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The ERISA Edit: J&J Suit Adds to Growing Wave of Health Plan Litigation Over Costs and Fees

Employee Benefits Alert

Johnson & Johnson Health Plan Fiduciaries Hit with Class Action Alleging Excessive Costs and Fees Paid to PBM Express Scripts

A healthcare policy and advocacy director at Johnson & Johnson (J&J), on leave due to a reasonable accommodation dispute, filed a putative class action on February 5, 2024, against J&J, its Pension & Benefits Committee (the Committee), and its human resources officers (collectively, the defendants), alleging ERISA fiduciary breach violations related to the management and administration of prescription drug benefits offered through J&J's group health plans for employees and retirees. Lewandowski v. Johnson and Johnson, No. 1:24-cv-00671 (D. N.J. Feb. 5, 2024). According to the complaint, the defendants' alleged breaches cost J&J's ERISA plans and employees millions of dollars in the form of higher payments for prescription drugs, higher premiums, higher deductibles, higher coinsurance, higher copays, and lower wages. The complaint faults the defendants' agreements with the plans' Pharmacy Benefits Manager (PBM), Express Scripts, which was not named as a defendant. This case is illustrative of a growing number of ERISA lawsuits challenging the costs and fees paid by health plans. It is one of the first to directly target plan fiduciaries for PBM contracting allegedly resulting in increased costs to participants and beneficiaries. 

The complaint asserts that the defendants failed to adhere to ERISA's fiduciary duty of prudence in multiple ways: 

"Defendants failed to exercise prudence before selecting a PBM, failed to exercise prudence in agreeing to make its ERISA plans and beneficiaries pay unreasonable prices for prescription drugs, failed to exercise prudence in agreeing to contract terms with its PBM that needlessly allows the PBM to enrich itself at the expense of the company's ERISA plans and their beneficiaries, failed to actively manage and oversee key aspects of the company's prescription-drug program, and failed to take available steps to rein in its PBM's profiteering and protect plan assets and beneficiaries' interests."  

The plaintiff alleges that the plans' PBM contracts caused the plans to pay substantial markups above what it costs a pharmacy to acquire certain generic-specialty drugs, and that the markups represent profit for the PBM with no corresponding benefit to the plans or their participants and beneficiaries. The complaint includes multiple examples of inflated drug prices allegedly charged under the plans' PBM contracts. 

The complaint further faults J&J for allegedly not engaging in an open request for proposal process before choosing a PBM and that J&J's contract with Express Scripts may have been guided by a conflicted consultant who had a financial interest in the selection of Express Scripts. According to the complaint, fiduciaries cannot discharge their fiduciary duties simply by relying on the advice of third-party service providers or consultants who may have conflicts of interest. The complaint also asserts that defendants violated ERISA by agreeing to steer participants and beneficiaries to Express Scripts' allegedly higher priced mail order pharmacy. 

The plaintiff claims defendants should have used their bargaining power to demand better contract terms and prices, should have considered contracting with an alternative "pass-through" PBM that passes on discounts and rebates to plans, and should have considered carving out their specialty drug program from their broader Express Scripts contract. The complaint lists a host of companies that the plaintiff claims have taken steps to prudently manage their prescription drug benefits, in contrast to J&J's alleged failures to do so.

This case is almost certain to spur copycat filings alleging similar violations and we will follow developments. Plan fiduciaries should not delay in reviewing their fiduciary processes, particularly as they relate to selecting and monitoring plan contracting arrangements with third-party service providers to assess the reasonableness of costs and fees being paid by their health plans.

DOL Adds Stringent Amendments to ERISA Prohibited Transaction Exemption Procedures

Last month, the U.S. Department of Labor (DOL) finalized amendments to its rules governing the filing and processing of applications for administrative exemptions from ERISA's "prohibited transaction" provisions. The final rule, which amends the procedures that were established by DOL's Employee Benefits Security Administration (EBSA) in 2011, is set to take effect on April 8, 2024. 

In general, ERISA prohibits a plan fiduciary from causing the plan to engage in a variety of transactions with certain related parties – including the fiduciaries themselves, sponsoring employers, unions, service providers, and others who may be able to exercise improper influence over a plan. That said, to prevent the disruption of customary business practices, the statute exempts certain transactions from the scope of the prohibition and also authorizes DOL to grant administrative prohibited transaction exemptions (PTEs), where relief from the prohibited transactions rules is (1) administratively feasible, (2) in the interests of the employee benefit plan and its participants and beneficiaries, and (3) protective of the rights of the plan's participants and beneficiaries. 

The procedures and policies governing PTEs have been revised several times since 1975, with each subsequent revision intended to make the process less administratively onerous. In its press release, DOL indicated that the amendments are intended to "promote [DOL's] prompt and efficient consideration" of these applications. 

Yet, for parties submitting applications for exemptions, the final rule adds significant new requirements to support the exemption request and makes several other key changes. While applicants now have the option of submitting applications electronically, the new rule now requires:

  • Additional information and records concerning the transaction to be exempted, including: 
    • A description of any material benefit that may be received by a party in interest as a result of the exemption transaction
    • An overview of the costs and benefits of the exemption transaction to the affected plans and parties
    • A description of any alternatives to the exemption transaction that were considered and rejected by the applicant
    • A description of conflicts of interest or potential self-dealing that would be permitted if the exemption is granted 
  • Stricter definitions of "qualified independent fiduciary" and "qualified independent appraiser," including requirements to make affirmative representations or produce records demonstrating their independence, to ensure they operate independently and prudently. 
  • Additional details on the contents of the administrative record to be made available for public inspection from the date an exemption application is submitted, including: the initial exemption application and any modifications; any correspondence with, or information provided by, the applicant; and any relevant material documents or supporting information submitted to DOL before an application was formally submitted. 
  • Restrictions on informal and anonymous pre-submission discussions between the regulated community and DOL about the exemption transaction.

In the preamble to the final rule, DOL acknowledged concerns raised by many commenters that DOL had become more restrictive over time in its approach to exemptions and that the proposed changes to the exemption procedures would make it even harder for the regulated community to obtain exemptions. The commenters pointed to the decline in the number of exemptions issued by DOL in the past several years as evidence of their concerns. DOL responded by asserting that the number and frequency of exemptions reflects a number of factors, including market participants' increased ability to structure transactions in ways to avoid violating the prohibited transaction rules, the flexibility provided by administrative class exemptions issued by DOL, the expansion of statutory exemptions and "market developments." DOL agreed with commenters that the exemption application process had become "more drawn-out and longer than necessary," and stated the new procedures are intended to provide "clearer expectations about what information should be included in exemption applications." Time will tell whether the new rule speeds DOL's internal review process or results in more denials. 

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