Labor & Employment Law Daily Wrap Up, PENSION AND BENEFIT PLANS—6th Cir.: BCBS of Michigan must face ERISA suit based on benefits plan mismanagement, (May 22, 2025)

By Jody Coultas, J.D.

The district court erred in holding that BCBSM was not acting as an ERISA fiduciary and that ERISA’s remedial provisions did not provide the relief sought.

The United States Court of Appeals for the Sixth Circuit reversed and remanded an Employee Retirement Income Security Act (ERISA) suit filed by a boat manufacturer against Blue Cross Blue Shield of Michigan (BCBSM), holding that the district court erred in finding that the manufacturer failed to plausibly allege that BCBSM was a “fiduciary with respect to” a self-funded health care benefits plan. The manufacturer hired BCBSM to administer its self-funded health care benefits plan. The relationship soured and the manufacturer filed an ERISA suit alleging that BCBSM knowingly squandered plan assets by systematically overpaying some categories of claims and profited from its mismanagement. The district court dismissed the claims. On appeal, the Sixth Circuit held that the manufacturer plausibly alleged that BCBSM controlled the disposition of plan assets when it was overpaying claims to medical providers and demonstrated that BCBSM was acting as an ERISA fiduciary. Further, the manufacturer plausibly alleged that BCBSM acted as an ERISA fiduciary by exercising discretion over its own compensation for a shared savings plan (Tiara Yachts, Inc. v. Blue Cross Blue Shield of Michigan, No. 24-1223 (6th Cir. May 21, 2025)).

Administration services. BCBSM offers services in which it will administer a self-funded benefits plan for employers. The insurer decides what claims to pay and for how much, then pays medical providers out of the plan’s assets. BCBSM is just one of 38 Blue Cross Blue Shield Association regional affiliates—colloquially known as the “Blues.” Each of the Blues negotiates with providers in its area to set rates for medical services. When a covered employee received care in another state—say, Tennessee—BCBSM promised the employer that it would reimburse the provider at whatever rate Tennessee’s Blue would pay. However, what actually occurred was that when an out-of-state provider who was not part of the host Blue’s network submitted a claim, BCBSM would “flip” its status and reimburse the provider however much it charged rather than at the host Blue’s lower rate. As a result, BCBSM reimbursed “many times over and above the customary amount for such services.” This was known as “flip logic.”

ASC. Tiara Yachts, Inc. is a Michigan corporation that designs and manufactures boats. It offers its employees health insurance through a self-funded benefits plan. Tiara Yachts hired BCBSM to administer the plan. An Administrative Services Contract (ASC) governed the relationship. Tiara Yachts alleged that BCBSM systematically overpaid claims submitted by medical providers during the years that BCBSM administered the plan. Tiara Yachts also alleged that BCBSM implemented a program to profit from its practice of overpaying claims. BCBSM enrolled all self-funded customers, including Tiara Yachts, in a new “Shared Savings Program” (SSP). Under that program, BCBSM hired third parties to claw back past overpayments from providers and 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.

District court. The federal district court in Grand Rapids, Michigan granted BCBSM’s motion to dismiss for failure to state a claim. It held that Tiara Yachts had not plausibly alleged that BCBSM acted as an ERISA fiduciary, either when paying providers based on flip logic or when paying itself through the SSP. The district court also determined that ERISA could not provide the relief Tiara Yachts requested.

ERISA. Under both ERISA claims (breach of fiduciary duties and engaging in transactions prohibited by the statute), Tiara Yachts was required to show that BCBSM was a “fiduciary with respect to” the plan when it engaged in the complained-of conduct. A party is an ERISA fiduciary when it exercises either (1) any authority or control over plan assets; or (2) discretionary authority over plan management or administration.

Overpaying claims. Because Tiara Yachts plausibly alleged that BCBSM controlled the disposition of plan assets when it was overpaying claims to medical providers, it demonstrated that BCBSM was acting as an ERISA fiduciary. An entity that exercises any authority or control over disposition of a plan’s assets becomes a fiduciary as to those actions. The district court held that Tiara Yachts’ allegations about flip logic and claims-processing issues were matters of contract and thus not actionable under ERISA. However, the appellate court clarified that contractual duties and ERISA fiduciary status are not mutually exclusive. BCBSM had the authority to write checks on the plan account, which were based on its own claim processing procedures. Also, BCBSM exercised control over where plan funds were deposited and how and when they were disbursed. Tiara Yachts alleged that through flip logic, BCBSM knowingly squandered plan assets by reimbursing certain out-of-state providers at charged rates rather than at the host Blues’ lower rates. Although Tiara Yachts did not refer to specific claims BCBSM overpaid through flip logic, it cited internal BCBSM emails that say flip logic affected an entire group of its customers to which Tiara Yachts belonged. That was sufficient to show BCBSM acted as a fiduciary.

The district court also held that BCBSM’s alleged practice of systematically overpaying providers did not give rise to ERISA fiduciary status because it constituted a “system-wide business decision[]” rather than any action specific to the plan. The appellate court noted that this reasoning would yield untenable results and declined to read ERISA to categorically immunize conduct that affects many plans rather than just a few. Tiara Yachts alleged that the ASC gave BCBSM the authority to grant or deny claims, and then to pay claims from plan assets. That was sufficient to show that BCBSM exercised “meaningful control” over disposing of plan assets when it overpaid providers through flip logic and other claims-processing errors, and thus acted as an ERISA fiduciary.

SSP. At the outset, the court noted that the allegations about the SSP did not sound in fraud, and that Tiara Yachts did not need to plead that BCBSM acted fraudulently as the elements of common law fraud do not overlap with elements of an ERISA self-dealing claim.

Tiara Yachts plausibly alleged that BCBSM acted as an ERISA fiduciary by exercising discretion over its own compensation for the SSP, according to the court. Where an administrator can recover for overpayments that it unilaterally caused or controlled, that constitutes discretion over compensation. BCBSM received both 30% of future overpayments the SSP prevented the plan from paying, and 30% of past overpayments the SSP clawed back from providers. Also, BCBSM controlled the number and amount of overpayments the plan made because BCBSM decided which claims to pay, determined how much to pay for them, and then wrote the checks. Thus, BCBSM’s control over the claims-processing apparatus meant it also exercised discretion in setting its compensation under the SSP. The allegation that BCBSM could control a key factor in its compensation was enough to trigger ERISA fiduciary duties at this pleading stage. The court rejected BCBSM’s argument that there were “too many steps between the initial payment and the recovery” for its control over claims processing to amount to discretion over its compensation.

Relief. Tiara Yachts sought relief under 29 U.S.C. §1132(a)(2) and equitable relief under 29 U.S.C. §1132(a)(3). The district court held that Tiara Yachts couldn’t recover under 29 U.S.C. §1132(a)(2) because its complaint sought recovery on behalf of itself, not the plan.

The appellate court found that while the complaint did not specify that recovery was “for the Plan,” the pleadings were sufficient to put BCBSM on notice that it was seeking recovery the losses for the plan.

However, Tiara Yachts could not recover under 29 U.S.C. §1132(a)(3) for BCBSM’s overpayments to providers that BCBSM never clawed back. To receive equitable relief “in the universe of transferred assets,” a plaintiff generally must be able to trace the award “back to ‘particular funds or property in the defendant’s possession.’” To the extent that Tiara Yachts sought restitution of funds BCBSM overpaid and never subsequently recovered, those funds are not in BCBSM’s possession and thus are not recoverable under 29 U.S.C. §1132(a)(3).

The case is No. 24-1223.

Judge: Bloomekatz, R.

Attorneys: Aaron M. Phelps (Varnum LLP) for Tiara Yachts, Inc. Tacy Fletcher Flint (Sidley Austin LLP) for Blue Cross Blue Shield of Michigan.

Companies: Tiara Yachts, Inc.; Blue Cross Blue Shield of Michigan

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