Thus, in a nutshell, Blue Cross lowered rates for its own subsidiary by effectively raising them for Flagstar and other self-insured plans. The letter agreements between Blue Cross and the hospitals spell out these facts in black and white.

But that does not mean that Flagstar knew about the deals. To the contrary, Blue Cross has admitted (in interrogatory responses in this case) that it never told Flagstar it had raised the Plan’s rates in order to lower them for its own subsidiary. And it appears that Flagstar was otherwise clueless about the change, because Blue Cross did not provide backup data for the bottom-line charges it sent Flagstar each month.

Deluca v. Blue Cross Blue Shield of Mich., 2010 FED App. 0371P (6th Cir.) (6th Cir. Mich. Dec. 8, 2010), Kethledge, J, dissenting.

This unpublished Sixth Circuit opinion spotlights a business practice that rarely gets such close scrutiny.  A Blue Cross subsidiary failed to meet its profitability numbers which inspired the idea to lower its reimbursement rates.

That solution did not sit well with health care providers, of course, so Blue Cross promised to make the transaction “budget neutral” in this way:

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. Some of these rate adjustments were retroactive to the beginning of the year in which they were negotiated.

A plan participant in one of the self-funded plans Blue Cross administered sued Blue Cross alleging breach of fiduciary duty.

DeLuca, a practicing attorney in Grosse Point Park, Michigan, was a beneficiary of the Flagstar Bank Group Health Plan through his wife’s participation as a Flagstar Bank employee. In 2006, he filed the present action against BCBSM alleging that BCBSM violated its duties as a fiduciary under two provisions of ERISA, 29 U.S.C. § 1104 and § 1106(b), by agreeing to increase its traditional and PPO plan rates in exchange for decreases in the HMO rates.

The district court granted Blue Cross’ motion for summary judgment, concluding that BCBSM was not acting as a fiduciary for the Flagstar Plan when it negotiated the rate adjustments, and DeLuca appealed.

Two Issues

On appeal the issues were:

#1 What Blue Cross acting as an ERISA fiduciary under 29 U.S.C. § 1104 when it negotiated the rate changes?; and

#2 Must Blue Cross be “acting in a fiduciary capacity” to be liable under 29 U.S.C. § 1106(b)(2)?

[which provides that “A fiduciary with respect to a plan
shall not . . . in his individual or in any other capacity act in any
transaction involving the plan on behalf of a party (or represent a
party) whose interests are adverse to the interests of the plan or the
interests of its participants or beneficiaries.”]

Not Acting As A Fiduciary

The Court held that Blue Cross was not in fact acting as a fiduciary when it negotiated the rates with providers.

We conclude, as did the district court, that BCBSM was not acting as a fiduciary when it negotiated the challenged rate changes, principally because those business dealings were not directly associated with the benefits plan at issue here but were generally applicable to a broad range of health-care consumers.

The Court concluded that “a business decision that has an effect on an ERISA plan not subject to fiduciary standards.”In this case, the “conduct at issue” clearly falls into the latter category, “a business decision that has an effect on an ERISA plan not subject to fiduciary standards.

. . . And Thus Not Liable For A Prohibited Transaction

The Court held that the foregoing conclusion defeated the prohibited transaction claim, stating that:

DeLuca’s argument, as we understand it, is that the terminology “in any other capacity” imposes liability on a fiduciary even when not acting in a fiduciary capacity, at least with regard to those activities prohibited by section 1106. Such an interpretation, however, flies in the face of our holding that, “by its own terms, § 1106 applies only to those who act in a fiduciary capacity.” Hunter, 220 F.3d at 724. Because BCBSM was not acting in a fiduciary capacity when it negotiated the rate changes at issue in this case, BCBSM did not violate § 1106(b)(2).In this case, the “conduct at issue” clearly falls into the latter category, “a business decision that has an effect on an ERISA plan not subject to fiduciary standards.”

Note: The dissent saw the matter as involving factual issues that made the case one for trial, not summary judgment. In a thoughtful opinion, Judge Kethledge wrote:

Whether Blue Cross functioned as a fiduciary when it established and maintained provider networks for Flagstar depends on how one characterizes their agreement. DeLuca says—and I think no one disagrees—that the function of negotiating rates with provider hospitals surely would have been fiduciary in nature had the Plan’s trustees kept that function in-house; and in DeLuca’s view, the Contract merely delegated that function from the trustees to Blue Cross. He therefore contends that Blue Cross was acting as a fiduciary when, as part of the services it provided under the Contract, it negotiated rates for the Plan. In contrast, Blue Cross argues that it actually provided a product—off-the-shelf access to its provider network at whatever rates Blue Cross cared to negotiate with them—rather than services.

The difference matters because, while selling a product tends not to create fiduciary duties under ERISA, providing services quite frequently does. And that is especially true for discretionary services that directly impact a plan’s finances. The nub of this case, therefore, is which conception of the parties’ agreement is right.

I do not think this issue is one we can fairly decide—at least in Blue Cross’s favor—as a matter of law.

29 U.S.C. § 1106(b)(2) – The dissent also disagreed on the elements required for a prohibited transaction under this provision, stating:

In Pegram v. Herdrich, 530 U.S. 211 (2000), the Supreme Court stated that, “[i]n every case charging breach of ERISA fiduciary duty, then, the threshold question is . . . whether that person was acting as a fiduciary (that is, was performing a fiduciary function) when taking the action subject to complaint.” Id. at 226 (emphasis added). But Pegram was only a § 1104 case, so that statement is pure dicta as to § 1106(b)(2).

A similar statement by our court, however,  cannot be so characterized. In Hunter v. Caliber System, Inc., 220 F.3d 702 (6th Cir. 2000), we said that, “by its own terms, § 1106 applies only to those who act in a fiduciary capacity.” Id. at 724. The Hunter court characterized that statement as a holding (albeit an alternative one), and I cannot fairly recast it as dicta. It is binding precedent for our circuit.

Policy Issues – The dissent reviewed the policy issues raised by Blue Cross and proposed some interesting rebuttals.  In the end, however, Judge Kethledge concluded that:

More fundamentally, I reject the unspoken premise of the preceding two arguments, which is that we should be acutely concerned about Blue Cross’s business model in the first place. Cases have consequences, and we should be mindful of them. But our task in this case is not to divine the business model that best serves the plans’ interests and those of everyone else; our task, instead, is the comparatively simple one of determining whether the letter deals violated ERISA. The wisdom of business models can be determined elsewhere.