PSNC 2024: Applying a Fiduciary Standard to Health Care

A federal law enacted three years ago is adding new fiduciary responsibilities for plan sponsors as that law and other federal regulations are driving risks and opportunities around health plans. 

Under the Consolidated Appropriations Act of 2021, plan sponsors are required to attest that their fees for health care plans are fair and reasonable for the services provided. 

As a result, it is vital that plan sponsors apply a fiduciary process, as required by the Employee Retirement Income Security Act, for their health care plans, according to Jamie Greenleaf and Barbara Delaney, who spoke at the PLANSPONSOR National Conference in Chicago earlier this month. 

After asking the room of plan sponsors whether they had a formal committee set up for their health and welfare plans, only three people raised their hands. Delaney, principal and founder of SS/RBA, a division of Hub International, said this is a widespread issue, and that more attention needs to be paid to applying a fiduciary standard to health care plans. 

“HR and finance need to be working together,” Delaney said. “If you’re a fully insured plan, you’re running an insurance company, whether you know it or not, and not understanding the rules is not by default, it’s by design.” 

Delaney also noted that while there has been a lot of talk about offering financial wellness tools to participants, she argued that financial wellness cannot be improved without first taking care of the health care system. 

“If you look at open enrollment every year, … it’s not helping people because they don’t know which health plan to pick,” Delaney said. “[We need to] build a financial wellness system that takes into account how to pick your [health care] program because I know plan sponsors spend a lot of time on this, but participants just don’t get it.” 

Greenleaf, senior vice president of OneDigital Retirement + Wealth, said there are three pieces of legislation impacting the health care industry of which plan sponsors should be aware. 

The first law has to do with hospital price transparency, which essentially states that patients should be able to go the hospital and know exactly what they are going to pay for, what a procedure will cost, the cost of staying at the hospital, etc. Patients also need to have the ability to shop for medical care based on prices. 

“If a hospital is out of compliance, there’s a penalty associated with that,” Greenleaf said. “As of today, … about 20% of hospitals are in compliance with the regulation, and there’s been about $2 million in fines.” 

Transparency 

The federal Transparency in Coverage rule is something that plan sponsors should be aware of, Greenleaf said. The regulation was rolled out over a three-year period and is now in full effect, as of January 1. It requires plan sponsors, regardless of size and if they are fully insured or self-insured, to provide employees with the ability to shop for care. 

“When I walk into a doctor’s office and the doctor says to me, ‘you need an MRI,’ I should be able to pull out my phone and look at all the MRI [prices] across my region for in-network and out-of-network and be able to shop for that cost or gap,” Greenleaf said.  

Greenleaf emphasized the importance of this regulation, explaining that if a company employs 100 people, for example, and covers 120 members, the employer will be charged $100 per member each day they are out of compliance. This is a massive expense, she said, also noting that a lot of litigation has been occurring around this issue, most recently with the Mayo Clinic.  

Gag Clauses 

Lastly, under the Consolidated Appropriations Act, employers have to attest that they have removed gag clauses from all of their covered service providers’ contracts. A gag clause is anything that prohibits a plan sponsor from accessing information about the cost and quality of the health care plan.  

Greenleaf said gag clause removal is important because it gives plan sponsors the ability to run a proper fiduciary process. Another important aspect of the CAA is that plan sponsors need to understand who they are paying and how much they are paying.  

“All of your covered service providers—your brokers, your third-party administrators, your [pharmacy benefit managers], your carriers—have to disclose both direct compensation [and] indirect compensation,” Greenleaf said.  

She explained that direct compensation is likely compensation that is explicitly written in a contract with a provider. Indirect compensation is often something sponsors may not be aware of and can include things like retention bonuses, or if a sponsor has a PBM, that PBM might be receiving compensation per prescription based on participants’ usage.  

For example, in a class-action lawsuit against Johnson & Johnson earlier this year, the company was accused of failing to exercise prudence in selecting its PBM and agreeing to undesirable contact terms. Specifically, Greenleaf said a consultant was allegedly getting paid by the PBM $6.50 for each prescription that every employee had.  

Benchmarking 

Under ERISA section 408(b)(2), just like a plan sponsor would do in the retirement space, a fiduciary must deem the compensation they are paying to advisers and providers to be reasonable. Similar to how a sponsor benchmarks fees in a 401(k) plan, Greenleaf said a sponsor must do the same with their health care plan.  

“This is not just [benchmarking] your broker, this is everybody that touches your plan [or] that is expected to make $1,000 or more on that plan,” she said. “There are lots of games being played in this space around compensation disclosures.” 

Delaney emphasized the importance of conducting a request for proposals for new PBMs. 

“If you’re using any of the big three PBMs, like CVS, which control about 80% of the marketplace, you’re probably having challenges getting the information [you need],” Delaney said. “Make sure you’ve carved out your Rx program from your medical and that you don’t have the same carrier overseeing both … You really need an expert in the kind of contract language you want to have in there.” 

In 2023, nearly 80% of all prescription claims were processed by three companies: CVS Caremark, the Express Scripts business of Cigna, and the Optum Rx business of UnitedHealth Group, according to data from the Drug Channels Institute. 

Best Practices 

With more lawsuits expected, Greenleaf said it is in sponsors’ best interest to establish a fiduciary committee for their health plan, if they have not already, because this helps establish a process around gathering information and deeming costs reasonable. She said it is important to make sure that fiduciary insurance covers the health care side of the plan, not just retirement, because some polices do and others do not.  

“Forming the committee is important because with the J&J [lawsuit], they didn’t have a committee [and] by default, they named individuals in the lawsuit, and they were all HR people,” Greenleaf said.”