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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.

 

AARP Survey: Plan Sponsors Want 401(K) / 403(B) Providers to Give Advice in Best Interest of Participants

According to a newly released AARP study, 89 percent of plan sponsors would like defined contribution plan providers to be required to meet fiduciary standards when offering investment advice to plan participants. Moreover, 78 percent would be “very likely” or “somewhat likely” to require providers to offer advice in the best interest of participants even in the absence of a government mandate.

Approximately two-thirds of the plan sponsors have engaged a provider that offers investment advice or consultation to plan participants.  While most of the 3010 survey respondents expressed confidence in their own providers, more than half acknowledged that a provider’s advice “may be influenced by the money that the provider makes from the plan investments.”

The Department of Labor is expected to issue guidance on the fiduciary obligations of investment advisors in August.  In the interim, plan sponsors should review their current contracts with defined contribution plan providers in order to understand whether the “best interest” standard is currently in force.

To read the full survey report, click here.

 

Spring Cleaning for Benefit Plans – It’s Time to Dust Off Your Vendor Agreements

Managing an employee benefit plan means managing a small army of service providers.  Not only should plan sponsors and fiduciaries be able to identify these vendors, but they should also understand the scope of the services which each vendor has agreed to provide and—perhaps even more critical—the responsibilities which the vendor has declined to provide.

Managing vendor relationships can be a daunting task.  Establishing a system for identifying and regularly reviewing your vendor services agreement, however, has its own rewards.  Read More →