That was the question addressed by the United States Court of Appeals for the First Circuit in the case, Massachusetts Laborers’ Health and Welfare Fund, et al v. Blue Cross Blue Shield of Massachusetts, in an opinion released on April 25, 2023.
The plaintiff/appellant in the case, Massachusetts Laborers’ Health and Welfare Fund (Fund), was the administrator of a multiemployer, self-funded health plan (Plan). The defendant, Blue Cross Blue Shield of Massachusetts (BCBSM), was engaged by the Fund as the Plan’s third-party administrator or TPA.
A self-funded health plan is a plan established, typically by an employer, to provide healthcare benefits to its employees and their dependents. In this type of plan, the employer agrees to pay medical costs incurred by its employees from its general assets as they arise. Compare this to a fully-insured plan, where the employer pays premiums to an insurance company, and the insurance company agrees to pay the medical costs incurred by the employer’s employees. An employer’s exposure in a fully-insured plan is limited to the insurance premiums paid.
On the other hand, an employer’s exposure in a self-funded plan is unlimited. It depends upon the actual claims incurred by its employees, which may be difficult to forecast with great accuracy.  However, if actual claims paid by the employer turn out to be less than the insurance premiums that the employer would have otherwise paid, then a self-funded plan can save the employer significant money.
A multiemployer plan is a term of art. It refers to a plan formed pursuant to a collective bargaining agreement in which a number of different employers participate. In this case, the participating employers all had employees who were members of the Laborers’ Local Union in Massachusetts. Because the Plan was self-funded, the medical costs incurred by the members of the Plan would be paid by the Fund. The Fund was financed by contributions from the participating employers.
A third-party administrator or TPA is a person or an organization retained by a plan to administer the plan. Such administration can include enrolling members in the plan and paying claims. In addition, most TPAs will have access to one or more provider networks that agree to provide medical care to the plan’s members at discounted rates negotiated by the TPA. Most employers with self-funded health plans engage a TPA to administer the plan for a couple of reasons. First, an employer generally does not have the expertise or staff to administer a self-funded health plan. Second, and most importantly, without a TPA, an employer would not have access to a provider network and its discounted rates and, instead, would have to pay a provider’s usual and customary charges for medical care provided to its employees.
In this case, Blue Cross Blue Shield of Massachusetts (BCBSM) was engaged by the Fund to serve as TPA for the Plan. The Fund and BCBSM executed an Administrative Services Agreement (ASA), pursuant to which BCBSM agreed to perform the administrative services set forth in the ASA on behalf of the Plan. Most relevant to the lawsuit, BCBSM agreed to arrange for a network of providers who would provide medical care to the members of the Plan at discounted rates and to pay claims as approved by the Fund at those discounted rates. The lawsuit involved the second of those two services.
The Fund alleged that BCBSM often paid the providers more than the rates negotiated by BCBSM with its provider network. As one example, it claimed that BCBSM paid a hospital $120,614 for a procedure, when the hospital actually billed only $38,786. An audit of a two-year period determined that BCBSM had overpaid its providers a total of $1.4m. In addition, the Fund alleged that BCBSM did not always seek to recover overpayments from the providers, as required by the ASA, and that, when it did take action to recover such overpayments, it retained more of the recovery than permitted by the ASA. The lawsuit claimed that these actions improperly increased the cost to the Fund and grossly overcompensated BCBSM.
The lawsuit was filed under the Employee Retirement Income Security Act of 1974 (ERISA). The lawsuit alleged that BCBSM had violated section 1109(a) of ERISA, which provides that:
(a) Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make to such plan any losses to the plan resulting from each such breach . . .
The lawsuit also sought injunctive relief against BCBSM under section 1132(a)(3) of ERISA, which provides that:
(a) A civil action may be brought–
(3) by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief to (i) redress such violations or (ii) to enforce any provision of this subchapter or the terms of the plan . . .
BCBSM filed a motion to dismiss the lawsuit. The District Court granted BCBSM’s motion on the grounds that BCBSM was not an ERISA fiduciary and, thus, could not be liable under ERISA. The Fund appealed.
The First Circuit agreed with the District Court that the threshold issue in the case was whether BCBSM was an ERISA fiduciary. It could only be liable under ERISA for breach of fiduciary duty if it was, in fact, a fiduciary.
The First Circuit then said that a person or organization can become an ERISA fiduciary in one of two ways. First, it could be named as a fiduciary in plan documents. The First Circuit noted that the Fund did not claim that BCBSM was named in the plan documents as a fiduciary because it could not. The ASA provided as follows:
The Trustees are the “administrator” and “named fiduciary” of the Fund as that term is defined in Section 3(16)(A) and 402(a), respectively, of ERISA. [BCBSM] is engaged as an independent contractor to perform the specific duties and responsibilities which the Trustees delegate to it. It is understood and agreed that [BCBSM] exercises its duties within the framework of the Plan of Benefits established by the Trustees. [BCBSM] and the Trustees of the Fund accept that the definitions of a fiduciary are contained in ERISA Section 3(21)(A).
Second, a person or organization could be a “functional fiduciary”. A person or organization is a “functional fiduciary”
. . . with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.
So, the question for the First Circuit was whether BCBSM was a functional fiduciary of the Plan.
The First Circuit said that the Fund claimed that BCBSM was a functional fiduciary because it exercised “discretionary authority or discretionary control respecting management of the Plan” and exercised “authority or control respecting . . . disposition of its assets”. The First Circuit first considered whether BCBSM exercised discretionary authority or control over the management of the Plan.
The First Circuit framed this issue as whether BCBSM was exercising discretionary authority or control over the management of the Plan when it negotiated discounted rates with its provider network and when it paid claims. The First Circuit said that BCBSM was not exercising discretionary authority or control over the management of the Plan when it negotiated discounted rates with its provider networks because BCBSM had assembled its provider network and negotiated its discounted rates before it was engaged by the Fund to serve as TPA. Neither of those actions were taken in connection with the management of the Plan. They were part of BCBSM’s general business operations. The Court then turned to the issue of paying claims.
First, however, the First Circuit focused on the word “discretionary”. It said that:
Discretion exists where a party has the ‘power of free decision’ or ‘individual choice.’ On the other hand, nondiscretionary or ministerial functions are those that do not require individual decisionmaking.”
It then said that BCBSM did not have discretion when paying claims. First, the ASA required BCBSM to pay claims at the discounted rates negotiated by BCBSM before it even entered into the ASA with the Fund. It did not have the authority or the ability to determine how much to pay on an ad hoc basis as claims were submitted. Second, the procedure set forth in the ASA for claims payment required BCBSM to get the permission of the Fund before it could even pay a claim. As a result, the First Circuit held that paying claims was nothing more than a ministerial act of following the ASA and the directions of the Fund and did not permit any discretion on the part of BCBSM.
You might ask, if BCBSM paid claims at rates different than the rates required by the ASA, how does that not constitute discretion on the part of BCBSM. Well, the term discretion in the ERISA context has a different meaning than everyday usage. Yes, BCBSM intended to overpay claims. It did not do so by accident. However, the ASA did not permit BCBSM to set rates on a case-by-case basis or to deviate from the pre-negotiated rates. Overpaying claims was not an act of discretion, it was a violation of the ASA. The First Circuit said that, while the Fund may have a breach of contract claim against BCBSM, it did not have a breach of fiduciary claim under ERISA.
The second prong of the “functional fiduciary” test was whether BCBSM exercised any authority or control over the disposition of the assets of the Plan. The Court framed the issue this way because the Fund had not alleged that BCBSM exercised control over the management of the Plan’s assets. The Court noted that this prong did not require discretionary authority or control. It simply required authority or control over the disposition of the Plan’s assets. However, the First Circuit said that this required something more than simply paying claims from the assets of the Plan.
This court has thus noted that “the mere exercise of physical control or the performance of mechanical administrative tasks generally is insufficient to confer fiduciary status.” Rather, a degree of “meaningful control” is required.
In the instant case, the First Circuit noted that the Fund constituted the Plan’s assets. The Fund was the receptacle into which employers made contributions to fund benefits and from which BCBSM paid claims. Employers made weekly deposits into the Fund, and the Fund was reconciled monthly to match deposits to claims actually paid. BCBSM could not invest the assets in the Fund and could not use the Fund to pay any expenses, other than claims and administrative costs as provided in the ASA.
As a result, the First Circuit determined that BCBSM did not have authority or control over the disposition of the assets of the Plan. It was simply matching the employers’ contributions to the Fund with the medical claims that the Fund authorized BCBSM to pay. While BCBSM’s overpayment of claims, or its failure to recover such overpayments, may have been a breach of the ASA, it was not the exercise of authority or control over the disposition of the Plan’s assets.
This is a slightly different question than we asked at the beginning of the article. BCBSM, the TPA involved in the case, was not an ERISA fiduciary. And, the reason that it was not an ERISA fiduciary is that the facts and circumstances of the case did not support that status. However, with different facts and circumstances, it is clear that a TPA can be an ERISA fiduciary and subject to both damages and injunctive relief for breach of its fiduciary duty.
 A self-funded employer may effectively limit its exposure to claims through stop-loss insurance. However, stop-loss insurance is not within the scope of this article.