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Administrative Services Contracts: The Importance of Reading Between the Lines |Hi-Lex Controls v. BCBS Michigan

Administrative Services Contracts in Self-Funded Health and Welfare Plans

It’s a given that plan sponsors and plan administrators should try to understand the terms of a vendor’s agreement to provide services to a plan.  But what is a plan sponsor to do when the language of an agreement is–in the words of the Sixth Circuit Court of Appeals–“opaque and misleading”?

Blue Cross Blue Shield of Michigan (BCBSM) served as the third party administrator (TPA) for Hi-Lex Controls, Inc.’s self-funded health and welfare plan for more than twenty years.  The Administrative Services Contract provided that BCBSM would process participants’ healthcare claims in exchange for a monthly administrative fee calculated on a per employee basis.  BCBSM also agreed to provide participants with access to its provider networks.

In 1993, BCBSM began to charge Hi-Lex and other self-insured customers additional fees on certain hospital claims, in addition to the contractually agreed administrative fees.  These surcharges included, among other charges, a provider network fee and a contribution to BCBSM’s contingency reserve.  Hi-Lex, a BCBSM customer since 1991, did not learn of the existence of these surcharges until 2011.  At trial, a BCBSM employee testified that the surcharges were waived for certain other customers.

In an opinion released on May 14, 2014, the Sixth Circuit Court of Appeals affirmed a $5.11 million judgment in favor of Hi-Lex and the plan.  The Court found that BCBSM held and managed both employee and employer contributions to cover health expenses and defray the administrative costs of the plan, even though the plan was self-funded and did not hold the contributions in  separate bank account or trust.   BCBSM therefore functioned as a fiduciary with respect to plan assets and engaged in self-dealing when it used the plan assets to pay for the surcharges.

Although this story–so far–has a happy ending for both the plan and the plan sponsor, the subtext of the decision is perhaps more important.  If you are negotiating an administrative services agreement on behalf of a plan, be sure to ask questions about any and all payment terms.  The facts of Hi-Lex Controls, Inc. v. BCBSM should serve as a warning to plan sponsors to read between the lines of their administrative services agreements.   If there are terms that are too “opaque” to understand, it’s better to ask imaginative questions up front than to learn hard answers after years of litigation.