A recent decision in the Sixth Circuit addresses the question of when a third party administrator of a self-insured health plan can be held liable for a breach of fiduciary duty for failing to disclose all of the fees it collects. 

In Hi-Lex Controls, Inc. v. Blue Cross Blue Shield of Michigan, the Sixth Circuit affirmed a lower court’s grant of a multi-million dollar award against Blue Cross Blue Shield of Michigan (“BCBSM”). The case arose when Hi-Lex, a sponsor of a self-insured health plan, sued BCBSM following its disclosure of certain mark-ups charged to some of its self-insured clients. BCBSM began charging the disputed fees in 1993. Hi-Lex argued that it was unaware that these fees were being charged until a 2011 disclosure by BCBSM. Ultimately, the district court determined that Hi-Lex should have discovered the disputed fees in 2007 when a pie chart that depicted the charges was presented to the company as part of an annual settlement meeting. Nonetheless, this finding allowed Hi-Lex the opportunity to bring suit under ERISA’s extended 6-year statute of limitations for claims involving concealment or fraud. The district court granted Hi-Lex summary judgment on its claim that BCBSM functioned as an ERISA fiduciary and that BCBSM had violated ERISA by self-dealing. Following a bench trial, the district court ruled that BCBSM also violated its general fiduciary duties. The court awarded Hi-Lex $5,111,431 in damages, and prejudgment interest in the amount of $914,241.

In affirming the district court’s decision, the Sixth Circuit focused on whether BCBSM acted as a plan fiduciary. The court rejected the argument that BCBSM was not a fiduciary because it simply adhered to contract terms giving it the unilateral right to retain funds as compensation because BCBSM exercised discretion with respect to this right by not imposing such fees uniformly on all self-insured clients. 

The court also rejected the argument that the funds that were used to pay the disputed fees were Hi-Lex corporate assets and not plan assets subject to ERISA protections. The court noted that under ERISA regulations, employee contributions constitute plan assets as soon as they are segregated from an employer’s general assets. With respect to employer contributions, which formed the bulk of the funds provided to BCBSM, the court noted that the assets of a welfare plan generally include any property, tangible and intangible, in which the plan has a beneficial ownership interest. In finding that the Hi-Lex plan had a beneficial interest in these employer contributions, the court looked to various factors, including that:

  • the SPD established that Hi-Lex intended to place the plan’s assets with BCBSM in its capacity as third party administrator. The SPD indicated that the third party administrator had been hired to review participant claims and pay benefits from the money provided by Hi-Lex; 
  • the SPD language required participants to make claims to BCBSM, which had the funds and the discretion to pay claims;
  • the SPD’s ERISA rights language indicated that participants have the right to sue fiduciaries (plural) if they misuse plan assets;
  • language in the administrative services agreement recognized that BCBSM had certain responsibilities under ERISA that it could not contract around; and  
  • BCBSM’s annual submission of data for inclusion in the plan’s Form 5500.

The court determined that collectively, these actions and representations established that BCBSM, Hi-Lex, and the company’s employees all understood that BCBSM would be holding ERISA-regulated funds to pay the health expenses and administrative costs of enrollees in the Hi-Lex health plan. As a result, beneficiaries had a reasonable expectation of a beneficial ownership interest in the funds held by BCBSM. The court also rejected BCBSM’s contention that a separate trust or account was needed to establish the existence of plan assets. 

Sponsors of self-insured health plans and third party administrators may find this case helpful in determining how fees must be disclosed, and determining when a third party administrator is acting as an ERISA fiduciary.