Participant Files ERISA Healthcare Fiduciary Suit Against Employer

What may be the first case of an employee alleging a fiduciary breach by their employer’s health care practices has just been filed.

Johnson & Johnson has been sued (Lewandowski v. Johnson & Johnson, D.N.J., No. 1:24-cv-00671, complaint 2/5/24) by employee Ann Lewandowski,[i] who claims that “over the past several years, Defendants breached their fiduciary duties and mismanaged Johnson and Johnson’s prescription-drug benefits program, costing their ERISA plans and their employees millions of dollars in the form of higher payments for prescription drugs, higher premiums, higher deductibles, higher coinsurance, higher copays, and lower wages or limited wage growth.”

The suit argues that “defendants’ mismanagement is most evident in (but not limited to) the prices it agreed to pay one of its vendors—its Pharmacy Benefits Manager (‘PBM’)—for many generic drugs that are widely available at drastically lower prices.”

The suit provides an example of a prescription generic used to treat multiple sclerosis that was available at retail pharmacies for as little as $40.55 for a 90-day supply. “Defendants, however, agreed to make their ERISA plans and their beneficiaries pay $10,239.69—not a typo—for each 90-pillteriflunomide prescription. The burden for that massive overpayment falls on Johnson and Johnson’s ERISA plans, which pay most of the agreed amount from plan assets, and on beneficiaries of the plans, who generally pay out-of-pocket for a portion of that inflated price,” according to the suit. 

“No prudent fiduciary would agree to make its plan and beneficiaries pay a price that is two-hundred-and-fifty times higher than the price available to any individual who just walks into a pharmacy and pays out-of-pocket.” The suit claims that the differential in price “goes largely into the pockets of the PBM, at the expense of the ERISA plans and their beneficiaries.” 

Incident ‘Tell’

“Not incidentally,” the suit,[ii] filed in the U.S. District Court for the District of New Jersey, points out that “Johnson and Johnson is a leading drug maker that earns billions of dollars a month selling drugs.”

“Defendants failed to exercise prudence at multiple steps in the process of administering prescription-drug benefits,” the suit continues, noting that the Johnson & Johnson defendants:

• failed to exercise prudence before selecting a PBM;[iii]
• 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.

Bargaining ‘Bust?’

Echoing the language found in many 401(k) excessive fee suits, this one argues that the plan fiduciaries failed to use their bargaining power to obtain better rates.

“ERISA required Defendants to make a diligent and thorough comparison of alternative service providers in the marketplace, to seek the lowest level of costs for the services to be provided, and to continuously monitor plan expenses to ensure that they remain reasonable under the circumstances,” the suit alleges. “Defendants did not do those things to the extent ERISA requires.  Defendants breached their fiduciary duties by failing to engage in a prudent and reasoned decision-making process. If Defendants had engaged in a prudent and reasoned decision-making process, they would have known of, and adopted, any of numerous options that would have drastically lowered the cost of prescription drugs in general and generic-specialty drugs in particular and would have resulted in other cost savings for the plans and their beneficiaries. Implementing those available options would have saved the plans and their beneficiaries millions of dollars over the proposed class period.”

Disclose Sure?

The suit would appear to have its basis in the provisions of the innocuously labeled Consolidated Appropriations Act of 2021 (CAA)—provisions said by some to be “the most significant compliance challenge employers have faced since the Affordable Care Act.” In essence, ERISA Section 408(b)(2)—which greatly expanded fee disclosure responsibilities for retirement plan providers—now applies to health care providers as well. And plan sponsor fiduciaries are on the hook to ensure that those fees/services rendered are reasonable, as they have been required to do for retirement plans.

Last year, Kraft Heinz filed suit against Aetna, who had served as a TPA for the Plans dating back to at least 2007. Noting that “the Plans lack the expertise to evaluate claims for payment submitted by doctors and hospitals,” the suit says that Kraft Heinz delegated that responsibility to Aetna “because Aetna represented its expertise evaluating payment claims submitted by providers for adherence to the Plans’ coverage and reimbursement policies and industry-standard coding guidelines  dictated by the Centers for Medicare and Medicaid Services (‘CMS’) and the American Medical Association (‘AMA’).” Kraft Heinz self-funds its employees’ and retirees’ medical expenses. “Kraft Heinz pays Aetna to prevent payment of duplicate claims. Yet, Aetna has taken millions from Kraft Heinz to pay thousands of duplicate claims since 2016,” the suit claimed.

According to the suit, filed in federal court in Camden, New Jersey, “Rather than prudently manage the Plans’ prescription-drug program, Defendants agreed to pay extraordinarily high prices for prescription drugs, ceded control of the Plans’ formulary to conflicted third parties, failed to supervise those conflicted third parties or otherwise ensure that decisions were made in the best interests of the Plans and their beneficiaries, failed to conduct  adequate reviews of the Plans’ prescription-drug  costs, failed  to  steer  beneficiaries  to lower-cost options, failed to engage in a prudent process for monitoring the Plans’ formulary, and failed to take available steps that would have saved the Plans and their beneficiaries millions of dollars.” The suit seeks class-action status.

Bloomberg News reports that, while some large companies and unions have sued their health plan providers alleging that they’ve breached fiduciary obligations, the case against J&J may be the first case by an employee making those claims against a prominent company.