Take the Power Back . . . Negotiating Provider Contracts for Benefit Plans

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By Kevin Selzer

Disputes between plan sponsors and plan service providers are not new. As with any contractual relationship, things don’t always go according to “plan” or at least, as the sponsor expects. When that happens, one of the first things sponsors (and their attorneys) will do is review the provider’s contract. Some sponsors will be surprised to find some very provider-friendly provisions, such as:

  • a provision specifying that the provider is permitted by the contract to act negligently (as long as the conduct does not rise to gross negligence or intentional misconduct), or
  • a provision indicating that the sponsor has contractually waived its right to participate in a class against the provider.

Unfortunately for sponsors, a provider’s willingness to fix an error often comes down to how much the provider wants to continue working with the sponsor on a go forward basis.

Why is this?  The provider industry, particularly among retirement plan recordkeepers and self-funded health plan TPAs, has become very consolidated resulting in fewer alternative providers for sponsors to choose. You could argue that this consolidation has enhanced the leverage of providers and caused “market terms” to be dictated by the few. In addition, providers have become very adept at maximizing contract leverage via process. For example, contracts are often presented to the sponsor after the provider has been selected and implementation is underway, at a point when the sponsor is committed to making the relationship work.

Sponsors can manage the latter form of leverage, process leverage, by negotiating terms during the selection process (and there are some ways to make that more efficient than full contract negotiation). There are differences in what providers are willing to agree to contractually. Some attention to the key contract terms during the RFP can help the sponsor pick based on contract terms (in addition to services and cost).

While Murphy’s law may make some disputes unavoidable, strategic thinking on contract negotiation can better position sponsors if/when disputes arise.