Considerations for Plan Sponsors The recent proposed class action lawsuit filed against Johnson & Johnson (J&J) related to the handling of their employee benefit plan has raised new concerns for employers and plan sponsors. In recent updates, Conner Strong & Buckelew has provided an overview of the case, highlighting the allegations and possible implications for employers and plan sponsors. In this communication, we’ll offer more insight into the case and what employers and plan sponsors may want to consider as the matter is adjudicated in the court. As expected, this case has raised the profile around how employers and plan sponsors vet vendors, evaluate options, and manage their health and benefit plans. We address these concerns below and outline our position on the practices we apply in helping clients manage the selection process of vendors, especially Pharmacy Benefit Managers (PBMs), and then managing said vendors on an ongoing basis.
Overview of the Complaint and the Allegations At its core, the complaint alleges that J&J breached the ERISA duty of prudence and the duty to act solely in the interest of the plan in selecting its PBM when other less costly arrangements were available (including pass-through options and specialty drug carve-out vendors). The alleged harm is the higher costs of drugs to the ERISA plan and to plan participants. This case is expected to be the first in a possible wave of similar litigation against employers alleging a breach of fiduciary duty due to the self-funded ERISA plan allegedly overpaying for services. The complaint essentially alleges that the J&J fiduciaries:
Mismanaged the plan by agreeing to pay its PBM inflated prices for generic specialty drugs that are widely available at drastically lower prices;
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;
Failed to exercise prudence and make a diligent and thorough comparison of PBMs;
Should have used its bargaining power to obtain better rates from their own PBM or another traditional PBM;
Failed to conduct an open RFP process and did not consider the full range of available options for PBM services; and
Failed to evaluate service providers and consultants for potential conflicts of interest.
At this point, the information contained in the complaint are allegations and J&J may have numerous defenses to the claims. The legal process now gives J&J an opportunity to respond, on both legal and factual issues. It is unclear what the outcome of the case will be, but it does raise various items for employers and plan sponsors to consider in terms of documenting their process and procedures in vendor selection and management, especially with PBMs, which is especially complex.
Conner Strong & Buckelew Vendor Vetting and Monitoring ProcessConner Strong & Buckelew has long recognized that our client’s welfare plans have significant fiduciary responsibilities and further burdens related to managing the financial viability of their health plans and the prudent disposition of the plan’s assets. Our guiding principle is to be our client’s advocate and consider our client’s best interests in all placements and negotiations. We have and will continue to:
Advocate in the strongest terms possible so that carriers, insurers, PBMs, TPAs and all health and benefit vendors provide all cost and claims data to support our client’s efforts to prudently fulfill their fiduciary oversight obligations under the law;
We have been steadfast in this area and have publicly advocated for industry-wide change.
Regularly competitively market all vendors delivering health and benefit services to our customers to ensure they consider alternatives and options to deliver cost-efficient benefit plan management;
We routinely collaborate with clients around the results in a transparent fashion.
Conduct thorough and comprehensive RFPs to the markets to regularly adjust for market changes and business needs;
Provide regular comprehensive reporting to measure vendor performance results so clients can make informed decisions; and
Disclose all compensation we earn to clients.
We are not influenced by any vendors that would impact our objective and impartial capacity to give clients the best advice and recommendations.
For pharmacy specifically:
We evaluate all options, including pass-through and traditional (spread) pricing, and evaluate which offers clients favorable deals.
We ensure that PBM agreements include regular “market checks” to allow for a routine consideration of cost options.
We perform regular market checks to ensure clients have favorable available terms.
We scrutinize and negotiate PBM agreements to ensure favorable terms are secured.
We have pharmacy and clinical experts we use to assist in these highly complex evaluations.
This lawsuit serves as a reminder to employers that they must prudently select and monitor plan service providers, such as PBMs. To further fortify their fiduciary decision making, we suggest plan sponsors consider establishing a formal process to oversee their fiduciary obligations under their welfare plans, similar to the process many use to manage their 401(k) retirement plans. This formal process should be designed to, among other things, support the employer’s prudent selection and monitoring of their third-party service providers, including PBMs. This is an area that we believe needs further conversation and we are prepared to advance such discussions with clients.
The timeline for the outcome of the J&J case is unclear. However, the case has raised significant considerations for group health plan sponsors. Many will require a re-review of processes and procedures and Conner Strong & Buckelew is committed to helping our customers navigate through these emerging issues. As more information becomes available, we will provide updates accordingly.
Please contact your Conner Strong & Buckelew account representative toll-free at 1-877-861-3220 with any questions.
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