Formally defining the relationship with the client through a properly drafted service agreement, and regularly documenting client communications, are just good practice. Further, maintaining a well-trained staff and implementing polished internal procedures can help to avoid a problem altogether. Benefits professionals experience real life cases. In the Update, we hope that our readers can benefit from the hindsight that those real life cases provide.
In this edition of the Update, Joe Faucher of Reish & Luftman outlines a case recently handled by the firm where the use of recognized risk management techniques could have helped to avoid a costly dispute. We hope the article will encourage firms that do not already have established risk management systems in place to re-think the decision, and to remind those that do that it is well worth the investment.
Most of the articles that we write for the Update focus on issues that are specific to the benefits world. Top heavy plans, prohibited transactions, DOL investigations, communication of participant investment allocation instructions – all of these topics are subjects that the readers of the Update deal with on a regular basis, and are unique to the employee benefits industry.
But the real purpose of the Update is not to focus on subjects that employee benefits professionals are already familiar with; the purpose is to help you identify risks in your practice, and take steps to avoid and manage those risks. Many of those risks do not involve technical issues specific to employee benefits, but rather arise out of a failure to identify problem areas, communicate with clients, and take steps to protect yourself. As with all of the articles in the Update, the example we have in mind relates to a case we recently handled. Keep in mind, regardless of whether your practice is similar to the practice described in this example, there are lessons to be learned from the example about how to properly manage your business and reduce potential liability.
We recently represented a large benefits consulting firm that provided services to a multi-employer (union) health and welfare plan. Our client handled all of the day to day aspects of managing the plan. It received claims, determined whether a claim was covered by the plan, collected premium payments and payments for self-funded benefits, determined eligibility and paid claims.
The plan was a challenge by almost anyone’s standards. Its participants – union members – included a large number of seasonal employees and part time employees. Many employees regularly came in and out of covered employment. To make matters even more complicated, the plan, which was established pursuant to a collective bargaining agreement, had provisions for "banked hours" which enabled participants to maintain coverage in the plan even if they had not worked the required number of hours in the most recent eligibility period. The plan was very difficult to administer, since there was a very short time period within which to determine whether a potentially ineligible employee was in fact ineligible, and by the very nature of the participants’ industry – construction – participants came in and out of the plan with regularity, so it was natural to assume that an apparently ineligible employee might in fact be eligible. Determining whether a given employee was eligible to receive benefits under the plan was, at any given time, a difficult task. Of course, the consequences of making a hasty decision that an employee was not eligible for benefits – and therefore not paying premiums or claims on behalf of that employee – could be disastrous. If the administrator concluded an employee was not eligible, premiums would not be paid, and neither insured nor self-funded benefit claims would be paid. Employees and their dependents could therefore be exposed to potential personal liability for medical expenses.
As we all know, medical bills can be staggering. So on a certain common sense level, it might seem that paying a premium for a potentially ineligible employee is the lesser of two evils compared to not paying a premium for a potentially eligible employee, and exposing that employee to personal liability for the full expense of a catastrophic claim. If the issue involved just one employee, or a handful of employees, the discussion might end there. However, over a period of at least a year, the administrator paid premiums and self-funded claims on behalf of a large number of participants who turned out to be ineligible. Because the problem involved numerous participants over several months, the union claimed that it had sustained damages well into the six figure range.
This was a systemic problem, not an isolated one. It was one that existed by virtue of the plan itself. Since the plan was the result of a collective bargaining agreement, and the administrator was not involved in the collective bargaining process, the administrator had no ability to dictate the terms of the plan, or to prevent problems through artful drafting in the plan documents. The plan said what it said, and the administrator needed to "play the cards it was dealt." So what was the administrator to do?
There are several ways that the administrator might have avoided liability altogether, or at least reduced its exposure. First, benefits administrators need to formally define their relationship with their clients. This can be accomplished in the first instance with a professionally drafted engagement letter that describes the administrator’s role relative to the plan, sets out specifically what the administrator will and will not do, and the decisions it will and will not make on the plan’s behalf. In this case, it might have been possible for the engagement agreement to anticipate the problem that the administrator would have in making timely eligibility determinations, and to provide an advance directive in the event the administrator encountered that dilemma. Hindsight, of course, is 20-20. If this is not a problem that an administrator has ever encountered before, it would be difficult to anticipate and include in the engagement agreement. However, if this is a problem that arises over and over again in multiple plans administered by the same TPA, the engagement agreement should be updated to address the issue. For instance, in our example, the engagement agreement could specifically direct the TPA to assume that a participant is eligible, but if eligibility comes into question for a specified period of time "such as ninety days", the TPA must obtain the plan sponsor’s permission to pay any further premiums or claims. If the problem is one that arises again in connection with multiple clients, it should be addressed in the engagement letter.
Even if the problem was not anticipated in time to refer to it in the engagement agreement, the TPA could identify the problem during the course of its work and seek guidance from the plan sponsor or employer organization regarding whether to pay premiums and claims for an apparently ineligible employee. Once the TPA gets the plan sponsor’s guidance, it should be confirmed in writing. This will provide evidence that the TPA was not unilaterally making the decision about whether to pay premiums or benefits, and will provide valuable evidence in the event of a lawsuit to show that it was the plan sponsor, not the TPA, that had the final authority to decide whether to pay the disputed item.
Finally, the problem in our case could have been avoided if more attention had been paid to the TPA’s own business practices. Specifically, premiums and claims were paid by the TPA on the basis of the insurance company invoices. In other words, if the insurance company charged for a premium or claim for a participant, the TPA paid the premium or benefit. Had the TPA paid based on its own eligibility records, rather than the insurance invoices, there is a significant likelihood that premiums and claims would not have been paid for most of the ineligible participants in question.
Every business has risk. Much of that risk can be eliminated or reduced by (1) taking steps to document your role as to your client relationships, and (2) periodically reviewing your business practices to make sure that your employees are adequately trained, and systems are in place to prevent inadvertent mistakes.
Copyright 2001 by Professional Practice Insurance Brokers, Inc., a Hilb, Rogal & Hamilton Company. Reprinted with permission from The Benefits Professional Update, First Quarter Update.