The J&J Employee Class Action Signals that Plan Sponsors Must Audit PBMs, or Face Liability

On February 5, 2024, a Johnson and Johnson employee filed a class action lawsuit against Johnson and Johnson, its Pension and Benefits Committee, and individual members of the Pension and Benefits Committee (collectively “J&J”).  Plaintiff alleges breach of fiduciary duties under the Employee Retirement Investment and Security Act of 1974 (“ERISA”).  According to the plaintiff, J&J mismanaged its prescription drug benefits plan (the “Plan”) by failing to effectively monitor its Pharmacy Benefits Manager (“PBM”), Express Scripts, Inc. (“ESI”), costing employees millions in higher drug costs, premiums, cost share requirements, and lost wages.  In a series of prior articles, Frier Levitt attorneys have stressed the that Plans must honor their fiduciary duties by monitoring and auditing PBMs in order to avoid liability under ERISA.  J&J’s recent lawsuit is only the beginning.  The stage has been set, and plan sponsors must act immediately to avoid potentially significant liability.

The Basis of the J&J Lawsuit

According to the complaint, J&J’s failure to monitor the PBM managing the Plan led to millions of dollars of excessive Plan costs, harming employees and their dependents.  For instance, the Plan paid, on average, nearly five hundred percent (500%) more to obtain prescription drugs than it cost pharmacies to purchase the drug.[1]  The Plan paid six times as much as ESI paid in reimbursement for the same prescription drug.  The Plan paid for $10,239.69[2] for products that were otherwise available for $28.40 for a ninety (90) day supply without using insurance. The plaintiffs allege these excessive costs enabled ESI to grossly enrich itself at the expense of the Plan employees.

In addition to excessive prices, the plaintiff alleges that J&J breached its fiduciary duties in selecting the broker, AON, who assisted J&J in contracting with ESI.  J&J utilized AON and that broker received compensation from ESI in exchange for AON steering the Plan towards ESI.[3]  Thus, AON had a conflict of interest when recommending ESI as the optimal choice to manage Plan assets.  ERISA requires plan fiduciaries obtain a written disclosure of all direct and indirect compensation a service provider, such as a broker or PBM, receives while servicing to the Plan.[4]  The plaintiff contends that J&J failed to appreciate this conflict.

The complaint identifies additional acts or omissions of J&J that contributed to J&J’s alleged breach of fiduciary duty, including:

  • The contract allowed ESI resulted to utilize ESI’s wholly-owned specialty pharmacy which charged inflated prices; and
  • JNJ failed to audit the PBM and review the Plan’s total drug spend and failed to provide lower cost options.

What Plan Sponsors Must do to Adhere to Their Fiduciary Duties

Employee class actions are largely avoidable.  Plan sponsors possess adequate tools to identify and eradicate the type of PBM conduct described above, that leads to excessive costs.  Plan sponsors must concentrate on three areas to adhere to their fiduciary duties and reduce total drug spend:

  • Audit, Audit, Audit!

Pursuant to ERISA, plan fiduciaries must act solely in the interest of plan participants and for the exclusive purpose of defraying reasonable expenses of administering the plan.[5]  Inherent to such a duty is the obligation to effectively monitor a covered service provider (PBMs, brokers, third-party administrators, insurers) to ensure that the service provider is handling the plan’s administration prudently.[6]  To abide by these statutory responsibilities, plan sponsors must periodically audit their PBMs and other service providers to uncover spread pricing, rebate manipulation, and incorrect categorization of generic drugs].

  • Negotiate Contracts and Obtain Disclosures: Reasonable Compensation is the Law.

ERISA specifically prevents plan sponsors from contracting with entities like PBMs unless no more than reasonable compensation is paid therefor.[7]  A PBM-plan agreement cannot be considered “reasonable” unless the PBM discloses all direct and indirect compensation the PBM and subcontracts/affiliates anticipate receiving.  Plan sponsors must obtain these disclosures to avoid PBMs passing costs onto the plan while retaining excessive profits for themselves or their affiliated subcontractors.  For example, PBMs use vague contractual language on the issue of manufacturer rebates.  These provisions are intended to deceive the plan into believing it is receiving one hundred percent (100%) of manufacturer rebates, but, in reality, allow PBM affiliated rebate aggregators to retain potentially massive dollars.  The rebate provision is critical to honoring the fiduciary duty.

  • Select an Objective and Unbiased Broker.

Plan sponsors, when contracting with benefits brokers, must demand disclosures of all direct and indirect compensation.  Benefits brokers often have undisclosed relationships with PBMs.  PBMs compensate benefits brokers for coercing plans into selecting the specific PBM.  Many benefit brokers are interested in selecting the best PBM for the broker.  Selecting an objective broker can also help avoid breach of fiduciary duty allegations.

The three areas of concentration outlined above are only the tip of the iceberg when it comes to adhering to fiduciary duties under ERISA.  In light of the recent J&J lawsuit, plan sponsors must ensure they are compliant with ERISA’s fiduciary duties.  Trusting that the PBM or broker has the plan’s best interests in mind is not sufficient to honor the fiduciary duty.

How Frier Levitt Can Help

Frier Levitt is at the forefront of assisting plan sponsors in adhering to their fiduciary responsibilities and avoiding lawsuits.  Frier Levitt’s Plan Sponsor Group has a proven track record of obtaining favorable results for plan sponsors in various areas, including, but not limited to, analyzing PBM contracts, auditing PBMs, and initiating actions against PBMs to recover savings wrongfully withheld by PBMs.  Contact us to learn more.

[1] See Class Action Complaint, at ¶ 5, Lewandowski, et al. v. Johnson & Johnson, et al., No. 1:24-cv-00671 (NJ Dist. Ct. Feb. 5, 2024).

[2] See Id., at ¶ 3.

[3] See Id., at ¶ 96.

[4] See 29 U.S.C. § 1108(b)(2)(B).

[5] See 29 U.S.C. § 1104(a)(1) (emphasis added).

[6] U.S. Department of Labor, Getting it Right – Know Your Fiduciary Responsibilities; available at https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/fact-sheets/tips-for-selecting-and-monitoring-service-providers.pdf; see also Thompson Information Services, Employer’s Guide to Self-Insuring Health Benefits, July 2014, accessed November 18, 2022; available at https://1.next.westlaw.com/Document/I0a1998999f1611df9b8c850332338889/View/FullText.html?listSource=Foldering&originationContext=MyResearchHistoryRecents&transitionType=MyResearchHistoryItem&contextData=%28oc.Search%29&VR=3.0&RS=cblt1.0 (“employers and others acting as fiduciaries to ERISA group health have a duty to ensure all payments received by PBMs are disclosed…to ensure that hidden costs are not passed on to their plans and plan participants.”).

[7] See 29 U.S.C. § 1108(b)(2)(A) (emphasis added).

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