The U.S. Department of Labor alleged that, in addition to charging a per-employee monthly fee, which was disclosed, a third party administrator (“MagnaCare”) charged employer-provided health plans an undisclosed markup above the actual amounts paid by MagnaCare to ancillary medical service providers such as labs and radiology and imaging services. The plans paid MagnaCare the full amount, and MagnaCare remitted the lower actual charges to the providers and retained the undisclosed markup, which MagnaCare called a “network management fee.” By operating under this fee arrangement and charging an undisclosed fee that was not approved by plan fiduciaries independent of MagnaCare, the DOL alleged MagnaCare breached its fiduciary duties and committed prohibited transactions under ERISA. In addition, the DOL alleged that MagnaCare did not fully comply with the Affordable Care Act’s “prudent layperson standard” because MagnaCare did not inform participants with diagnosis codes that were not on MagnaCare’s “ER list” that they could supplement the information provided to MagnaCare to establish there was an emergency medical condition. The DOL expected the prudent layperson standard to be mentioned in the explanation of benefits. The DOL also alleged that MagnaCare’s explanation of benefits failed to comply with the DOL’s claims regulations in other ways, and MagnaCare failed to implement comprehensive procedures to process claims for which there could be potential third party liability. MagnaCare agreed to pay $16 million to its clients and the DOL (as a civil penalty) and possible future payments to settle these claims. MagnaCare also agreed to provide new fee disclosures, offer fixed fee arrangements, and implement new claims processes. Plan sponsors should make upfront inquiries before engaging plan service providers, and modify their service agreements as needed, to help avoid these types of problems.

View the Complaint.

View the Consent Order.