Health Care, Human Resources, and Law

Varnum wins $5.1M fees case against BCBSM

May 31, 2013
| By Pete Daly |
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A federal judge ordered Blue Cross Blue Shield of Michigan on May 23 to pay back $5.1 million it collected in hidden fees while serving as third-party administrator for a self-insured employee health insurance plan.

Hi-Lex Controls of Rochester Hills, which has a plant in Battle Creek, was represented in its suit against BCBSM by three Varnum Law attorneys, led by Perrin Rynders in the Grand Rapids office. The suit was filed in June 2011, alleging violations of the federal Employee Retirement Income Security Act of 1974.

BCBSM subsequently released a statement to the Business Journal May 29, saying the decision by U.S. District Court Judge Victoria A. Roberts in Detroit “is contrary to a decision of the Michigan Court of Appeals (last year) regarding the exact same contract language.” Those other cases were in Michigan courts, and BCBSM said it will appeal Roberts’ ruling in federal court.

However, Rynders said “our case was not about contracts,” but rather “about what Blue Cross said it was actually doing.”

In regard to the BCBSM statement that it would appeal, Rynders responded, “Judge Roberts decided the case based on the Employee Retirement Income Security Act of 1974. That federal statute prohibits a fiduciary like BCBSM from charging hidden fees and then lying about it repeatedly in hospital claims reports. The fact that BCBSM points to a state court ruling that has nothing to do with ERISA underscores the fact that it had no valid defense to the ERISA claims that Judge Roberts was called upon to decide.”

BCBSM was hired by Hi-Lex to be its third-party administrator to handle all claims made under the Hi-Lex employee health benefits plan from 1994-2011. The plan falls under ERISA regulations.

Rynders said Hi-Lex had testified in court that BCBSM gave it annual and quarterly accounting statements for years while repeatedly assuring Hi-Lex it was not being charged access fees — “but they were.”

The access fees were contained within hospital claims BCBSM paid on behalf of Hi-Lex employees but then marked up — in some cases by 13 percent or more.

The Roberts decision states the case concerns “certain fees that BCBSM allocated to itself as additional compensation,” with Hi-Lex arguing it did not know about those fees until recently because they had been hidden by BCBSM.

For its part, BCBSM argued that it did not breach any fiduciary duties required by ERISA because the disputed fees had been fully disclosed and Hi-Lex had agreed to pay them.

In her May 23 Finding of Facts and Conclusions of Law, Roberts wrote that BCBSM “went to great lengths to ensure that the Disputed Fees were not disclosed to the customer.”

“BCBSM violated ERISA’s prohibition against self-dealing and also breached its fiduciary duties. It also engaged in fraud and concealment to hide its violations from Plaintiffs,” wrote Roberts.

Exhibit 507, evidence submitted by Hi-Lex, shows the results of a Request For Proposals the company issued in 2003, in effect soliciting bids for a third-party administrator in the following year. The company’s self-funded health insurance plan then covered just under 1,200 employees. Hi-Lex specifically asked if “network access/management fees” were included in the charges. Two of the responding companies — one of which was BCBSM — indicated they did not charge access fees, while the other two that responded did. The proposed cost presented by BCBSM was $505,000, but Rynders said the real cost was actually hundreds of thousands of dollars above that. He said if BCBSM had revealed it was also going to charge access fees, its proposal would not have been even close to competitive with the other three proposals.

Rynders said he has filed 26 cases against BCBSM regarding its fees charged as third-party administrator of employee health insurance plans. Three have been settled; 23 are still pending.

In its May 29 email to the Business Journal, BCBSM said it was “disappointed that the judge ruled in favor of the plaintiff regarding the interpretation of the contract.”

“The decision is contrary to a decision of the Michigan Court of Appeals regarding the exact same contract language,” added BCBSM.

“On June 6, 2012, the Michigan Court of Appeals unanimously overturned a $1.13 million judgment in a dispute brought by Calhoun County which challenged a fee that Calhoun County paid to Blue Cross in return for access to Blue Cross’s best-in-state hospital network and to comply with state mandates. The fee at issue in the Calhoun County case was the exact same fee at issue in the Hi-Lex case,” wrote BCBSM.

A spokesperson for BCBSM said there were three other cases in state courts in West Michigan that were reversed last summer as a result of the Michigan Appeals Court decision in the Calhoun County case.

According to Helen Stojic in corporate affairs at BCBSM/Blue Care Network, in July 2012, judges in Holland and Battle Creek reversed their previous decisions and ruled in favor of BCBSM on claims of breach of contract. In September, she said, a judge in Muskegon dismissed a similar case on all counts.

The Business Journal reported in March 2012 that the city of Holland, which has had a self-funded employee health insurance plan since 1991, sued BCBSM for charging hidden “access fees” as the city’s third-party administrator. The city was awarded almost $1.6 million in damages.

BCBSM argued that Holland was aware of the fees being charged.

Tim Vagle, director of finance at the city of Holland, told the Business Journal last week that, “due to a decision of the Court of Appeals on another case against BCBSM (Calhoun County), the Ottawa County Circuit Court has set aside the jury verdict in the Holland vs. BCBSM case. The city has appealed this decision to the Michigan Court of Appeals. It is not expected that there will be any ruling on these appeals for a year or two.”

BCBSM controls about 70 percent of the health insurance market in Michigan and has operated under special legal status of a charitable and benevolent insurance organization since organized under Michigan law several decades ago. As such, it has been exempt from state and local taxes on income and property, according to Dr. Rob Deane, who serves on the advisory council to the Area Agency on Aging of West Michigan.

Rynders said that years ago, when the state required BCBSM to offer supplemental health insurance to retirees, it had to increase its revenues to fund that obligation. However, when BCBSM tried to pass that cost on to all of its customers in surcharges, the high cost caused it to lose a lot of business — about 225,000 “members” during 1989 alone. Rynders said a 1993 memo from a BCBSM executive urged the organization to stop attaching surcharges and, instead, mark up hospital bills so that the additional cost was no longer visible to the customers.

In March, Gov. Rick Snyder signed legislation that overhauls BCBSM, ending its tax-exempt status, changing how it is regulated and letting it transform into a new nonprofit structure by 2014.

Under the new form, BCBSM will pay state and local taxes averaging $100 million annually and no longer be the state’s “insurer of last resort,” which required it to accept all customers regardless of health status. Its rate-increase requests will be reviewed by the state insurance commissioner, as other insurers currently are, and no longer will be subject to an extra layer of scrutiny by the Michigan attorney general. It also will drop its charitable “social mission” and commit to contributing nearly $1.6 billion over 18 years to an endowment working to improve public health and health care access.

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