Johnson & Johnson Lawsuit Dismissal Changes Nothing! Health Plan Fiduciaries Must Stay Vigilant Over Pharmacy Benefit Management

The dismissal of an employee-led class action lawsuit against Johnson & Johnson (J&J), which accused J&J and the J&J health plan fiduciaries of mismanaging the health plan’s prescription drug benefit, might lead health plan administrators to believe that they will not be held responsible for proper management of the prescription drug benefit and rigorous oversight of Pharmacy Benefit Managers (PBMs) providing services to their employee health plan. That is a dangerous and incorrect assumption, however; this lawsuit was dismissed on procedural grounds, and nothing in the Opinion and Order dismissing the lawsuit eliminates or reduces the fiduciary obligations that health plan fiduciaries must meet under the Employee Retirement Income Security Act of 1974 (ERISA). It has never been more important for health plan fiduciaries to scrutinize the agreements they enter into with PBMs, obtain compensation disclosures from their PBM to root out all conflicts of interest, and monitor their contracted PBM’s performance to ensure that prescription drug benefits are managed transparently, in accordance with the health plan documents and ERISA, and in the best interest of plan participants.

Procedural Reason for Dismissal of the J&J Lawsuit

In January 2024, a class action lawsuit was filed against J&J by an employee. The lawsuit alleged that J&J, as plan administrator, and all of the other J&J health plan fiduciaries, breached their fiduciary duties to plan participants by failing to ensure reasonable plan costs and by not exercising prudence in selecting the plan’s PBM. The Complaint alleges that the health plan mismanagement by defendants caused plan participants to pay excessive premiums and out-of-pocket expenses for prescription drugs. Without ruling on the merits of these claims, the court dismissed the case on procedural grounds. The court held that the Plaintiff’s claim that she paid higher premiums, an injury caused by the plan mismanagement, was too speculative to establish that she was actually injured, and also held that even if the Plaintiff had been able to show she was actually injured, no ruling by the court could redress the harm she suffered. This was because the unique nature of the high-cost drug infusion the employee needed for her medical condition meant that even if she received some portion of her out-of-pocket costs back as a remedy for the mismanagement, she would owe that money right back to the plan for her second infusion and other medications that were paid for 100% by the plan after she reached her out-of-pocket maximum.

The court never considered or ruled on whether the health plan fiduciaries breached their duties by mismanaging the prescription drug benefit under the health plan or failed to exercise prudence in selecting the plan’s PBM. As such, there is no change to the significant fiduciary responsibility health plan fiduciaries have. A similar case against Wells Fargo brought by several employees remains pending and appears to not be free of the same procedural issues as J&J, meaning there will likely be a ruling on the substance of claims like this in the near future. Meanwhile, it is important for health plan fiduciaries to understand and meet their duties when it comes to their PBM and drug benefit.

Fiduciary Responsibilities vis-à-vis a Health Plan PBM

Under ERISA, plan administrators are legally required to act solely in the best interest of plan participants and beneficiaries and to ensure plan assets are used for the exclusive purpose of providing benefits and paying plan expenses. ERISA’s matching fiduciary duties of prudence and loyalty includes making prudent decisions regarding service providers, ensuring that only fair and reasonable costs are paid for goods and services by the plan and its participants, avoiding conflicts of interest and continuously monitoring the performance of service providers to the plan. When it comes to a PBM, the fiduciary obligations of prudence and loyalty include:

Cost Transparency: This means requiring the PBM to disclose pricing structures, rebates, and spread pricing to prevent excessive costs and conflicts of interest. Initial negotiations of the contract with the PBM are critical; the terms of the contract and associated fees must be reviewed thoroughly. Terms that conflict with ERISA or other fiduciary obligations should be removed.
Reasonableness of Costs and Fees: This means ensuring that the fees charged by the PBM for its services and the costs of drugs in the PBM formulary are reasonable and fully disclosed. This includes obtaining compensation disclosures which show all direct and indirect compensation prior to entering or extending a PBM contract.
Conflicts of Interest: This means identifying any conflicts that may exist because the PBM is prioritizing their financial interests over the plan’s. It is imperative to obtain a fee disclosure from a PBM to ensure there are no undisclosed financial incentives influencing the PBM’s decisions. The failure to obtain a compensation disclosure renders the Plan’s contract with a PBM a prohibited transaction.
Contract Compliance: This means ensuring the PBM adheres to agreed-upon terms in the contract between the PBM and the plan, including formulary management, rebate pass-throughs, and pricing guarantees. Regular audits help plan fiduciaries verify whether their PBM is adhering to the terms of their agreement, and often uncover hidden fees, undisclosed spread pricing, and other examples of noncompliance with the PBM contract that may drive up costs unnecessarily.
Ongoing Oversight: This means fiduciaries have a continuous duty to monitor the PBM, which can be partially fulfilled by hiring an independent vendor to perform ongoing review of electronic claims data to ensure contractual adherence, formulary adherence, the absence of hidden or excessive fees, and compliance with contractual and regulatory obligations.
Performance Evaluation: This means regularly assessing the PBM’s service quality and cost management by reviewing service and cost against performance guarantees in the contract. It also means regularly benchmarking prices and PBM services, which means comparing the plan’s PBM pricing and services to those offered by competitors to gain insight into whether the plan is receiving the best value for the prescription drug benefits.

Next Level Fiduciary Performance

In addition to the duties set forth above, to effectively manage a PBM and fulfill ERISA’s fiduciary duties, plan administrators should clearly designate individuals or a committee responsible for overseeing pharmacy benefits. Anyone or any group responsible for overseeing pharmacy benefits should receive ongoing education and training on ERISA requirements, PBM industry practices, PBM contracting, and cost-containment strategies.

Additionally, plan administrators should remain flexible and open to exploring different PBM models. Transparent PBMs, which pass through all negotiated discounts and rebates to the employer, can offer a more straightforward and cost-effective alternative to traditional PBM arrangements. Plan administrators should also evaluate whether carving out specialty drug management from their PBM contract could lead to better pricing and improved oversight.

Conclusion

Failing to monitor PBM performance and scrutinize contract terms can have significant financial and legal consequences (the same is true for all health plan covered service providers including TPAs, carriers, brokers, etc.). Plan administrators that do not take an active role in managing their pharmacy benefits may find themselves facing unnecessary cost increases or worse, potential lawsuits if plan participants believe their benefits are being mismanaged. The dismissal of the J&J lawsuit changes nothing; the same duties of prudence and loyalty, including the duty to monitor the plan’s PBM, apply. Health plan fiduciaries must remain vigilant, ensuring that their prescription drug benefit programs are designed and managed in a way that prioritizes fairness, cost-effectiveness, and compliance with fiduciary responsibilities. A proactive management strategy will help health plan fiduciaries navigate the complexities of pharmacy benefits management while safeguarding the interests of their workforce.

Dae Y. Lee co-authored this advisory with Julie Selesnick, Senior Counsel, Berger Montague and Jamie Greenleaf, Founder, TILT.