[co-author: Erin Steele]
In DepthSponsors and fiduciaries of health and welfare plans should be aware of a recently filed class-action lawsuit against alleged fiduciaries of a health plan. It challenges health-plan fiduciary oversight and reasonableness of fees and is similar to actions against fiduciaries of defined-contribution retirement plans. The action highlights the importance of establishing and documenting prudent fiduciary processes for making decisions on behalf of health and welfare plans.
A class of participants and beneficiaries in pension, 401(k), and health and welfare plans sued the Charlotte-Mecklenburg Hospital Authority (d/b/a “Atrium”) in the Western District of North Carolina. Although the primary issue is whether these plans were improperly designated as governmental entity plans, which are exempt from the Employee Retirement Income Security Act of 1974 (ERISA), the key issue for health-plan fiduciaries is whether Atrium retained a costly, affiliated entity as a third-party administrator for its health plan and failed to ensure that participants paid only ‘reasonable’ fees for services, co-insurance and deductibles.
Regarding Atrium’s health plan, the complaint alleges a prohibited-transaction claim based on the plan’s retention of MedCost as the network provider and third-party administrator. The plaintiffs allege that MedCost is 50 percent owned by Atrium, thus a “party-in-interest” under ERISA’s prohibited-transaction provisions and that the arrangement is prohibited under ERISA unless exempt by one of ERISA’s exemptions from the prohibited-transactions provisions (¶139). One such exemption applies to arrangements between a plan and party-in-interest if the party-in-interest provides services for reasonable compensation, but the complaint alleges that Atrium offered other employers using the MedCost network greater discounts than Atrium offered participants in its own health plan. The plaintiffs allege that Atrium received a benefit from the portion of plan assets MedCost received as administrative costs and thus acted in its own self-interests (¶145) (which amounts to self-dealing for which there is no exemption) (¶144). The plaintiffs also allege that participants paid MedCost “far greater amounts” for medical services than they would pay under other available managed care networks (¶141), and that MedCost has higher deductibles and co-insurance amounts and returns higher reimbursements to Atrium than alternate...
