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Performance standards

To: SPBA Member TPAs & Their Clients Re: Performance Standards, Guarantees, Penalties & Bonuses Look at your liability before you leap! From: Frederick D. Hunt, Jr. - President Occasionally, someone suggests that clients should demand or TPAs should offer formal performance standards, guarantees, or penalties to assure top service. The performance judgement is usually measured by such things as speed of paying claims and/or "accuracy" of paying claims. If benefits were in a vacuum of government red tape, it would make sense. TPAs are intensely proud of their speed and quality of service, and employers and plans want to be sure that their workers get the best and fastest service. HOWEVER, we are definitely not in a regulatory vacuum, and well-intended performance standards/guarantees/penalties can end up creating financial and legal liability nightmares for the employer/client. Actually, there is good news and bad news. The good news is that TPAs and plans are already subject to the most demanding consumer-protection performance standard in the world! It is called ERISA fiduciary responsibility (section 404 & 405 of Title I of ERISA). It demands absolute flawless performance and service for the plan from everyone who is in any way involved (though a recent court decision surprisingly exempted consultants from ERISA fiduciary responsibility). ERISA fiduciary carries both civil and criminal enforcement. Thus, every employee benefit plan is protected by and subject to extremely tough performance standards. In fact, it was the clear intent of Congress in passing ERISA that no duplicative standards be imposed. The bad news is that it is virtually impossible to fairly judge speed and accuracy because of the jungle of government regulations. Each year, there are about 1,500 new laws, regulations, interpretations, opinions, and major court cases emerging from about 300 government offices (each of which thinks it can apply its demands irrespective of possible conflicting requirements of the others). Only about 30% of these new requirements are ever announced adequately, even in the trade press...in large part because only about 1% (yes, only one percent) ever get final comprehensive guidance how to comply. Meanwhile, the penalties for even innocent goofs can cripple an employer or plan. Thus, about 99% of the time, plans & TPAs are forced to make educated guesses how to proceed...with disastrous penalties for a misstep. That's not the kind of minefield an employer or plan wants its TPA to race through because of some arbitrary performance speed standard! In fact, an employer/plan who imposed such as standard which might cause a mispayment because the TPA did not have time to await government guidance or to await further documentation from the medical provider or patient would expose himself to significant legal liability for a breach of ERISA fiduciary duty. Remember, most employee benefit laws in recent years are technically employer responsibility, so it is corporate dollars and liability at risk. On the other hand, ERISA fiduciary enforcement can and usually does go directly for the individual trustee(s) who contributed to the fiduciary breach. Thus, it the person(s) at the plan sponsor whose personal assets and reputation are on the line if they contributed to any breach of fiduciary duty. Let me give a real example: COBRA has been law for 7 years. The only government guidance how to apply are some informal questions & answers from the IRS which do not cover all situations. An employer followed the IRS-provided guidance precisely to determine if a plan participant was eligible and should have claims paid. The IRS guidance clearly said "no". When the employee sued, however, the Federal court and appeals court both agreed that the employer correctly followed the only available IRS guidance (and thus no legal liability for the plan sponsor individual). HOWEVER, the court disagreed with IRS' informal unofficial Q&A guidance...so it found the employer guilty (which cost $500,000, I understand). These are Catch-22 situations your TPA faces for you every day. Do you want your TPA to hurry through that kind of eligibility claim? What is "accurate" payment of that claim? ...what IRS published? ...what the courts surprisingly decided after the fact? Sometimes the liability, such as MSP, comes back to haunt the employer years later. Meanwhile, there are more and more situations of medical billing "errors"...either accidental, or "up-coding" and "designer diagnosis" to get more from the plan than the true medical condition or treatment warranted. These are tricky, often high-tech, scams which require time to research. To rush to pay inadequately-researched medical bills not only risks wasting the plan and employer's money...but also opens liability for breach of fiduciary duty. There will never be a flawless way to walk through the government minefield. However, SPBA member TPAs devote great amounts of their time and money talking directly with the government bureaucrats who actually make the interpretations. The goal is to know how those in charge plan to interpret the rules...even if it isn't in print anywhere. This process takes time, and is still often fuzzy. Usually, it must be done on a case-by-case basis because of the idiosyncrasies of each beneficiary or plan's situation. The government has been known to have a waiting list 22 days long just for a return call to a question (and that's having the inside information of who to call and what to ask!) Though most professions like to puff their role and importance, TPAs have always carefully respected their role and responsibility as carefully defined in the service agreement with the client and ERISA. The TPA has no powers not delegated by the client. Thus, responsibility always returns to the plan sponsor/employer (just as the taxpayer is responsible for paying for goofs his CPA might make on his tax forms). Thus, if a plan sponsor/employer were to direct the TPA to hurry or pay anything in a way that does not seem completely "prudent" (the all-encompassing ERISA fiduciary term)...the plan/employer takes on significant legal liability. Some consultants (who have escaped fiduciary duty) that suggest performance penalties know what a minefield the TPA must run and thus tell the employer/plan that it will be a cost-saver or money-maker when/if the TPA ever fails to meet the standards. That's true...but beware the legal boomerang too! Each documented TPA performance "failure" also becomes potential evidence against the employer/plan for lack of fiduciary oversight of the TPA. Therefore, performance standards/guarantees/penalties sound great in a vacuum. However, not only does the ultimate performance standard & penalty system already exist to protect the plan...but the measurements set forth in most performance guarantees are unmeasurable. If a client employer plan sponsor insists on a duplicative performance agreement, there should be a clear written directive to the TPA and understanding that the plan/employer is accepting the full legal liabilities involved in directly instructing the TPA to perform within a certain arbitrary time or "accuracy" framework. Performance standards/guarantees/penalties sound good with superficial thinking in the abstract, but the legal liability & risks for the client far exceed the benefits of duplicative standards. t's not fair to put the client sponsor and individual trustees at such risk. The flip side of the question is also occasionally asked: whether it is OK for clients to reward TPAs for exceptionally good service. At the risk of seeming self-serving for TPAs, the answer is that it's OK, assuming that if it is from plan assets, the total of normal fee + bonus isn't outrageous for the services provided...or it's OK if the bonus comes from the client's corporate (non plan) assets. This kind of bonus often arises when an employer or plan encounters a new complex government compliance issue (such as COBRA or MSP) or cost-containment program, and the TPA puts forth extra effort to make it work. In effect, the bonus is simply payment for extra services, and is probably best to be designated as such.