Pharmacy Benefit Managers (PBMs): Drug Pricing and Fiduciary Issues

Reuters

02-05-2025

Over the past year, the plaintiffs' bar in litigation under ERISA has set its sights on health plans and, more specifically, on the issue of prescription drug costs in employer-sponsored health plans. The focus of these lawsuits is the allegation that health plan sponsors (employers) are paying excessive fees to PBMs, which are powerful intermediaries between health plans, plan participants, pharmacies, and pharmaceutical companies. PBMs administer the prescription drug portion of a health plan.
At present, three PBMs process approximately 80% of all prescription drugs:
Express Scripts (Cigna business).
CVS Caremark (Aetna business).
OptumRx (UnitedHealth Group business). (Compl. ¶ 3, In re Caremark Rx, LLC, No. 9437 (F.T.C. Sept. 20, 2024).)
In numerous lawsuits, plaintiffs have alleged that:
These 'Big Three' PBMs have engaged in anticompetitive practices that inflated drug prices.
The employers and health plan participants paid allegedly excessive fees as a result of the anticompetitive practices. (See Litigation Involving Alleged Excessive Spread Pricing below.)
Employers are acutely aware of similar excessive fee cases that have been brought against them as ERISA fiduciaries of 401(k) and 403(b) retirement plans. In the retirement plan cases, plaintiffs have asserted breaches of ERISA fiduciary duties based on the plan fiduciaries' alleged overpayment of fees for investment management and recordkeeping services (for more information, see ERISA Fiduciary Duties: Overview on Practical Law). Most of these cases have alleged that the investment options selected by plan sponsors were overly expensive and underperforming compared to other investment vehicles.
Overview of Recent PBM Litigation
In recent health plan cases, the plaintiffs' excessive fee claims are based on information obtained under the price transparency rules that were issued under both the Affordable Care Act (ACA) and the Consolidated Appropriations Act, 2021 (CAA-21) (for more on the transparency requirements, see Transparency in Coverage (TiC) Under the ACA Toolkit (PHSA Section 2715A) on Practical Law). Under these rules, plan participants now have access to tools that show the amount that they and their health plans pay for the cost of prescription drugs. Using this information, plaintiffs are:
Comparing the health plan negotiated rates for prescription drugs against the costs of these same drugs when obtained outside of their health plan.
Alleging in cases filed against plan sponsors that the plan sponsors failed to act prudently when negotiating with the PBM for drug prices.
Most of these cases are in their early stages. In one case, however, a claim for fiduciary breach based on alleged injuries in the form of higher premiums was dismissed, with leave to amend, for lack of standing under Article III of the US Constitution (see Court Decision in the J&J Case below). The plaintiff filed a second amended complaint in that case to try to remedy the standing issues (see Second Complaint in the J&J Case below). Additionally, another court in a different case also dismissed the plaintiffs' fiduciary breach claims without prejudice for lack of standing (see Court Decision in the Wells Fargo Case below).
However, the plaintiffs' bar will likely continue to file similar cases and try to find a way to overcome motions to dismiss. Most of the recently filed cases against health plan sponsors have not yet been resolved. Given the uncertainty about the outcome of these cases and what new causes of action may be filed in the future, it is helpful for plan sponsors and attorneys who assist employers with negotiating PBM contracts to understand:
How PBMs work and how they make money from group health plans.
The allegations in current lawsuits and potential defenses.
Ways to protect against becoming the next target of the plaintiffs' bar.
Role of PBMs in Health Plans
PBMs are the entities that administer the prescription drug portion of a health plan. They are the intermediary between the health plans, plan participants, and pharmaceutical companies. In an employer-sponsored health plan, the employer contracts with the PBM to manage and administer the prescription drug portion of a health plan, including:
Negotiating drug prices.
Creating prescription drug formularies, which are lists of the health plan's preferred and non-preferred drugs grouped by categories, and pharmacy networks.
Administering claims and appeals.
Separately, PBMs enter into contracts with the pharmacies that dispense the drugs. Those contracts address the amount that the pharmacies will be paid for the drugs dispensed to health plan participants.
PBMs also have a separate contract with the pharmaceutical companies about amounts that will be paid to the PBM for placing their drugs on health plan formularies. This is known as a rebate. Rebates aim to incentivize PBMs to include the pharmaceutical company's drugs on the PBM's formularies and to obtain preferred tier placement.
The pharmacies negotiate upstream in the supply chain through agreements with wholesalers (which negotiate to buy drugs from the pharmaceutical companies). Wholesalers supply drugs to pharmacies and set the wholesale rates at which the pharmacies obtain the drugs they dispense. Once the drugs are in the pharmacies, these drugs are later distributed to consumers, such as health plan participants.
A PBM's role as the intermediary in this ecosystem is represented in the graphic below.
How PBMs Make Money
There are numerous ways that PBMs make money, including from:
Spread compensation.
Drug reclassifications.
Rebates.
Formulary and market share fees.
Spread Compensation
The recent lawsuits filed by plaintiffs focus on spread compensation. Spread compensation occurs when a PBM enters into a contract with a health plan sponsor (such as the employer) stating that the plan will pay a certain amount to the PBM for a drug when the pharmacy dispenses it to a plan participant. The PBM has a separate contract with the pharmacy that sets the amount the PBM will pay the pharmacy when the drug is dispensed to a participant.
For example, assume that a PBM has a contract with a pharmacy to reimburse the pharmacy for a drug that it dispenses at the price of $300. However, the PBM separately charges the health plan $2,000 when that drug is dispensed. The $1,700 differential is referred to as the spread compensation, which the PBM retains as a profit from the transaction. In almost all cases, the PBM does not disclose the amount of the spread compensation to the plan sponsor.
Spread compensation appears to be the greatest when the PBM uses its own mail order pharmacy to dispense specialty generic drugs to participants. The Federal Trade Commission (FTC) has stated that the Big Three PBMs marked up:
Numerous specialty generic drugs dispensed at their affiliated pharmacies by thousands of percent.
Many other drugs by hundreds of percent.
Based on FTC studies, the combined spread pricing income for the Big Three PBMs from 2017 through part of 2022 was $1.4 billion generated from specialty generic drugs. (FTC Report: Specialty Generic Drugs: A Growing Profit Center for Vertically Integrated Pharmacy Benefit Managers (Jan. 2025); see Litigation Involving Alleged Excessive Spread Pricing below.)
Rebates
At a basic level, PBMs receive rebates from drug manufacturers in exchange for the PBM's placement of their drug on a prescription drug formulary used by group health plans. In the past decade, PBMs have introduced restrictive formularies that completely exclude certain drugs from coverage. Therefore, drug manufacturers faced the risk that their products would be excluded from the formularies. The PBMs began demanding higher rebates from drug manufacturers in exchange for placing those drugs on their restrictive formularies. The FTC claims that in a single year, PBMs collected billions of dollars in rebates (Compl. ¶¶ 2, 5, In re Caremark, Rx, LLC, No. 9437 (F.T.C. Sept. 20, 2024)).
Contract Terms
Attorneys play an important role in negotiating and documenting a PBM agreement with the employer. One critical job for the attorney is to ensure that the agreement has narrow definitions for key terms, such as:
Average wholesale price (AWP).
Generic drug.
Brand and specialty drugs.
Rebate.
AWP
It is very common for the pricing provisions in the contract between the employer and the PBM to be based on AWP. Historically, AWP was a figure determined and reported by drug manufacturers to an industry compendium, such as Medi-Span. Medi-Span records the amount reported by the manufacturers as their suggested AWP.
However, it does not appear that Medi-Span conducts any verification process to determine whether the figures reported as AWP are close to the actual wholesale price paid for drugs. Regardless of this potential flaw, PBM contracts use AWP as the pricing benchmark. For example, the schedule to a PBM agreement may state that the employer's health plan will pay the PBM 50% off of AWP when a particular brand drug is dispensed to a plan participant at a pharmacy.
A common definition of AWP in PBM agreements states, for example, that ''AWP' means the 'average wholesale price' of the Covered Product on the date dispensed, as set forth in the current price list in recognized sources such as Medi-Span's Master Drug Database file or any other nationally recognized reporting service of pharmaceutical prices as utilized by PBM as a pricing source for prescription drug pricing.'
A contract that uses the term AWP should have a specific, strict definition of that term. The sample definition above may leave too much discretion to the PBM. A more precise definition would refer to the current dollar value assigned to a National Drug Code number as determined by the current edition of Medi-Span National Drug Data File, including supplements as updated regularly by Medi-Span, for the actual package size dispensed.
Alternative to AWP: NADAC Plus
Even if the contract has a narrow definition of AWP, the employer should consider whether to use a different benchmark for pricing, such as the National Average Drug Acquisition Cost (NADAC). Developed by the Centers for Medicare and Medicaid Services (CMS), NADAC represents the average price that retail community pharmacies pay to acquire prescription drugs, including both brand and generic drugs, from wholesalers. NADAC pricing is calculated by:
Collecting data from participating pharmacies across the country.
Aggregating the data to determine the average acquisition cost for each drug.
The difference between the AWP cost of a drug and the cost of that same drug on the NADAC can be significant. For example, a generic drug may have an AWP price of $100 but a NADAC price of $15. Due to the unreliable pricing of AWP, state Medicaid programs have moved from using AWP to using NADAC (CMS Report: Methodology for Calculating the National Average Drug Acquisition Cost (NADAC) for Medicaid Covered Outpatient Drugs (Dec. 2024)).
An employer could ask that pricing be negotiated based on NADAC plus (meaning the drug price listed on the NADAC, plus a set dollar amount or a dispensing fee).
Generic Drug
Pricing in a PBM contract is different for brand and generic drugs. In most cases, generic drugs (drugs that are not specialty drugs) cost less than brand drugs. The terms generic drug and brand drug may be negotiated with the PBM. A common definition of generic drug in a PBM contract may state, for example, that 'the term 'generic drug' shall mean a multisource drug set forth in a nationally recognized source, as reasonably determined by the PBM, that is available in sufficient supply from multiple FDA-approved generic manufacturers of such drugs.'
This term allows the PBM significant discretion to determine what is considered a generic drug. A more precise definition would state:
What reporting service is being used (such as Medi-Span).
The exact Medi-Span codes that will be used for determining which drugs are generics.
The relatively vague definition above allows the PBM to categorize all single-source generics as brands. This can be detrimental to the plan sponsor. For example, assume that a generic is introduced into the market. The first generic drug to be approved for marketing in the US has an exclusive right to sell its product for 180 days (referred to as 180-day exclusivity). (This is a provision of the Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act (Pub. L. No. 98-417 (1984)).)
Under many PBM contracts, this first generic drug will be considered a brand drug regarding the pricing provisions in the PBM's contract with the plan sponsor. However, the PBM may immediately treat that drug as a generic regarding the amount that it reimburses a pharmacy. This can create a situation where the employer's group health plan is being charged a price by the PBM that is much higher than the amount that the PBM is reimbursing the dispensing pharmacy.
Brand and Specialty Drugs
As with generic drugs, the definition of brand drugs should be negotiated with the PBM to ensure that generics are not priced as brand drugs.
PBMs generally require group health plans to pay a higher price for specialty drugs. There is no specific definition within the industry of what is considered a specialty drug. As a result, PBMs and plan sponsors should negotiate this term. Once a drug is added to a PBM's specialty drug list, this often triggers an exclusivity provision in the PBM's contract with the plan sponsor that requires the use of the PBM's affiliated specialty pharmacy. The FTC noted that what is considered a specialty drug differs widely across PBMs (see FTC Report: Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies (July 2024)).
It is difficult to create a tight definition of specialty drugs. The employer and the PBM should negotiate a specific list of drugs that will be considered specialty drugs rather than rely on a potentially vague definition.
Rebate
Many contracts between the employer and the PBM state that the employer will receive 95% or more of the rebates. However, the employer should carefully negotiate the definition of rebate to ensure that it receives the expected amounts. Some reports show that employers actually only receive about 85% or less of rebates (Drug Channels: Texas Shows Us Where PBMs' Rebates Go (Aug. 9, 2022)).
Rebates can arise in different ways, such as from:
The drug being placed on a formulary.
The drug being placed on a preferred tier on a formulary.
The percentage of the market share that the PBM achieves for the drug.
The PBMs may delegate the collection of manufacturer rebates to rebate aggregators. Audits by some employers have shown that the rebate aggregator, which may be affiliated with the PBM, may keep a portion of the rebate without the employer's knowledge. In addition, fees paid to the PBM from the drug manufacturer may not be labeled as a rebate but instead as some other kind of fee (for example, a manufacturer administrative fee or health management fee).
A common definition of the term rebate (that is unfavorable to the employer) states, for example, that the term refers to 'the amounts collected by the PBM for the client from various pharmaceutical companies that are directly attributable to prescriptions dispensed to members.'
This definition would not include amounts collected by rebate aggregators or any rebates based on market share. A more favorable definition would take into account all of the various types of rebates and other fees collected by the PBM from the drug manufacturers, including amounts collected by their affiliated rebate aggregators.
Why Plans Are Paying Large Fees for Prescription Drugs
Among other reasons, employer-sponsored health plans are having to pay large fees for prescription drugs because:
Despite new laws, PBM fees are still opaque, making it difficult for employers to fully understand and evaluate those fees.
Employers lack bargaining power because the Big Three PBMs own 80% of the prescription drug market.
PBMs are subject to minimal rules under ERISA.
Additionally, most courts have found that PBMs are not ERISA fiduciaries (for more information, see Health Insurer and PBM Did Not Breach ERISA's Fiduciary Duties in Setting Prescription Drug Prices on Practical Law).
It is unclear if Congress will take any action in the near future to address these issues or if the battle regarding the high costs of prescription drugs will occur in the federal courts in the form of class action lawsuits against plan sponsors (in their fiduciary capacity).
Federal Transparency Rules
Both the ACA and the CAA-21 contain transparency rules. One rule requires health plans to make available a self-service tool on an internet website for their enrollees to use, without a subscription or other fee, to search for cost-sharing information on covered items and services. The tool is required to provide users real-time responses based on cost-sharing information that is accurate at the time of the request. (26 C.F.R. § 54.9815-2715A2(b)(2)(i); 29 C.F.R. § 2590.715-2715A2(b)(2)(i); 45 C.F.R. § 147.211(b)(2)(i).) A plan participant should be able to use this self-service tool to see how much the plan pays for a prescription drug and how much of that cost the participant must pay.
Although there are other important transparency rules in the ACA and the CAA-21, this is the key requirement for prescription drugs.
(For more on the ACA and CAA-21 transparency rules, see Transparency in Coverage (TiC) Under the ACA Toolkit (PHSA Section 2715A), Health Plan Disclosure Requirements Under the CAA-21, and 2025 Trump Administration Transition Toolkit: The First 100 Days on Practical Law.)
Main Allegations by Plaintiffs in PBM Cases
The class action lawsuits that have been filed against health plan sponsors in their fiduciary capacity focus on alleged violations of ERISA's fiduciary duty of prudence. ERISA requires that fiduciaries 'discharge [their] duties with respect to a plan solely in the interest of the participants and beneficiaries and … with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims' (ERISA § 404(a)(1) (29 U.S.C. § 1104(a)(1))).
These complaints typically allege breaches of fiduciary duty based on the failure to:
Adequately negotiate the PBM agreement.
Monitor the PBM (for example, by conducting a market check on drug prices).
Consider alternative PBM pricing models (for example, a pass-through model that does not include spread pricing). (See Johnson & Johnson below.)
Possible Defenses in PBM Cases
The biggest challenge for plaintiffs in the PBM lawsuits is demonstrating the legal concept of Article III standing, which requires the plaintiffs to establish that:
The plaintiffs sustained a concrete injury.
The injury was caused by the defendant.
The injury is redressable by a court order.
(For more on standing in the benefits context, see Supreme Court Rejects Doctors' Challenge to FDA's Regulation of Medication Abortion (Mifepristone) for Lack of Standing on Practical Law).
The defendants in these class action lawsuits claim that the plaintiffs have not shown that the purported fiduciary breaches caused any of the alleged injuries to the plaintiffs. Rather, according to the defendants, the plaintiffs received all the benefits that they were contractually entitled to receive (that is, the prescription drug benefits offered under the health plan at the cost established under the plan documents). As a result, the defendants assert that the plaintiffs:
Have not suffered an injury that can be directly traced to the challenged conduct.
Lack standing to bring a lawsuit.
The defendants' standing argument is based on the case of Knudsen v. MetLife Group, Inc. (117 F.4th 570 (3d Cir. 2024)). In that case, between 2016 and 2021, the health plan earned approximately $65 million in drug rebates, which the plaintiffs alleged the employer unlawfully retained for itself. The plaintiffs claimed that had the drug rebates been properly allocated, the defendant 'may have … reduced co-pays and co-insurance for pharmaceutical benefits' and 'may have distributed rebates to participants in proportion to their contributions to the Plan' (Knudsen, 117 F.4th at 575 (quoting Complaint ¶ 36)).
The Third Circuit stated that the plaintiffs failed to allege a concrete financial injury because they failed to allege 'which out-of-pocket costs increased, in what years, or by how much' (Knudsen, 117 F.4th at 582). The court also stated that the plaintiffs failed to provide concrete facts establishing that the employer's alleged ERISA violations (that is, retention of prescription drug rebates) was the but-for cause of their alleged injury (that is, increased out-of-pocket costs).
The Third Circuit emphasized that financial harm, 'even if only a few pennies,' is a concrete non-speculative injury (Knudsen, 117 F.4th at 580). The court stated that a plaintiff could, in theory, allege a concrete financial injury sufficient to establish standing where an employer charged participants more for their coverage than is allowed under plan documents.
Litigation Involving Alleged Excessive Spread Pricing
The following section addresses recent litigation involving plaintiffs' allegations of excessive spread pricing against health plan sponsors in their fiduciary capacity. Two of these cases have resulted in court decisions that dismissed the plaintiffs' claims as speculative.
Johnson & Johnson
In a high-profile lawsuit filed in February 2024, the plaintiff (a plan participant) alleged numerous examples of excessive spread pricing under the PBM agreement (Class Action Compl., Lewandowski v. Johnson & Johnson, No. 24-671 (D.N.J. Feb. 5, 2024) (J&J case)).
Plaintiff's Allegations in the J&J Case
In the J&J case, the plaintiff alleged that:
A generic HIV antiviral drug was treated as a specialty drug under the PBM contract.
The NADAC priced the acquisition cost of that drug at about $181 dollars for a 90-day supply.
The cash price for a 90-day supply of the drug for an uninsured person (based on the information listed on the websites for Cost Plus, Rite Aid, and other pharmacies) was about $200.
The plan paid the PBM $1,629 for the same 90-day supply — a markup of over $1,400 on one prescription.
The complaint alleged that no fiduciary in the proper exercise of their fiduciary duties would agree to this allegedly inflated and excessive pricing. The plaintiff also alleged that agreeing to pay these excessive prices for the drugs:
Caused participants to pay inflated premiums for health plan coverage.
Forced participants to pay more out-of-pocket costs at the pharmacy counter than they would have paid absent the defendants' fiduciary breaches. (No. 24-671 (D.N.J. Feb. 5, 2024).)
As of the date of this article, no decision has been made on the merits of the J&J Case.
Health Plan Fiduciaries' Defenses in the J&J Case
The defendants in the J&J case raised several defenses in a reply in support of their motion to dismiss. For example, the defendants addressed the plaintiff's allegation that if the overall costs paid to the PBM had been lower, the defendants might have made a different decision each year about how much of the premium to pass on to the participants. The defendants stated that this allegation was speculative.
The defendants also refuted the allegation that the plaintiff incurred greater out-of-pocket expenses for her prescription drugs as a result of the alleged fiduciary breaches. The defendants noted that the plaintiff would have met the cap for prescription drug costs in the plan regardless of the allegedly excessive pricing. The defendants stated that the plaintiff did not dispute that she would have reached her $3,500 total maximum out-of-pocket amount under the plan each year. In the defendants' view, the allegedly excessive costs for certain drugs meant that the plaintiff reached her $3,500 maximum out-of-pocket amount a few months earlier each year than she otherwise would have. (Reply in Supp. of Defs.' Mot. to Dismiss, Lewandowski v. Johnson & Johnson, No. 24-671 (D.N.J. Aug. 12, 2024).)
Court Decision in the J&J Case
In January 2025, the district court ruled that the plaintiff in the J&J case lacked Article III standing to bring her claims (Lewandowski v. Johnson & Johnson, 2025 WL 288230 (D.N.J. Jan. 24, 2025); for more information, see District Court Dismisses J&J Fiduciary Claims Alleging Mismanagement of Prescription Drug Benefits on Practical Law).
Regarding the allegation that the defendants' fiduciary breach caused the plaintiff to pay higher health plan premiums, the court stated that the injury was 'speculative and hypothetical' and that the plaintiff's claim of injury was a conclusory allegation that did not meet the requirements for standing.
The court also addressed the plaintiff's claim that paying higher prices for drugs caused her to pay more out-of-pocket costs. The court concluded that the plaintiff established an injury-in-fact but failed to show standing because her injury was not redressable by an order from the court. The court reasoned that '[e]ven if [d]efendants were to reimburse [p]laintiff for her out-of-pocket costs on a given drug — that is, the higher amount of money she spent as a result of [d]efendants' breaches — that money would be owed to her insurance carrier to reimburse it for its expenditures on other drugs that same year' (Lewandowski, 2025 WL 288230, at *5). As a result, the court concluded that 'there is nothing [it could] do to redress [p]laintiff's alleged injury' (Lewandowski, 2025 WL 288230, at *5).
Based on information submitted by the plaintiff, it appears she received medical infusions each year that cost well over the plan's out-of-pocket maximum, so she would have hit the plan's cap due to other treatments that she received.
Second Complaint in the J&J Case
On March 10, 2025, the plaintiff in the J&J case filed a second amended complaint, which added:
Several new allegations in an attempt to address the Article III standing issues raised by the court.
A new plaintiff (Robert Gregory), who was a retiree enrolled in J&J's retiree medical plan. (Second Am. Class Action Compl., Lewandowski v. Johnson & Johnson, No. 24-671 (D.N.J. Mar. 10, 2025).)
The amended complaint addressed issues relating to:
Higher premiums. The amended complaint sought to address the court's determination that it was speculative that the plan's payment of higher drug costs resulted in higher premiums. To do so, the amended complaint added:
references to a number of governmental and independent studies supporting the contention that higher drug costs lead to higher premiums for participants;
a description of the Consolidated Omnibus Budget Reconciliation Act (COBRA) premium costs and retiree health plan premium costs (which are entirely paid by former employees); and
an explanation of how high costs in the plan directly impact COBRA and retiree premium rates (since the initial complaint had focused on the premium rates paid by active employees, which were highly subsidized by the employer) (for more on COBRA premiums, see COBRA Overview on Practical Law).
Higher out-of-pocket costs. The amended complaint addressed the court's conclusion that because the plaintiff had met her out-of-pocket maximum for the year on other out-of-pocket claims, her alleged harm was not redressable by the court. In response to this determination, the amended complaint added a new plaintiff who allegedly did not reach his out-of-pocket maximum under the health plan.
Reduced benefits. The amended complaint added another alleged injury, namely, that higher drug costs resulted in reduced benefits for participants. According to the amended complaint, the amount that the plan allegedly overpaid for drugs would have been used to deliver additional benefits to participants.
As of the date of this article, the J&J defendants have not responded to the amended complaint.
Wells Fargo
The plaintiffs in a case filed later in 2024 made allegations very similar to those in the J&J case (Class Action Compl., Navarro v. Wells Fargo & Co., No. 24-3043 (D. Minn. July 30, 2024) (Wells Fargo case)).
Plaintiff's Allegations in the Wells Fargo Case
Like the J&J case, the plaintiffs in the Wells Fargo case alleged that the fiduciaries breached their duties by not taking proper measures to ensure that plan costs for prescription drugs were reasonable. However, one significant difference between the two cases is that the plaintiffs in the Wells Fargo case also included an ERISA prohibited transaction claim. In general, ERISA prohibits transactions between a health plan and its service providers unless only reasonable compensation is paid for the services (for more information, see Prohibited Transactions and Exemptions Under ERISA and the Code in Practical Law).
Based on information in the plan sponsor's Form 5500, the plaintiffs claimed that Wells Fargo paid incredibly high administrative fees (over $25 million) to the PBM, Express Scripts. The plaintiffs claimed that this amount greatly exceeded the fees paid to Express Scripts by plans comparable in size or smaller than Wells Fargo's plan and, therefore, the allegedly excessive compensation resulted in a prohibited transaction.
Court Decision in the Wells Fargo Case
On March 24, 2025, the district court dismissed the fiduciary breach claims in the Wells Fargo case on a basis similar to the court's dismissal of the J&J case (Navarro v. Wells Fargo & Co., 2025 WL 897717 (D. Minn. Mar. 24, 2025); for more information, see In PBM Litigation, Another District Court Dismisses Participants' ERISA Fiduciary Claims for Lack of Standing on Practical Law). The court found the complaint's contention that higher drug prices directly caused the plaintiffs to incur higher premiums and out-of-pocket costs to be entirely speculative.
In summing up its findings, the court stated, '[w]hile compelling and detailed, [p]laintiffs' allegations are simply too speculative to show concrete individual harm, too tenuous to show causation, and too conjectural to show redressability.' Regarding a request for prospective injunctive relief requiring Wells Fargo to reduce participants' contribution amounts, the court found that because all of the plaintiffs were no longer participants in the Wells Fargo group health plan, they ''have no concrete stake in the lawsuit' regarding any prospective injunctive relief.' (Navarro, 2025 WL 897717, at *10 (quoting Thole v. U.S. Bank N.A., 590 U.S. 538, 541-42 (2020)).)
The dismissal was without prejudice, which enables the plaintiffs to file an amended complaint.
JPMorgan Chase & Co.
On March 13, 2025, participants in the JPMorgan-sponsored health plan filed a complaint against JPMorgan and certain board members and executives, alleging breach of fiduciary duties by mismanaging the prescription drug plan (Class Action Compl., Stern v. JPMorgan Chase & Co., No. 25-2097 (S.D.N.Y. Mar. 13, 2025) (JPMorgan case)). Notably, all three of the named plaintiffs had not met their out-of-pocket maximum.
The PBM in this case is CVS Caremark (CVS). The lawsuit, brought by the same law firm that brought the J&J case, made allegations of breach of fiduciary duties similar to those in the J&J case and Wells Fargo case, with some notable differences as described below.
Conflict of Interest
The complaint in the JPMorgan case scrutinizes JPMorgan's business relationship with CVS for conflicts of interest. It alleges that JPMorgan abandoned its joint venture, Haven Healthcare, because of pushback from its private banking health care clients, including CVS. Haven Healthcare was formed with the goal of eliminating the need for health care intermediaries, including PBMs. The complaint appears to use this as evidence that JPMorgan:
Was fully aware of the excessive pricing issues with CVS.
Chose not to pursue ways to minimize the excessive pricing in the PBM contract due to its business relationship with CVS.
Contract Language
The plaintiffs allege that JPMorgan could have negotiated contractual terms that would have minimized or eliminated the excessive compensation paid to CVS. They cite papers from industry groups (of which JPMorgan is a member) that provide examples of unfavorable contract language that should be removed from agreements, as well as tools for negotiating more favorable contracts.
Vertical Integration
The complaint discusses the vertical integration of CVS with Cordavis (a drug manufacturer partially owned by CVS) and JPMorgan's alleged failure to address this vertical integration in its PBM contract. The complaint alleges that the plan's formulary only contained the biosimilar for Humira, which was manufactured by Cordavis, even though it is significantly more expensive than other Humira biosimilars.
Suggested Actions for Plan Sponsors
ERISA is a process-driven statute. The focus is not on whether the fiduciary came to the 'right' answer or obtained the 'best' deal, but whether the fiduciary engaged in a prudent process. This prudent process defense has been used in 401(k) excessive fee cases.
Some employers have taken the following steps to conduct a prudent process when entering into a contract with a PBM:
Hire a specialized PBM consultant to run a request for proposal (RFP) for PBM services.
Ask if the PBM consultant receives any direct or indirect compensation from the PBMs. This is encouraged so that the employer knows if the consultant has any conflicts of interest.
Conduct an RFP for PBM services at a regular cadence (every three to five years).
As part of the RFP for PBM services, include specific questions about all direct and indirect compensation that the PBM receives related to the contract.
Train the human resources (HR) or benefits department on the basics of pricing issues and contract terms for PBM contracts so that the department can more meaningfully engage in the RFP process.
Create a health and welfare fiduciary committee that engages in the RFP process and takes regular actions to monitor the PBM.
Educate applicable employees (for example, the HR or benefits department or the members of a health and welfare committee) on fiduciary obligations for health plans.
Document the procedures listed above.
The Future
The J&J case was a win for plan sponsors. However, the ERISA plaintiffs' bar will likely continue to bring excessive fee cases against the fiduciaries of employer-sponsored health plans. If the plaintiffs can establish standing and survive a motion to dismiss (for example, based on a claim of a prohibited transaction, as in the Wells Fargo case), the floodgates could open for similar litigation. Even if plaintiffs are not successful with the specific claims described above, they will likely continue to bring lawsuits against the employer-sponsored health plans and PBMs under different theories.
Plan sponsors should evaluate their procedures for reviewing PBM contracts and monitoring PBM performance. Additionally, plan sponsors should confirm that they have adequate fiduciary liability insurance in place with an experienced, reputable insurer.