Wells Fargo and J&J lawsuits: Key legal insights for fiduciaries and benefits advisors

Here we go again. For the second time in less than six months, a large corporation’s health plan has been targeted in a lawsuit by employees alleging that the plan failed to do what is best for members.

This is the reality facing Wells Fargo, who now joins Johnson & Johnson (J&J) as one of the first American companies to be sued in test cases regarding the alleged mismanagement of health benefit plan funds in violation of a federal law intended to protect the plan’s members.

While these cases could pave the way for similar lawsuits, the result is unclear, and business leaders should not wait to find out. The good news is that by knowing a few high-level details about these cases and taking purposeful steps, employers and their benefits advisors can help protect their health plans in defending against similar claims while also putting members’ best interests first.

Two big steps toward health plan transparency

As a trial attorney who practiced civil litigation for almost two decades, the current chief legal officer for a service provider for self-funded health plans, and a member of our company’s committee responsible for monitoring our own employee benefits plans, I want employers, brokers and consultants to understand how we got here and where we might be headed. I promise to keep the legal jargon to a bare minimum. Here’s what you need to know:

Employee Retirement Income Security Act of 1974 (ERISA): This law says that anyone who is legally designated to manage a health plan (a “fiduciary”) must manage the plan with care, skill, prudence and diligence.  A fiduciary’s primary responsibility is to operate the plan solely in the best interests of the plan members. 

Consolidated Appropriations Act of 2021 (CAA): This law and previous executive orders imposed new transparency requirements relating to group health plans and their service providers, including requirements that plans not enter into agreements that contain “gag clauses” that restrict their ability to access claims payment data, and new requirements that certain service providers disclose their fees and services to the plan fiduciaries.  

Related: How the first ‘fiduciary duty’ lawsuit for health benefits affects employers and employees

Using these two laws in concert signals a growing litigation trend wherein plaintiffs may argue that as transparency data becomes available through the CAA’s requirements, a fiduciary has a duty to scour the information to make comparative judgments and potentially act on it. While these laws are meant to protect consumers, they also have significant implications for businesses.

A simple prescription for better plan hygiene

Both the Wells Fargo and J&J lawsuits focus on the spread pricing type claims involving pharmacy benefit managers (PBMs), where the plaintiffs allege that the prices of certain drugs offered on the formulary were many times higher than the cost of drugs obtained through a pass-through pricing model or from a pharmacy outside of insurance.  Why PBMs? Right now, there is a lot of federal and state scrutiny around PBM pricing models and the lack of transparency relating to plan costs.  The recent Wells Fargo case brings to light a specific example of how this plays out: 

Wells Fargo paid nearly $70,000 for bexarotene gel, a medication used to treat skin cancer, through Express Scripts’ mail-order pharmacy. The worker could have purchased the same medication from Rite Aid for $3,750 in cash. This means that the plan paid 1,867% more for the medication through their employer-sponsored plan if the person paid cash and didn’t use the health plan. 

Also: Avoiding ERISA lawsuits and breaches of fiduciary responsibility: Lessons from litigation

Of course, there are strong legal defenses that will be used by the group health plans in these cases.  It is clear, though, that the legal strategy here is to try and raise enough allegations in the complaint to get past a motion to dismiss and into costly discovery, where the employer may be willing to settle. It is also clear that the lack of transparency in health care creates opportunities for plaintiffs to use CAA transparency data to develop additional theories of liability against health plan sponsors which builds upon successes achieved in litigating cases against fiduciaries of 401(k) retirement plans. While it’s impossible to know how these specific cases play out, here are three action items groups should take to protect themselves in defending these cases.

1. Choose your health plan vendors wisely and monitor their performance

Plan sponsors and their advisors should have a process in place to review information made available under the various transparency laws and regulations and act on it, if appropriate.  When working with health plan service providers, keep in mind these best practices:

• Carefully review the disclosures made by your health plan vendors. Make sure to understand what the plan’s service providers are responsible for, the specific services they provide and how they are paid.
• Document a process and frequency for hiring, evaluating and monitoring service providers.
• Hire service providers that can assist in performing fiduciary duties and responsibilities, and delegate those responsibilities when permitted.  While a plan cannot discharge all of its fiduciary duties under ERISA, it may be able to seek indemnification from the vendors they hired to perform those services.
• Meet with alternative PBMs and health plan service providers that offer cost-containment strategies. This ensures you are acting prudently by exploring more cost-effective options. 
• Use your audit rights whenever practical. Employer-sponsored health plans are not required to have the cheapest nor the most expensive service providers – they just need to have a process for selecting, evaluating and monitoring their providers.

2. Follow your health plan document and processes

When you have a health plan document and an internal process for making reasonable, consistent health plan decisions, you will be better positioned to defend your plan, if challenged. This does not need to be overly complicated; simply holding regular annual meetings, having a clear agenda and recording meeting minutes can be enough to show your process in action.

3. Hire outside counsel

Self-funded employers working with a third-party administrator (TPA) to run their health plans should hire outside counsel to help ensure both plan design and execution are compliant with federal laws and regulations. 

Beyond legal fees: The hidden cost of health plan lawsuits 

Today’s regulatory environment is complex and growing more complicated by the day. Employers continue to face increasing scrutiny over the management of their health plans, and related lawsuits are seemingly on the rise. Of course, one of the most immediate and tangible impacts of these lawsuits on employers is the potential for tremendous financial expense driven by huge legal fees and possible settlements. The only thing worse than the high monetary price tag of these lawsuits might be the long-lasting damage they cause to an employer’s reputation and trust among the workforce – a price they could continue paying long after the sticker shock of the settlement wears off.

Troy Sisum is the Chief Legal Officer for Imagine360.