This article includes our new "NFP Observations" format, which combines compliance information with commentary and practical insights from our Benefits Compliance team.
Self-insured group health plans have become increasingly popular among employers seeking greater control over their healthcare expenses and flexibility in designing benefits that suit their workforce. Self-insuring can lead to significant cost-savings but also brings certain administrative and regulatory responsibilities and increased exposure to ERISA breach of fiduciary duty lawsuits.
For instance, employers sponsoring group health plans subject to ERISA must determine their role in deciding appeals of denied claims. Plan sponsors can either designate a third-party administrator (TPA) as claims fiduciary with final decision-making authority over appeals or assume the role of claims fiduciary themselves. Importantly, even if the claims fiduciary role has been delegated to a TPA, the plan sponsor’s broader fiduciary duty to monitor the TPA’s service to the plan cannot be delegated. Monitoring can become particularly challenging when the plan sponsor does not play the role of final decision-maker. However, serving as a claims fiduciary demands strict compliance with considerable regulatory claims and appeals procedures. The decision whether to play a more hands-on role as claims fiduciary requires weighing the ability to monitor the TPA and the ability to satisfy the regulatory requirements related to appeals processes.
Background
ERISA has long mandated comprehensive procedural rules for handling claims and appeals that safeguard participants’ rights to receive proper notification of decisions and a “full and fair review” of denied claims. The ACA amended ERISA by enhancing these protections, including adding an external review requirement. The external reviews must be conducted by an Independent Review Organization (IRO). Prior to the external review and before bringing legal action in court, participants must exhaust the plan’s internal claims and appeals processes.
Under fully insured plans – where premiums are paid to an insurer to assume financial obligations for claims and administrative costs – the final internal appeal decision is made by the insurer. Under self-insured plans, the employer assumes responsibility for all financial risks of claims and costs, though stop-loss insurance can reduce some of this risk. For administrative convenience, self-insured plan sponsors typically rely on a TPA to make claims decisions and handle internal appeals.
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With the expanded availability of self-insured “light” products, such as level funding, graded funding, and minimum premium insurance, self-insuring is being embraced by increasingly smaller companies. As with traditional self-insuring models, these products offer potential savings on premiums and administrative costs. However, with them comes greater compliance responsibilities. In addition to increased ERISA fiduciary obligations, self-insured medical plans are directly responsible for completing ACA reporting (regardless of applicable large employer status), securing a MHPAEA comparative analysis, paying PCOR fees, implementing additional HIPAA privacy protections, satisfying transparency in coverage requirements, submitting prescription drug and healthcare spending reports, and providing surprise billing protections, among other responsibilities. Before switching from a traditional fully insured medical plan to a self-insured, level-funded, or other similar plan arrangement, employers should review these added responsibilities and assess the level of TPA assistance through the RFP process. |
Remember Your Fiduciary Status
Under ERISA, any person or organization that exercises discretion when administering claims and appeals is a claims fiduciary. Generally speaking, fiduciaries are responsible for certain duties applicable to plan participants, including the duty to act in accordance with the plan documents, the duty of undivided loyalty to plan participants, and the duty of prudence. For a more comprehensive discussion of plan fiduciary obligations, please ask your NFP broker or consultant for a copy of the NFP publication ERISA Fiduciary Governance: A Guide for Employers.
Even if the TPA makes all claims-related decisions in administering the plan and assumes the role of claims fiduciary, the plan sponsor cannot sign away their own fiduciary status. At the very least, there is an expectation that plan sponsors will monitor the TPA (such as through claim audits) to ensure that the appeals procedures required under ERISA and described in the plan documents are consistently followed.
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In addition to enabling close monitoring of a TPA’s performance, auditing the appeals process can provide valuable insights into the effectiveness of the plan’s benefit design and administration. This information can help employers identify gaps in coverage and make necessary adjustments to improve benefits for participants. |
Errors or omissions in the appeals process, even if made by the TPA, may lead to a lawsuit against the plan sponsor and increase the likelihood that claim denials will be overturned by a reviewing court. For this reason, some plan sponsors may consider taking a more active role in the appeals process by serving as claims fiduciary with final authority to decide appeals.
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Plan sponsors should carefully review the terms of TPA administrative services agreements (ASAs) with legal counsel to confirm that the TPA’s role in the appeals process is described as intended. This includes close attention to indemnification terms where the TPA may or may not agree to financially compensate the plan sponsor in the event of the TPA’s error or omission. Relatedly, the ASA should clearly state which party is responsible for handling lawsuits over claim denials. Plan sponsors should also confirm that the ASA does not overly restrict the ability to audit the TPA’s handling of claims. |
Establishing an Appeals Committee
If a plan sponsor decides to serve as a claims fiduciary, it must provide a full and independent review under ERISA and not merely mechanically ratify a TPA’s decision. Establishing an internal appeals committee can facilitate consistent procedures that satisfy ERISA’s “full and fair review” standard. Because of the extensive regulatory requirements related to health plan appeals and heightened responsibility that comes with serving as a claims fiduciary, plan sponsors should work with legal counsel to formalize an appeals committee.
Typically, a plan sponsor’s appeals committee offers a second-level internal appeal following the TPA’s first-level internal appeal. All appeal procedures, including the plan sponsor’s role and discretionary authority, should be clearly explained in plan documents and claim denial letters. This includes explaining the additional external appeal rights through an IRO, which must be available following the internal appeal process.
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In addition to clearly explaining appeal procedures, claim denial letters must communicate why the claim was denied, the specific plan terms on which the denial was based, and how to perfect the claim on appeal — and do so in language the average participant can understand. The DOL’s Advisory Council on Employee Welfare and Pension Benefit Plans recently issued a report investigating the low rate of group health plan participant appeals and lack of knowledge of appeal procedures. The report contained several recommendations for the DOL to consider with the aim of improving the appeals process for participants. While the report is only advisory, it provides a useful reminder for plan sponsors to verify that claim denials are being adequately communicated to participants. One way to accomplish this is through a TPA audit as part of a plan sponsor’s fiduciary duty to monitor plan service providers. The report was recently featured in Compliance Corner: ERISA Council Report on Health Plan Claims and Appeals. |
The primary functions of the appeals committee are to interpret plan terms, ensure claims appeals are decided consistently with the plan terms, and consult with medical experts as needed. The members of an appeals committee should have some level of general knowledge of group health plans that would qualify them to carry out these functions. They will also need to be able to devote the necessary time to committee meetings and other activities, including training on ERISA fiduciary duties.
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Importantly, appeals committees should not serve as a mechanism to cover select claims in ways that clearly conflict with the plan terms. Granting these types of exceptions in deciding which claims are paid with plan assets, even if in favor of a plan participant, disregards ERISA’s fiduciary requirement to consistently follow the plan terms. Furthermore, it can trigger employee relations issues and accusations of discriminatory behavior. |
The requirements for group health plan appeals are considerable, including meeting strict timelines for decisions, giving full consideration to a participant’s appeal documentation, consulting with independent specialized medical experts, and allowing participants the opportunity to respond to new evidence on appeal (e.g., any independent medical expert report obtained by the committee). Along with ensuring these requirements are satisfied, an appeals committee must adequately communicate benefit decisions and document its decision-making process, such as through written procedures and meeting minutes.
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Because an appeals committee has access to individually identifiable, sensitive, protected health information (PHI), the plan sponsor will need to make sure they are fully compliant with HIPAA’s privacy and security requirements for self-insured health plans. These requirements include adopting written policies and procedures, training all staff members who may have access to PHI, and conducting a risk analysis to assess any potential security weaknesses. A third-party vendor that specializes in HIPAA compliance can help with this task. |
Responding to Plan Document Requests
In addition to the right to a “full and fair review” of appeals under ERISA, participants have the right to request and examine plan documents. Summary plan descriptions, amendments, and group health plan notices must be distributed automatically at certain times, but a participant can request a copy of the official plan document, Form 5500, and any other contract or “other instruments under which the plan is established or operated” at any time. These types of participant requests are typically made as a precursor to a claim appeal.
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This last category of documents – “other instruments under which the plan is established or operated” – has been the subject of many DOL advisory opinions and participant lawsuits. Depending on the particular facts and circumstances surrounding the request, this category can include any ASA between the plan sponsor and the TPA, internal guidelines used by the TPA to review claims, usual and customary fee schedules used to calculate benefits, and meeting minutes for any plan sponsor appeals committee. |
Plans have 30 days to respond to a document request from a participant, beneficiary, or their legal representative. ERISA authorizes participants to pursue penalties of up to $110 per day for a plan’s failure to adequately respond to their document request.
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These penalties are often assessed by courts reviewing claim disputes. Notably, in August 2021, a federal court in Utah awarded the then-current maximum $100 per day in ERISA penalties totaling $123,100 against a self-insured employer and TPA for failing to disclose complete claim coverage criteria and the ASA. The case was featured in Compliance Corner: Tenth Circuit Reviews MHPAEA Standing and Document Production. |
Plan sponsors should verify solid procedures are in place to respond fully and timely to any ERISA document request. While the request may be directed to the plan sponsor or an appeals committee, the task of responding can be quite burdensome and require extensive claim information controlled by the TPA. For these reasons, the responsibility for responding to document requests should be explicitly addressed in ASAs.
Final Thoughts
Sponsoring a self-insured group health plan can provide opportunities for financial savings and benefits customization. With that flexibility comes increased fiduciary obligations, particularly with respect to the claims and appeals process. Some employers may decide to play a more active role in that process, including through the establishment of a formal committee to handle second-level internal appeals. However, employers must carefully assess their capacity to support such closer involvement, ensuring they have the necessary resources, expertise, and commitment to satisfy the regulatory requirements.