Ways to avoid risk as a benefit plan fiduciary

By Chris Hanson-Ehlinger
Fri, Jul, 11, 2014 @ 14:07 PM

describe the imageThe concept of fiduciary responsibility is familiar to all benefit plan managers. In basic terms, it commits individuals responsible for day-to-day administration of a benefit plan to be good stewards of the resources provided and to manage the benefits in the best interests of the employees and their beneficiaries. Doing so requires that the fiduciary either has the personal expertise in a variety of areas or hires the expertise if the fiduciary is not confident in his or her level of knowledge.

What may not be immediately recognized, however, is that according to the Department of Labor (DOL), the Employee Retirement Income Security Act (ERISA) sets standards of conduct for those who manage an employee benefit plan and its assets (fiduciaries). Further, fiduciaries are not limited to the individual, committee or entity identified in written plan documents. Any person that exercises his or her own discretion when administering or managing a benefit program makes that person a fiduciary under ERISA guidelines.

Imagine a situation where you are called to attend a meeting in the executive board room to discuss the administration of your employer’s benefit program. How would you respond if you were challenged to summarize the specific activities and tasks you have completed that fulfill your fiduciary responsibility? A rule of thumb you can use to assess your fiduciary efforts is called the Prudent Man Rule, which is sometimes also referred to as the American Rule. It is an old legal concept dating back to the early 1800s that suggests a fiduciary must act with the same care, skill, prudence and diligence that “a prudent man acting in a like capacity” would employ.

Following are examples of how and where you can apply the Prudent Man Rule to the administration of your pharmacy benefit:

  • Contracts created by pharmacy benefit managers (PBMs) are complex, lengthy and may contain significant ambiguity. More often than not, the contract is written by the PBM and presented to the employer for approval. PBM contracts also clearly and consistently establish that the employer holds all fiduciary responsibility for the prescription plan and that the PBM is simply administering the benefit at the employer’s direction. The prudent benefit manager would be well advised to seek outside expertise to assist with finalizing a PBM contract that is consistent with all financial negotiations and free of any loopholes that benefit the PBM over the employer and, by extension, the employees. The prudent benefit manager would also be well advised to seek an independent advisor to review any existing contracts and amendments to identify any deficiencies that require correction in future agreements.

  • PBMs have a remarkable record of success in their ability to renew and retain existing clients. This is not necessarily a negative circumstance if the incumbent vendor has been thoroughly vetted against similar vendors. The only approach that provides the full evaluation of PBM capabilities and obtains market competitive rates is to issue a request for proposal (RFP) to multiple vendors. Renewals and extensions with current vendors, even those that may include improvements in pricing, are not sufficient. The prudent benefit manager recognizes the value of soliciting competitive information by issuing RFPs on a regular basis.
    ERISA imposes a high priority on the need for plan administrators to document their work. An additional advantage of the RFP process is that the work product generated by the competitive evaluation of multiple PBMs represents a comprehensive document trail. The prudent benefit manager recognizes that hiring an expert in managing an RFP project increase the level of competitive information brought to vendor evaluations and increases the level of detail contained in the resulting documentation.

  • Employer sponsored prescription benefit programs are becoming increasingly complex. PBMs work hard to administer the benefit according to the employer’s wishes, but with the number of moving parts present in the typical benefit design, mistakes occur routinely. The only assurance the employer has that the plan meets expectations and that resources are spent wisely is to audit the PBM. The prudent benefit manager, therefore, schedules audits on a routine basis. Reports generated by the PBM are not a sufficient substitute to a comprehensive audit. A third party auditor has the tools, experience and independence to deliver the quality audit that is required.

Let us return to the board room. Your meeting with senior staff is complete. How did you do? Were you able to provide documentation to confirm that you and your team are meeting your fiduciary responsibilities? Would you give yourself a passing or a failing grade when applying the Prudent Man Rule? What processes must be changed in the future to fully comply with your fiduciary responsibility?

Administering a prescription drug benefit plan can be a difficult job but, when you recognize the positive contribution it makes in an employee’s life, it is also a rewarding task. Many benefit managers have found that due to the evolution of complex plan designs combined with a rapidly changing environment, staying on top of all the category specific details can exceed the capacity of their staff. The prudent benefit manager calls in experts to help manage this critical component of the benefit plan.

Craig Oberg, RPh, is a managing consultant at The Burchfield Group. He works with national employers to develop PBM assessment and strategic management plans. For more information, please call us at 800-778-1359 or send a note to http://www.burchfieldgroup.com/contact/.

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