By: David Ostrowsky
Was it a standard administrative cost or a true “phantom tax” allegedly stifling competition?
Back in November, Wesco, a 55-year-old privately-held gas station chain, and the benefits fund for the Utility Workers Union of America filed a class action lawsuit, alleging that Blue Cross Blue Shield of Michigan (BCBSM), an insurance carrier serving over six million Midwesterners, engaged in an anticompetitive practice by charging an additional PEPM (“per-employee, per-month”) fee to any group that opted to use a stop-loss carrier other than BCBS. For BCBS of Michigan, the fee represents a fairly standard industry practice for charging a plan extra if it opts to use a non-preferred stop-loss carrier; conversely, for the aforementioned plaintiffs, the constantly escalating PEPM fee represents a means for inflating costs for the already cash-strapped covered groups as well as driving smaller stop-loss carriers out of the market. Looking ahead, how this case plays out in federal court in Michigan will have a monumental impact on not just the stop-loss marketplace but also the self-funding industry in its entirety.
Though it is fairly common for Third Party Administrators (TPAs) to have contractual arrangements with preferred stop-loss carriers, the argument here, according to Wesco, is that the extra fee proved to be so prohibitively expensive that the company had no choice but to use BCBS of Michigan, already its TPA, as its stop-loss carrier. Subsequently, if smaller stop-loss carriers cannot compete – which would amount to a violation of the Sherman Antitrust Act as well as state antitrust laws – there is no limit to which BCBS could charge self-funded employers.
According to court filings, Michigan’s largest health insurer implemented the fee years ago “to serve as a deterrent and discourage BCBSM’s self-funded customers from buying stop-loss coverage from other carriers while simultaneously weakening its rivals competitively by effectively raising the prices of their stop-loss products.”
Consequently, the “effective prices of stop-loss insurance for self-funded accounts are significantly higher than they otherwise would be in Michigan,” according to the lawsuit that opines the fee is “substantively no different than a price-fixing scheme explicitly designed and employed to raise its rivals’ costs in violation of federal and state antitrust laws.”
In other words, the allegation here is that other stop-loss carriers that want to provide more reasonably priced coverage are going to be compelled to offer substantially better deals that hurt their bottom line in order to compensate for the added burden of BCBS’ fees.
But BCBS of Michigan may have a compelling counterargument – aside from buffing up their coffers amidst the ambiguous landscape of anti-trust laws. For self-funded groups, it is naturally easier to work with an entity with which they are familiar as there is less likelihood for administrative snafus to surface; after all, the TPA is the same entity as the stop-loss carrier. In more layperson terms, everyone is already on the same page.
On a grander scale, however, it is important to remember that the relationship involving a benefit plan, TPA, and stop-loss carrier transcends premiums and coffers from which claims can be paid. TPAs charge a fee when a non-preferred carrier is selected for multiple reasons. Indeed, there are more inherent inefficiencies and resources needed for engaging with a carrier with whom an existing process is not yet ironed out. TPAs and their preferred carriers have established processes and system-based tools that facilitate a more streamlined transmission of needed materials; their systems are literally built to integrate with each other. Meanwhile, other carriers would require the TPA to implement and utilize completely new processes outside their usual system.
Furthermore, it bears mentioning that stop-loss carriers that charge less are sometimes able to do so because the scope of their coverage is more limited, their policies contain more exclusions, and they may tend to delay or deny payments. Though the TPA’s only responsibility is to administer the plan in accordance with its terms and applicable law – irrespective of what stop-loss will or will not pay – TPAs, such as BCBS, are often blamed for a stop-loss carrier's failure to reimburse, and are accused of having made some administrative error by allowing the plan to pay claims that would not be reimbursed. Accordingly, TPAs may argue that they institute these fees to safeguard themselves – and their respective plans –from getting in a relationship with cut-rate carriers that will cost them more in the long run. At the very least, the fees arguably buffer the TPA against costs incurred when defending themselves against claims of negligence when a carrier may eventually refuse to reimburse the plan.
Though this case is still in its infancy at this time, new developments can quickly surface as the federal court is being asked to issue an injunction to hinder Blue Cross from assessing this fee.