On February 5, 2024, a class action lawsuit was brought against Johnson & Johnson, a major pharmaceutical and medical technologies corporation.
The lawsuit was filed by employees in federal court who alleged that J&J and other group health insurance plan fiduciaries breached their duties under the Employee Retirement Income Security Act (ERISA).
While the company denies these allegations, the recent litigation has already impacted pharmacy costs in the U.S.
Background on ERISA Fiduciary Duties
Every ERISA plan has one or more fiduciaries. An ERISA fiduciary is anyone with the authority to manage and control the administration and operation of a plan and its assets.
These individuals are important because they are responsible for properly administering ERISA plans to protect both plan participants and employers who sponsor them. Fiduciaries who fail to fulfill their duties could face severe penalties.
Duties Outlined in ERISA
Under ERISA, fiduciaries have a legal obligation to act in the best interest of the plan and could be held liable if breaches are discovered in their fiduciary duty.
Some fiduciary duties include:
- Monitoring plan performance, benefits, and plan operations
- Making investment decisions on behalf of the plan
- Avoiding prohibited plan transactions
- Disclosing relevant information to plan participants about their benefits, investments, plan provisions, and other plan information
- Verifying that plan costs and fees are reasonable
- Reporting all required information to maintain compliance
Importance of Careful Decision-Making and Transparency in Plan Management
Fiduciaries are tasked with taking proactive steps to help minimize the potential risks associated with their role. This includes safeguarding legal compliance, employer reputation, financial health, and employee relations.
Through careful decision-making and transparency in plan management, plan participants have greater trust in their employer and feel more secure in their plan benefits.
Allegations and Core Issues
The suit against Johnson & Johnson alleges that the company breached its fiduciary duties by failing to take the proper measures to ensure its plan costs were reasonable.
In addition, the plaintiffs allege that J&J did not exercise prudence in choosing its pharmacy benefit manager (PBM) and agreed to undesirable contract terms.
The mismanagement of J&J’s group prescription drug benefits program allegedly cost employees millions of dollars through higher premiums, coinsurance, deductibles, payments for prescription drugs, and lower wages and wage growth.
Plan Design Issues
One of the core issues in the lawsuit against J&J deals with plan design. Whether a generic drug is deemed a “specialty” drug directly impacts how much plans are required to pay.
However, there is no definitive set of objective factors that help determine whether a drug is a specialty drug, meaning the classification of certain drugs as “specialty drugs” should have been discussed by PBMs and plan fiduciaries.
Another highlight of the plaintiff’s argument concerns prudent formulary management practices. Prudent fiduciaries replace brand-name drugs with FDA-approved, lower-cost options when available.
Alternatively, generics are added to the formulary at a lower cost, and plan beneficiaries are incentivized to obtain these lower-cost generic drugs instead of more expensive name-brand options.
Selection and Monitoring of Service Providers
Further allegations state that J&J should have used its negotiation power to get better rates from its PBM or an alternative PBM.
Alternatively, it could have transitioned its prescription drug plan to a “pass-through” PBM that sets its prices on actual pharmacy acquisition costs instead of inflated benchmarks.
The plaintiffs also argue that prudent fiduciaries should evaluate service providers for possible conflicts of interest and promote greater transparency.
Implications and Employer Action
Employers that offer group health plans may feel the implications of the J&J lawsuit. It is important for employers to continue to monitor developments in the case.
Risks and Considerations for Employers
Employers are at risk for legal challenges posed by employees for paying more than necessary. Years of warnings about hidden details on negotiated prices for health care services are now publicly available to employees through new regulations and laws.
Recommendations for Employers
As the case progresses, now is the optimal time for employers to review fiduciary best practices regarding their group health plans.
This includes confirming the ERISA group health plan fiduciaries and ensuring that proper plan documents are in place and available for participants upon request.
Employers should also determine how service providers are monitored and whether there are potential conflicts of interest.
They should review current plan expenses and fees to determine if they are reasonable. Finally, they should confirm that a fiduciary liability insurance policy covers the group health and welfare plan.
New City Can Help with Ensuring Compliance for Group Health Insurance
The threat of another J&J lawsuit is prompting many employers to ensure compliance with their group health insurance. At New City, we’ve helped countless businesses develop proven compliance strategies to achieve peace of mind.
Contact New City Insurance to learn more.