Third-Party Administrators for Distressed Employer Groups

1. Third-Party Administrators for Distressed Employer Groups This roundtable discussion is brought to you by the Payors, Plans, and Managed Care Practice Group (PPMC PG) and Health Plan Affinity Group (HP AG) April 25, 2011 ∙ 12:00-1:00 pm Eastern Moderator Brian R. Stimson, Esquire Alston & Bird LLP Atlanta, GA Presenter Jarrod W. Pearson, EsquireHoskin Farina & Kampf, PC Grand Junction, CO 1

2. When the money runs out and what it means for TPAs More employer groups will experience bankruptcies, insolvency, and cash-flow problems Ongoing obligations for TPAs Providers are more likely to seek payments from other sources: Other “payment” theories against TPAs (tort / negligence, contract, fiduciary duty, etc…) Participants/Beneficiaries, controlled-groups and other non-plan assets Increased enforcement actions Department of Labor (DOL), Employee Benefits Security Administration (EBSA) ERISA Actions The Big Picture in a Down Economy 2

3. Presentation Roadmap • What should a TPA do as employer groups start having financial trouble? • What steps should a TPA take once an employer group IS distressed? • What proactive steps can a TPA take to avoid problems? 3

4. When Employer Groups Start Having Problems 4

5. Payment Issues – returned checks Complaints Participants / Beneficiaries Providers Government agencies (state and local) Other Administrative Issues Stop-loss Pharmacy Benefit Managers Network Access Agreements Brokers, Accountants, Lawyers Plan Contacts When is an employer group in distress? 5

6. How long can a TPA “suspect” without taking action? • Fiduciary Status • Actions vs. Formal Characterization • David P. Coldesina, D.D.S. v. Estate of Simper, 407 F.3d 1126 (10th Cir. 2005) (parties controlling plan assets are “automatically in a position of confidence by virtue of that control, and as such they are obligated to act accordingly”) • Discretionary Authority or Control • In re Luna, 406 F.3d 1192 (10th Cir. 2005) (fiduciary if exercises authority or control over “assets” of the plan) • Briscoe v. Fine, 444 F.3d 478 (6th Cir. 2006) (TPA was fiduciary to extent it exercised any authority or control over plan assets) • “Mere” Ministerial Functions • 29 CFR 2509.75-8, D-2 (“a person who performs purely ministerial functions…is not a fiduciary…”) 6

7. How long can a TPA “suspect”?, cont… • Fiduciary Duties • Duty to Warn • Acosta v. Pacific Enterprises, 950 F.2d 611 (9th Cir. 1991) as amended on reh’g (1992)(looks to common law trust duties of a fiduciary) • **Kenseth v. Dean Health Plan, Inc., 610 F.3d 452 (7th Cir. 2010) (duty to disclose material information is “core of a fiduciary’s responsibility) • Duty to Pursue • Rosen v. Hotel and Rest. Emp. & Bartenders Union of Phila., Bucks, Montgomery and Delaware Counties, PA, 637 F.2d 592 (3rd Cir. 1981) (in context of pension plan, some action must be taken to safeguard beneficiaries credited service) • “Prudent Man Standard of Care” • 29 USC 1104(a) • Solely in the interests of participants and beneficiaries • …with the care, skill, prudence and diligence under the circumstances that a prudent man would use… 7

8. How long can a TPA “suspect”? cont… • New Fiduciary Definition - Investment Advice • Definition of the Term “Fiduciary”, 75 Fed. Reg. 204 (proposed Oct. 22, 2010) (to be codified at 29 C.F.R.2510.3-21) • Update or signal for further change? • Balance of Liabilities • Employer Group – Defamation, contract, tort, theft/conversion • Participants/Beneficiaries – Fiduciary, tort/negligence, contract, non-ERISA 8

9. Steps to take after TPA suspects • Documentation • Every step in claims process • Communications (in and out) • Complaints • Notices to Employer Group / Plan Sponsor • Stop-loss, PBMs, Provider Discounts, etc… • Duties to fund • Seek counsel • Pre-Authorizations • Payment is contingent • TPA is not the “payor” • Participants / Beneficiaries • Duty to warn? 9

10. When Employer Groups ARE Distressed 10

11. Drop in economy – rise in enforcement • Recent EBSA initiatives • Contributory Plan Criminal Project (CPCP) • “focuses on protecting employees who participate in all types of contributory plans – both pension and health” • Performance measured on ratio of cases accepted for prosecution against cases referred • As of Nov. 16, 2010: 191 investigations initiated, 97 referred to prosecutors, 20 indictments, 7 guilty pleas, and $385,447 in assets restored • Rapid ERISA Action Team (REACT) • EBSA can “respond in an expedited manner to protect the rights and benefits of plan participants when the plan sponsor faces severe financial hardship or bankruptcy and the assets of the EBP are in jeopardy.” • For financial hardship, EBSA “attempts to identify the assets of the responsible fiduciaries and evaluate whether a lawsuit should be filed against those fiduciaries to ensure that the plans are made whole and the benefits secured.” 11

12. Drop in economy – rise in enforcement, cont… • Recent EBSA enforcement actions - REACT • Glenn Cunningham / Palm Springs Orthopedics Medical Clinic • $34,000 in restitution from owner who withdrew plan assets and failed to forward contributions • Standard Automotive Corp. • $340,000 in restitution in bankruptcy proceedings from plan trustee who used plan assets to pay trustee’s law firm for services to plan that were improper, unnecessary and unreasonably expensive • Wolverine Proctor & Schwartz, LLC. • Settlement agreement with bankruptcy trustee requiring restitution of funds to health plan administered by TPA 12

13. Investigations and Prosecutions • TPA’s Status • How does the investigator or prosecutor classify the TPA? • Understanding • Does the investigator or prosecutor understand how the TPA operates, how a typical claim “moves” through the system, and how funding is handled? • Information Sharing • Look to TPA service agreements regarding confidentiality and disclosures • Is a court-order, warrant or subpoena necessary to disclose PHI? • 45 CFR 164.512(e) – Judicial and Administrative Proceedings • 45 CFR 164.512(f) – Law Enforcement Purposes • Does the TPA have a compliance plan or similar policies and procedures? • Cooperation and Partnerships • Long-term relationships with investigators and prosecutors 13

14. Bankruptcy Issues • Is the TPA required to continue providing services? • Is the TPA service agreement executory? • See, 11 USC 365 • In re Drahn, 405 B.R. 470 (Bankr. N.D. IA 2009) (“A contract under which the obligation of both the bankrupt and other party are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other”) • Are payments for claims under plan entitled to priority? • See, 11 USC 507(a)(5) • In re Jet Florida Systems, Inc., 80 B.R. 544 (Bankr. S.D. FL 1987) (self-insurance medical claims are entitled to priority) 14

15. Bankruptcy Issues, cont… • Are administrative fees entitled to priority? • In re Cardinal Industries, Inc., 164 B.R. 76 (Bankr. S.D. OH 1993) (the ultimate policy goal of section 507 “requires that expenses associated with administering a self-insured plan also be afforded priority”) • Remember, REACT activities 15

16. Unpaid Providers, Vendors, Participants and Beneficiaries • Unpaid Providers and Vendors • Providers and vendors may wish to look to other assets of the employer group / plan sponsor • What do the Network Access Agreements / Vendor service agreements say with respect to payment? • Who are the parties? • Assignment of rights from beneficiaries • Participants and Beneficiaries • Would they elect to receive services if they knew? • 29 USC 1132(a)(1)(B) • Civil action may be brought by participant or beneficiary “to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan” 16

17. Proactive Steps For TPAs To Take 17

18. Contract Provisions To Consider • TPA Service Agreements • Plan Sponsor’s obligation to notify TPA of financial distress • Investigation cooperation • From the plan sponsor / employer group; and • By the TPA with investigators and prosecutors • Authority to disclose financial issues to providers, participants and beneficiaries • Non-fiduciary status • Generally, words of limitation in a contract provide no protection if a court finds that a TPA undertook, acted upon, or assumed a fiduciary duty or responsibility • Vendor Agreements / Network Access Agreements • Group-specific cancellation rights • TPA clause (not responsible for payment) 18

19. Compliance Plans • Be Aware • Have policies in place requiring employees to report concerns regarding employer group’s solvency, financial condition, and unusual activities • Document • TPA’s adherence to requirements • Plan Sponsor’s retention of discretion • Shelby County Health Care Corp. v. Majestic Star Casino, LLC., 581 F.3d 355 (6th Cir. 2009) (applied de novo review when discretionary authority is exercised without proper delegation) • Pursue • What happened with stop-loss funds (with advance-funding coverage)? • Why was payment denied or check returned? • Inform • Remind plan sponsor of obligations • If questioned, inform providers, participants and beneficiaries that the claim is awaiting funding or payment authorization 19

20. Keep Records • Complaint logs • Communications • Inquiries from third-parties • Providers • State and local agencies • Compliance Plan • Document training sessions / activities • Reports 20

21. RESOURCES • EBSA Enforcement Manual • http://www.dol.gov/ebsa/newsroom/fscpcp.html • A good criminal attorney 21

22. QUESTIONS? Jarrod Pearson (970) 986-3400 jpearson@hfak.com 22

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