February 08, 2024

This week, employer plan sponsors and other stakeholders in the broader health care sector have been inundated with news of a class action lawsuit filed on February 5, 2024, by a participant in the Johnson & Johnson (J&J) health plan challenging the decisions made and actions taken by the company and the fiduciaries of its health plan regarding a portion of its prescription drug coverage. (WSJ, Bloomberg, Stat News)

There are many who are expressing opinions about what this lawsuit represents and will mean for employers and their health care plans. However, the reality is that, like all lawsuits, the allegations are not conclusions and plans should continue to exercise reasonable, diligent, and methodical decision-making in current and future plan design and administration. In some sense, knee-jerk actions (such as design or vendor change, efforts to immediately audit plans, etc.) in reaction to the assertions in the lawsuit - especially changes to quickly adopt arrangements or practices characterized by the plaintiffs as “prudent” and thus seemingly “safe” - could also run the risk of potentially being outside of a plan’s customary deliberative and prudent process. While it will be important to stay informed about developments in this case and its ultimate outcome, all plan sponsors have their own circumstances and obligations to assess and take into consideration in administering their ERISA plan.

Why Your CEO May Care

The wide reporting and abundant speculation about negative impacts on J&J may raise the question for a CEO – “are we at risk for a lawsuit about our health plan and fiduciary decisions?”  The answer to that question has always been yes – although recent focus on transparency (discussed in more detail below) has heightened awareness and interest in scrutinizing plans for a variety of different purposes, among which will be some that are valuable and others that will be damaging and wasteful. Some industry observers predict that plaintiff’s attorneys will rush to bring similar suits to the forefront, as such cases grab headlines and capture attention.

In the ERISA context, the more probing potential question from a CEO is one with which plan fiduciaries are generally already familiar and have taken steps to address for many years – “are our fiduciaries appropriately informed and engaging in decision-making and otherwise acting in a reasonable and prudent [notably not “perfect”] manner with regards to our plan and its participants and beneficiaries?”

The specific ERISA standard on a fiduciary’s “Prudent man standard of care” (29 USC 1104(a)) is more detailed and has been the subject of litigation (as is the case here) and voluminous academic work, professional advisory, and layperson commentary.

But it’s the answer to this long-standing, nuanced, and complex question that is at the heart of the J&J case and that now and in the future will continue to guide plan sponsors and fiduciary actions.

What is the Lawsuit About?

At its core, the lawsuit alleges that J&J’s health plan and its covered individuals are paying too much for generic specialty drugs and could have used different plan designs, vendors, and other factors to pay less. By selective comparison to “pass-through” or other Pharmacy Benefit Manager (PBM) arrangements and cash/uninsured prices, it asserts that J&J and the named fiduciaries of the plan failed to act “prudently” (among other ERISA terms) with respect to the administration of the plan. Finally, the case suggests that ultimately the alleged failure resulted in plan expenses, premiums, and cost-sharing that was millions of dollars more than it otherwise needed to be with respect to those particular items and services.

What Does this Lawsuit Mean for Self-insured Employer Plan Sponsors and Fiduciaries?

At this point, this lawsuit means that someone is questioning/challenging health plan administration in a “new” way. In and of itself, this does not mean that the plan sponsor and fiduciary defendants did anything wrong. And, ironically it does NOT mean that plan sponsors should rush to make plan changes in response. In fact, the lawsuit’s focus on ERISA’s requirements for “care, skill, prudence, and diligence under the circumstances…” are instructive as to the steps and process that employers may wish to take to assess their own plans and programs.

We would urge caution (and care, skill, prudence, and diligence) on summarily relying on the numerous conclusory assertions and comparisons made throughout the complaint that appear to deem certain plan arrangements, designs, contracts, and decisions as “prudent”. We also urge further caution in rushing to assume that if your plan were to use one of those options, vendors, designs, etc. it and the company would be “safe” from legal challenges or scrutiny, whether credible or not. A major point, if not the whole point, of the ERISA fiduciary standard of care is for the fiduciaries to take stock of the broader circumstances, the broader context, and with diligence and care (etc.) make decisions and take action.

Although being reported as novel for an ERISA health plan, the basic assertions in the lawsuit are not entirely new. They may be familiar to HR and benefits professionals (as well as the C-suite) from numerous challenges with varying outcomes pursued against defined benefit (DB) and defined contribution (DC) ERISA retirement plans. Indeed, we anticipate fiduciaries of the various types of ERISA plans would generally receive training about their fiduciary responsibilities and have instituted processes that have been informed by the different retirement plan court decisions on issues similar to those here. 

One-Size-Does-Not-Fit-All

ERISA’s fiduciary duty is not generally a static standard, frozen in time “blessing” any one particular method or arrangement of providing benefits in all circumstances. ERISA allows and encourages employers to craft and deliver benefit plans, within certain parameters, that they expect will work well for their employees and families. This means that the designs, costs, administrative arrangements, and other elements may be different from plan to plan, and comparisons between plans on the totality of their coverage and benefits can be challenging to do on an apples-to-apples basis. While ERISA’s fiduciary standard is a comparative one that evolves with new designs, treatments, technology, and other factors, the fiduciary decisions and actions in any one plan may be well within the realm of “prudent” for such plan even if it’s different than choices made by other fiduciaries in other circumstances that were seemingly beneficial for another plan and its participants and beneficiaries.

How Do New Transparency Requirements Relate to This Situation?

In recent years health care stakeholders and plan sponsors have focused on broad transparency into the prices, costs, profits, and business arrangements of many types of health plan service providers, brokers, consultants, vendors, medical providers, hospitals, and others. Employer plan sponsors, through the Business Group, and more broadly have roundly supported additional transparency. Much of the required information is publicly available. And what is not public may be available to plan participants and beneficiaries through various tools or upon request.

There are few, if any, constraints on the potential uses of this additional information for purposes that the various stakeholders may each view individually as good, bad, or indifferent. Under the Consolidated Appropriations Act, 2021 and the Final Transparency in Coverage Rules (2020) group health plans are required to ensure that certain plan, costs, and vendor information is disclosed and provided through various means. This creates opportunities for plans, employees, patients, and others to use this information in their decisions and for their own purposes. Following these new requirements, there was speculation and confusion (as is often the case with new requirements) about how information may or must be used by plan fiduciaries with respect to their decisions and actions. This case, along with industry capabilities and standards, agency guidance, and other developments may ultimately help inform permissive and/or required plan actions toward use of the information and handling of individual issues and inquiries.

What Should Employers Do Now?

Notwithstanding the caution and care with which plan sponsors and fiduciaries should proceed as discussed above, the new information and inquiry in the lawsuit also provides an opportunity for plans to review certain processes, arrangements, and fundamentals. Plan sponsors may wish to start by:

• Discussing with appropriate legal counsel and/or consulting resources.
• Reviewing current contract terms with PBMs and other service providers along with the process and documentation for having considered and engaged in those agreements.
• Confirming that the plan is receiving appropriate direct and indirect compensation disclosure(s) from applicable service providers.
• Identifying plan arrangements that may be expiring or otherwise be advisable to review and potentially put out to bid.
• Ensuring that plan fiduciaries are updated and trained on their responsibilities and ERISA’s applicable standard of care, and provided appropriate support in the execution of their duties.
• Reviewing and updating any applicable insurance policies (e.g., E&O, D&O, fiduciary liability) and indemnification terms covering the company, the health plan, and individual named fiduciaries.

What’s Next?

Business Group on Health will continue to monitor developments related to this case and will provide additional information to members. We will also discuss this case, any new information, and additional implications at our next Public Policy: Regulatory & Compliance Update webinar on Thursday, February 15, 2024 at 12:00 p.m. ET. Members can register here.

Employer plan sponsors and fiduciaries may wish to engage with legal counsel and/or consultants to advise on next steps for their particular circumstances and plan administration.

We provide this material for informational purposes only; it is not a substitute for legal advice.

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Articles & Guides Pharmacy/Prescription Drugs Employee Retirement Income Security Act (ERISA)