Lawsuit Challenging Employer Health Plan Options Survives Motion to Dismiss

by Alex Smith

A pending lawsuit against Northwestern University and its health plan fiduciaries raises novel claims that could be problematic for employers that offer multiple medical benefit options if the court’s recent denial of Northwestern’s motion to dismiss gains traction. The lawsuit, Barbich v. Northwestern University, alleges that the plan’s fiduciaries violated ERISA and breached their fiduciary duties by offering employees a medical plan option that provided insufficient value compared to an alternative option offered to employees. The plaintiffs allege that the “premium” plan option that charges higher premiums in exchange for lower deductibles and cost-sharing is financially dominated by the “value” plan option because the lower cost sharing does not sufficiently outweigh the higher premium.

Surprisingly, the lawsuit survived the defendants’ motion to dismiss for failure to state a claim. The court declined to consider the settlor, rather than fiduciary, nature of the decision to offer a second medical plan option at the motion to dismiss stage even though there cannot be a fiduciary breach when there is no fiduciary action or inaction. It is important to note that this is not a decision on the merits regarding whether the plan fiduciaries acted inappropriately. While this decision is frustrating for employers, it is still just an isolated decision regarding a motion to dismiss that does not serve as binding precedent. An appellate court or other federal district courts may disagree with this decision.

The lawsuit appears to take issue with the common and reasonable practice by employers of offering employees multiple medical benefit options so that employees can weigh the tradeoffs of premium cost versus cost-sharing levels based on their personal circumstances. Some employees may value paying a lower premium in exchange for higher deductibles, copays, and coinsurance, while other employees may prefer paying a higher premium in exchange for lower cost-sharing obligations. An employer, as settlor, deciding to allow employees to make this choice for themselves doesn’t cause plan fiduciaries to violate their fiduciary duties just because some employees think one option is superior. If this lawsuit is successful or spawns other similar lawsuits that survive motions to dismiss, employers that offer employees a choice among multiple medical plan options could decide that it is not worth the additional costs and exposure to provide employees with the choice of multiple medical plan options.