Employers who choose to self-insure their group health plan (GHP) have significant fiduciary responsibility to the plan’s participants and beneficiaries. In order to manage this fiduciary risk, plan sponsors often hire an insurance carrier as its third-party administrator to take advantage of the carrier’s provider network, administrative management, and cost control practices.
The traditional turn-key approach offered by insurance carriers helps simplify the administrative process while offering a network of providers, but it may limit flexibility by restricting them from implementing third party cost containment solutions not supported by that carrier. As more technology-driven solutions disrupt the traditional healthcare model by reducing costs and providing better baseline quality of care through digital means, many plan sponsors are moving away from this turn-key approach. Before making such a decision, plan sponsors should determine if they are ready to take on the fiduciary challenges associated with this move.
Plan Sponsor Basics
A GHP plan sponsor is an organization that establishes a plan for the benefit of the organization’s employees. Employers must understand some basic rules to ensure they are meeting their responsibility as plan sponsor. A good starting point is to review the U.S. Department of Labor, Employee Benefits Security Administration, publication entitled, Understanding Your Fiduciary Responsibilities Under A Group Health Plan. This publication provides a simplified explanation of the Employee Retirement Income Security Act (ERISA), which sets forth the fiduciary standards for non-governmental and church plans. The publication summarizes these responsibilities as follows:
- Acting solely in the interest of the plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them
- Carrying out their duties prudently
- Following the plan documents
- Holding plan assets, if any, in trust
- Paying only reasonable plan expenses
The plan sponsor is responsible for all stages of the design, implementation, amendment, and termination of a plan. In an ERISA plan, the plan sponsor is also the named fiduciary pursuant to ERISA section 402(a). In this capacity, the plan sponsor is responsible for ensuring the plan is designed and operating in compliance with applicable laws, regulations, and the plan document. Generally, a plan sponsor selects an insurance carrier to act as a third-party plan administrator to run the day-to-day operations of a plan but continues to serve as plan administrator as defined by ERISA section 3(16).
The plan sponsor and its board are responsible for providing direction, a sound governance structure, as well as fiduciary and strategic oversight. The members and size of the board varies greatly based on the nature, size, and complexity of the plan, and it is not uncommon to have as many as 10 members. These boards should be comprised of individuals who possess sufficient knowledge and skills to carry out these responsibilities. They need to meet regularly to oversee the operations of the plan and ensure applicable legal requirements are met. Additionally, the board is responsible for safeguarding the financial integrity and solvency of the plan as well as establishing procedures to protect it from fraud and unnecessary risk. Often, advisors – attorneys, plan actuaries, benefit consultants, and accountants – are hired to assist where knowledge gaps exist or specialized skills are needed.
Questions to Consider
As plan sponsors contemplate moving away from the turn-key approach offered by many insurance carriers, they need to understand how the plan’s complexity and its operating environment will change to ensure the board and its advisors have the knowledge and skills to continue to meet its fiduciary responsibility. Otherwise, a lack of proper understanding could lead to costly mistakes that may outweigh any benefit derived from the transition. Some questions the plan sponsor should consider include:
- What are the board’s short- and long-term goals and how does the plan and current operating environment impede success?
- What changes does the board intend to make to the plan and its operating environment to meet its short- and long-term goals and do the costs outweigh the benefits?
- How, and over what time, will these changes be implemented?
- How will success be measured, and what reporting does the board need to measure it?
- What new or additional duties and functions will the plan sponsor need to undertake, and how may that impact the organization’s internal and external resources?
- How will the board’s oversight and monitoring function need to change to mitigate operational, regulatory, and vendor risk?
As the promise of better healthcare outcomes and lower overall costs are realized by plan sponsors that move away from the traditional turn-key approach offered by insurance carriers, more plan sponsors will consider making this change. Proper planning is essential to success.