Recent litigation against Johnson & Johnson provides an important reminder for all employee benefit plan sponsors that the fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) apply not only to retirement plans but to health and welfare plans as well.
For decades, retirement plans have faced class action litigation in which plaintiffs argue that the plan’s administrator breached their ERISA fiduciary duties by paying excessive fees to plan providers. Now, plaintiffs are testing similar arguments against health and welfare plans.
Lewandowski v. Johnson & Johnson Complaint
On February 5, 2024, a proposed class action was filed against Johnson and Johnson, its benefits committee, and the members of the benefits committee, Lewandowski v. Johnson & Johnson. Plaintiffs allege that defendants breached their fiduciary duties under ERISA by mismanaging Johnson & Johnson’s prescription-drug benefits program, particularly with respect to its selection of, and contractual arrangement with, its pharmacy benefit manager (PBM), costing its plan and its 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.
Applying similar arguments to those employed by plaintiffs in retirement plan excessive fee cases, plaintiffs in Johnson & Johnson allege that the plan’s PBM charged higher prices on many generic and specialty drugs otherwise available at lower prices and entered into arrangements that financially incentivize members to obtain prescriptions from the PBM’s own higher-cost mail-order pharmacy, unjustly benefiting the PBM.
Plaintiffs contend that defendants should have used their bargaining power and general industry knowhow to, among other things, obtain better contract terms and prices, steer beneficiaries toward more cost-effective pharmacies, utilize a PBM that bases prices on pharmacy acquisition costs and passes on all manufacturer discounts and rebates to the plan, and consider carving out their specialty drug program to curb costs.
The case is a culmination of events from recent years, including greater access to prescription drug pricing information due to the 2020 Consolidated Appropriations Act’s transparency requirements, soaring prescription drug costs, and a shifting focus to welfare plans as the object of fiduciary litigation.
Action Items
While the allegations in Johnson & Johnson are untested and several substantive questions remain, this case raises the risk of copycat cases. As we’ve learned from excessive fee litigation with retirement plans, often, the best defense to a fiduciary breach allegation is evidence of a prudent fiduciary process. With current litigation trends, it’s more important than ever for health and welfare plan fiduciaries to adopt and implement the same prudence standards as have been applied to retirement plans.
Specifically, plan sponsors should take a proactive and critical look at their welfare plan governance and administration to ensure that fiduciary duties are being satisfied, including the following:
- Establish and Maintain a Health and Welfare Plan Committee. If it does not have one already, plan sponsors should consider establishing a formal benefits administration committee with the authority to make fiduciary decisions with respect to its health and welfare plans, such as hiring service providers, determining claims, and interpreting plan documents. Once established, the committee should meet regularly with a prepared agenda, engage in discussion and exercise reasonable diligence, and record meeting minutes to document and demonstrate a prudent process.
- Review and Update Committee Documents and Committee Composition. Fiduciary committees should have an updated charter or bylaws, and a clear delegation of authority from the plan sponsor. These documents should be reviewed regularly to ensure that they mirror the committee’s practices. Committee members generally should have relevant skills for their positions.
- Conduct Regular Fiduciary Training. Plan fiduciaries should attend periodic fiduciary training to stay apprised of recent developments, trends, and best practices.
- Monitor Service Providers; Review and Pay Reasonable Fees. Plan fiduciaries can (and often should) delegate certain administrative functions to third party professionals. Even when functions have been delegated, however, fiduciaries retain a duty to monitor those third parties to ensure that the service provider is performing its obligations under the applicable service agreement and that any fees paid from plan assets are reasonable. Fees should be periodically benchmarked against the market, and all contracts should be thoroughly read and negotiated with assistance from counsel. Fiduciaries should consider conducting an RFP or RFI if it’s been several years since their last review.
- Follow Plan Documents. Plan fiduciaries should have a copy of the plan’s governing documents, including all trust agreements (if applicable) and summary plan descriptions. Fiduciaries should conduct periodic plan compliance reviews to ensure all plan documents are consistent with administrative practice and applicable law.
- Fiduciary Liability Insurance. Evaluate current fiduciary liability insurance policies to consider whether current coverage levels are sufficient, whether the policy includes health and welfare plan administration, and whether the policy covers all applicable fiduciaries.
- Consider Cybersecurity Obligations. To date, the DOL’s cybersecurity guidance has focused on retirement plans and related service providers. Plan fiduciaries should consider adopting and implementing cybersecurity policies and procedures in accordance with the DOL’s cybersecurity guidance with respect to its health and welfare plans as well.
- Highlight Your Wins. The Johnson & Johnson complaint lists several companies that, according to plaintiffs, have been successful in negotiating savings for its plan participants. Much of this information comes through press releases and employee communications. Highlighting your successes, cost savings, and benefit offerings can help shape employees’ positive perception of your benefit plans.
By being proactive, we believe health and welfare plan fiduciaries can better protect themselves against potential litigation. If you have any questions about this legal update, please contact a member of the MMM Employee Benefits & Executive Compensation Team.
