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Diana Orantes Ceresi
Associate General Counsel
SEIU, AFL-CIO, CLC
1313 L Street, N.W.
Washington, DC 20005
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Dear Ms. Ceresi:
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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.
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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.
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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.
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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 therefor.
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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.
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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.
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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 accreditation of health care service
providers by independent services or state agencies.
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We hope this information will be helpful to you.
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Sincerely,
Bette J. Briggs
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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