Prohibited transaction - hiring of a subsidiary

[Carol V. Calhoun]

Here's the situation.  TPA wants to hire its own subsidiary as a care coordinator for the health plans it serves. I'm trying to figure out:

• Whether we have a prohibited transaction.
• Whether an exemption applies.
• Whether the arrangement needs to be mentioned in the TPA agreement.  In other words, if the TPA agreement includes care coordination services, must it be separately disclosed that these services are provided through the subsidiary and what portion of the fees go to the subsidiary?

It doesn't really seem to me that the prohibited transaction rules should apply in this case.  After all, there is no more potential for abuse if the TPA uses a subsidiary for this than if it performs the services itself.  However, I'm concerned about Information Letter 1998-02-19 and Prohibited Transaction Exemption 93-62, which treat the selection of health care services as a fiduciary function.

[Chaz]

Are you sure that the TPA is an ERISA fiduciary (at least for activities other than claims adjudication)?  In my experience in the health plan area, that would rarely be the case.  By contrast, the Information Letter you cite is with respect to a trustee of a multiemployer plan who clearly is a fiduciary.

Virtually of the ASA agreements I review permit the TPA to delegate certain functions to its affiliates and there is no disclosure of how much of the fees go to the affiliates.  That is even the case where the plan sponsor is a multiemployer health and welfare fund.

[Carol V. Calhoun]

More facts on this one:

• The TPA is an ERISA fiduciary with respect to claims.
• The care coordinator gets paid a flat fee for each participant who has a care plan.
• The way a participant becomes eligible for a care plan is to have multiple health conditions for which the plan is responsible for payment.  Thus, if the TPA approves more claims, this would in theory result in more participants having care plans, and the care coordinator subsidiary getting paid more money.

Now, as a practical matter, we think it highly unlikely that the TPA would approve extra claims just so its subsidiary could get the extra money.  The money received by the subsidiary per participant would be far less than the amount of any claim that would cause a participant to receive a care plan.  If the TPA were approving thousands of dollars in claims so that its subsidiary could get a few hundred dollars in fees, it would rapidly lose business from employers upset by the high number of claims being paid.

However, we're wondering whether there is nevertheless a prohibited transaction, and if so, whether there is any kind of statutory or administrative exemption.  And so far, I'm just not finding any discussion of prohibited transaction issues in a health plan.  Is anyone aware of anything out there?