A recent lawsuit against Johnson & Johnson could have wide-ranging repercussions for employers that sponsor health plans. At a macro level, the lawsuit claims that J&J did not meet its obligation to negotiate favorable pricing and, as a result, plan participants and their beneficiaries paid increased costs and premiums.

The one primary allegation against J&J manifests in three different ways: Failure to use prudence in negotiating contract pricing terms, selecting pharmacy benefit managers (PBM) and designing the prescription drug plan. The lawsuit claims these three breaches of fiduciary duty led to increased premium rates and cost-sharing for plan participants, and a rise in overall expenses relating to prescription drug costs—which, in turn, increased the premium rates that participants (employees) contribute.

The complaint raises questions around employers’ obligations to act as a fiduciary for their employees under ERISA guidelines in their role as group health plan sponsors.

To avoid similar lawsuits and continue to act as fiduciaries, employers—as ERISA plan sponsors—should focus on several key areas regarding their fiduciary obligations.

Impact on employer fiduciary duties

While there is no one-size-fits all approach mandated by ERISA, there are several takeaways for employers to consider based on the lawsuit.

Admittedly, it is too early in the litigation process to determine how prescription drug plans and employer fiduciary duties might be affected. However, there is the potential for other lawsuits to follow, considering recently enacted transparency requirements under the Transparency in Coverage Final Rule and CAA 2021 (which makes information concerning drug prices—and other plan costs—publicly available).

However, these laws also provide employers with greater access to healthcare pricing information so they can make better-informed cost-conscious decisions regarding plan benefits. Employers concerned about litigation should ensure they are engaging in prudent fiduciary decision-making processes with respect to the selection of PBMs and other vendors and seek input from legal counsel.

Employer fiduciary duties: Next steps

Processes review

As this case plays out in court, employers—as ERISA plan sponsors—should carefully consider their fiduciary obligations. At a high level, employers should actively engage in a prudent process when selecting and overseeing plan service providers and vendors.

Working closely with legal counsel, employers should develop and implement a formal annual process where the employer obtains, reviews and monitors PBM and other vendor proposals, agreements, benchmarking, clinical programs and performance.

In addition, employers should use internal or external resources to manage and oversee key aspects of the prescription drug program with a focus on overall benefits to employees while ensuring that costs remain reasonable. If necessary, employers should consider directing beneficiaries toward more cost-effective options.

During the PBM selection process, plan sponsors should review the terms of PBM and other prescription drug options with a focus on value received for the cost (lowest cost choice does not always mean the most reasonable and prudent choice). They should also arrange a schedule to run PBM and other vendor contracts through the RFP process, and upon the RFP completion process, implement a transparent PBM pricing model.

Implementing contract arrangements that involve direct-to-pharmacies or manufacturers or direct-to-consumer pricing could also be advisable. In addition, to mitigate risk on a large scale, it’s wise to purchase the most suitable fiduciary liability insurance to protect plan sponsors and fiduciaries from fiduciary breach liabilities.

Fiduciary committees, training and outside experts

Another important step to consider centers on setting up a fiduciary committee for health and welfare benefits, including adopting a charter and delegating fiduciary responsibility to the committee and reviewing PBM and other vendor contracts to compare related fee and rebate arrangements and formularies.

It’s also important for plan sponsors to work with subject matter experts who understand the changing landscape of pharmacy benefits, instead of an overreliance on medical insurance carriers or PBMs, which may not be sufficient.

Along with outside expertise, devising a formal training program for fiduciaries can help clarify and contextualize fiduciary obligations and duties.

There is no one-size-fits-all approach

All these processes and considerations should be implemented in consultation with legal counsel to remain compliant with ERISA. Of note, employers are required to consider the totality of facts and circumstances of their own situation, knowing that there is not a singular or one-size-fits-all approach to fiduciary decision-making.

ERISA does not require that plan fiduciaries always use the lowest cost vendor, and employers may choose not to work with non-traditional PBMs, even if they supposedly offer lower drug pricing. There are other considerations that impact the prudent actor analysis, including network access, claims processing and drug formulary selection, all of which may be significant to plan participants.

Most importantly, this litigation serves as a reminder for employers to review their fiduciary obligations and maintain compliance, particularly when selecting and overseeing plan services providers and vendors.

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