Most employers are familiar with their fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA) as they relate to employee retirement plans; however, many aren’t aware they also apply to health and welfare plans.
Of particular interest to benefits providers today is the ongoing case of Lewandowski v. Johnson and Johnson (et al.) — a class-action filed in federal court in New Jersey. The plaintiff alleges Johnson & Johnson (J&J) violated its fiduciary duty under ERISA to ensure that prescription drug prices under its health benefit plans are reasonable, that J&J failed to exercise prudence in selecting its pharmacy benefit manager (PBM), and by agreeing to unreasonable contract terms contributed to increased healthcare premiums and out-of-pocket drugs costs for employees. The lawsuit highlights prescription drug pricing available via cash pay versus what J&J’s PBM, Express Scripts, approves for the same drug. For example, according to the J&J lawsuit complaint, the generic prescription drug, Aubagio, used in the treatment of multiple sclerosis, costs $28.40 per 90-pill prescription at Cost Plus Drugs versus the J&J PBM.
The J&J litigation is generating awareness and concern around group health and prescription drug plan strategies and compliance with the fundamental principles of ERISA. The upshot for self-funded plans is they should strongly consider partnering with PBMs that can help mitigate the risk of litigation by adopting cost containment strategies, and act with due diligence when it comes to procuring lowest drug costs. And even if your plan isn’t subject to ERISA — for example a church or government plan — you may still be best served by following its fiduciary standards. In addition, certain regulations that apply only to public employers, like Michigan’s Public Act 152, create a strong business case to act prudently and lower plan costs for plan participants whenever possible.
What are your fiduciary responsibilities?
To meet ERISA-mandated fiduciary responsibilities, you must:
- Act solely in the interest of plan participants and their beneficiaries.
- Ensure service providers such as insurance carriers and PBMs that assist in carrying out plan functions are paid only reasonable plan costs. To meet this obligation, you must understand the fee structure, including direct and indirect administrative fees and any commissions.
- Act with care, skill, prudence, and diligence in carrying out your duties. This includes service provider selection and ongoing monitoring through audits to ensure they perform contract and plan terms. Having a broker help with your review can be invaluable.
- Act in accordance with the plan’s documents and ensure required communications such as summary plan descriptions and annual notices are complied with. ERISA requires a summary plan document that outlines rights and responsibilities in the plan and every employee should receive one. Some employers are unaware they need this document and others forego it to save costs, but in the event of litigation, this document can be important for your defense.
It's important to note that the fiduciary standards don’t necessarily require that participants be offered or given the lowest-priced product or services; rather, ERISA mandates a process whereby the fiduciary engages in prudence and diligence under the then existing circumstances to evaluate the role of a provider such as a PBM. If it can be shown that after a reasonable, prudent, and diligent process, a particular service provider was selected, then the fiduciary standards may be satisfied. Conversely, if the vendor partner was selected based upon a haphazard, limited, or deficient process, you could be exposed to liability.
Four actions you can take right now to mitigate risk
Given the developing legal landscape, it’s important to recognize the significant risk about this issue and exercise caution and care in executing your fiduciary duties. As an employer, it’s incumbent on you to understand, for example, what goes into drug pricing when constructing your contract with a PBM, and just as importantly, what you might be overlooking to ensure there aren’t underlying costs you’re not aware of. This may seem overwhelming, but consider that the goal is prudence, not perfection. Here are four steps you can take now to protect against liability.
1. Form a fiduciary committee responsible for benefits decision making
If you don’t already have one, form a committee of employees and management responsible for benefits decision-making and monitoring vendor partners. The committee should have the skills necessary to meet the care, prudence, and diligence standards established by ERISA. Ensure the committee has access to plan data and an action plan to use that data to support sound decision-making. Consider providing fiduciary training to support the committee in exercising care and compliance with its fiduciary duties.
2. Review your PBM and other service provider contracts
Get involved. Self-insurance provides plan sponsors with maximum control and rewards employers that play a more active role in managing the plan. Take the time you need to understand the solutions and cost structures that are embedded in your third-party administrator’s offering. This includes contract terms, expiration dates, and bidding procedures. Consider the value received for the cost (remembering that lower cost doesn’t always mean most reasonable) and pinpoint any conflicts of interest that may exist.
Finally, evaluate your third-party administrator(s) to ensure they understand the fiduciary responsibilities that apply to them. Many organizations don’t do this.
3. Consider engaging a “lowest net cost” PBM
Consider selecting a PBM that prioritizes the lowest net cost instead of maximizing discounts and rebates. Lowest net cost PBMs are compensated entirely on an administrative fee basis (per employee/member per month, or per script); there’s no spread pricing, no rebate retention, and no percent-of-savings compensation.
4. Engage a competent group benefits advisor
As a leader responsible for your group health plan, it can be hard to know where to start. Consider engaging an independent group benefits consultant to review your program and use analytics to assess your current claims situation and future projections. They can find underlying costs you’re not aware of, recommend cost containment solutions, act as agent to help you negotiate terms, and be an overall trusted advisor to help make sure you’re bringing the best benefits forward to decision-makers.
The future of group benefits
The J&J lawsuit is the first of many anticipated class-action suits against employers for breach of fiduciary duties in their health plans. What can we learn from it? Employees are increasingly concerned about whether employers are exercising care and prudence with respect to the selection of service providers and administration of their plans, and they’re taking action. Employers have a statutory obligation to monitor the cost-effectiveness of their health benefit plans.
Is your consultant helping you do your due diligence?
Part of your fiduciary responsibility as a plan sponsor is to ensure you’re getting independent, objective advice. Engage a benefit plan advisor who’s working on your behalf and can guide you in understanding, evaluating, selecting, and contracting with the right service providers. With prudence and good oversight, you can mitigate risk and help drive down costs for you and your plan members. Reach out to a member of our team to learn more.
