6th Circuit Reverses Blue Cross Blue Shield Claim Overpayment Dismissal

A lawsuit accusing Blue Cross Blue Shield of Michigan of overpaying medical providers and participating in self-dealing, which had been dismissed by a district court, was remanded back to the district court by the U.S. 6th Circuit Court of Appeals on Wednesday.

The 6th Circuit decision signifies a win for Tiara Yachts Inc., a Michigan-based company that designs and manufactures boats, as the appeals court found that Blue Cross Blue Shield acted as a fiduciary to the plan by exercising control over the plan’s assets.

In Tiara Yachts Inc. v. Blue Cross Blue Shield of Michigan, filed in July 2022 in U.S. District Court for the Western District of Michigan, Tiara Yachts alleged that BCBSM systematically overpaid claims submitted by medical providers during the years that BCBSM administered the plan—from 2006 to 2018.

Under the Consolidated Appropriations Act of 2021, plan sponsors are required to attest that their fees for health care plans are fair and reasonable for the services provided. The CAA also includes regulation about transparency and the removal of gag clauses on data sharing with plan sponsors, among other things.

Tiara Yachts, represented by Vanum Riddering Schmidt & Howlett LLP, claims BCBSM breached its fiduciary duties under the Employee Retirement Income Security Act by overpaying claims and collecting fees directly tied to “inflated” payments it authorized. Tiara Yachts seeks damages, restitution, disgorgement and a declaratory judgement that BCBSM breached its fiduciary duties.

BCBSM filed a motion to dismiss the claim for its failure to state a claim, and the district court granted that motion, holding that Tiara Yachts did not plausibly allege that BCBSM acted as an ERISA fiduciary and that ERISA could not provide the relief the company requested.

Tiara Yachts appealed the motion, and a three-judge panel on the 6th Circuit reversed the dismissal and remanded the case for proceedings consistent with its opinion.

Allegations Against BCBSM

BCBSM is one of 38 Blue Cross Blue Shield Association regional affiliates—also know as the “Blues.” Each of the Blues negotiates with providers in its area to set rates for medical services. The Blues have a policy that allows individuals enrolled in one Blue’s plan to receive the benefit of another “Host Blue’s” pricing if they need out-of-state medical care. When contracting with BCBSM, Tiara Yachts secured this benefit for its participants, thereby keeping its costs for out-of-state medical care down.

However, Tiara Yachts alleges that BCBSM processed claims using an “intentional design” called “flip logic.” When an out-of-state provider that was not part of Host Blue’s network submitted a claim, BCBSM would “flip” its status and reimburse the provider the actual charge, rather than the Host Blue’s lower rate, according to the lawsuit. As a result, Tiara Yachts accuses BCBSM of allowing providers to “bill and get fully reimbursed for highly inflated cost of services.”

According to internal emails between BCBSM employees, flip logic affected “all” customers on one of BCBSM’s claims-processing platforms, except those purchasing auto insurance.

The Tiara Yachts complaint also accuses BCBSM of concealing flip logic from its customers and limiting access to claims data and explanatory documents.

In addition, Tiara Yachts further alleges that BCBSM implemented its “Shared Savings Program” to profit from its practice of overpaying claims. Under that program, the boating company argues that BCBSM hired third parties to claw back past overpayments from providers to detect and prevent future overpayments before they occurred. In exchange for those services, BCBSM kept 30% of the payments third parties either recovered or prevented, according to the complaint.

6th Circuit’s Argument

The appeals court stated in its opinion, authored by U.S. Circuit Judge Rachel Bloomekatz on behalf of U.S. Circuit Judges Stephanie Davis and Eric Murphy, that, as BCBSM “had the authority to write checks on the plan account” and exercised control over where the plan funds were deposited and when they were disbursed, BCBSM acted as a fiduciary to plan.

Because Tiara Yachts cited internal BCBSM emails stating that flip logic affected an entire group of customers that included Tiara Yachts, the court found that Tiara Yachts has plausibly alleged that BCBSM acted as a fiduciary when it controlled—and then “failed to preserve”—plan assets.

In addition, the appeals court found that under the plan’s administrative services contract, it allowed BCBSM to retain savings from payments it “erroneously approved.” When an administrator can recover overpayments it “unilaterally caused or controlled,” the court argued that constitutes discretion over compensation, affirming that BCBSM acted as an ERISA fiduciary by exercising discretion over its own compensation for the Shared Savings Program.

The court also found that because the complaint alleges harm to both Tiara Yachts and to the plan, the company adequately pleaded that it seeks relief for the plan, not for itself. Tiara Yachts also asked for BCBSM to return the funds it overpaid from plan assets and the profits it generated from SSP fees. The 6th Circuit found that Tiara Yachts can recover damages on behalf of the plan.

Blue Cross Blue Shield did not immediately respond to a request for comment.