Art by Marc Rosenthal

Fiduciaries and service providers to employee benefit plans covered by the Employee Retirement Income Security Act of 1974 should prepare now for what could be a new wave of class action ERISA fee and expense litigation—this one crashing down on health care plans.

Backdrop of Retirement Plan Litigation

In the last two decades, hundreds of class action lawsuits have been filed against fiduciaries of ERISA retirement plans alleging their imprudence and lack of oversight of plan finances caused their plans to pay too much for investments and plan administration. Those lawsuits, netting hundreds of millions of dollars for participants and their attorneys, typically include claims that plan fiduciaries imprudently selected and retained investment options with high fees when lower-priced options were available and paid too much for recordkeeping and investment management services.

Some of the attorneys who spearheaded this retirement plan litigation tsunami may now be turning their attention to health care plans. With new health plan disclosure and transparency laws in place, the groundwork is laid for lawsuits focused on health plan expenditures and fees. Like the retirement plan cases, the anticipated health plan fee litigation will be costly to defend. As this litigation takes shape, health plan fiduciaries and service providers should carefully review what they respectively pay and charge for health plan benefits and services.

Joanne Roskey

Legal and Regulatory Framework

ERISA Section 404(a)(1) imposes on plan fiduciaries a duty to act prudently and solely in the interests of participants and beneficiaries when managing and administering employee benefit plans and the assets of those plans. To comply, ERISA fiduciaries must pay only reasonable plan expenses. In addition, under ERISA Section 406(a)(1)(C), a fiduciary engaging a service provider to give services to a plan will cause an ERISA-prohibited transaction if the plan’s contract or arrangement with the service provider does not meet the “reasonable compensation” criteria set forth in the prohibited transaction exemption in ERISA Section 408(b)(2). Fiduciaries can be held liable for losses to plans caused by their fiduciary breaches and prohibited transactions, and service providers can be ordered to return to plans the fees they received in violation of ERISA. Fiduciaries and service providers are also subject to civil penalties under ERISA Section 502(i) and (l).

Recent amendments to ERISA Section 408(b)(2) will play a role in any upcoming health plan fee and expense litigation. The statutory amendments, which added new subsection 408(b)(2)(B) to ERISA, closely align with retirement plan fee disclosure regulations that went into effect in 2012. Under the new subsection, as a prerequisite for certain plan contracts or arrangements to be considered “reasonable,” “brokers” and “consultants,” as defined by the statute, who provide services to ERISA health plans, must disclose all direct and indirect compensation they or their affiliates and subcontractors reasonably expect to receive in the amount of $1,000 or more in connection with their services to a plan. These disclosures must be made in writing to a responsible plan fiduciary in advance of entering or extending a covered service provider contact or arrangement, and failure to comply with the disclosure requirement renders the contract or arrangement a prohibited transaction under ERISA.

Private litigants and the U.S. Department of Labor, which enforces ERISA as to employer-sponsored employee benefit plans, will likely try to use information in these disclosures, or the lack thereof, to support legal claims against health plan fiduciaries and service providers challenging the reasonableness of service provider fees and other plan expenditures. The new law exempts health plan fiduciaries from the prohibited transaction provisions of ERISA Section 406(a)(1)(C) and (D) when a fiduciary requests from a covered service provider information about direct and indirect compensation 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. 

New laws aimed at increasing health care cost transparency will, likewise, have an impact on health plan fee and expense litigation. The Transparency in Coverage regulation issued by DOL and the U.S. Departments of Health and Human Services and the Treasury in 2020 requires group health plans to disclose machine-readable data setting forth payment rates for in-network items and services, out-of-network allowed amounts and prescription drug rates and costs. This regulation followed a similar 2019 Hospital Price Transparency rule issued by HHS that requires the disclosure of hospital pricing and negotiated rates. The Consolidated Appropriations Act of 2021 added to ERISA more prescription drug and medical costs reporting obligations for health plans, and the departments will publish the reported information biannually. The CAA also added prohibitions on the use of “gag clauses” in plan contracts with health care providers, third-party administrators and other service providers that restrict access to and disclosure of claims and encounter data and cost and quality of care information. Because health plan fiduciaries now have increased access to cost and pricing information, they will be expected to use it to help evaluate and control plan expenditures.

Several ERISA lawsuits, including one discussed below, have been filed by plan fiduciaries against TPAs seeking access to claims and financial data and claiming that the TPAs failed to carry out their duties in accordance with ERISA and their TPA contracts and engaged in self-dealing, causing losses to the plans. These lawsuits assert that fiduciaries need access to plan claims and financial data to carry out their fiduciary oversight of TPA plan administration and seek to hold TPAs liable as fiduciaries for allegedly generating undisclosed and excessive compensation through their handling of plan assets. The prevalence of these types of lawsuits against TPAs and other service providers will likely increase as health plan fiduciaries face heightened risk of litigation and liability for excessive plan fees and expenses, despite significant legal questions that must be resolved about whether the TPAs qualify as ERISA fiduciaries and whether the funds at issue are plan assets.

One silver lining for employers and plan fiduciaries that end up defending ERISA class action lawsuits by plan participants and beneficiaries asserting that health plan fees and expenses were too high is that the court may find those plaintiffs do not have enough at stake, or “standing” to sue. Several federal courts, including the U.S. 9th Circuit Court of Appeals, have ruled in recent ERISA cases brought by health plan participants and beneficiaries that the plaintiffs did not sufficiently allege a cognizable injury or demonstrate a concrete stake in the outcome of the litigation, which are necessary to claim standing, because their benefits were not adversely affected by the alleged fiduciary misconduct or their assertions that the complained of conduct increased their costs were too speculative. This caselaw is still evolving but may provide an effective strategy for getting cases dismissed early before protracted and costly discovery takes place. Standing issues, however, will not derail DOL ERISA lawsuits against health plan fiduciaries and service providers.

Possible Fee and Expense Targets

Pharmacy benefit managers’ compensation is a prime target for litigation against fiduciaries. PBMs generate revenue by charging health plans administrative and transaction fees for their services, but they also profit from “spread pricing” by retaining the largely undisclosed difference between the amount they receive in benefit payments from plans and the lower amount they pay pharmacies or drug manufacturers for drugs. They may also obtain rebates and other undisclosed revenue from manufactures based on the volume and price of drugs they administer.

Although some manufacturer rebates paying for preferred placement of often higher-cost drugs on plan formulas may be passed onto plans, at least in part, whether those rebates justify the higher cost of the drugs on a formulary is not an easy calculus. This scenario evokes questions that retirement plan fiduciaries have had to address in court: if it was reasonable and prudent to place higher-price retail shares on a plan’s investment platform to generate revenue-sharing that can offset plan recordkeeping and other administrative expenses.

Service provider fees and compensation, sometimes undisclosed to plan fiduciaries, arising from repricing or renegotiation of health care provider fees are likely to be another area of focus. A recent lawsuit against Aetna illustrated the types of service provider compensation plan fiduciaries may need to consider when evaluating the reasonableness of plan expenditures.

In Kraft Heinz Co. Employee Benefits Administration Bd. v. Aetna Life Insurance Co., the plan’s benefits committee asserted that Aetna, as a TPA, breached its fiduciary duties under ERISA when it reprocessed and repriced both in-network and out-of-network claims. The lawsuit claims Aetna paid providers less than the amount charged to the plans for the claims, keeping the difference as undisclosed revenue and using some of those funds to pay the undisclosed fees of subcontractors. The plaintiffs also faulted Aetna for allegedly failing to give them access to claims and financial data to allow them, as plan fiduciaries, to monitor Aetna’s “handling of funds and associated payment integrity.”

Hidden fees tacked onto benefit expenses may be a target. The DOL’s well-publicized 2017 lawsuit and settlement involving MagnaCare Administrative Services in illustrated this practice. The DOL asserted that the TPA violated ERISA by charging plans an undisclosed markup over the actual amounts paid by the TPA to providers of ancillary medical services, such as laboratories.

According to the DOL complaint, this markup was in addition to a per-employee monthly fee for network access and plan management. The DOL claimed that although the TPA contract referenced a management fee of an unspecified amount, the TPA’s monthly and year-end summaries of direct and indirect fees paid by the plans did not disclose the amounts paid as management fees.

The new Section 408(b)(2) health plan disclosure requirements could be used as a sword against plan fiduciaries who fail to receive or ask for disclosures that should detail fees and other forms of indirect or undisclosed compensation, such as the undisclosed management fees in the MagnaCare case.

Expenses and fees paid to obtain insurance coverage, including stop-loss policies, are likely to be probed. Plan fiduciaries need to pay attention to how much they are paying for insurance coverage for the benefits provided, whether annual rate increases are supported by utilization and market data and the amount brokers are obtaining in total fees and compensation.

Broker compensation models can take many forms, including commissions on premiums paid, flat fees per employee per month and fee-for-performance arrangements that reward brokers for reducing costs. There can be additional forms of broker compensation from third parties, such as marketing and service fees and bonus incentive payments.

Fiduciaries who fail to monitor and correct the expenditure of plan assets on claims that are not covered under plan terms or are paid in error at rates higher than permitted under plan documents and agreements are potential targets for ERISA fiduciary breach claims. Similarly, a fiduciary’s failure to monitor and account for if and how service providers recover mistaken claims payments, and whether they are collecting unreasonable fees on those recoveries, are also potential issues for ERISA fiduciary litigation.

Preparing for Litigation

Given the complexity of health care pricing and contracting, assessing the reasonableness of health plan fees and expenses is not easy. Plan fiduciaries may not have sufficient information about, or access to, claims payments and other financial data or their TPA’s or insurer’s pricing and payment practices. Service providers, in turn, may not voluntarily disclose third-party or other compensation they are receiving in connection with their services, and depending on the type of services and sources of payments at issue, may have no legal obligation to do so under the SectionSearch 408(b)(2) disclosure provisions or otherwise. Even if a fiduciary were to gain access to plan-level service provider fee and other revenue information, comparing one plan’s costs and expenses to other plans in the same geographic area or industry can be extremely challenging, especially when plans contain customized design features.

Fiduciaries and service providers should act now to mitigate the legal risks associated with lawsuits alleging health plans paid unreasonable and imprudent fees and expenses. The following actions will make plan fiduciaries and their plans and plan service providers less attractive targets for litigation or at least increase the chance of an early court ruling in their favor in cases filed against them.

Health plan fiduciaries should:

• Obtain direct and indirect compensation and fee disclosures from service providers and take advantage of the tools provided in ERISA Section 408(b)(2) if disclosures are not forthcoming.
• Assess how their plans’ fees and expenses compare with market rates and act to lower costs, if needed. This can be done through solicitation of requests for proposals from new vendors, review of Form 5500 service provider data and using consultants with access to benchmarking data.
• Utilize—and ask service providers and consultants to utilize—the price comparison data contained in the new transparency tools to compare and evaluate plan costs and service provider compensation.
• Ensure contracts with service providers clearly address access to sufficient claims and financial data to allow for fiduciary monitoring of plan expenses, service provider compensation and service provider performance.
• Engage in meaningful oversight of service provider performance and compliance with plan and contract terms, including conducting plan audits.
• Prioritize review and analysis of plan costs and service provider compensation by establishing cost review committees with responsibility for monitoring costs and fees and for developing policies and procedures for that purpose.
• Document all activities taken to review, compare and manage health plan costs and service provider compensation and performance.

Plan service providers should:

• Determine if they are covered under the Section 408(b)(2) health plan disclosure requirements and, if so, work with counsel to prepare appropriate disclosure documents.
• Be prepared to respond to fiduciary and DOL fee disclosure requests and be ready to defend any decision not to disclose fee information.
• Assess if fees and overall compensation are in line with market rates for similar services.
• If service providers qualify as ERISA fiduciaries, assess if they are generating undisclosed revenue using plan assets to which ERISA fiduciary duties may attach.
• Ensure contracts with plans clearly address who owns and has access to plan claims and financial data.
• Anticipate and prepare for health plan and health plan fiduciary requests for increased access to plan claims and financial data and assess litigation risks attendant to those requests.
• Document all activities taken to review and compare the reasonableness of fees, plan charges and overall compensation.

Fiduciaries and service providers should consult experienced ERISA litigation counsel to help them evaluate and reduce litigation risk. The importance of proactively reviewing plan fees and expenses and maintaining documentation demonstrating the prudent processes used to control costs cannot be overstated and will serve as the foundation of a sound legal defense.

Joanne Roskey is a member in Miller & Chevalier’s ERISA litigation and employee benefits practice. Prior to her current role, Roskey served as deputy associate solicitor in the Department of Labor’s plan benefits security division and as chief of the division of health investigations for the DOL’s Employee Benefits Security Administration.