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Sixth Circuit Finds an Insurance Company Does Not Violate its ERISA Fiduciary Obligations by Taking its Business Interests into Account When Negotiating Hospital Rates

The U.S. Court of Appeals for the Sixth Circuit recently ruled that an insurance company does not violate its fiduciary obligations under ERISA by taking its own business interests into account when negotiating and setting reimbursement rates with health care providers, even if those decisions have an adverse effect on ERISA plan participants.  DeLuca v. Blue Cross and Blue Shield of Michigan, 628 F.3d 743 (6th Cir. 2010), reh’g and reh’g en banc denied, No. 08-1085 (6th Cir. Feb. 17, 2011).

In DeLuca, the plaintiff was a plan participant under a self-funded benefit plan maintained by Flagstar Bank F.S.B. (“Flagstar Bank”) for its employees and their dependents known as the Flagstar Bank Employee and Beneficiary Plan (“Flagstar Plan”).  Blue Cross Blue Shield of Michigan (“BCBSM”) provided claims processing and administrative services on behalf of the Flagstar Plan pursuant to the terms of an Administrative Services Only Agreement (“ASO”).  The plaintiff alleged that BCBSM obtained the agreement of certain hospitals to accept lower reimbursement rates from its HMO, a BCBSM wholly-owned subsidiary, in exchange for higher reimbursement rates from BCBSM’s traditional open-access and PPO plans, including self-funded plans administered by BCBSM.  According to the plaintiff, the alleged misconduct caused the Flagstar Plan to pay excessive reimbursement rates, which, in turn, subjected plan participants to higher contributions, co-payments, co-insurance and deductibles.

BCBSM acknowledged that it entered into the agreements alleged by the plaintiff in an effort to make its HMO line of business more competitive and simplify its pricing structure.  Specifically, BCBSM acknowledged that it “negotiated a series of letters of understanding with various hospitals that altered [its] pre-existing rate agreements,” so as to “equalize the rates” for health care services paid by the HMO plans with those paid by the PPO plans.  DeLuca, 628 F.3d 743, 746.  BCBSM agreed to “make the rate adjustments budget-neutral for the health care providers by increasing the PPO and traditional plan rates to make up for the decrease in the HMO rates.”  Id.

BCBSM further acknowledged that the reimbursement rate changes increased the costs of medical benefits for PPO and traditional open-access plans that utilized the BCBSM network, including the Flagstar Plan.  As a result, participants in those plans paid more for health care coverage. However, BCBSM argued that its actions do not violate any ERISA fiduciary obligations because it was simply not performing a function related to the operation of an ERISA plan, but rather a function undertaken by BCBSM on its own behalf, and critical to the operation of its business.  BCBSM further argued that it negotiates hospital reimbursement rates as a whole, and not for any single customer or plan, and that nothing in the ASO charged BCBSM with a duty to negotiate hospital reimbursement rates on behalf of Flagstar Bank or to act in the Flagstar Plan’s interests when it negotiates hospital reimbursement rates.  Instead, BCBSM argued, the ASO limits BCBSM’s responsibilities to providing services for the processing and payment of enrollees’ claims and establishing, arranging and maintaining networks through contractual agreements with health care providers. 

The Sixth Circuit agreed with BCBSM, and concluded that while BCBSM owes plans a fiduciary duty when it performs claims processing functions, it did does not owe the same level of duty to plans when it negotiates provider reimbursement rates.  Specifically, the Sixth Circuit concluded that BCBSM was not “acting as a fiduciary when it negotiated the challenged rates, principally because those business dealings were not directly associated with the benefits plan at issue, but were generally applicable to a broad range of health care consumers.”  DeLuca, 628 F.3d 743, 747.   The Sixth Circuit noted that imposing a fiduciary obligation on BCBSM to negotiate reimbursement rates on a plan-by-plan basis would destroy BCBSM’s “economic advantage in the market,” and “damage its ability to do business on a system-wide basis, ultimately to the Flagstar Plan beneficiaries’ disadvantage.”  Id. 

As discussed briefly in DeLuca, an insurance company’s ability to negotiate the purchase of healthcare services on a system-wide basis creates significant market power, and this market power leads to the discounted rates offered to consumers.  This is because when hospitals negotiate with insurance companies, they are primarily concerned with the volume of business that the insurer can bring to the hospital through its enrollee base.  The primary focus is on the volume when determining which insurers receive most favorable rates, and then on the projected claims experience.  As a result, insurers that bring greater overall volumes of business to the hospital are more desirable and will be able to negotiate more favorable rates with the hospital.  Conversely, insurers that bring comparatively smaller volumes to the hospital will not have the power to negotiate as favorable a rate as a higher volume insurer. 

Consequently, separate negotiation of hospital reimbursement rates for each type of product offered by an insurance company would necessarily result in the insurance company sacrificing its ability to negotiate the most competitive reimbursement rates.  The insurance company would lose the benefit of its aggregated purchasing power.  The insurance company’s negotiating power would decrease further if it were required to negotiate rates on behalf of each individual plan. 

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    John is a partner in the firm's Estate Planning Department. He focuses his practice on estates, trusts, family business and disability planning, and the administration of estates and trusts. John also has an active health law ...



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