Johnson & Johnson (J&J) Facing Class Action Lawsuit for Mismanaging Rx Program

J&J is being sued and facing a class action lawsuit where the plaintiff alleges breaches of fiduciary duty and violations under ERISA specific to J&J’s mismanagement of prescription drug costs for their self-insured health plan participants.

The lawsuit alleges that J&J paid excessive fees to its pharmacy benefit manager (PBM) including overpayment for specialty generic drugs and markups on prescription drugs that went beyond reasonable levels, causing financial harm.

Here are two examples of overpayment cited in the lawsuit:

Overpayment to the PBM beyond reasonable mark up: paying the PBM $900 for a 90-day Rx for the generic form of Prilosec which can be filled at several pharmacies for under $20.

Overpayment to the PBM beyond reasonable mark up: paying the PBM $10,200 (NOT a typo!!) for a 90-day Rx for the generic form of a drug that treats MS which can be filled at several pharmacies for under $80.

IMA comment: plan sponsors as fiduciaries must act in that capacity. Even if the plan sponsors/fiduciaries weren’t aware of the alleged egregious overpayments to the PBM, they had a duty to stay informed and manage the plan in the best interest of the plan participants.

Hold on for this twist: The suit also accuses J&J of profiting from the plan because some of the more expensive medications paid for by the plan were actually sold by J&J.

What is fiduciary duty as it relates to a company’s group health plan? This is covered under ERISA §404. In short, fiduciaries are required to perform their duties solely in the interest of participants and beneficiaries with the skill, prudence, and diligence that a prudent person acting in a like capacity would use. They must also avoid conflicts of interest.

IMA comment: fiduciary duty would not be upheld if a plan sponsor paid their PBM 250 times the going rate of a drug!

Do all plan sponsors have a fiduciary duty or only some? Most do. ERISA fiduciary responsibilities apply when plan assets are involved. For most employer-sponsored health benefits, plan assets consist of employee contributions and plan funds that are held in trust. Very few employers who are subject to ERISA use a trust to fund their employer-sponsored health insurance plans, so it is principally the use of employee contributions and how benefits are paid that is relevant to most employers.

Who should be named a plan fiduciary? Typically, this is an individual, or sometimes a committee of people, working for the plan sponsor with decision-making authority. However, fiduciary status can also flow from the plan functions performed by a person who is not otherwise named as a fiduciary. It is not a person’s title, office, or other formal designation that determines fiduciary status.

How is this lawsuit meaningful to employers who sponsor a health plan? In general, the lawsuit is a reminder that plan sponsors have an obligation to regularly monitor benefit compliance requirements and to operate their employer-sponsored plans accordingly. The responsibility of doing so can be separated into two categories:

Fully insured plans: the carriers play a significant role and share in the compliance responsibility with the employer plan sponsor.

Self-insured plans: there is an increased level of responsibility for the employer, although the employer will typically contract with third party vendors to assist in meeting its obligations. The employer’s fiduciary responsibility is primarily to carefully select vendors and monitor their compliance with applicable rules to the best of their ability.

Potential Next Steps for Employers

The more direct involvement an employer has in plan operations and decisions the more responsibility the employer plan sponsor bears. The following are some steps employers can take to minimize the risk of fiduciary liability:

• Include a compliance responsibility analysis as a critical part of the vendor selection process.
• Review vendor contracts and consider including indemnification provisions that protect the employer as plan sponsor.
• Consider purchasing fiduciary liability insurance.

IMA will continue to monitor regulator guidance and offer meaningful, practical, timely information. This material should not be considered as a substitute for legal, tax and/or actuarial advice. Contact the appropriate professional counsel for such matters. These materials are not exhaustive and are subject to possible changes in applicable laws, rules, and regulations and their interpretations.