What Are the Fiduciary Risks of Self-Funded Health Plans?

In response to relentless increases in healthcare costs and broker despair, insurance carriers, MGAs, TPAs, and consultants are encouraging employers of all sizes to self-insure their health plans. For the right-fit employer, doing so can provide an opportunity to reduce costs, but agents and brokers should be aware that self-insurance isn’t a magic bullet. There are several reasons why these plans can be problematic for both employers and their employees. In this blog, we’ll address the differences between a self-funded and fully insured health plan as well as the fiduciary liability risks involved in self-insurance.

What is a self-funded health plan?

In a self-funded health plan, an employer is fully responsible for defining the plan’s benefits and providing and paying for those benefits to covered individuals per the terms of the plan. Meanwhile, in a fully insured plan, an employer buys a group health insurance policy from an insurer, the policy documents define the plan’s benefits, and the insurer assumes full responsibility for benefits to all covered individuals.

Where do the risks lie?

In a typical self-funded health plan, there are a minimum of three contracts: the health plan itself, a stop-loss policy, and a claims administration agreement. This last contract is where fiduciary risks often emerge. But to best understand the risks coming from the claims administration contract, we must first highlight the fiduciary responsibilities and liabilities arising from the Employee Retirement Income Security Act of 1974 (ERISA).

Under ERISA, plan fiduciaries—anyone who exercises discretion with respect to management or administration of the plan—have several mandated duties. Among them is the duty to pay only reasonable plan expenses. Thus, plan fiduciaries (employers, in the case of self-funded plans) must identify fees and ensure they are reasonable. However, claims administrators frequently charge fees that would be difficult to defend as “prudent and reasonable.”

The most onerous and imprudent fees typically are due to the administrators’ charges for their cost containment programs. For example, all medical bills must be repriced since medical providers do not bill according to their network contract or other agreed upon amount. There is no argument that it is a necessary service to adjust the “billed amount” to the “agreed amount” on all medical services invoices. The issue is how much the administrator charges for the service.

Some administrators charge on what is called a “percentage of savings” basis for their bill repricing services instead of a flat-fee per bill. With this arrangement, the cost containment fee is dependent on the medical provider’s original bill, which is irrelevant to what the medical provider will be paid. Under this fee arrangement, the charge to reprice a medical bill could run into the tens of thousands of dollars. It is almost laughable, if it was not so serious, when the claims administrator chooses to establish a limit and agrees that no single bill repricing will cost more than $50,000.

Agents and brokers should also note that it is common for claims administrators to fail to disclose all of their fees. Obviously, it is not possible to determine whether or not the fees are prudent and reasonable if they are not disclosed. The moment the employer signs such contracts, they are most likely already in violation of ERISA.

What are the consequences of an ERISA violation?

If the Department of Labor determines that the fees are not prudent and reasonable, then the employer will likely have to reimburse the plan for the excessive fees. Additional penalties may also be assessed. To add insult to injury, it is highly unlikely that the employer’s stop-loss policy will reimburse them for cost containment fees, so they could be on the hook for thousands, if not tens of thousands, of dollars in expenses for many of their plan’s claims.

Agents and brokers, ask yourself, “How many employers are aware of the potentially catastrophic financial risks mentioned above? And how many of them would continue to self-insure their health plan costs if they were aware?” Substantial opportunities await those who assist employers in understanding these risks and making better decisions.

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