Category Archives: Fiduciary Duty

The Case of the Hidden Fees

In self-funded plans under ERISA, corporations pay health care benefits themselves and, in addition often contract with a health insurer to administer the plan.  The health care insurer operates as a third-party administrator, or TPA, and is paid a fee for these administrative services.

In the case of Hi-Lex Controls, Inc. v. Blue Cross Blue Shield, 751 F.3d 740 (6th Cir. 2014), all was well and good until Blue Cross Blue Shield of Michigan (BCBSM) got greedy.  It was already receiving its administrative fee on a contractual per-employee-per-month basis.  Apparently, that wasn’t good enough.  BCBSM started to add mark ups to hospital claims, and it invented a remarkable phrase to capture the difference between the higher amount it billed to its self-funded client and the lower amount it paid to the hospital: “Retention Reallocation.”

BCBSM took these mark up fees from its self-funded client every year from 1993 until 2011 when it finally disclosed their existence for the first time.  Its client, to say the least, was not amused.  It sued BCBSM for breach of fiduciary duty and self-dealing – both violations of ERISA.  After a nine-day bench trial (there is no right to a jury trial under ERISA), the federal district court awarded more than $5 million to Hi-Lex Controls and an additional $900,000 in prejudgment interest.

But was BCBSM a fiduciary to Hi-Lex Controls?  After all, the relationship arguably was contractual in nature and BCBSM could be said to have breached its contract by charging more than the contracted-for amount.

This is the issue that is almost always at the heart of litigation under ERISA and so it is worth talking about.  A breach of contract claim would normally be preempted, meaning that ERISA would apply and not state law.  So Hi-Lex Controls could not bring a breach of contract claim here.

Since ERISA governs, there could be a claim if there were a fiduciary relationship.  This, in turn, hinges on the exercise of discretionary control.  Hi-Lex Controls proved at trial that BCBSM sometimes waived the mark up fees for some clients, meaning it exercised discretion.  As a result (and there were other technical aspects I need not describe here) the appellate court held that BCBSM was a fiduciary.

ERISA requires a duty of loyalty on the part of fiduciaries, and bars self dealing.  Affirming the lower court’s trial decision in its entirety, the Sixth Circuit’s decision is instructive for the following reasons:

First, because the case arises under an employee benefits plan, the claims must be brought under ERISA, not state law.

Second, self-funded plans should be investigating how their TPAs are administering their plans in order to take effective action against miscreants.  One option is a regular audit of fees.  A thorough review of prior conduct before hiring a TPA is also a must.

Third, even after the critical discovery of the overcharge, it took a trial to establish the necessary findings of discretion (in the ultimate irony, BCBSM sometimes did not collect the hidden fees; if it always did arguably there would not be discretion) in order to prove that BCBSM was a fiduciary and therefore that its actions were in violation of ERISA.  Plans should be prepared to move forward in this way to protect their plan assets.