TPA court ruling spotlights fiduciary violation

Benefit brokers and advisers who do business with third-party administrators (TPAs) need to be on their guard in the wake of a significant legal decision late last month. 

TPAs that control and profit from group health plan assets are fiduciaries under ERISA, according to a ruling by the U.S. Court of Appeals for the Sixth Circuit that reinstated fiduciary breach claims against a Michigan Blues plan. The case spotlights the importance of pricing transparency in TPA contracts with self-insured employers.

Tiara Yachts sued Blue Cross Blue Shield of Michigan, which administered its self-funded health plan. The court found that BCBSM overpaid claims, then profited by retaining 30% of recovered funds as fees through a shared savings program. Experts say the ruling will spark increased scrutiny of TPAs, reinforcing the importance of fiduciary oversight and need for plan sponsors to regularly perform claim audits to spot unscrupulous practices. 

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But advisers also could be in the crosshairs. "It's not just the TPAs that face scrutiny," explains Al Lewis, CEO of Quizzify and the Validation Institute who recently wrote a commentary for Employee Benefit News arguing that becoming a fiduciary adviser is good for business. "Any adviser who recommends a TPA and is getting fees from them is not immune. This would especially be the case if the fees were not disclosed and were dependent on the TPA's revenue."

The ruling reinforces a fundamental point in the health plan advisory market, which is that fiduciary responsibility isn't optional, notes Jamie Greenleaf, co-founder of Fiduciary in a Box. Calling it a victory for employers in affirming their right to hold service providers accountable, she says it "sends a strong signal that employers must stop assuming their vendors have it handled and start implementing a documented fiduciary process. The risks are real, and the courts are watching."

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In most cases, however, TPAs are not making their own unilateral decision on how plan assets are spent and other court cases have decided that the facts and circumstances weren't enough to prove a fiduciary breach, cautions Christopher Condeluci, principal and sole shareholder at CC Law & Policy. 

Insufficient fee disclosures

Brokers and advisers are legally obligated to disclose their direct and indirect compensation to health plans, which includes commissions or overrides from a TPA. However, these disclosures under Section 408(b)(2) of the Employee Retirement Income Security that were amended by the Consolidated Appropriations Act of 2021 (CAA) "are woefully inadequate," explains Julie Selesnick, founder and principal attorney for Health Plan Legal Counsel. 

An example of that opacity involves statements about commissions, overrides and/or bonuses from various insurance carriers being based on an entire book of business and not attributed to any one plan. In such a case, providing insufficient detail would constitute a breach of fiduciary duty in a future lawsuit. She suggests totaling the amount received the previous year and determining a pro rata share that can be attributed to a particular plan. 

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"Brokers should consider refining their offerings to include writing RFPs that ensure legal compliance, data access and accountability from TPAs and PBMs, since the RFP process is already undergoing a major renaissance since passage of the CAA," she says.

A good fiduciary practice is to determine whether the broker is recommending a TPA based on his or her ability to earn a bonus, which Selesnick says is an impediment to receiving unconflicted advice. The best course of action would be to hire someone who only receives fees from the plan and avoids indirect compensation from any vendor.

The bottom line is that industry producers have a responsibility to pay closer attention to any unusual actions that TPAs are taking behind the scenes that could be construed as potential red flags, as well as ensure that employer contracts with TPAs are ironclad, according to Condeluci.

"Having as much disclosure and transparency as possible on fees related to all activities in these agreements is a must," he says, adding that brokers and consultants should demand that TPAs and PBMs they recommend for employer clients also file a 408(b)(2) disclosure.

In carefully considering the value of these services, he notes that HR and benefit leaders need to ensure that the TPA will agree to share a complete and accurate set of the health plan's claims data and is transparent with pricing information. "There may be variation between the types of services an independent TPA furnishes vs. an insurance carrier-owned TPA furnishes," he adds.