Now is a good time for third-party administrators (TPA) to make sure that critical but frequently overlooked health plan documentation is complete and error-free. This isn’t about perfectionism; it’s about protecting themselves and their clients from unnecessary litigation.
The TPA plays a vital role in ensuring self-funded plan sponsors and their members have frictionless experiences, especially when they need to file a claim or subrogate one. And TPAs are known for being efficient and responsive with an enviable knowledge of self-funded plans and subrogation.
Yet many TPAs don’t learn until it’s too late that they have unknowingly put themselves and their plan sponsors at risk for ERISA-related litigation. This is what happens when forms are incomplete or plan documentation is misaligned.
It may sound like a simple oversight or an easily fixable error. Unfortunately, if the error is discovered after the fact, it is not simple. In fact, the absence of one critical clause or a misunderstood document type can trigger class-action exposure. In turn, the litigation can last months and cost tens of thousands of dollars in legal fees. It is obvious what effect this can have on the TPA’s reputation.
See also: The next big ERISA risk? Hidden fees in out-of-network pricing
The most frustrating aspect of these types of situations is that mistakes are not usually discovered until a claims recovery provider or an attorney finds it as part of the subrogation process.
The good news is that all of this is avoidable with proper planning and a little bit of diligence.
A closer look at two critical ERISA documents
Here’s the thing that every TPA needs to know. Regardless of the TPA’s size or experience, every ERISA health plan must have two critical documents.
The first is a formal plan document, which is legally binding. The second document is the summary plan description (SPD). This is the member-friendly description of the plan that includes the member’s benefits, rights, and obligations.
These two documents should mirror each other, reflecting similar language. They can be combined if they are properly drafted and designated. Where a plan’s documentation can get tricky is when the formal/legal plan document and the SPD are not connected.
When there is a lack of a sufficient connection, reliance on a subrogation provision that is only contained in the SPD can trigger litigation. It’s just as bad as if no legally binding plan document exists. In this scenario, reliance on key language that is found only in the SPD can also be a triggering event for litigation.
While an SPD often contains all the essential information about the plan, the courts do not view the standalone document as legally binding. The formal plan document must incorporate, by reference, the SPD. If this information is missing, the TPA has an uphill battle when it comes to recovering funds. At best, they will be challenged, though it’s more likely they will not be deemed as legally authorized to recover. This could lead to litigation against the plan and the TPA.
Even when a case is eligible for subrogation and the claim is significant, available recovery funds may be exhausted by the time unnecessarily protracted legal proceedings are wrapped up. All because the right forms were not properly written or completed.
The myth of ‘it won’t happen to me’
Even the most detail-oriented TPAs can inadvertently make mistakes with these two critical documents. Arguably, as many as one-third to one-half of TPAs may not have full control over document alignment.
This happens for a variety of reasons. Most of them have to do with a compliance gray zone where stakeholders assume that others have the documents under their control. The three most common reasons include:
- Plan sponsors assume TPAs are managing document compliance. However, the plan sponsor is the fiduciary and while they can delegate the document compliance activity, plan sponsors cannot delegate the consequences if someone else gets it wrong.
- The TPA assumes that outside ERISA counsel is managing the document. Sometimes, however, reality is ERISA counsel is typically brought in to handle specific issues, not comprehensive document oversight.
- Finally, the lack of role and responsibility clarity in the services agreement between the TPA and plan sponsor creates information gaps, uncertainty and, often, errors.
To avoid these mistakes, the TPA and sponsor should proactively track down and verify who is responsible for what and clearly document responsibilities.
3 immediate actions
To avoid the unnecessary risks of misalignment or mismanagement of these documents, TPAs should immediately review plan documents in their entirety. During the process, pay close attention to language related to subrogation, reimbursement and recovery. This information must be included in the legally binding plan document. Again, the SPD alone is not sufficient.
Second, to the extent that you are relying on SPD language for any health plan rights like subrogation, the plan document must clearly state that the SPD is incorporated by reference and treated as part of the governing document.
The third step is to verify the documents with legal counsel who has solid ERISA expertise. Allocating resources up front to this critical activity will avoid costly, time-consuming issues down the line.
Whether a TPA has a handful of clients or is managing tens of thousands of members, making sure the right documentation foundation is in place is more than just good account management. It’s vital to the fiduciary interests of clients, protecting the plan’s bottom line, and avoiding unnecessary litigation.
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