On January 26, 2022, the Supreme Court issued an opinion which may prove to be one of the most significant developments for ERISA health plan fiduciaries in recent years. While the term “healthcare” does not appear once in the decision, I believe that this case may be more disruptive to the $1 trillion private health insurance industry than any regulatory or legal action thus far. Employer-sponsored group health plans cover some 179 million Americans, about fifty-five percent (55%) of the country’s total population. The Hughes v. Northwestern University* decision has laid the groundwork for a robust and dynamic litigation strategy against health plan fiduciaries; assuming an enterprising plaintiffs’ attorney is willing to take on a piece of the $1 trillion dollar opportunity. The Hughes decision also gives health plan fiduciaries a road map to risk mitigation. Will health plan fiduciaries act proactively in the absence of an external catalyst that forces their hand? Time will tell.
First, I will go over the relevant facts of the Hughes case, which are primarily focused on fiduciary roles and responsibilities in the context of retirement plans. Parallels will be drawn in the context of health plan administration. The threat of liability exposure will be evident, if not downright existential. Finally, this article will offer some practical advice and potential solutions for affirmatively and proactively mitigating the risks highlighted in Hughes.
At Issue in Hughes
The question before the Court in Hughes was whether the petitioners – current and former participants in two retirement plans maintained by Northwestern University– plausibly stated a claim for breach of fiduciary duty. The petitioners, three current or former employees of the University who participated in the plans, initially sued in Federal district court against the University and its retirement committee alleging that that they violated their statutory duty of prudence by:
failing to monitor and control record-keeping fees, resulting in unreasonably high costs to plan participants;
offering mutual funds and annuities in the form of retail share classes that carried higher fees than those charged by otherwise identical share classes of the same investments; and
offering too many options that were likely to confuse investors.
The Seventh Circuit had dismissed the plaintiffs’ complaint, reasoning that the claims failed as a matter of law because Northwestern’s plans contained numerous investment options that Hughes conceded were prudent, so Hughes “could not complain about the flaws in other options.”
The Supreme Court ultimately remanded the case in order to allow Seventh Circuit to reconsider Hughes’ complaint under the proper legal standard and cautioned that, “[a]t times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.” Under this revised standard of review, the Seventh Circuit could determine whether, as plaintiffs’ alleged, the plan fiduciaries imprudently selected or failed to monitor plan investments with excessive fees that underperformed alternative, lower-priced investments, whether the plan fiduciaries monitored all plan investments and failed to remove imprudent investment options from the plan’s investment menu, and whether they failed to eliminate poor investments from the retirement plan within a reasonable time, all of which could constitute a breach of fiduciary duty under ERISA.
Parallels from Hughes to Health Plans
It doesn’t take much foresight to see the parallels here to health plan fiduciaries.
Given the recent statutory and regulatory focus on the importance of transparency and ERISA fiduciaries’ access to data related to both a cost and quality, its not a stretch to assume that health plan fiduciaries should either be regularly reviewing these data points, or in the absence of their availability, demanding them from their vendors.
Retirement plan investing is undoubtedly a complex endeavor but, would anyone for even a second assert that it is any more complex than the health benefits arena into which we throw our employees-unguarded and ill-informed? Can putting an ill-advised and imprudent investment choice in front of an employee/investor be any more dangerous than putting an employee at the mercy of a hospital with an infection rate three times higher than benchmark, or designing a health benefits plan that puts life-saving treatments out of financial reach due to formulary and/or plan design? We know which hospitals bankrupt people, yet we continue to put them in our network. We know which providers have markedly better health outcomes and which have markedly worse health outcomes, yet we treat them the same and leave it to the member to figure out.
The Path Forward
The path forward must be guided by a set of principles, that can be grounded in what I call “the fiduciary framework.” When making any decision in the capacity of a fiduciary, one must evaluate that decision by asking these questions:
Am I acting in the sole interest of plan participants with the exclusive purpose of providing benefits;
By making this decision, am I in any way removing these assets from being held in trust;
Have I apprised myself fully of all plan expenses, assessed them for reasonableness, and have I put the financial controls in place to ensure that only those expenses are paid;
In making this decision, am I acting with the skill, prudence and diligence of a prudent person acting in a like capacity that is familiar with such matters?
While most health benefits plan administrators know they are subject to ERISA and therefore act as fiduciaries, many simply ignore the true implications and obligations that this status confers.
For example, if you are a self funded health plan ERISA fiduciary and you utilize a Blue Cross Blue Shield licensee as your carrier, the self-funded dollars that are paid to your carrier are commingled with other employer funds and fully insured account funds, and your self-funded dollars are not subject to third party oversight if you are accessing the Blue Card System (i.e., BCBS California member accessing BCBS Massachusetts network). Thus, I am now fully aware that self-funded funds are not being held in trust, they are in fact commingled, and I have no way of assessing the financial controls in place, or assessing for reasonableness, the disbursement of these funds once they are handed over to my carrier.
Another good example of this exercise this fiduciary framework exercise is in the context of fees. When a health plan administrator has failed to, whether by design or dereliction, to apprise him/herself of all fees being paid by the health plan, including broker/consultant fees, third party recovery services fees, “value-based provider” fees, and any other direct or indirect fees otherwise derived from the health plan. In the absence of awareness, the ability to assess for reasonableness is non-existent.
While the path ahead is not straight, downhill or smooth, it is both navigable and traversable with the right fiduciary framework and a bit of grit and tenacity. Employers must realize that they can no longer play victim to the runaway trend train– in fact – plan sponsors must come to the hard and unpleasant realization that they have been complicit in its continuation. To date, this complicity could largely be excused because of perceived information asymmetry; however, the excuse no longer holds up in the current regulatory and legal environment.
ERISA fiduciaries in the retirement plan space learned the hard way, with almost a decade of fiduciary litigation under their belts and billions spent, they continue to pay a hefty price for their failure to proactively protect against liability. The trend of 401(k) lawsuits was accredited to the maturing body of law under the ERISA and several new tools available to plaintiffs' attorneys, like robust databases that disclose true fee levels for retirement plans and benchmarking capabilities across products. Sound familiar?
Whether you’re a PE firm doing due diligence, General Counsel responsible for organizational risk identification and mitigation, or a C-Suite Executive that has an interest in the financial and/or reputational well-being of your organization; the time is now to identify the fiduciaries within the organization, then methodically undertake a well-documented fiduciary framework approach to all aspects of decision making.
Great summary. Thanks for sharing. I wholeheartedly agree this case presents serious implications to self-insured health plans