Lawsuits for Health Plan Scams Have Begun!

500th post! ERISA enforcement is here, and I am unbearable smug about it.

This is the 500th post on The Frontier Psychiatrists newsletter, and as an insufferable know-it-all, I'm thrilled to report: “I was right,” like all insufferable know-it-alls.

The headline? Johnson and Johnson¹ have been hit with an extremely detailed and potentially expensive class action lawsuit for ERISA fiduciary breach. This article will tell the story of what I predicted, what has happened, why it matters, and what I see happening next:

On July 1st, 2022, I wrote my first article. It was about the Post-Roe Crisis I say coming:

…The 1974 Employment Retirement Income Security Act (ERISA) is a federal tax and labor law establishing standards for private industry.  It provides the rationale for which health insurance gets a tax break. …Importantly, the Combined Appropriations Act of 2021 mandated employers and benefits brokers act as fiduciaries, making it illegal for employers to pay for a health insurance plan that does not cover all medically necessary care….And since employer benefits that pay for what doctors do are tax exempt only if they comply with ERISA …

And lo and behold, the class action against J&J is on this very basis:

…ERISA was designed to put an end to… mismanagement and to protect the interests of employee benefit plan participants. It does so by “establishing standards of conduct, responsibility, and obligation for fiduciaries ofemployee benefit plans,” and by providing plan participants with “appropriate remedies, sanctions, and ready access to the Federal courts” when plan fiduciaries mismanage plan assets. 29 U.S.C. § 1001(b). Courts have referred to ERISA’s fiduciary duties as “the highest known to the law.”

For my everyday audience of non-regulatory attorneys specialized in this area of the law, a fiduciary is supposed to act in the interest of another. Regarding health benefits, as of 2021, people at your employer are supposed to act in your interest. This means your health benefits must be in your interest, and someone else buying wildly overpriced stuff is not in your interest. It's not a good way to spend your money, and that means they have breached their fiduciary duty if they choose to burn your members’ cash on healthcare that isn't any good or is far too expensive.

This is the whole reason why health benefits get to be tax-exempt: because someone agrees to act in your interest².

In corporate law, named fiduciaries have a particularly important role because they're actual individuals, not just the nameless corporation. This is a personal responsibility.

It looks so real!

In the case of Johnson and Johnson, which does not have a committee to oversee its health benefits, they name the members³ of the retirement plan committee as the fiduciaries because they are already expressly covered under ERISA:

The Pension & Benefits Committee of Johnson and Johnson; and the members of the Pension & Benefits Committee of Johnson and Johnson, including Peter Fasolo, Warren Luther, and Lisa Blair Davis,

Those individual names are terrifying for those people; frankly, I feel a little bad for them as humans. But they had a fiduciary duty, and they violated it according to this class action. This is especially important because directors’ and officers ’ (D+O) insurance exists. It’s the kind of insurance that covers the members of a pension and benefits committee and indemnifies them against legal action. Most D+O insurance doesn't cover ERISA fiduciary breach.

I'm a psychiatrist. I try to understand human behavior for a living. A glaringly obvious concept to me? People avoid doing things that will be catastrophic for them personally. They are less likely to avoid doing things that are a big deal for a company that bought an insurance policy to cover their bad behavior. Personal responsibility is why most corporate officers don't just steal money from the bank account— they would have no coverage for that behavior. Most insurance policies, outside of healthcare, don't cover things they know will lose money. You can't buy fire insurance and then burn your house down. That would be a bad way to underwrite a fire insurance policy. The insurance company would be guaranteed to lose money. Fire insurance policies exempt arson as a cause of the fire.

I am a sassy phone call-er.

Personal Responsibility is the difference between taking something very seriously and standard run-of-the-mill corporate bad behavior. ERISA fiduciaries are charged with not knowingly or recklessly setting a match to the money plan members pay for health benefits. That is the allegation in this class action.

The officers were required, under ERISA, to act prudently (and here it’s all about the pharmacy benefit managers):

“make a diligent effort to compare alternative service providers in the marketplace, seek the lowest level of costs for the services to be provided, and continuously monitor plan expenses to ensure that they remain reasonable under the circumstances.”

I have written about this bear trap several times and even transcribed entire hour-long conversations with my PBM in the footnotes (I’m in italics!)

Owen: Now, what I would like to ask is, that is interesting, but when you actually go to the website of Lilly, the manufacturer of the drug, The list price of Taltz is 6,586.40 per individual pen, which is of course, what I'm prescribed, and you're telling me that the discount price is [00:13:00] 6,777.41 which is more than the list price according to Eli Lilly. And then you advise me that given the average retail price is 13,000, which is, of course, much more than the actual list price of the drug.

Owen: I am saving a ton of money somehow, but actually, my insurance is paying more than the list price of the drug.

Rep: Mm-hmm.

Owen: And does that make any sense to you?

Rep: So for the, I understand what you're saying. Yeah. But as far as, like, do you give any explanation to that, or why we, I guess, maybe charge you, you know, a whole lot more than what the manufacturer cost is?

Ouch. Now, that is just me making trouble in a newsletter, but the suit against J+J alleged exactly that kind of behavior:

Defendants’ mismanagement is most evident in (but not limited to) the prices it agreed to pay one of its vendors—its Pharmacy Benefits Manager (“PBM”)—for many generic drugs that are widely available at drastically lower prices.

I have gone as far as to call most PBMs literal racketeering:

The heart of any protection racket is a threat. Pay up, or else.⁵

The threat to life or limb needs to be serious. Better yet, they should be willing to do awful things to your family.

Insurance companies are not threatening your family. They're offering to protect your family. And your business. From a horrible, terrifying thought. What if you get sick, or someone in your family gets sick, and you can't get medical care?

That sounds pretty scary. It works better if you can be assured reliably that any threat will be catastrophic. That would mean, in Healthcare, that there would be no way that anyone could be expected to pay. The costs would have to destroy your life.

Lest you think this kind of snarky satire has no place in public discourse, I am thrilled to cite this piece of grade-a snark in the class action:

…[medicine can be purchased] without even using their insurance, at Wegmans for $40.55, ShopRite for $41.05, Walmart for $76.41, Rite Aid for $77.41, or from Cost Plus Drugs online pharmacy for $28.40. Defendants, however, agreed to make their ERISA plans and their beneficiaries pay $10,239.69—not a typo—for each 90-pill teriflunomide prescription.

“not a typo”…dying.

The filing continues:

No prudent fiduciary would agree to make its plan and beneficiaries pay a price that is two-hundred-and-fifty times higher than the price available to any individual who just walks into a pharmacy and pays out-of-pocket.

This is the real gravamen⁴ of this case (and the thousands of others coming): no prudent person would agree to this nonsense. ERISA is a law that regulates complex systems, but if you run an employer and provide health benefits, you have to comply with it. “It’s complicated” isn’t a defense; it is why you have a directorship in the first place—your whole job is to ensure that sort of highway robbery is not the health plan you offer.

This case is almost all about the PBM, which I will remind readers, is an industry that makes enough money to go from the Earth to Saturn for $1/meter and is growing at 8.8% annually for the privilege of making costs go up. These are bad products. No one should buy them. They aren’t prudent.

The case is a barn burner, but it’s worth a read. This matters because an employer uses a major carrier, and it’s built-in. If you work at a company, you have a right not to be over-changed and under-cared for. If you run a company, you must make sure—as outlined in this case—you are being prudent. It is also vastly cheaper for everyone involved not to have endlessly increasing costs. That is just good business!

I made great predictions.

I have argued that the “PBM part” of the ERISA fiduciary breach claims is just the beginning. The entire health plan needs not be a scam. The next enforcement, I predict, will focus on prior authorization and its role in strategically blocking cost-effective care to increase the plant administrator's profits at the expense of the plan member.

Behavioral health is the lowest-hanging fruit regarding enforcement around access because the regulations are the most stringent. You only have ten days to get a behavioral health appointment under the Accountable Care Act, built on top of ERISA, for any psychiatric condition—and there isn't a supply of experts needed.

What are the next steps for companies that want to do the right thing?

1. Have a Health Benefits Committee. The first step is to ensure you have a behavioral health benefits committee, just like a pension committee. You need to know who your fiduciaries are, and they need to be ready to act in their fiduciary duty relentlessly.

2. Get Your Data. This also means there are a ton of lawsuits in the making against plan administrators by employers asking them to provide the data to demonstrate that they are behaving appropriately. This is ass-covering— but necessary.

3. Go Self-Funded. I predict there will be a stampede towards self-funded plans, and we may see in the next year or two the complete implosion of fully funded plans sponsored by employers—the liability is just too high.

4. Get a New PBM. PBM lawsuits will be relatively easy with this precedent, so there will be many more of those, essentially every company using anything other than cost-plus drugs, Capital RX, or one of the other cost-plus PBM vendors. Dead in the water in the employer market.

5. Buy Validated Solutions. Validated solutions for cost savings that offer plausible deniability or actual fulfillment of fiduciary duty will become popular. Thank God for the Validation Institute!

For full disclosure, one of my jobs offers a validated solution in mental health that comes with a guarantee for the companies that they are meeting their ERISA fiduciary duty when it comes to mental healthcare (and has a $1 million indemnification for the directors and officers who choose it against any claims that they breached that duty.)

It's time to get serious about fiduciary duty. It's time to get serious about health benefits. It's time to get serious about pharmacy costs, and that means employers have to stop getting scammed, or they will be held personally responsible, and nobody wants that for themselves.

1. and named fiduciaries at the company

2. Now we know who those people will be in the subsequent lawsuits at your company

3. They have three committee directors personally named in the lawsuit, but they add every other committee member as a John Doe codefendant— to be added by name later.

4. I love this word! It is defined as “the essence or most serious part of a complaint or accusation.”

"a constitutional violation may comprise the gravamen of a plaintiff's complaint."