Case 2:19-cv-10507-MAG-EAS ECF No. 1 filed 02/19/19

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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
CHIPPEWA-LUCE-MACKINAC
Case No. 19-cv-_________________
COMMUNITY ACTION HUMAN
RESOURCE AUTHORITY, INC.,
Honorable _____________________
AND CHIPPEWA-LUCEMACKINAC COMMUNITY ACTION
HUMAN RESOURCE AUTHORITY,
INC. BENEFIT PLAN,
Plaintiffs,
v.
BLUE CROSS BLUE SHIELD OF
MICHIGAN,
Defendant.

COMPLAINT
Plaintiffs, Chippewa-Luce-Mackinac Community Action Human Resource
Authority, Inc. ("Chippewa Luce") and Chippewa-Luce-Mackinac Community
Action Human Resource Authority Benefit Plan (hereafter referred to as the
"Plan"), by and through their counsel, Varnum LLP, hereby state as their
Complaint against Defendant Blue Cross Blue Shield of Michigan ("BCBSM") as
follows:
NATURE OF ACTION
1.

Chippewa Luce entrusted BCBSM to administer its self-insured

employee benefit Plan. Pursuant to their contract, Chippewa Luce sent large sums

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of money to BCBSM, which BCBSM was supposed to use to pay employee
health care claims. Chippewa Luce recently learned that, contrary to their contract
and numerous specific claims reports, BCBSM also skimmed additional
administrative fees from the Plan assets Chippewa Luce provided on behalf of the
Plan to pay claims. BCBSM's misappropriation of Plan assets is a clear violation
of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §
1001, et seq. In fact, as explained below, BCBSM's scheme has already been
adjudicated by the United States Court of Appeals for the Sixth Circuit as
fraudulent and unlawful. Plaintiffs bring this suit to recover the misappropriated
funds and obtain all other relief to which they are entitled.
PARTIES, JURISDICTION AND VENUE
2.

Chippewa Luce is a Michigan non-profit corporation.

3.

The Plan is Chippewa Luce's ERISA-governed benefit plan.

Chippewa Luce and the Plan are hereafter collectively referred to as "Plaintiffs."
4.

During all relevant times, BCBSM was a Michigan non-profit health

care corporation organized under the Nonprofit Health Care Corporation Reform
Act, MCL 550.1101, et seq (the "Act").
5.

This Court has subject matter jurisdiction pursuant to 28 U.S.C. §

1331 and 29 U.S.C. § 1132 because Plaintiffs' claims arise under ERISA.
6.

Venue is proper in this Court pursuant to 28 U.S.C. § 1391(b) because

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BCBSM resides in the Eastern District of Michigan. Venue is also proper pursuant
to 29 U.S.C. § 1132(e)(2).
GENERAL ALLEGATIONS
7.

Plaintiffs hereby incorporate by reference the allegations contained in

the preceding paragraphs.
8.

Chippewa Luce offers health care benefits through the Plan. Rather

than buy health insurance to cover employee health care claims under the Plan,
during the relevant time period Chippewa Luce has opted to self-insure. As such,
Chippewa Luce paid the actual employee health care costs covered by the Plan, up
to a large threshold. Chippewa Luce bought "stop loss" insurance to cover claims
that exceeded that threshold.
A.

2013: First "Hidden Fees" Trial (Hi-Lex v. BCBSM) Results in a
Judgment Against BCBSM for 100% of Hidden Fees.
9.

This case is nearly identical (factually and legally) to Hi-Lex Controls,

Inc., v. BCBSM, No. 11-cv-12557 (E.D. Mich.), the first Hidden Fees case to
proceed through trial. Following a nine day bench trial in the Hi-Lex case, the
Honorable Victoria A. Roberts issued Findings of Fact and Conclusions of Law
that were sixty-three pages long (the "Hi-Lex FFCL"), awarding the Hi-Lex
plaintiffs 100% of the claimed Hidden Fees, pre-judgment interest back to 1994,
and attorneys' fees.

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While Hi-Lex was the first Hidden Fees case to go to trial, it was not

the first such case in this Court. The original Hidden Fees case is Pipefitters Local
636 Insurance Fund v. BCBSM, No. 04-73400 (E.D. Mich.), which was filed on
September 1, 2004. On July 18, 2013, the Sixth Circuit Court of Appeals issued its
unanimous, published opinion in Pipefitters holding that BCBSM was an ERISA
fiduciary and that BCBSM violated ERISA by charging the very same fee at issue
here to its self-insured, Administrative Service Contract ("ASC") customers.
Pipefitters Local 636 Ins. Fund v. BCBSM, 654 F.3d 618 (6th Cir. 2011).
11.

Following the decision in Pipefitters, on May 14, 2014, the Sixth

Circuit Court of Appeals issued its unanimous, published opinion in Hi-Lex,
affirming this Court's decision. Hi-Lex Controls, Inc. v. BCBSM, 751 F.3d 740
(6th Cir. 2014), cert. denied 135 S.Ct. 404 (Oct. 20, 2014). The Sixth Circuit in
Hi-Lex relied heavily on its prior decision in Pipefitters, noting that Hi-Lex
"involves the same ASC, same defendant, and same allegations" as its decision in
Pipefitters. Id. at 750.
12.

Because this case is identical to Hi-Lex in all material respects, where

appropriate, Plaintiffs will refer to the Hi-Lex FFCL and the Hi-Lex Opinion.
B.

Chippewa Luce Contracted with BCBSM to Administer Its Self-Insured
Plan.
13.

The framework for the relationship between Chippewa Luce and

BCBSM was contained in the ASC. The ASC was a boilerplate document drafted
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by BCBSM, and it set forth the purported rights and responsibilities of each party
with regard to BCBSM's administration of the Plan.
14.

Upon information and belief, the ASC between Chippewa Luce and

BCBSM was executed by the parties effective February 2006.
15.

Pursuant to the ASC, BCBSM agreed to administer the Plan by paying

covered employee health care claims on behalf of the Plan, using money provided
to it by Chippewa Luce.
16.

The obligations of the parties were outlined in the ASC: The parties

agreed that BCBSM would process and pay, and Chippewa Luce would reimburse
BCBSM for all Amounts Billed related to Enrollees' claims.
17.

"Amounts Billed" is defined in the ASC as the amount Chippewa

Luce owes in accordance with BCBSM's standard operating procedures for
payment of Enrollees' claims.
18.

"Enrollees" are defined in the ASC as Employees and dependents of

Employees who are eligible and enrolled for Coverage.
19.

In exchange for its services, BCBSM was entitled to an administrative

20.

The ASC did not contain any pricing terms. Rather, the specific fees

fee.

to be paid by Chippewa Luce in exchange for the administrative services provided

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by BCBSM were enumerated in a "Schedule A." Together, the ASC and Schedule
A formed the parties' contract.
21.
C.

The ASC was renewed year after year by the parties for several years .

Plaintiffs Provided BCBSM With Plan Assets, Which Were Controlled
by BCBSM and Supposed to be Used to Pay Covered Employee Claims.
22.

Under the ASC, Plaintiffs were required to prepay the pro rata cost of

estimated Amounts Billed for that quarter, the pro rata cost of the estimated
administrative charge for that contract year, and the amount BCBSM determined
was necessary to maintain the prospective hospital reimbursement funding for that
contract year.
23.

The specific prepay amounts to be paid by Plaintiffs were dictated by

the Schedule A's.
24.

Under the ASC, BCBSM was required to provide Plaintiffs with "a

detailed settlement showing Amounts Billed to and owed by Chippewa Luce
during the prior available Quarter including any surplus or deficit amounts."
25.

The quarterly settlements were used to adjust the future prepay

amounts upward or downward depending on whether employee health care claims
were higher or lower than what Chippewa Luce had previously prepaid.
26.

Pursuant to the terms of the ASC, as renewed, Chippewa Luce sent

the required prepayments to a BCBSM-owned bank account, on a periodic basis.

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The prepayments sent to BCBSM's bank account were "Plan Assets"

as defined by ERISA. Hi-Lex FFCL, at ¶¶ 5, 6, & 180; Hi-Lex, 751 F.3d at 74546.
28.

BCBSM had complete authority and control over the bank account

and the Plan Assets sent to it by Chippewa Luce.
29.

BCBSM (1) exercised discretionary authority and control with respect

to management of the Plan; (2) exercised authority and control with respect to
management and disposition of Plan Assets; or (3) had discretionary authority and
responsibility in the administration of the Plan. Hi-Lex FFCL, at ¶¶ 180-82; HiLex, 751 F.3d at 744-47.
D.

BCBSM Illegally Skimmed Additional Administrative Compensation
From the Plan Assets Entrusted to It.
30.

Plaintiffs have recently learned that starting in 1994, BCBSM

implemented a scheme to secretly obtain more administrative compensation than it
was entitled to.
31.

The scheme is outlined in the Hi-Lex case and also in an internal

BCBSM memo obtained from that litigation. See Exhibit 1.
32.

The catalyst for BCBSM's scheme is that in 1987 and 1988, BCBSM

was in poor financial shape. Hi-Lex FFCL, ¶ 9.

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BCBSM started charging self-funded customers subsidies and

surcharges: the "Plan-Wide Viability Surcharge," "Other Than Group Subsidy,"
and "Group Retiree Surcharge." Id. at ¶ 10.
34.
at ¶ 11.

The customer response to the new fees was resoundingly negative. Id.
BCBSM received "tremendous complaints from customers," in part

stemming from the fact that "[t]he billing of these amounts to customers was an
add-on to the bill, highlighted for all to see." Id.
35.

BCBSM could not convince its customers that the subsidies and

surcharges were fair. Id. at ¶ 12.
36.

The charges were so unpopular that, in 1989 alone, BCBSM lost

225,000 members. Id. at ¶ 13.
37.

Many other customers refused to pay the fees. Id. at ¶ 14.

38.

According to BCBSM, the fees made it a "challenge to maintain

customer relationships." Id. at ¶ 16. By disclosing the fees, BCBSM was "its own
worst enemy." Id.
E.

1993-1994: BCBSM's Plan to Hide Fees
39.

In 1993, a simple solution to the problem was proposed. Executives

suggested replacing the disclosed fees with hidden fees buried in marked-up
hospital claims (the "Hidden Fees"). Id. at ¶ 17.
This solution offered several advantages to BCBSM:

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Reflecting certain BCBSM business costs in hospital claim costs will
provide long-term relief to the problems detailed above and will also
satisfy short-term objectives of enhancing customer relationships
while cutting operational costs. Inclusion of these costs in our
hospital claim costs is actually more reflective of the actual savings
passed on to customers as it will now include the hospital savings net
of the costs incurred to provide these savings. This will also improve
our operations efficiencies since mass mailings for subsidy amount
changes will no longer be necessary. Changes to these costs will be
inherent in the system and no longer visible to the customer. The
same argument applies to risk charges and provider related
expenses.
Id. at ¶ 19 (emphasis added).

BCBSM's senior management approved this

proposal. Id. at ¶ 22.
40.

The program was known as "retention reallocation." Id.; Hi-Lex, 751

F.3d at 743.
41.

The term "retention" refers to money BCBSM retains, as opposed to

money used to pay medical claims. Hi-Lex FFCL, at ¶ 26.
42.

The scheme worked as follows: regardless of what BCBSM was

required to pay a hospital, BCBSM reported a larger charge that was passed on to
the customer. Hi-Lex, 751 F.3d at 743. BCBSM kept the additional amount as
hidden administrative compensation:
Actual Claim Paid to Hospital:
Add-On For Hidden Fees Kept by BCBSM:
Hospital Claim Reported to Plaintiff:
Id.

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But BCBSM did not stop there. It also shifted the cost associated with

maintaining its network (internally known as "Network Access Fee") to the Hidden
Fees. Hi-Lex FFCL, at ¶ 25.
44.

Previously, BCBSM had included the Network Access Fee in the

disclosed administrative fee. Id. at ¶ 12.
45.

This scheme offered several advantages to BCBSM, one being the

Hidden Fees (per a BCBSM executive summary) would be "inherent in the system
and no longer visible to the customer." Id. at ¶ 19.
46.

Not only did the subsidies and surcharges disappear from customer

bills, but BCBSM was able to lower its disclosed administrative fee (by shifting
the "Network Access Fee"), giving the illusion that it was more cost competitive,
without actually giving up any revenue.
47.

Collectively then, the Hidden Fees consisted of four components. The

"Other Than Group" subsidy, "Contingency/Risk" surcharge, the "Retiree"
surcharge, and the "Network Access" fee. Id. at ¶¶ 25 & 27.
48.

This hidden administrative compensation was in addition to the

disclosed "Administrative Fee" described in each Schedule A.
49.

This program went into effect in October 1993. Id. at ¶ 22.

50.

The Hidden Fees were determined unilaterally by BCBSM. Id. at ¶

31; Hi-Lex, 751 F.3d at 750.
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BCBSM's cost accountants and actuaries decided how much to recoup

through the Hidden Fees and how much hospital claims had to be marked up to
reach that goal. Hi-Lex FFCL, at ¶ 31; Hi-Lex, 750 F.3d at 750.
52.

Internal BCBSM documents confirm that it had complete discretion in

setting the amount of the Hidden Fees, as well as which customers paid them. HiLex FFCL, at ¶ 33; Hi-Lex, 750 F.3d at 750.
53.

BCBSM changed the Hidden Fees at its whim or waived them entirely

for customers who discovered them.
F.

1994-Present: BCBSM Employed a Bevy of Artifices to Hide the Fees
54.

Following the implementation of "retention reallocation," BCBSM

went to great lengths to ensure that the Hidden Fees were not disclosed and would
remain invisible to its customers. Hi-Lex FFCL, at ¶ 35.
1.

Form 5500 Certifications

55.

Each year, BCBSM provided customers (including Plaintiffs) with a

certification to complete their Form 5500, which is filed with the U.S. Department
of Labor. Id. at ¶ 66; Hi-Lex, 751 F.3d at 746.
56.

The Department of Labor, Internal Revenue Service, and Pension

Benefit Guaranty Corporation developed Form 5500's to satisfy annual reporting
requirements under ERISA and the IRS Code. Hi-Lex FFCL, at ¶ 67.

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BCBSM carefully crafted its Form 5500 certification to hide the

Hidden Fees. Id. at ¶ 76.
58.

Portions of the Hidden Fees should have been, but were not, reported

in one or more of the lines on the worksheet. Id. at ¶ 73; Hi-Lex, 751 F.3d at 748
n. 11.
59.

For example, the "OTG subsidy," was a subsidy BCBSM claimed was

mandated by the State of Michigan. Hi-Lex FFCL, at ¶ 25(c).
60.

BCBSM should have reported the amount of the OTG subsidy on

Line 9(c)(i)(D) of the Form 5500 certification, titled "OTHER EXPENSES
(MANDATED SUBSIDY)." Id. at ¶ 69.
61.

But BCBSM consistently reported zero for this item, even though it

took and kept millions of dollars from its self-funded customers. Id. at ¶ 71.
62.

The same is true of the "Contingency/Risk" surcharge used to improve

BCBSM's reserves. Id. at ¶ 25(b).
63.

BCBSM should have reported this fee on Line 9(c)(i)(F), titled "RISK

AND CONTINGENCY." Id. at ¶ 69.
64.

BCBSM consistently reported "Not Applicable" for this item, despite

taking millions of dollars in contingency. Id. at ¶ 71.

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None of the other components of the Hidden Fees were reported by

BCBSM in the proper locations on the certification. Id.; Hi-Lex, 751 F.3d at 748 n.
11.
66.

There were, however, lines for "Administration" (Line 9(c)(i)(B)) and

"Other Retention" (Line 9(c)(i)(G)) on the certification. Hi-Lex FFCL, at ¶ 71.
67.

Of the amounts retained by BCBSM, the only ones disclosed to

Plaintiffs in the Form 5500 certification were the disclosed Administrative Fee and
stop-loss fee.
68.

A reader reviewing the Form 5500 certifications could not determine

whether any Hidden Fees were charged or in what amount. Hi-Lex FFCL, at ¶ 72;
Hi-Lex, 751 F.3d at 748.
69.

As a result, Plaintiffs were misled into believing that BCBSM retained

far less administrative compensation than it, in fact, actually retained. Id.
2.

Quarterly Settlements

70.

BCBSM sent Plaintiffs quarterly reports containing details about the

plan's performance. Id. at ¶ 39.
71.

The reports did not show the amount—or even the existence—of the

Hidden Fees. Hi-Lex FFCL, at ¶¶ 40-44.
72.

BCBSM carefully crafted false quarterly reports to make it appear to

customers like Plaintiffs that (1) the claims paid to providers (e.g. hospitals) were

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higher than they actually were and (2) they were paying far less to BCBSM for
administrative fees than they actually were. Id.
73.

BCBSM accomplished this by reporting the Hidden Fees as hospital

claims on the line for "TOTAL CLAIMS EXPENSE" rather than as administrative
fees on the line for "TOTAL ADMINISTRATIVE FEE EXPENSE." Id.
74.

BCBSM did this even though it has admitted that the Hidden Fees

were "administrative compensation." Id. at ¶ 47.
3.

Renewal Documents

75.

BCBSM provided misleading claims data in the "Provider Contract

Savings Report" at the time of contract renewal. Id. at ¶¶ 51-55.
76.

The report hid the Hidden Fees in numerous ways:

• Overstating the amount paid to healthcare providers on Plaintiffs' behalf (by
including the Hidden Fees kept by BCBSM);
• Understating the amount of discounts offered by providers (by excluding the
Hidden Fees kept by BCBSM); and
• Overstating the amount of "claims expenses passed on to your group" (by
including Hidden Fees kept by BCBSM). Id.
77.

Also, BCBSM misrepresented that its reported "Administrative Fee is

all-inclusive." Id. at ¶ 56; Hi-Lex, 751 F.3d at 749.

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The amount BCBSM reported as the Administrative Fee did not

include the Hidden Fees, which were additional (hidden) administrative
compensation. Hi-Lex FFCL, at ¶ 57.
4.

Annual Settlements

79.

Each year, BCBSM sent Plaintiffs an annual settlement.

80.

This report included a section titled "Administrative Fee Settlement";

however, BCBSM did not include the Hidden Fees in that section. Hi-Lex FFCL,
at ¶ 62.
81.

Instead, BCBSM reported only the administrative fee that was

reflected in each Schedule A. Id. at ¶ 60.
82.

The annual settlement also reported "Actual Claims Paid by

BCBSM." Id. at ¶ 61-62.
83.

Despite the use of the terms "actual" and "paid," the actual claims

amount was increased to include the Hidden Fees kept by BCBSM. Id. at ¶¶ 6165.
84.

BCBSM knew this was false and misleading because the Hidden Fees

were administrative compensation kept by BCBSM, not benefit claims paid to a
healthcare provider. Id. at ¶ 62.
85.

Reading the statement, it would be impossible for a BCBSM customer

to determine whether Hidden Fees were charged, or in what amount. Id. at ¶ 64.

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An underwriter for BCBSM admitted that, through this practice,

BCBSM "would be overstating [the] true cost of [a] claim." Id. at ¶ 63.
G.

2004-2007: BCBSM Debated Whether to Disclose the Hidden Fees
87.

Starting around 2004, BCBSM executives raised concerns about the

lack of disclosure surrounding the Hidden Fees, leading to an internal debate. Id.
at ¶ 120.
88.

A snapshot of this debate was captured in a 2004 email between

BCBSM employees: "If we want to counter that perception [that we hide fees] and
retain our credibility, we must be willing to disclose all our fees and stand behind
them." Id. at ¶ 122.
89.

The BCBSM new-business sales staff opposed disclosure because, by

revealing its true compensation to customers, the resulting administrative fees
would be too high and BCBSM could not compete. Id. at ¶ 123.
90.

BCBSM's true intentions are shown by the evolution of a proposed

renewal exhibit that starts with a numeric disclosure of the Hidden Fees and is
watered down over time to the point where all line items for Hidden Fees and any
monetary reference are removed. Id. at ¶ 125.
91.

BCBSM senior underwriter Ken Krisan was responsible for coming

up with a strategy for "disclosing" the Hidden Fees without customers actually
noticing. Id. at ¶ 126.

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His own emails confirm that actual disclosure of the Hidden Fees was

not BCBSM's intent:
• "I think there is a need [to] downplay this [Hidden Fees] with respect to the
outside world … [corporate communications] may be helpful in developing
some internal training materials or job aids that puts the proper 'spin' on
what we want to say." Id. at ¶ 126 (emphasis in FFCL).
• "We want to keep this a little on the understated side so we don't want to
include this in any mass communications. In many cases this is not going
to [be] good news." Id. at ¶ 126 (emphasis in FFCL).
• "[B]ecause we want to downplay the release of this information, it was
decided that Agents and Customers should not receive any written
materials." Id. at ¶ 126 (emphasis in FFCL).
• "The [Hidden] Fee portion of the discussion is intended to be downplayed to
the customer. … There is no plan to provide anything to customers or agents
on this topic." Id. at ¶ 126 (emphasis in FFCL).
• "We want to stay away from identifying what is in the fee." Id. at ¶ 126.
H.

BCBSM Investigation Showed That ASC Customers Did Not Know
About the Hidden Fees
93.

In 2007, BCBSM internally investigated whether any customers knew

they were paying Hidden Fees. Id. at ¶¶ 133-35.

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The results were startling. BCBSM's own employees reported that a

staggering 83% of self-insured ASC customers with January renewals did not
know about the fees. See id; Hi-Lex, 751 F.3d at 750.
95.

The results of BCBSM's formal investigation were consistent with

anecdotal accounts from BCBSM employees:
• Ken Krisan, Director of Middle Group Underwriting: "The [Value of Blue]
report will identify the [Hidden] Fee which for most groups is something
new." Id. at ¶ 136.
• Kenneth Bluhm, Director of Financial Accounting: "[N]ot all ASC groups
are aware of BCBSM's [Hidden Fees]." Id. at ¶ 136.
• James Bobak, Manager of Large Group Underwriting: "I know many of the
smaller [groups] aren't aware [of hidden fees]." Id. at ¶ 136.
• Christine Farah, Vice President of Sales:

"I agree that there is

overwhelming confusion on [hidden] fees internally (and externally)." Id. at
¶ 136.
• Ken Krisan: "[I]t is not certain [some accounts] were aware of the [hidden]
fees when entering into the arrangement." Id. at ¶ 136.
96.

Plaintiffs now believe that BCBSM charged them Hidden Fees since

at least 1994. In fact, Plaintiffs have obtained a letter written by BCBSM wherein
BCBSM admitted that the Hidden Fees "have been in place for Local ASC groups

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since 1994." See Exhibit 2. To the extent BCBSM charged Plaintiffs Hidden Fees
prior to this time, Plaintiffs also seek recovery related to those prior years.
I.

BCBSM Violated the ASC and Schedule A's by Charging the Hidden
Fees.
97.

Plaintiffs never agreed to pay the Hidden Fees, and the purported

disclosures in the contract documents were false and misleading. Hi-Lex, 751 F.3d
at 748.
1.

The Schedule A's Are Misleading

98.

BCBSM previously argued that it was allowed to assess the Hidden

Fees because of an amorphous "disclosure" included in some Schedule A's. For
the year 2005, for example, the so-called "disclosure" read:
Your hospital claims cost reflects certain charges for provider network
access, contingency, and other subsidies as appropriate.
99.

This sentence is false and misleading, and did not disclose the Hidden

Fees (Hi-Lex 751 F.3d at 748):
• The first page of that Schedule A has a heading entitled "Administrative
Charge."

It was under this heading that BCBSM's administrative

compensation was to be disclosed.

Plaintiffs expected all fees paid to

BCBSM to be included in this section of the Schedule A. The Hidden Fees
were "administrative compensation" and were not noted. Hi-Lex FFCL, at ¶
140; Hi-Lex, 751 F.3d at 747.

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• The sentence omits the critical fact – that Plaintiffs would be paying these
fees as additional administrative compensation to BCBSM. Id. Just the
opposite, the language stated that the identified items would be "reflected" in
the "hospital claims cost."

"Hospital claims cost" is the cost paid to

hospitals for services rendered. Thus, the "disclosure" represented that the
amounts "ordered by the Insurance Commissioner" would be paid to the
hospitals.

In reality, the fees were not included in the claims paid to the

hospitals – they were additional administrative compensation retained by
BCBSM. Hi-Lex FFCL, at ¶ 140.
100. BCBSM itself recognized that its contracts were confusing and that its
"customers probably don't completely understand the Access Fees." Id. at ¶ 141.
2.

The ASC Was Misleading

101. BCBSM also previously argued that the ASC disclosed the Hidden
Fees, but the Court of Appeals concluded that this cited language was "opaque and
misleading" (Hi-Lex, 751 F.3d at 748):
The Provider Network Fee, contingency, and any cost transfer
subsidies or surcharges ordered by the State Insurance Commissioner
as authorized pursuant to 1980 P.A. 350 will be reflected in the
hospital claims cost contained in Amounts Billed.
102. The placement of this language was carefully chosen by BCBSM.
The ASC contains a heading called "Financial Responsibilities," under which it
says the customer will "pay BCBSM the total of the following amounts…." The
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"following amounts" are then identified in a numbered list of specific obligations
(e.g., administrative fees, late fees, and interest).
103. Not one of the nine enumerated obligations includes Plaintiffs
paying Hidden Fees. Hi-Lex FFCL, at ¶ 143.
104. By not including Hidden Fees in the enumerated list of financial
obligations of the customer, BCBSM effectively represented that the Hidden Fees
were NOT something to be paid by the customer to BCBSM. Id.
105. Next, the "disclosure" represented the fees as "ordered by the State
Insurance Commissioner." Id. at ¶ 144; Hi-Lex, 751 F.3d at 748.
106. This was a misrepresentation in three respects: (1) it is untrue; the
Insurance Commissioner never ordered any BCBSM customers to pay these fees,
nor would the Insurance Commissioner have had that authority in the first place
(Hi-Lex, 751 F.3d at 748 ); (2) by characterizing the fees as something "ordered"
by state government, BCBSM represented that these were NOT any kind of
compensation for it, but rather some kind of fee imposed by the State, although,
these Hidden Fees were kept by BCBSM as additional administrative
compensation; and (3) BCBSM disavowed any claim that it was ordered to collect
the OTG subsidy from Plaintiffs in a brief to the Sixth Circuit. Hi-Lex FFCL, at ¶
144.

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107. This language also refers to "Amounts Billed." "Amounts Billed" is
defined as "the amount the Group owes in accordance with BCBSM's standard
operating procedures for payment of Enrollees' claims." Id. at ¶ 145.
108.

The definition of "Amounts Billed" does not include fees paid to

BCBSM. Id.; Hi-Lex, 751 F.3d at 748.
109. Additionally, the ASC, at Art. IV, B1 "Scheduled Payments,"
identifies seven payments to be made pursuant to the Schedule A. None of the
seven include the Hidden Fees. Further, by itemizing payments "listed in Schedule
A," BCBSM represented that there were no other payments, and consequently,
Plaintiffs would not have understood the subject language in the Schedule A to be
referring to more fees. Hi-Lex FFCL, at ¶ 146.
110. Further, even to the extent that the contract documents provide some
hint about additional fees, those documents describe only what might happen in the
future. Hi-Lex, 751 F.3d at 748.
111. Every year, however, Plaintiffs received DOL 5500 certification
sheets from BCBSM which purported to show the administrative compensation
that BCBSM was actually receiving.

Id. The 5500 Forms, though, falsely

indicated that BCBSM was not retaining any administrative compensation beyond
that clearly delineated in the ASC and Schedule As. Id.

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112. BCBSM's strategy of secrecy worked as planned and Plaintiffs were
unaware that they had been charged Hidden Fees since the beginning of the ASC
arrangement.
113. Plaintiffs were not on actual or constructive notice that BCBSM was
charging the Hidden Fees, despite the exercise of reasonable diligence on their
part.
114. Moreover, the Sixth Circuit already has held that a similarly situated,
hypothetically diligent plaintiff would not have discovered BCBSM's Hidden Fees
scheme. Hi-Lex, 751 F.3d at 749-50.
115. In fact, "BCBSM committed fraud by knowingly misrepresenting and
omitting information about the [Hidden] Fees in contract documents. Id. at 748.
J.

BCBSM Engages in a Similar Illegal Scheme by Overstating
Physician/Professional Claims
116. An extensive factual record of BCBSM's wrong doing with regard to

illegal mark-ups of hospital claims has been developed in the Hi-Lex case.
117. During the Hi-Lex litigation, Plaintiffs learned of another illegal
scheme: BCBSM intentionally overstated physician/professional claims as part of
a program known as the Physicians Group Incentive Program ("PGIP").
118. Under the PGIP, BCBSM added a fee, internally called "Physician
Incentive," to the amount charged by a professional, resulting in an increased
charge to Plaintiffs. These additional fees were not reported to Plaintiffs at all.
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Rather, they were secretly buried within the amounts reported as professional
claims expense.
119. BCBSM required Plaintiffs to pay for PGIP by unilaterally increasing
the amount that BCBSM agreed to pay physicians for their services (i.e., fee
updates to the fee schedule).
120. BCBSM had previously made yearly increases to the fee schedule, but
PGIP caused the increases to be greater than they would have been had PGIP not
been implemented. For example, in a BCBSM document released to physicians in
June 2004, BCBSM informed physicians that "Beginning July 1, 2004, physicians
will receive an average 2 percent increase in the BCBSM maximum payments for
most procedures. Also, an additional 0.5 percent increase will be used to fund
the [PGIP]." (emphasis added).

Clearly the "additional 0.5 percent" would not

have been paid by Plaintiff if PGIP did not exist.
121. Similarly, an internal BCBSM memo demonstrated that the PGIP
caused Plaintiffs to pay an additional amount by comparing the previously-normal
fee update with the new fee update: "Approved amount with fee update is $100.
Approved amount with the added incentive is $100.50." Again, this internal memo
clarifies that Plaintiffs paid more because of PGIP; otherwise they would have just
paid, for example, $100, not $100.50.

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122. Plaintiffs were financially liable for the additional PGIP amounts. In
fact, BCBSM manipulated its accounting system so that the additional amount for
PGIP came directly from Plaintiffs' claims.
123. In other words, BCBSM took portions of Plaintiffs' ERISA Plan
Assets that were supposed to be used to pay the professionals that provided
services to covered beneficiaries, and instead BCBSM used those funds for its own
benefit and at its own discretion.
124. The amounts collected as PGIP payments were not paid to
professionals that provided services to Plaintiffs, and BCBSM has not otherwise
explained how it used those payments.
125. The PGIP was directly contrary to the parties' self-funded
arrangement, under which Plaintiffs were to pay the actual amount of healthcare
claims incurred under the Plan, plus an administrative fee to BCBSM to
compensate it for its administrative services. To the extent BCBSM had physician
incentives, or other programs, those were provided by BCBSM in exchange for
the administrative fee. Those were not costs to be separately (and certainly not
secretly) recovered from Plaintiffs.
126. The PGIP was not disclosed in the ASC, nor in Plaintiffs' Schedule
A's.

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127. When confronted with these allegations, BCBSM responded that it
was allowed to assess the PGIP because of an amorphous "disclosure" included in
some Schedule A's. For the year 2007, the so-called "disclosure" read:
The Group acknowledges that BCBSM or a Blue Cross and Blue
Shield Plan may have compensation arrangements with providers in
which the provider is subject to performance or risk-based
compensation, including but not limited to withholds, bonuses,
incentive payments, provider credits and member management fees.
Often the compensation amount is determined after the medical
services has been performed and after the Group has been invoiced.
This "disclosure" said nothing about BCBSM retaining a portion of Plaintiffs'
ERISA Plan Assets in an amount unilaterally determined by it, and then paying out
those monies (if at all) to professionals unilaterally determined as deserving by
BCBSM. Instead, it referred to "BCBSM" having compensation arrangements
with providers, which at best suggests that BCBSM would be compensating the
providers out of its own pocket.
128. Further, nothing in the alleged disclosures explained how much the
PGIP would be or how it would be calculated.
129. Likewise, nothing in the Schedule A's indicated that Plaintiffs agreed
to pay the PGIP. In fact, BCBSM's charging of the PGIP was inconsistent with the
ASC, which specifically identified Chippewa Luce's payment obligations, none of
which included paying the PGIP.

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130. The so-called "disclosures" of the PGIP were, at best, ambiguous and
misleading, and like the Hidden Fees disclosures, were similarly "opaque."
131. In fact, it is clear that the PGIP scheme is nearly identical to the
Hidden Fees scheme. And like the Hidden Fees scheme, the PGIP scheme violates
ERISA because, among other things, BCBSM unilaterally determined the PGIP
payments, secretly took these payments from Plaintiffs, and then mis-reported its
use of Plan Assets.
132. Further, to the extent BCBSM used Plaintiffs' Plan Assets to its
benefit, that also constitutes illegal self-dealing under ERISA.
133. Consequently, all of the above-described fees, charges, subsidies and
surcharges, including the PGIP and Physician Incentive, are hereafter collectively
referred to as "Hidden Fees."
COUNT I
BREACH OF FIDUCIARY DUTY – ERISA
134. Plaintiffs hereby incorporate by reference the allegations contained in
the preceding paragraphs.
135. BCBSM was a fiduciary pursuant to 29 U.S.C. § 1002(21)(A) with
respect to the Plan because (1) it exercised discretionary authority and control over
management of the Plan; (2) it exercised authority and control over management
and disposition of Plan Assets (Hi-Lex FFCL, at ¶ 182; Hi-Lex, 751 F.3d at 744-47;

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or (3) it had discretionary authority and responsibility in the administration of the
Plan.
136. Chippewa Luce is a fiduciary because it exercised discretionary
authority and control over management of the Plan.
137. As a fiduciary, BCBSM was required to, among other things,
discharge its duties solely in the interest of the employees and beneficiaries of the
Plan, preserve Plan Assets, fully disclose its actions and any compensation it was
taking for its services, avoid making false or misleading statements, and abide by
any statutory obligations or restrictions imposed on it.
138. BCBSM breached its fiduciary duties by, among other things:
(a)

Charging the Hidden Fees;

(b)

Failing to disclose the Hidden Fees;

(c)

Submitting false and misleading quarterly settlement statements
and annual summaries;

(d)

Submitting false and misleading Form 5500 reports; and

(e)

Otherwise engaging in a pattern of conduct designed to
mislead, confuse, deceive and otherwise trick Plaintiffs into
paying more for its services than Plaintiffs were obligated to
pay.

139. BCBSM's breach of its fiduciary duty has proximately caused
substantial damages to Plaintiffs.

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140. BCBSM fraudulently concealed that it was charging the Hidden Fees,
the amount of those fees, and that it was otherwise violating its legal obligations to
Plaintiffs. Hi-Lex FFCL, at ¶¶ 233-49; Hi-Lex, 751 F.3d at 748-50.
141. Plaintiffs did not discover the full extent of BCBSM's wrongful
conduct until learning of the pending Hidden Fees litigation.
COUNT II
PROHIBITED TRANSACTION UNDER ERISA
142. Plaintiffs hereby incorporate by reference the allegations contained in
the preceding paragraphs.
143. BCBSM is a fiduciary pursuant to 29 U.S.C. § 1002(21)(A) and a
"party in interest" pursuant to 29 U.S.C. § 1002(14).
144. As a fiduciary and party in interest, BCBSM was prohibited from
engaging in certain transactions as set forth in 29 U.S.C. § 1106.
145. BCBSM's conduct with respect to the Hidden Fees was a prohibited
transaction because, among other things, (a) it constituted a transfer to, or use by or
for the benefit of, BCBSM of Plan Assets, and (b) BCBSM dealt with Plan Assets
in its own interest and for its own account. See Hi-Lex FFCL, at ¶ 201; Hi-Lex,
751 F.3d at 750-51.
146. BCBSM's violation of 29 U.S.C. § 1106 has proximately caused
substantial damages to Plaintiffs.

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147. BCBSM fraudulently concealed that it was charging the Hidden Fees,
the amount of those fees, and that it was otherwise violating its legal obligations to
Plaintiffs. Hi-Lex FFCL, at ¶¶ 233-49; Hi-Lex, 751 F.3d at 748-50.
148. Plaintiffs did not discover the full extent of BCBSM's wrongful
conduct until learning of the pending Hidden Fees litigation.
PRAYER FOR RELIEF
Plaintiffs respectfully request that the Court to enter judgment in their favor
and against BCBSM as follows:
A.

Ordering BCBSM to provide a full and complete accounting of all
Hidden Fees received by it from Plaintiffs;

B.

Declaring that BCBSM breached its fiduciary duty and otherwise
violated federal law by (1) charging the Hidden Fees, (2) failing to
disclose or report the Hidden Fees, and (3) submitting false and
misleading quarterly settlements, annual settlements and Form 5500's,
and otherwise acting through a pattern of deception;

C.

Awarding restitution to Plaintiffs of the Hidden Fees;

D.

Awarding monetary damages, costs, interest, disgorgement of
BCBSM's profits, and attorneys' fees (including statutory attorneys'
fees under ERISA) to the fullest extent of the law; and

E.

Awarding all other relief to which Plaintiffs may be entitled.

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VARNUM LLP
Attorneys for Plaintiffs

Date: February 19, 2019

By:

/s/ Aaron M. Phelps
Aaron M. Phelps (P64790)
Business Address & Telephone:
Bridgewater Place, PO Box 352
Grand Rapids, MI, 49501-0352
Phone: (616) 336-6000
Fax: (616) 336-7000
amphelps@varnumlaw.com

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