For at least the last generation plan sponsors, and particularly plan fiduciaries, have devoted (or should have been devoting) significant time and energy monitoring the fees charged to participants in their 401(k) plans and ensuring appropriate disclosures. The Hi-Lex Controls, et. al. v. Blue Cross Blue Shield of Michigan case should serve as an important reminder to group health plan fiduciaries that under the Employee Retirement Income Security Act of 1974 ("ERISA") monitoring plan fees is equally important in both their retirement and group health plans.
Hi-Lex Controls, Inc., an automotive parts supplier with approximately 1,300 employees, maintained a self-insured group health plan. Blue Cross and Blue Shield of Michigan ("BCBSM") served as the plan's third-party administrator. BCBSM's services were provided pursuant to an "administrative services only" ("ASO") agreement. Under the terms of the ASO agreement, BCBSM administered claims for the Hi-Lex self-insured group health plan (the "Plan"). BCBSM negotiated fees and established access within its provider networks to Plan participants. BCBSM was paid a monthly administrative fee based on the number of employees per month ("PEPM") enrolled in the Plan.
But BCBSM didn't limit its fees to just the PEPM amounts generated. No, Hi-Lex alleged, BCBSM obtained additional payment by essentially marking up (by as much as 22 percent) certain hospital charges and pocketing the mark up.
BCBSM appears to have gone out of its way to hide these additional fees from Hi-Lex (and presumably other customers). In fact, it was disclosed in the case that internal company e-mails appear to show that BCBSM's managers knew customers were not aware of these markups and that, stunningly, employees were routinely trained to "downplay" the hidden fees if they were discovered.
The Federal District Court in Michigan found for Hi-Lex and awarded it more than $6 million in damages and pre-judgment interest. BCBSM appealed the court's findings. On appeal, a three-judge panel confirmed the District Court's holding. On October 20, the United States Supreme Court refused to hear BCBSM's appeal and thus the Sixth Circuit's holding will stand.
Learning Lessons for Plan Sponsors
As Hi-Lex won the case and can now recover from BCBSM for its bad acts, it seems odd to suggest that there are learning lessons for plan sponsors in this case. But there are. There is no argument that BCBSM has been appropriately penalized for its fraudulent behavior in this case. One of BCBSM's more self-serving arguments in the case was that Hi-Lex was at least partially to blame because it didn't read and understand the agreement. We agree with Hi-Lex's counsel on this point when they responded to BCBSM's rather lame argument by comparing BCBSM to a bank robber who wants to keep the money because the bank's security guard failed to thwart the robbery. (We must admit that we tend to admire creative legal arguments, but this one left us scratching our head.)
While we don't subscribe to BCBSM's theory that the bank guard's failure excuses the bank robbers' actions, we do think that there is at least some credence to the idea that plans sponsors must be diligent because, unlike a bank or a security guard, plan sponsors are subject to ERISA's fiduciary rules. These rules do require plan fiduciaries to be, among other things, diligent in the discharge of their responsibilities. Unfortunately, the BCBSM's of the world don't make that easy. A recently reviewed ASO included three full pages of different types of fees the ASO would collect in various circumstances. Three full pages of additional fees, including "provider access fees," "contingency fees" and other similarly named fees. We're not saying those fees are unfair or unwarranted. But it is odd to see this long list of fees when the salesperson sold the ASO arrangement on only a PEPM basis.
ERISA requires all plan fiduciaries to be diligent and monitor fees paid by the plan and its participants. So, to avoid offering vendors the opportunity to defraud plan participants, the Hi-Lex case serves as a reminder that ERISA plan sponsors should:
- Hire competently trained ERISA counsel to review all vendor contracts, including ASO contracts. Too often these agreements are either signed without proper review or reviewed by procurement or contract attorneys who do not have specialized training and therefore cannot throw down a yellow flag on inappropriate fees;
- Demand that all plan vendors establish and maintain transparent practices for establishing and collecting fees;
- Specifically require that all vendors (without demand) provide plan sponsors and plan participants with clear and concise periodic disclosures of all amounts received by the vendor in the administration of the plan; and
- Review existing relationships to determine whether they or their plans have been overcharged by vendors that have engaged in similar practices.
Our wake-up call is not intended to suggest that we think Hi-Lex plan fiduciaries did anything wrong. We do not. But we do think that the case serves as a reminder to group health plan sponsors, particularly those that sponsor self-insured plans, to be diligent in reviewing the fees charged by vendors to their plans. It is obvious that BCBSM is not alone in these types of practices.
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