By Daniel Aronowitz, President, Encore [formerly Euclid] Fiduciary
The fiduciary imprudence case filed on February 5, 2024 against Johnson & Johnson in the District Court of New Jersey was not the first excess fee case filed against a large health plan – the previous cases against MetLife, the Sequoia MEWA, and the UNITEHERE national multiemployer health plan were first – but it was the most anticipated. ERISA defense firms have been predicting for the last year that plaintiff law firms will attempt to replicate and translate their success in excess fee retirement cases to health plans. In this regard, it has been widely known and reported based on LinkedIn solicitations that the Schlichter Bogard law firm is soliciting plan participants of large health plans sponsors. But two obscure plaintiff firms scooped the Schlichter firm in a very sophisticated lawsuit alleging fiduciary mismanagement of prescription-drug benefits. The highly detailed and lengthy complaint represents a groundbreaking attempt to turn plan sponsors into guarantors of the lowest possible fees for every drug or medical service offered by the plan. Just like the cases alleging overpayments to TIAA and Fidelity in the retirement space, this lawsuit is claiming that J&J fiduciaries must pay for alleged excessive overpayments or markups to the pharmacy benefit manager (PBM) for specialty generic drugs. It is a staggering damages model that attempts to turn health plans into liability traps for corporate America.
Before ERISA is improperly weaponized into a liability tool for the trial bar against health plan sponsors, just like it has been against retirement plans, we must flip the script before this liability scheme is institutionalized in the courts. We cannot allow plaintiff law firms to dictate ERISA fiduciary liability that was never intended by Congress or even the most progressive bureaucrats at the Department of Labor. In the retirement plan excess fee cases, the damage models are mostly about purported excess payments to TIAA, Fidelity, and other service providers. We believe that most of the excess fee claims against retirement plans are not legitimate, but the allegedly overpaid service providers never had to pay any of the money back when courts upheld certain excess fee claims. And they never had to defend their plan sponsor clients who were accused of paying too much for their services. From what we can discern, the plan service contracts never changed to require indemnification for claims of excess fees.
We need to learn from the retirement-plan experience and implement a different defense playbook for any healthcare-related excess fee claims. No plan sponsor wants to overpay for health services or drugs. Health plan fees are convoluted and amorphous. Most thoughtful Americans, and even members of Congress, believe drug prices and health plan services are too high. But they don’t blame their employers – they blame the health care companies and the PBMs who dictate drug prices. The labyrinthine health care system is designed to hide fees. Plaintiff lawyers will posit plan participants as the innocent victims of fiduciary negligence by plan fiduciaries. But defined benefit health plans are different from defined contribution retirement plans in several key ways, as we discuss below. The most important difference is that, whereas plan participants personally pay most, if not all, of the recordkeeping and investment fees in defined contribution retirement plans, plan sponsors pay 70 percent or more of the health plan premiums in defined benefit health plans, and are responsible to fund the plan if participants need more medical care than anticipated by plan financial reserves. Plan sponsors have no incentive to overpay for health plan services because it is a material corporate expense. They should not be accused of sitting passively without caring about what participants pay, unless there is real evidence of conflicts of interest or malfeasance by plan fiduciaries, none of which is credibly alleged [outside of alleged inherent PBM conflicts of interest] in the J&J imprudence complaint.
If there is any victim of excess fees in health plans, the victim is the plan sponsor. If there is an culprit in health plan excess fees, it is the PBM or other service provider. Consequently, if there is any liability for excess fees, the liability should be borne by health care providers. And any liability damage recoveries should be returned to plan sponsors – not to plaintiff lawyers or even participants. In the Johnson & Johnson case, if J&J overpaid for drug services to its PBM Express Scripts, then the victim is J&J, not participants who can be used by plaintiff lawyers to establish a new liability scheme. If PBMs are improperly compensated – and many members of Congress publicly state that there is a problem with PBMs – then this is a societal issue that demands a legislative solution. It should not be an opportunity to scapegoat the companies that provide health benefits. It is like blaming the State of Texas for the migrant crisis when the federal government refuses to the close the border or Congress fails to solve the problem.
Let’s be prepared to flip the script before plaintiff lawyers set a biased and prejudicial narrative that has animated the retirement plan excess fee cases. The following is a summary of the Johnson and Johnson excess fee case and four initial issues for plan sponsors to consider when evaluating the merits of this lawsuit.
The Health Plan Excess Fee Case Filed Against Johnson and Johnson
In Lewandowski v. Johnson and Johnson, Case 1:24-cv-00671 (D.N.J. February 2, 2024), a single participant, purportedly on behalf of 130,000 workers at J&J, filed a seventy-five page class action complaint on February 2, 2024 alleging that the Pension and Benefits Committee of Johnson and Johnson Salary Medical VEBA plan and related health plans mismanaged prescription-drug benefits in the health plan for company employees. The plaintiff-participant in the plan is alleged to have two chronic medical conditions, including using the J&J plan to treat a cancer diagnosis. She claims that the plan informed her that she would only owe $300 out-of-pocket for her cancer treatment, but ended up paying $1,685.42 out of pocket when the health plan paid $78,331.82 for her treatment. She claims that the same cancer drug treatment should have cost the plan approximately $40,000 by going out of network, but the plan administrator told her that “saving money is not a reason to go out of network.”
The very sophisticated complaint, which must have been drafted with the assistance of an industry insider well versed in PBMs and drug pricing, alleges that the J&J defendants “breached their fiduciary duties and mismanaged Johnson & 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 complaint states that the alleged “mismanagement” of the prescription drug benefits is most “evident” by the prices it agreed to pay Express Scripts, its PBM for many generic drugs that allegedly are widely available at drastically lower prices. For example, the introduction to the complaint claims that the plan pays $10,239.69 – which the complaint assert is not a “typo” for dramatic effect – for a 90-bill prescription of the generic form of the drug Aubagio, which is purportedly available at grocery or drug stores for an out-of-pocket price of $40.55 to $77.41. The complaint claims that the “burden for that massive overpayment” falls on J&J ERISA plans and participants, who generally pay out-of-pocket for a portion of that inflated price. The complaint summarizes that “[n]o 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.”
As noted above, the primary fiduciary breach claim in the massive and detailed complaint is that J&J defendants mismanaged the plan’s specialty drug program, particularly with respect to generic-specialty drugs. This alleged mismanagement caused the plans and their beneficiaries to vastly overpay for generic-specialty drugs and has cost the plans and their beneficiaries millions of dollars over the class period. The complaint makes the following additional claims to support two related breach of fiduciary duty counts under ERISA sections 1104(a), 1132(a)(2) and 1132(a)(3) for allegedly failing to act solely in the interest of, or for the exclusive purpose of providing benefits to plan participants and beneficiaries:
- Defendants agreed, with the assistance of Aon as a broker or employee benefit consultant (EBC) to make the plans and their beneficiaries pay, on average, a “markup of 498%” above what it costs pharmacies to acquire those drugs – or “roughly 6 times as much as the PBM paid for those very same drugs. This is alleged to be a “staggering markup” for dozens of other drugs with “unreasonable markups” that are pocketed by Express Scripts;
- To support the claim of a “staggering markup” of specialty-generic drugs, the complaint in paragraph 113 includes a summary chart of 42 generic-specialty drugs with an alleged pharmacy acquisition cost of $28,050.53 compared to the price J&J agreed to pay of $167,604.88, which the complaint computes as a 497.51% alleged markup;
- In paragraph 120, the complaint alleges that the “extraordinarily high prices for generic-specialty drugs are not offset by special discounts from Express Scripts for other kinds of drugs.” But the complaint admits that “[f]or the 50 most common high-cost branded drugs (including Ozempic, Trulicity, Xarelto, and many more), Defendants agreed to a roughly 2% markup over pharmacy acquisition cost for those drugs”;
- Plan fiduciaries agreed to terms in which plan beneficiaries are financially incentivized to obtain their prescriptions from the PBM’s own mail-order pharmacy, even though that pharmacy’s prices are routinely higher than the prices at other pharmacies. According to the complaint, plan participants were steered toward this option that, for many drugs, wastes thousands of dollars in plan assets while “enriching” the Plans’ PBM by that same amount;
- The benefit committee ignored cheaper, well-known alternatives and instead chose to force its benefit plans and employees to acquire drugs via some of the most expensive methods conceivable;
- Additional claims of mismanagement allege that the defendants agreed to steer beneficiaries toward Express Scripts’ mail-order pharmacy Accredo, even though Accredo’s prices are routinely higher than retail pharmacies charge for the same drugs.
The alleged fiduciary violations are summarized in a separate section of the complaint:
- Plan fiduciaries failed to exercise prudence at multiple steps in the process of administering prescription drug benefits that has allowed the plan’s PBM to enrich itself at the expense of the company’s ERISA plans and their beneficiaries;
- Defendants failed to engage in a prudent and reasoned decision-making process before agreeing to a PBM contract that requires the plans and their beneficiaries to pay Express Script inflated prices for generic-specialty drugs;
- Plan fiduciaries failed to adequately negotiate the plans’ contract with Express Scripts and failed to prudently exercise their rights under that contract;
- Plan fiduciaries failed to adequately consider contracting with a different traditional PBM or a pass-through PBM, instead of Express Scripts, for all of the Plans’ prescription-drug needs;
- Plan fiduciaries should have considered carving out their specialty-drug program from their broader contract with Express Scripts. “Fiduciaries of similar plans across the country have conducted comprehensive plan reviews and concluded that their plans’ interests were best served by carving out specialty pharmacy benefits from their overall PBM contract”;
- Plan fiduciaries should have heeded warnings by experts of PBM tactics and conflicts of interests that PBMs “enrich themselves at the expense of the plans and their beneficiaries.” “Defendants knew or show have known that their PBM contracts unreasonably failed to heed these warnings and failed to protect the Plans from these widely reported tactics, despite having bargaining power.” For example, a 2010 Internal Foundation of Employee Benefit Plan article warned of the ways that PBMs use specialty drugs to extract profits from plans: “most PBMs increase their profit margins by buying specialty drugs at low prices and selling them at far higher prices, rather than using their marketplace leverage to decrease their clients’ costs.”
- In addition to multiple other articles warning about PBM over-pricing of specialty drugs, the complaint alleges that J&J made “numerous public statements that reveal its knowledge regarding PBM practices and the pharmaceutical industry,” including testimony to the U.S. Senate that “too often these [PBM] rebates and discounts are not shared with patients, leaving the sickest patients paying out-of-pocket costs.”
- The complaint names several companies, like PepsiCo and Foot Locker, which made changes to its PBM or hired a pass-through PBM, to reduce specialty drug costs.
This case will play out in the court, and it is likely that other law firms, including Schlichter Bogard, will follow copycat claims. Future lawsuits will likely involve other health plan services beyond PBM drug pricing. That is why it is crucial at the onset that plan sponsors use this test case to prevent plan sponsors from being scapegoated for PBM drug pricing, or the pricing for other medical services in America. The following are our initial thoughts on this attempt to assert new liability against ERISA plan fiduciaries for health plan fees:
ISSUE #1: Does a participant have standing to sue for excessive fees on behalf of a defined benefit health plan? The Johnson and Johnson lawsuit is a brazen attempt for a plaintiff law firm to use a solitary participant in the J&J medical plan to seek derivative damages on behalf of 130,000+ other participants and their beneficiaries in the J&J health plans. Courts have allowed participants with the tiniest account balances to assert class and derivative claims on behalf of an entire defined contribution plan, even sometimes allows nominal participants to dispute the fees and performance of investments in which they did not invest in some cases. But we know from prior case law that courts understand that defined benefit plans are different from defined contribution plans. In Thole v. U.S. Bank, N.A., 140 S. Ct. 1615 (2020), in a five to four decision authored by Justice Kavanaugh, the United States Supreme Court held that participants in an ERISA defined benefit pension plan did not have standing under Article III of the U.S. Constitution to bring breach of fiduciary duty claims against defined benefit plan fiduciaries based on alleged imprudent investments and underfunding of the plan. The key reason was that the company, not the participants, bore the risk of losses, as it ultimately had an obligation to fund the plan in the event of investment losses. In that case, U.S. Bank had funded the plan to make up for a significant investment loss. The Court ruled that participants lacked standing to sue a defined benefit plan unless they can show that their benefits were somehow impaired.
The question is whether the Thole standing ruling applies to welfare benefit plans. We have at least three answers to this question, with two rulings holding no standing, but a third case involving a multiemployer case in which the court found standing. The most prominent ruling involving a single-employer plan is Knudsen v. Met Life Group, Inc., 2:23-cv-00426 (D.N.J. 07/18/2023). The plaintiffs in the MetLife case alleged that MetLife received approximately $65 million in rebates from its pharmacy benefits manager that were retained by the plan. That plan paid about 70% of the cost of coverage, with participants paying the 30% remainder. In granting MetLife’s motion to dismiss, the district court relied on the Thole ruling that plaintiffs lacked Article III standing as they were not injured by how the rebates were used. Instead, plaintiffs were seeking extra contractual benefits that they were entitled to under the plan. The participants had not alleged that they had been denied benefits to which they were entitled or paid more than required under the terms of the plan with respect to any medical benefits they received. The plan terms were clear that the rebates belonged to MetLife, and were not to be considered when calculating co-insurance or co-payment amounts. The same result was reached by the Eastern District of New York in Gonzalez de Fuente v. Preferred Home Care of New York, LLC, 2020 WL 5994957 (E.D.N.Y. 10/09/2020), which was decided after the Thole decision.
The Ninth Circuit similarly found no standing in Winsor v. Sequoia & Insurance Services, 62 F.4th 517 (9th Cir. 2023), in a case in which participants in an ERISA welfare benefit plan sued the manager of a fully insured multiple employer welfare arrangement (MEWA). Participants alleged breach of fiduciary duty tied to commissions received by the manager and administrative fees paid to the insurers. The Ninth Circuit affirmed the district court’s dismissal of these claims that the plan administrator received kickbacks and excessive administrative fees on standing grounds, because “plaintiffs were [only] contractually entitled to the insurance benefits that [the defendant] agreed to purchase for them with the program’s funds – benefits that plaintiffs have received.”
By contrast, participants in a multiemployer plan were granted standing to challenge administrative fees in a little-known pending case in Acosta v. Board of Trustees of UNITE HERE Health, No. 22-C-1458 (N.D. Ill. 03/31/2023). In the UNITE HERE case, participants in one of the individual plan units for union workers in California alleged that the plan incurred excessive overall administrative expenses and unfairly allocated higher expenses to the California plan units compared to the Las Vegas plan unit that allegedly had better benefits. The plan moved to dismiss under Thole on the grounds that plaintiffs had failed to allege that they were denied any contractual benefits or lost any wages. But the court accepted as true that participants had allegedly lost potential wages based on the unsupported claim that “every penny they give in contribution [to the plan] is one less penny of wages.” Although the defense claimed that the alleged lost wages were conclusory and unproven, particularly given that wages and benefits were governed by collective bargaining agreements, the court nevertheless found standing because “Plaintiff alleged that the conduct of Defendants impacted their end of the bargain, including in terms of lost wages, higher cost-sharing and coinsurance payments, and less valuable health benefits.” From our perspective, the lost wage claim was contrived, but the court allowed the case to proceed. Because standing cannot be appealed until the case is finalized, the decision will likely never reach the appellate court.
The plaintiff law firms bringing the J&J excess fee case know these standing rulings, and tried to plead individual injury to establish standing that is based on the UNITE HERE template, including a contrived claim that her wages would have been higher if the health plan was cheaper. That is not how corporate America works, as many of can attest. In addition to purported lost wages, she pleaded a specific amount of cost-sharing for her cancer treatment.
There are many holes in her standing argument, as she has not proven that she purchased any of the other drugs that have an alleged excessive price. As noted, any claim that J&J would have paid her a higher salary – the complaint notes that she is not on active duty because of her health – if health plan costs were lower is pure conjecture, just like it was in the UNITE HERE case. She also cannot claim that she was ever denied any benefits. We also do not know if she chose the high-deductible option in which she had to pay all expenses until she reached our annual limit. There is just one claim of coinsurance for one drug. The complaint does not even assert what the coinsurance percentage is for plan participants, so we cannot tell if plan participants pay more if the company pays more.
Standing is nevertheless the core threshold issue in the case: does a participant have the right to sue a defined benefit health plan when they have received all of the plan benefits offered by the plan? That fact that she does not like her benefits – or a lawyer told her that her benefits are bad – should not be the test. Most of us don’t like our health plan either. But that doesn’t give us the right to sue for a better plan. If I don’t like my company’s plan, I can always get a new job. But this isn’t about participants – this is about whether the trial bar can create liability from the ERISA federal statute. That is their business model: find a statute, and evaluate whether there is a way to make money.
Even if there is standing, does a participant have standing to sue about drugs that they do not need? This case is about dozens of drugs that are supposedly too expensive. Participants typically cannot sue on investments that they didn’t select. Surely they cannot sue on every drug in the PBM’s formulary. Surely this one participant cannot represent a class of participants that chose different plan options, and likely used different services in the plan. Class certification is usually a foregone conclusion in retirement plan cases. But it is not fair to give one participant in a gigantic plan the right to represent a class of participants that all use the health plan for different drugs and services.
ISSUE #2: Do defined benefit fiduciaries have an obligation to provide 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.” Once we get passed the issue of standing, we reach the issue of liability. Multiple lawyers have predicted that the impending health plan excess fee cases would be brought under the new fee disclosure rules of the 2020 Consolidated Appropriations Act, 2021 (CAA), but we do not see an reference to the CAA in the case. The complaint is a standard breach of fiduciary duty claim under the ERISA benefits provisions of sections 502(a)(2) and (a)(3). 502(a)(2) is a beneficiary’s right to sue for appropriate relief for breach of fiduciary duty under the section 1109 liability statute; and section 502(a)(3) is the catch-all appropriate equitable relief provision. The complaint, therefore, represents the proposition that the same purported fiduciary duties that apply to retirement plans also apply to health plans. According to the complaint, fiduciaries must ensure that their agreements with service providers and the amounts they pay to those service providers are reasonable; fiduciaries must 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. According to the complaint, fiduciaries cannot ignore the power their plans wield to obtain favorable rates, because “wasting beneficiaries’ money is imprudent.”
It is important to note that the complaint admits that most of the drugs offered by the plan are two percent above the acquisition cost. They do not dispute the pricing for the majority of the drugs offered by the plan. Instead, the breach claim is that several dozen specialty-generic drugs are too expensive. The complaint is thus alleging that every drug offered by the plan must be the lowest possible price. In practical terms, this is a radical proposition, because it means that ERISA fiduciary committees must ensure that the health plan is paying reasonable fees for every single health service or drugs. In the hands of the trial bar, this is a hammer to claim that every single medical service and available drug must be at the lowest possible price in the market. ERISA health plan responsibilities have never interpreted this way. The reason is that health coverage is a company expense, even if a percentage of the responsibility is shared with participants. J&J had no incentive to overpay for any drugs or medical services for its health plan participants. This plaintiff firm wants the right to object to specific aspects of the overall health plan.
We do not accept the proposition that company-sponsored health plan fiduciaries have to ensure that every single medical service and drug offered under the plan is the lowest cost available in the market. We have never seen the Department of Labor espouse this view. The reason is that it is impractical and unfair. It would require a complete revamp of the health delivery system in America. It would turn company sponsored plans into Medicare, and even the government has trouble managing health care costs. We believe the liability proposition espoused in this case is unfair to corporate America. ERISA defense lawyers can opine on what ERISA demands in terms of reasonable cost for plan services. But we have never seen an ERISA lawyer advise their plan clients that they have a Tibble v. Edison International responsibility to ensure that all health plan services are the lowest-fee institutional price. Why would any company offer a health plan if they have the burden, with dollar-for-dollar liability, to do the impossible, which is to ensure that thousands of medical services and drugs are the lowest prices available in the market? Plaintiffs assert that the prudent answer is to dump your PBM and use pass-through PBMs or other lower-cost mechanisms. But it a radical proposition that ERISA fiduciaries are responsible for any excess profit earned by the PBM for every single, individual drug offered by the plan. This complaint is espousing a new ERISA liability scheme for health plans – a liability scheme for which most companies are not prepared. It is a liability scheme that even Medicare cannot deliver, despite it having the ultimate bargaining power.
ISSUE #3: Who is the Victim of Excess Health Fees? As noted on the issue of standing, the complaint is a deliberate attempt to establish a derivative claim in the complaint by alleging that the J&P health plan itself has been harmed. The J&J VEBA plan is an ERISA qualified defined benefit plan. But the reality is that, even though the benefits are distributed through a plan vehicle, J&J as the corporate sponsor has to pay the benefits. It is no different than U.S. Bank in the Thole case when the company was responsible to fund any investment loss as the guarantor of the benefit contract. If the participants need more drugs or require higher than anticipated health services, the plan pays, but it is funded by J&J. J&J is the plan. J&J has to pay. The complaint’s attempt to cast the plan as the victim of the J&J fiduciaries’ negligence is a legal fiction. Again, J&J is the plan. That is why standing should be different between a defined benefit and defined contribution plan.
If Express Scripts is enriching itself at the expense of the J&J plan, the victim is not the participants, but instead is J&J as the entity responsible to fund all medical services required under the plan document. J&J is the victim of any improper health plan and drug pricing. We must change the narrative on this issue. If PBMs are the culprit, then J&J and other plan sponsors are the victim. The trial bar is not working to save poor participants. If they are legitimately exposing improper pricing, the victim is the company who has to foot the bill.
ISSUE #4: Who should pay if the PBM fees are excessive? Closely following the issue of properly identifying the PBM as the culprit and the plan sponsor as the victim, the next question is who should be liable? In the retirement plan litigation, we somehow allowed plan sponsors to be liable when TIAA, Fidelity and other retirement plan service and investment providers allegedly overcharged retirement plans. In the J&J case, it is the same dynamic. The PBM is alleged to have taken improper markups that represent profits for the PBM. The plan and J&J made nothing on these alleged drug markups. But the lawsuits attempts to turn any improper pricing of the PBM into a negligence claim by the plan sponsors.
If there is any improper pricing uncovered in excess fee lawsuits, the PBM or offending health service provider should pay. If they are not a fiduciary, then plan sponsors need to look to their contracts. If the contracts do not provide indemnification, then the contracts must change. Plan sponsors must require health service providers to indemnify them for claims of improper pricing. At a minimum, the damages of alleged excess fees should be reimbursed by the PBM or service provider. We cannot continue to have plan sponsors and their fiduciary insurers backstop the alleged overpricing of PBMs in America. We never believed most of the excess fee claims against Fidelity and other quality service providers. But the claims against PBMs appear to have some truth. We will learn more as the case progresses. But if there is any merit to these claims, PBMs must be brought into these cases by counterclaims, or provide indemnification to defend their business models. PBMs should not be allowed to sit on the sideline and have plan sponsors defend the PBM business model. PBMs should pay to defend the PBM business model. We must flip the script in excess fee cases.
The Encore Perspective
Most Americans agree that the medical system in America is dysfunctional. It never made sense that employers pay for health care of most Americans. But we also know that, even though Medicare is the most popular health plan in America, many of us do not trust the government to be the exclusive provider of health care. We can look to Canada and Great Britain to know that a government health care system will lead to health care rationing and long delays in medical services. The American health care system needs a legislative solution to ensure fair pricing for medical services if the free market is not working properly. In particular, there are enough issues with PBMs that Congress needs to devise a legislative solution to ensure that drug pricing are fair and equitable, but at the same time they must ensure that drug companies have the profit motive to develop new drugs. This is a societal issue that should not be decided on the backs of the sponsors of employee medical care in America.
In the meantime, we cannot allow the trial bar to exploit the dysfunction in the American health care system. Plan sponsors cannot be used as scapegoats in a liability scheme in which health plan fiduciaries are personally liable for excessive profits that PBMs or any other health care providers receive in the system. But that is exactly what the Johnson and Johnson case will do if allowed to proceed in the court system. It will be the tip of the iceberg in which the trial bar will have the ability to sue nearly every other company in America. We must flip the script and seek a legislative solution, and not allow plan sponsors to bear the liability of health care dysfunction. Otherwise, smart companies will stop offering company-sponsored plans and turn their participants over to the government-sponsored health care exchange.