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Kent Companies, Inc. v. Blue Cross and Blue Shield of Michigan

United States District Court, E.D. Michigan, Southern Division

February 26, 2015




This lawsuit is one among more than fifty similar cases brought against defendant Blue Cross and Blue Shield of Michigan ("BCBSM") for allegedly charging hidden administrative fees by, among other things, inflating hospital claims with hidden surcharges in violation of the Employment Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §1001 et seq. Now before the court is defendant's motion to dismiss the claims as time-barred and for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). Also before the court is plaintiffs' motion for partial summary judgment as to liability only. Oral argument was heard on January 27, 2015. Because of fact issues concerning whether plaintiffs knew or should have known of the hidden fees, BCBSM's motion to dismiss the claims as time-barred shall be denied without prejudice, and plaintiffs' motion for partial summary judgment shall be denied without prejudice. BCBSM's unopposed motion to dismiss the state law claims shall be granted.

I. Background

Kent Companies, Inc. ("KCI"), a family owned concrete construction firm, on behalf of itself and the Kent Companies Inc. Employee Health Plan ("Plan"), filed a nine-count Complaint on August 7, 2014. Count I alleges that BCBSM breached its fiduciary duty in violation of ERISA, 29 U.S.C. § 1104, and Count II alleges that BCBSM engaged in selfdealing in violation of ERISA, 29 U.S.C. § 1106. Counts III through IX allege various state claims. BCBSM moved to dismiss the state law claims, and plaintiffs did not oppose that motion. Accordingly, the state law claims shall be dismissed. The court now turns its attention to the ERISA claims that are at the heart of this dispute.

BCBSM has been the third-party administrator of plaintiffs' self-insured employee benefit Plan since June 19, 2001, when the parties executed their Administrative Services Contract ("ASC"). Under the ASC, BCBSM agreed to administer the Plan by paying covered employee health care claims using money provided to it by KCI, and granted KCI employees access to BCBSM's provider networks. In exchange, BCBSM collected administrative fees. The parties renewed the ASC each year from 2001 to 2008 by completing a Schedule A. While the ASC did not contain any pricing terms, the Schedule A enumerated the fees. Together the ASC and the Schedule A formed the parties' contract. The ASC required BCBSM to provide plaintiffs with a detailed settlement showing the amounts billed to and owed by KCI.

Plaintiffs allege that BCBSM increased its administrative fees in the late 1980s, but when self-funded plans balked at the hefty charges, and BCBSM lost as many as 225, 000 members in 1989 alone, thereafter BCBSM began hiding administrative charges by burying them in marked-up hospital claims. In its new system begun in 1993, plaintiffs allege that BCBSM submitted inflated hospital bills to its customers, and then pocketed the difference between the amounts actually paid to the hospital and the inflated amounts wrongfully charged to the customer, coining its new system "retention reallocation." Plaintiffs allege that BCBSM decided how much to mark up hospital claims to recoup administrative fees, and the amounts varied widely or were waived for customers who discovered them.

According to the Complaint, the allegedly hidden fees consisted of four components:

(1) the "Other Than Group" ("OTG") subsidy, (2) the "Contingency/Risk" surcharge, (3) the "Retiree" surcharge, and (4) the "Network Access" fee. In addition to the hospital claim mark-ups, plaintiffs also allege that BCBSM had another fraudulent scheme by which it intentionally overstated physician/professional claims as part of a program known as the Physicians Group Incentive Program ("PGIP"). Under the PGIP, plaintiffs allege that BCBSM inflated the amount charged by a professional, resulting in an increased charge to plaintiffs without reporting the additional fee.

BCBSM was required to complete Form 5500 worksheets to its customers to satisfy annual reporting requirements under ERISA and the IRS Code. Plaintiffs allege that the hidden fees should have been reported on the 5500 Forms, but were not. Plaintiffs further allege that BCBSM failed to report the hidden fees on quarterly settlements, renewal documents, and annual settlements.

This case is markedly similar to Hi-Lex Controls, Inc. v. BCBSM, 751 F.3d 740 (6th Cir.), cert. denied, 135 S.Ct. 404 (2014), where the Sixth Circuit affirmed a $6 million judgment holding that BCBSM had engaged in wrongful self dealing and breached and its fiduciary duty under ERISA when it inflated hospital claims with hidden surcharges in order to retain additional administrative compensation. Except for the PGIP fees, all of the hidden fees claimed in this case were also at issue in Hi-Lex. Plaintiffs argue that the Hi-Lex decision entitles them to summary judgment as to liability on their ERISA claims. For the reasons discussed below, Hi-Lex does not entitle plaintiffs to summary judgment at this early juncture as distinct factual issues exist here as to when KCI knew, or through due diligence, should have known of the disputed fees.

II. Standard of Law Re Rule 12(b)(6)

Rule 12(b)(6) allows the Court to make an assessment as to whether the plaintiff has stated a claim upon which relief may be granted. Under the Supreme Court's articulation of the Rule 12(b)(6) standard in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 554-56 (2007), the Court must construe the complaint in favor of the plaintiff, accept the allegations of the complaint as true, and determine whether plaintiff's factual allegations present plausible claims. "[N]aked assertions devoid of further factual enhancement" are insufficient to "state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). To survive a Rule 12(b)(6) motion to dismiss, plaintiff's pleading for relief must provide "more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Ass'n of Cleveland Fire Fighters v. City of Cleveland, 502 F.3d 545, 548 (6th Cir. 2007) ( quoting Bell Atlantic, 550 U.S. at 555) (citations and quotations omitted). Even though the complaint need not contain "detailed" factual allegations, its "factual allegations must be enough to raise a right to relief above the speculative level on the assumption that all of the allegations in the complaint are true." Id. ( citing Bell Atlantic, 550 U.S. at 555).

III. Analysis: Defendant's Motion to Dismiss

A. ERISA's Statute of Limitations

The parties agree that the ERISA claims at issue here are subject to the limitations period set forth in 29 U.S.C. § 1113. The statute requires that "a claim be brought within three years of the date the plaintiff first obtained actual knowledge' of the breach or violation forming the basis for the claim." Hi-Lex, 751 F.3d at 747 (internal quotations marks and citations omitted). "Actual knowledge means knowledge of the underlying conduct giving rise to the alleged violation, ' rather than knowledge that the underlying conduct violates ERISA." Id. (internal quotation marks and citations omitted). The statute extends the statute of limitations period, however, "in the case of fraud or concealment, " in which case "such action may be commenced not later than six years after the date of discovery of such breach or violation." 29 U.S.C. § 1113(2). In determining when plaintiffs should have discovered the facts giving rise to the ERISA violation, courts employ an objective standard. J. Geils Band Employee Ben. Plan v. Smith Barney Shearson, Inc., 76 F.3d 1245, 1254 (1st Cir. 1996).

In this case, plaintiffs filed suit on August 7, 2014. Thus, if the six-year statute of limitations period applicable in cases of fraud or concealment applies, BCBSM must show that plaintiffs were aware of the hidden fees before August 7, 2008 in order to establish that the claims are time-barred. BCBSM argues that it disclosed the allegedly hidden fees prior to August 7, 2008 in four ways: (1) the ASC, (2) the 2006 Schedule A, (3) the 2007 Schedule A, and (4) the March 12, 2008 annual settlement statement which included a pie chart titled "Value of Blue." Plaintiffs respond that those documents failed to disclose the hidden ...

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