Skip to main content

The ERISA Edit: More Litigation Involving Health Plan Savings Fees

Employee Benefits Alert

Hospital System Seeks Court Order Requiring Cigna to Disgorge Fees Charges on Out of Network Claims Processing

Several New Jersey hospitals owned by CarePoint Health Systems, Inc. filed a second amended complaint against Cigna Health and Life Insurance Co. and Connecticut General Life Insurance Co. (Cigna) alleging, inter alia, Cigna's cost-containment savings program covering certain out-of-network benefit claims violates ERISA. Hudson Hospital OPCO, LLC. d/b/a CarePoint Health-Christ Hospital v. Cigna Health and Life Insurance Co., No. 2:22-cv-04964-ES-JBC (D.N.J. Nov. 29, 2023). This case is one of a growing number of lawsuits alleging improper self-dealing by third-party administrators (TPAs) for charging "savings fees" to self-funded plans based on alleged savings achieved for the plans through the TPAs' processing of out-of-network claims.

According to the lawsuit, Cigna underpaid more than $100 million on 4,708 out-of-network claims, the majority of which were for emergency services and some of which were for services rendered to participants and beneficiaries in ERISA-covered plans. Payment of the emergency services claims, which pre-dated the No Surprises Act, was governed by the Affordable Care Act's (ACA) "Greatest of Three" rule contained in Public Health Service (PHS) Act section 2719A(b)(3). According to the second amended complaint, Cigna improperly calculated the out-of-network reimbursements as a percentage of Medicare rates, instead of using the reasonable and customary payment methodologies contained in the plans. 

The plaintiffs further allege that Cigna violated ERISA's fiduciary duty and self-dealing prohibitions by entering into "arrangements with Plans by which it purports to charge the Plans a fee calculated as a percentage of 'savings' Cigna or its third-party supposedly achieve for the Plans in processing the claims."  According to the lawsuit:

Although Cigna leads the Plans to believe that it is achieving the "savings" through legitimate means, in reality, Cigna calculates the "savings" based on the difference between the amounts of the health care provider's gross charges and the amounts that Cigna actually reimbursed the provider. Cigna applies and retains (for itself and its business partners) the "savings" it allegedly achieved, regardless of whether the underpayments and resultant "savings" comply with the terms of the Plans. Thus, Cigna's "cost-containment" program creates a built-in incentive for Cigna and its business partners to have the Plans reimburse valid health care claims as little as possible and well below what the Plans actually require.

Relying on assignment of benefit agreements with participants and beneficiaries, the plaintiffs seek to recover the allegedly unpaid or underpaid benefits under ERISA section 502(a)(1)(B) and obtain equitable relief, including disgorgement of all "savings fees" from Cigna, for alleged self-dealing and fiduciary breaches by Cigna under ERISA sections 404(a)(1)(A) and (D) and 406. The court previously dismissed plaintiffs' first amended complaint without prejudice because of pleading insufficiencies. The first amended complaint made only passing reference to the alleged "cost-containment fees" but asserted that those fees amounted to up to 30 percent of "the amounts by which Cigna underpays the Carepoint Hospitals." Since passage of the No Surprises Act, the payment amount on out-of-network emergency services claims is determined in accordance with the statutory and regulatory framework established by that legislation.

We recently highlighted another case against UnitedHealth Group, Inc. raising similar allegations related to fees charged to self-funded health plans under a "shared savings" program. A motion to dismiss the latest allegations against Cigna is anticipated.

Plan Participants Seek Rehearing in Case Deciding Pleading Standard for Prohibited-Transaction Claims

As we recently discussed here, in Cunningham v. Cornell University, Nos. 21-88, 21-96 & 21-114, --- F.4th ----, 2023 WL 7504142 (2d Cir. Nov. 14, 2023), the Second Circuit tackled the interpretation of ERISA §§ 406(a)(1)(C) and 408(b)(2)(A) and held that the prohibited-transaction claims of thousands of participants in certain retirement plans administered by Cornell University (Cornell) failed at the pleading stage because their complaint did not allege that the services of their retirement plans' service providers were unnecessary or that the compensation paid to the service providers was unreasonable. See ERISA § 408(b)(2)(A) (exempting from prohibited-transaction provision "services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor"). Citing Jones v. Harris Associates L.P., 559 U.S. 335, 346 (2010), the court stated that "a fee 'so disproportionately large that it bears no reasonable relationship to the services rendered' raises an inference that it was not 'the product of arm's length bargaining.'" In contrast, the court held, the same could not be said "of routine payments made to service providers." 

On November 28, 2023 the class plaintiffs petitioned the court for rehearing. According to the plaintiffs, rehearing is warranted because, by citing twice to Jones v. Harris Associates, the panel purportedly disregarded ERISA's "high fiduciary standard" in favor of "a standard developed under an entirely different statute" — the Investment Company Act of 1940 (ICA). Since the ICA is governed by a "disproportionality" standard, not a "reasonableness" standard like that found in ERISA § 408(b)(2)(A), the plaintiffs say the court should not have analogized to it. They argue that the analogy "is not only incorrect" because it conflicts with ERISA's text, but it is also "devastating to the rights of workers and retirees protected by ERISA." Instead of relying on the ICA's standard, the plaintiffs claim that the panel should have looked to the common law of trusts, which "provides that it is unreasonable to waste beneficiaries' money by incurring higher expenses when a service of substantially identical quality is available at a lower cost." The plaintiffs say that, viewed under that correct standard, their complaint properly alleged unreasonableness for purposes of ERISA § 408(b)(2)(A). 

The plaintiffs further claim that the panel should not have imported into its decision the ICA's disproportionality standard without briefing on the issue, noting that "[a] precedential ruling establishing a new liability standard should at least be based on full briefing." They argue that rehearing en banc is necessary because the panel expressly acknowledged that its decision conflicts with, at a minimum, the Eighth Circuit's decision in Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 601–02 (8th Cir. 2009)), which held that that § 408(b)(2)(A)'s exemptions are affirmative defenses that have no bearing on whether a plaintiff's claim withstands a defendant's motion to dismiss. 

Because the panel referenced Jones arguably in passing, and because the court did, in fact, look to the "common law rules regarding trustees," it seems unlikely that the panel will grant rehearing. But because the panel's decision does expressly disagree with Braden, the plaintiffs' petition might gain some traction with the court as a whole.

IRS Consolidates Guidance on Qualified Pre-Approved Plans

On November 21, 2023, the Internal Revenue Service (IRS) issued new guidance for employers that consolidates and updates previously issued Revenue Procedures regarding qualified pre-approved plans so that these plans can be better aligned with one another.

New Revenue Procedure 2023-37 covers several broad categories including:

  • rules regarding remedial amendment periods, the remedial amendment cycle system, and plan amendment deadlines for qualified pre-approved plans and for section 403(b) preapproved plans;
  • procedures for a provider to apply for an opinion letter confirming that the form of the provider's plan satisfies the qualification requirements or section 403(b) requirements; and
  • procedures for an adopting employer of a qualified preapproved plan or a section 403(b) pre-approved plan to apply for a determination letter regarding the adopting employer's plan.

The IRS notes that the period for a provider of a defined contribution qualified pre-approved plan to apply for a Cycle 4 Opinion Letter will begin on February 1, 2024, and end on January 31, 2025. 

The guidance includes many specific updates effective for all pre-approved plans. The remedial amendment period for disqualifying provisions or form defects is clarified to expire at the same time as adopting interim amendments. The interim amendment rules are updated to provide that, "if an Adopting Employer does not correct a failure to timely adopt an Interim Amendment within two years after the time period . . . then the Adopting Employer's plan will be treated as an individually designed plan at the end of that two-year period," the IRS explains.

The interim amendment deadline and the individually designed plan remedial amendment period deadline are unified. "The rules for issuing an opinion letter are clarified to provide that an opinion letter will not be issued for amendments made between submission periods," the IRS notes. "Instead, a provider must submit a restated plan that incorporates the amendments during the next submission period."

The 71-page text of Revenue Procedure 2023-37 is posted here

IRS Issues 401(k) Rules for Long-Term, Part-Time Employees With Cash or Deferred Arrangements

The IRS issued proposed regulations to amend the rules applicable to plans that include cash or deferred arrangements under Internal Revenue Code section 401(k) to provide guidance with respect to long-term, part-time employees. 

The rulemaking 

would amend section 1.401(k)-5 (which is reserved for mergers and acquisitions under the existing regulations) to reflect the rules for long-term, part-time employees under section 112 of the SECURE Act and sections 125 and 401 of the SECURE 2.0 Act. Proposed § 1.401(k)-5 defines "long-term, part-time employee," and, with respect to each long-term, part-time employee, requires a qualified [cash or deferred arrangement ("CODA")] to satisfy the participation requirements of proposed § 1.401(k)-5(c) and requires the plan that includes the CODA to satisfy the vesting requirements of proposed § 1.401(k)-5(d). In addition, proposed § 1.401(k)-5(e) provides guidance regarding nonelective and matching contributions made to the plan on behalf of long-term, part-time employees, and proposed § 1.401(k)-5(f) provides guidance regarding certain elections that the employer or employers maintaining the plan may make with respect to long-term, part-time employees.

The 70-page text of the regulations is posted here. Comments are due January 26, 2024. A public hearing has been scheduled for March 15, 2024.

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

This, and related communications, are protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices, and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this presentation without prior written consent of the copyright holder.