The recent dismissal of an employee-led class action lawsuit against Johnson & Johnson (J&J), which alleged mismanagement of the health plan's
This case was dismissed on procedural grounds, not on its merits. Nothing in the court's ruling reduces or eliminates the
- Scrutinizing PBM agreements to ensure transparency and fairness.
- Obtaining full PBM compensation disclosures to uncover conflicts of interest.
- Ongoing performance monitoring to ensure prescription drug benefits align with plan documents, ERISA requirements and the best interests of participants.
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In January 2024, a class action lawsuit was filed against J&J by an employee. The lawsuit alleged that J&J, as plan sponsor and all of the other J&J health plan fiduciaries, breached its fiduciary duties to plan participants by failing to ensure reasonable plan costs and by not exercising prudence in selecting the plan's PBM. The complaint alleges that health plan mismanagement by defendants caused plan participants to pay excessive premiums and out-of-pocket expenses for prescription drugs.
Without ruling on the merits of these claims, the court dismissed the case on procedural grounds. The court held that the plaintiff's claim that she paid higher premiums, an injury caused by the plan mismanagement, was too speculative to establish that she was actually injured and also held that even if the plaintiff had been able to show she was actually injured, no ruling by the court could redress the harm she suffered. This was because the unique nature of the high-cost drug infusion the employee needed for her medical condition meant that even if she received some portion of her out-of-pocket costs back as a remedy for the mismanagement, she would owe that money back to the plan for her second infusion and other medications that were paid for 100% by the plan after she reached her out-of-pocket maximum.
The court did not evaluate or determine whether the health plan fiduciaries failed in their duties by mismanaging the prescription drug benefit or lacked prudence in selecting the plan's PBM. Therefore, the fiduciary obligations of health plan sponsors remain unchanged and as critical as ever. A
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Under ERISA, plan sponsors and other health plan fiduciaries are legally required to act solely in the best interest of plan participants and beneficiaries and to ensure plan assets are used for the exclusive purpose of providing benefits and paying plan expenses. ERISA's matching fiduciary duties of prudence and loyalty includes making prudent decisions regarding service providers, ensuring that only fair and reasonable costs are paid for goods and services by the plan and its participants, avoiding conflicts of interest and continuously monitoring the performance of service providers to the plan. When it comes to PBMs, fiduciary obligations of prudence and loyalty require plan sponsors to take a proactive and diligent approach. Key areas of fiduciary oversight include:
1. Cost transparency
Fiduciaries must ensure PBMs fully disclose pricing structures, rebates and spread pricing to prevent excessive costs and conflicts of interest. Contract negotiations are critical. Terms should be carefully reviewed and any provisions conflicting with ERISA or fiduciary duties must be removed.
2. Reasonableness of overall costs
Fiduciaries are responsible for ensuring that PBM service fees and drug costs are reasonable, transparent and fully disclosed. Obtaining compensation disclosures – outlining all direct and indirect payments – is essential before entering or renewing any PBM contract.
3. Managing conflicts of interest
PBMs may prioritize their own financial interests over the plan's. Fiduciaries must identify and eliminate conflicts of interest by requiring full fee disclosures to ensure there are no hidden financial incentives influencing PBM decisions. Failure to obtain a compensation disclosure could render the PBM contract a prohibited transaction under ERISA.
4. Contract compliance and auditing
Fiduciaries must ensure PBMs adhere to contract terms, including formulary management, rebate pass-throughs and pricing guarantees. Regular audits help uncover hidden fees, spread pricing and noncompliance that may be driving up costs unnecessarily.
5. Ongoing oversight
Fiduciary responsibility doesn't end after signing a contract. Continuous monitoring is required. Engaging an independent vendor to conduct ongoing electronic claims audits ensures adherence to contractual and regulatory obligations, identifies hidden costs and confirms compliance.
6. Performance evaluation and benchmarking
Fiduciaries must regularly assess PBM performance, cost management and service quality by reviewing contract performance guarantees and benchmarking against competitors to ensure the plan is receiving the best value.
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Advisers can support employers in their fiduciary obligations. Health plan fiduciaries that do not take an active role in managing their pharmacy benefits may find themselves facing unnecessary cost increases or worse, potential lawsuits if plan participants believe their benefits are being mismanaged. The dismissal of the J&J lawsuit changes nothing; the same duties of prudence and loyalty, including the duty to monitor the plan's PBM, apply.
Plan sponsors must stay proactive in overseeing their health care plan and prescription drug benefit programs, ensuring they are structured and managed with transparency, cost-efficiency and fiduciary compliance in mind. By taking a strategic approach, health plan fiduciaries can effectively navigate the complexities of pharmacy benefit management while protecting both their organization and the employees they serve.
