In a landmark legal development, the health benefits landscape is witnessing a seismic shift that could redefine employer responsibilities and the structure of health benefits plans across the nation. The recent class-action lawsuit, Lewandowski v. Johnson & Johnson, has cast a spotlight on the intricate and often opaque world of prescription drug pricing within employer-sponsored health plans, signaling a potential wave of future litigation under the Employee Retirement Income Security Act (ERISA).
Valhalla Business Advisors stands apart in the landscape of health benefits consultancy. Our approach is rooted in our founding beliefs, is exemplified through our Independent Advisor Agreement, a testament to our fiduciary dedication. This forward-thinking approach ensures our clients receive unbiased, conflict-free advice. In an industry mired in conflicting incentives, Valhalla’s model represents a beacon of trust and reliability, guiding employers through the complexities of health benefits management. This attribute will prove to be “table stakes” as risks of lawsuits like Lewandowski v. Johnson & Johnson continue to emerge.
The Heart of the matter
At the core of this groundbreaking lawsuit are allegations that could resonate with every employer offering health benefits to their employees. The case unfolds a narrative where Johnson & Johnson’s health plan is accused of failing its fiduciary duties by allegedly causing participants to pay significantly more for prescription drugs through the plan than if they purchased them out-of-pocket at cash prices. The claim highlights startling price disparities for drugs treating serious conditions like multiple sclerosis, HIV, leukemia, and cancer, with markups reaching as high as 13,200% above the National Average Drug Acquisition Cost.
The suit would appear to have its basis in the provisions of the innocuously labeled Consolidated Appropriations Act of 2021 (CAA)—provisions said by some to be “the most significant compliance challenge employers have faced since the Affordable Care Act.” In essence, ERISA Section 408(b)(2)—which greatly expanded fee disclosure responsibilities for retirement plan providers—now applies to health care providers as well.
Source: https://www.napa-net.org/news-info/daily-news/participant-files-erisa-healthcare-fiduciary-suit-against-employer
According to reporting by the National Association of Plan Advisors, “[the] next wave of fiduciary litigation seems to be expanding, based on social media outreach by the law firm of Schlichter Bogard.” This article demonstrates targeted legal activity against employers including Anthem, Kohl’s, Walgreens, T-Mobile, Target, State Farm, and others.
Beyond the price tags
However, the lawsuit digs deeper than just the sticker shock of drug prices. It challenges the very mechanisms and relationships that underpin the management of health benefits, highlighting potential conflicts of interest among Pharmacy Benefit Managers (PBMs), Employee Benefit Consultants (EBCs), and Third-Party Administrators (TPAs). The suit questions the transparency and integrity of the selection process for PBMs, negotiation of plan contracts, and the oversight of service providers, suggesting a systemic failure to uphold fiduciary duties.
This case is not an isolated incident but rather a harbinger of what may become a new norm in ERISA litigation. With the Consolidated Appropriations Act of 2021 paving the way, employers must brace for increased scrutiny of how they manage and administer health benefits plans. The potential financial implications are significant, with judgments or settlements possibly running into tens of millions, not to mention the reputational risk and administrative burden of litigation.
Recent investigations and reporting, including in-depth analyses by ProPublica and STAT, have highlighted how the compensation models for health insurance brokers and PBMs can significantly impact plan costs and quality. Brokers, often the primary advisors for employers in selecting health plans, may receive commissions and bonuses from insurers based on the premiums of the plans they sell. This arrangement can create a misalignment of interests, where the recommendations provided to employers might not necessarily align with the most cost-effective or beneficial options for their employees.
Similarly, PBMs, which manage prescription drug benefits, have been scrutinized for practices that may not align with the best interests of plan participants. Complex rebate structures, spread pricing, and exclusive formulary decisions can obscure the true cost of medications, potentially leading to higher expenses for both employers and employees. These entities play a critical role in the drug supply chain, yet their operations and financial incentives are often shrouded in opacity.
Actionable Steps Forward
To navigate this tumultuous landscape, employers must adopt a robust fiduciary process for their health benefits plans. Establishing a fiduciary committee, gaining a comprehensive understanding of the compensation structures for all service providers, and ensuring the reasonableness of such compensation in exchange for services rendered are critical first steps. This proactive stance not only mitigates the risk of litigation but also aligns with the best interests of both the employer and the employees, fostering a transparent, equitable, and sustainable health benefits ecosystem.
The Lewandowski v. Johnson & Johnson case exemplifies the urgent need for employers to take a proactive stance in managing their health benefits plans. Here are actionable steps to enhance transparency and fiduciary oversight:
- Demand Full Disclosure: Require complete transparency from brokers, PBMs, and other service providers regarding their compensation models and potential conflicts of interest. If a broker or consultant participates in supplemental and contingent compensation programs as an aspect of its business model (i.e. source of profit), that broker or consultant should be replaced with one adopting an unconflicted (read: fiduciary) business model. [Note Paragraph 69 in Lewandowski v. Johnson & Johnson.]
- Establish a Fiduciary Committee: Form a committee dedicated to overseeing the selection and management of service providers, ensuring their interests align with those of the plan participants.
- Conduct Regular Audits: Implement periodic reviews of plan performance, service provider contracts, and cost structures to identify areas for improvement and ensure compliance with fiduciary standards.
- Educate Employees: Provide resources and tools to help employees understand their health benefits, encouraging informed decision-making and engagement.
At Valhalla Benefits Advisors, we understand the complexities and challenges employers face in this evolving legal and regulatory environment. Our team is equipped to guide you through establishing and maintaining fiduciary best practices, ensuring your health benefits plan is not only compliant but also optimized for the wellbeing of your employees and the financial health of your organization. With a focus on innovation, integrity, and insight, we stand ready to navigate these new waters with you, safeguarding your interests and those of your employees in the face of the rising tide of ERISA healthcare litigation.
APPENDIX
Paragraph 69 from Lewandowski v. Johnson & Johnson
69. Prudent fiduciaries ensure that any EBC ["Employee Benefits Consultant"] they hire to help them select and negotiate with a PBM does not have conflicts of interest that would prevent it from offering objective advice to the plan and operating a truly open RFP process. Prudent fiduciaries would not hire an EBC who was receiving kickbacks or other forms of compensation from the PBM it was selecting or negotiating with, or who would refuse to solicit bids or accept offers from PBMs who were not paying kickbacks or providing other forms of compensation. As one media outlet put it, “[e]mployers ... may be neglecting their legal duty by not asking their consultants and brokers to disclose all the sources of their revenue.”