Best practices in the area of ERISA health and welfare plan governance are evolving. Concerned group health plan fiduciaries have been evaluating compliance processes while facing a set of rigorous fiduciary duties imposed by amendments to the Employee Retirement Income Security Act of 1974 (ERISA). In February 2024, a newly filed class action brought these concerns to the forefront.
Read on for analysis of the case and a related discussion of fiduciary obligations for ERISA health and welfare plans.
Introduction
The Consolidated Appropriations Act, 2021 (CAA 2021), amended ERISA Section 408(b)(2) by adding a new Section 408(b)(2)(B) to require certain service providers to issue fee disclosures to employer-sponsored group health plans in a manner akin to employer-sponsored retirement plans.
Then, on December 30, 2021, the Department of Labor (DOL) released Field Assistance Bulletin (FAB) No. 2021-03, a series of eight questions and answers highlighting key portions of the CAA 2021 language, to set a temporary enforcement policy with respect to ERISA Section 408(b)(2)(B). FAB No. 2021-03 stated that the DOL’s enforcement efforts will consider whether a disclosure is “reasonably designed and implemented” in a manner that is a good faith, reasonable interpretation of ERISA Section 408(b)(2)(B); however, it also noted that additional regulatory guidance was not expected. Instead, the DOL has suggested that group health plans look to guidance regarding retirement plans to manage compliance efforts.
In this newly developed regulatory environment, and with ERISA plaintiffs’ firms launching targeted advertisements on social media sites, fiduciary compliance came to the forefront with a recently filed lawsuit against Johnson & Johnson’s group health plan.
This suit against Johnson & Johnson, Lewandowski v. Johnson & Johnson, alleges several breaches of fiduciary duties for unreasonably high fees paid to service providers. Filed in the United States District Court for the District of New Jersey, Lewandowski alleges that Johnson & Johnson, acting as the plan sponsor, the Pension & Benefits Committee of Johnson & Johnson, acting as the plan administrator, and three named executives breached their fiduciary duties to participants in Johnson & Johnson’s group health plan. Specifically, the Complaint alleges that the defendants failed to demand lower prices to administer a prescription drug benefit under the group health plan, resulting in millions of dollars in “losses” for the plan’s participants and beneficiaries.
Lewandowski stems and roots from ERISA Section 408(b)(2)(B) and contains parallels to excessive fee litigation cases brought against ERISA retirement plan fiduciaries over the past decade, which highlighted fees underlying investments chosen by plan fiduciaries. Group health plan sponsors may expect similar claims to be brought in the near future. To avoid costly class actions, prudent fiduciaries of employer-sponsored group health plans should consider looking to fee litigation precedents against ERISA retirement plans as a safeguard.
ERISA Fiduciaries and Group Health Plans
Identifying plan fiduciaries is a critical task that carries lasting implications and, as seen in Lewandowski, can result in personal liability for individuals involved in the administration of the group health plan. As group health plans can be structured in myriad ways, the analysis of who has fiduciary responsibilities can quickly become complicated. For example, group health plans can have different governance structures and many potential service providers — consultants, claims administrator and, as in Lewandowski, pharmacy benefit managers. The extent to which any or all of these people function as fiduciaries is a complicated analysis but necessary to determine the scope of liability in future Section 408(b)(2)(B) suits.
Generally, a person or entity is an ERISA fiduciary to the extent the person or entity exercises: (i) discretionary authority or discretionary control regarding the management of an ERISA plan (including a group health plan as a “welfare benefit plan” under ERISA), (ii) management or disposition of plan assets, (iii) investment advice for a fee, or (iv) responsibility in the plan’s administration. Therefore, regardless of the designations that may appear in plan documents or contracts with outside entities, anyone — even an individual — can become a fiduciary based on the functions they perform for an ERISA plan.
An ERISA fiduciary is held to a high standard of behavior. Fiduciaries are required to act solely in the interest of plan participants and beneficiaries for the exclusive purpose of providing benefits and paying reasonable expenses for administering the plan and in accordance with ERISA’s duty of care and prudence.
In addition, ERISA’s prohibited transaction rules limit the types of transactions into which plans may enter with “parties in interest,” which typically include service providers (e.g., third-party administrators, insurance companies and benefits consultants). As a rule, transactions with parties in interest are prohibited unless an exemption applies. Here, where the plan’s contract or arrangement with the service provider provides “no more than reasonable compensation” to the service provider, the transaction is exempt under ERISA Section 408(b)(2). However, if fiduciaries permit service providers to receive excess compensation, those fiduciaries can be held liable for losses to the plan caused by the prohibited transaction and face allegations of fiduciary breach. Similarly, service providers can be ordered to return the fees received from a prohibited transaction in violation of ERISA.
Consolidated Appropriations Act of 2021 — Fee Disclosure for Group Health Plan Service Providers
As noted above, the CAA 2021 amended ERISA 408(b)(2) by adding a new statutory subsection 408(b)(2)(B) that closely aligns employer-sponsored group health plan fee disclosures with the retirement plan fee disclosure regulations issued by the DOL that went into effect in 2012. ERISA Section 408(b)(2)(B) provides that any contract or arrangement related to a group health plan is not reasonable (i.e., is a prohibited transaction) unless all of the compensation (direct or indirect) that a “service provider” reasonably expects to receive (where $1,000 or more) is disclosed in writing to a responsible plan fiduciary in advance of entering into or extending the contract or arrangement.
Covered “service providers” under the statute are composed of two groups: brokers and consultants. However, ERISA Section 408(b)(2)(B) does not define broker or consultant for purposes of providing covered services; instead, the language expresses a list of subservices in each category. Brokerage services provided to a group health plan include, for example, services related to selecting insurance products, recordkeeping services, benefits administration, pharmacy benefit manager services, wellness plan services and third-party administration services. Likewise, the definition of consulting services mirrors the definition of brokerage services while covering the development or implementation of group health plan processes. As the DOL FAB requires only a reasonable and good faith effort to determine whether the brokerage or consulting services are provided, employer-sponsored group health plans are in a position where service providers can self-classify (thereby determining they are not brokers or consultants) rather than fall under a bright-line test to determine the relationship.
The disclosures mandated by the CAA 2021 are designed to provide group health plan fiduciaries with sufficient information to determine whether a broker’s or consultant’s compensation is reasonable and assess potential conflicts of interest. Lewandowski is likely the first of many such suits, seeking to use the information in these disclosures, or lack thereof, to support participant claims against group health plan fiduciaries and service providers. Moreover, as the nature of the plan’s contractual relationship between brokers and consultants is complex, often involving multiple parties and affiliates, group health plans — particularly large, self-insured plans — face significant hurdles in determining to whom service provider fee disclosure should apply. In addition, where aspects of the contract are concealed as “proprietary,” actually gathering the disclosures under ERISA Section 408(b)(2)(B) can prove problematic.
As seen in the retirement plan fee disclosure context, the failure to monitor these disclosures is the basis of many plaintiffs’ claims alleging breached fiduciary duties. Similar to the regulations in the retirement plan fee disclosure context, the CAA 2021 provides limited relief through an exemption from ERISA’s prohibited transaction provisions only if the group health plan fiduciary requests a disclosure from a service provider and gives notice to the DOL of any failure on the part of the service provider to respond to the request in a timely manner.
Transparency Laws
As the Lewandowski lawsuit presents a novel question regarding fee disclosure for group health plans under ERISA Section 408(b)(2)(B), additional recent requirements under federal law underscore another potential “best practice.” The Transparency in Coverage final regulation issued by the DOL, Department of Health and Human Services, and the Department of the Treasury in 2020, under the Patient Protection and Affordable Care Act of 2010 and CAA 2021, requires group health plans to disclose machine-readable data that set forth payment rates for in-network items and services, out-of-network allowed amounts and prescription drug rates and costs. The CAA 2021 expanded upon the Transparency in Coverage regulation by requiring more prescription drug and medical cost reporting obligations for group health plans. For many group health plans — again, particularly large, self-insured plans — as with the service provider fee information discussed above, this pricing information also rests with third-party administrators and pharmacy benefit managers.
This type of data-driven analysis has proven helpful in retirement plan fee litigation. Now, many circuits require plaintiffs to provide a meaningful benchmark to bring an excessive fee case. That is, the plan’s fees must be unreasonable in light of services offered when compared to another plan of the same size over the same period of time that uses the same method of calculating fees.
While both service providers and group health plan fiduciaries are analyzing and evaluating the amount and usefulness of detailed, machine-readable cost information, it may be possible for the data to provide a meaningful benchmark in the group health plan landscape. Because fiduciaries are now required to have increased access to cost and pricing information of underlying plan benefits, considering how to use data to help evaluate and control plan costs should be top of mind for ERISA group health plan fiduciaries. Identifying the responsible fiduciaries for this function is critical as ERISA plaintiffs’ firms begin using the same or similar data to support claims regarding excessive fees paid by group health plans.
Next Steps
As the actions of ERISA group health plan fiduciaries are highly scrutinized, the following steps should be considered to create a compliance-driven fiduciary process:
- Establish a health and welfare benefits fiduciary committee, adopt a committee charter to set forth responsibilities and any limitations on authority, and delegate fiduciary responsibilities as appropriate.
- Review existing group health plan service provider agreements to confirm whether the broker and consultant disclosure requirements apply, and if so, request and review provider fee disclosures.
- Ensure contracts with service providers address access to sufficient claims and financial data to allow prudent monitoring of plan expenses. This can be done by requiring contracts to address who owns and has access to plan claims and financial data and identifying any affiliates and subcontractors involved in the service provider contract or arrangement.
- Establish a routine process to monitor group health plan fees to ensure that they are reasonable and in accordance with industry standards. This can be done by soliciting new vendor requests, reviewing Form 5500 service provider data and using consultants to gather benchmarking data.
- Periodic review of plan benefit data — service provider fees, benefit pricing, claims audits (for payment accuracy as well as trends in approvals/denials) — has arguably evolved into a fiduciary “best practice.” Documenting the review process can also assist with establishing reasonableness and prudence of fiduciary decision-making.
In anticipation of increased litigation in this area, plan fiduciaries should familiarize themselves with retirement plan fee suits that have gained traction over the past decade. Claims against ERISA group health plan fiduciaries are likely to have many parallels to their retirement plan brethren in terms of the type of claims, compliance and fiduciary issues.
