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How Employers and Consultants Can Navigate the Fiduciary Threat of the J&J Lawsuit

The Employee Retirement and Income Security Act (ERISA) has always placed a burden on HR professionals and benefits committee’s to act as a fiduciary to their employees when designing the benefit plan and contracting with vendors.  But a new lawsuit has placed a magnifying glass over this risk.  A class action lawsuit filed against Johnson & Johnson on February 5th, 2024 has named The pension and benefits committee, the EVP and CHRO personally and the VP of HR personally as defendants in the suit.  This development is likely the first of many lawsuits and it focuses on the pharmacy benefits management contract that was entered into by Johnson & Johnson.

What are the accusations?

The lawsuit alleges that the plan did not meet its fiduciary obligations to manage the plan in the best interest of the plan and its beneficiaries.  Specifically, the lawsuit alleges that certain medications on the formulary were prohibitively expensive and well outside the realm of reasonable prices.  The examples cited are teriflunomide, a generic form of Aubagio, for which the plaintiff was charged over $10,000 and can be found on some online pharmacies for as little as $30.00.  The suit claims this result is a failure of the fiduciaries to meet their “duty of prudence”.  The suit alleges that ERISA’s duty of prudence requires plan fiduciaries to make a diligent effort to compare alternative service providers in the marketplace, seek the lowest level of costs for the services to be provided, and continuously monitor plan expenses to ensure that they remain reasonable under the circumstances.  While the example cited is very specific the suit alleges that it was likely the result of systemic failures of prudence in the PBM procurement process.

What Does This Mean For Employers?

For those responsible for the employee benefits plan, there is a growing threat of more class action lawsuits from plan beneficiaries.  Many employers have failed to do their due diligence to evaluate pharmacy contracts.  The end result of this lawsuit is more complex.  While the suit focuses on specific medications with pricing abuse, a benefit plan is purchasing thousands of drugs from myriad pharmacies.  Contracting for this broad basket of goods may mean procuring some drugs at uncompetitive costs while contracting competitively for the broad basket of goods.  This conflict between the individual beneficiary and the beneficiaries of the plan as a whole is left undefined.  Is the fiduciary obligation to the plan or to the beneficiaries?  When an individual beneficiary may be harmed but the broader group of beneficiaries procures drugs at a lower cost – what is the proper decision?  The J&J lawsuit will likely resolve this ambiguity.

With that being said, this conflict and ambiguity only arises in the event the plan sponsor followed a diligent and prudent procurement process for the broader basket of prescriptions.  This is an addressable area for employers.

What Should HR Professionals Do To Protect Themselves?

While we cannot provide legal advice, the lawsuit itself – which can be found here – provides some suggestions as to what the standard of prudence that HR professionals must adhere to might look like in regards to their pharmacy benefits management plan.  It first means going through a thorough and defensible process to evaluate vendors and ensure the existing contract is competitive with market rates.  Working with your benefits consultant there are several keys to running a defensible procurement process:

  1. Evaluating the pharmacy contract based on the actual claims data of the plan
    • Pharmacy contract offers can vary widely depending on the utilization of a plan and so a prudent plan sponsor should evaluate their contracts reflective of their actual utilization – this is specifically because one contract may price a drug very competitively (even at a loss) while it makes excessive profit on another.  
  2. Independently evaluating estimated costs
    • PBM’s are notorious for favorably interpreting their contracts.  Plan sponsors should work with a consultant that has the ability to independently validate estimated costs based on the contract language.  This means evaluating the Average Wholesale Price by drug channel and evaluating exclusions in the contract offer and the relative impact.
  3. Making a conscious decision on Pass-Through Vs. Traditional Contract Types
  4. Establish an ongoing Monitoring program.
    • Because utilization can vary within a pharmacy contract, both by drugs used and pharmacies used, employers should establish an ongoing monitoring practice to ensure that contract terms are being met and that excessive price gouging is not present in the plan.
  5. Providing proper weight to programming and member experience
    • Within the formal RFP process employers should be sure to follow a documented process that considers and weighs PBM program offerings and service experience in conjunction with contract and pricing terms.

To date, the vast majority of pharmacy contracts are entered into haphazardly.  Suggestions, recommendations, friends, ease, ideology and rhetoric are no substitute for a proper procurement process. 

In summary, pharmacy contracting is complex, it requires a balance of art and science.  Adhering to a documented and thorough process is the best defense for HR professionals.  Many of these steps are specifically referenced in sections 38, 39, 55, 57, 62, 63, 85 on what a prudent fiduciary should do.

Written by Jason Wenzke

President, Ringmaster Rx

Ringmaster Technologies