My company hired a vendor to outsource the utilization management and appeals processes for our health plan. I have heard that we, as the plan sponsor, have a fiduciary duty to monitor the vendor’s activities. What does that mean, and, if this is really required, how can we comply?
The 1974 Employee Retirement Income Security Act's (ERISA) fiduciary duty of prudence requires that benefit plan sponsors use diligence and care when selecting vendors and service providers that perform functions for the plan that are fiduciary in nature.
Since this duty of prudence extends beyond initial vendor selection, fiduciaries should not only ensure that fees are reasonable, but that service providers continue to adhere to the terms of their contract and continue to meet the plan sponsor’s needs.
In addition, while duties imposed by ERISA are longstanding, there is heightened attention in this area due to recent legislation such as the Consolidated Appropriations Act (CAA) of 2021. While many practitioners anticipate a wave of new litigation against group health plan sponsors, fiduciaries can better defend against these claims by documenting and taking proactive steps to ensure appropriate service providers are selected and continue to meet the terms of their agreements.
Employers sponsoring group health plans (“plan sponsors”) are subject to a host of laws and responsibilities when providing benefits to employees. Simply writing a check or transmitting premiums on their employees’ behalf does not relieve plan sponsors of their obligations. Furthermore, recent legislation highlights an increased focus on employers’ compliance burdens, including the responsibility employers undertake when selecting vendors to perform services for their benefit plans.
ERISA governs most private-sector employers and sets minimum standards for employee welfare benefit plans and establishes standards of conduct for plan fiduciaries. Despite its name, ERISA’s reach is not limited to retirement programs, and most employer-sponsored benefits are subject to ERISA, unless an exception applies.1 A fiduciary is one who exercises discretionary authority or control over a plan’s administration or assets, and ERISA requires that plans include a named fiduciary who serves as plan administrator.2 A plan administrator is by default a fiduciary for purposes of ERISA. ERISA not only requires that a fiduciary be named in the plan document, but other individuals might also have fiduciary status depending on what activities they undertake regarding the plan.
The concept of fiduciaries arises from ERISA’s enactment to protect the interests of employees who participate in employee welfare benefit plans. The standard for these duties has been described many times as “the highest known to law.” Basic fiduciary duties are outlined in Section 404 of ERISA. These include a duty of loyalty, a duty to discharge one’s duties for the exclusive purpose of providing plan benefits or for defraying reasonable expenses of plan administration (the exclusive benefit rule), a duty to act prudently, to diversify assets (typically envisioned in the retirement plan context), and a requirement to follow the terms of the written plan document(s).
While this summary does not do justice to decades of case law, the duty of loyalty and the exclusive benefit rule can be summarized to require that fiduciaries act only in the interests of plan participants and beneficiaries, and that plan assets are only used to pay for the plan and plan expenses. (For example, a plan sponsor could not use employee’s benefit payments to pay for the employer’s general operating expenses.)
The asset diversification requirement largely falls outside of the employee welfare benefit space but will be familiar to plan sponsors given the frequency of litigation related to retirement investment decisions. The requirement to follow the terms of the plan is important because participants need to be able to accurately ascertain the benefits available to them, including any limitations on those benefits, and plan documents will inform participants and beneficiaries of their rights and responsibilities under the plan.
Finally, the duty to act prudently at its highest level requires that fiduciaries act “with the care, skill, prudence and diligence under the circumstances” of a prudent person acting in a similar situation, who is familiar with such matters.”3
Selecting and monitoring service providers falls under the duty of prudence. The “prudent expert rule” cited above essentially requires that a fiduciary act as a reasonable fiduciary would when in the same position. This standard is objective, such that a fiduciary’s good faith or good intentions are immaterial when analyzing a fiduciary’s prudence in undertaking a particular action. An important note here: this rule does not require perfection. Instead, courts examining these claims have looked to fiduciaries’ processes and thoroughness when making a particular decision.
Where the services a vendor will be performing are fiduciary in nature, the process of selecting a vendor/service provider is in and of itself a fiduciary function. To the specific question posed here, claims adjudication and medical necessity determination are services that are fiduciary in nature. So, choosing a vendor to perform these services is a fiduciary function. Choosing a vendor does not necessarily require selecting the least expensive option. It should instead be a holistic decision, one that considers the vendor’s performance, policies and practices, the scope of services provided, experience with customers and individual participants and, yes, how much the vendor charges for the services being obtained. Choosing a vendor with the cheapest fees that provides a low level of service and low customer satisfaction is not a wise choice from the perspective of fiduciary prudence.
There is also an ongoing duty to monitor service providers. While regulators do not expect fiduciaries to “look under the hood” of every claim or individual decision made by a service provider, the Department of Labor (DOL) has provided some helpful direction for plan sponsors in selecting and monitoring vendors for employee benefit plans.4 These tips can be boiled down to several key points:
For most of ERISA’s existence, employer plan sponsors were primarily concerned with potential scrutiny over their management and offering of retirement plans. However, the tide appears to be turning, and recent attention spotlighting plan sponsors’ decisions in the health and welfare benefit space underscores the importance of taking fiduciary obligations seriously.
The Consolidated Appropriations Act (CAA) of 2021, a multibillion-dollar spending bill spanning innumerable areas, amended ERISA to require fiduciaries to review direct and indirect compensation to service providers to determine if fees are reasonable.5 These broker compensation disclosures underscore regulators’ heightened attention to the cost of services related to offering and maintaining health care benefits. (While outside the scope of this Q&A, in the benefit context the CAA also placed increased obligations on group health plans for reporting pharmacy and medical costs, eliminating “surprise billing” for certain services, ensuring “gag clauses” are not present in contracts, and offering cost-sharing tools for participants.) The plaintiff’s bar has already begun to leverage these new rules against employers, though the success of these claims will ultimately play out in coming years.
One case that has gained national attention, though it will not be the last of its kind, involved allegations against individually named fiduciaries as well as the company at large, asserting violations centered around its management of the employer plan’s prescription drug benefits. While the allegations were widespread, they included claims that the fiduciaries failed to “make a diligent effort to compare alternative service providers in the marketplace,” “seek [the] lowest level of costs for services to be provided,” and “continuously monitor plan expenses to ensure that they remain[ed] reasonable under the circumstances.”6
Without opining on the particulars of one instance of litigation, this lawsuit should highlight for employer plan sponsors the importance of diligently managing and documenting their decisions related to welfare benefit plans under ERISA.
When vetting a potential new vendor, plan sponsors should take a holistic approach and consider vendors’ fees, services, the specific needs of the company, and the vendors’ responsiveness to customers. Plan sponsors should also consider documenting a formal RFP process in the event the ultimate choice in service provider is ever questioned. Selection and designation of a fiduciary committee to help with these tasks may be appropriate for some companies, and the process and composition of the committee will likely be similar to those of a retirement plan committee.
Fiduciary liability insurance may be a logical next step. (A note on this point: fiduciary liability insurance is not the same as a fidelity bond, which is generally only required for self-funded plans that have a trust or otherwise separate assets from the employer’s general assets before paying benefits.) Fiduciary liability insurance is intended to protect fiduciaries from losses resulting from a breach of fiduciary duty, although ERISA unsurprisingly does not permit agreements that would relieve a fiduciary of their duties under the law.
As previously mentioned, plan sponsors should monitor service providers, which may involve periodic audits. While many service providers’ standard contractual language will necessarily be protective of the service provider, there is often some room for negotiation. As a result, consultation with experienced employee benefits counsel may be advisable, particularly when negotiating the initial terms of an agreement. Plan sponsors may contract with third-party vendors to perform an audit, although this level of independent review may not be necessary or available depending on the service or prior agreement with the original service provider.
It is increasingly important that employers sponsoring benefit plans understand their fiduciary obligations under ERISA, including the duty of prudence that generally governs provider selection and monitoring. The landscape of compliance with employee benefits-related laws is changing and increasingly complex. Plan sponsors should be diligent in ensuring that vendors providing services to the plan are appropriately vetted and held accountable for their obligations.
Authored by Stephanie Raborn, JD
McGriff National Specialty Practices, Employee Benefit Solutions
References
