Johnson & Johnson Drug Benefit Lawsuit: An 'Absolute' Warning for Employers

A lawsuit filed earlier this month accusing a Fortune 500 company of overpaying for prescription drugs presents an opportunity for employers to re-examine how they manage their pharmacy benefits, sources told HR Dive.

The lawsuit, filed in U.S. District Court in New Jersey by a medical policy and advocacy director at Johnson & Johnson, accuses the company of breaching its fiduciary duties under the Employee Retirement Income Security Act, allegedly causing its ERISA plans and employees to lose millions of dollars due to suspected drug overpayments.

For example, the plaintiff alleges that a 90-tablet prescription of the multiple sclerosis drug teriflunomide could be filled at a retail pharmacy for as little as $40.55, but Johnson & Johnson's plan paid more than $10,000 for the same amount of the drug, a 250-fold difference.

A Johnson & Johnson spokesperson previously denied the allegations in a statement to HR Dive, and court records show the case is still ongoing. But Cheryl Larson, president and CEO of the Midwest Business Group on Health, said the case is "absolutely" a wake-up call for employers given recent regulatory changes.

Specifically, the No Surprises Act, passed as part of the Consolidated Appropriations Act of 2021, requires employer-sponsored health plans to submit annual prescription drug data reports to the Centers for Medicare and Medicaid Services. Larson noted that the law puts pressure on employers to provide data to control drug costs, but does not impose similar requirements on other intermediaries in the pharmacy benefit ecosystem, namely pharmacy benefit managers (PBMs).

In the Johnson & Johnson case, the plaintiff alleges the company agreed through its PBM arrangements to pay fixed prices for certain drugs, including teriflunomide. The plaintiff also claims Johnson & Johnson agreed to terms that incentivized plan members to fill prescriptions at the PBM's own mail-order pharmacy, even though that pharmacy's prices were "generally higher" than competing pharmacies.

Larson said that while she does not believe it is common for employers to pay significantly higher amounts for generic drugs in their plans, employers struggle to obtain information from PBMs about what PBMs pay drug manufacturers for drugs and the difference between that price and what employers are charged, known as the "spread."

"There is a lack of transparency in the pharmacy benefit space, and employers are completely in the dark about spreads," Larson said. "Employers cannot see what is going on, yet they are held accountable for their relationships with these intermediaries."

An opaque 'supermarket'

Rick Kelly, national pharmacy practice leader at Marsh McLennan Agency, said prescription drug benefits are a confusing area for employers, in part because a typical benefit plan covers hundreds of different drugs. This vast number directly affects how employers negotiate PBM contracts.

"A lot of times, the negotiation between an employer and a PBM comes down to how the employer gets the best overall deal," Kelly said. "What is the total cost of the basket of prescription drugs they are purchasing?"

Kelly used a supermarket analogy: employers try to get the best price for everything in their shopping cart. While an employee might be able to buy a drug at a lower price at a pharmacy by not using insurance or using a prescription discount service, employers are not deliberately overpaying on specific drugs when negotiating with PBMs.

"No one is deliberately overpaying on a particular prescription, but I think sometimes they may save a lot on specialty or brand drugs, and sometimes they save a lot on all generics," Kelly said.

However, employers face numerous challenges in PBM negotiations. For example, different formularies (the lists of covered drugs maintained by PBMs) may define drugs differently, and even these definitions have some flexibility, Kelly noted. PBM contracts also typically contain complex financial terms and language; "it is critical that employers have people with expertise to evaluate, review, and negotiate these deals," Kelly added.

Employers seek greater transparency

Client satisfaction with PBMs has declined in recent years, according to a 2022 report from the Pharmaceutical Strategies Group. Meanwhile, a list of trends compiled in a recent Marsh McLennan report shows employers are seeking transparent PBMs to better understand drug pricing.

However, this has not yet translated into a wave of employers switching PBMs. A 2023 survey by the Business Group on Health found that only about 9% of surveyed employers planned to change their PBM. But the organization's "subsequent conversations with smaller groups of members suggest that bidding activity may be increasing," Magda Rusinowski, vice president at the Business Group on Health, said in an email to HR Dive.

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"Employers must have people with expertise to evaluate, review, and negotiate these deals."

Rick Kelly

National pharmacy practice leader at Marsh McLennan Agency

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Kelly said that because of the lack of transparency across the pharmacy space, employers need to be clear about what they are seeking in their PBM arrangements. For example, employers may want deeper insight into when and how much they pay for specific drugs, or they may want more information about spread pricing or specific drug definitions.

"Transparency is really important, but unfortunately the term is overused in the market and has become somewhat diluted," Kelly said. "Being able to see into the cost structure, how the PBM is compensated, how they are held accountable, all of that falls under transparency."

Plan audits can help employers obtain more of this data, but the problem is that the average self-funded employer cannot afford the cost of an audit, Larson said. She noted that at the most basic level, employers can ask their PBM what the spread is on a specific drug and how that affects plan members.

"Employers should be willing to demand data they can understand and act on, and be assertive about it," said Ray McMahan, senior vice president of payer solutions at healthcare technology company Prescryptive.

Employers might also want to look at organizations like Blue Shield of California, which overhauled its pharmacy benefit program in 2023, aiming to simplify pricing structures and save about $500 million annually, according to Healthcare Dive.

Overall, Larson said the Johnson & Johnson case provides an opportunity for employers to consider these and other options more carefully.

"This employer is just one of thousands," she continued. "This could happen to anyone. Let's use this as an opportunity to learn and demand more accountability from our intermediaries so we can continue to provide high-quality benefits to our employees and their families."