Fiduciary lawsuits: What benefits professionals can learn from the past about future litigation
It’s critical that employers and their benefits advisors take the fiduciary standards learned from retirement plans and apply them to their health plans.
Employees from both organizations claimed that the company mismanaged the cost of their health care plans and forced thousands of U.S. employees to overpay for prescription drugs. These class action lawsuits may be among the first in the health care plan arena, but with decades of experience in the retirement plan space, I’ve witnessed numerous fiduciary breach cases tied to retirement plan mismanagement. The parallels between these retirement plan lawsuits and the current issues facing employer-sponsored health care plans are striking.
While the first few retirement plan lawsuits weren’t successful, plaintiff attorneys quickly realized that the best approach to successful litigation was to focus on the excessive fees charged in 401(k) plans as a fiduciary breach. By 2020, the value of class action settlements reached over $6.2 billion, according to sources. A similar strategy is now playing out with health care plan benefits.
Although the Employee Retirement Income Security Act of 1974 (ERISA) has always covered both retirement programs and health and welfare plans, many employers got a pass on health care plan fiduciary responsibility oversight due to their limited access to information. That changed with the Consolidated Appropriations Act (CAA) of 2021. The CAA explicitly prohibits the use of “gag clauses” in agreements between health plans (including employer-sponsored group health plans) and covered service providers. The purpose of these provisions is to enhance transparency in health care by ensuring that plan sponsors and participants have access to vital information about costs and provider quality, ultimately empowering them to make better-informed health care decisions.
Through the CAA, employers are increasingly getting the data they need to select service providers, monitor their performance and replace them when necessary. The elimination of gag clauses pushed employers to become more informed about health care costs, not only meeting their requirements as fiduciaries, but also simply doing what’s truly right for their employees and their health. With knowledge comes power, and employers must establish prudent processes for their health care plans, similarly to the approach they took with retirement plans 20 years ago and continue to do today.
Just like the class action lawsuits around mismanagement of retirement plans, the initial lawsuits alleging fiduciary breach with pharmacy costs are against very large companies. However, as history shows on the retirement plan side, once plaintiff’s attorneys begin understanding what makes the strongest case, they are more apt to file against any size employer.
The good news is that retirement plan class action lawsuits have laid the groundwork for how employers can be responsible fiduciaries when it comes to health care plans: Employers should acknowledge themselves as a fiduciary, thoroughly review and audit contracts, and trust but verify benefits advisors and any covered service provider they use.
Three steps to take today
First, employers should acknowledge themselves as a fiduciary. In doing so, employers should establish a fiduciary committee, put together a charter for that committee and make sure that they get fiduciary liability insurance for that committee. Employers have a responsibility to their participants. They must always act in the best interest of their participants, not the advisor, third-party administrator, pharmacy benefit manager or any other covered service provider.
Second, it’s imperative for every fiduciary committee to thoroughly review and audit contracts. Committee members should review all documents and conduct thorough investigations into any potential conflicts of interest. Think of it like a self-audit. This will help the committee identify what they have in place today, what needs immediate attention, and what may be able to be delayed. The key is to document everything. As a fiduciary, employers must establish a prudent process, adhere to it, and document it. Employers must ensure that it’s conflict-free and repeatable. Ultimately, it’s not about the outcome; it’s about the process and acting in the best interest of their participants.
Lastly, employers should understand the relationship that the brokers/benefits advisors and/or service providers have with the products they sell, understand how they get paid and know if the services that they’re providing produce meaningful outcomes. Blindly trusting an advisor or service provider without having a full picture can lead to an unintentional breach of fiduciary responsibility. Not thoroughly vetting or researching providers and deferring to the only option an advisor or provider puts out there isn’t just irresponsible – it may be a huge disservice to employees and the possibility of better value options. Again, this is where it is important to have that fiduciary committee established to perform a self-audit to identify and resolve any conflicts, some of which could pop up from not fully vetting a broker’s presented options.
Learning for tomorrow
Litigation in the health care plan space is increasing, and employers need to stay vigilant. The first employer-sponsored health care plan class action lawsuit claiming potential breach of fiduciary responsibility occurred only three years after the CAA 2021. It took almost 20 years in the retirement plan area for the first class action lawsuit.
Employers can learn from the past and class action lawsuits for mismanagement of retirement plan benefits. At the time these lawsuits were filed, few employers knew what fiduciary standard meant; many didn’t know how to establish a fiduciary process, and they didn’t know what the cost of a fiduciary breach would be. Now, most employers know what fiduciary standards are and today, they need to know they’re going to be held to the same standard on their health care plan.
With a microscope on the cost of health care over the past few years, especially around price transparency and surprise billing, it’s critical that employers and their benefits advisors take the fiduciary standards learned from retirement plans and apply them to their health plans.
Jamie Greenleaf is Co-Founder of Fiduciary In A Box.