Episode 42 – Fiduciary Duties: A Wakeup Call

Released March 13, 2024

Mike Stull (0:00)

Hey everyone and welcome. Thanks for joining us on HR Benecast, your source for expert commentary and insights on current health benefits related news and strategies. This is your host, Mike Stull.

It’s been a busy year already here at Employers Health, and just last week, we wrapped up the Annual Benefits Forum. We had a fantastic attendance and I want to thank everyone who contributed to this successful event. From our speakers to sponsors to everyone who took time out of their busy schedules. We sincerely appreciate the time and effort you put in to make this event a big success. We look forward to an even bigger and better event in 2025 and hope you’ll join us. We have dates already, April 22 and 23rd in Columbus, Ohio. So, April 22 and 23rd 2025 in Columbus, Ohio.

If you weren’t able to join us in person, all of the conference general sessions and some of the breakout sessions will be available virtually beginning April 4. You can learn more at employershealthco.com/events.

One of the speakers at the annual benefits forum was Jeff Zimon, founder of Zimon Law. While Jeff’s session was not recorded, I’m happy to have him join us here today to share some of the key themes from his presentation, specifically, the importance of solid plan documentation on pharmacy plan design and administration. Jeff has more than 20 years of experience advising clients on all aspects of employee benefits and benefits disputes and litigation. He’s a frequent speaker at national and regional forums on various matters related to ERISA and employee benefits. I hope you enjoy my conversation with Jeff.

All right, welcome Jeff. To get started, can you tell the audience a little bit about yourself?

Jeff Zimon (2:16)

Well, thanks Mike. So, I am what you would describe as an ERISA guy, ERISA lawyer. I’ve been doing this ERISA work for over three decades and have seen a lot going on in the last several decades. I also am the owner of a company called EZERISA, which provides compliant services, document services for the group health and welfare industry. And that just means, mostly, I’m very busy, but also it allows us the opportunity to really dig into some of the details in the industry and learn from brokers and other colleagues and friends in the industry pretty intimately about what’s going on.

Mike Stull (3:06)

Great, and based in Northeast Ohio, right?

Jeff Zimon (3:08)

We are headquartered in Northeast Ohio, but we have clients really all over the country.

Mike Stull (3:15)

Excellent. So, let’s dig right in. We know that there’s a lot out in the, what I would refer to as the employee benefits media and on LinkedIn and social media right now about fiduciary obligations of benefit plan sponsors. And I think all of that culminated with the recent filing of a lawsuit against Johnson & Johnson, not in its capacity as a drug manufacturer, but in its role as a sponsor of its employee benefits plan. Tell us a little bit about your understanding of this case.

Jeff Zimon (3:58)

Well, thanks. You know, Lewandowski versus Johnson & Johnson was filed on February 5, and it is a novel lawsuit. It’s novel. It’s brand new. And what it highlights is something that most of us working in the health and welfare space don’t think about every day, which is this ERISA fiduciary responsibility thing. If you are on the retirement plan side, you think about that every day, because you’re talking about money sitting in a retirement plan that is being managed and operated, and there’s lots of rules around that. But in the health and welfare space, we don’t often think about what is the fiduciary role and responsibility, as compared to what is a sponsor role and responsibility, and they’re different. Sponsor role is not a fiduciary role, and how does that impact what we do every day?

The lawsuit is unique and clearly drafted with the help of insiders, but I like to say at the start, just because of allegations are made, doesn’t mean that they’re true. It doesn’t mean that Johnson & Johnson did anything wrong and it doesn’t mean that the plaintiffs will win the case. There’s a lot to unpack in here, but I’d say at a very high level, there’s an allegation that Johnson & Johnson failed the required fiduciary prudent practices with respect to the selection of the pharmacy benefit management company that they selected. With the agreement on the drug prices falling under that PBM and certain contract terms that were against the interests of covered persons. They alleged that there were improper methods for getting specialty drugs, the failure to steer participants toward lower costs and the failure to oversee generally the prescription drug plan. And the allegations in 75 or so pages are as many talented plaintiffs do, are nicely presented to make it really look like Johnson & Johnson did something wrong. They show examples of very, very expensive drugs that cost the participant almost $2,000 in a deductible that you could get on the street for less than $100. And so, they have these strident examples of high-cost pharmacy as part of their support for the case. And it has caused a lot of people to turn around and say, wait a minute, what’s this fiduciary thing we’re supposed to be doing. Are we doing it?

And where are these roles and responsibilities? In the 401K and retirement plan space, we’ve been talking about this for 30 years, but in the health and welfare space, we really hadn’t talked about it. And what’s fascinating to me is how now we’re going to start talking about the roles and responsibilities of fiduciaries versus non fiduciary functions, sponsor functions, because there’s decisions that companies get to make every day that are not fiduciary functions. There are tasks and things that are being done in these plans that are not fiduciary functions. So, what I think this lawsuit has done is to provide a bit of a wakeup call. Now we’ve been, we meaning our firm and Employers Health, have been kind of looking at these kind of things for a while, and we kind of understood that pharmacy benefits generally have been under target.

And you know, ERISA was 1974, right? And when you look at all that airspace between 1974 and the Affordable Care Act in 2010, the government wasn’t so focused. People weren’t as focused on group health generally, and I include group health as including pharmacy. And all of a sudden, with the Affordable Care Act, everybody’s starting to pay more attention to group health, a lot more attention, right? It took almost five years to get the Affordable Care Act running. I mean, it’s one of the biggest pieces of legislation since Medicare, right? And when it started going, the government started paying attention.

And so, what you’ve seen in the past few years, and we’ve had these discussions, our firm and your firm have had these discussions, there’s increasing scrutiny. So, what do you do about increasing scrutiny? Well, you take a look at what you’re doing, and you start thinking about process, and you start thinking about making sure that you’re protecting yourself. So, one of the big allegations in this lawsuit is kind of amazing, which is that there was a failure to produce a plan document and a summary plan description for the health care plan. And upon request, you have to produce a plan document that meets certain requirements under ERISA 402 and an SPD that meets certain requirements under ERISA 102. And you have to produce this and there’s this allegation that Johnson & Johnson, a leading publicly traded company with over 130,000 employees, did not produce a simple plan document. And funny, because we’ve had this conversation. We had this conversation two years ago, two and a half years ago, as Employers Health and Zimon LLC were getting together, talking management to management, which is me, management and your senior leaders, including folks like you, talking about the fact that, hey, you know, the guns are coming. The focus is coming right from the manufacturers, right into employer plans. So, let’s get ready. And that’s one of the things that we put on our target list. Trying to think about these things in advance. So, we’re actually kind of ready for this in terms of where Employers Health is in terms of its processes helping clients, you’re kind of already there. You are already there, and we’re already there on the plan document side as well.

Mike Stull (9:52)

Excellent. You mentioned and I know this might be a loaded question that could turn into, you know, hours of discussion, but at a high level, you talked about tasks that are fiduciary tasks and then non fiduciary. Could you give kind of a high-level explanation of that for the non-lawyers out there?

Jeff Zimon (10:19)

Sure. So, what I like to do is, you know, sometimes our folks, our brokers, for example, our broker friends, most of them stay on the group health side, group benefit side. They don’t wander into the retirement side. And some of our HR people do and do not wander onto the retirement side. But for those who are already on the retirement side, they kind of know this. They may not have captured this in terms of, call it group health and pharmacy benefits, but there’s a line that gets drawn between items that are fiduciary functions. So, the key fiduciary function in this lawsuit is the appointment of a fiduciary. So, when you approve and deny a claim, the claim is payable, the claim is not payable. That decision is a fiduciary decision. When you process a claim and or a claim appeal, that’s a fiduciary decision, and that’s the core as to why the allegation is that there was a fiduciary act that failed in picking the PBM, because the PBM is the approver or denier of the claim, and therefore they are a fiduciary for that purpose.

And so, your appointment of the fiduciary has to be done prudently. There are, and the underlying contract, and some of that stuff is probably more like a sponsor function, because the sponsor was contracting with a vendor. But the process involved in deciding who the vendor should be, in this case, who the PBM should be, who is that claims processor should be, done in a way that’s sort of the way that brokers and employers health does it, which is, you know, you go to the market and you look at several options, and you look at all the different variables, and I will be very surprised in the Johnson & Johnson case if the selection process for the PBM did not go through what would be a reasonable fiduciary process. And not every PBM is going to bring the lowest cost of everything or the best of everything. It’s just not possible. And you have to have a provider that can approve or deny claims, and you have to have a provider that can apply a deductible, etc. The determination of what the plan says, what the plan covers, and what the plan does not cover, is a sponsor function. Very important. The design is sponsor function. Why is that so important? Because if the fiduciary obligation was to design a plan, you wouldn’t have any deductibles, right? Because the fiduciary has to take care of the participants, you wouldn’t be able to deny a claim, and you wouldn’t have any deductibles, and you would just give away as much as you could.

So, it wouldn’t make any sense for a fiduciary to design the plan. So, all the design elements, including the construct of the formulary should be a sponsor function. Now, there are ways in which plaintiffs might mash these things together, but the determination of what the plan covers and does not cover, the terms of where you go to get certain pharmacy products is a sponsor determination. And so, and anything that’s a mechanical calculate, mechanical testing, kind of mechanical operative thing, the application of a deductible is not a fiduciary function. It’s called ministerial function. It’s like applying a vesting schedule in a retirement plan. How many years does the person have, you apply the vesting schedule? In this case, what’s the deductible? How much has the person used? Does it accumulate against the health plan? You know, these are math problems that are in the computer system. These are not fiduciary functions. But if the question is, and to be clear, the question as to whether a particular drug is covered or not covered is not going to be a fiduciary decision. It’s a sponsor decision. Accepting a design of a plan where you go to get the drugs is a design issue. So, what you see here is there’s a lot of mixing and melding of what is a fiduciary responsibility versus a sponsor function, and I surmise that you’ll see Johnson & Johnson coming out, showing a process with their brokers and their advisors and consultants, like we already do with Employers Health, I say we, but you, already do. Bringing in resources to evaluate programs and evaluate and compare and contrast those programs. That’s a big part of what we do and what our broker colleagues do. And if you want to carve out a specialty drug, or you want to force somebody to go someplace else to get a specialty drug, for example, you can do that. It’s a design element.

So, what we’re now going to start seeing is an increased sensitivity on the part of our clients to think about a couple things. First of all, to get some training about where those lines get drawn on the functions that we have relative to pharmacy benefit delivery because we want our people to be educated and focus on it. And we also want to see process around decision. You want at least two PBMs to compare. And knowing the brokerage industry, like I do, because I work with insurance brokers and group benefits, literally every day, sometimes every hour, and I’m happy to do it. You know, there’s no, it’s rare, although there are instances, but it’s rare where you have a situation where they say, let’s just go to Express Scripts, or let’s just go to CVS Caremark, or let’s just go to this one, or let’s just go to that one, right? So, it’s usually, there’s evaluations that go on, there’s testing that goes on, there’s formularies and locations and things like this. And even when you have an incumbent, there’s process around staying with the incumbent. At a minimum, you’re going to bid their pricing, you’re going to bid their access and all that stuff.

So, as you start thinking about each role and responsibility in the delivery of pharmacy benefits, from the search, to the contracting, to the actual functional delivery. You think about which functions apply discretion with respect to a claim, that’s a fiduciary function, and the appointment of a fiduciary is a fiduciary function. And that’s really what the link is. You pick the wrong player, but the actual design elements and how you operate, the nitty gritty of application is generally going to be considered ministerial, and it’s going to be sponsor functions. So, it’s something that I think we’re all going to start focusing on more as we go down this road, regardless of the outcome of the J & J lawsuit. Regardless, I think we’re all going to be focused on this more, and we’re going to be happy about the things that we see we’re already doing correctly, and we’ll tweak the things that we see we’re not doing correctly.

And one of those big things is there’s been a huge gap in the industry. And one of the big gaps is the pharmacy benefit managers don’t really do documents. I mean, I say they don’t really do, they don’t do documents. And one thing that’s highlighted here, and something that our organizations talked about two years ago was there aren’t any documents. And because I have this sister company, EZERISA LLC, we made the decision over two years ago, me and your senior management that we would add that to the portfolio of the EZERISA company and build a pharmacy benefit document that could be undertaken by our clients together, so that we would be in compliance with that requirement. And candidly, if we started now, we wouldn’t be ready for another two years, because it took, it took 18 months to bring it to market. It just it takes a long time to develop software and systems and beta test it and all that. But we’re already there. We’ve been there since pretty much last June, and Employers Health has been there as well, already starting in and already underway. So that’s one thing. Another thing we’ve got solved. Some of the things we got solved because we’re already doing good process. And the other thing we already have solved.

Mike Stull (18:17)

You mentioned that part of the fiduciary responsibility has to do with discretion over whether to pay a claim or not pay a claim. And I know in the talks that we’ve done, you mentioned the education of both benefits consultants and our clients, and in those educational programs, you talk a lot about, the plan documents laying out the rules of the game, or the rules that we’re going to follow as we administer these plans. So, could you talk a little bit about, what the big gaps are that you’re seeing in the document process, obviously, in the J & J lawsuit, there was just failure to provide a document or documents, but could you talk to the audience a little bit about the specific document gap that we’re trying to make sure that we fill?

Jeff Zimon (19:21)

Sure. So, regardless of whether the government has been ignoring this or not, which it has in candor, I think if you talk to people at the Employee Benefit Security Administration, you know they have audited health care plans since ACA came into effect, but they really haven’t focused on pharmacy. And now everybody’s focusing on pharmacy. We’ve been focusing on pharmacy for at least two, three years now, and the Consolidated Appropriations Act had some new reporting requirements. There’s focus. But fundamentally, since ERISA was established back in 1974, there was a requirement of a written plan document. The plan document is the core contract, and it, in essence, establishes the existence of the plan. It doesn’t always have every detail in it, but it establishes the existence of the plan. It usually would incorporate something akin to a certificate of coverage, and this applies in a group health plan setting as well.

Then there’s this requirement for Summary Plan Description, now that description is not a contract. And when people talk about SPDs, which is the acronym for summary plan description, all the time, SPDs, SPDs, SPDs, they kind of forget the fact that first you need a plan document. You have to have an actual contract adopted and signed by the employer. And a plan description is a reporting document. It’s a disclosure document, it’s not a contract, but you could combine them. You could unify them into a single source document that covers both the contract required provisions, including fiduciary guidelines, by the way, as to who’s the fiduciary for what decisions and the details. And your question talks about details that are missing. And this new lawsuit has opened up some floodgates a bit, and I’ve predicted and predicted again that there’s going to be more. We’re going to see more before it kind of dies down in it. We may not see it die down for a while, but my prediction is over the course of the next 12 months, you’re going to see copycats. You’re going to see additional angles on it etc.

But you know what you really need to do is you need to describe what the benefits are under a pharmacy plan. So, if you hand out a schedule of benefits that tells you, you know, generics over here, preferred and brand drugs over here, specialty, here’s a few specialty rules. You hand out this chart, this graphic that shows all the copays and deductibles, usually by supply line. And in fact, supply line is our thought process, because supply line is from prescription drug delivery by your physician, to the participant who’s then going to go acquire the medicine. So, we think of everything in terms of supply lines.

But what’s the cost sharing, deductibles, copays and coinsurance amounts that might apply? Right? And you often, if there is a deductible apply, there’s a first dollar deductible, especially in a high deductible health plan. But more often, you see what I would call copay. It’s not usually a percentage, coinsurance being a percentage, copay being a fixed dollar amount. You know you want to get your drug, it’s a $10 copay, unless the drug costs less than $10. Which it often does. Generics, you know, you pay $6 instead of $10 so you have to have that laid out. You have to actually define it. What’s interesting is you hand out a schedule, say, copay $10 but you’re not really defining what that is, right? Because if you did, you know it’s copays $10 but it’s up to $10 it’s not really $10, right? Because if my drug costs five, I don’t have to pay $10 so and then there’s benefits, exclusions and limitations.

And to me, this is really important, what’s your exclusions, what your limitations are, and if you’re going to require authorizations, pre authorizations, you’re going to require any kind of process around that. Step therapies, which became very popular and important years ago. And I used to be critical of step therapy until it happened to me, and I figured out ultimately that a drug that I take, I could get generic as opposed to a brand, and it works just fine. In fact, just as good, if not better. Plans do want to be able to do step therapies and evaluations. We want to be able to identify in and out of network stuff. We want to define a bunch of stuff, and then we want to be able to apply it. And we want to make reference to formularies, like, that’s an allegation in the lawsuit. We want to make reference to formularies. We want to give everybody the contact information, you don’t want to have to run to HR every time you want to ask, “Well, I want to appeal this decision,” right? So, you’re going to run to the HR person. How do I do this? And then there’s, of course, Cobra implications and claims process and claims procedures and what do those claims procedures provide for, right?

And so, there’s a ton of detail. And for those folks that do beyond pharmacy, involved in group health plans, that’s what’s in group health plans, and that’s what’s in these things called wrapped documents, which have been in place for a bunch of years, allowing an employer to combine multiple lines of coverage into a master plan document and a master SPD. But it all refers down to some of these details. So, for example, you can make reference to a formulary and how to get it, and if you want a published copy, here’s what you do to go get your formulary, and so the formulary is therefore accessible. Formularies change periodically, based on supply, based on analysis, based on new drugs coming in. And so, you want to have a dynamic approach to that.

But critically important for me is we’re now focused on, and have been for some time, management of the pharmacy spend, management of the pharmacy cost, management and administrative process around how our folks are obtaining prescription drugs and utilizing prescription drugs. Especially with the new weight loss drugs. Which you guys have done an amazing job talking about in your stuff with the weight loss drugs and how that is working without the proper documentation in place. I’ve got a problem, which is I can’t manage anything. I can’t force anybody to do anything without the documentation. And so, when you see this Johnson & Johnson lawsuit, what you see out there is them saying, there’s no rules of these roads. They’re breaching everything. They’re breaking all the rules. There aren’t even any rules and the way they describe it in the lawsuit, it sounds like Johnson & Johnson was completely asleep at the switch, which, by the way, is the design and the way that plaintiffs file these types of lawsuits. This is not a new strategy, but I give them credit for painting that picture, right? Guys, they don’t even have a plan document. They have 130,000 employees, and by the way, they’re in the prescription drug industry. So, it’s not like they don’t know. They’re not, like, producing shoes, right? They’re in the prescription drug industry. So, this is part of the plaintiff theme. But for our purposes, we need the documentation in order to be able to properly manage and we create rules of the road, we create processes and we create guideposts. That’s principally why we do it,

Mike Stull (26:18)

Because if we have a client and they are accused of being asleep at the wheel, or we want to make sure they have the documents that they can provide that says, no, actually, we have a very organized, prudent process. And here it is.

Jeff Zimon (26:37)

You know, interestingly you say that because I’ve been in situations where the lawyer letter comes to the company. And when I say, you need plan documents, and people are like, yeah Jeff, plan documents. But when the lawyer writes the letter that says, I would like a copy of all this stuff, or you see a letter from a participant that looks like it’s a lawyer letter. You want to be able to respond to that within 30 days, which is the allegation, because that’s the rule, because they can start doing penalties for every person that didn’t get a document. It’s up to $110 a day. They have 130,000 people at that company. So, if I’m the plaintiff’s lawyer, I’m getting as many people as I can to write in and ask for the plan document, if we assume it doesn’t exist. Because, you know, that’s millions and millions of dollars a day that the plaintiffs can easily clean up simply because the allegation is they didn’t have a document. So, you keep your eye on the ball. When somebody writes in, you produce the document and they complain about something.

I had this recently in a case, somebody complained about how much it cost, and we did an investigation. Everybody responded on how much something was costing, and it was a cogent, prudent evaluation of why something costs so much money, and what the contract said and what they did. You know, I like to say there’s no guarantee in any health plan, and there’s no requirement at law that everything be the cheapest and least expensive. There’s no guarantee. It’s just not the way it works. And even in this lawsuit they do admit that many, a vast majority of the drugs are pretty much at a 2% margin. So, there’s going to be more here. But right now, what this has sent to us, what’s the message that we receive is we need to do a nice selection process. We need to make sure our plans are documented. And when I had suggested this to Employers Health leadership a couple years ago, they’re like, absolutely. And I said, you know, it’s going to take me a lot of time and money to build this thing. They’re like, we’ll use it. We’ll absolutely use it. We know we need it.

And so, a couple years ago, we built the plan document SPD, and it’s adaptable, it covers all your special rules, it covers all of your PBM special rules, which we bake in. It’s comprehensive and it’s detailed, and it allows customization to add special features, and the rest of it is there in bulk, and that solves part of the problem. I’m not involved in the contracting process and the selection process, unless I’m asked, but bottom line is, we have this other piece covered, and then our good broker friends and our Employers Health people are doing this evaluation back and forth of the most appropriate pharmacy benefit management company for a particular company’s plan. And there’s a lot to that. There’s a lot of factors to that, and that just has to be a reasonable process. There’s no perfection there either, right, where they’re not asking a client to build their own PBM, right? Some have sort of tried to, but that’s not what the law requires. The law requires and the law assumes, if there’s a prudent process involved, that’s commercially reasonable, you win. That’s your obligation. And then make sure that you have the rules. Make sure you have the rules in a piece of paper somewhere, and that’s the other piece that’s already there.

Mike Stull (29:44)

So, if a client is interested in learning more about the process that we’ve put together and the service that we have available, what’s their next step?

Jeff Zimon (29:58)

Well, first of all, if the sales teams haven’t mentioned it already, our client service support team is all over this. Already we have built probably almost a third of the plan documents for the Employers Health coalition clients. And our plan is to build, unless we’re rejected or somebody already has one, which is, we’ve encountered some questions, but we haven’t encountered anybody that says, oh, here’s my document. And if they think that there’s a document that works and they want us to take a look at it, we’ll look at it and run a checklist on it, because we’ve done that for brokers in the past. But basically, your client service folks are sending out emails to the brokers, and brokers should take a look at that, respond back. You know, we can have them all built within a few months. Anybody who wants one, as long as we have the data, which we get directly from our PBM partners and our service teams internally, as long as well as our EZERISA teams help put those documents together. Sometimes there are follow up questions and we want clients to review it, but it’s one of those things that you ask us, and it will be delivered and delivered promptly, and that’s part of the design. Because while we have patterns that have the PBM special language already built in there, so we don’t have to add that every single time. Really, the customer service teams at Employers Health are ready to go and are already doing this.

Mike Stull (31:22)

Excellent. Well Jeff we really appreciate, and I really appreciate, you making time this morning. To talk about what’s happening out there and the steps as you rightfully mentioned we’ve been taking for a couple years to try and get in front of these types of risks and really appreciate you coming on.

Jeff Zimon (31:46)

Always a pleasure. I’m sure there will be more. Thank you very much for the chance to talk to everybody today.

Mike Stull (31:51)

Thanks again, Jeff. We certainly appreciate it. I thought that was a fantastic discussion. And if you want to learn more, you can reach out to your client solutions executive here at Employers Health.

Again, if you were unable to join us for the Annual Benefits Forum watch for the recordings beginning April 4th at employershealthco.com forward slash events.

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