Fiduciary Provisions Regarding Quality
in Health Plans
PWBA
Office of Regulations and Interpretations
February 19, 1998
Diana Orantes Ceresi
Associate General Counsel
SEIU, AFL-CIO, CLC
1313 L Street, N.W.
Washington, D.C. 20005
Dear Ms. Ceresi:
This is in response to your letter on
behalf of the Service Employees' International Union (SEIU) requesting guidance
concerning the application of the fiduciary provisions of Title I of the
Employee Retirement Income Security Act of 1974 (ERISA). Specifically, you ask
whether it is appropriate for a trustee of an ERISA-covered health and welfare
fund to consider quality in the selection of health care services.
You represent that you have been asked on
several occasions by various of your members who serve as trustees of
Taft-Hartley health and welfare funds sponsored by SEIU locals throughout the
country whether they can give quality of health care services priority over cost
when contracting with or making a choice from among various providers or plans.
You seek assurance that ERISA does not require fiduciaries to contract with the
health care provider or plan that submits the lowest fee quote.
When the selection of a health care
provider involves the disposition of employee benefit plan assets, such
selection is an exercise of authority or control with respect to the management
and disposition of the plan's assets within the meaning of section 3(21)(A) of
ERISA, and thus constitutes a fiduciary act subject to the general fiduciary
responsibility standards and prohibited transaction provisions of ERISA. Section
404(a)(1) of ERISA requires, among other things, that a fiduciary discharge his
or her duties with respect to a plan solely in the interest of the participants
and beneficiaries and with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent person acting in a like capacity
and familiar with such matters would use in the conduct of an enterprise of like
character with like aims.
The prohibited transaction provisions
state in sections 406(a)(1)(C) and (D) of ERISA, that a fiduciary with respect
to an employee benefit plan shall not cause the plan to engage in a transaction
if he or she knows or should know that such transaction constitutes a direct or
indirect furnishing of services between the plan and a party in interest with
respect to the plan, or transfer to, or use by or for the benefit of, a party in
interest, of any assets of the plan. Section 408(b)(2) of ERISA provides a
statutory exemption from the prohibitions of section 406(a) for contracting or
making reasonable arrangements with a party in interest, including a fiduciary,
for office space, or legal, accounting, or other services necessary for the
establishment or operation of the plan, if no more than reasonable compensation
is paid therefore.
In selecting a health care provider in
this context, as with the selection of any service provider under ERISA, the
responsible plan fiduciary must engage in an objective process designed to
elicit information necessary to assess the qualifications of the provider, the
quality of services offered, and the reasonableness of the fees charged in light
of the services provided. In addition, such process should be designed to avoid
self-dealing, conflicts of interest or other improper influence. What
constitutes an appropriate method of selecting a health care provider, however,
will depend upon the particular facts and circumstances. Soliciting bids among
service providers at the outset is a means by which the fiduciary can obtain the
necessary information relevant to the decision-making process. Whether such a
process is appropriate in subsequent years may depend, among other things, upon
the fiduciary's knowledge of the service provider's work, the cost and quality
of the services previously provided by the service provider, the fiduciary's
knowledge of prevailing rates for similar services, as well as the cost to the
plan of conducting a particular selection process. Regardless of the method
used, however, the fiduciary must be able to demonstrate compliance with ERISA's
fiduciary standards.
With regard to the foregoing, it should be
noted that, because numerous factors necessarily will be considered by a
fiduciary when selecting health care service providers, the fiduciary need not
select the lowest bidder when soliciting bids, although the fiduciary must
ensure that the compensation paid to a service provider is reasonable in light
of the services provided to the plan. It also should be noted that, because
"quality of services" is a factor relevant to selection of a service provider,
it is the view of the Department that a plan fiduciary's failure to take quality
of services into account in the selection process would constitute a breach of
the fiduciary's duty under ERISA when, in the case of a Taft-Hartley or other
plan, the selection involves the disposition of plan assets.
In assessing "quality of services," the
Department believes that a plan fiduciary may, among other things, consider the
scope of choices and qualifications of medical providers and specialists
available to participants, ease of access to medical providers, ease of access
to information concerning the operations of the health care provider, the extent
to which internal procedures provide for timely consideration and resolution of
patient questions and complaints, the extent to which internal procedures
provide for the confidentiality of patient records, enrollee satisfaction
statistics, and rating or We hope this information will be helpful to you.
Sincerely,
Bette J. Briggs
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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