J&J drug pricing lawsuit seeks class action status

In what’s being called a “watershed” case for pharmaceutical price transparency and accountability, a lawsuit seeking class action status accuses drug giant Johnson & Johnson of mismanaging its employee benefits program causing huge overpayments for certain drugs. And it is likely a harbinger of what’s to come for employee health plans.

The drug pricing lawsuit, filed in early February in New Jersey U.S. District Court by a former Johnson & Johnson employee, says the company’s pension and benefits plan did not take proper measures to ensure its costs were reasonable and failed to prudently select a pharmacy benefit manager resulting in undesirable contract terms.

Allegations included in the 74-page complaint includes the eye-opening example of the Johnson & Johnson benefits manager paying a whopping $10,239.69 for a 90-day supply of a treatment for multiple sclerosis when a generic drug was available at local pharmacies for as little as $28, even before accounting for insurance.

That’s “not a typo,” the complaint states.

Breach of 'fiduciary duties' charged

“Defendants breached their fiduciary duties and mismanaged Johnson and Johnson’s prescription-drug benefits program, costing their ERISA plans and their employees millions of dollars in the form of higher payments for prescription drugs, higher premiums, higher deductibles, higher coinsurance, higher copays, and lower wages or limited wage growth,” the complaint states.

This drug pricing lawsuit, which asks for a jury trial, joins a number of impending lawsuits alleging improper corporate governance of pension and employee plans but may be the first to involve health care benefits. It won’t be the last.

“This is probably the first of many class action suits pitting plan participants against their plan sponsor for not taking their fiduciary responsibility seriously,” said Mark Galvin, founder and CEO of Talon, based in Portsmouth, New Hampshire, which worked with the White House Health Policy Team in developing the new Transparency in Coverage rule. Talon was subsequently used as the model upon which the new Transparency in Coverage and No Surprises Act federal mandates are based.

Galvin said the lack of healthcare price transparency has led to outrageous overspending, with price disparities between providers paying up to 25 times for the same services.

“The new federal transparency rules are exposing this overspending and requiring employers to shop for better prices as fiduciaries,” he said.

While Galvin and others agree the Johnson & Johnson drug pricing lawsuit is going to put managers of employee health plans on notice that their fiduciary responsibility will extend to price shopping and negotiation for drugs, he said the corporations aren’t totally to blame for the alleged mismanagement.

Lack of transparency cited

“The system is broken by the lack of transparency and perverse incentives, not unethical employers,” he said. Talon provides real-time healthcare shipping tools to expose true prices.

The new rules require employers to shop for better prices as fiduciaries or face major fines.

“The new rules will drive overall market efficiency over the next three to five years,” he said.

Congress enacted Employee Retirement Income Security Act (ERISA) following several high-profile scandals involving employers that mismanaged employee benefits programs causing millions of dollars of harm to employees and their dependents.

“ERISA was designed to put an end to this mismanagement and to protect the interests of employee benefit plan participants,” the Johnson & Johnson lawsuit notes. “It does so by ‘establishing standards of conduct, responsibility, and obligation for fiduciaries of  employee benefit plans,’ and by providing plan participants with “appropriate remedies, sanctions, and ready access to the Federal courts’ when plan fiduciaries mismanage plan assets.”

NABIP anticipates more lawsuits

The National Association of Benefits and Insurance Professionals also  believes more lawsuits like the J&J case are coming.

“It’s anticipated that several more lawsuits alleging similar violations will be filed in the same fashion,” said NABIP CEO Jessica Brooks-Woods. “The Johnson & Johnson lawsuit seeks unspecified damages and statutory penalties under ERISA because – if the case’s allegations are accurate – J&J did not uphold its responsibility to fiduciaries.”

Brooks-Woods said overall, the case underscores the importance of ERISA and the legal responsibilities of plan administrators to act in the best interests of the participants and beneficiaries including exercising prudence in contract negotiations and plan management to ensure reasonable costs and fees.

“NABIP will be following these developments and informing our membership as they are filed. “Plan fiduciaries should not delay in reviewing their fiduciary processes, particularly as they relate to selecting and monitoring plan contracting arrangements with [third-party administrators] to assess the reasonableness of costs and fees being paid by their health plans,” she added. “NABIP will be following these developments and informing our membership as they are filed.”

For its part, Johnson & Johnson said the lawsuit is baseless and it will move for dismissal.

“The allegations and legal theories asserted in the complaint are meritless,” a Johnson & Johnson spokeswoman said. “As a company, we are committed to our employees, and we seek to provide the best coverage for the best medicines at the lowest cost. In evaluating our options, we seek to secure the best combination of cost and other terms from the pharmacy benefit managers that control the market and set reimbursement levels for medicines.”

But the complaint presents multiple examples it says showing Johnson & Johnson’s plan paid hundreds, sometimes thousands, of times more for drugs than could be obtained in lower-cost outlets.

Warnings on overcharging unheeded

“Prominent media outlets, industry publications, governmental entities, and research organizations have long reported on the [pharmacy benefit management] tactics and conflicts of interest, and have warned plan administrators about the financial harms that result when they fail to act prudently and instead allow PBMs to enrich themselves at the expense of the plans and their beneficiaries,” the lawsuit states. “Prudent fiduciaries would heed this advice…by taking steps to protect their plans from these widely reported tactics.”

The lawsuit said Johnson & Johnson’s plan administrators knew or should have known that their PBM contracts unreasonably failed to heed these warnings and failed to protect the plans from widely reported tactics, despite having ample bargaining power.

“The problem quite honestly, companies couldn’t take their fiduciary responsibility seriously because they were being blocked by the entire industry which was operating in total secrecy, in pricing and all types of structures to surgically remove the consumer from the health care market,” said Talon’s Gavin. “Now the new rules take us from totally opaque pricing to total transparency.”

Galvin said it’s taken a little time for health plans to realize the impact of the transparency and accountability. But they will come to realize it through litigation like the Johnson & Johnson case.

“What you're seeing now and what this litigation is a result of, is there's enough people and enough transparency that people are learning about the bad behaviors that were happening behind the curtains that they never knew about,” he said. “And I wouldn't say Johnson & Johnson knew that they were getting gouged for this stuff. But it is their responsibility.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].