Health Plan TPA to Pay for Undisclosed Fees

The 6^th U.S. Circuit Court of Appeals affirmed a district court decision granting Hi-Lex Controls, Inc. summary judgment on its claim that BCBSM functioned as an ERISA fiduciary and violated the Employee Retirement Income Security Act (ERISA) by self-dealing. The appellate court also affirmed the district court’s ruling that BCBSM violated its general fiduciary duty under Section 1104(a) and that Hi-Lex’s claims were not time-barred. The court awarded Hi-Lex $5,111,431 in damages and prejudgment interest in the amount of $914,241.

Rejecting BCBSM’s argument that it is not an ERISA fiduciary, the 6^th Circuit noted it recently held in a similar case that BCBSM functioned as an ERISA fiduciary when it served as a third-party administrator (TPA) for a separate client and assessed a plan-related fee (see “Service Provider Assessing a Fee Was a Fiduciary”). BCBSM argued that it exercised no discretion with respect to the disputed fees because they were part of the standard pricing arrangement for the company’s entire administrative services contract (ASC) line of business. However, the appellate court said the record supports a finding that the imposition of the disputed fees was not universal.

It noted that the district court cited an email in which BCBSM’s underwriting manager acknowledged that individual underwriters for BCBSM had the “flexibility to determine” how and when access fees were charged to self-funded ASC clients. In addition, the manager admitted during testimony at trial that the disputed fees were sometimes waived entirely for certain self-funded customers. “The district court did not err in finding that the Disputed Fees were discretionarily imposed,” the court wrote in its opinion.

The appellate court also agreed with the district court that Hi-Lex’s claims did not violate ERISA’s statute of limitations because the plan sponsor can validly invoke the extended six-year period permitted by the fraud or concealment exception. The court said BCBSM committed fraud by knowingly misrepresenting and omitting information about the disputed fees in contract documents. 

In affirming the decision that BCBSM violated ERISA by self-dealing, the 6^th Circuit again cited the previous, similar case, noting that it involved “the same ASC, same defendant, and same allegations.” In that case, the court held that BCBSM’s use of fees it discretionarily charged “for its own account” is “exactly the sort of self-dealing that ERISA prohibits fiduciaries from engaging in.”

Similarly, the court found in the prior case BCBSM violated ERISA Section 1104’s exclusive benefit rule because when a “fiduciary uses a plan’s funds for its own purposes, . . . such a fiduciary is liable under § 1104(a)(1) and § 1106(b)(1).”

According to the court opinion, under BCBSM’s ASC with Hi-Lex, it received an administrative fee per employee per month. In 1993, BCBSM implemented a new system whereby it would retain additional revenue by adding certain mark-ups to hospital claims paid by its ASC clients. Regardless of the amount BCBSM was required to pay a hospital for a given service, it reported a higher amount that was then paid by the self-insured client. The difference between the amount billed to the client and the amount paid to the hospital was retained by BCBSM in a system termed “Retention Reallocation.”

Hi-Lex asserted it was unaware of the existence of the fees until 2011, when BCBSM disclosed to the company in a letter the existence of the fees and described them as “administrative compensation.” Following the disclosure, Hi-Lex sued BCBSM, alleging violations of ERISA as well as various state law claims.

The 6^th Circuit’s decision in Hi-Lex Controls, Inc. v. Blue Cross Blue Shield of Michigan is here.