One recent lawsuit is testing uncharted legal waters when it comes to determining exactly what fiduciary duty employers owe employees with regard to the provision of employee health plans.
On February 5th, a class action lawsuit was filed against Johnson & Johnson in US District Court alleging the company breached its fiduciary duty to employees by egregiously overpaying for prescription drugs.
The plaintiffs, or employees and former employees, support their claim by citing the seemingly exorbitant sticker prices that the company plan appears to be paying for certain medications - prices that supposedly far exceed the cost that uninsured customers pay for the same medication.
Interestingly, in addition to naming Johnson & Johnson as a defendant in the case, the plaintiffs also filed suit specifically against the Johnson & Johnson Planning & Benefits Committee as well as each of the individual fiduciaries that make up that committee, which may be the first time that such fiduciaries have been personally named as defendants in a case like this for employee benefits.
ERISA Fiduciary Liability
The Employee Retirement Income Security Act of 1974 (ERISA) governs primarily two components for an employer - their retirement and employee benefits.
Retirement - As a corollary, about 10-15 years ago, with new ERISA requirements for retirement plans, a number of lawsuits were filed against employers for violation of fiduciary duty. These lawsuits have primarily focused on allegations that plan fiduciaries failed to uphold their duties, leading to significant repercussions for plan participants and beneficiaries. The core issues at the heart of these legal battles include:
The outcomes of these lawsuits have varied, with some resulting in substantial settlements or judgments against fiduciaries, while others have been dismissed. The legal landscape surrounding ERISA fiduciary liability has evolved, with courts increasingly setting higher standards for fiduciary conduct. These cases have led to greater awareness and changes in how retirement plans are managed, including more transparent fee structures, improved investment option monitoring, and the adoption of best practices in plan governance.
Fast-forward to benefits - It remains to be seen how receptive the judicial system will be to the plaintiffs’ claims given that the excessive list prices plaintiffs are highlighting in the suit may be more a reflection of bundling practices common among pharmacy benefit managers (PBMs) than an indication of price gouging or negligent administration.
Perhaps regardless of the ultimate outcome, however, any validation of the underlying premise that the fiduciary duty owed to employees by employers and health plan fiduciaries may extend to these matters will likely bring with it a surge in employees suing their employers for excessive medical care costs and fees.
These suits could come in a variety of forms as it relates to employee benefits, which span not only medical but also cover dental through disability and voluntary. Key items that attorneys may be considering include:
Strategy vs. Duty
Company leadership is hired to run a company effectively. They have a duty to shareholders to run the business to the best of their ability. Senior officers, directors and officers have insurance to protect themselves. When a company performs below expectations, are they liable to shareholders? Only if there are egregious and potentially illegal errors.
The same line is drawn here. You cannot sue someone for implementing a strategy that was ineffective, but you can sue someone if they were negligent.
How to Reduce Your Company’s Risk
In order to minimize the risk exposure that the expansion of fiduciary duty in line with the plaintiff’s perspective presents, here are 3 steps employers can take to ensure that they are properly exercising their fiduciary duty with regard to employee health plan administration.
Organize and Authorize a Health Plan Committee: In the complaint against Johnson & Johnson, the fact that they did not have a health plan committee in place to oversee health benefit plan issues may end up working against the company, especially in light of their implicit acknowledgment of the potential value of a such a committee as evidenced by the existence of their pension plan committee, which serves a similar function with regard to employee retirement benefits.
Request Disclosures From EBCs and PBMs: According to the Johnson & Johnson complaint, federal law requires contract service providers like employee benefits consultants and pharmacy benefits managers to disclose in writing any compensation of more than $1,000 that they receive for their services, whether that compensation is acquired directly or indirectly. Further, failure to obtain such written disclosure prior to entering into, renewing, or extending a contract with a contract service provider makes that contract a de facto ERISA violation, so fiduciaries responsible for these matters should insist that such disclosures are documented before those contracts and renewals are signed.
Take Personal Responsibility: With each member of the benefits committee being named individually as a defendant in the Johnson & Johnson class action suit, proper oversight of health plans as well as the associated costs and administration is no longer any single fiduciary’s job - it is every fiduciary's job - which further underscores the value of health plan committees that are organized in part to provide accountability for these kinds of health-plan related issues.
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Although the outcome of the lawsuit has not yet been determined at this point, the ripples across the benefits industry are already being felt, and with rising medical costs trending in the opposite direction of many people’s ability to afford them, employers and benefits managers are almost certainly going to be targeted as possible recipients of the blame with increasing regularity going forward.
You can read more about this case here.
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