Second Large Employer Sued under ERISA & CAA for Failure to Manage Employee Benefit Program
Steps for Employers, VPs of HR & CFOs to Avoid This Looming Litigation
Since April 2024, employees have sued Johnson & Johnson and Wells Fargo for gross mismanagement of their employee benefit plans in violation of the Employee Retirement Income Security Act of 1974 (ERISA) and the Consolidated Appropriations Act (CAA), specifically the Transparency in Coverage Rule that came into effect in December 2021.
Under ERISA, fiduciaries of employee benefit plans (typically top human resources and/or finance officers within an organization) are held to specific standards of conduct because they act on behalf of participants in these plans and their beneficiaries. Here are the core requirements for fiduciary responsibility as outlined by ERISA relevant to these cases:
Act with Prudence: One of the primary duties of a fiduciary is to act with prudence. This means that fiduciaries must perform their duties with the care, skill, prudence, and diligence under the circumstances that a prudent person familiar with such matters would use. This often involves being well-informed about their duties and acting in accordance with the plan's terms unless they are inconsistent with ERISA.
Act Solely in the Interest of Plan Participants and Beneficiaries: Fiduciaries must act solely in the interest of the plan participants and beneficiaries, with the exclusive purpose of providing benefits to them and defraying reasonable expenses of administering the plan. This is often referred to as a duty of loyalty.
Pay Only Reasonable Plan Expenses: Fiduciaries must ensure that any fees paid by the plan for services are reasonable and necessary for the plan's operation. This includes ensuring that the compensation for service providers to the plan is not excessive.
Fiduciaries who do not follow these principles of conduct can be held personally responsible for restoring any losses to the plan or for restoring any profits made through improper use of the plan's assets resulting from their actions. The Department of Labor (DOL) has the authority to enforce these rules through penalties, corrective actions, and litigation.
ERISA's fiduciary responsibilities are designed to ensure that those who manage and control plan assets are held to the highest standards of accountability, thus protecting the interests of the participants and beneficiaries of the plans.
CFOs and HR Pros Cannot Outsource this Obligation
Reliance on a broker, agent, consultant, advisor, whisperer, or whatever term we are using for them this month is no defense. In fact, that person, more specifically the entity for whom they work, is likely part of the problem.
This has been the law for fifty years under ERISA. However, the CAA helped to clarify and sharpen our focus on this issue. As ERISA firm, Trucker Huss writes:
The Consolidated Appropriations Act of 2021 (CAA) also included many provisions that require a new level of transparency on pricing and fees charged to health plans. Notably, the CAA amended ERISA § 408(b)(2) — which greatly expanded fee disclosure responsibilities for retirement plan providers — such that ERISA § 408(b)(2) disclosure requirements now apply to health plans for certain service providers. Under the CAA, a ‘responsible plan fiduciary’ is required to review the compensation disclosures provided by a plan’s brokers and consultants to ensure that they are only paid reasonable compensation. And it requires brokers and consultants, which arguably can include PBMs (depending on the services provided), to disclose ‘direct’ and ‘indirect’ compensation received during the term of the contract.
This is only the beginning, employers. Sources inside the DOL and Department of Justice have made it clear that there will be more of these suits.
I wrote extensively about this in April 2023 at BenefitsPRO in “The fiduciary imperative of reference-based pricing: A legal and financial analysis.” In that piece, I argued that given the federal government's endorsement of RBP and its proven efficacy in reducing employer costs and expanding participant options, it is now virtually impossible for a plan fiduciary to lawfully discharge their duties in accordance with ERISA without at least considering the implementation of RBP.
The first two groundbreaking suits on this topic are now in process. There are similarities.
Both cases focus intensely on the mismanagement of pharmacy benefits in a self-funded employer plan
Both employers use Express Scripts as their pharmacy
Both employers use AON as their broker/consultant
Both specifically name human resource professionals as defendants
Both defendants are giant industry insiders who absolutely should have known better (J&J is, obviously, deep in the pharmacy industry, and for many years, Wells Fargo owned benefit insurance brokerages)
Both suits were brought by Fairmark Partners, a large, reputable law firm that did excellent work in researching and laying out these complaints. In Wells Fargo, local counsel was added from Minnesota firm Gustafson Gluek.
I encourage you to read at least the factual allegation section of each complaint. Both are written clearly, concisely, and very easily understandable—even for folks who are not in the industry. Each complaint is about one hundred pages long. You can read J&J here and Wells Fargo here.
I'll quote extensively for your convenience to give you an idea of just how egregious and straightforward this is. I’ll place them at the very end so as not to disrupt the flow of this post.
What’s an Employer to Do?
First and foremost, employers/plan sponsors should use free and independent brokers/consultants who openly and readily disclose every penny they receive from all service providers. The larger the insurance brokerage grows, the more challenging this becomes as they earn more and more overrides or offer their own “exclusive” pharmacy deal – which can sound amazing but regularly is solely to drive more rebates back to the brokerage. Overrides are payments from insurers or service providers to brokerages based on the volume they do on the whole, as opposed to your contract directly. The argument for them is that they don’t come directly out of your premium – but thinking about this for more than a second illuminates the flaws in this superfluous argument. Money is fungible. I.e., any money going from an insurer to a brokerage is less revenue for that insurer that they will make up with increased premium. Furthermore, this more nebulous form of compensation can incentivize your broker to recommend a provider that is not the best for you based on what he or she stands to gain from that sale.
You’ve heard this from me before. So, instead, I want to share a few quotes from a recent podcast with ERISA attorney and PBM specialist Paul Holmes. In that interview, Holmes was asked if brokers are disclosing all the compensation they are receiving; his response was,
In my experience, they are not. All of the large brokerage and consulting firms are coming up with evasive responses to those requests. … The CAA is not really working yet.
This was at the 8:50 timestamp in this podcast. The whole podcast from the Moving To Value Alliance is great, and I highly recommend it. It is entitled PBM Problem (Part 1): Who Do Brokers and Consultants Really Work for?
In that same podcast, Holmes goes on to note that insurers and PBMs have become overwhelmingly profit-driven and have worked hard to write their contracts such that the average plan sponsor can't decipher them. This allows teh PBM to obfuscate all of the profit centers being hidden in the plan. He goes on to state,
In American business you don’t expect your major vendors to be profit-gouging you, and you don’t expect these major consulting firms to be taking their side instead of yours.
I can attest to what Holmes is saying. After nearly 23 years in this industry as an attorney and consultant – that is exactly what happens. I’ve audited hundreds of health plans over the years and seen behavior that would make a mob boss blush.
As an example, some consultants have historically focused intensely on large public plans and church plans for one reason. [The wise ones in the crowd nod vigorously.] It is because public employers and church plans do not need to file 5500s, which, until the passage of the CAA, was the only forced public disclosure of broker commissions and fees. Hence, the gorgers specialized in that industry, so they could run commissions well up to over a million dollars on a client without any compelled disclosure.
Any one employer’s personal broker or consultant may be fantastic. They may pride themselves on the utmost level of integrity and honesty. I get it. I encounter those folks too. And by the way, GOOD ON YA out there!
The largest problem I see is that those fighting to do what is right are not exposed to what is happening at the highest levels within their organization. They may not be told what the carrier overrides are. The swaying and manipulation of opinion may be as subtle as corporate management regularly putting out communications about the quality “partnership” they have with Carrier A, or sponsoring social gatherings more frequently with that carrier, etc. Similarly, that brokerage may also disseminate communication about how “difficult” reference-based pricing can be or how using a free, independent pass-through PBM can cause a health plan to leave valuable Rx rebates on the table.
The messaging gets through. Once an entity is publicly traded or being stripped and flipped by private equity, its gluttonous addiction to profit over everything dominates. In the context of publicly traded brokerages, remember, their fiduciary obligation is to maximize profits for shareholders. So, are they really behaving “wrong” when they “nudge” a client toward a Big 4 Carrier with larger overrides to the brokerage?
That’s for you to ponder.
Employers/Plan Sponsors: Guard Yourself Today
You must review your broker’s compensation disclosure. And no, you don’t want to rely on the one that they paid tens of thousands to a law firm to write as evasively as they could. You want to craft your own. And you need that document to be specific. If you don’t, you are open to liability – even personal liability.
Here is what the law firm of Babst Callard says on this topic (the emphasized language is mine):
Repercussions for Failing to Provide Section 202 Disclosures
Generally, ERISA prohibits plans from entering into transactions with parties-in-interest, which include service providers such as brokers and consultants. An exception to this general rule is that a plan may enter into contracts for various services as long as those contracts are reasonable. The disclosures listed above, specifically the disclosures regarding indirect compensation, are designed to aid responsible plan fiduciaries in determining the reasonableness of the agreements with consultants and brokers.
Covered service providers must notify the responsible plan fiduciary in writing of any changes in the disclosures no later than 60 days from the date the covered service provider is informed of the change. Additionally, while covered service providers are required to provide responsible plan fiduciaries with the disclosures on their own accord, the CAA also empowers plan fiduciaries to request Section 202 disclosures from covered service providers. The failure of a covered service provider to make the required disclosures within 90 days of a written request obligates the plan fiduciary to notify the Department of Labor within 30 days of the covered service provider’s failure to respond. Additionally, a responsible plan fiduciary should avoid contracting with brokers or consultants who fail to provide Section 202 disclosures as to do so may subject the plan to penalties.
Did you catch that?
Not only should you fire them … but you are “obligated” to report them to the Department of Labor.
Let that one sink in for a moment.
I’m going to make a complimentary resource available to you for this purpose.
If you are already a self-funded employer or you have 250 or more employees on your plan, I will send you a copy of an affidavit and sample disclosure you can use to guard yourself against brokers behaving badly. This is to protect you. It is very simple and straightforward. If your consultant behaves evasively or won’t sign this document, you will have your answer. If your consultant will sign this document, hold on tight because you have one of the good ones!
Email: cgottwals@mahoneygroup.com
TPAs, PBMs, stop-loss vendors, brokers (or consultants, agents, advisors, recommenders, whisperers, VPs, Sr. VPs, Sr. Sr. VPs – again, the vernacular tends to change every year or so as the middlemen become embarrassed of their industry’s behavior and thereby try to rebrand) don’t bother emailing me. This isn’t for you. It's for large clients who are already self-funded or considering self-funding. If you want to get your hands on this, you can have your client request it from me—if you dare! Ha!
Plan sponsors, I can assure you, there are a number of consultants at large brokerages reading this and, as they said in the old Hardy Boys books, uttering an oath. They don’t want you to see the type of affidavit and disclosure I’m going to show you. I bet the human resource professionals at Johnson & Johnson and Wells Fargo wish they hadn’t ignored this requirement.
Highlighted excerpts from Johnson & Johnson:
3. This case principally involves mismanagement of prescription-drug benefits. Over the past several years, Defendants breached their fiduciary duties and mismanaged Johnson and Johnson’s prescription-drug benefits program, costing their ERISA plans and their employees millions of dollars in the form of higher payments for prescription drugs, higher premiums, higher deductibles, higher coinsurance, higher copays, and lower wages or limited wage growth. Defendants’ mismanagement is most evident in (but not limited to) the prices it agreed to pay one of its vendors—its Pharmacy Benefits Manager (“PBM”)—for generic drugs that are widely available at drastically lower prices. For example, someone with a 90-pill prescription for the generic drug teriflunomide (the generic form of Aubagio, used to treat multiple sclerosis) could fill that prescription, without even using their insurance, at Wegmans for $40.55, ShopRite for $41.05, Walmart for $76.41, Rite Aid for $77.41, or from Cost Plus Drugs online pharmacy for $28.40. Defendants, however, agreed to make their ERISA plans and their participants/beneficiaries pay $10,239.69—not a typo—for each 90-pill teriflunomide prescription. The burden for that massive overpayment falls on Johnson and Johnson’s ERISA plans, which pay most of the agreed amount from plan assets, and on participants/beneficiaries of the plans, who generally pay out-of-pocket for a portion of that inflated price. No prudent fiduciary would agree to make its plan and participants/beneficiaries pay a price that is two-hundred-and fifty times higher than the price available to any individual who just walks into a pharmacy and pays out-of-pocket. …
5. Discrepancies like this exist for dozens of drugs under Johnson and Johnson’s ERISA plans. For example, as explained in greater detail below, certain generic and branded drugs are designated as “specialty” drugs based on the conditions they treat or other factors. While Plaintiff’s plan with Johnson and Johnson declined to provide her with access the plan’s drug formulary upon request, an analysis of Defendants’ prices for the generic drugs designated as specialty on a publicly available formulary managed by the same PBM reveals a pattern of unreasonable markups. Across all generic-specialty drugs on the formulary for which there is publicly available data on average acquisition costs, Defendants agreed to make the plans and their beneficiaries pay, on average, a markup of 498% above what it costs pharmacies to acquire those drugs. In other words, Defendants agreed to make Johnson and Johnson’s ERISA plans and their participants/beneficiaries pay, on average, roughly 6 times as much as the PBM (or a PBM-owned pharmacy) paid for those very same drugs. Not incidentally, Johnson and Johnson is a leading drug maker that earns billions of dollars a month selling drugs. …
9. The price discrepancies noted herein are illustrative of a pervasive and systematic problem of unreasonable prescription drug charges, despite well-known alternatives available to Defendants. Among other things, Defendants should have: used their bargaining power to obtain better rates from their own PBM or another traditional PBM; taken steps to steer participants/beneficiaries toward the most cost-effective option instead of to the PBM’s own pharmacy; moved all or parts of their prescription-drug plan to a “pass-through” PBM that bases its prices on actual pharmacy acquisition costs rather than inflated and manipulable benchmarks; directed substantial portions of their prescription-drug program to a well-known online pharmacy that charges only a modest markup above acquisition cost; and/or taken other steps detailed below. Yet the Pension and Benefits Committee of Johnson and Johnson—a major drug maker that itself profits from high drug prices—has instead chosen to force its benefits plans and covered employees and retirees to acquire drugs via some of the most expensive methods conceivable. …
63. Some EBCs [Employee Benefit Consultants], while purporting to act in the interest of prescription-drug plans, are in fact being paid by PBMs in ways that incentivize them to act against the plan’s interests. For example, PBMs may promise to pay an EBC a commission on every prescription if the EBC recommends the PBM to its client plans. As one media outlet reported, “[c]onsulting firms can collect at least $1 per prescription from the largest PBMs, according to more than a dozen independent drug benefits consultants and attorneys involved with employers’ PBM contracts. That can go as high as $5 per prescription in extreme cases, three of those people said. Consulting firms and brokerages may receive a certain dollar amount for each covered employee and member. Or they may share in the rebates that the PBMs pluck from pharmaceutical manufacturers — money that otherwise could be used by employers to lower premiums for their workers.” …
66. Some EBCs, while purporting to manage an open RFP process for their client plans, will refuse to solicit bids from PBMs that decline to offer the EBC kickbacks or other forms of indirect compensation. …
69. Section 202 of the 2021 Consolidated Appropriations Act prohibits covered plans from entering into a contract, renewal, or extension of services for the plan with “covered service providers,” which includes EBCs, without first requiring the covered service provider to disclose, in writing, any and all direct and indirect compensation in excess of $1,000 it receives for providing services to the plan. A covered plan’s failure to obtain the required disclosures from a covered service provider under Section 202 makes its contract with that service provider a prohibited transaction under ERISA. Prudent fiduciaries obtain the required disclosures from their EBCs and ensure that the disclosures are sufficiently clear and unambiguous, and that no conflict of interest exists, before entering into, renewing, or extending their contract. …
72. When fiduciaries agree to overpay for prescription drugs, employees—and especially the sickest employees—bear much of the burden. …
96. On information and belief, Defendants used Aon (previously known as Aon Hewitt) as their broker, or EBC. According to public reporting, Aon receives indirect compensation from certain PBMs in connection with Aon’s clients’ use of those PBMs. In its SEC filings, Aon acknowledges its receipt of indirect compensation from the companies to which it steers its clients—compensation it refers to as “market-derived income”—and warns investors that “this revenue may be subject to scrutiny by various regulators under conflict of interest, anti-trust, unfair competition, conduct and anti-bribery laws and regulations.” Accordingly, Defendants allowed their selection of a PBM for the Plans to be guided or managed by a broker with a conflict of interest—i.e., a financial interest in steering Defendants toward certain PBMs or including certain provisions in the PBM contract, in ways not necessarily correlated with the financial and other interests of the Plans and their participants/beneficiaries. …
129. One way in which Defendants have further mismanaged the Plans is by agreeing to steer beneficiaries toward Express Scripts’ mail-order pharmacy, Accredo, even though Accredo’s prices are routinely higher than the prices retail pharmacies charge for the same drugs.
Highlighted excerpts from Wells Fargo -
3. Defendants’ mismanagement is evident from, among other things, the prices it agreed to pay one of its vendors—its Pharmacy Benefits Manager (“PBM”)—for many generic drugs that are widely available at drastically lower prices. For example, someone with a 90-unit prescription for the generic drug fingolimod (the generic form of Gilenya, used to treat multiple sclerosis) could fill that prescription, without even using their insurance, at Wegmans for $648, ShopRite for $677.68, Rite Aid for $891.63, Walmart for $895.63, or from Cost Plus Drugs online pharmacy for $875.09. Defendants, however, agreed to make the Plan and its participants/beneficiaries pay $9,994.37 for each 90-unit fingolimod prescription. The burden for that overpayment falls on both the Plan and its participants/beneficiaries. The Plan itself pays most of the agreed amount from Plan assets, while Plan participants/beneficiaries pay more in the form of increased premiums and increased out-of-pocket costs. No prudent fiduciary would agree to make its plan and participants/beneficiaries pay a price that is fifteen times higher than the price available to anyone who just walks into a pharmacy and pays without using their insurance. …
5. Discrepancies like this exist for dozens of drugs under the Plan. For example, as explained in greater detail below, Defendants designated approximately 300 generic drugs as “preferred” drugs that participants/beneficiaries are encouraged to use. Across all such “preferred” drugs for which there is publicly available data on average acquisition costs, Defendants agreed to make the Plan and its beneficiaries pay, on average, a markup of 114.97% above what it costs pharmacies to acquire those same drugs. In other words, for drugs that Defendants themselves designate as “preferred” choices for Plan participants/beneficiaries, Defendants agreed to make the Plan and its participants/beneficiaries pay, on average, more than twice as much as Express Scripts (or the pharmacy owned by Express Scripts, called Accredo) paid for those very same drugs. …
178. Wells Fargo, one of the largest financial services companies in the world, is an active participant in the pharmaceutical market. Wells Fargo regularly publishes research about the economics of the pharmaceutical industry and hosts an annual healthcare conference that routinely features PBM market participants.
179. Wells Fargo has also operated a leading employee benefits consulting practice and brokerage, advising clients on topics including pharmacy benefits and conducting RFP processes on behalf of companies seeking new PBM contracts. In a 2017 “Employee Benefits Outlook” report, Wells Fargo advisors warned of rising prescription drugs costs and specialty drug spending, and noted: “In today’s environment, employers must work a little harder to improve the health of their population while minimizing increasing costs for their employees.” Another 2017 article by a Wells Fargo advisor listed PBM consolidation as a primary driver of rising prescription drug costs and encouraged employers to “[r]eview your current pharmacy benefit manager contract to ensure that the most aggressive unit cost and appropriate-use strategies are in place.” In 2013, a Wells Fargo advisor explained that “substantial savings” were possible when employers act prudently in assessing PBM options, pricing strategies, and contracts.
180. Wells Fargo analysts have noted that Express Scripts’ growth in earnings has been driven the very practices alleged here, including markups on specialty drug prescriptions, steering of plan members its own pharmacy, and clients’ repeated failure to identify and switch to alternative PBMs with better prices and terms.