Nonprofit Insurer Breached Fiduciary Duty By Charging Plan For Michigan “Pass-Through” Fees

By setting and billing a multi-employer plan customer for a Michigan cost transfer subsidy fee, an insurer breached its fiduciary duty to the plan, the Sixth Circuit U.S. Court of Appeals has recently ruled in Pipefitters Local 636 Insurance Fund v. Blue Cross and Blue Shield of Michigan (No. 12-2265)

Background. Pipefitters Local 636 Insurance Fund (the Fund) is a union’s self-funded multi-employer trust fund, and a customer of nonprofit Blue Cross and Blue Shield of Michigan (BCBSM). Under Michigan state law, BCBSM is exempt from state and local taxes, but it is obligated to pay a cost transfer Medigap subsidy fee of 1 percent of its earned subscription income, which assists the state of Michigan in covering such things as copayments and deductibles not covered by Medicare. According to the terms of the contract between the Fund and BCBSM, BCBSM was to provide administrative services such as automated claims processing, cost containment initiatives, and records maintenance for the Fund, and the Fund agreed to pay such fees as claims, administrative charges, and hospital prepayments, along with “any cost transfer subsidies or surcharges…as authorized pursuant to Michigan law,” the latter of which were to be “reflected in the hospital claims cost contained in Amounts Billed.”

Fee collected from Fund. BCBSM collected the fee from the Fund from June 2002 to January 2004, although it did not always require self-insured customers to pay the fee. The Fund sued BCBSM in district court in September 2004 for breach of fiduciary duty, and the court dismissed the claim. The Sixth Circuit reversed, and the district court then granted the Fund class certification, and also granted the Fund’s motion for summary judgment on its fee imposition claim and its fee disclosure claim. The Sixth Circuit reversed on all but the fee imposition claim.

BCBSM was ERISA fiduciary. When affirming the fee imposition claim, the court first determined that BCBSM was an ERISA fiduciary. The court looked both at BCBSM’s relationship with the state of Michigan, which did not prescribe a particular method by which the insurer was to pay its Medigap transfer fee, and at the BCBSM’s relationship with the Fund. The court noted that, in order to collect the fee, BCBSM would negotiate discounts with health care providers. It would not pass through the entire discount to its administrative services customers, however, so that if it paid, for example, a $100 discount rate for a procedure normally billed at $120, it would bill the Fund $101, in order to cover the 1 percent Medigap fee. The court pointed out that the contract did not set forth the exact dollar amount of any cost transfer fees to be charged or the method by which it was to be calculated. BCBSM had argued that it had no discretion when the fee rate was set at 1 percent, but the court responded that the state of Michigan did not fix the rate that BCBSM charged each customer, and added that the fact that BCBSM did not pass the fee through to all of its administrative customers was additional evidence that BCBSM exercised enough discretion to make it an ERISA fiduciary with respect to its collection of the fee from the Fund, despite the fact that the contract specifically stated that BCBSM was not a named fiduciary.

Fiduciary duty was breached. The court then held that BCBSM had breached its fiduciary duty (ERISA Reg. Sec. 406(a)(1)) and that it had violated ERISA’s rule against self dealing (ERISA Reg. Sec. 406(b)(1)) when it discretionarily set the transfer fee charged to the Fund and when it used those fees received to fulfill its Medigap obligation to the state of Michigan. BCBSM essentially used the Fund’s money for its own purposes, the court said, and the district court’s grant of summary judgment to the plan was affirmed.

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