Increased Expectation and Exposure for Plan Fiduciaries

“Just because you’re paranoid doesn’t mean that they’re not out to get you.”—Joel Wood, Council President (paraphrasing Joseph Heller, Catch 22)

Last month, a class action lawsuit was filed against drugmaker Johnson & Johnson and its benefit plan committee in the United States District Court for the District of New Jersey. The plaintiffs claim that the company’s group benefit plan fiduciaries breached the duties imposed on them under the Employee Retirement Income Security Act (ERISA) in selecting the plan’s pharmacy benefit manager (PBM) by relying on a biased consultant in the PBM selection process and failing to negotiate more reasonable contract terms with the PBM for the services that were being provided to the plan and its participants.

Some of the allegations of malfeasance in the complaint are—without the benefit of any additional context—eye opening. For example, the complaint alleges that one drug included on the formulary—teriflunomide, used in treating multiple sclerosis—is available from some pharmacies for less than $30 for 90 pills but costs over $10,000 under the J&J plan for the same prescription. The complaint further claims there was an average markup of 498% on the J&J plan formulary over the average pharmacy acquisition cost for generic specialty drugs.

In the last 20 years, hundreds of class action lawsuits have been filed alleging that ERISA plan fiduciaries’ imprudence and lack of oversight of plan finances resulted in excess payments for investments and plan administration.

Now the class action bar is turning its attention to group health plans, and the J&J lawsuit is the first shot across the bow. Potential plaintiffs are aided by the expanded compensation ERISA 408(b)(2) disclosures that are now required by group health plan service providers acting as “consultants” or “brokers” for the plan. The J&J plaintiffs’ lawyers did not, however, rely on those but instead relied heavily on the extensive U.S. Department of Health and Human Services “transparency” reporting that is now required for plans and their insurers, as well as for third-party administrators (TPAs) and PBMs regarding their actual plan-related contractual arrangements and expenditures. All of the transparency reporting data on which the J&J complaint relies is publicly accessible.

ERISA imposes a host of fiduciary obligations on plan fiduciaries, including that they must act solely in the “best interests” of the plan and its beneficiaries and that any compensation paid to or remuneration received by plan service providers in connection with the plan be “reasonable.” Potential claims can be based on, among other things, allegations that:

• The plan bears unreasonable costs or fees (such as the allegations asserted in the complaint against J&J)
• The plan is being charged excessively for insurance costs and/or related fees
• Service provider fees and compensation have not been disclosed to the plan
• Service providers (including insurance brokers, TPAs, PBMs and others) are receiving hidden fees either from the plan or related to the plan (For brokers, the failure to fully disclose plan-related remuneration is our primary liability exposure in this context.)
• Plan fiduciaries have failed to monitor claims-related fees and expenses.

Planning and Process

The question we keep getting from brokers concerned about their clients’ potential new “J&J” litigation risk is what is a plan (and its broker) to do. There does not appear to be a magic bullet, but process will undoubtedly count. Embracing the responsibility to monitor the plan’s costs and fees and to develop policies and procedures for assessing the reasonableness of those expenses (or establishing a subcommittee to do so) is likely the first step. Documenting those deliberations and assessments also is essential, in part because it is prudent to fulfill the plan oversight fiduciary obligations and in part as a defensive mechanism against a potential lawsuit.

In establishing such procedures, there are a few things plan fiduciaries may want to consider.

• Obtaining direct and indirect compensation and fee disclosures from service providers and taking advantage of the Department of Labor reporting obligations and other ERISA Section 408(b)(2) tools if disclosures are not forthcoming. TPAs and PBMs assert that they are not required to make these 408(b)(2) disclosures, but plan fiduciaries can insist on them nevertheless especially because it is clear that any compensation or other remuneration received—directly or indirectly—by their PBMs and TPAs must be “reasonable” in any event.
• Instituting a process for evaluating their plan’s fees and expenses to compare them with market rates. There obviously is a potential role for plan consultants to assist with these evaluations and assessments.
• Ensuring—to the extent feasible—that their contracts with plan service providers, including PBMs and TPAs, enable the plan fiduciaries to access the data needed to perform these evaluations and assessments and so that they can satisfy any of their own reporting obligations.
• Engaging in meaningful oversight of their plan service providers’ performance and compliance with their contractual obligations and exercising their contractual audit rights to adequately assess their service providers’ performance and compliance with those obligations.

Service contract renewal periods obviously provide opportune moments to attempt to effectuate some of these changes. Plans also should review their own insurance coverage with their brokers to ensure that their plan fiduciaries are insured for any potential negligent breaches of their oversight obligations.

We are at a moment in which the many TPAs and PBMs are asserting that they have no ERISA plan disclosure obligations, but plan fiduciaries may be held accountable for failing to insist on such disclosures from their plan service providers.

Something is going to have to give. Our job at The Council is to ensure that we bring TPAs and PBMs into the transparency fold so that our plan fiduciary clients can satisfy their fiduciary obligations. My money is on us.