CAA raises the bar on fiduciary governance for health plans

The employer-sponsored health plan system is broken. Over the past decade, costs have skyrocketed, and as a result, health benefits are the second largest line item on employer P&Ls. The only thing more expensive is employee compensation. And yet, in 2021, average family premiums topped $22,000 per year, and they continue to grow at an unsustainable rate.

But positive change has come in the form of the Consolidated Appropriations Act of 2021 (CAA), adding transparency and accountability to the market.

So why are people so scared? Because change — even if it’s good — is scary.

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Most health and welfare benefit plans are subject to the Employee Retirement Income Security Act of 1974 (ERISA), which protects the interests of employee benefit plan participants and their beneficiaries. It establishes standards of conduct for plan managers and other fiduciaries. While ERISA has always applied to health and welfare plans and retirement plans, the lack of transparency in healthcare has made it near impossible for fiduciaries to establish a prudent process.

A game changer
The CAA adds transparency to the health plan space in multiple ways. It requires the removal of gag clauses from plan contracts, giving plan sponsors new access to (and permission to use) their health plan data. It requires vendors that service health plans to disclose all compensation, and requires plan sponsors to determine if that compensation is “reasonable.” The CAA also requires plan sponsors to submit an annual report on prescription drug usage and costs, and an attestation of compliance.

In layman’s terms, employers have new access to information, and that comes along with responsibilities and risks. In short, the CAA just put the big “F” in Fiduciary for plan sponsors. The good news is, plan sponsors can draw on previous experience and reduce fiduciary risk through prudent procedures.

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Look at what happened in the retirement plan industry: Just about 20 years ago, it suffered from a total lack of transparency. Conflicts of interest among service providers were common, and employers lacked process and advocates. The end result was that users suffered by not having enough money to retire with dignity. Fast forward to 2022, and you’ll find that there is full transparency on vendor compensation, conflicts have been removed, commissioned educators are a thing of the past and employers have regularly scheduled committee meetings to follow a prudent fiduciary process. Transparency has helped employers greatly improve outcomes for their employees.

However, this change did not occur overnight, nor did it come without casualties. Non-compliant employers were hit with penalties from the Department of Labor (DOL), not to mention class-action lawsuits. Service providers also were included in lawsuits. Ignorance may be bliss, but complacency is costly. Change takes commitment and hard work, but the rewards can be significant. We saw this in terms of better outcomes, superior benefits with meaningful impact and reasonable costs.

The CAA has flown under the radar of most employers and service providers, but it is in full effect. The DOL has already started to audit plans to determine compliance. This year, employers will need to sign attestations that they have removed gag clauses and received service providers compensation disclosures. They also will need to deem fees reasonable or risk prohibited-transaction penalties.

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Employers must establish governance procedures to manage their liabilities on health plans. This will lay the foundation for decision making, acting as a prudent-man rule that gives discretion to a fiduciary. Employers will need to seek out partners to help them execute the process, much like they do in the retirement space. Brokers should be prepared to engage with the committee in a new way. They will be held to a new standard, and must act in the best interest of the employer and employees. Remember, ERISA is about an unbiased, conflict-free process. Fiduciary governance will establish the process and the committee will need to adhere to and document the process.

Inaction is the real threat
It is time for the healthcare industry to abandon harmful practices and embrace change. Brokers, carriers, TPAs and PBMs that embrace the CAA will have an opportunity to capture greater market share and have a more meaningful impact on their clients. Those who do not, will become the casualties. Winston Churchill said, “those who fail to learn from history are doomed to repeat it.” That could be a good thing or a bad thing, depending upon how you decide to move forward.

Neuroscience tells us that the brain perceives uncertainty, volatility, ambiguity and unpredictability the same way it registers the threat of a bear or lion. In this case, the real threat is inaction. Thanks to the CAA, change is coming to health plans, the employers that sponsor them and service providers they work with in the form of fiduciary responsibilities and liabilities.