Alert March 30, 2011

Sixth Circuit Holds That Service Provider’s Business Decisions Are Not Subject to ERISA Fiduciary Duties

Recently, a divided panel of the U.S. Court of Appeals for the Sixth Circuit held that a company that provided services to an ERISA plan did not act in a fiduciary capacity when it negotiated with third parties to establish and modify services arrangements in a manner which increased benefit costs for the plan. See 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).

Background 

In DeLuca, Blue Cross and Blue Shield of Michigan (“BCBSM”) provided claims processing and other administrative services to an ERISA-covered, self-insured medical plan sponsored by Flagstar Bank. BCBSM’s agreement regarding the Flagstar plan stated that BCBSM also was responsible for establishing, arranging and maintaining networks through contractual arrangements with healthcare providers. In this regard, as part of its business, BCBSM negotiated separate payment rates with healthcare providers for medical services under the three different types of coverage options it offered to customers – i.e., HMOs, preferred provider organizations (“PPOs”) and traditional plans like the Flagstar plan. Beginning in 2004, to make its HMO line of business more competitive, BCBSM negotiated with a number of healthcare providers to decrease rates charged to its HMOs while at the same time increasing the rates payable by PPOs and traditional plans (so that the changes would be budget-neutral from the perspective of the healthcare providers). In some cases, the rate changes were retroactive to the beginning of the year. These rate changes increased the costs of medical benefits for PPOs and traditional plans that utilized the BCBSM network, including the Flagstar plan.

A beneficiary of the Flagstar plan sued BCBSM, asserting that, in negotiating the rate changes, BCBSM had breached the fiduciary duty of loyalty under ERISA Section 404(a)(1) and had engaged in a prohibited transaction under ERISA Section 406(b)(2) by acting on behalf of a party with interests adverse to the plan in a transaction involving plan assets. The district court granted summary judgment for BCBSM, concluding that BCBSM was not acting as a fiduciary of the Flagstar plan when it negotiated the rate changes.

Sixth Circuit Analysis

In affirming the district court’s judgment, the majority of the Sixth Circuit panel held 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 [in DeLuca] but were generally applicable to a broad range of health care consumers.” 

The majority concluded that BCBSM’s conduct in negotiating its rates did not constitute any of the types of activities that would be considered fiduciary functions within the meaning of ERISA Section 3(21)(A), the statute’s definition of fiduciary. The court reasoned that rate negotiation did not amount to management or administration of the Flagstar plan (which are fiduciary functions under Section 3(21)(A)), because BCBSM’s actions in connection with the rate changes were business decisions that applied not just to the Flagstar plan but to a broad range of BCBSM’s customers. The court emphasized that making business decisions is not a fiduciary function, even where those decisions have an effect on an ERISA plan. Accordingly, the majority held that because BCBSM was not acting as a fiduciary in negotiating rates, BCBSM had not breached its ERISA fiduciary duties or engaged in prohibited transactions.

The majority opinion also discussed some possible policy ramifications that could result from a contrary holding. In the court’s view, if BCBSM were subject to fiduciary duties in negotiating rates, it would be required to negotiate with healthcare providers on behalf of the Flagstar plan separately, rather than as part of a negotiation on behalf of numerous plans and other customers in the aggregate. The court reasoned that such a result could ultimately harm the Flagstar plan, because in negotiating on behalf of a single plan, BCBSM would lose the leverage made possible in negotiating on an aggregated basis.

Dissent

Judge Kethledge dissented, asserting that the majority seemed to be more concerned about BCBSM’s business model than the services BCBSM was responsible for under its agreement with the Flagstar plan and ERISA’s definition of fiduciary. The dissent took the position that the case should have moved forward to trial to determine whether BCBSM’s negotiation activities were fiduciary in nature, given that they were “highly discretionary and [had] a direct impact on the Flagstar plan’s bottom line.”  Judge Kethledge also expressed the view that imposition of fiduciary duties on BCBSM’s rate negotiation activities would not have required BCBSM to negotiate rates on behalf of the Flagstar plan separately from other plans and arrangements.