Sponsors of health plans are subject to Employee Retirement Income Security Act (ERISA) requirements.
The five most important ones, according to Joe Faucher, of counsel with Drinker Biddle & Reath in Los Angeles, are to: “follow the plan document, to pay only reasonable expenses associated with the plan, to act prudently, to properly marshal the assets of the plan in a trust and to pay benefits that are due.”
The sponsor to the health plan must comply with two critical standards, adds Tess Ferrera, a partner and head of the ERISA Litigation Group at Schiff Hardin LLP in Washington: “They have a duty to act prudently and to remain loyal to the interests of the plan and its participants. These are very high and very strict standards.”
The Department of Labor has issued a report, “Understanding Your Fiduciary Responsibilities Under a Group Health Plan,” in which it lays out the four essential components of a health plan:
- A written plan that describes the benefit structures and guides day-to-day operations;
- A trust fund to hold the plan’s assets;
- A recordkeeping system to track contribution and benefit payments, maintain participant and beneficiary information, and to accurately prepare reporting documents; and
- Documents to provide plan information to employees participating in the plan and to the government.
The health plan can either be self-funded, whereby the employer pays the benefits, or insured, whereby an insurance company pays the benefits, Faucher says. Self-funded plans, which are common among large employers, typically hire an insurance company to act as a third-party administrator (TPA) that assumes fiduciary responsibility for processing claims, Faucher says. The TPA will determine “whether the claimant is eligible, whether the plan covers the benefit, and how much should be paid,” he says.
Even when hiring a claims-processing TPA, it is incumbent upon the sponsor to monitor the TPA to ensure they are charging a reasonable amount and processing claims properly, he adds.
For health plans that are insured, the fiduciary responsibilities are similar, Faucher says. “The plan fiduciary ought to determine that the amount that they are paying for the insurance and the services are appropriate,” he says. “They also need to continually monitor the insurance company to ensure that they are paying claims in an appropriate way, that the needs of their participants are being met, and that the costs are reasonable.”
The health plan sponsor must go through a rigorous process when first selecting the insurance company or TPA, Ferrera says. “They should hire a consultant, do due diligence on a number of insurance companies or TPAs and look at the quality of the services being provided in relation to the cost,” she says. “And every year when renewing the contract with the insurance company, the plan administrator needs to revisit fees. That is an ERISA obligation.”Coming Up: Most common health plan lawsuits.
“Much of the litigation that comes up regarding health plans involves claims that the insurance companies charged hidden fees to the health plan,” according to Faucher. “The in-house plan fiduciaries have an obligation to understand what they are paying and what the contract provides for.” To successfully accomplish this, the fiduciaries “have to first understand what the contract says—to have a clear understanding of what the contract provides for. They then need to keep track of what is being charged.”
It is also often common for participants to sue either the plan fiduciary or the insurance company when benefits are denied, Ferrera says. The health plan will need to have an internal appeals process. If that fails, the participant may sue the company.
The best way to avoid these types of lawsuits, she says, “is to make sure you have a very good insurance company that adheres closely to the claims procedures in your plan. If the plan is self-funded, make sure you have a good TPA. If the claims administrator is applying the benefits of the plan properly and going through all of the required steps when receiving a claim, the defense for the employer is that the benefits are excluded from the plan. That goes a long way to insulate you from liability.”
In addition to hiring sound insurance companies and TPAs, Ferrera suggests, health plan sponsors might consider hiring lawyers and/or consultants to help them run the plan.
While stop-loss insurance is not a responsibility under ERISA, it is a best practice that health plan sponsors might want to consider, Faucher says. These types of insurance plans protect employers from catastrophic claims, such as treating a child born with severe birth defects or a patient who has cancer, he says. “Those claims can result in millions of dollars of claims—even large employers may find that to be burdensome,” he says. Stop-loss insurance policies won’t cover the whole amount, but can help alleviate the costs.