Plan Sponsor Liability in Auditing Pharmacy Benefit Managers: Lessons from Recent Lawsuits Against J&J and Wells Fargo

In 2024, significant legal developments highlighted the growing importance of plan sponsor liability in managing and auditing Pharmacy Benefit Managers (PBMs). These cases underscore the fiduciary responsibilities that plan sponsors must uphold under the Employee Retirement Income Security Act (ERISA) and the severe consequences of failing to do so.

The Role of PBMs and Plan Sponsor Liability

Pharmacy Benefit Managers (PBMs) are third-party administrators that manage prescription drug benefits on behalf of health plans. They negotiate with drug manufacturers and pharmacies to control drug spending, aiming to secure favorable pricing for plan participants. However, the opaque nature of PBM operations has raised concerns about potential conflicts of interest, lack of transparency, and the adequacy of cost savings passed on to plan participants.

Plan sponsors—typically employers—are responsible for selecting, overseeing, and auditing these PBMs. Under ERISA, they have a fiduciary duty to act solely in the interest of plan participants and beneficiaries. This includes ensuring that the PBM's operations are transparent, the pricing is fair, and that the PBM’s practices do not result in excessive costs or reduce access to necessary medications for employees.

??Johnson & Johnson: A Cautionary Tale

In early 2024, a class action lawsuit was filed against Johnson & Johnson by a group of employees alleging that the company failed to properly audit its PBM, resulting in inflated prescription drug prices for plan participants. The plaintiffs claimed that Johnson & Johnson breached its fiduciary duty by not adequately monitoring the PBM’s pricing practices, which led to higher out-of-pocket costs for employees.

The lawsuit emphasized that Johnson & Johnson's lack of oversight allowed the PBM to engage in practices that were detrimental to employees. These practices included spread pricing—where the PBM charges the plan more than it reimburses the pharmacy—and rebates that were not fully passed on to the plan. The case is still pending, but it has already sent ripples through the corporate world, highlighting the importance of thorough audits and oversight of PBM activities.

In the document below, you can view the prices charged by Johnson & Johnson's plan via Express Scripts PBM for all the medications cited in the lawsuit, juxtaposed with the prices we would offer through a cost-based transparent PBM approach.?

?Wells Fargo: Expanding the Scope of Liability

Similarly, Wells Fargo faced a lawsuit in 2024 targeting its human resources leadership team. Employees accused the bank of failing to protect their interests by not properly overseeing its PBM, resulting in excessive drug prices. The plaintiffs argued that Wells Fargo’s HR leadership team neglected its fiduciary duties under ERISA by allowing the PBM to prioritize profits over the well-being of plan participants.

The Wells Fargo case broadened the scope of liability by targeting not just the company but specific individuals within the HR department. This sets a precedent that could hold HR leaders and other plan administrators personally liable for failing to fulfill their fiduciary responsibilities.

Key Takeaways for Plan Sponsors

These lawsuits against Johnson & Johnson and Wells Fargo underscore several critical points for plan sponsors:

1. Rigorous Auditing: Plan sponsors must rigorously audit PBMs to ensure transparency and that all pricing practices benefit plan participants. This includes regular audits, independent reviews, and a clear understanding of how PBMs make money.
2. Transparency and Accountability: Ensuring transparency in PBM operations is crucial. Plan sponsors must demand clear and detailed reporting from PBMs on pricing, rebates, and any potential conflicts of interest.
3. Proactive Management: Plan sponsors cannot adopt a "set it and forget it" approach. Ongoing oversight and active management of PBM relationships are necessary to protect plan participants.
4. Personal Liability Risks: The Wells Fargo case highlights that HR leaders and other individuals involved in managing benefit plans could be held personally liable for breaches of fiduciary duty. This risk makes it imperative for plan sponsors to educate their teams on the importance of compliance and oversight.
5. Legal Precedents: The outcomes of these cases will likely set legal precedents that could influence future litigation and regulatory actions. Plan sponsors should stay informed about these developments and consider their implications for their own practices.

Conclusion

The lawsuits against Johnson & Johnson and Wells Fargo serve as a stark reminder of the fiduciary responsibilities that plan sponsors have under ERISA. As PBM operations become more complex, the need for vigilant oversight and auditing becomes increasingly critical. Plan sponsors must take proactive steps to ensure that their PBMs operate transparently and in the best interest of plan participants, or they risk significant legal and financial consequences.

Our consultants at Cambridge can provide a complementary assessment and playbook. Contact us at [email protected] if interested in learning more.