Blue Cross and Blue Shield

Featured Health Business Daily Story March 2, 2010

 Michigan Blues Plan Is Sued by Municipalities Over Alleged ‘Hidden’ Network Access Fees 

Reprinted from The AIS Report on Blue Cross and Blue Shield Plans*, a hard-hitting independent monthly newsletter on business strategies, products and markets, mergers and alliances, and financing of BC/BS plans.

*Not affiliated with the Blue Cross and Blue Shield Association or its member companies.

By Liana Heitin, Editor (

Blue Cross Blue Shield of Michigan is facing lawsuits from nearly a dozen self-funded municipal organizations and public entities around the state who claim the health plan made millions off of hidden provider network access fees. And while the company’s transparency — not the legitimacy of charging such fees — is the conduct in question, one benefits consultant says self-funded groups should expect to pay access fees for the Michigan Blues plan’s superior network discounts. Still, the Blues plan is less forthright than competitors such as Aetna Inc. and CIGNA Corp. in disclosing those fees, he says. The consultant also warns that other self-funded groups may have similar legal claims against the Michigan Blues plan.

 The Oakland County Road Commission, the first organization to file suit over the disputed contract language, reached a settlement with the Michigan Blues plan last fall. BCBSM agreed to pay the county $650,000 and waive administrative fees for three years, according to The Detroit News, which obtained the information through a Freedom of Information Act request. Michigan Blues spokesperson Helen Stojic would not discuss the specifics of the settlement, but said only that the “Oakland County [lawsuit] was some time ago. We arrived at a mutually acceptable long-term business arrangement in lieu of continued court proceedings.”

 That settlement acted as a catalyst, according to the plaintiffs’ attorneys, William Horton and Liza Favaro with Troy, Mich.-based law firm Giarmarco, Mullins & Horton, P.C., for other organizations to revisit the language in their contracts and file suits of their own. Two other communities have settled since then and 11 more are pending, the attorneys say.

 Horton and Favaro are also forming a proposed class-action suit, involving the Genesee County Road Commission, the city of Saginaw, and Tuscola and Cass counties. They filed the complaint in August 2009 and are waiting for a judge to certify the case. Favaro tells The AIS Report that the suit could include “roughly 200 potential class members from across the state.”

 The plaintiffs allege that prior to 1994, the Michigan Blues plan itemized all administrative fees, including the access fees now in question. However, the plan began receiving complaints from self-funded clients, who argued that the access fees should only apply to fully insured plans.

 The attorneys point to an internal memo circulated among BCBSM executives in late 1993 entitled “Retention Reallocation Executive Summary.” The memo states: “Citing BCBSM’s high costs, many customers have complained and have threatened to leave if relief was not provided.…Reflecting certain BCBSM business costs in hospital claim costs will provide long-term relief to the problems [related to billing]…and will also satisfy short-term objectives of enhancing customer relationships while cutting operational costs.” And in the line that the attorneys have relied on in painting the practices as disingenuous, it says: “Changes to these costs will be inherent in the system and no longer visible to the customer.”

 A few months later, the insurer rolled out the new pricing arrangement in which the access fees were tacked onto claims rather than disclosed on the rider. For instance, under this arrangement, the client would receive a statement for a $100 hospital claim. However, the claim would not explain that the Michigan Blues plan had received a discount and only paid the hospital $85. The extra $15 went to the health plan as an administrative cost. Favaro says, “the value of Blue Cross is that it has special arrangements with specific hospitals that enable it to get discounts with hospital claims. But they weren’t passing those savings on.” She says that the fees were as high as 15% by 2002 — and in Oakland County, they totaled $17 million over 14 years.

 Stojic contends that “when contracts were renewed annually, the contract renewal documents reminded customers that part of their obligation included payment of these fees.” She also emphasizes that the fees “enable these groups to realize substantial savings through the Blue Cross hospital network.”

 Access Fees Are High but Legitimate

 A Michigan employee benefits consultant, who has worked with BCBSM for many years and requests anonymity, says that the legitimacy of the expense should not be in question. “It’s an access fee — it’s the cost of the access to a developed network where Blues has spent a considerable amount of time, energy and money in negotiating favorable rates of reimbursement. There’s a cost to doing that.”

 He explains that the Michigan Blues plan’s access fees likely were higher than those of other health plans, which could have scared off potential clients who were only comparing fixed costs. Potential self-funded clients might not recognize that the Michigan Blues plan makes up for this with lower medical claims, he says. “When you look at the effective discount relative to the next largest PPO in the state, Blue Cross still commands a compelling pricing advantage,” the consultant says. “While the overhead burden is higher, it’s completely offset by its effectiveness in negotiating with particular providers. There’s no question that’s the case — it’s been proven through claim repricing, actuarial studies, over and over.”

 However, he asserts, the cost savings don’t excuse the health plan for not disclosing its fees. The principal issue is transparency, and BCBSM “clearly made a conscious decision to bury the fees.” The Michigan Blues plan is less forthright than its commercial competitors, such as Aetna Inc. and CIGNA Corp., according to the consultant.

 Plaintiffs Say ‘Language Is Meaningless’

 According to the complaint issued on behalf of Livingston County, one of the communities whose case is pending, the following language appeared in the Schedule A (a yearly rider to the master contract) until 2006: “Your hospital claims cost reflects certain charges for provider network access, contingency, and other subsidies as appropriate.” The charges referred to were not listed in the quarterly reports, the complaint states. BCBSM changed the language in the 2006-2007 contract, adding a reference to an “ASC Access Fee,” which was not described in the master contract. An Oakland County employee was the first to notice the language change in 2006, says Favaro, and begin questioning the fees.

 “At this point, we’ve had judges in seven cases say that language is ambiguous,” says Favaro, referring to those judges who have ruled against BCBSM’s motions to dismiss the lawsuits. “We don’t believe it discloses anything.…The language is meaningless,” she says. “Our response is, ‘If you really wanted to disclose it, there were so many other ways you could have done so.’”

 The agents who sold the plans should be held accountable as well, says the benefits consultant. “In some instances, the agents who failed to do their work have collected massive commissions and gotten off scot-free,” he says. “They didn’t do their jobs, they didn’t evaluate, didn’t analyze and disclose the flow of dollars. And in some cases, those were pretty big dollars.” He says the agents should have known to request a retention reallocation report, now known as an additional administrative compensation report, which details the plan’s overhead costs.

 The consultant speculates that these claims could apply to any self-insured group, but for now only municipal and public entities have gotten involved, in part because they are in contact with one another. Favaro says that she and Horton, who are involved in all cases, did not actively solicit clients but that the other entities came to them after the Oakland settlement.

 According to Stojic, BCBSM does “not believe these cases will be successful because they have no merit. The disputed fees were specifically referenced in each of these group customers’ BCBSM contracts.” She also notes that all groups have continued to do business with the Michigan Blues plan.

 Favaro says she estimates the next case is likely to go to trial this summer.