The Rise of ‘Financially Dominated’ Coverage Claims for Employer Health Plans

Jake Mattinson

Chris Nemeth

Once overshadowed by retirement plan litigation, employer-sponsored health and prescription drug plans appear to have become the next major target for plaintiffs’ firms. Within the last several years, a series of novel class action lawsuits arose alleging that fiduciaries breached their duties by failing to properly negotiate prescription drug pricing, select pharmacy benefit managers and obtain competitive bids from service providers, among other claims.

Thankfully for employers, courts have so far dismissed these cases for lack of standing, finding plaintiffs’ purported injuries too diffuse and hypothetical, but similar complaints are likely to be filed. These developments underscore a simple but critical truth: The Employee Retirement Income Security Act’s fiduciary standards apply with equal force to retirement plans and health and welfare benefit plans.

Plaintiffs’ firms have recently advanced a new theory: that employers breach their fiduciary duties by offering health insurance options so expensive relative to other options as to provide no reasonable value. In these complaints, traditional high-premium, low-deductible preferred provider organization health plans are alleged to be “financially dominated” by high-deductible health plans with lower premiums.

A “financially dominated” health plan is one in which another available health plan in the same employer offering always costs less, making the “dominated” a lesser, more-expensive selection in all cases. The concept originates in academic literature, not case law. Plaintiffs attempt to analogize it to fiduciary obligations in 401(k) plan menu design, arguing that just as fiduciaries must monitor investment options, they must also ensure that health plan options are balanced and non-duplicative.

Although still in their early stages, these suits serve as an important reminder to health and welfare plan fiduciaries of the importance of a quality fiduciary governance process. In this article, we outline the key claims of these lawsuits and both general and specific considerations for employers to help protect themselves and meet their fiduciary obligations under ERISA.

Allegations

The plaintiffs responsible for these complaints allege that health plan fiduciaries: (1) did not prudently select and monitor PPO health insurance options; and (2) failed to communicate an accurate description of insurance options to participants by not disclosing the financially dominated status of the traditional PPO plan. Had fiduciaries properly monitored and selected plan options, plaintiffs claim, they would have ensured that no option financially dominated the other.

Plaintiffs argue that the fiduciary duty of prudence required ongoing evaluation of health plan offerings and prices to ensure that each option provided some distinct advantage and reasonable value. By failing to do so, plaintiffs claim that participants were left uninformed, misled and steered toward higher-cost options, as well as paying excessive premiums unnecessarily. While these theories are yet untested, they reflect a growing willingness to apply ERISA’s fiduciary standards to new aspects of health plan administration.

The plaintiffs’ claims are by no means airtight. The claims raise, among others, potential issues of legal standing and whether the choice to offer a traditional PPO and an HDHP is a fiduciary decision at all. The plaintiffs in these cases also do not evaluate other potential benefits to higher premium PPOs, such as predictability of expenses or whether the PPO options are, in fact, cheaper and/or more affordable in all instances across all classes of participants.

More fundamentally, violations of ERISA’s duty of prudence must demonstrate a flawed process, not just a flawed result. But with so much uncertainty at this stage, employers with group health plans would be wise to review the case allegations and understand their level of risk to ensure they are maintaining proper fiduciary governance processes and making any necessary plan adjustments.

Specific Considerations

Universities have been the primary target of this litigation trend so far, perhaps because health plan pricing information is often publicly available for these entities. That focus to date, however, is no guarantee that other large employers will not be targeted next, especially if one of these lawsuits finds legs and survives a motion to dismiss. As a result, any employer that offers both a higher-premium, lower-deductible PPO plan and an HDHP plan—which likely means most employers, given the recent shift to HDHPs—fits the profile for potential future litigation of this type. Indeed, the fact that this is an incredibly common combination of health plan offerings is one reason to follow closely the rise of these cases.

Employers with stark differences in premium pricing—or, ironically, which offer proportionally low deductibles and out-of-pocket maximums in their HDHP plans—may be more likely targets. Employers will likely not want to overhaul plan design in response to this early-stage litigation. Instead, they should focus on process: understanding how plan options and premium pricing decisions are made, documenting fiduciary deliberations and ensuring communications clearly explain cost-sharing differences.

General Considerations

These are not the first cases targeting employer-sponsored health plans, and they almost certainly will not be the last. The stringency of ERISA’s fiduciary duty standards can make it appear tantalizingly easy for the plaintiffs’ bar to state plausible claims. An employer’s best defense against these claims is often a demonstrably prudent process, structured by quality fiduciary governance procedures.

As a result, some general recommended items for employers to consider as it relates to their health and welfare plan governance include the following:

• Establishing a formal fiduciary committee for health and welfare plans;
• Delegating fiduciary duties to that committee clearly and in writing;
• Selecting committee members who are knowledgeable about the plan and/or have relevant expertise;
• Maintaining minutes of committee deliberations; and
• Providing regular fiduciary training to members.

These steps may appear remedial, but collectively, they can both demonstrate a prudent process to courts and allow plan fiduciaries to identify and address potential issues well in advance of any court or regulatory action.

Health plan litigation is evolving rapidly. The new line of complaints targeting employer health plan offerings is concerning not only because it could potentially apply to a large number of employers, but also because it demonstrates that the plaintiffs’ bar is energetically pursuing health and welfare fiduciary claims, including in areas where fiduciary duties may not apply.

Employers cannot predict every novel legal theory, but they can control one crucial factor—maintaining a fundamentally sound and well-documented fiduciary process.

Chris Nemeth is a partner in and co-head of the ERISA litigation practice at McDermott Will & Schulte who counsels clients on complex commercial litigation and government investigations, specializing in ERISA matters, financial and banking cases, business torts, and breach of contract actions.

Jake Mattinson is a partner in McDermott Will & Schulte who focuses his practice on employee benefits and matters related to 401(k), 403(b), pension, executive compensation, health care reform, and cafeteria and welfare plans.

Scott Kenkel, a former associate at McDermott Will & Schulte, also made contributions to this article.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS STOXX or its affiliates.