” I don’t see how it’s possible to serve as a fiduciary while not having access to claims data, the ability to hold providers accountable by auditing detailed bills or providing transparency in cost and outcomes to guide participants.” – Chris Shoffner
CFOs And HR Execs Facing Millions In Personal Liability Due To Unmanaged Health Benefits Plans
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- Though the same fiduciary responsibility exists for health benefits, evidence suggests that the vast majority of employers have fallen short.
- I don’t see how it’s possible to serve as a fiduciary while not having access to claims data, the ability to hold providers accountable by auditing detailed bills or providing transparency in cost and outcomes to guide participants.
Dereliction of Fiduciary Duties Triggering Department of Labor Investigations
The first shots across the bow have been fired highlighting how benefits leaders need to pay as close attention to health benefits as they have been paying to retirement plans. The most recent lawsuits name the HR leaders in the companies involved (GAP and CB&I) as defendants since they are listed as the plan administrator (sometimes CFOs are the plan administrators). It’s clear that there is going to be the increased scrutiny for health benefits that has been commonplace for retirement benefits. For example, you can Google “ERISA class action” to find the many cases surrounding retirement benefits going after plan administrators for failing in their fiduciary duties. Similar cases in healthcare could have as far-reaching implications as Obamacare in driving employers to health benefits that deliver value.
This shouldn’t be a surprise in light of the fact that employers commonly spend two and a half times more on health benefits than on retirement benefits. Employers typically have extremely rigorous oversight of retirement benefits with independent investment committees, regular audits and more. Though the same fiduciary responsibility exists for health benefits, evidence suggests that the vast majority of employers have fallen short. After all, we’ve seen how straightforward it has been for employers large and small to spend 20-55% less per capita on health benefits with benefits superior to what 99% of the workforce gets. If a tech entrepreneur/CEO who isn’t a benefits professional (me) can readily find proven solutions (now captured in the Health Rosetta) that have been implemented in small/medium/large employers, school districts and municipalities, it points out that the biggest lie in healthcare is that it’s not possible to control healthcare costs.
I don’t have visibility into GAP’s health benefits. However, if it’s similar to the vast majority of employers, they are spending $2,000 to $5,000 more per employee per year than they should. Even if only a fraction of their 150,000 employees and dependents receive benefits, it’s still millions that could have gone into the employees’ pockets. For example, if there were only 50,000 covered lives in their plan and they achieved only $2,000 in annual savings (a layup with a well-managed plan), that is still $100 million in recurring savings every year that is being squandered.
[Disclosure: As I’ve disclosed many times, the Health Rosetta is an open-source project that provides a reference model for how purchasers of healthcare should procure health services. In my role as managing partner of the Hf Quad Aim Fund, the Health Rosetta is the foundation of our investment thesis.]
Basic ERISA Fiduciary Responsibilities
ERISA is designed to protect employee benefits plans, including retirement and health plans. Under ERISA laws, the people responsible for running the health plans are bound by fiduciary duties. Failure to uphold those duties can result in a lawsuit being filed against the people or organizations responsible for overseeing the benefits plans.
The individuals that are fiduciaries are in a position of trust with respect to the participants and beneficiaries in the plan. Examples of fiduciary’s responsibilities include the following, outlined in Fiduciary News:
- Acting solely in the interest of the participants and their beneficiaries
- Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan
- Carrying out duties with the care, skill, prudence and diligence of a prudent person familiar with such matters
Cigna, United and GAP cases Highlight Risk for Companies and Executives
What is interesting about the two most recent cases is how they were initiated by out-of-network providers. These providers were able to pierce the veil that has kept employers from being able to audit the claims they were paying (itself a remarkably absurd clause an employer would agree to sign). The Cigna CI +1.19% case highlights how an employer and its HR executives expose themselves to legal risk. Mark Flores summarizes the cautionary tale for all self-insured employers:
This bellwether lawsuit in ERISA healthcare claims disputes presents a cautionary tale for all self-insured plan administrators with “Head in the Sand” TPA monitoring practices. Cigna administered self-insured ERISA plan, CB&I and its Plan Administrator, Dennis Fox, were sued for alleged ERISA plan assets embezzlement, deceptively concealed through “fake PPO discounts” and Cigna’s “fee forgiveness protocol scam.”
The most recent case against the GAP and United Health is even more worrying for companies and their executives. Beyond the civil suits, the Department of Labor is now involved. Further, since ERISA requires IRS reporting (IRS Form 5500), the fact that the details of this case show that what the GAP reported (unknowingly) on their IRS forms was incorrect. For example, Form 5500 requires reporting on administrative expenses and whether a service provider received indirect compensation. The case details would imply that GAP’s Form 5500 is technically false even though the GAP was unaware of this:
On May 10, 2016, in the southern district of Texas Federal Court, United HealthCare administered self-insured ERISA plan, GAP Inc. and its Plan Administrators, Cynthia Radovich and Lesley Dale, were sued for alleged ERISA plan assets “self-dealing and embezzlement,” deceptively concealed through an “illegitimate recoupment scheme that financially rewards United for wrongfully recouping valid benefits.”
Chris Shoffner has been a Chief Risk Officer for health plans and a broker/consultant for 401k plans. Shoffner commented on one of the primary risks he observes when stepping in as a fiduciary on behalf of his clients:
Since there is personal financial liability as a health plan or retirement plan fiduciary, I take it very seriously. ERISA covers both and the level of diligence, process and audit that takes place in running a typical 401k is extensive. Typically a health plan has twice as much money running through it and almost none of the same oversight or transparency. I don’t see how it’s possible to serve as a fiduciary while not having access to claims data, the ability to hold providers accountable by auditing detailed bills or providing transparency in cost and outcomes to guide participants. Recent cases demonstrate how companies and their HR executives are putting themselves at serious legal risk. Nearly every employer I see has multiple breaches of their fiduciary duties. Fortunately, it’s very straightforward to remedy the breaches. To do otherwise is a clear dereliction of fiduciary duties.
Think of it this way; if a 401k plan were to purchase shares of a company and the prices varied from $6 to $60 for the same shares on the same day, people would be alarmed. Yet this happens in healthcare everyday.
Benefits expert Craig Lack described the scrutiny on 401k over health benefits to be a case ofstepping over dollars to pick up pennies:
The health plan fiduciary is typically oblivious to the true costs hidden inside their plans in the same way they don’t understand the all-in costs of their 401(k) plan. The major difference is that healthcare waste can easily be ten times greater than the “Bps” being scrutinized inside 401(k) plans.
It’s not hard to imagine how the Department of Labor (DOL) and the IRS’ ears perk up when there are terms like embezzlement thrown around. My source has been asked by the DOL to train investigators previously unaware of these shenanigans that the source described as pervasive.
Remedying Risks Remarkably Straightforward
Earlier I wrote “Benefits Brokers Are Dead. Long Live Benefits Advisors,” about how the old practices that benefits brokers profited from are rapidly changing. In light of the very significant fees benefits brokers can realize from their employer clients, it’s not unreasonable that the employer would expect the broker to be extremely diligent about analyzing the practices of the health plan solutions they put before employers. Most employers are using the services of benefits firms that are public companies or are backed by the deep pockets of private equity firms. It’s hard to imagine how they’ll escape the scrutiny of enterprising attorneys exposing failure of fiduciary duties. Thus, benefits consultancies are feeling the same sense of urgency as their clients to avoid grave legal risk.
I’m often asked by forward-looking benefits consultancies to speak to their teams and clients about how the game is changing just as much for the benefits executives as it is for the healthcare system as a whole. On a daily basis, I hear from benefits consultants who see a great opportunity before them. On the one hand, “The U.S. Has Gone To War For Much Less Than What Healthcare Is Doing To America.” On the other hand, the benefits consultant wields great power with their clients if they step up to the challenge. By virtue of catalyzing the Health Rosetta project that points out the stark difference between the status quo and what forward-looking employers are doing, I’m able to point them in the direction they should take their clients.
Brian Klepper was previously the CEO of the National Business Coalition on Health, an association of organizational health benefits purchasers. Klepper weighed in on the Cigna and United Health cases:
I worry that benefits managers often fall short of their fiduciary duties and put themselves at risk by simply assuming that vendors are acting in patients’ and purchasers’ interests. These recent lawsuits against prominent mainstream health plans administrators clearly suggest that that’s often not the case. The same may be true when benefits managers go along with unnecessary care. US health care is defined by a culture of excess that drives up cost unnecessarily and undermine the stability, not only of health care, but of our national enterprise. The penalties for this type of fraud should be severe. All benefits leaders and their consultants should be overhauling how they manage care and cost, or risk the consequences. It’s particularly notable that the Department of Labor is now arguing that fiduciary dereliction in health benefits is rampant.
The great news for proactive benefits leaders is there is a tremendous opportunity to improve. While employers are spending more than enough to fund quality retirement and health benefits, very few are actually delivering that. One benefits expert quipped, “The bar is so low, a snake could jump over it.”
Klepper was optimistic about solutions:
Realizing far better health care value isn’t hard, but it does require considering approaches that the conventional system won’t offer. Forward-looking employers aren’t satisfied with merely slowing healthcare’s inflation. For example, one large public company had a net 1.7% positive impact on their earnings from partially implementing one of the big spend approaches we recommend. Few things in a CEO’s toolkit have as much potential to move the earnings needle. C-suites that wake up to this reality recognize that risk isn’t limited to a breach of fiduciary duties for ERISA. Not implementing proven benefits solutions may also opens them up to activist shareholders concerns that a company has failed to actively manage health care, the second biggest cost in its supply chain.
There isn’t an HR or benefits consultant who wouldn’t like to report to their CEO that the best way to slash healthcare costs and to increase earnings is to improve health benefits. This is exactly what is being accomplished by deft employers who introduce value-based benefits that are positioned as a new benefit layered on top of existing benefits. These new benefits are warmly embraced by their employees once they understand how it works. With the legal sword of Damocles hanging over benefits leaders, there has never been a greater imperative to act and to act swiftly.