What employers should know about excessive health plan costs

In the past decade, employers who sponsor pension plans have been subject to class actions brought by their employees, alleging the employers breached their fiduciary duty to pension plan participants by failing to rein in excessive fees.

Now, that scrutiny has expanded to include employers who sponsor health plans, and who allegedly have not controlled participant costs, principally for prescription drugs.

The CAA

The Consolidated Appropriations Act of 2021, which became effective in December 2021, has kicked off a new level of scrutiny by the federal government and private litigants of health plan fees and costs.

The CAA amends the Employee Retirement Income Security Act of 1974 known as ERISA, and among other things, sets forth new rules requiring health care vendors, such as brokers and consultants, to disclose detailed information on the amount of compensation such vendors expect to receive (if it exceeds $1,000) from services rendered to employer-sponsored health plans.

A contract with such a vendor that doesn’t require vendors to disclose information on their compensation isn’t considered “reasonable” under ERISA, and is, therefore, a “prohibited transaction.” Similarly, a vendor contract that contains a “gag clause” barring disclosure of compensation data is also not reasonable, and, therefore, is prohibited under the CAA.

Such transactions can lead to sanctions imposed by the U.S. Department of Labor. If an employer enters into a vendor contract that is not reasonable, the employer faces imposition of civil penalties, including a 100% penalty if the prohibited transaction isn’t corrected within 90 days after notice by the Labor Department Secretary.

Lewandowski v. Johnson & Johnson

Such a failure to enter into a reasonable contract also exposes employers who sponsor health plans to class-action lawsuits alleging breach of fiduciary duty and financial harm to plan participants and their beneficiaries.  However, plan participants thus far have failed to convince courts that they have “standing” under Article III of the U.S. Constitution to pursue such claims. “Standing” requires that a person allege he, she or it suffered a specific injury that is redressable by a court.

A case in point is Lewandowski v. Johnson & Johnson, brought in the U.S. District Court for the District of New Jersey. In that case, an employee sought class certification and alleged that Johnson & Johnson, as plan administrator, and its in-house benefit plans oversight committee breached their fiduciary duty owed to plan participants by failing to eliminate higher premiums and excessive prescription drug costs.

The employee alleged, for example, that a 90-pill generic prescription drug to treat multiple sclerosis costs $40.55 at a local grocery store. However, the employer allegedly made their ERISA plans and their beneficiaries pay $10,239.69 (not a typo) for the same 90-day supply, impacting employee contributions and co-pays.

On Jan. 24, 2025, the U.S. District Court granted Johnson & Johnson’s motion to dismiss two counts for breach of fiduciary duty under ERISA. The court ruled that the employee, who sought class certification, lacked Article III standing because (1) the employee’s claim that premiums were high was “speculative” and (2) her claim that drug costs were excessive was not redressable by a court because the employee did not suffer any injury in that she would have reached her out-of-pocket drug costs “cap” even if the drug she complained about were cheaper.

Although the employee has refiled her ERISA claims, it is unclear if she will be able to show she has Article III standing to pursue them.

Nevertheless, employers should take immediate steps to ensure that in-house oversight procedures are in place to allow effective supervision of health plan providers and to head off potential lawsuits alleging that participants are forced to pay excessive premiums and prescription drug costs.

Barry F. Rosen heads Gordon Feinblatt’s health care practice group, and can be reached at 410-576-4224 or [email protected]. Theodore P. Stein is a member of Gordon Feinblatt’s employee benefits/ERISA and health care practice groups, and can be reached at 410-576-4229 or [email protected].