In Pipefitters, Sixth Circuit Holds Service Provider Is Fiduciary in Assessing Fee

by Goodwin

In Pipefitters Local 636 Insurance Fund v. Blue Cross and Blue Shield of Michigan, No. 12-2265, 2013 WL 3746217 (July 18, 2013), the U.S. Court of Appeals for the Sixth Circuit held that an entity providing services to a plan acts as an ERISA fiduciary where it exercises discretion to determine and assess a fee paid by the plan to the service provider.


In Pipefitters, a self-funded health plan entered into an administrative services contract (“ASC”) with Blue Cross and Blue Shield of Michigan (“BCBSM”), under which BCBSM would provide certain services to the plan and the plan would be responsible for paying benefit claims and specified fees.  The ASC also provided that “any cost transfer subsidies . . . ordered by [the relevant state insurance commission] will be reflected in the hospital claims cost” payable by the plan.

Under applicable state law, BCBSM was required to pay 1% of its revenues to the state to subsidize the cost of health care to senior citizens in the state receiving “Medigap” coverage (the “Medigap Obligation”), but state law did not prescribe the method by which BCBSM was to satisfy this Medigap Obligation.

During the first 18 months that the ASC was in effect, BCBSM undertook to obtain funds to satisfy the Medigap Obligation by, in effect, charging and retaining 1% of the cost of benefit claims it paid on behalf of the plan, with the amount retained referred to as the “OTG Fee.”  (For example, on a $100 claim, BCBSM would charge the plan $101, pay the health care provider $100, and retain $1 as an OTG Fee to pay the Medigap Obligation.)  After 18 months, BCBSM unilaterally decided to stop charging the OTG Fee. 

District and Appeals Court Decisions in Pipefitters

The Pipefitters plan sued BCBSM, asserting that BCBSM acted as an ERISA fiduciary in determining and assessing the OTG Fee.  The plan argued that, in causing the plan to pay the OTG Fee, BCBSM had breached its fiduciary duties of prudence and loyalty and had engaged in prohibited self-dealing.  After the district court granted summary judgment for the plan, BCBSM appealed.

The Sixth Circuit affirmed in a unanimous decision.  The court noted that while state law imposed the Medigap Obligation on BCBSM, the method of obtaining funds to pay that obligation was left to the discretion of BCBSM.  The court rejected BCBSM’s argument that the method BCBSM decided to use – the OTG Fee – was compelled by the terms of the ASC which provided that state-required “cost transfer subsidies” would be reflected in the costs of claims paid by the plan. 

The court emphasized that BCBSM had not assessed the OTG Fee against all of its self-funded plan customers, and had unilaterally decided to stop assessing the fee against the Pipefitters plan.  Because its discretionary assessment of the fee against the plan benefitted BCBSM (by helping it to fund its Medigap Obligation), the court concluded that BCBSM had breached its fiduciary duties under ERISA.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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