will likely be made here, but this new lawsuit gives us much to think about – not just with the way fiduciaries select and monitor PBMs but also the way fiduciaries select and monitor other medical plan service providers like networks, third-party administrators, and consultants/brokers.

Brandon Long is an experienced, AV Preeminent-rated employee benefits attorney and a member of McAfee & Taft's Employee Benefits and Executive Compensation Group.

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