On this podcast, Harvey Cotton, Bill Littell, and Darien Saft from Ropes & Gray's benefits consulting group delve into the intricacies of the Lewandowski v. Johnson & Johnson ERISA class action lawsuit. They discuss the allegations of fiduciary breaches in the administration of J&J's pharmacy benefit and explore the potential implications of these alleged breaches for employers who provide self-insured medical and Rx benefits to their employees. The team also provides an overview and analysis of ERISA fiduciary duties as they relate to employer-sponsored health insurance plans, the role and complexities of pharmacy benefit managers (PBMs) within the health plan offering, and best practices for plan sponsors to ensure there are processes in place to benchmark and manage health plan costs effectively for their employees.
Transcript:
Harvey Cotton: Hi, everyone—thank you for tuning in today to our podcast. I'm Harvey Cotton, a principal in the Ropes & Gray benefits consulting group based in Boston. I am joined today by my colleagues, Bill Littell and Darien Saft. Bill is a senior consultant and attorney, and Darien is a benefits consultant and an underwriter—they are also both members of the benefits consulting group.
We are here today to provide an overview of Lewandowski v. Johnson & Johnson, a recent ERISA class action lawsuit brought against J&J pertaining to the pharmacy benefits it offers to its employees and to discuss some questions and considerations employers may want to be thinking about in light of this suit. This litigation has received a good deal of attention because it is the first of its kind to address the underlying costs associated with an employer's self-insured prescription drug benefit. However, as most of our listeners are likely aware, ERISA class action lawsuits are not new. Over the last several years, we've seen a large wave of ERISA class action litigation brought against plan sponsors of defined contribution retirement plans alleging excessive fees, improper investment options, and other claims of fiduciary misconduct.
So, let's get into it. Darien, can you provide an overview of this class action lawsuit and the plaintiff's specific claims?
Darien Saft: Of course—let's dive in. Given this lawsuit is somewhat novel in the health and welfare benefits space, it will be interesting to see how it plays out in court. Depending on its outcome, even in the pre-trial stage, it's possible it could spur copycat complaints, which is what happened in the retirement plan litigation context.
This lawsuit was filed in New Jersey's Federal District Court in February 2024 by an employee and alleges that the company and its group health plan fiduciaries breached their duties under ERISA to prudently manage its prescription drug program. The group health plan is sponsored by J&J, but its pharmacy benefit program is administered by Express Scripts, which is the health plan's Pharmacy Benefit Manager, or PBM. The plaintiff alleges that plan fiduciaries failed to negotiate lower drug costs for its employer-sponsored plan and that that failure, in turn, caused employees to overpay for prescription drugs. By failing to negotiate lower drug costs or find a different PBM that offers more competitive pricing, the complaint alleges participants overpaid through higher out-of-pocket co-payments and co-insurance. Furthermore, it alleges that these higher overall prescription drug expenses resulted in higher group health plan premiums—the cost of which was shared by the company and the plan participants. Of course, these are all merely allegations. J&J filed a motion to dismiss the complaint, and the plaintiffs filed an amended complaint in response to that motion. J&J has until June 28 to file a new motion to dismiss, so it remains to be seen how the court will respond to these filings.
Harvey Cotton: Right, I guess the concept is that even if you have health plan participants who are not getting prescriptions through their employer's health plan on a routine basis, they could feel the financial consequences of a more costly prescription drug benefit through higher payroll premium contributions because historical prescription drug costs would be taken into account when determining future premiums for health plan participants.
Bill, so what ERISA fiduciary duties does the lawsuit allege that the plan fiduciaries breached?
Bill Littell: The claims boil down to two alleged breaches of ERISA fiduciary standards: the exclusive benefit rule and the prudent expert rule. The exclusive benefit rule says that an ERISA fiduciary must act solely in the interest of plan participants and beneficiaries, with the exclusive purpose of providing benefits to participants and paying reasonable expenses of administering the plan.
Harvey Cotton: That sounds familiar...
Bill Littell: Right. And most of us have heard news stories from time to time about what seem to be soaring patient prescription drug costs, or we've even encountered such costs ourselves. The lawsuit is claiming that under ERISA's exclusive benefit rule, it's the fiduciary's responsibility to review and monitor these prescription drug costs on behalf of their participants and to ensure the costs are reasonable and benefit the plan participants as a whole. Now, unlike fees for retirement plan record-keeping or investment advisers, it seems like it would be more complicated for employers to continuously monitor prescription drug costs for their employees given that manufacturers may change prescription drug list prices, supply chain intermediaries like pharmacy benefit managers powerfully influence drug costs to a given plan in a constantly evolving manner, and a plan participant could start utilizing a different, more costly prescription drug on any given day. I want to be clear though—when determining whether a breach of ERISA's exclusive benefit rule occurred, in my view, the focus should be on the aggregate costs for the entire group of plan participants—it shouldn't dwell on a few specific costly examples.
Harvey Cotton: That makes perfect sense, and that's consistent with what J&J argued in their initial response to the plaintiff's complaint. Now, what about that other fiduciary standard?
Bill Littell: Right. So, as for the prudent expert rule, paraphrasing ERISA's statutory language, a fiduciary is required to act with the care, skill, prudence, and diligence under the circumstances that a prudent person acting in a like capacity and familiar with such matters would use. Given how dynamic and complicated the prescription drug market can be for self-insured prescription drug programs, we believe that a best practice would be for self-insured employers to periodically engage subject matter experts to help advise on prescription pharmacy benefit offerings, particularly as the breadth of such offerings continues to expand. Doing so will enable plan sponsors to ensure they are keeping abreast of the benefits offered and what changes would be prudent to make. Additionally, if an employer were to be sued in a similar case, its best defense would involve a well-documented process for reviewing and monitoring the plan's providers and the corresponding costs of the benefits offered under the plan.
Harvey Cotton: Thanks for that overview, Bill. Like you said, the prescription drug market is very complicated—I couldn't agree more. It really is a complex market with many players and intermediaries and subtle nuances, and it begs the question whether sufficient resources and information are available for plan fiduciaries to make prudent decisions regarding the pharmacy benefits they provide to their employees. I wonder if there may even be an argument that this is a larger, systemic issue across the pharmaceutical industry and this lawsuit might be seen almost, or at least partly, as less of a commentary about employer prudence (or lack thereof) and more of an expression of a prevailing sense of frustration with the lack of transparency regarding the source of high prescription drug prices and a recognition that these high prices continue to stress the U.S. health care market, including the predominant employer-sponsored segments. If it is the latter, questions remain about whether analyzing ERISA fiduciary duties in this context will solve the problem we face in the United States with the high cost of prescription drugs.
So, let's get back to the specifics of the lawsuit. Bill, can you share some of the details about what the claimant laid out for these alleged fiduciary breaches?
Bill Littell: At a high level, the plaintiff alleges four things:
- First, they allege that the plan fiduciaries failed to prudently select a PBM and didn't conduct searches for other, less costly PBMs;
- Second, they say that the plan fiduciaries failed to consider other types of PBM arrangements, like a pass-through model where the PBM's only source of revenue is an administrative fee;
- Third, they say fiduciaries failed to effectively negotiate PBM pricing with Express Scripts, the plan's PBM; and
- Lastly, plaintiff claims that plan fiduciaries failed to prudently develop a prescription drug plan design that utilized lower cost options.
According to the plaintiff, all of these alleged fiduciary breaches resulted in participants paying higher plan expenses, which resulted in increased compensation for Express Scripts, the plan's PBM.
Harvey Cotton: The lawsuit also calls out that the company has a voluntary employee benefits association, or a so-called VEBA, that is used to fund the company's health and welfare benefits. Bill, since VEBAs are not all that common outside of the union context these days, do you see this as an important factor as to how this case plays out?
Bill Littell: Taking a step back, a VEBA, as you mentioned, Harvey, is a trust that is established to fund an employer's health and welfare plans, usually with employer and participant contributions. However, even if an employer does not have a VEBA and is paying for its health plan with its general assets and with participant contributions, it's still subject to ERISA. Given that the PBM's design and pricing structure affect employee costs, whether through out-of-pocket costs or through payroll premium contributions, it will be interesting to see how much significance is placed on whether the presence of the VEBA plays much of a role in the court's analysis.
Harvey Cotton: Right, as this case develops and we see how J&J frames its new motion to dismiss, we should be able to glean more. Darien, at this point in the case, what questions or considerations might other employers be thinking about in light of this new litigation?
Darien Saft: Lawsuit aside, ERISA fiduciary obligations should always be front of mind for plan sponsors. Over the last several years, legislation and regulation have brought clarity and heightened scrutiny to health plan obligations, including, with respect to the transparency, or some would say, lack of transparency, of prescription drug costs. There have been various federal- and state-level laws enacted with the goal of providing employers with greater visibility into health care and drug pricing information, so that employers can make better informed decisions regarding their pharmacy benefit offerings and employees can have access to comparative drug prices.
I also find it very helpful for employers to better understand the pharmaceutical supply chain so they can better assess the true cost of the benefits that they offer. The supply chain consists of manufacturers, wholesalers, rebate aggregators, PBMs, and pharmacies, and the money between them is flowing through multiple pipelines with different prices experienced by different entities, and many of these prices bear little relevance to ultimate patient pricing. At various stages in the pipeline, businesses are making profits. It's incredibly complicated.
Harvey Cotton: Complicated may be putting it mildly...
Darien Saft: Indeed. Maybe the best first thing that employers with self-insured group health coverage can do is to proactively review their current PBM contract. This will take you pretty far into the weeds, so it may be worthwhile and prudent to consider engaging a pharmacy benefits consultant or another type of expert who understands how drug pricing and PBM contracting works. One of the goals of this review should be to assess and better understand the fees, discounts, rebate arrangements, and incentives for utilizing certain PBM-affiliated-or-owned pharmacies and how funds are flowing through the system. In addition to the financial elements of the contract, there are many opportunities to optimize the pricing through key stipulations such as annual market checks and how contractual terms are ultimately reconciled. Actively digging into your self-insured pharmacy drug benefits would be prudent and could potentially result in overall cost savings for both the plan and its participants. I think it's important to remember, and Bill noted this earlier as well, that while the complaint highlights examples of a handful of what appear to be very expensive drugs, the assessment of whether one is fulfilling its duties under ERISA will take into account overall plan costs and benefits. The same could be said for other components of your health plan costs such as provider network discounts and the administrative fees.
We work with clients and other consultants to help think through these considerations and the levers to bring down costs while helping ensure appropriate access. We also increasingly work with our clients to educate them on the overall nature of the pharmaceutical supply chain. That knowledge can help employers better approach negotiations around drug benefits with a greater level of sophistication.
Harvey Cotton: So, should employers be thinking about going out to market and issuing RFPs for pharmacy benefit managers?
Darien Saft: Under ERISA, it definitely can't hurt to have a strong record of conducting periodic market evaluations and comparing costs and fees. For those employers that haven't had a formal RFP for PBMs in several years, it may be time to consider going out to bid. The PBM market continues to evolve rapidly with the pricing changing quickly and with the availability of more transparent pricing models. For instance, the market has seen an emergence of direct-to-consumer pricing models that cut out some of the players in the supply chain. Pharmacy benefit consortia also continue to be available to employers and could potentially decrease employer spending on pharmacy benefits. There are a lot of pharmacy benefit options and carriers out there for employers to consider, but often the devil is in the details. It takes knowledge and a robust analysis to select the right option for each employer.
For those employers who have more recently conducted a PBM search, the answer to your question probably depends on how prudent and effective that last RFP process was. ERISA is process-based, so all employers offering self-insured pharmacy benefits would be well served if they are able to demonstrate a prudent process that enables them to regularly assess any material changes in the market. Given the evolution in the market and pressure from government and employers, I would think this process is warranted at least every three years or so.
Harvey Cotton: Thank you, Darien—that's really helpful. Bill, anything to add on what employers may want to be thinking about now?
Bill Littell: Building off of what Darien said, my overarching recommendation at this point would be for employers to consider reaching out to their ERISA counsel to review the processes they have in place to ensure that they fulfill their ERISA fiduciary obligations for their health and welfare plan, including making sure that their internal HR folks—or really anyone responsible for health and welfare plan renewals—are fully aware of their fiduciary responsibilities. It may make sense to also think about your health and welfare plan governance structure. And it's also important to periodically meet with your health and welfare consultants and vendors to review plan utilization and determine if any solutions can be implemented to contain plan and participant costs, like step therapy or case management programs.
Harvey Cotton: Those are great points, Bill. Step therapy and case management programs may be unfamiliar to plan participants and could help them and the plan contain their prescription drug costs.
Bill Littell: Finally, if we've learned anything from the last decade of expanding ERISA class action litigation on the defined contribution retirement plan side of the ledger, it's quite possible, or even likely, that we may see some degree of copycat suits, as Darien noted earlier—that is, more litigation alleging high costs and fees relating to employers' pharmacy benefits or other health plan benefits, especially if the early results in cases like this are favorable for the plaintiffs. To this end, plan sponsors may also want to consider taking a fresh look at their fiduciary liability insurance specific to their health and welfare programs.
Harvey Cotton: Right, and in the wake of some initial successes for the plaintiffs' bar, the ERISA retirement plan class action lawsuits have continued to be widespread, with new ones getting filed literally weekly against a multitude of employers across industries and sizes, so there's potential for this to play out in a similar fashion.
Darien and Bill, thank you both for joining me and for sharing all of your very helpful and important insights. We'll continue to keep current on this case, and we intend to release a podcast with any significant updates as this suit makes its way through the courts. If listeners have any questions about this lawsuit or what they might want to consider doing in terms of their health and welfare plan governance and oversight, please feel free to reach out to any of us. We also plan to provide opportunities for our own clients to learn more about related matters, so please keep an eye out for further information as this case progresses.
We really appreciate you joining us today, and for more information, you can visit our website at ropesgray.com. You can also subscribe and listen to this series wherever you regularly listen to podcasts, including Apple and Spotify. Thanks again for listening today and take care.
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