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Health Plan Fiduciary FAQs: 9 Best Practices for Concerned Plan Sponsors

Health plan fiduciary lawsuits pose a new risk for employers. As businesses scramble to insulate themselves from accusations of benefit mismanagement, it’s useful to keep these best practices in mind.

Until recently, plan sponsor fiduciary obligations under the Employee Retirement Income Security Act (ERISA) were discussed much more frequently in the context of employer-sponsored retirement plans than health and pharmacy benefit plans. The 2024 class action lawsuit against Johnson & Johnson has brought a lot of attention to the fact that ERISA imposes fiduciary obligations on health and pharmacy plans as well, and it is important for employers and other covered entities to understand and abide by these obligations.

The Consolidated Appropriations Act of 2021 (CAA) made numerous changes to ERISA with the aim of reducing healthcare costs and increasing protections for participants of health and pharma plans. These new CAA provisions increased the amount of information available to health plan sponsors and administrators and may have also played a role in raising the profile of their fiduciary obligations.

Recent class action lawsuits against health plan sponsors could be the beginning of a new legal trend.

The class action fiduciary lawsuits that are now being filed against major employers such as Johnson & Johnson and the Mayo Clinic could be the beginning of a new litigation trend. In these lawsuits, health and pharmacy plan sponsors are being sued by their own employees for breach of fiduciary duties due to alleged mismanagement of health and pharma benefit offerings. In the Johnson & Johnson complaint, allegations were made that this mismanagement resulted in unnecessarily high costs for plan members, and that these high costs constitute a violation of plan sponsor fiduciary obligations under ERISA. Other lawsuits have been filed along similar lines as well, but these two are the most high-profile cases at the time of writing.

Whether you’re a seasoned CHRO or an HR generalist, these cases serve as a useful wake-up call. While the specific allegations about each of these companies are quite different and the fate of these lawsuits remains uncertain, there is no doubt that all health plan sponsors can benefit from auditing their plan administration practices for fiduciary compliance.

For those looking to better understand these lawsuits and their implications, the following FAQs are a good place to start:

Q: What is a health benefit plan fiduciary?

Under ERISA, a benefit plan fiduciary is any individual or entity that exercises authority or control over an employer-sponsored benefit plan or the management of said plan. This means that both businesses themselves and the individual employees who help facilitate a company’s benefit offerings could be considered plan fiduciaries.

Many Americans are used to hearing the word “fiduciary” in a financial or investment context, and the core meaning of the term is the same here. The duties of care and integrity imposed on fiduciaries are among the highest, if not the very highest, in the common law. The critical and defining duty of a fiduciary, which is also the key element in the two legal cases mentioned above, is that a fiduciary must act in the best interest of their clients or plan members. This fundamental fiduciary imperative holds true in a benefit plan context as well.

Q: What are the obligations of a health benefit plan fiduciary?

To answer this question, it is again useful to reference the fiduciary duties of a financial advisor or retirement plan sponsor. In a financial context, fiduciaries are obligated to give unbiased financial advice and provide a product or service that assists their clients with achieving their financial goals.
The same principle shines through for health plan fiduciaries: plan sponsors are obligated to provide their plan members with competitive, transparent, and ethical health and pharmacy offerings that assist their members in their goal of accessing high-quality medical and pharmacological care at a cost-effective rate.

Though these obligations sound simple in theory, it can be difficult to execute them in practice. This is doubly true when one considers the skyrocketing costs and lack of transparency within America’s healthcare system, which presents plan sponsors with an inherently crooked playing field.

However, just as the job of a financial fiduciary isn’t to secure guaranteed financial returns for their clients, the job of a health plan fiduciary isn’t to secure an objectively good deal for their plan members. Instead, fiduciaries are obligated to do the best job they can for their clients, and to do so in a provable and legally defensible manner. Specific information about best practices can be found at the end of this article.

Q: What liability could employers face for violating fiduciary obligations?

Any person who is a fiduciary with respect to a plan is liable for breach of fiduciary duty as laid out in ERISA. Liability can include personal liability for losses caused to the plan, personal liability to restore the plan any profits that the fiduciary made through the use of plan assets, and other equitable or remedial relief, as the court may deem appropriate.

The Johnson & Johnson case is noteworthy for naming individual employees of the corporation.

The Johnson & Johnson case, which named individual employees of Johnson & Johnson, offers an insightful look into the possible liabilities that fiduciaries may face when they fail to fulfill their responsibilities. If fiduciaries fail to follow their fiduciary duties, they could quickly become personally accountable for compensating any losses to the plan or for returning any profits gained from the inappropriate use of the plan’s assets due to their actions.

In addition to this, plan sponsors should also consider the intangible but important potential for negative reputational consequences.

Q: What best practices should health benefit plan fiduciaries follow?

Health plan fiduciaries should strive to manage and administer their benefit offerings in a manner that is ethical, transparent, on par with industry standards, and as cost-competitive as possible. It is imperative that this be done in a systemic, deliberate, and well-documented fashion in order to insulate your organization from accusations of mismanagement or impropriety. More specifically, here are nine fiduciary best practices for health plan sponsors to consider:

1. Health Plan Documentation Reviews

Regularly review and update plan documents to ensure they meet legal requirements and align with the fiduciary principles outlined above. Scheduled reviews can help anticipate and adapt to changes in the regulatory landscape, minimizing legal risks.

2. Vendor Due Diligence and Cost Benchmarking

Conduct thorough due diligence on current and potential vendors to assess their capabilities, competitiveness, and track record. Continuously monitor existing vendors to ensure they meet performance standards and offer cost-effective solutions. Benchmark plan costs against industry standards to ensure financial prudence and competitiveness.

3. Data-Collection and Risk Management Initiatives

Implement strategies to proactively identify and mitigate potential threats to the plan’s financial stability and participant satisfaction. This includes regular audits, financial assessments, and gathering participant feedback to address risks early.

4. Compliance Adherence and Conflict of Interest Avoidance

Stay abreast of regulatory changes and ensure strict compliance with ERISA and other relevant laws. If in-house resources are insufficient for these tasks, consider contracting third-party assistance. Lastly, include specific measures to avoid conflicts of interest and ensure that all decisions made are in the best interest of the plan participants rather than for any ulterior motive. This is a major component of the Johnson & Johnson lawsuit and may be of particular importance for pharmacy plans.

5. Education and Training

Provide educational resources and regular training sessions to help both executive decisionmakers and frontline benefits administrators to understand and appreciate their fiduciary obligations. Include materials detailing the potential risks of noncompliance in order to ensure that the stakes are clear.

6. Transparent Communication

Maintain open lines of communication with plan participants, clearly informing them of changes, rights, and procedures related to their health and pharmacy benefits. This type of transparency empowers participants to make informed decisions while also reducing legal risk.

7. Third-Party Reviews

Engage independent third-party reviewers to assess the plan’s compliance with fiduciary standards and identify areas for improvement. This external validation can provide insights that internal reviews might miss and reinforces a commitment to transparency and accountability.

8. Documentation and Record Keeping

Maintain detailed records of all decisions made regarding the health plan, the rationale behind these decisions, and the information that was used to make them. This ensures readiness for any external audits or reviews and supports compliance and accountability.

9. Proactive Cost-Containment Efforts

One of the central allegations against both Johnson & Johnson and the Mayo Clinic is that health plan mismanagement led to unnecessarily high costs for plan participants. Organizations that actively make an effort to understand what is driving their plan waste and investigate ways to lower plan premiums without reducing the quality of coverage will be well-positioned to weather legal challenges.

In light of the new legal trend of health plan fiduciary lawsuits, HR professionals must reassess their approach to fiduciary responsibilities and health plan management. By embracing the best practices above, organizations can fulfill their obligations, reduce their legal risks, and potentially even lower their plan costs.

For more information, tune into our on-demand webinar A Cost Containment Wake-Up Call: Why Plan Members are Suing Their Employers, hosted by leaders of OneDigital’s compliance, employee benefits, and pharmacy consulting teams.