Rising Scrutiny of Employer Health Plan Administration: ERISA Fiduciary Litigation, Federal Transparency Initiatives, State Enforcement, and Compliance Considerations
As federal and state governments continue to prioritize drug pricing reform, employers across the nation face a rapidly evolving landscape of legal and regulatory scrutiny regarding the management of their health plans. A convergence of class action ERISA litigation, inquiries from a coalition of 14 states, and increased federal emphasis on health care price transparency has created new compliance challenges and potential areas of risk for plan fiduciaries. Ongoing developments shed light on the implications for employers and compliance considerations for their health plans as related to health care and prescription drug management.
The Emerging Wave of ERISA Health Plan Fiduciary Breach Litigation
Plaintiffs' lawyers—who have spent the past 20 years bringing litigation over allegedly excessive fees in the $10+ trillion 401(k) plan market—have increasingly been turning their attention to the $5+ trillion health care market. Three recent putative class actions, targeting large employers over the administration of prescription drug benefits, exemplify this trend. In each of the cases, plaintiffs broadly allege that plan fiduciaries failed to prudently manage pharmacy benefit manager ("PBM") contracts, which they argue resulted in substantial overpayments for prescription drugs and increased costs passed on to plan participants.
Plaintiffs in the three cases—Lewandowski v. Johnson & Johnson, Navarro v. Wells Fargo & Co., and Stern v. JPMorgan & Co.—each allege that the employer's health plan fiduciaries breached their ERISA duties by mismanaging the employer's prescription drug benefits program. Their complaints allege that this management caused millions of dollars in overpayments, inflated premiums, and higher out-of-pocket costs for plan participants through poor PBM contract negotiation, failure to monitor PBM fees and drug pricing, and failure to explore more cost-effective models, such as pass-through PBMs. One central theory referenced across the cases is the practice of "spread pricing," in which a PBM charges a health plan more for a prescription drug than it reimburses the dispensing pharmacy, retaining the difference as profit. To illustrate the alleged harm, plaintiffs in these cases cited examples of generic drugs for which the plaintiffs' claim plans paid more than large retail pharmacies charge without insurance.
In both Lewandowski and Navarro, the defendants were successful at the motion-to-dismiss stage, with the courts in both cases finding that the alleged injuries—higher premiums and out-of-pocket costs—were too speculative to establish a concrete harm traceable to the alleged fiduciary breaches and thus not sufficient to confer Article III standing. See Navarro v. Wells Fargo & Co., 2026 U.S. Dist. LEXIS 42932 (D. Minn. March 3, 3026); Lewandoski v. Johnson & Johnson, 2025 U.S. Dist. LEXIS 232825 (D.N.J. Nov. 26, 2025). Plaintiffs in both cases have filed an appeal.
In Stern, however, on the out-of-pocket costs claims, the court distinguished Lewandowski and Navarro, holding that plaintiffs there had alleged a price analysis sufficient to establish standing at the motion to dismiss stage. The Stern court also rejected arguments that out-of-pocket maximums and other plan design features limited the harm a participant could face from any allegedly overpriced drug, finding that such features may not, at the pleading stage, eliminate the economic harm caused by overpaying for a specific drug. In addition, plaintiffs were able to leverage the recently lowered pleading standard for prohibited transaction claims established by the Supreme Court in Cunningham v. Cornell Univ., 604 U.S. 693 (2025) to survive a motion to dismiss regarding transactions with the plan's PBM. See Stern v. JPMorgan Chase & Co., No. 1:25-CV-02097 (JLR), 2026 WL 654714 (S.D.N.Y. Mar. 9, 2026).
Federal Transparency Initiatives
Earlier this year, Congress passed pharmacy benefit manager reforms, which will go into effect (for calendar-year plans) on January 1, 2029, as part of the Consolidated Appropriations Act of 2026 that was signed into law on February 3, 2026. The law requires PBMs to disclose to health plans all direct and indirect compensation, in addition to other detailed information, a summary of which must also be available to participants upon request. In addition, PBMs will be required to pass through 100% of certain price concessions (e.g., rebates) received by the PBM and give plans audit rights. These reforms will require plan fiduciaries to negotiate changes to PBM contracts, analyze additional disclosures, make new determinations of reasonable compensation in order to avoid prohibited transaction penalties, and provide certain summary information upon request to avoid civil fines. While there is time before the law goes into effect, plan fiduciaries should start to consider these issues soon—especially regarding contractual changes for upcoming multiyear contract renewals.
Days before the law above was enacted, the Department of Labor issued a proposed regulation that, if finalized, would apply (for calendar-year plans) on January 1, 2027. The regulations also require more transparency into the direct and indirect compensation a PBM expects to receive (through initial and semi-annual disclosures) and gives health plans audit rights. As currently drafted, the regulation follows a similar structure to the disclosure rule applicable to retirement plans, but it is broader in scope. While the regulation must still be finalized, and could be modified based on comments received, plan fiduciaries should continue to monitor the status of the regulation and be prepared to act quickly if and when it is finalized.
State Actions
Employers typically do not focus on state-government actions when administering self-insured health plans, given ERISA's preemption of state laws that attempt to regulate employee benefit plans, but recently states have waded into areas that require attention. First, over the past several years, various states have requested in-depth information from PBMs regarding prescription drug claims and reimbursements for the PBM's entire book of business, including with respect to employers' self-insured health plans. Among other things, this has the potential to raise concerns about disclosing sensitive employee information to the government and complying with the HIPAA Privacy Rule. Employers and plan fiduciaries should carefully review communications received from PBMs that are subject to such state reporting obligations and investigations.
Second, in December 2025, a coalition of state financial officers from Indiana, Kentucky, Louisiana, Mississippi, Montana, Nebraska, North Dakota, Ohio, Oklahoma, South Carolina, Utah, and Wyoming sent letters addressed to "Fortune 500 Companies." Writing in their asserted capacities as fiduciaries for state investment funds that hold shares in these companies, the officials called on employers to control health care spending costs and protect shareholder value by undertaking a detailed payment-integrity analysis of their health care spending. The letters specifically raised potential litigation concerns, flagging that "[h]ealth care-related ERISA lawsuits are surging, with some lawsuits filed against vendors and others against employers for failure to properly evaluate vendors. Considering these lawsuits can help a plan avoid (1) practices alleged to be driving up plan costs beyond 'reasonable expenses of administering the plan,' and (2) expensive litigation and liability." Further, "[f]ailure to conduct a payment integrity analysis may also increase a company's odds of being the target of DOL enforcement actions." The letters requested that the identified companies respond with detailed information to a number of questions related to how fiduciaries select and monitor their health plans' service providers and how they use data to ensure that their health plans are not overpaying for medical care or prescription drugs.
Compliance Considerations
The convergence of ERISA class action litigation, state-level inquiries, and federal transparency initiatives signals a new era of scrutiny for employer-sponsored health plans and their fiduciaries. These developments warrant careful attention, and companies may benefit from proactively assessing their PBM arrangements, documenting their fiduciary processes, and preparing for the possibility of both private litigation and governmental inquiries. Companies that establish and document rigorous fiduciary practices now will be better positioned to defend against future claims and demonstrate their commitment to prudent plan management in the face of rising scrutiny and novel legal theories.
What ERISA Health Plan Fiduciaries Should Consider Now
As with all ERISA fiduciary claims, courts focus on whether fiduciaries can demonstrate a documented, reasoned, and continuously monitored decision-making process. Strong governance, acting in compliance with plan terms and ongoing oversight, can reduce litigation risk. Given this, fiduciaries of employer-sponsored health plans may wish to consider the following steps to enhance prudent fiduciary processes:
- Understand Fiduciary Structure: Review plan documents to understand where fiduciary authority resides. Employers have wide latitude to design the fiduciary structure that works best within their organization. Ensure plan documents clearly allocate fiduciary authority and confirm that plans are, in practice, being administered in accordance with the plan terms.
- Document Fiduciary Decision-Making: Prepare appropriate written records to document decisions, such as vendor selection and renewal decisions (including maintenance of RFP materials, fee analyses, market benchmarking reports, and other determinations that costs are reasonable) and records of periodic fiduciary training. Ensure that discussions, analyses, and the reasoning behind decisions are documented appropriately and in a timely manner.
- Actively Monitor Service Providers: Perform periodic reviews of fees and service performance and consider available audit rights to document vendor adherence to contractual obligations and performance outcomes.
- Review Vendor Contracts: Examine service provider contracts to confirm they include meaningful audit rights, clear data access provisions, transparent fee arrangements, appropriate oversight of drug formularies, limits on one-sided vendor terms, and full disclosure of all compensation mechanisms.
- Monitor Legislative and Regulatory Developments: Track proposed reforms and regulatory guidance affecting prescription drug programs to evaluate their potential impact on employer health plans.
- Assess Impact on Plan Costs and Fee Structures: Evaluate how prospective reforms to drug pricing, insurer oversight, or intermediary compensation structures may impact plan costs and existing vendor relationships.
The ever-evolving landscape of legal and regulatory scrutiny has increased the complexity that comes with ensuring compliance with ERISA. Jones Day's teams offer a unique combination of experience in the health care regulatory sector and in ERISA's substantive law. And their ability to help clients effectively negotiate PBM and vendor agreements, and to assist health plan fiduciaries demonstrate well-documented, reasoned, and continuously monitored decision-making processes, well-positions Jones Day to assist clients navigate this rapidly shifting legal landscape.
Associates Taylor Goodspeed and Ilse Gomez contributed to this article.
