Health Care Plans and Pharmacy Benefit Managers Targeted in Class Action

Mayer Brown

Many medical benefit plan fiduciaries contract with pharmacy benefit managers (“PBMs”) to administer the prescription drug portion of their health plans, placing the PBM in charge of day-to-day management of the programs. Under the traditional PBM model, plan fiduciaries generally negotiate prescription drug prices with a PBM, which in turn negotiates pricing with drug manufacturers, profiting from the difference. This “spread pricing” has drawn the attention of policymakers in recent years. A proposed class action in the United States District Court for the District of New Jersey, recently filed against Johnson and Johnson (“J&J”) and its Pension & Benefits Committee, suggests that health and welfare plans—which are subject to the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”)—may have garnered the attention of potential litigants keen to scrutinize plan agreements with PBMs.

The complaint alleges that the J&J defendants violated their fiduciary duties under ERISA in (i) their management of prescription drug benefits for participants in J&J’s employer-sponsored medical plans, and (ii) their selection of a PBM. Most of the medical plans’ expenses are paid from the J&J Voluntary Employees’ Beneficiaries Association (“VEBA”), which is a tax-exempt trust the assets of which are considered plan assets under ERISA. According to the complaint, the plaintiff is enrolled in a J&J medical benefit plan, and has paid employee premiums to the plan which have been used to pay for prescription drugs and the plan’s PBM arrangement.

The plaintiff alleges that J&J’s selection of the PBM caused the plans and, consequently, the plans’ participants, to pay inflated prices compared to what would have been paid without the PBM, and claims that widely known conflicts of interest regarding PBMs and a misalignment of incentives contributed to the J&J defendants breaching their fiduciary duties to the plans and their participants. The plaintiff alleges that the J&J defendants failed to engage in a prudent and reasoned decision-making process by failing (1) to negotiate lower prices with the selected PBM; (2) to consider contracting with a different PBM or using an alternative PBM approach; and (3) to carve out their specialty-drug program from the PBM contract. The plaintiff further claims that prudent fiduciaries would have taken steps to protect their plans from being overcharged by PBMs.

Employer-sponsored qualified retirement plans have proven to be a common target of litigation regarding excessive fees and mismanagement of investments. With the passage of the Consolidated Appropriations Act of 2021 (“CAA”), which added new disclosure requirements relating to services being provided to ERISA-covered group health plans, it has been anticipated that plaintiffs may begin targeting the costs associated with health plans, particularly with respect to fees charged by consultants and brokerages. The J&J complaint does not turn on those disclosure issues or the fees paid to consultants or brokers, though it does allege that conflicts existed with those entities, as well as that J&J failed to satisfy its responsibilities to provide the plaintiff with certain requested plan documents and administrative information.

The outcome of this suit—and the extent to which the allegations around the prices paid by participants in the J&J plans are substantiated or explained in discovery—could indicate that a plan fiduciary’s selection of a PBM will be subject to closer scrutiny for compliance with ERISA’s fiduciary duties going forward. In light of the litigation, plan sponsors may consider taking additional measures to review and document their processes related to the selection and monitoring of PBMs.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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