A lawsuit by an employee suing Johnson & Johnson Inc. for allegedly mismanaging drug benefits is a sign of potential future litigation against companies that rely on pharmaceutical industry middlemen to negotiate pricing and rebates.
Ann Lewandowski, a health-care policy and advocacy director for Johnson & Johnson, filed the proposed class action Feb. 5 in US District Court for the District of New Jersey. The lawsuit alleges that the New Jersey-based company mismanages its employee health plan by paying its pharmacy benefit manager, Express Scripts Inc., inflated prices for generic specialty drugs that are widely available at much lower cost.
Employers may be vulnerable to legal challenges by employees for paying excessive costs, given that previously hidden information on negotiated prices for health care services is now publicly available to potential plaintiffs through new laws and regulations, suggesting a wave of similar lawsuits in the future. These lawsuits parallel those filed against companies for paying excessive fees or mismanaging investments in 401(k) defined contribution retirement plans, according to attorneys who advise employers.
Companies have increasingly filed lawsuits against their health plan administrators for breaching fiduciary duties under the Employee Retirement Income Security Act. For example, Kraft Heinz Co. sued health plan administrator Aetna Life Insurance Co. for allegedly approving fraudulent claims, which was ultimately dropped in December 2023.
In another trend, there have been suits filed by employers, unions, and employees against health plan administrators for causing them to overpay for medical bills and claims.
However, the Johnson & Johnson case appears to be the first case brought by an employee against a major company alleging breach of ERISA fiduciary duty over mismanagement of health plan funds. In response to the lawsuit, Johnson & Johnson media relations Senior Director Tesia Williams said in an email that the allegations and legal theories asserted in the complaint are meritless and the company will move to dismiss the complaint in its entirety.
Suits Anticipated
“We’ve been anticipating that the fiduciaries of those plans that are hiring these third-party contractors are vulnerable to just the type of claims that Johnson & Johnson is facing here,” said Joanne Roskey, a member of Miller & Chevalier Chartered’s ERISA and employee benefits practice.
The lawsuit alleges that Johnson & Johnson mismanaged its prescription drug benefits program, resulting in employees paying millions of dollars in excess payments for drugs, as well as higher premiums, deductibles, coinsurance, copays, and limited wage growth. The lawsuit does not name Express Scripts, which is one of the nation’s three largest PBMs, as a defendant.
The suit points to a charge of over $10,000 for a 90-day prescription of the generic drug teriflunomide, used to treat multiple sclerosis, that would have cost as little as $28 from online pharmacy Cost Plus Drugs.
The court will focus on whether the plan had a reasonable process for selecting and monitoring its drug benefits, according to Roskey. The plan’s expenses are paid from the Johnson & Johnson Salary Medical VEBA, an employer-sponsored trust to pay medical benefits.
Roberta Casper Watson, leader of the Wagner Law Group’s health and welfare practice group, emphasized that the fact that there’s a trust has a bearing and once the employer puts a dollar in the trust, it becomes a plan asset. Assets in a VEBA “would make them all plan assets and strengthen the ERISA case,” Watson said.
Additionally, the plaintiff claimed in the Johnson & Johnson suit that paying inflated prices for drugs harmed employees in part because it resulted in lower wages for them.
Mitigating Liability
Employers can mitigate their liability exposure to these types of cases by ensuring they are engaged in a prudent process in selecting and monitoring their service providers, according to benefits attorneys who represent companies.
Employers may need to add staff, spend more time examining contracts to ensure they’re getting the best deal, and then do a lot of digging to ensure that the people they’ve signed contracts with are actually doing what they say they will do. The fact that Johnson & Johnson has become an early target of employee suits on fiduciary violations is “interesting,” according to Shawn Gremminger, president and CEO of the National Alliance of Healthcare Purchaser Coalitions.
Hospitals and health plans are required to make their negotiated prices publicly available, but drug prices and information about how PBMs like Express Scripts price the drugs they manage has not been as open. Employers and consumer groups have called for more transparency from these middlemen, who have been known to engage in practices like “spread pricing”— charging companies’ insurers more for drugs than they pay pharmacies to fulfill their claims and pocketing the difference.
However, it’s still difficult for employers to get negotiated pricing and claims data that shed light on PBM operations and other aspects of plan spend in a usable format. The threat of another Johnson & Johnson suit may prompt employers to look beyond the top three PBMs, which dominate marketshare, for alternative PBMs that are more transparent in their practices.
Lewandowski, currently on leave due to a dispute over an accommodation for a medical condition, is represented by Wheeler, DiUlio & Barnabei PC and Fairmark Partners LLP. The case is Lewandowski v. Johnson & Johnson, D.N.J., 1:24-cv-00671, 2/5/24.