Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...
By Carmen Castro-Pagan
Dec. 23 — The trustees of an employee welfare benefit plan can continue with their claims that third-party administrators breached fiduciary duties and engaged in prohibited transactions under the Employee Retirement Income Security Act, the U.S. District Court for the Northern District of California ruled (ILWU-PMA Welfare Plan Bd. of Trs. v. Conn. Gen. Life Ins. Co., 2015 BL 421387, N.D. Cal., No. 3:15-cv-02965-WHA, 12/22/15).
In the Dec. 22 opinion, Judge William Alsup denied in part the third-party administrators' motion to dismiss, holding that the trustees sufficiently alleged facts showing that the TPAs exercised considerable discretion over plan management, thus becoming de facto ERISA fiduciaries. Alsup dismissed the plan's ERISA claims due to lack of standing, and some of the trustees' state-law claims as well.
The International Longshore & Warehouse Union and the Pacific Maritime Association created the ILWU-PMA welfare plan. The plan offered and self-funded an indemnity program for medical, surgical and hospital benefits.
In 1999, Great-West Life & Annuity Insurance Co. started processing the plan members' claims under the indemnity program. It adjudicated members' claims, maintained records, evaluated health-care usage for fraud and abuse, and prepared and issued checks to pay claims. The agreement with the plan provided that it wouldn't serve as a fiduciary.
In 2003, Carewise Health Inc. acquired a company that negotiated discounts on fees from out-of-network providers for the ILWU-PMA plan. Carewise only negotiated fees and didn't make any payments.
The plan conducted a claims audit in 2004 and found that Great-West had paid almost $1 million in out-of-network claims in full as billed, rather than as a percentage of the usual, customary and reasonable charge. Great-West agreed to correct this. A 2009 audit found that Great-West and Connecticut General—which acquired Great-West in 2008—had failed to apply the usual, customary and reasonable charge standard to claims.
In 2009, Carewise, without the plan's authorization, entered into several automatic discount agreements with providers, in which it guaranteed quick and audit-free payments to providers based on discounts from billed rates rather than discounts based on the usual, customary and reasonable charge standard.
In 2012, the trustees ended the contractual relationship with Connecticut General and Carewise resigned as a vendor to the plan. The plan and its trustees filed a lawsuit in 2015 against the third-party administrators, alleging the companies breached their fiduciary duties and engaged in prohibited transactions under ERISA, along with claims of breach of contract, negligence, unjust enrichment and other state-law claims.
The court declined to dismiss the trustees' fiduciary breach claims because the alleged breaches didn't arise out of the performance of merely ministerial tasks. The court noted that the allegations specified that Carewise and Connecticut General exercised considerable discretion by setting aside the usual, customary and reasonable rate for reimbursement and by applying their own schemes.
The allegations offered sufficient support for the inference that Carewise and Connecticut General usurped authority over plan management from the trustees, and exercised discretion as a matter of fact.
Moreover, the court said that since Connecticut General had the authority to write checks on the plan's assets and to issue those checks, it exercised authority or control respecting management or disposition of plan assets. Those allegations were sufficient to survive a motion to dismiss, the court concluded.
As to the prohibited transaction allegations, the court said that the trustees adequately alleged that Carewise assumed fiduciary duties when it entered into auto-discount agreements with providers.
As to the non-fiduciary prohibited transaction claim, the court rejected Carewise's argument that it wasn't an interested party. The court said that by implementing auto-discounts rather than negotiating claims on a case-by-case basis, Carewise received compensation for fee-negotiation services it never performed, thus receiving unreasonable compensation.
The plan and its trustees were represented by Leonard Carder LLP; Seyfarth Shaw LLP; Schwartz & Cera LLP; and Petra M. Reinecke. Connecticut General was represented by Hogan Lovells US LLP. Great-West was represented by Sidley Austin LLP. Carewise was represented Lewis Brisbois Bisgaard & Smith LLP.
To contact the reporter on this story: Carmen Castro-Pagan in Washington at email@example.com
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