Tiara Yachts v. BCBSM: A Case About Fiduciary Duty, Overpayment Schemes, and What Happens When Plan Administrators Profit from Their Own Mistakes
- Christin Deacon
- May 20
- 5 min read
A high-stakes ERISA lawsuit between employer-plan sponsor Tiara Yachts and Blue Cross Blue Shield of Michigan (BCBSM) is now before the U.S. Court of Appeals for the Sixth Circuit. What began as a dispute over improper claims payments has become a referendum on whether large third-party administrators (TPAs) can sidestep fiduciary liability by embedding questionable practices into opaque systems and labeling them “business decisions.”
At the heart of the case is a simple but critical question: Was BCBSM acting as a fiduciary when it used Tiara Yachts’ plan assets to overpay claims, then charged a 30% fee to recover those same overpayments?
The case involves complex systems, insider emails, and a U.S. Department of Labor (DOL) amicus brief that takes the rare step of backing the employer—and calling the district court’s ruling a fundamental misreading of ERISA.
Procedural Posture: Appeal from Dismissal
Tiara Yachts filed suit in 2022, alleging that BCBSM breached its fiduciary duties and engaged in prohibited transactions under ERISA. The district court dismissed the case under Rule 12(b)(6) for failure to state a claim. The court concluded that:
BCBSM was acting as a service provider under contract, not as a fiduciary.
The alleged misconduct was a matter of “system-wide business operations,” not fiduciary conduct specific to Tiara Yachts’ plan.
The complaint lacked “claim-level granularity”—that is, it didn’t identify individual transactions that demonstrated harm to the plan.
Tiara Yachts appealed to the Sixth Circuit. The Department of Labor filed a strongly worded amicus brief supporting reversal.
The Core Allegations
Tiara Yachts alleges three distinct but interconnected fiduciary breaches:
Systemic Overpayments: BCBSM allegedly paid inflated claims—particularly to non-participating (out-of-network) providers—using Tiara’s plan assets. The complaint asserts that these overpayments violated the terms of the Administrative Services Contract (ASC) and the plan documents.
Profiting from Overpayments via the Shared Savings Program: Rather than fix the overpayment problem, BCBSM instituted a Shared Savings Program. Under this arrangement, it “recovered” part of the excessive payments and retained 30% of the recovered amount as a fee. Tiara argues this structure incentivized BCBSM to allow inflated payments in the first place—thus profiting from its own mismanagement.
Obstructing Oversight by Restricting Access to Claims Data: Tiara also alleges that BCBSM hindered its ability to monitor plan administration by denying access to claims data, including provider identifiers and payment records—thereby compounding the fiduciary breach.
BCBSM’s Defense
BCBSM argues that it did not act as a fiduciary in connection with the challenged conduct. Its primary defenses include:
Contractor, Not Fiduciary: BCBSM claims it was merely carrying out its contractual duties as a third-party administrator and that its compensation and claims processing practices were governed by agreement—not fiduciary discretion.
System-Wide, Not Plan-Specific: The company contends that because the processing logic (like “flip logic”) applied across all clients using a particular NASCO system configuration, it was a business decision affecting many plans—not a fiduciary act targeted at Tiara’s plan.
No Specific Harm Alleged: BCBSM emphasizes that Tiara’s complaint failed to identify a specific overpaid claim, and that general allegations about systems and incentives don’t meet the threshold for an ERISA fiduciary breach claim.
The Department of Labor Weighs In
The DOL’s amicus brief rebukes the district court’s reasoning and strongly supports Tiara Yachts’ position. It makes several key arguments:
The DOL reaffirms that funds remitted by a plan sponsor to a TPA for the purpose of paying claims are plan assets under ERISA. By deciding how those funds were used, BCBSM exercised control—triggering fiduciary status under ERISA § 3(21)(A).
“BCBSM exercised control over plan assets because it both possessed and exercised power to write checks on Plan funds.”(DOL Amicus, p. 16)
The fact that a processing rule applies to many plans does not insulate the administrator. If the conduct involves plan assets and harms a specific plan, it is actionable fiduciary conduct.
“The actions alleged by the Complaint—overpaying claims with Plan funds—are unambiguously fiduciary conduct.”(DOL Amicus, p. 10)
The Shared Savings Program, as described, created a structural incentive for BCBSM to allow excessive payments and then earn a fee on the recovery.
“The Shared Savings Program thus created a perverse incentive for BCBSM to allow improper payments and mismanagement of Plan assets… and profit on its own mismanagement.”(DOL Amicus, p. 5)
The DOL also rejects the notion that the complaint must identify a specific transaction. Where the plan was processed on a system with a known overpayment flaw, and the TPA had control over payments, general allegations are sufficient to state a claim.
The Role of Flip Logic
One of the most explosive revelations in this case is the role of a processing rule known internally as “flip logic.”
Flip logic was a rule embedded in NASCO, the claims processing platform used by BCBSM for hundreds of self-funded employer clients. When a claim included a referral from a participating provider, flip logic automatically reclassified the rendering provider—even if they were out-of-network—as in-network.
This triggered claims to be paid at full billed charges rather than the host plan’s negotiated rate. Providers caught on and exploited the loophole, especially labs. Claims were inflated by thousands—or hundreds of thousands—of dollars.
And yet, rather than disable the logic, BCBSM used the overpayment opportunity to fuel its Shared Savings Program, recovering the money and keeping a 30% cut.
Internal BCBSM emails, attached to the complaint, provide powerful corroboration. Among the revelations:
They knew the system was broken:
“Flipping logic is in direct contradiction with the group-elected benefit.”
They saw the abuse happening in real time:
“Providers bill and get fully reimbursed for highly inflated cost of services.”
They knew employers didn’t understand the risk:
“Demonstrating effects of the ‘flip’ logic may cause groups to question their original consent.”
And most damningly, they admitted fiduciary responsibility:
“We have fiduciary responsibility to our ASC customers. Our lack of control over the issue was viewed as failure to fulfill this responsibility.”
What Comes Next
The Sixth Circuit will decide whether Tiara Yachts’ claims can move forward. If the court reverses the dismissal—as the DOL urges—it could set a significant precedent:
Affirming that TPAs with control over plan assets are fiduciaries, even when acting under contract.
Making clear that systemic design choices (like embedded processing rules) are not exempt from fiduciary scrutiny.
Establishing that self-dealing wrapped in “savings” language can still violate ERISA.
This case is about more than one employer and one processing rule. It exposes how opaque systems and misaligned incentives can quietly drain plan assets—and how the largest players in healthcare administration can profit from their own errors unless someone demands accountability.
BCBSM didn’t just make a mistake. They monetized it. And now, with internal documents and regulatory backing, Tiara Yachts is asking the courts to say: that’s not just bad business—it’s a breach of trust.
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