Priddy et al v. Health Care Service Corporation

Filing 21

OPINION: The Defendant's Motion will be Allowed to the extent that Plaintiffs are alleging a breach of fiduciary duty under ERISA for failure to pass on rebates and discounts. The Defendant's Motion will be Denied to the extent that Plai ntiff is alleging the HCSC is a fiduciary due to its status as a mutual insurance company. The Motion to Dismiss will be Denied to the extent that Plaintiffs are asserting a breach of fiduciary duty based on board member payments. The Motion to Dism iss will be Denied to the extent that Plaintiffs are alleging violations of § 1106 in Counts I and II. The Motion to Dismiss will be Denied as to Count III. The Motion to Dismiss will Be Allowed as to Counts IV and V. The Motion will be Denied a s to Counts VI and VII. the Motion of Defendant Healthcare Services Corporation to Dismiss the First Amended Complaint 13 is ALLOWED IN PART and DENIED IN PART. The Motion to Dismiss for lack of standing as to Prairie Analytical Systems, Inc., Me tro Chicago Surgical Oncology, LLC and Ad-Libs Advertising, Inc. is ALLOWED. Those Plaintiffs are terminated as Parties. The Motion to Dismiss for lack of standing as to other Plaintiffs is DENIED. The Motion to Dismiss is ALLOWED as to the claims which allege a breach of fiduciary duty under ERISA for failure to pass on rebates and discounts. The Motion to Dismiss as to other breach of fiduciary duty claims is DENIED. The Motion to Dismiss is DENIED to the extent that Plaintiffs are assertin g claims for Prohibited Transactions in Counts I and II. The Motion to Dismiss is DENIED as to Count III. The Motion to Dismiss is ALLOWED as to Counts IV and V. The Motion to Dismiss is DENIED as to Counts VI and VII. This case is referred to United States Magistrate Judge Tom Schanzle-Haskins for the purpose of holding a scheduling conference. (SEE WRITTEN OPINION) Entered by Judge Richard Mills on 3/18/2016. (GL, ilcd)

E-FILED

Tuesday, 22 March, 2016 08:53:30 AM
Clerk, U.S. District Court, ILCD

IN THE UNITED STATES DISTRICT COURT
FOR THE CENTRAL DISTRICT OF ILLINOIS
SPRINGFIELD DIVISION
SUSAN PRIDDY, CRAIG FISCHER, JAN
YARD, PRAIRIE ANALYTICAL SYSTEMS,
INC., METRO CHICAGO SURGICAL
ONCOLOGY, LLC, MARK SCHACHT,
M.D., NEIL FRIEDMAN, M.D., SURAJ
DEMLA, JEFFREY ROSE, AD-LIBS
ADVERTISING, INC., and MICHAEL
BIELER, Individually and on Behalf of All
Other Individuals Similarly Situated who are
beneficiaries or dependents of beneficiaries
of health care coverage provided or
administered by Defendant and employers or
individuals who purchased on their own
behalf or on behalf of their employees and
their beneficiaries health insurance coverage
underwritten, administered or otherwise
provided by HEALTH CARE SERVICE
CORPORATION, an Illinois Mutual Reserve
Insurance Company, d/b/a BLUE CROSS
AND BLUE SHIELD OF ILLINOIS, BLUE
CROSS AND BLUE SHIELD OF
MONTANA, BLUE CROSS AND BLUE
SHIELD OF NEW MEXICO, BLUE CROSS
AND BLUE SHIELD OF OKLAHOMA, and
BLUE CROSS AND BLUE SHIELD OF
TEXAS,

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Plaintiffs,
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v.
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HEALTHCARE SERVICES
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CORPORATION, an Illinois Mutual Reserve )
Insurance Company,
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Defendant.
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Case No. 14-3360

OPINION
RICHARD MILLS, U.S. District Judge:
The Plaintiffs’ First Amended Complaint includes seven counts
asserting violations of the Employee Retirement and Income Security Act
of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq., and Illinois statutory and
common law.
Pending before the Court is the Motion of Defendant Healthcare
Services Corporation to Dismiss the Amended Complaint pursuant to Rule
12(b)(1) and 12(b)(6).
I. FACTUAL ALLEGATIONS
The Plaintiffs consist of eight individuals and three entities. Plaintiffs
Susan Priddy, Craig Fischer and Suraj Demla purchased individual policies
from Defendant Health Care Services Corporation (“the Defendant” or
“HCSC”), an insurance company licensed by the State of Illinois.
Plaintiffs Jan Yard, Mark Schacht, M.D., Neil Friedman, M.D., Jeffrey Rose
and Michael Bieler obtained coverage through a plan purchased by their
employers.

Plaintiffs Prairie Analytical Systems, Inc., Metro Chicago

2

Surgical Oncology, LLC, and Ad-Libs Advertising, Inc., are corporations
that purchased coverage from one of HCSC’s divisions to cover their
employees.
Plaintiffs Priddy, Fischer and Yard are Illinois citizens residing in the
Central District of Illinois.
Plaintiff Prairie Analytical Systems, Inc., is an Illinois corporation
with its domicile and principal place of business in Sangamon County,
Illinois. Plaintiff Metro Chicago Surgical Oncology, LLC is an Illinois
corporation with its domicile and principal place of business outside the
Central District of Illinois.
Drs. Schacht and Friedman are citizens of Illinois who reside outside
the Central District of Illinois.
Plaintiffs Demla and Rose are citizens and domiciled in the State of
Texas.
Plaintiff Ad-Libs Advertising, Inc., is a corporation with its domicile
and principal place of business in the State of Oklahoma.
Plaintiff Bieler is a citizen of and domiciled in the State of

3

Oklahoma.
Defendant HCSC is an Illinois Mutual Reserve Insurance Company
with its domicile and principal place of business in Chicago, Illinois. HCSC
does business in the Central District of Illinois.
Through its Blue Cross and Blue Shield divisions, HCSC offers health
insurance policies in Illinois, Montana, New Mexico, Oklahoma and Texas
for individuals and groups. HCSC enters into financial arrangements with
drug providers in order to manage pharmaceutical prices. The Plaintiffs
allege that Illinois law “prohibits Defendant from profiting or enjoying a
benefit to the exclusion of its insureds/owners,” given that it is “required to
maintain and use its assets for the exclusive benefit of its insureds/owners.”
See Doc. No. 12 ¶¶ 26-27. Additionally, the Defendant has violated its
obligations by including language in its Plan Documents which states it
may obtain discounts and receive a benefit from Providers that it does not
share with its insureds.
The Plaintiffs further allege that Defendant purchased a series of
wholly-owned affiliates or purchased controlling interest in affiliates or

4

holding companies that control other affiliates and other separate entities
from which the Defendant obtained profits and other benefits.
Subsequently, HCSC placed several of its officers and directors on the
board of directors on one or more of these newly-acquired affiliates or
entities, or permitted some of its officers and directors to sit on the boards
of these newly acquired entities. The Plaintiffs assert that, under federal
law and Illinois common law, a presumption of self-dealing arises based on
this practice. Accordingly, the Defendant must show its conduct was for
the exclusive benefit of the insureds/owners and it may not claim its
conduct was justified by the “business judgment rule.”
The Defendant contends that its financial arrangements with drug
providers often lead to discounts and other allowances that result in
ultimate payment of substantially less than the billed amount. These price
allowances figure into the price of the product and are not otherwise shared
with groups or insureds.
HCSC also enters into contracts with hospitals and other facility
providers to which providers agree to provide services to individuals covered

5

by the policies for contracted amounts. These amounts are often lower
than the provider’s billed charges. Under some plans, HCSC calculates a
patient co-insurance amount using an estimate of these discounted amounts
instead of the actual ultimate discount.
For the patient, the coinsurance calculated using the average discount
percentage is final and will not be adjusted. Because the average discount
percentage is an estimate, however, final discounts from facility providers
may vary from that number. HCSC pays providers additional amounts if
the discounts are less than the average discount percentage. It receives the
benefit if the actual discounts are greater.
The Plaintiffs contend that, irrespective of the Defendant’s
obligations under ERISA, the Defendant has failed to adhere to its
obligations under Illinois law. The Plan owners are the owners of this
Illinois mutual insurance company and the Defendant does not “share”
with its owners the benefits its receives from separate contracts with third
party providers. Moreover, HCSC does not share the benefits it derives
from affiliates and subsidiaries. According to the Plaintiffs, therefore, the

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Defendant has admitted to withholding corporate assets or “discounts”
from providers.
Count I is asserted by all Plaintiffs, except for Priddy, Fischer and
Demla, and asserts ERISA breach of fiduciary claims, pursuant to 29 U.S.C.
§§ 1132(a)(1)(B) and 1132(a)(3). Count II is asserted by the same group
of Plaintiffs and alleges a claim for “prohibited transactions,” under 29
U.S.C. § 1106. Count III is asserted by the same group of Plaintiffs and
requests the appointment of a receiver under 29 U.S.C. § 1109(a).
Count IV is asserted by Illinois residents only and alleges ERISA
violations pursuant to 29 U.S.C. §§ 1132(a)(1)(B) and 1132(a)(3), based
on alleged false information contained in the “Explanation of Benefits”
(“EOB”).
Count V is asserted by Plaintiffs Priddy, Fischer and Demla and
alleges a state law claim for lack of good faith and fair dealing pursuant to
the Unfair Claims Practices statute, 215 ILCS 5/154.6, and based on
common law.

Count VI is asserted by the same Plaintiffs and alleges a

state law claim for breach of common law fiduciary duty. Count VII is

7

asserted by the same Plaintiffs and seeks an accounting under Illinois law.
The Defendants have moved to dismiss the Plaintiffs’ First Amended
Complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and
12(b)(6).
II. DISCUSSION
The Defendant contends there are a number of reasons why the
Complaint should be dismissed. First, the Plaintiffs have not adequately
alleged constitutional standing.

Additionally, the Employer Plaintiffs’

ERISA claims should be dismissed for lack of standing.
The Defendant further asserts that Count I does not allege a plausible
claim for relief under ERISA. Moreover, HCSC is not a fiduciary under
ERISA or as an insurer and it did not breach a fiduciary duty with board
member payments. The Defendant also contends that Counts I and II do
not adequately allege ERISA violations for prohibited transactions.
The Defendant alleges that Count III, which requests the
appointment of a receiver under ERISA, is not a statement of a claim and
should be dismissed.

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The Defendant next asserts that the allegation that HCSC violated
ERISA by sending EOBs which contained false information does not state
a claim under ERISA.
The Defendant asserts that Counts V and VI do not state claims
under Illinois statutory law.

Moreover, the claim for an accounting

contained in Count VII does not constitute a separate cause of action.
A. Legal standard
To survive a motion to dismiss under Rule 12(b)(6), a complaint must
“state a claim to relief that is plausible on its face.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when
the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct
alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Although factual
allegations at this stage are accepted as true, “allegations in the form of legal
conclusions are insufficient to survive a Rule 12(b)(6) motion.”
McReynolds v. Merrill Lynch & Co., Inc., 694 F.3d 873, 885 (7th Cir.
2012) (citing Iqbal, 556 U.S. at 678).

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A plaintiff cannot survive a motion to dismiss by merely providing
notice of a claim. See Adams v. City of Indianapolis, 742 F.3d 720, 728-29
(7th Cir. 2014). Because of the plausibility requirement, “the court must
review the complaint to determine whether it contains ‘enough fact to raise
a reasonable expectation that discovery will reveal evidence’ to support
liability for the wrongdoing alleged.” Id. at 729 (quoting Twombly, 550
U.S. at 556).
B. Motion to dismiss for lack of standing
The plaintiffs must have standing to satisfy Article III’s case-or
controversy requirement. See Lujan v. Defenders of Wildlife, 504 U.S.
555, 559 (1992).

To invoke the jurisdiction of the federal courts, a

plaintiff must show (1) a concrete injury that is actual or imminent and not
hypothetical; (2) fairly traceable to the defendant’s alleged wrongful
conduct; (3) that is likely to be redressed by a favorable decision. See id.
at 560-61. A plaintiff must show personal injury and not merely allege that
other unidentified members of a potential class may have suffered injury.
See Warth v. Seldin, 422 U.S. 490, 502 (1975).

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(1)
The Defendant contends the Plaintiffs have not alleged individual
standing to pursue their claims because they have not alleged that they paid
for pharmaceutical products or made facility coinsurance payments that
were calculated using the average discount percentage. Thus, they have
failed to allege personal injury and cannot establish constitutional standing.
In paragraph 47 of the Amended Complaint, the Plaintiffs state that
“Defendant caused Plaintiff to pay in excess of the actual amount of
coinsurance Plaintiff and others similarly-situated should pay under the
contractual terms as set out in the Plan documents.”

Additionally,

paragraph 49 provides: “As a result of Defendants’ relationship with its
pharmacy benefit managers, Plaintiffs paid higher prescription drug
charges.” Paragraph 50 provides, in part, that “Plaintiffs also paid higher
co-insurance rates than they should have because of the undisclosed, secret
rebates and arrangements between Defendants and preferred providers
which discounted the rates reimbursed by Defendants.”
Upon considering these allegations, the Court concludes that the

11

foregoing statements adequately allege a concrete injury which is fairly
traceable to the Defendant’s conduct and which potentially could be
redressed by a decision in the Plaintiffs’ favor. Accordingly, the Plaintiffs
have asserted constitutional standing.
(2)
Next, the Defendant contends that the ERISA claims of Prairie
Analytical Systems, Inc., Metro Chicago Surgical Oncology, LLC and ADLibs Advertising, Inc. (“Employer Plaintiffs”) should be dismissed for lack
of standing.

The Employer Plaintiffs are corporations that allegedly

obtained policies from HCSC to cover their employees. Although the
Employer Plaintiffs purport to bring ERISA claims in Counts I-IV, they do
not allege any basis for the assertion that they, as opposed to their
employees, have submitted claims for benefits, paid for pharmaceuticals or
have a plausible claim of concrete injury.
Employers lack standing to pursue claims under ERISA’s civil
enforcement provision. See Giardono v. Jones, 867 F.2d 409, 413 (7th Cir.
1989) (holding that an employer does not have standing to sue under

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ERISA § 1132, which expressly grants federal jurisdiction to limited parties,
not including employers), abrogated on other grounds by Yates v. Hendon,
541 U.S. 1, 4-5 (2004).
The Plaintiffs note that paragraph 4 of the Amended Complaint
provides that some of the Employer Plaintiffs are also plan participants or
beneficiaries. The Complaint does not say which of the Employer Plaintiffs
so qualify. The Court concludes that this general statement, standing
alone, is not enough to allege a concrete injury that is traceable to the
alleged wrongful conduct.
Accordingly, the Employer Plaintiffs lack standing and will be
dismissed. To the extent that Prairie Analytical Systems, Inc., Metro
Chicago Surgical Oncology, LLC and AD-Libs Advertising, Inc. have alleged
claims, Counts I-IV are dismissed as to them. The Court notes that those
counts include other parties as well.

The Employer Plaintiffs will be

dismissed as parties.
C. Motion to dismiss for failure to state a claim
(1) Count I

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a. Alleged violation of 29 U.S.C. § 1132(a)(1)(B)
Count I is brought on behalf of all Plaintiffs except for Priddy, Fischer
and Demla and purports to allege a violation of 29 U.S.C. § 1132(a)(1)(B)
and 1132(a)(3). Section 1132(a)(1)(B) authorizes a civil action by a
participant or beneficiary “to recover benefits due him under the terms of
his plan, to enforce his rights under the terms of the plan, or to clarify his
rights to future benefits under the terms of the plan.” The Defendant
alleges that Count I does not assert a plausible claim for relief under the
statute.
The Plaintiffs allege the First Amended Complaint is not limited to
the Defendant’s utilization of average discount price and the explanation
of benefits. The Plaintiffs are also challenging the Defendant’s use of
ERISA plan assets to purchase a series of “affiliates.”
In paragraph 54 of the First Amended Complaint, the Plaintiffs allege
HCSC violated ERISA Section 502(a)(1)(B) because “[t]he actual,
contractual relationship and the resulting financial consequences of that
relationship between Defendant and its affiliates and/or Defendant’s

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Providers is not disclosed by Defendant to Defendant’s individual insureds
in any manner that would enable the individual [Plaintiffs] to understand
or accept that relationship.” See Doc. No. 12 ¶ 54.
Relying on Larson v. United Healthcare, 723 F.3d 905 (7th Cir.
2013), the Defendant states, “An ERISA § 502(a)(1)(B) claim is essentially
a contract remedy under the terms of the plan.” See id. at 911 (internal
quotation marks omitted).

HCSC alleges that the terms of the plan

attached to the Complaint are indisputable.1 Members are responsible for
a flat dollar payment per prescription and, to the extent HCSC receives a
discount from the drug provider, “[n]either the Group nor you are entitled
to receive any portion of any such payments, discounts and/or other
allowances.” See Doc. No. 12, ¶¶ 35, 36 & Ex. A at 75.
The Plaintiffs assert, that by not sharing the monies or profits derived
from the affiliates with either the Plan owners or passing on the profits to
the Plan beneficiaries through reduced premiums or other means, the

To assist “in determining the sufficiency of the complaint, the court may
rely on exhibits to the complaint.” Chi. Dist. Council of Carpenters Welfare
Fund v. Caremark, Inc., 474 F.3d 463, 466 (7th Cir. 2007).
1

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Defendant is violating ERISA and Illinois common law.
The Defendant contends that Plaintiffs’ First Amended Complaint
and the attachment establish that HCSC’s contractual “relationships” and
the financial consequences of contracts with affiliates and providers are
disclosed in the only contract on which the Plaintiffs rely. The Plaintiffs
provide no basis for the allegation that they had a different “reasonable
expectation and understanding of their contracted rights.”
To the extent that Plaintiffs in Count I are alleging the Defendant
violated § 502(a)(1)(B) of ERISA by failing to disclose its contractual
relationships and the financial consequences of its contracts, the Court
concludes that Plaintiffs have failed to allege a plausible claim.
b. Alleged breach of fiduciary duty under ERISA
The Plaintiffs (excluding Priddy, Fischer and Demla) allege that
Defendant violated its fiduciary duties pursuant to 29 U.S.C. § 1104(a)(1).
Pursuant to the Defendant’s status as a fiduciary under ERISA, the
Plaintiffs allege it must “act exclusively on behalf of the Plan Participants
and their beneficiaries . . . under a duty of loyalty.” See Doc. No. 12 ¶ 57.

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By receiving financial benefits which it does not “share” or pass on to the
Plan Participants, therefore, HCSC violates its fiduciary obligations.
To assert an ERISA claim for breach of fiduciary duty, the Plaintiffs
must show that Defendant was a fiduciary as the term is defined in the
statute and was acting in that capacity at the time it took the challenged
actions.

See Chicago Dist. Council of Carpenters Welfare Fund v.

Caremark, Inc., 474 F.3d 463, 471-72 (7th Cir. 2007). “[A] person is a
fiduciary with respect to a plan to the extent (i) he exercises any
discretionary authority or discretionary control respecting management of
such plan or exercises any authority or control respecting management or
disposition of its assets . . . or (iii) he has any discretionary authority or
discretionary responsibility in the administration of such plan.” 29 U.S.C.
§ 1002(21)(A).
The Plaintiffs allege that Defendant has discretion in determining the
amount to be paid by insureds. In the Amended Complaint, the Plaintiffs
assert that Defendant “exercises discretion, and thereby acts as a fiduciary,
in determining the ‘estimate’ average discount percentage (‘ADP’) utilized

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to determine the amount in connection with the provision of benefits under
the Plan.” See Doc. No. 12 ¶25.

The Plaintiffs contend HCSC has

discretion in creating, calculating and administering the benefit
determinations affecting the Plaintiffs and other Plan Participants
To the extent that Plaintiffs allege that HCSC acts as a fiduciary in
determining the average discount percentage, the Court does not agree.
The Plaintiffs do not assert that an erroneous calculation of the average
discount percentage gives rise to their claims.

Moreover, the average

discount percentage is applied to facility charges and not pharmaceutical
charges. The Priddy Policy defines it as a “percentage discount determined
by Blue Cross and Blue Shield that will be applied to a Provider’s Eligible
Charge for Covered Services rendered to you by Hospitals and certain other
health care facilities for purposes of calculating Coinsurance amounts,
deductibles, out-of-pocket maximums and/or any benefit maximums.” See
Doc 9-1, at 12.

That policy notes that Blue Cross and Blue Shield

considers a number of factors in determining the average discount
percentage applicable to a claim. These include differences among hospitals

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and other facilities, contracts with those entities and the nature of the
services involved and other factors. It does not involve a discretionary
determination of the management or assets of an ERISA benefit plan.
Based on the foregoing, it is apparent that the average discount
percentage methodology is a specific component of certain HCSC insurance
policies sold to the Plaintiffs or their employees to provide health care
coverage. Although HCSC sells the insurance policies, it does not have
discretion over any ERISA benefit plan or the assets of the plan.
In Caremark, the Seventh Circuit rejected the plaintiff ERISA plan’s
assertion that a third party contracting with it is a fiduciary under §
1002(21)(A). In that case, the plaintiff ERISA fund alleged that Caremark
“breached its fiduciary duties by charging Carpenters a higher price than
Caremark negotiated with retail pharmacies, and by choosing drugs for the
formulary that were more expensive so that Caremark could pocket extra
rebates it obtained from drug makers.” 474 F.3d at 470. The district court
there found that nothing in the contracts required Caremark to pass
through drug cost savings and that the prices were the result of an “arms-

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length deal that did not give rise to fiduciary duties.” See id. at 470-71.
The Seventh Circuit affirmed, noting that under any interpretation
of the contracts, Caremark was not required to pass along all of its savings
and, because that was the core of the complaint, the plaintiff had not
alleged a breach of fiduciary duty. See id. at 475. The court observed that
Caremark was entitled to retain any rebates and did not have to pass the
savings on to the ERISA fund. See id. at 475-76.
Applying the reasoning of Caremark, the Court concludes that HCSC
was not required to pass on rebates and discounts received from
pharmaceutical companies and other providers. Because ERISA does not
require the Defendant to pass on the savings pursuant to its contracts with
the Plaintiffs, the Court finds that it did not breach any fiduciary duty
under ERISA by failing to pass on rebates and discounts.
c. HCSC as a fiduciary as an insurer
The Plaintiffs also allege that Defendant is a fiduciary “as an Illinois
Mutual Insurance Company.” See Doc. 12 ¶59. The Defendant notes “it
is well settled that no fiduciary relationship exists between an insurer and

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an insured as a matter of law.” Martin v. State Farm Mut. Auto. Ins. Co.,
348 Ill. App.3d 846, 850-51 (1st Dist. 2004). It claims that HCSC’s status
as a mutual insurance company does not alter that fact. See Illinois State
Bar Ass’n Mut. Ins. Co. v. Cavenagh, 368 Ill. Dec. 55, 67 (1st Dist. 2012).
As the Plaintiffs allege, however, Illinois courts have recognized that
a mutual insurance company and its directors may have a fiduciary
obligation to their insureds under Illinois law. See Lower v. Lanark Mut.
Fire Ins. Co., 114 Ill. App.3d 462, 467-68 (2nd Dist. 1983). Therefore, the
Court is unable to conclude that HCSC is not a fiduciary based on its
status as a mutual insurance company. Accordingly, the Court declines to
dismiss this portion of Count I.
d. Breach of fiduciary duty with board member payments
In paragraph 59 of the Amended Complaint, the Plaintiffs allege that
HCSC breached a fiduciary duty by “plac[ing its] Officers and Directors on
various Boards of Directors of affiliates and other entities owned or
controlled by the Defendant, and the retention of profits and other
benefits.” Paragraph 31 states in part: “Federal law and the common law

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of the State of Illinois recognize a presumption of self-dealing created by
the placement by Defendant of its Officers and Directors on the boards
and/or control groups of the affiliates and subsidiaries which it purchased
using the assets of this mutual insurance company.” As an example, the
Complaint cites Prime Therapeutics, alleging it is the fourth largest
pharmacy benefit manager in the country. The Plaintiffs allege that a
“substantial majority” of Prime Therapeutics’ Board of Directors are
affiliated with Blue Cross Blue Shield and HCSC.
The Defendant notes that the only affiliate identified by the Plaintiffs
is Prime Therapeutics. The Plaintiffs list two members who hold positions
at HCSC and are on Prime Therapeutics’ Board of Directors, citing that
entity’s website in paragraph 33 of the Amended Complaint.

HCSC

asserts that the website lists twelve directors and the other ten seats are
held by individuals who are unaffiliated with HCSC and Blue Cross and
Blue Shield divisions.

Because this is not a “substantial majority” or

enough for HCSC to exercise “control” and, given that Plaintiffs have not
adequately alleged a fiduciary relationship, the Defendant claims Plaintiffs

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are unable to establish a breach of fiduciary duty on this basis.
The Plaintiffs contend that Defendant has breached its fiduciary duty
under ERISA and the common law. Citing Kenseth v. Dean Health Plan,
Inc., 610 F.3d 452 (7th Cir. 2010), the Plaintiffs allege that as a fiduciary
under ERISA, the Defendant must “carry out its duties with respect to the
plan solely in the interest of the participants and beneficiaries and []for the
exclusive purpose of [] providing benefits to participants and their
beneficiaries.” Id. at 465 (internal quotation marks omitted) (citing 29
U.S.C. § 1104(a)(1)). The Plaintiffs further state that ERISA provides that
a fiduciary “shall not deal with the assets of the plan in his own interest or
for his own account.” 29 U.S.C. § 1106(b)(1).
In paragraphs 27 and 28 of the First Amended Complaint, the
Plaintiffs allege that Defendant’s use of premiums it obtained from its
insureds/owners for their health care coverage to purchase ownership or
gain control of various separate companies it describes as “affiliates” or
“subsidiaries” and its admitted decision not to share these benefits with its
owners/insureds constitutes self-dealing. In paragraph 70, the Plaintiffs

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allege the Plan documents show that the financial benefits and profits
insure to someone other than its self-identified 14 million owners.
Because the Amended Complaint includes sufficient allegations that
suggest discovery might reveal evidence of liability, the Court concludes
that Plaintiffs have asserted a plausible claim for breach of fiduciary duty
on this basis. At this stage, the Court need not determine whether a
“substantial majority” of Prime Therapeutics’ Board of Directors or those
of any other entity are affiliated with the Defendant.
Accordingly, the Court declines to dismiss this aspect of Count I.
(2) Counts I and II and § 1106(a)(1) and (b)
The Defendant contends that Counts I and II do not adequately
allege violations of 29 U.S.C. § 1106(a)(1) and (b). The Plaintiffs (except
Priddy, Fischer and Demla) also allege in Count I that HCSC violated this
statute by its non-disclosure of the specific terms of contracts HCSC has
with providers, thereby constituting “Prohibited Transactions.” Section
1106 generally prohibits a fiduciary from (a) causing an ERISA plan to
engage in certain types of transactions; (b) dealing with the “assets of the

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plan in his own interest or for his own account,” or engaging in other types
of transactions adverse to the interests or assets of the ERISA plan.
Paragraph 58 of the Amended Complaint states:
The non-disclosure of the actual terms of these agreements
that benefit Defendant at the expense of Plaintiffs, and other
provisions of the Plan documents which Defendant has relied
upon to take advantage of this scheme are also Prohibited
Transactions which are also barred by 29 U.S.C. § 1106(a)(1)
and (b) as they provide a benefit to the Defendant at the
expense of benefits that should be shared with the Plan
Participants and their beneficiaries.
The Defendant states that Plaintiffs do not cite any alleged
transaction between HCSC and an ERISA Plan that violates a specific
provision. It appears that Plaintiffs are alleging that by not disclosing
certain

information,

the

Defendant

is

engaging

in

“Prohibited

Transactions” in violation of § 1106.
HCSC further contends the Plaintiffs do not identify any ERISA
“Plan Assets” that were affected by alleged HCSC conduct. The Defendant
correctly notes that the Amended Complaint refers to “Plan participants
and their beneficiaries” and not to ERISA Plan assets.
Based on a liberal interpretation of the above language, the Court
25

concludes the language can be construed as referring to ERISA Plan Assets
and thus fall within the scope of § 1106. Although the claims that are part
of Count I are lacking in specificity, the Court will allow them to go forward
in order to determine if discovery will reveal whether the alleged nondisclosure resulted in Prohibited Transaction pursuant to § 1106.
In Count II, the Plaintiffs assert that § 1106 prohibits the “Defendant
from utilizing any Plan asset to the detriment of its Plan Participants.” See
Doc. No. 12 ¶ 61. However, the Defendant contends that Plaintiffs do not
allege such “funds” are the Plaintiffs’ “Plan assets.” Paragraph 62 states:
Defendant derives its operating assets from premium
payments made to it by its insureds/owners. Defendant
admittedly has used the funds derived from these premiums to
purchase a series of affiliates and subsidiaries, which Defendant
also acknowledges provide Defendant with substantial financial
benefits including but not limited to rebates from various drug
companies, reduced costs of drugs charged to Defendant, and
various other benefits.
Defendant states in the policy
provisions cited above that these financial benefits are not
shared in any manner with its insureds. This acknowledged use
of Plan assets for the benefit of Defendant but to the detriment
of its insureds, the Plan Owners and Plan Participants, violates
the prohibition on such conduct under 29 U.S.C. § 1106 that
bars the use of any Plan asset by a Plan fiduciary such as
Defendant to the detriment of the Plan Participants and others
similarly situated.
26

The Defendants’ assertion that Plaintiffs have not alleged that funds HCSC
derived from premium payments are “Plan assets” is not entirely accurate.
While perhaps not directly alleged, it is certainly implied in the above
paragraph.

Accordingly, the Court concludes that Plaintiffs have

sufficiently alleged a violation of § 1106 in Count II.
(3) Count III and appointment of a receiver
In Count III, Plaintiffs (except Priddy, Fischer and Demla) seek the
“Appointment of a Receiver” under 29 U.S.C. § 1109(a). Section 1109(a)
states:
Any person who is a fiduciary with respect to the plan
who breaches any of the responsibilities, obligations or duties
imposed upon fiduciaries by this subchapter shall be personally
liable to make good to such plan for any losses to the plan
resulting from each such breach, and to restore to such plan and
profits of such fiduciary which have made through use of assets
of the plan by the fiduciary, and shall be subject to such other
equitable or remedial relief as the court may deem appropriate,
including removal of such fiduciary. A fiduciary may also be
removed for a violation of section 1111 of this title.
The Defendants allege that a request for an appointment of a receiver
is not a separate cause of action under ERISA. Rather, it is a specific claim

27

for relief that must be supported by a viable cause of action.
Because it is too early to determine whether there was an ERISA
violation, the Court is unable to rule out whether the drastic remedy is
appropriate. Therefore, the Court declines to dismiss Count III.
(4) Count IV
In Count IV, the Plaintiffs (Illinois residents only) assert claims for
violations of 29 U.S.C. §§ 1132(a)(1)(B) and 1132(a)(3). These Plaintiffs
allege HCSC violates ERISA by sending a statement entitled “Explanation
of Benefits” (“EOB”) that falsely advise Plaintiffs and other Plan
participants and beneficiaries that the amount the Provider will charge for
the particular service in question has not and cannot be determined at the
time the EOB is issued to the Plaintiffs and others similarly situated. The
Plaintiffs allege that because the Defendant knows these charges, its
statement that it must “estimate” the charges upon which the coinsurance
is based and calculate the charge based on an average discount percentage
is false.

The Plaintiffs further contend this is “false and deceptive,

intended to lull the Plan participants into accepting the EOB scheme

28

without realizing that the percentage the plan participants are required to
pay is well in excess of the percentage that a reasonable insured would
expect to pay under the terms of the policy; and the scheme
correspondingly enables Defendant to pay far less in reimbursement than
a reasonable insured would understand it to owe.” See Doc. No. 12 ¶78.
The Plaintiffs also assert that Defendants have provided their Plan
participants “a confusing and contradictory explanation of the supposed
necessity” for the EOB/average discount percentage methodology.
Consequently, the Defendant has failed under ERISA to “adequately and
disclose the means of ascertaining the benefits at issue in a means
understandable to the average participant,” as is required under ERISA.
See Doc. No. 12 ¶79. The Plaintiffs allege this “scheme” violates the
Defendant’s fiduciary obligations because it “reduces the benefits available
to the Plan Participants and inflates the cost to those Plan Participants in
violation of the obligations imposed on Defendant under ERISA prohibiting
such self-dealing.” See ¶80. The Plaintiffs also assert that the Illinois
Administrative Code prohibits the Defendant from interpreting the

29

provisions of its policy language contrary to Illinois statutory law and that
prohibition is not preempted by ERISA.
The Plaintiffs contend that the EOB form is the primary instrument
HCSC used in creating confusion and ambiguity between the so-called
“clear disclosure” of HCSC’s asserted “right” to discounts, as opposed to
what the Plaintiffs claim is the correct treatment of the monies HCSC adds
to these bills–an unauthorized and improper surcharge. Paragraph 43 of
the First Amended Complaint states, “The EOB, however, does not inform
the insured that the bill or charge upon which HCSC has calculated the
[average discount percentage] is one created by adding on a charge for a
‘non-service’ on the part of HCSC. The EOB states to the contrary and is
yet another deception fostered by Defendant.” Paragraph 44 provides as
follows:
The precise mechanism of the EOB may be seen by the
example attached as Exhibit B to this Complaint. This EOB
does not refer to any separate charge or expense created by or
attributable to Defendant. Instead the EOB on its face refers
exclusively to a service or billing submitted by one of Plaintiff’s
Providers, and is thereby consistent with the definitions in the
Booklet referring to calculations based on actual Provider
charges and inconsistent with the interpretation given it by
30

Defendant that the booklet and the EOB “clearly” informs
Plaintiff that HCSC is taking a payment for its own benefit.
Paragraph 45 states that the EOB purports to say that the average discount
percentage is based on an “Amount Billed” by the medical Provider and is
calculated on that basis.
The Plaintiffs contend that by misleading participants as to how the
average discount percentage is determined and making misrepresentations
concerning Provider charges, HCSC has breached its fiduciary duty. “The
duty to disclose material information is the core of a fiduciary’s
responsibility.” Kenseth v. Dean Health Plan, Inc., 610 F.3d 452, 466 (7th
Cir. 2010).

This duty “includes an obligation not to mislead a plan

participant to misrepresent the terms or administration of an employee
benefit plan.” Id.
In contending the count should be dismissed, the Defendant cites a
Northern District decision by United States District Judge Charles R.
Norgle in Berk v. Health Care Service Corporation, d/b/a Blue Cross Blue
Shield of Illinois, Case Number 12-CV-8074, which is attached to the
Defendant’s Memorandum. The court noted that plaintiff was seeking
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“reformation” of the contract to eliminate the use of the average discount
percentage, contending that the defendant’s failure to disclose the financial
arrangements and ambiguous contract terms “prevent[ed] plan participants,
like himself, from accurately calculating their payment obligations.” See
Berk, at 9. He alleged “that the use of the [average discount percentage]
breaches Defendant’s fiduciary duty to the plan participants under ERISA
because, by using the [average discount percentage] instead of the exact
amount of the discounts pursuant to the contracts between Defendant and
the providers, Defendant is obtaining a financial benefit at the expense of
the plan participants.”

Id. at 7.

In addition to seeking contract

reformation, Berk sought “recovery of the money that he would have saved
on his coinsurance.” Id. at 9.
The court in Berk found there was no ERISA violation and the
plaintiff failed to state a claim for relief. See id. It concluded that “the
terms of the plan explaining the [average discount percentage] scheme are
not ambiguous as Plaintiff concludes; rather, they are specifically outlined
and defined.” Id. The court observed “the contract discloses the fact that

32

Defendant

has

separate

financial

arrangements

with

healthcare

providers–arrangements from which the participants are not entitled to
benefit.” Id.
HCSC asserts the claims here should be dismissed for the same
reason. The Plaintiffs have not alleged any language in their policies that
prohibits the Defendant from using the average discount percentage. As
previously discussed, the Priddy Policy discloses the average discount
percentage methodology as part of the contract and specifies that Priddy is
not entitled to any amount HCSC receives in excess of the average discount
percentage. The court in Berk observed that, “[w]hile Plaintiff may prefer
to have his benefits calculated in another manner, it is simply not the
agreement that his employer reached with [HCSC].” Berk, at 9-10.
To the extent that Plaintiffs allege the explanation of benefits and
average discount percentage scheme violates the Defendant’s fiduciary
obligations, HCSC reiterates it is not a fiduciary on the facts alleged
because the contracts purchased from HCSC do not require it to pass on its
discounts from providers. See Caremark, 474 F.3d at 466. The court in

33

Berk applied Caremark in dismissing the plaintiff’s claim, as follows:
A fiduciary duty must be alleged in accordance with § 1002 and
the specific facts at issue[] in this case–namely, whether
Defendant is acting as a fiduciary when implementing the ADP
scheme as provided by the insurance contract, as opposed to
using the savings as provided by the financial agreements
between Defendant and the health care providers. Because
[HCSC] has no duty to pass on the savings from the financial
agreements in accordance with the express terms of the
contract, it is not a fiduciary with respect to the allegations in
the complaint.
Berk, at 11.
The Court agrees with Judge Norgle’s analysis in Berk. The Plaintiffs
here do not point to any language in their policies that prohibits the
Defendant from using the average discount percentage.

The average

discount percentage methodology is disclosed in the Priddy Policy. The
Policy specifies that Priddy is not entitled to any amount HCSC receives
in excess of the average discount percentage. Accordingly, the Defendant
has no duty to pass on its savings from its separate financial agreements
with health providers. Moreover, the Defendant is not an ERISA fiduciary
for this purpose because the contracts that Plaintiffs or their employers
purchased from HCSC do not require HCSC to pass on these discounts
34

from providers. Because the Defendant is not contractually obligated to
pass on these discounts from providers, the Court concludes HCSC is not
an ERISA fiduciary for that purpose. See Caremark, 474 F.3d at 466.
The Defendant alleges the Plaintiffs’ assertion that the EOB/average
discount percentage scheme violates the Illinois Administrative Code is
misplaced. Title 50, Section 2001.3 of the Illinois Administrative Code
prohibits an insurance company from including in a policy “a provision
purporting to reserve discretion to the health carrier to interpret the terms
of the contract, or to provide standards of interpretation or review that are
inconsistent with the laws of this State.”

Because the average discount

percentage methodology is a specific term of the Plaintiffs’ contracts and
thus cannot be alleged to be a discretionary interpretation of the terms of
their policies, HCSC alleges Section 2001.3 of the Illinois Administrative
Code is not applicable to this case.
The Plaintiffs dispute the Defendant’s interpretation of Section
2001.3 on the basis that HCSC exercises discretion over the benefits
determination. Because the record establishes that the average discount

35

percentage is a specific term of the Plaintiffs’ contracts, the Defendant has
no discretionary authority and Section 2001.3 is not applicable.
Accordingly, the Court further finds that Plaintiffs have not asserted
a viable claim pursuant to Title 50, Section 2001.3 of the Illinois
Administrative Code. Count IV of the Amended Complaint fails to state
a claim upon which relief can be granted and will be dismissed.
(5) Count V–Violation of Illinois statutory law
In Count V, Plaintiffs Priddy, Fischer and Demla assert that
Defendant is bound by the rules and regulations of Illinois which require
good faith and fair dealing as prescribed by the Unfair Claims Practices
statute codified at 215 ILCS 5/154.6 and by the common law and in
accordance with the Illinois Business Corporation Act, which imposes
fiduciary obligations on insurance companies that operate as mutual
companies that are owned by its policyholders. The Plaintiffs contend that
HCSC has breached its fiduciary obligations, breached its duty of good
faith and fair dealing, and has placed its own financial interests above the
interests of its owners, the policyholders.

36

As the Defendant notes, however, “section 154.6 does not give rise to
a private remedy or cause of action by a policyholder against an insurer but
is instead regulatory in nature.” Area Erectors, Inc. v. Travelers Property
Cas. Co. of America, 367 Ill. Dec. 392, 399 (1st Dist. 2012). Section 154.7
authorizes the State Director of Insurance with “the authority to charge a
company with section 154.6 improper claims practices and serve the
company with notice of a hearing date.” Id. Accordingly, the Plaintiffs
“cannot personally seek damages from [HCSC] under section 154.6.” Id.
For the foregoing reasons, the Plaintiffs have not alleged a plausible
claim in Count V for violation of Illinois statutory law. Consequently,
Count V will be dismissed.
(6) Count VI–Breach of common law fiduciary duty
Plaintiffs Priddy, Fischer and Demla assert a state law claim for
breach of fiduciary duty, claiming that HCSC, a mutual insurance company
under Illinois law, has admitted to retaining various profits and benefits
which it refuses to share or credit to the benefit of the owners of the
company.

37

The Defendant earlier contended that HCSC is not a fiduciary by
virtue of being a mutual company. HCSC claims the Plaintiffs plead no
other facts in support of the claim or any facts at all in support of a claim
for any breach. To the extent that Plaintiffs allege HCSC “placed or
permitted to be placed on the Boards of Directors of one or more of these
affiliates and subsidiaries Officers and Directors of the Defendant
corporation itself,” the Plaintiffs identify only Prime Therapeutics as an
“affiliate.” Moreover, the Plaintiffs have not alleged what fiduciary duties
are breached by the placement of these directors or how the Plaintiffs were
injured.
Accordingly, the Defendant asserts that Count VI should be
dismissed.
For the reasons provided earlier in considering whether HCSC is a
fiduciary as an Illinois Mutual Insurance Company, the Court declines to
dismiss Count VI.
(7) Count VII–Action for accounting under Illinois law
In Count VII, Plaintiffs Priddy, Fischer and Demla seek an accounting

38

under Illinois law.
The Defendant alleges that, like requesting appointment of a receiver,
an accounting is a not a separate cause of action. “An accounting is a form
of equitable relief incidental to a substantive claim.”

Adams v.

Catrambone, 359 F.3d 858, 861 n.2 (7th Cir. 2004). Given that it is too
early to determine whether any of the Plaintiffs’ substantive claims will
succeed, the Court concludes it is premature to dismiss Count VII.
III. CONCLUSION
Based on the foregoing, the Court concludes that the individual
Plaintiffs have sufficiently alleged constitutional standing.
The Employer Plaintiffs–Prairie Analytical Systems, Inc., Metro
Chicago Surgical Oncology and Ad-Libs Advertising, Inc.–are dismissed for
lack of standing. Accordingly, the claims in Counts I-IV which are asserted
by the Employer Plaintiffs only will be dismissed and the Employer
Plaintiffs will be terminated as Parties.
The Defendant’s Motion will be Allowed to the extent that Plaintiffs
are alleging a breach of fiduciary duty under ERISA for failure to pass on

39

rebates and discounts.
The Defendant’s Motion will be Denied to the extent that Plaintiff is
alleging the HCSC is a fiduciary due to its status as a mutual insurance
company.
The Motion to Dismiss will be Denied to the extent that Plaintiffs are
asserting a breach of fiduciary duty based on board member payments.
The Motion to Dismiss will be Denied to the extent that Plaintiffs are
alleging violations of § 1106 in Counts I and II.
The Motion to Dismiss will be Denied as to Count III.
The Motion to Dismiss will Be Allowed as to Counts IV and V.
The Motion will be Denied as to Counts VI and VII.
Ergo, the Motion of Defendant Healthcare Services Corporation to
Dismiss the First Amended Complaint [d/e 13] is ALLOWED IN PART
and DENIED IN PART.
The Motion to Dismiss for lack of standing as to Prairie Analytical
Systems, Inc., Metro Chicago Surgical Oncology, LLC and Ad-Libs
Advertising, Inc. is ALLOWED. Those Plaintiffs are terminated as Parties.

40

The Motion to Dismiss for lack of standing as to other Plaintiffs is
DENIED.
The Motion to Dismiss is ALLOWED as to the claims which allege
a breach of fiduciary duty under ERISA for failure to pass on rebates and
discounts.
The Motion to Dismiss as to other breach of fiduciary duty claims is
DENIED.
The Motion to Dismiss is DENIED to the extent that Plaintiffs are
asserting claims for Prohibited Transactions in Counts I and II.
The Motion to Dismiss is DENIED as to Count III.
The Motion to Dismiss is ALLOWED as to Counts IV and V.
The Motion to Dismiss is DENIED as to Counts VI and VII.
This case is referred to United States Magistrate Judge Tom SchanzleHaskins for the purpose of holding a scheduling conference.
ENTER: March 18, 2016
FOR THE COURT:
s/Richard Mills
Richard Mills
United States District Judge
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