Paying More, Getting Less: Why Employer Health Plans Need ERISA Fiduciary Scrutiny

by Matthew P. Suzor and Laura Twizere

The Employee Retirement Income Security Act (“ERISA” or the “Act”) was passed, in great part, in response to retirement benefits mismanagement scandals in the 1960s and 1970s.  Before signing the Act into law on September 2, 1974, President Gerald R. Ford remarked, “[t]oday, with great pleasure, I am signing into law a landmark measure that may finally give the American worker solid protection in his pension plan.”

From the beginning, ERISA’s provisions applicable to health plans received much less attention.  That made sense at the time; as there was no crisis regarding employer-sponsored health plans in contrast to the challenges facing retirement benefits.  Health insurance largely took the form of indemnity plans that reimbursed employees at a set rate for any medically necessary care from any licensed provider.  Times have changed.

The Current State of Health Plans

In 2022, employer-sponsored plans covered almost 154 million people, and most employer-sponsored health plans play a direct role in managing and coordinating medical care through the selection of providers and contribution rates.  At the same time, healthcare spending on national and individual levels has risen dramatically.  Nationally, healthcare spending has continued to grow, reaching $4.5 trillion in 2022.  Individually, the financial burden is equally striking: in 2023, the average annual premium for employer plans for family coverage was $23,968 (equal to 23% of the median family household income of $102,800) and $8,435 for individual coverage (equal to 17% of median non-family household income of $49,600).  These price increases have outpaced inflation and have disproportionate effects on low- and middle-income workers and their families, particularly because premiums are not paid in proportion to income.

Employee Choice & Welfare Loss

Behavioral economics offers some insight into how employees are making their health plan choices in such a costly field.  Contrary to traditional economic models, which would assume individuals select the plan best suited to their financial and medical needs, real world insurance choices are more complex.  Studies show that employees often choose suboptimal plans, creating substantial welfare loss.

One notable study involving financially dominated plans from The Quarterly Journal of Economics by Saurabh Bhargava, George Loewenstein, and Justin Sydnor stood out.  Financially dominated plans in this context refers to health plans in which the beneficiary is paying more for care at any level of utilization compared to at least one other available plan.

The study reviewed data of 23,894 single-coverage employees from a large U.S firm in which the employees could choose from 48 plans; 36 low-deductible options of which 35 were financially dominated.  The researchers found that about “55% of employees selected a plan that was financially dominated by another available plan and 61% of employees chose dominated plans on a nominal basis.”

Thanks to the breadth of the data available to the researchers, they were able to estimate the savings the workers could have gained from choosing a dominant plan.  The employees would have saved “an average of $372 each year, which is, on average, equivalent to 24% of original plan premiums, 50% of the premiums associated with the counterfactual plan, and 2% of annual salary.”  To understand why employees chose suboptimal options, researchers conducted two online experiments exploring three factors:

• Menu complexity: Too many plans and plan features for employees to consider
• Nonstandard preferences: Strong preference for low-deductible plans driven by rational factors like liquidity constraints
• Low insurance competence: Poor understanding of insurance concepts

Across both experiments and data, the strongest association with financially dominated plan selection was low insurance competence.

These findings demonstrate that insurance choice often reflects limited understanding rather than genuine risk preference.  As a result, many employees end up paying more for fewer benefits, making individual choice an insufficient solution to the associated welfare loss.  This, in turn, raises important questions about how employers, as fiduciaries, structure and present their health plan offerings.

Time for Health Plan Oversight

ERISA’s fiduciary responsibilities are often described as the “highest known to law.”  While extensive standards and court decisions address retirement plan fiduciaries, far less detail and enforcement exist for health plans.  The most relevant guide is an informational letter from the Department of Labor (“DOL”), issued in 1998 in response to a question from the Service Employees’ International Union.  The letter states:

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.

The DOL’s response affirms that health plan fiduciaries are endowed with the same responsibilities as their retirement plan counterparts to ensure arrangements are reasonable.  However, enforcement has not kept pace.  Despite rising health insurance expenditures and evidence that employees are not reaping the benefits of the high cost, many fiduciaries do not appear to follow prudent processes.  A 2020 survey by the National Committee for Quality Assurance found that employers were often unaware of how their health plans performed relative to state and national benchmarks.

Cost data tells a similar story: from 1996-2001, private insurers paid hospitals approximately 10% more than Medicare.  By 2012 private plans paid 75% more, and the most recent data suggests that private plans now pay 224% of what Medicare pays hospitals for identical services.

This great cost accompanies substantial responsibility.  Hundreds of billions of dollars are spent yearly on employer-sponsored health plans representing a significant fraction of employees’ wages.  Therefore, ensuring that health plan fiduciaries meet their responsibilities is essential not only for individual financial security but for broader economic welfare.

Looking Ahead

In recent years, there has been new attention directed to health plans in ERISA litigation.  Some prominent cases include Lewandowski v. Johnson & Johnson, which relates to excessive fees for prescription drugs, and Barbich et al v. Northwestern University, which addresses financially dominated plans.  While these cases are in the early stages, this emerging wave of litigation is necessary and long overdue.