According to CMS, annual health care spending in the United States reached about $4.5 trillion in 2022, 9% of which (about $405 billion) was spent on prescription drugs.[1] CMS also reports that in 2022, 18% of annual health care spending in the U.S. (or about $800 billion) was paid through employer-sponsored health plans. Given the billions of dollars spent every year through ERISA-covered plans, the importance of that benefit to the personal well-being of American workers and the inconsistency in the amounts paid for pharmacy benefits from plan to plan, it is no surprise that litigation relating to ERISA-covered health plans is on the rise. We are seeing increased challenges to how plans choose to provide pharmacy benefits to their employees and, in particular, their choice of pharmacy benefit managers (PBMs).

Lewandowski v. Johnson and Johnson

One such challenge was filed this year in a putative class action entitled Lewandowski v. Johnson and Johnson, et al, 24-cv-00671 (D.N.J. 2/5/2024). While the First Amended Complaint in the Lewandowski action, filed on May 10, 2024, is 93 pages long, its pertinent allegations can be summarized fairly succinctly. Plaintiff argues that defendants (including Johnson & Johnson – but not any PBM) mismanaged the Johnson & Johnson health/medical plans’ (collectively, Plans) prescription-drug benefits, costing the Plans and their participants millions of dollars in the form of higher payments for prescription drugs, higher premiums, higher deductibles, higher coinsurance, and higher copays.[2] The First Amended Complaint, among other things, alleges that defendants breached their ERISA duties of prudence and loyalty and seeks a broad range of relief. Remedies sought include restoration of losses, surcharge (make-whole relief) and other equitable remedies (including the appointment of an independent fiduciary).[3]

The First Amended Complaint is replete with allegations of overpayments for specific drugs. Plaintiff alleges, for example, that a 90-pill prescription for the generic drug teriflunomide[4] could be filled, without insurance, for as little as $40.55. The Plans, however, agreed to pay $10,239.69 for each 90-pill prescription. Plaintiff alleges further that differences of this magnitude exist for dozens of generic drugs under the Plans and “across all generic – specialty[5] drugs on the formulary for which there is publicly available data on average acquisition costs,” a markup of 498% was being charged to the Plans and participants.[6]

Plaintiff alleges that (a) the Plans were harmed because they paid most of the agreed amount from plan assets and (b) participants were harmed because they were forced to pay out-of-pocket for a portion of the higher price (a larger amount than they would have paid had the drugs cost the plan less). Plaintiff concludes that, “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”.[7]

Beyond identifying these differences in payments for generic drugs (including multiple examples of other drugs available directly from pharmacies for far less than charged to participants through the Plans), the First Amended Complaint also provides an extensive list of companies that ostensibly switched to “pass-through” PBMs that, according to plaintiff, could have produced significant cost savings to the Plans and participants:

Some PBMs offer services focused specifically on specialty drugs. In this kind of arrangement, a plan uses a traditional PBM for most of its prescription-drug needs, but carves out management of all specialty drugs to a specialty-focused PBM. In the specialty PBM carve-out model, responsibility for the entire specialty benefit is carved out to a PBM with a focus on, and expertise in, management of specialty drugs. These specialty PBMs—who typically use the pass-through model—can incorporate all aspects of specialty drug management, including claims processing, specialty formulary, and specialty pharmacy network management. Specialty carve-out PBMs do not need to own a specialty pharmacy and have no financial incentive to artificially promote greater or more expensive drug use—and, as a result, offer substantial savings to plans and their participants/beneficiaries. Many large companies use the specialty carve-out model for their prescription-drug plans. For example, DuPont carved out specialty drugs from its contract with CVS Caremark, and contracted with the pass-through PBM Archimedes to manage its specialty-drug program. Similarly, Signet Jewelers carved out specialty drugs from its contract with the traditional PBM OptumRx, and contracted with Archimedes to manage its specialty-drug program.[8]

Motion to Dismiss Original Complaint and Filing of First Amended Complaint:

On April 19, 2024, Defendants filed a motion to dismiss the original Lewandowski Complaint. In that motion, Defendants make two basic arguments. First, they argue that Plaintiff received all the benefits due to her under the Plans and that she will receive nothing additional even if she wins. Consequently, Defendants argue, Plaintiff lacks standing based on the Supreme Court decision in Thole v. U.S. Bank N.A., 140 S.Ct. 1615 (2020). Second, they argue that Plaintiff failed to state a claim under FRCP 12(b)(6) because she did not plausibly allege an imprudent process for negotiating PBM services.[9]

Interestingly, Defendants argue that Plaintiff’s focus on 42 specific drugs is inappropriate because Plaintiff must look at the entire prescription drug program and prove that, on the whole, it was overpriced. This argument appears to assume that it is okay if some participants are disfavored (because they are required by the plan to overpay for their drugs) while other participants are favored (because they are underpaying for their drugs) as long as “as a whole” the overall costs are favorable to the plan.

Assuming this is what Defendants intend to argue with regard to the First Amended Complaint, such an argument seems, in our opinion, to define a separate violation of ERISA – a breach of the Defendants’ fiduciary duty of impartiality. See e.g. Su v. RiversEdge Advanced Ret. Sols. LLC, 2024 U.S. Dist. LEXIS 50922, *27-28 (W.Pa. 2/20/24):

The Supreme Court has consistently held that an ERISA fiduciary owes a duty of impartiality to plan participants. See Howe v. Varity, 516 U.S. 489, 514, 116 S. Ct. 1065, 134 L. Ed. 2d 130 (1996) (describing duty of “trustee[s] to take impartial account of the interest of all beneficiaries”). Other courts have also noted that fiduciaries owe a duty to treat all participants and beneficiaries impartially. Summer v. State Street, 104 F.3d 105, 108 (7th Cir. 1997) (“picking and choosing among beneficiaries [would be] in violation of the traditional duty imposed by trust law of impartiality among beneficiaries”); see also Restatement of Trusts (Second), § 183 (1959) (“When there are two or more beneficiaries of a trust, the trustee is under a duty to deal impartially with them”).

The RiversEdge Defendants violated these duties when they transferred funds purposefully between the trust accounts of various Mismanaged Plans as needed to cover up the deficiencies in the accounts caused by their embezzlement. As a result, some of the Mismanaged Plans are short of funds, while others likely are not because they hold the assets of other Mismanaged Plans. As fiduciaries, the RiversEdge Defendants were required not to transfer assets among the plans in this way. Their violations are clear and also alarming. This evidence shows that the Acting Secretary will likely succeed on the merits.

Or, as one would say in the vernacular, a fiduciary is not allowed to “rob Peter to pay Paul” by causing one group of participants to pay more so as to subsidize the amount other participants pay.

As noted above, rather than respond to the Motion to Dismiss, on May 10, 2024, Plaintiff filed a substantially expanded First Amended Complaint. The First Amended Complaint includes additional allegations relating to harm allegedly suffered by the Plaintiff: “Across 14 prescriptions for generic drugs that she has obtained since August 2022, Defendants agreed to make the plans and Plaintiff pay, on average, a markup of 230.05% above pharmacy acquisition cost. Put another way, the average pharmacy acquisition cost for these prescriptions was $182.60.”[10] It also includes additional allegations regarding the process Plaintiff alleges a prudent fiduciary would follow when selecting a PBM: “Instead of agreeing to pay prices based on a ‘discount’ from a made-up benchmark (AWP) that does not correspond to the actual cost of prescription drugs, prudent fiduciaries agree to pay reasonable prices based on the actual acquisition cost of the drugs their members purchase.”[11]

Whether or not these additional allegations will impact Johnson & Johnson’s next move remains to be seen.

Lessons for the Future:

Given the amount of money flowing through ERISA-covered health plans and how the costs of health services, pharmacy and equipment has become increasingly opaque, the Lewandoski action has served as a loud wake-up call to the ERISA plaintiffs’ bar that there may be significant issues and, possibly, significant recoveries to be had relating to ERISA-covered health plans. Consequently, health plan fiduciaries would be well advised to take serious action before they find themselves in the spotlight of one of those actions (and defending themselves from angry employees, boards of directors and plaintiffs’ attorneys). For example, fiduciaries should:

• Carefully review their PBM programs and take action to assure that both their procedural and substantive processes for selecting their vendor can withstand a judicial spotlight;
• Consider carefully the role incentives and conflicts that any brokers they have hired might be laboring under when they recommend a particular PBM;
• Fully understand the direct and indirect compensation and revenue flows between all brokers, consultants, PBMs, pharmacy manufacturers and distributors, and other service providers;
• Take affirmative action to monitor their PBM program and respond to participant complaints as they arise rather than waiting for a lawsuit to be filed;
• Consider establishing a Health and Welfare Committee. Historically, plan sponsors have established governance practices, including plan Investment Committees, to address fiduciary concerns. However, Health and Welfare Committees are often overlooked. These committees need the authority to make fiduciary decisions and monitor group health plan fees for reasonableness based on the services the plan receives in relation to industry standards;
• Maintain a prudent process, including conducting periodic RFPs, and monitoring service providers. This may include amending current service provider agreements to ensure they provide obligations related to fee disclosure requirements in order to understand and monitor any plan fees or costs; and
• Continuously provide training and education for plan fiduciaries to mitigate that risk where available. This ensures a thorough understanding of their responsibilities under ERISA and that they are up to date on best practices related to all aspects of plan administration.

Plan sponsors might also want to strongly consider the advisability of bringing onboard an independent fiduciary well-versed in ERISA’s nuances and PBMs to oversee their plan’s selection and monitoring of their PBM programs. A professional independent fiduciary is likely to be able to proactively and independently identify any conflicted PBM recommendations of the types alleged in the Lewandowski case and take action to insulate a sponsor and its employee benefit plan fiduciaries from the types of allegations raised in the complaint (remember, the only defendant in the action is Johnson & Johnson – not the allegedly conflicted PBMs themselves). Similarly, an independent fiduciary is also more likely to understand and identify conflicts consultants and brokers are subject to when considering their advice.

[1] https://www.cms.gov/newsroom/fact-sheets/national-health-expenditures-2022-highlights.

[2] The original Complaint also named Johnson and Johnson’s Pension & Benefits Committee as a group and each member individually as defendants and sought to hold each of them liable for the relief sought in the Complaint. Before Plaintiffs filed their Amended Complaint, however, Johnson and Johnson and Plaintiff stipulated that Johnson and Johnson “will be responsible for any judgment” against the Committee or any of its members. Amended Complaint, ¶ 17.

[3] The complaint also alleges a failure to timely provide documents in violation of 29 U.S.C. § 1024(b)(4).

[4] Which Plaintiff identifies as the generic form of Aubagio, used to treat multiple sclerosis.

[5] Plaintiff defines “specialty drugs” in paragraphs 77 – 80 of the First Amended Complaint as follows:

Some drugs, whether brand or generic, are classified as “specialty” drugs. As originally envisioned, the “specialty” designation referred to expensive branded drugs used to treat complex or rare chronic conditions, required special handling or care, and historically were available only at hospitals, doctors’ offices, or specialty pharmacy locations where the patient could receive specialized instruction from a medical professional. Today, however, the “specialty” designation is largely arbitrary. . . . [T] there is no question that specialty drugs are a major driver of prescription-drug spending . . . account[ing] for more than half of all pharmacy spending, with total non-discounted spending in 2022 at approximately $324 billion (compared to $311 billion for non-specialty). . . . . The classification of a generic drug as a “specialty” drug can have a major impact on the price the plan will be required to pay for that drug because, . . . many plans agree to pay . . . traditional PBM rates for “specialty” drugs that are higher (i.e., have a lower discount from [Average Wholesale Price] AWP) than the prices they pay for non-specialty drugs.

[6] First Amended Complaint, ¶ 5.

[7] First Amended Complaint, ¶ 3.

[8] First Amended Complaint, ¶ 85.

[9] Defendants also moved to dismiss the Section 1024(b)(4) claims and strike Plaintiff’s jury demand.

[10] First Amended Complaint, ¶ 6.

[11] First Amended Complaint, ¶ 50.