The New Fiduciaries

Imposition of new “fiduciary duties” has become a popular weapon for lawmakers to exert pressure on business sectors they do not trust or understand, or that they flat-out do not like.

In healthcare, frustrated state policymakers seeking to bring down costs for consumers and to get their arms around some of the more opaque segments of the ecosystem have leapt onto the fiduciary duties bandwagon.

The web of common law and statutory fiduciary duties is already complex and only seems to be growing. A key question, then, is who should be caught in it?

Trust and Confidence

First, some history and legal background. Common law fiduciary status traditionally is reserved for special relationships of trust and confidence—in practice, an ongoing relationship within which one party exercises discretion, control, or special advisory capacity over another’s assets or investment, legal, or business decisions. In other words, one party relies heavily on— and puts tremendous faith in—the other to perform to the highest professional, legal, and ethical standards.

Examples of fiduciary relationships include attorney-client, trustee-trust beneficiary, director-corporation, and investment advisor-client. Fiduciaries are assigned duties of loyalty, care, good faith, and prudence, among others. It is a robust set of obligations and expectations designed to eliminate actual and potential conflicts of interest between fiduciaries and their principals.

The common law fiduciary regime is designed to impose exceptional obligations in exceptional circumstances. When fiduciaries don’t meet that high bar, say by misappropriation of funds or failing to properly disclose conflicts of interest, their principals can seek recourse in court. Available common law remedies for breach of fiduciary duties are numerous and include punitive damages for intentional or particularly egregious breaches, disgorgement of the fiduciary’s profits, rescission of transactions, and injunctions against current or future conduct.

In addition to common law fiduciary principles and obligations, which have evolved over time through court precedent, state and federal lawmakers can (and do) supplement and/or clarify these obligations with specific statutory requirements. Statutory duties typically prescribe particular fiduciary obligations (e.g., to act solely in the best interest of the principal, provide certain disclosures, and follow other administrative/ compliance rules) owed in particular types of relationships (corporate governance, asset management, trusts and estates, and so on). These laws can be drafted broadly to track with the common law or can be combined with detailed requirements; they can also spell out or limit specific enforcement mechanisms, remedies, or damages available for breaches.

Fiduciary Designations Expand in Health Insurance

In the health insurance space, states are increasingly willing to expand statutory categories that meet the definition of fiduciaries. In the last few years, for instance, multiple states have imposed fiduciary duties on pharmacy benefit managers (PBMs) and third-party administrators (TPAs). States are pursuing different approaches in these bills—different formulations of the duties themselves, different parties identified to which the duties are owed—but the overall trend appears to be to apply fiduciary duties as a mechanism to pressure market relationships and costs.

Healthcare entities seem to be in states’ crosshairs for multiple reasons. The first is perceived (or in some cases, demonstrated) misalignment of financial interests between key players—e.g., entities that benefit through higher fees or other financial incentives by making certain drug formulary, network, and/or benefit design decisions that ultimately cost more for their clients (private employer plan sponsors or state Medicaid plans).

Second, there is a general sense of frustration among state lawmakers and regulators about the “black box” nature of some contracting practices and business arrangements.

Finally, there is increasing concern about vertical integration and lack of competition in some parts of the industry, which raise worries about where some entities’ loyalty actually lies and only exacerbates the issues of misaligned financial interests and opaque business practices.

To exert additional control in the market, states appear increasingly ready to slap fiduciary duties on entities that are not viewed as being adequately transparent in their dealings and/or that operate in low-competition markets under vertically integrated business arrangements.

In some cases, these state actions may make sense. Going back to core fiduciary principles, to the extent that entities have control over plan assets or make benefits determinations—as TPAs and PBMs typically do—there is at least a colorable argument that fiduciary status is appropriate and provides added protection for plan sponsors and beneficiaries who rely on these third parties’ expertise and loyalty.

Unfortunately, at least two states have recently proposed legislation that could extend fiduciary status well beyond its traditional common law bounds.

As introduced in January, an Indiana bill would have imposed fiduciary duties directly on insurance producers and employee benefits consultants (in addition to TPAs and PBMs). The proposed duties included acting solely in plan sponsors’ best interest, disclosing all potential conflicts of interest (not further defined), and disclosing all compensation, among other requirements. Producers and benefits consultants ultimately were carved out of the Indiana bill after successful education efforts with state legislators before the legislation was signed into law in April.

Taking a different approach that likely would capture producers, legislation introduced in Missouri this year would impose fiduciary obligations on any person who negotiates with a PBM on behalf of a purchaser of healthcare benefits. As of this writing, the bills remained in committee in the Missouri General Assembly as time runs down on its latest session.

These state bills target transactional or discrete sales-related activity, not ongoing special relationships of trust. Is it appropriate to extend fiduciary status to one-time transactions or sales scenarios? We would argue no.

First, discrete sales activity does not fit within the fiduciary model. Producers do not as a matter of course engage in fiduciary activities. They do not maintain control over assets, manage plan compliance or administration, or “take the wheel,” so to speak, from their clients. Brokers help their clients shop for the best possible coverage at the best possible price. If they don’t do a good job, they lose business.

Second, and somewhat related to the first point, we don’t see the same vertical integration challenges with brokers that we do with PBMs and TPAs. Granted, there is plenty of merger activity among brokerages, but the market remains extremely competitive and clients have many choices when it comes to hiring brokers.

Third, brokers operate in a transparent manner. The 1974 Employee Retirement Income Security Act (ERISA) already requires producers and consultants expecting $1,000 or more in direct and indirect compensation for services provided to group health plans to make detailed disclosures to the responsible plan fiduciary regarding their services and compensation.

These disclosures give clients a clear picture of what services are being performed for their money and the financial arrangements and compensation sources for producers, and ultimately protect plans sponsors from unknown conflicts of interest. Notably, PBMs and TPAs have so far claimed that they are not bound to follow these rules and are therefore not providing the same level of transparency.

Finally, fiduciary obligations offer important protections in certain trust-dependent relationships, but they also come with costs, particularly compliance obligations (e.g., reporting and recordkeeping) and litigation risk. These additional expenses are, in most cases, passed on to consumers in the form of higher fees, and they can drive decisions about which clients or businesses to work with.

Increased business costs clearly can be and often are justified when there are compelling public policy reasons to impose them via new legislation or regulation. But when there is no good policy justification and increased costs would negatively impact affordability and availability of services—which is the case if fiduciary duties are imposed on insurance producers—states should proceed with caution in imposing substantial new legal obligations like fiduciary duties.

It remains to be seen whether healthcare-focused state fiduciary legislation will pick up speed and how different states might pull this particular lever to address increasing costs and black-box industry segments in this space. But we hope that principles and sound policy rationale will prevail, and insurance producers will be left out of the fray.