By: Jon Jablon, Esq.
When it comes to self-funded health plans, fiduciary duties often tend to lurk in the background – acknowledged and respected, but not always fully understood. The recent Sixth Circuit decision in Tiara Yachts, Inc. v. Blue Cross Blue Shield of Michigan brings those duties into sharp focus, offering a valuable lesson for TPAs, brokers, and plan sponsors.
Tiara Yachts hired BCBSM to administer claims for its self-funded health plan. Tiara alleged that BCBSM systematically misapplied pricing rules when processing out-of-network, out-of-state claims. Specifically, BCBSM was supposed to apply negotiated Host Blue rates (i.e., discounted rates established by the Blue Cross entity in the provider’s region) but instead used what they internally called a “flip logic” workaround. Specifically, when the provider wasn’t in-network with the local Blue plan, BCBSM would treat the provider as out-of-network entirely – so instead of paying the negotiated Host Blue rate, BCBSM would pay the full billed charge. In effect, claims that should have been reimbursed at negotiated rates were paid at much higher amounts, without any clear benefit to the plan or its members, and allegedly in violation of the negotiated rate promises that BCBSM had made to their clients such as Tiara.
And here’s where it gets good.
BCBSM applied a “Shared Savings Program” to recover those overpayments, designed to correct the BCBSM-created errors in pricing and recover the very funds that BCBSM had systemically overpaid. Despite the nature of this program as correcting BCBSM’s own mistakes, BCBSM charged a fee of 30% of the amounts recovered. They created the mess, and sold their client the mop.
The court’s central question was whether BCBSM acted as a fiduciary under ERISA. The Sixth Circuit said yes, and not at all subtly. In line with ERISA’s longstanding “functional fiduciary” approach, the court held that BCBSM’s authority over claim payments, and its discretion to compensate itself from plan assets, was more than enough to establish fiduciary status. Though the court noted that BCBSM was aware of the “flip logic” errors rather than necessarily overpaying intentionally in order to create a revenue opportunity, the court also reasoned that the fact that the alleged errors were systemic didn’t absolve them; if anything, the scope of the errors strengthens the fiduciary argument. Charging a fee to rectify the mistake is a separate, but significant issue, and it is central to the alleged breach, and it will carry significant weight when the case returns to the trial court.
This case underscores that fiduciary status isn’t conferred by contract or by title, but by action. There are two central questions: whether BCBSM was a fiduciary, and if so, whether it violated its duty. The deciding factor for whether fiduciary duties exist is whether the TPA had discretion over plan assets, and the question of whether the duty was breached hinges on whether the TPA used that discretion to enrich itself. The implication here is that when the same entity both erroneously pays and reclaims plan funds, any appearance of self-dealing is magnified, particularly when the TPA is charging the plan to rectify its own systemic errors, and when there’s no independent check on the reasonableness of the fee involved.
This is where a smart separation of functions becomes important. This case underscores not just the importance of understanding fiduciary boundaries, but also the prudence of outsourcing high-risk functions like third-party liability and overpayment recovery. Doing those things in-house without guardrails creates a dual risk: both the appearance of profiting from your own errors, and actual fiduciary exposure if the math doesn’t hold up. Using an independent vendor both adds a layer of auditability and removes any suggestion that the fox is guarding the henhouse.
Tiara Yachts serves as a compelling reminder that fiduciary duties aren’t theoretical. They’re real, enforceable, and they have some serious teeth when warranted. For anyone handling plan assets – especially in contexts involving provider reimbursements or overpayment recovery – it’s crucial to focus on transparency, documentation, and often, outsourcing.
As a general lesson from this case, as a TPA, if your fees to fix your own errors start to feel more lucrative than your actual claims administration, it might be time to give that model a second look (or at least run it by legal before a federal court does).
If you have questions about your own program, a vendor’s program, or even just fiduciary duties in general, please contact The Phia Group!