United States District Court Eastern District of Michigan, Case No: 11-12557 Filed- 9/7/2012
Federal Court Rules Blue Cross Blue Shield Acted As ERISA Fiduciary & Engaged in Self Dealing
Borroughs v. BCBS Michigan
Ramifications of the Court Case
- Court determined that Blue Cross acted as an ERISA fiduciary in its role as third-party administrator and engaged in self-dealing by unilaterally determining its administrative fees.
- One aspect the Court relied upon in finding that the administrator exercised control over plan assets, and was therefore a fiduciary, is that it “allott[ed] to itself an administrative fee . . . .”
These cases are about certain “Access Fees” that Blue Cross Blue Shield Michigan (BCBS) allocated to itself as additional administrative compensation. According to court documents, “in the late 1980s, BCBS was in poor financial shape. In order to increase revenue, it began charging its self-insured customers additional fees.”
Understandably, the self-insured customers were unhappy that these charges amounted to an add-on to their bill. They were also unhappy to be subsidizing insured customers. Many customers who stayed with Blue Cross simply refused to pay the fee because they did not believe it was fair. Ultimately, BCBS remained in poor financial shape.
In 1993, according to court documents, “BCBS decided to hide the Disputed Fees by merging them with hospital claims on billing statements”
The court rules that:
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 court relied upon the Sixth Circuit, in that it has treated TPAs as ERISA fiduciaries when they exercise authority and control over plan assets by depositing plan assets into accounts the TPA selects, writing checks from the accounts, advising contracting companies to deposit funds with the TPA, and determining when and how the funds are to be dispersed
In a third case in this district, with nearly identical facts, Judge Tarnow held that Blue Cross was a fiduciary when it assessed an “other than group” (“OTG”) fee, a type of cost-transfer subsidy. As quoted by the Sixth Circuit, Judge Tarnow ruled on the record:
I find that [BCBSM], in fact, exercised authority or control over the Plan assets, and under ERISA it was a fiduciary. That’s because the [Fund] had to advance funds to [BCBSM], which then paid the claims on the [Fund]’s behalf to the providers. Sometimes, as it has been mentioned here, [BCBSM] had to pay more than was advanced, but [the Fund] was responsible for making up the difference, which is an inherent nature of self-insuring arrangement.
….
This shows that [BCBSM] exercised control over Plan assets, and there’s really no factual dispute about this. The [Fund]’s knowledge of the OTG fee is not relevant or material to the question of whether [BCBSM] exercised control over the assets.
Accordingly, [BCBSM] was a fiduciary in assessing the OTG fee.
Pipefitters Local 636 Ins. Fund v. Blue Cross Blue Shield of Michigan, 654 F.3d
618, 626 (6th Cir. 2011).