Using “Dummy Code” to Pass Administrative Fees Through to Health Plan May Be Fiduciary Breach

A participant in her employer’s self-insured ERISA group health plan sued the plan’s claims administrator and a subcontractor that provided access to chiropractic and other services, challenging certain billing practices. She alleged that when a participant was treated by a health care provider in the subcontractor’s network, the charge for the service was bundled with the subcontractor’s administrative fee using a “dummy code,” and the participant’s and plan’s financial responsibility was determined based on the bundled amount. This type of fee-shifting scheme did not fit within any plan provisions regarding covered amounts, nor was the fee included among the administrative fees set forth in the service agreement between the employer and the claims administrator. Suing on behalf of herself, other participants, and the plan, the participant asserted that burying administrative fees in provider claims in this manner was a breach of fiduciary duty. A court ruled in favor of the claims administrator and subcontractor without a trial, and the participant appealed.

Although the appellate court upheld one element of the ruling—that the participant had not experienced a direct financial injury—it disagreed with the trial court’s conclusions on most of the other claims. The appellate court first considered the claims administrator’s fiduciary status and potential breach. It determined that a reasonable factfinder could conclude that the claims administrator was a fiduciary because it had discretionary authority and control with respect to the plan and control over plan assets. Citing another appellate court decision upholding an award to a plan for a TPA’s concealment of fees (see our Checkpoint article), the court noted that the claims administrator’s ability to implement the billing scheme indicated discretionary authority and control. The court also observed that it would be reasonable to conclude that the claims administrator’s actions—such as referring to the subcontractor as a health care provider, and using codes that did not represent actual medical services—violated the terms of the plan and constituted a fiduciary breach. The subcontractor, on the other hand, was not a fiduciary because it was performing purely ministerial functions. However, the court determined that a reasonable factfinder could conclude that the subcontractor was a party in interest and engaged in prohibited transactions. (Indications of the subcontractor’s party-in-interest status included making its network of providers available to participants.) In addition, it appeared that the subcontractor was aware of the “questionable nature” of the billing arrangement.

EBIA Comment: This case returns to the trial court for further proceedings, including development of the evidence and consideration by a “reasonable factfinder.” While the outcome remains to be seen, it is clear that courts take seriously perceived billing abuses by plan service providers. Care should be taken to ensure that service provider payment arrangements comply with the terms of the plan and applicable service agreements. For more information, see EBIA’s ERISA Compliance manual at Sections XXVIII.C (“Fiduciary Responsibilities Imposed by ERISA”) and XXVIII.D (“Prohibited Transactions Under ERISA § 406”). See also EBIA’s Self-Insured Health Plans manual at Section XXIII.C (“Service Provider Compensation”).

Contributing Editors: EBIA Staff.