Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...
Blue Cross Blue Shield of Michigan engaged in self-dealing when it unilaterally calculated and collected additional administrative fees from employers that contracted with Blue Cross for claims administration and network access to its self-funded employee health benefit plans, the U.S. District Court for the Eastern District of Michigan ruled Sept. 7 (Borroughs Corp. v. Blue Cross Blue Shield of Michigan, E.D. Mich., No. 2:11-cv-12557-VAR-PJK, 9/7/12).
Blue Cross began charging an administrative “access fee” in the late 1980s to improve its financial situation. Blue Cross allegedly decided to hide the fee within hospital claims on employers' billing statements in 1993 after it lost customers that were unhappy with the new fees.
Two Blue Cross customers sued in June 2011 after learning their billing statements included the “hidden” fees.
Judge Victoria A. Roberts determined that Blue Cross acted as an Employee Retirement Income Security Act fiduciary in its role as third-party administrator and engaged in self-dealing by unilaterally determining its administrative fees.
Borroughs Corp. and Hi-Lex Controls Inc. entered into identical administrative service contracts with Blue Cross for claims administration services and network access to Blue Cross's self-funded health benefit plans. Under the contracts, Blue Cross served as TPA for the companies' ERISA-governed employee health benefit plans.
The contracts required Blue Cross to process and pay employee health claims, provide network access to its network, and negotiate with hospitals and health care providers. Hi-Lex and Borroughs reimbursed Blue Cross for claims it paid.
The companies alleged in their complaints that they discovered the fees in 2011 and that Blue Cross used a “bevy of artifices” to disguise the fees within the billing statements, the court said. Blue Cross argued that its administrative compensation fees were disclosed in the contract in an unnumbered and untitled provision that stated the fees were “reflected in the hospital claims cost contained in the Amounts Billed.”
Hi-Lex and Borroughs claimed that Blue Cross violated ERISA by breaching fiduciary duties and engaging in prohibited transactions. The companies also included state law claims. The parties filed cross-motions for summary judgment.
The court first assessed whether Blue Cross was an ERISA fiduciary with respect to the employers' plans. Quoting Briscoe v. Fine, 444 F.3d 478, 37 EBC 1779 ( 77 PBD, 4/21/06; 33 BPR 997, 4/18/06), the court said that ERISA Section 409 “makes any person found to be a fiduciary personally liable to the ERISA-covered plan for any damages caused by that person's breach of fiduciary duties.”
According to the court, Blue Cross is a plan fiduciary if it exercised “discretionary control over the disposition of plan assets” or “any authority or control over plan assets.” The U.S. Court of Appeals for the Sixth Circuit determines fiduciary status based on a functional test and applies ERISA fiduciary status to TPAs when they exercise “practical control over an ERISA plan's money,” the court said, quoting Guyan International Inc. v. Professional Benefits Administrators Inc., No. 11-3126 (6th Cir. Aug. 20, 2012) (161 PBD, 8/21/12; 39 BPR 1635, 8/28/12).
The Sixth Circuit has treated TPAs as ERISA fiduciaries when they exercised authority and control over plan assets by depositing assets into accounts the TPA selected, controlled the funds, wrote checks from the accounts, advised contracting companies to deposit funds with the TPA, and determined when and how the funds were dispersed, the court said.
Based on these prior holdings, Blue Cross acted as an ERISA fiduciary when it transferred plan assets to itself to pay the administrative fees, the court said. According to the court, “[t]he fact that Blue Cross was able to allocate to itself an administrative fee demonstrates its control over plan assets.”
The court was not convinced by Blue Cross's argument that it was not an ERISA fiduciary. Blue Cross's contract with the employers did not set forth a specific administrative fee, permitted Blue Cross to calculate its own fee, and allowed Blue Cross to “exercise discretion in a deliberately opaque manner to determine the amount of fees to pay itself.”
After determining that Blue Cross served as an ERISA fiduciary for Hi-Lex's and Borroughs's employee benefit plans, the court concluded that Blue Cross violated ERISA Section 406(b)(1) by dealing with plan assets in its own interest. Blue Cross was liable for self-dealing because it “unilaterally determined the amount of [administrative fees] to keep as part of its administrative compensation and collected those fees from plan assets,” the court said.
ERISA permits a fiduciary to “defray reasonable expenses of administering the plan” but “does not allow a fiduciary to set its own administrative fee and directly collect those fees from plan assets,” the court said, quoting Patelco Credit Union v. Sahni, 262 F.3d 897, 26 EBC 2060 (9th Cir. 2001) (164 PBD, 8/29/01; 28 BPR 2232, 9/4/01). The court concluded that Blue Cross “unilaterally dealt with plan assets for its own benefit,” which is the type of self-dealing that is a per se breach of ERISA Section 406(b)(1).
The court next determined that issues of material fact still existed regarding whether Blue Cross breached ERISA fiduciary duties by lying or misleading the employers. The court also left unresolved Blue Cross's limitations period argument. The court dismissed the employers' state law allegations after concluding those claims were ERISA-preempted.
Borroughs and Hi-Lex were represented by Stephen F. MacGuidwin, Aaron M. Phelps, and Perrin Rynders of Varnum, Grand Rapids, Mich. Blue Cross was represented by G. Christopher Bernard, Jason R. Gourley, Alan N. Harris, Joseph T. Muzingo, Rebecca D. O'Reilly, and Matthew R. Rechtien of Bodman, Ann Arbor, Mich., and Detroit.
By Matthew R. Madara
The full text of the opinion is at http://op.bna.com/pen.nsf/r?Open=mmaa-8xzjqh.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)