Excessive Fee Cases: Not Just for Retirement Plans Anymore

As discussed by Holland & Knight attorneys in the Winter 2024 Benefits Law Journal and in alerts on July 20, 2020, and Sept. 22, 2022, plan sponsors and fiduciaries have seen lawsuits filed alleging that they paid excessive administrative and recordkeeping fees and, in turn, violated their fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA).

In a recent trend, plan sponsors have seen this theory of liability applied to health and welfare plans, specifically in regard to the cost of prescription drug benefits and fees paid to pharmacy benefit managers (PBMs). Although those lawsuits have not made it past the pleadings stage, the claims serve as reminders to plan sponsors to scrutinize their fee arrangements with their health and welfare plan service providers, including PBMs.

Background on Excessive Fee Cases

For many years, retirement plan participants have raised claims against plan sponsors and plan administrators claiming that the administrative and recordkeeping fees paid by the plan were excessive. Plan participants typically claim the plan fiduciaries breached their fiduciary duties by allowing the plan to pay excessive fees in violation of ERISA Section 404.

In a group of recent cases, participants have taken this theory and turned their attention to fees paid to PBMs under health and welfare plans. The decisions issued to date have dismissed the cases for lack of standing, but the courts' decisions do leave open the possibility that the trend will continue.

Third Circuit

In Knudsen v. MetLife Group, the U.S. Court of Appeals for the Third Circuit addressed one of the first challenges to allegedly excessive fees associated with a health plan's prescription drug benefits. The court upheld the trial court's determination that the plaintiffs lacked standing.

MetLife Group served as the plan sponsor and administrator of an employee benefit plan that provided medical and prescription drug coverage. The plan was self-funded, meaning the plan sponsor was responsible for paying the claims and bearing the financial risk associated with making those payments. The plan sponsor's PBM negotiated volume discounts and rebates with drug manufacturers, and the plan sponsor applied those rebates toward plan expenses.

The named plaintiffs – participants in the plan – alleged that the plan sponsor violated ERISA by diverting the drug rebates from the plan to itself, causing participants to pay higher out-of-pocket costs, mainly in the form of premiums. The plaintiffs claimed that had the sponsor not taken the rebates for itself, the plan sponsor may have reduced ongoing contributions, copays and co-insurance for pharmaceutical benefits and may have distributed rebates to participants in proportion to their contributions to the plan.

The U.S. District Court for the District of New Jersey dismissed the plaintiffs' complaint for lack of standing, concluding that the plaintiffs had not pled facts that demonstrated individualized injury. The court concluded that the plan participants had no legal right to the general pool of plan assets and any asserted injury to the plan was not an injury to plaintiffs themselves.

The Third Circuit affirmed on appeal. The appellate court concluded that the plaintiffs' allegations were insufficient to show that the purported violative conduct was the but-for cause of their injury – namely, an increase in their out of pocket costs.

New Jersey District

In Lewandowski v. Johnson and Johnson, No. 3:24-cv-00671, the U.S. District Court for the District of New Jersey, which sits in the Third Circuit where Knudsen was pending, had another opportunity to address a claim for allegedly excessive fees in connection with a plan's PBM arrangement. The district court again dismissed for lack of standing.

Lewandowski had a nearly identical factual premise to Knudsen. The plaintiff, a participant in Johnson & Johnson's sponsored medical plans, brought suit against the plans' sponsor and administrator, alleging that the defendants mismanaged the prescription drug benefits program, causing the ERISA plans and participants to pay higher prescription drug prices, premiums, deductibles, coinsurance and copays.

The plaintiff cited specific examples of the higher payments for certain prescription drugs, including a detailed chart illustrating how much the plans paid for a selection of certain drugs, compared to a pharmacy acquisition cost. The plaintiff alleged that no prudent fiduciary would agree to make its plan and participants pay a price that is significantly higher than the price available to an individual who walks into a pharmacy and pays out of pocket. The plaintiff alleged two distinct injuries – one in the form of paying higher premiums and another in the form of higher out-of-pocket costs for medication.

The defendants moved to dismiss, asserting that the plaintiff did not allege a concrete harm or injury-in-fact because she did not allege that she was improperly denied benefits under the plan. The defendants argued that the plaintiff did not suffer any injury because she would have paid the exact same amount in total out-of-pocket costs each year she has participated in the plan, regardless of the cost of the drugs.

The district court agreed and found that the plaintiff's alleged injury – that she paid more in premiums due to the defendants' purported breach of fiduciary duty during the negotiation process of the plans – did not support standing because the outcome of the suit would not affect the plaintiff's future benefit payments.

The district court also addressed the plaintiff's claimed injury from allegedly paying more out of pocket for medications that were available at a lower cost. Though the court concluded that the plaintiff had alleged an injury traceable to the defendants' alleged ERISA violations, the plaintiff's purported injury was not redressable. The plaintiff had reached her prescription drug cap for each year she asserted in the complaint. Thus, even if the defendants were to reimburse the plaintiff for her out-of-pocket costs on a given drug, that money would be owed to her insurance carrier (technically, the employer) to reimburse it for its expenditures on other drugs that same year, not to the plaintiff.

Based on these findings, the court dismissed for lack of standing but allowed the plaintiff the ability to try and replead. The plaintiff filed an amended complaint on March 10, 2025.

District of Minnesota

Following the reasoning from the Third Circuit cases, the U.S. District Court for the District of Minnesota recently dismissed another challenge to PBM fees on standing grounds in Navarro v. Wells Fargo & Company.

The facts in the Navarro case are similar to the other cases that were filed. The plan sponsor moved to dismiss for lack of standing and failure to state a claim. The court dismissed for lack of standing (and did not address the alternative grounds for dismissal).

In reaching its conclusion, the court stated that, "in theory," it agreed with plaintiffs' theory of standing: that they were each individually harmed in the form of high out-of-pocket costs and increased monthly premiums for coverage. But, the court countered based on the actual facts alleged that the plaintiffs' alleged harm was too speculative and not redressable. The court decision addressed the plaintiffs' claim under both 29 U.S.C. § 1132(a)(2) and (a)(3).

The court reasoned that the plaintiffs lacked standing for their claims under 29 U.S.C. § 1132(a)(2) because "the connection between what Plan participants were required to pay in contributions and out-of-pocket costs, and the administrative fees the Plan was required to pay the PBM, is tenuous at best." The plan sponsor was vested with sole discretion to set participant contribution rates. The court also rejected the plaintiffs' proposition that the court could alter the terms of the plan to require the plan sponsor to alter participants' contributions amounts, stating that it is "unaware of any mechanism by which it could force Wells Fargo to reduce participant contribution rates," nor did the plaintiffs identify one.

The court concluded that the plaintiffs lacked standing under Section 1132(a)(3) because they were no longer participants in the plan and had no stake in the prospective injunctive relief they requested. The court did not give the plaintiffs the chance to file an amended complaint and closed the case after issuing its opinion.

Key Takeaways

Though the current challenges to PBM fees have not been successful to date, attacks on the fees and expenses paid by health and welfare plans are likely to continue. Lawsuits challenging fees paid by retirement plans gained significant traction in the courts and often resulted in settlements in the millions. As the wave of those suits recedes, health and welfare plans are becoming the next target. The recent challenges to PBM fees act as a reminder to plan sponsors to scrutinize the fees paid to all plan service providers.

Best practices may include:

• reviewing fiduciary governance of the health plan and considering a committee structure with periodic meetings and documentation of activities
• documenting the selection process and ongoing oversight of all health plan vendors, particularly PBMs and other third-party administrators
• conducting a fulsome review of the services provided to the health plan and associated costs, including indirect costs, for prescription drug services

PBM arrangements can be complex – knowledgeable consultants and legal counsel may be of assistance to help understand the cost structure (including rebates, performance guarantees, etc.) and how costs, both direct and indirect, are passed through to the health plan.

If you would like assistance in evaluating your plan's governance practices, ensuring that your plan complies with ERISA or determining how these lawsuits might impact your plan, contact the authors or another member of Holland & Knight's Executive Compensation and Benefits Team or ERISA Litigation Team.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.