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Lawsuit Poses New Challenges for Employers and Plan Sponsors

Employers and plan sponsors have a new issue to be mindful of in light of a lawsuit filed this week in a federal court in Camden, New Jersey, against Johnson & Johnson (J&J). In a nutshell, an employee is suing their employer, J&J, claiming that under their self-funded benefit plan J&J did not exercise their fiduciary obligation to ensure costs for pharmacy care were properly managed. In the same way an employer/plan sponsor has a fiduciary obligation that its 401(k)-retirement plan is managed correctly, this case argues the same obligation exists for a health plan.


In this case, the employee alleges that over the past several years, J&J’s mismanagement of the employee’s health plan, evidenced by the price it agreed to pay its Pharmacy Benefits Manager (“‘PBM”), led to employees being overcharged for many generic drugs that are widely available outside the J&J plan at drastically lower prices. It’s alleged that this cost the ERISA plan and the employees millions of dollars in the form of higher payments for prescription drugs, higher premiums, higher deductibles, higher coinsurance, higher copays, and lower wages or limited wage growth.


The suit claims that the burden for the alleged overpayment falls on J&J’s ERISA plan, which has a duty of prudence to the plan and its plan assets, and to the beneficiaries of the plan who generally pay out-of-pocket for a portion of the price. Hence, the suit alleges that J&J failed to protect plan assets and beneficiaries’ interests by not taking available steps to ensure that the PBM fees/services rendered were reasonable. ERISA requires Plans to engage in a prudent and reasoned decision-making process. The suit alleges that if J&J had engaged in a prudent and reasoned decision-making process, they would have known of, and adopted, any of numerous options that would have drastically lowered the cost of prescription drugs in general and generic-specialty drugs in particular and would have resulted in other cost savings for the plans and their beneficiaries.


The claim of “fiduciary responsibility” over health plans has long been theorized as a looming issue. For example, is there now an expectation that employer/plan sponsors will have to measure the real effectiveness of a carrier’s network discounts? If a network discount is, for example, equivalent to 250% (or more) of Medicare will that be considered reasonable enough? This case and other similar challenges based on fiduciary oversight and transparency have gained significant attention, and the speculation is more cases like this will follow. While the outcome of the challenge is still uncertain, what is clear is that this type of case will lead to calls for more transparency and accountability in the industry, and further press issues like pay for performance, Mark Cuban-like pharmacy models, reference/index-based pricing programs, and other solutions that are disruptors, but pose the potential to reduce costs.


Conner Strong & Buckelew has long recognized that our client’s group health plans have significant fiduciary responsibilities and further burdens related to managing the financial viability of their group health plans and the prudent disposition of the plan’s assets. We recognize that their health care spend is one of the largest and most steeply increasing line items in their budgets. Toward that end, we have and will continue to push our carrier and TPA partners to provide all cost and claims data to support our client’s efforts to prudently fulfill their fiduciary oversight obligations under the law.


We are watching this case closely and will share more updates as they become available. Please contact your Conner Strong & Buckelew account representative toll-free at 1-877-861-3220 with any questions. For a complete list of Legislative Updates issued by Conner Strong & Buckelew, visit our online Resource Center.

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