Dignity Health Poised to Settle ERISA Lawsuit for $100 Million

San Francisco, CADignity Health has agreed to pay $100 million to settle a proposed class action ERISA lawsuit that accused it of using a undeserved religious exemption to justify underfunding its pension plan by $1.5 billion. The proposed settlement would require Dignity Health to add $50 million in retirement plan funding in 2020 and at least $50 million in 2021. In addition, the settlement requires Dignity Health to refrain from reducing participants’ accrued benefits because of a plan merger or amendment for 10 years. Dignity Health has also promised to fund the plan until 2024, making the minimum contribution recommended by actuaries to the plan.

Rollins v. Dignity Health raises at least four big questions. These are:

• The role played by religious organizations in providing healthcare;
• What mergers and consolidations in the healthcare industry mean for healthcare workers;
• When and if the Free Exercise and Establishment Clauses of the First Amendment should affect how federal employment and pension law is applied; and
• What recourse healthcare workers who participate in federally exempt “church plans” have when they discover that there is not enough money to pay promised benefits.

However, because the lawsuit is likely to end by settlement, these questions will remain unanswered.

Given the importance of religiously affiliated healthcare organizations and the recent deference shown by the U.S. Supreme Court to religious objections on the part of business owners who do not wish to comply with federal anti-discrimination or healthcare laws, it is certain that these topics will come up again.

Facts first

Dignity Health operates a health care conglomerate in California, Arizona and Nevada and ancillary care facilities in nineteen states. It is the fifth largest healthcare provider in the U.S. It maintains the Dignity Health Pension Plan (“Dignity Plan”), a defined benefit pension plan, in which more than 80,000 individuals participate.

Lead plaintiff, Starla Rollins, was employed by Dignity as the MCH Billing Coordinator at San Bernardino Community Hospital in San Bernardino, California from 1986 until 2012. She is a participant in the Dignity Plan because she is or will become eligible for pension benefits under the Plan to be paid at normal retirement age. Patricia Wilson has been employed since 1995 as a registered nurse at Chandler Regional Medical Center in Chandler, Arizona, which Dignity acquired in 1999. She is also a participant in the Dignity Plan.

Rollins and Wilson brought this lawsuit against the Dignity Plan under the provisions of ERISA because the plan was underfunded. At the time the Second Amended Complaint was filed, the Dignity Plan allegedly had assets sufficient to pay only 75 percent of accrued obligations. Rollins and Wilson had reasonable grounds to fear that their promised pension benefits would never be paid and sued on behalf of themselves and similarly situated participants.

Dignity Health maintains that the Dignity Plan is not subject to ERISA because it falls under an exemption in ERISA carved out for church plans. The exemption is ultimately rooted in the Free Exercise Clause of the First Amendment.

Rise of church/government partnerships in healthcare

The Catholic Church is, by no means, the only religious organization involved in the healthcare industry, but it is the largest. Over the past decade, Catholic hospitals have merged with and purchased nonsectarian hospitals around the United States, becoming leading players in the nation’s healthcare industry. Catholic hospitals receive billions of taxpayer dollars each year and have a combined gross patient revenue of $213.7 billion.

As far as employment and pension law is concerned, however, it can become important to distinguish between employees of religious organizations (nursing nuns, for example) and secular employees of secular organizations that provide healthcare services under the distant auspices of a church. The first may not be protected by federal law, while the latter are.

The Supreme Court has set up a complicated set of criteria for determining whether a defined benefit plan, like that maintained by Dignity Health Services is an exempt church plan. Among the issues that the courts consider are whether:

• a religious institution plays any official role in the governance of the organization;
• the organization receives [financial] assistance from the religious institution; and
• a denominational requirement exists for any employee or patient/customer of the organization.

The Constitutional challenge

Rollins also raises a more fundamental Constitutional challenge to the church plan exemption by asserting that exempting hospital systems like Dignity that have chosen to compete with commercial businesses is fundamentally unfair. It grants an exemption from costly legal requirements to hospitals with some connection to religion but not to similar secular hospital systems.

The Complaint argues that this exemption constitutes an unconstitutional establishment of religion because it is not necessary to alleviate a substantial, state-imposed burden on religious exercise or to avoid substantial government entanglement in religion.

Other state remedies

Finally, the lawsuit argues that even if the Dignity Plan is exempt from the provisions of ERISA because of the church plan exemption, participants should have a remedy under state breach of contract laws. These are not generally the rules used to hold plan fiduciaries accountable.

The 80,000 participants in the Dignity Plan may soon be able to breathe a sigh of relief about the near-term security of their own retirement benefits. The larger questions, however, remain unresolved.