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ERISA Lawsuit Alleges Breach of Fiduciary Duty Due to Mismanagement of Prescription Drug Benefits

February 22, 2024

A proposed class action lawsuit filed against Johnson & Johnson (J&J) alleges that the company breached its fiduciary duties under ERISA by mismanaging its prescription drug benefits plan. The complaint asserts that J&J violated ERISA’s fiduciary duty of prudence in multiple ways and that this mismanagement cost the plan and its participants millions of dollars due to higher out-of-pocket costs for prescription drugs, higher premiums, and lower wages or limited wage growth.

This lawsuit highlights for employers the importance of adhering to their fiduciary duties when managing their health plans. Employers must prudently select and monitor their third-party service providers, including pharmacy benefit managers (PBMs). There may be more lawsuits like this one in the future, as the PBM industry faces increasing scrutiny and new transparency laws provide employees with more information regarding health care costs.

ERISA Fiduciary Duties

Individuals who have discretion in administering and managing an employee benefit plan are subject to ERISA’s strict fiduciary standards. Significantly, ERISA requires fiduciaries to discharge their duties with respect to employee benefit plans:

  • Solely in the interest of plan participants and beneficiaries;
  • For the exclusive purpose of providing plan benefits, or for defraying reasonable expenses of plan administration; and
  • With the care, skill, prudence and diligence that a prudent person in similar circumstances would use.

The duty to act prudently is one of a fiduciary’s central responsibilities. ERISA requires fiduciaries to prudently select and monitor plan service providers, considering various factors, including the service provider’s fees and expenses.

Fiduciary Breach Lawsuit

The plaintiff, an employee of J&J, alleges that the company failed to exercise prudence with respect to its prescription drug benefit. Notably, the complaint alleges that J&J mismanaged the plan by agreeing to inflated prices from its PBM for generic specialty drugs. The complaint also alleges that the company agreed to terms that encouraged participants to use the PBM’s own mail-order pharmacy, even though its prices were routinely higher than other pharmacies. In one example, J&J allegedly allowed its ERISA plans and beneficiaries to pay its PBM over $10,000 for a 90-day supply of teriflunomide (the generic form of Aubagio, used for multiple sclerosis treatment), despite the option for individuals to fill the prescription for between $28.40 and $77.41 from other pharmacies.

The plaintiff asserts that ERISA required J&J to make a diligent and thorough comparison of PBMs, to seek the lowest level of costs for services, and to continuously monitor plan expenses to ensure they remained reasonable, all things that J&J failed to do. The plaintiff requests a variety of types of relief, including that the company restore to the plan and its participants all losses resulting from each breach of fiduciary duty.

The above information does not constitute advice. Always contact your employee benefits broker or trusted advisor for insurance-related questions.

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