Health Plan Law

No one disputes that Fairway created a fund or trust from which it partially paid health insurance claims to the leased employees. Nor is it disputed that Voyles, when asked to obtain health insurance for Fairway’s leased employees, procured an excess liability policy from Monumental Life with a $75,000 per-person deductible. Fairway planned to pay health insurance claims from its self-created fund until the $75,000 deductible was reached.

For whatever reason, the plan failed. Fairway could not pay the claims made against it by the leased employees and was ultimately forced into insurance receivership.

Utica Mut. Ins. Co. v. Voyles, Slip Copy, 2008 WL 2019652 (C.A.10 (Okla.)) (May 12, 2008)

This recent unpublished Tenth Circuit opinion illustrates the troubles that may be visited on employers that experiment with employee leasing arrangements coupled with self-funded benefit plan arrangements. Theoretically, neither concept is flawed. Practically, when combined, the utmost due diligence is required to avoid difficulties of the sort evidenced in the Voyles matter.

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At the federal level, Senator Barack Obama (D-Ill.) has introduced S.2044, the Independent Contractor Proper Classification Act. If enacted, this legislation would limit the availability of the “safe harbor” provisions in the Revenue Act of 1978,1 permit workers to petition the IRS for a determination of their status as an independent contractor or employee, and mandate that employers post notices to employees and independent contractors informing them of their right to challenge their classification as an independent contractor. The legislation is being considered by the Senate Finance Committee.

The Risk of Using Independent Contractors, The New York Law Journal (May 15, 2008)

In the employee benefits context, classification of workers as employees or not is a critical presuppositional issue that will affect the validity of many subsequent judgments in the administration of employee benefit plans. For example, including non-employees in a qualified retirement plan violates the exclusive benefit rule and may lead to plan disqualification. On the other hand, treating those who are properly classified as employees as independent contractors presents an array of significant, potentially devastating, risks as well.

It is this latter problem that has made the headlines of late. The New York Law Journal article published today gives a succinct treatment of the risks of misclassifying employees as independent contractors.

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Malpractice premiums are frequently cited as a significant driver behind the consistent rise in the cost of health care in the United States. This claim is controversial.*  In any event, a new study is of interest in this context.

The Wall Street Journal reports a study published in Health Affairs (subscription required), suggesting that malpractice premium rates have actually fallen slightly in Massachusetts over the past 15 years or so.

Researchers focused on premiums for policies that covered up to $1 million per claim and $3 million per year. In inflation-adjusted terms, the mean premium in 2005 was $17,810, down from $17,907 in 1990. The figures are based on policies sold by ProMutual, a state-regulated mutual insurer that’s a big player in Massachusetts.

But for the sliver of docs in specialties where the risk of being sued is especially high, rates were high to begin with, and they went up even more during the period. For the highest-risk group, which includes OBGYN, spinal surgery and major neurological surgery, the mean premium rose from $66,220 to $95,045.

The lead author, Marc Rodwin, is a lawyer and a professor at Suffolk University Law School in Boston.

Here is the article abstract:

Massachusetts has the fourth-highest median malpractice settlement payments for all states. The American Medical Association (AMA) declares it a crisis state. As a test case, we analyzed its premiums from 1975 to 2005. In 2005 mean premiums were $17,810 for the coverage level and policy type most frequently purchased. Most physicians paid lower inflation-adjusted premiums in 2005 than in 1990. Mean premiums increased in only three specialties comprising 4 percent of physicians: obstetrics, neurology, and orthopedists–spinal surgery. However, because of discounts and surcharges, in 2005 premiums within the three highest-risk specialties varied nearly threefold, and nearly one-third paid less than in 1990.

Malpractice Premiums In Massachusetts, A High-Risk State: 1975 To 2005

_________________________________________________________________________________________________

*  According to a report by economists at the McKinsey Global Institute, while the U.S. tort system is a peculiar American phenomenon, it contributes little to the cost equation. When viewed from an economic perspective, “it is only a small contributor to the higher cost of health care in the United States.”   See, Accounting for the Cost of Health Care in the United States, McKinsey Global Institute (January 2007).

While the Court is not unsympathetic to Defendants, it recognizes that the Fund has a fiduciary responsibility to enforce its lien on the proceeds of Defendants’ workers’ compensation settlements in order maintain the solvency of the Fund for the benefit of all participants. This unpleasant episode, which results in Defendants getting less money for their injuries due to the required payback, could have been avoided had Plaintiff been invited to the settlement table before the workers’ compensation cases were finalized in negotiation.

Graphic Communications National Health and Welfare Fund v. Tackett, Slip Copy, 2008 WL 2020504 (S.D.Ill.) (May 09, 2008)

In a very well-reasoned opinion, the district court in Tackett held that workers’ compensation awards are subject to ERISA health plan reimbursement rights. The case at once both exposes a common evasive practice employed by workers’ compensation carriers and debunks the spurious legal pretext offered to justify the scheme.

The facts are very familiar to lawyers that have a workers’ compensation practice.

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From Professor Roger Baron, South Dakota School of Law:

In Doran v. Missouri Department of Social Services, 2008 WL 199079, handed down May 2, 2008, the Federal District Court for the Western District of Missouri certified a class action (on behalf of a class of plaintiffs) against the Missouri Department of Social Services for overreaching assertions of Medicaid liens against all aspects of the plaintiffs’ workers comp recoveries. According to the Ahlborn decision, reimbursement is only permitted against that portion of the recovery which represents the medical expenses. Reimbursement is not permitted against any portion of the recovery which represents permanent total or permanent partial benefits. This decision recognizes the validity of the plaintiffs’ claims under 42 U.S.C. 1983 and 1396(p)(a)(1).

The  Ahlborn decision would seem to have substantially resolved the issue of aggressive first dollar Medicaid liens.  From the seminar I participated in on May 2, I understand now that some state Medicaid departments have not quite bought in to this idea.  The case Professor Baron notes is significant in this transition period.

Here’s an old post I published on the issue for context:

From time to time, one encounters the unpleasantness of a Medicaid lien in trying to resolve personal injury cases. The statutory provisions enabling recoupment by the Medicaid program have always seemed Draconian. Nonetheless, from the standpoint of the group health plan that has an interest in enforcing its own reimbursement claims, attention must be paid to the reach of the Medicaid laws.

The United States Supreme Court has summarized State obligations as to subrogation under the Federal Medicaid law as consisting of the obligation to:

• “ascertain the legal liability of third parties ··· to pay for [an individual benefits recipient’s] care and services available under the [State’s] plan,” 42 U.S.C. § 1396a(a)(25)(A);

• seek reimbursement for [medical] assistance to the extent of such legal liability,

• enact ‘laws under which, to the extent that payment has been made ··· for medical assistance for health care items or services furnished to an individual, the State is considered to have acquired the rights of such individual to payment by any other party for such health care items or services,’ § 1396a(a)(25)(H);

• ‘provide that, as a condition of [Medicaid] eligibility ···, the individual is required ··· (A) to assign the State any rights ··· to payment for medical care from any third party; ··· (B) to cooperate with the State ··· in obtaining [such] payments ··· and ··· (C) ··· in identifying, and providing information to assist the State in pursuing, any third party who may be liable,’ 1396k(a)(1).

Nonetheless, U.S. Supreme Court has held that these provisions do not support State statutes that claim more than the portion of a Medicaid recipient’s settlement that represents medical expenses. See, Arkansas Department of Health and Human Services v. Ahlborn, 126 S.Ct. 1752 (2006). A fine discussion of the implications of this case appears in the North Carolina Trial Law Blog. Thus far, little guidance has developed from the courts as to the implications of this May 1, 2006 decision, but its taming effect on Medicaid reimbursement demands should be evident in future developments.

This from the Wills, Trusts & Estates Prof Blog:

Joshua Foster (J.D. Candidate, June 2008, St. John’s University School of Law) has recently published his Note entitled ERISA, Trust Law, and the Appropriate Standard of Review: A De Novo Review of Why the Elimination of Discretionary Clauses Would be an Abuse of Discretion, 82 St. John’s L. Rev. 735 (2008).

The article supports the use of discretionary clauses as adequately protecting the interested parties and consistent with trust law that underlies ERISA and state insurance law.

From the article:

Part I of this Note will give a brief background of ERISA, New York insurance law, the assertions of the Department as set forth in the Circular Letters, and the Model Act upon which many statutory schemes draw from.  Part II will examine the Firestone decision and its emphasis on trust law in keeping with the legislative intent underpinning ERISA.  Part III will examine the policy concerns that both sides raise and will argue that the current system has benefited the parties that ERISA legislation has intended to protect while providing additional benefits to the judicial system.

In my view, whether the claims manual was part of the administrative record, or whether it guided the internal decision-making of UNUM’s claims adjusters, is immaterial to resolution of the dispute before me. There is no dispute the claims manual is not part of the disability policy. There is no provision in the disability policy that incorporates or refers to the claims manual, or indicates that the definition or application of any given term in the policy is governed by a claims manual.

Thus, while the manual may well provide internal guidance for UNUM’s employee’s, and may furnish an administrative basis for the approach taken by UNUM in 2005, applying the standards of de novo review set forth above, I cannot find that a reasonable person in the position of a plan participant would understand that the disability policy is modified or controlled by provisions set forth in an internal claims manual. The provisions of UNUM’s claims manual do not assist me in the resolution of this dispute.

Mactas v. UNUM Life Ins. Co. of America, Slip Copy, 2008 WL 2001250 (D.Colo.) (May 08, 2008)

This recent offset case provides several noteworthy points for both claimants and plan administrators. The dispute can be reduced to a dispute over whether indexed earnings included bonuses or not.

The interesting legal points of the case lie in the district court’s assessment of probative value of UNUM’s internal claims manual, its perspective in applying the standard of review and as an illustration of the felicitous effects of de novo review for a claimant’s case.

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Of course, employers gain considerable advantage by incorporating severance pay arrangements in a tightly drawn ERISA plan document. The plans are usually rather simple in design, and the one in dispute in this case appears rather typical.

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My friend Rob Hoskins, Esq. (legal counsel to the petitioner in LaRue v. DeWolff, Boberg) has put together a great resource for ERISA attorneys.  The resource is called ERISABoard.com and, despite having been recently launched, already has substantial enrollment by some of the top practitioners in the field.

The site is non-commercial - it serves as forum for the exchange of ideas by attorneys interested in ERISA issues. I encourage you to visit the site and take advantage of the information available there.

Acting Insurance Commissioner Joel Ario today announced a 40-state settlement with Conseco Inc., which was necessary due to a pattern of consumer harm in the company’s long-term care insurance business. The Pennsylvania Insurance Department led the multi-state investigation, which resulted in a $2.3 million fine and an additional $30 million in claims-handling improvements and restitution.

News Release, COMMONWEALTH OF PENNSYLVANIA, Insurance Department

Conseco, Inc. (NYSE: CNO) issued a press release that announced a settlement among state insurance regulators and two of its insurance subsidiaries: Conseco Senior Health Insurance (CSHI) Company and Bankers Life and Casualty Company. The settlement concludes a multistate market conduct examination led by Pennsylvania, Illinois, Indiana, Texas and Florida related to long-term care claims practices and procedures, complaint handling, and sales and marketing practices.

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Consumers whose claims previously had been denied will receive a total of $676.2 million in additional benefits, Dinallo said. More than 23,000 claimants sought to have their denied claims reassessed as part of the settlement agreement and 41.7% of these were reversed in whole or in part. New York claimants gained benefits worth $59.8 million.This follows a 2003 investigation into whether the company had inappropriately denied claims for benefits under individual and group long-term disability insurance policies. That investigation was conducted by the New York State Attorney General’s Office, the New York State Insurance Department, state insurance regulators conducting a multi-state examination led by Massachusetts, Maine and Tennessee on behalf of all the other states, and the United States Department of Labor.As a result of that investigation, the four states and the Department of Labor entered into the regulatory settlement agreement with the company in November 2004 requiring Unum to pay a $15 million fine, to reassess the claims that previously had been denied, and to completely restructure its claim handling procedures to ensure objectivity and fairness.

The full examination report is available on the New York Insurance Department’s website at

http://www.ins.state.ny.us/exam_rpt/62235m07.pdf

Potential conflicts of interest resulting in a lower level of deference concern conflicts between the insurer and the administrator, not extraneous third parties. . . . The only conflict of interest applicable in this case is the internal conflict of Hartford due to its dual role as administrator and insurer.

Pylant v. Hartford Life and Accident Insurance Co., No. 3-05-CV-0379-G, op. at 4 (N.D.Tex. Jan. 20, 2006) (Kaplan, J.), aff’d, 2006 WL 3247314 (N.D.Tex. Nov.9, 2006)

As discussed in a prior article, the federal judiciary has permitted limited discovery beyond the “administrative record” as the inquiries may bear upon the question of a structural conflict of interest as, for example, where the administrator and the insurer are the same entity. Another level of conflict of interest may exist, namely, that of “third parties”, such as consultants, who review the record and advise the administrator.

Using the recent district court opinion in Alexander v. Hartford Life and Acc. Ins. Co., Slip Copy, 2008 WL 906786 (N.D.Tex.) (April 03, 2008) as a point of departure, the following discussion will take up this latter issue as it was presented to the district court.

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Self-insured ERISA plans routinely contend that they are not subject to state mandates because of the impact of ERISA preemption.  However, employers sponsoring these plans should be aware of the mandates of the jurisdiction where they operate if for no other reason then to evaluate the effect of their own plan in comparison to others offered (particularly union sponsored plans if union avoidance is a concern).

State Health Insurance Mandates 2008

Keith R. McMurdy has some interesting comments on state insurance benefit mandates.

Inasmuch as these mandates are typically implemented by requirements for policy form approval, they should not affect self-funded ERISA exempt plans.  And, of course, ERISA preempts the mandates as to self-funded ERISA plans by operation of the deemer clause which negates the preemption savings clause in such instances.

Nonetheless, Keith notes that self-funded ERISA plan sponsors may have reason to evaluate the mandates for purposes of benefit comparisons.
He cites to a very useful compendium of state law mandates compiled by the Council for Affordable Health Insurance.  The 2008 catalog of state mandates may be accessed here.

HT to Keith McMurdy.

With limited exceptions, discovery in an ERISA action seeking judicial review of the denial of benefits is restricted to consideration of the administrative record. . . . One such exception is where the participant or beneficiary alleges that the plan administrator operates under a conflict of interest.

Alexander v. Hartford Life and Acc. Ins. Co., Slip Copy, 2008 WL 906786 (N.D.Tex.) (April 03, 2008)

The scope of judicial review in ERISA claim for benefit cases has presented one of the classic debates that belie the tired old bromide to the effect that ERISA is a “comprehensive and reticulated” statute needing no supplementation.

As the caselaw illustrates, the federal courts themselves struggle to articulate essential structures for the civil remedies provisions, including the most basic concept of the proper standard of review. The subject of permissible discovery is yet another important, but divisive issue.

This recent district court opinion will offer us the opportunity to outline several conflict of interest issues that have divided the courts on the subject of permissible discovery. I will set these topics up in a short series of posts for convenient reference.

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As a prevailing ERISA plaintiff, Flom is entitled to an award of fees unless such an award would be unjust. Because there are no circumstances that would make an award unjust in this case, we reverse and remand for an award of fees.

Flom v. Holly Corp. Slip Copy, 2008 WL 1924944 (C.A.9 (Mont.)) May 01, 2008

This short memorandum opinion sets forth the essential test for “prevailing party” status so as to merit an award of attorneys’ fees. In this case, the district court denied the plaintiff’s motion, but the Ninth Circuit reversed based upon the fact that the district court had remanded the case to the plan administrator and the remand did effect a change in his legal relationship with the plan.

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John Alvis Jackson, Jr. and Larry Andrew Carey (together, the “Defendants”), were prosecuted in the Western District of Virginia on multiple fraud and theft offenses involving a loss of more than $15 million.

U.S. v. Jackson — F.3d —-, 2008 WL 1903485 (C.A.4 (Va.)) (May 1, 2008)

The Fourth Circuit affirmed the criminal convictions of the defendants in this recent opinion for, among other things, making false statement concerning, and theft from, ERISA benefit plans.

The Defendants were each convicted by a jury in early 2006 of the following offenses:

• two counts of bank fraud, in contravention of 18 U.S.C. § 1344 (the “bank fraud offenses”);

• five counts of wire fraud, in violation of 18 U.S.C. § 1343 (the “wire fraud offenses”);

• a single count of making false statements in documents required by the Employee Retirement Income Security Act of 1974 (“ERISA”), in contravention of 18 U.S.C. § 1027 (the “ERISA false statement offense”);

• two counts of theft from an ERISA-covered pension plan, in violation of 18 U.S.C. § 664 (the “ERISA theft offenses”); and,

• a single count of theft from a health care benefit program, in contravention of 18 U.S.C. § 669 (the “health care program theft offense”).

Jackson was also convicted of conspiracy to commit various federal offenses, in violation of 18 U.S.C. § 371 (the “conspiracy offense”). In late 2006, Jackson was sentenced to 108 months in prison and Carey was sentenced to 87 months.

As the Supreme Court has observed, “the plain meaning of the statute should be conclusive except in the ‘rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.’” It is the rare case of this type that is the subject of this Article.

David F. Shores (Wake Forest) Textualism and Intentionalism in Tax Litigation, 61 Tax Law. 53 (2007).

Paul L. Caron, TaxProf Blog, notes David Shores’ article which appears in the peer-reviewed ABA journal, The Tax Lawyer. Before you conclude this article is just for tax lawyers, at least read the article’s introduction.We ERISA lawyers live in two worlds in a sense, as ERISA has both Title I and Title II.

The administration of ERISA is divided among the U.S. Department of Labor, the Internal Revenue Service of the Department of the Treasury (IRS), and the Pension Benefit Guaranty Corporation (PBGC). Title I, which contains rules for reporting and disclosure, vesting, participation, funding, fiduciary conduct, and civil enforcement, is administered by the U.S. Department of Labor. Title II of ERISA, which amended the Internal Revenue Code to parallel many of the Title I rules, is administered by the IRS. Title III is concerned with jurisdictional matters and with coordination of enforcement and regulatory activities by the U.S. Department of Labor and the IRS. Title IV covers the insurance of defined benefit pension plans and is administered by the PBGC.

(from the EBSA website)

While some of us tour the entire domain, others prefer to stay on the tax side or the employment side. But you don’t have to be a tax lawyer to appreciate the scholarship in David Shore’s article on statutory construction. ERISA controversies often turn on statutory construction as the recent LaRue decision so aptly indicates. Here’s where the article has value for the Title I denizens.
From the introduction:

Tax cases frequently turn on issues of statutory construction. The statute might be general in nature, such as section 162, which allows a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” Alternatively, the statute might be highly specific, providing a clear answer to the question at hand. . . . In answering questions of this type, courts will often look to legislative history, statutory structure, or tax policy in an effort to determine exactly what Congress intended when it adopted the provision or term in question. Such an intentionalist approach is, of course, in keeping with conventional rules of statutory construction that call for a determination of congressional intent when no clear answer can be obtained by applying the statutory language to the issue at hand.

In some instances the statute will be highly specific. A court might then adopt a textual or plain meaning approach to statutory interpretation, closing its eyes to legislative history, statutory structure, or tax policy, suggesting a congressional intent at odds with the result dictated by the language of the statute. Indeed, the court might not view such a case as involving an issue of statutory construction at all. To construct or construe a statute implies a need to determine its meaning. But, if the meaning is clear, the court merely needs to apply the statute according to its text. Construction is unnecessary. It is in cases of this type that courts are likely to part company, with some taking a textual approach, and others adopting an intentionalist approach to reach a result viewed as consistent with legislative intent in spite of its inconsistency with the statutory language. As the Supreme Court has observed, “the plain meaning of the statute should be conclusive except in the ‘rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.’” It is the rare case of this type that is the subject of this Article.

Note: Hat tip, of course, to Paul Caron for calling our attention to this article. If you are still reading this, then you will probably be interested in these articles which, unlike the previous work, may be downloaded on SSRN:

Caleb Nelson, What Is Textualism? Virginia Law Review, Vol. 91, April 2005

Herman Philipse, Antonin Scalia’s Textualism in Philosophy, Theology, and Judicial Interpretation of the Constitution, Utrecht Law Review, Vol. 3, No. 2, pp. 169-192, December 2007

This area of discussion very quickly shifts into debates in the philosophy of language, as evidenced by works such as this -

I Do Not Think It Means What You Think It Means: How Kripke and Wittgenstein’s Analysis on Rule Following Undermines Justice Scalia’s Textualism and Originalism ( DANIEL GOLDBERG )

And when you arrive at the conclusion that you need to approach the law via Wittgenstein, I submit you are approaching the outer margin of practical relevance noted in a post by Larry Solum  (also noted by TaxProf) about the law and economics crowd here. I think most of us will agree that a step must have been missed somewhere along the way if this is where we have arrived in theories of statutory construction.

Within limits, though, reflection on how courts should reason in interpreting statutes is a profitable exercise, and I do look forward to reading David Shore’s article, which appearing in The Tax Lawyer, will undoubtedly be grounded in sufficient practical purpose to avoid the relevance dilemma.

All that remains is the claim for injunctive relief. Plaintiff seeks injunctive relief under sections 502(a)(2) and 502(a)(3) of ERISA, and asserts that his intent is to prevent what happened to Mrs. Wells from happening to other Plan Participants. Defendant moves for summary judgment on the ground that Plaintiff does not have evidence sufficient to prove that Defendant is presently acting in violation of ERISA or its implementing regulations.

Wells v. California Physicians’ Service, Slip Copy, 2008 WL 1859066 (N.D.Cal.) (April 23, 2008)

The facts of this sad case illustrate the tragic conflict that can arise when families trying to obtain medical care for loved ones confront the claims administration mechanisms that operate as cogs and wheels within the larger mechanical apparatus of the ERISA remedial system. One of the salient facts that undoubtedly frustrated the plaintiff was that the defendant refused to approve a drug that it had previously approved and had evidently proved efficacious.

Nonetheless, in the view of the district court, ERISA offers no relief for the Plaintiff’s claims.

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Although Lumbermens has shown that the Summary Plan Description (“SPD”) unambiguously confers upon the Plan administrator discretionary authority to determine eligibility for benefits and to construe the terms of the plan, see Ingram v. Martin Marietta Long Term Disability Income Plan, 244 F.3d 1109, 1112 (9th Cir.2001), it has failed to show that it properly furnished Gertjejansen with the SPD as required by ERISA regulations.

Gertjejansen v. Kemper Ins. Companies, Inc., Slip Copy, 2008 WL 1787484 (C.A.9 (Cal.)) (unpublished)

Getting to an abuse of discretion standard of review is actually a two-step task.

First, the plan or SPD must actually have an appropriately drafted clause. Second, the document must actually get to the plan participant. While the outcome in this case was not affected by the standard of review, the case is nonetheless interesting for its focus on what often seems overlooked in benefit claims cases, i.e., were the plan documents actually distributed to the plan participants in the form present to the court as a part of the administrative record.

The ERISA Requirement

Under ERISA, “[t]he administrator shall furnish to each participant, and each beneficiary receiving benefits under the plan, a copy of the summary plan description, and all modifications and changes” within 120 days after the plan takes effect. 29 U.S.C. § 1024(b)(1)(B).

Now we are in the digital age, of course, so here the rule allows a variant on compliance, to wit:

A plan administrator satisfies those disclosure requirements by furnishing documents through electronic media as long as the administrator “takes appropriate and necessary measures reasonably calculated to ensure that the system for furnishing documents … [r]esults in actual receipt of transmitted information.” 29 C.F.R. § 2520.104b-1(c)(1)(i).

Placing Is Not Furnishing

Here the plan evidently missed a step. The Court observes:

Lumbermens has submitted nothing on the record to suggest that the mere placement of an updated SPD on its intranet site could ensure that Gertjejansen would actually receive the transmitted information. The district court correctly reviewed the denial of benefits de novo. When de novo review applies, “the court simply proceeds to evaluate whether the plan administrator correctly or incorrectly denied benefits.” Abatie, 458 F.3d at 963.

Thus, the failure to ensure that plan participants receive the digital information can have a bearing on the standard of review.

Note: In the Ninth Circuit, the SPD is a plan document and should be considered when interpreting an ERISA plan. Bergt v. Ret. Plan for Pilots Employed by MarkAir, Inc., 293 F.3d 1139, 1143 (9th Cir.2002).

Disconnect? The Court just held that the plan failed to show that the participant actually received the updated SPD information. This cost the employer the favorable deferential standard of review. Nonetheless, it relied upon the SPD in reaching its decision on the merits:

An ERISA plan must be administered in the interest of the participants and beneficiaries in accordance with the documents and instruments governing the plan. 29 U.S.C. § 1104(a)(1)(D). Here, the SPD unambiguously states that participants must cooperate with the claim administrator’s request for a scheduled appointment for case management. It is clear from the record that Gertjejansen did not cooperate with repeated efforts to engage her in case management, making Lumbermens unable to reach a determination that Gertjejansen was disabled. It is therefore irrelevant whether Gertjejansen was in fact disabled because her breach of the Plan’s terms prevented such a determination from being made. See Jordan v. Northrup Grumman Corp. Welfare Benefit Plan, 370 F.3d 869, 880 (9th Cir.2004).

One would like to suppose that we are missing a fact here, or else the logic of the decision is impaired. It is difficult to see how the Court could hold that a participant could be reasonably be required to comply with requirements contained in an SPD was not furnished to her.

Janell Grenier recently noted the employee benefit troubles that can result from misclassification of workers. The occasion of the comment was a recent article in the L.A. Times, “Independent Contractor Status Scrutinized.”

In addition to the problems of having insurance coverage defeated based upon “employee” definitions, inadvertently promising benefits to those you did not intend, and jeopardizing the qualified status of your retirement plans, there is a another significant issue - ERISA preemption may not be available as a defense to claims brought by independent contractors.

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Although we have never addressed the question of derivative standing for ERISA benefits, our sister circuits have consistently recognized such standing when based on the valid assignment of ERISA health and welfare benefits by participants and beneficiaries. . . .

Thus, it may be that in the proper case assignees other than health care providers have derivative standing under ERISA. We need not here resolve that question, because this is clearly not such a case.

Brown v. Sikora and Associates, Inc., Slip Copy, 2008 WL 1751934 (C.A.4 (S.C.)) (April 16, 2002)

In this recent opinion, the Fourth Circuit considered the issue of derivative standing in the context of an ERISA claim for benefits action. The underlying facts and the district court opinion were discussed here.

The Fourth Circuit affirmed the district court, holding that the assignments presumably taken by the original PEO defendant (Sikora) in a claims for benefit case through settlement were insufficient to create ERISA standing in a subsequent claim by the PEO against third parties (Fidelity Group) allegedly responsible for the defalcation in benefit funding.

When assignees of ERISA benefits have been found to have derivative standing, they could have sued the actual ERISA participants, who would then have clearly had standing to sue for the unpaid ERISA benefits. Thus permitting derivative standing in these cases would further the purposes of ERISA “to protect the interests of participants in employee benefit plans and their beneficiaries.” Marks v. Watters, 322 F.3d 316, 322 (4th Cir.2003). In the case at hand, Sikora could never have sued the actual participants Brown and Abernathy to recover their ERISA benefits; thus, allowing Sikora derivative standing does nothing to further the purposes of the statute because it offers no benefits for the ERISA participants.

Moreover, examination of Sikora’s amended complaint makes clear that, unlike the typical party permitted derivative standing, Sikora has claimed derivative standing not out of any concern with the participants’ unpaid ERISA benefits, but in order to obtain federal subject matter jurisdiction over Sikora’s independent state-law claims against Storey. In its amended complaint, Sikora seeks a declaration that Storey is the alter ego of Fidelity and thus “personally liable for the acts and omissions of Fidelity,” particularly a $3,733,693.41 default judgment entered in favor of Sikora against Fidelity in a related ERISA suit. Without expressing any opinion regarding the validity of these claims, we do not believe that they should be smuggled into federal court under the jurisdictional guise of Brown and Abernathy’s assignment of ERISA benefits.

The validity of assignments under ERISA cannot be assumed. Challenges to ERISA standing via defects in assignment of claims remains one of the more effective tools of defendants in ERISA cases.

Note: As discussed in my earlier post, the case had a number of procedural turns which ultimately contributed to the plaintiff’s undoing. For example:

In the alternative, Sikora argues that it possesses standing for its ERISA claims as a fiduciary under the ERISA plan. But, as the district court correctly noted, Sikora repeatedly asserted in its pleadings that it was not a fiduciary of the plan. “The general rule is that ‘a party is bound by the admissions of his pleadings.’ “ Lucas v. Burnley, 879 F.2d 1240, 1242 (4th Cir.1989) (quoting Best Canvas Prods. & Supplies v. Ploof Truck Lines, 713 F.2d 618, 621 (11th Cir.1983)). Sikora presents no compelling legal argument why this rule should now be abandoned, and we decline to do so.

More On Assignment Issue - In distinguishing this case from provider cases the Court stated:

. . . an employee organization who pays claims on behalf of the plan cannot later bill the participant or beneficiary. The participant or beneficiary would not be forced to bring suit against the plan. Allowing an assignment to an employee organization, thus, would only create a new class of parties, not determined by Congress as necessary to further the statute’s purposes, that could bring suit under ERISA. . . . Accordingly, the Court concludes that Sikora, an employee organization, may not bring this action as an assignee of participants and beneficiaries of the plan.

This case looks like it is going the way of most remedy cases - a debate between the literalist and remedialists on the court. The literalists (Roberts, Alito, Scalia, and Thomas) think that the statutory provision is clear and there shouldn’t be a separate standard of review for conflicts. The remedialists (Stevens, Souter, Breyer, and Ginsburg) believe that the common law of trust must inform the meaning of ERISA’s remedial sections because that is where ERISA derives from.

Paul Secunda, WorkPlace Prof Blog

Paul kindly furnished me with his prediction on the MetLife case and it is going to be interesting to see how he makes out on this. Here’s Paul’s view:

Here goes nothing: 4-1-4 remedialists with a controlling concurrence by Kennedy. He seems to want to provide for a compromise by providing for certain procedural mechanisms an employer can take (a la Faragher and Ellerth) to avoid liability.

In my opinion, the notion of internal firewalls and protections hinted at by Justice Kennedy shows a failure to understand the practical realities of insurance company claims administration. Moreover, Justice Roberts conflates insurance company administration and employer self-funded claims administration in his comments. I doubt anything definitive will come of this case and that we will have at least one footnote (probably by Justice Roberts) that will spawn endless speculation.

See Brian King’s analysis here:

Insurers want to say either that the conflict is so slight it doesn’t need to be factored into the judiciary review at all or that the claimant must show specific facts demonstrating a substantial conflict in the particular case before the court before anything other than an arbitrary and capricious standard of review should be used. Claimants argue that the inherent conflict is so significant that every case should be reviewed de novo rather than with any degree of deference to the insurer’s decision. The Court is struggling to find out if there is something workable to put in place that is in between those two ends of the spectrum.

Suzanne Wynn appears to share my doubts about the efficacy of the oral argument:

The transcript is an excellent read of how oral argument before the Court can go horribly wrong for some attorneys. The Justices were very active today, and the questioning itself is well worth reading. The depth of questions from the Justices is more than matched by the number of questions and the rapidity of questioning. The first 20 pages of the transcript is a lesson within itself of how an attorney can manage not to complete a sentence when being questioned by the Justices

Postnote - I’ll venture that the Court will come back with a close to majority opinion though I still don’t think the opinion will settle that much. I think Paul’s “literalists” will make the compromise to get something firm for the lower courts to look at on this issue, and it will be rooted in trust law that is sufficiently vague that a consensus can be formed with each seeing what they wish to see in the final opinion (and footnotes narrowing conclusions where needed to permit agreement in the main opinion).

Consistent with established principles of trust law, we hold that a denial of benefits challenged under 1132(a)(1)(B) is to be reviewed under a de novo standard unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan. . . . Thus, for purposes of actions under 1132(a)(1)(B), the de novo standard of review applies regardless of whether the plan at issue is funded or unfunded and regardless of whether the administrator or fiduciary is operating under a possible or actual conflict of interest. Because we do not rest our decision on the concern for impartiality that guided the Court of Appeals, see 828 F.2d, at 143-146, we need not distinguish between types of plans or focus on the motivations of plan administrators and fiduciaries. Of course, if a benefit plan gives discretion to an administrator or fiduciary who is operating under a conflict of interest, that conflict must be weighed as a “facto[r] in determining whether there is an abuse of discretion.” Restatement (Second) of Trusts 187, Comment d (1959).

Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989) (emphasis added)

That portentous parting comment in Part III of the Court’s Firestone opinion sowed the contentious seed from which almost two decades of litigation have reaped the proverbial whirlwind. Oral argument in MetLife v. Glenn yesterday raises the question of whether the Court is now prepared to plow the crop under and begin again.

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Glazer argues that she was not provided a “full and fair review” of the denial of her request for benefits as required by ERISA. 29 U.S.C. § 1133(2). If benefits are denied, section 1133 requires the plan administrator, “[i]n accordance with regulations of the Secretary,” to provide a “full and fair review … of the decision denying the claim.” Id. § 1133. The administrator must “[p]rovide … upon request … all documents, records, and other information relevant to the claimant’s claim for benefits” for the review to qualify as a “full and fair review.” 29 C.F.R. § 2560.503-1(h)(2)(iii).

Glazer v. Reliance Standard Life Ins. Co. — F.3d —-, 2008 WL 1775437 C.A.11 (Fla.) (April 21, 2008)

With the distant thunder of opposing artillery in the MetLife v. Glenn Supreme Court case in the background (argument today), trench warfare continues in the workaday world of claims administration. In this recent decision, the Eleventh Circuit added its weight to that of the Tenth on an important aspect of the standard of “full and fair review”.

The Eleventh Circuit held that an ERISA plan administrator was not required to furnish a plan participant the report of physician who conducted independent peer review of participant’s medical records during review of the initial denial of participant’s benefit claim. The court accepted the plan administrator’s argument that it had not relied upon the report or used the report in the course of making the benefit determination until its final decision was reached.

According to the Court:

Glazer’s argument is contrary to the plain text of the regulations. Subsection (h)(2)(iii) requires the plan administrator to produce all “relevant” documents. A document is relevant if it “[w]as relied upon” or “[w]as submitted, considered, or generated in the course of making the benefit determination.” 29 C.F.R. § 2560.503-1(m)(8)(i)-(ii). Reliance had not “relied upon” the Hauptman report or used the report “in the course of making the benefit determination” until the determination had been made. After Reliance reached its final decision, all relevant documents generated during the review and initial claim determination had to be produced to the claimant. Id. § 2560.503-1(i)(5). This requirement would be superfluous if the claimant had a right to the documents during the pendency of the review. See Kornblau v. Dade County, 86 F.3d 193, 195 (11th Cir.1996) (courts should avoid rendering other provisions of a regulation superfluous or inoperative).

Note: The Tenth Circuit opinion influenced the decision of the Court as noted here:

The only other circuit court that has decided this issue reached the same conclusion as we do. The Tenth Circuit held, in Metzger v. UNUM Life Insurance Company of America, that “subsection (h)(2)(iii) does not require a plan administrator to provide a claimant with access to the medical opinion reports of appeal-level reviewers prior to a final decision on appeal.” 476 F.3d 1161, 1167 (10th Cir.2007). The court explained that requiring these documents to be produced earlier would create “an unnecessary cycle of submission, review, re-submission, and re-review.” Id. at 1166. The court agreed with the Department of Labor that the purpose of the production of these documents is to enable a claimant to evaluate whether to appeal an adverse determination. Id. at 1167 (quoting ERISA Claim Procedure, 65 Fed.Reg. 70,246, 70,252 (Nov. 21, 2000)). Documents produced before a decision is made would not assist a claimant in deciding whether to pursue an appeal because the claimant would not yet know if there has been an adverse determination. Id.

See :: Review of Claim Denials (Unit 2): Disclosure Requirements On Administrative Appeal

Aaron Juckett, One Stop ESOP Blog, provides an overview of key points noted during an April 15, 2008 presentation by Paul Windsor, an investigator from the Employee Benefits Security Administration (EBSA) of the Department of Labor (DOL). The program title, What to Expect from an Employee Benefits Security Administration Investigation, is undoubtedly an attention-getter.

The program was a part of the Spring Conference of the ESOP Association – Wisconsin Chapter. Don’t let the ESOP moniker put you off - the fiduciary and disclosure information is relevant and transferable to group benefit plan administration.

Among the items of interest to those working in the employee welfare benefits field:

• What does the EBSA Investigate – What does the EBSA investigate?
• Fiduciary Duty of Loyalty and Prudence (ERISA Section 404(a), 29 U.S.C. Section 1104(a) - Fiduciary duties - Prudent man standard of care)
• Prohibited Transactions: Certain transactions between the plan and parties-in-interest are prohibited absent an exemption (ERISA Section 406(a), 29 U.S.C. Section 1106(a) - Prohibited Transactions - Transactions between plan and party in interest)
• Conflicts of Interest (ERISA Section 406(b), 29 U.S.C. Section 1106(b) - Prohibited Transactions - Transactions between plan and fiduciary)

• How Investigations are Identified – Investigations are identified through computer targeting (off of the IRS Forms 5500), referrals from the IRS and other agencies, information from the media, bankruptcy and other filings, complaints (participants, fiduciaries, informants, attorneys, etc.), and private lawsuits.

For the complete overview, see Aaron’s notes here.

Note: The issues of service provider compensation and potential prohibited transactions in the group benefit environment presents an important area of due diligence responsibility. For more on this topic, see the due diligence checklist on this site.

The “Consultant/Adviser Project” - This item is noteworthy in the audit context:

EBSA’s newest National Project will focus on the receipt of improper, undisclosed compensation by pension consultants and other investment advisers. EBSA’s investigations will seek to determine whether the receipt of such compensation violates ERISA because the adviser/consultant used its position with a benefit plan to generate additional fees for itself or its affiliates. EBSA may also need to investigate individual plans to address such potential violations as failure to adhere to investment guidelines and improper selection or monitoring of the consultant or adviser. The CAP will also seek to identify potential criminal violations, such as kickbacks or fraud.

[from EBSA website visited 12/20/06]

See also -:: EBSA “Targeting Criteria” Enhancements Lead to Large Enforcement Gains; :: EBSA Enforcement Efforts Capped By 32% Increase In Indictments
Hat tip to Aaron Jenkins.

The plaintiff-the Pharmaceutical Care Management Association-is a national trade organization representing pharmacy benefit managers. Pharmacy benefit managers act as “middlemen” hired by health benefit providers (such as employers, health maintenance organizations, and public and private health plans) “to provide prescription drug benefit administration and management services.” One important role of a pharmacy benefit manager is to pool health benefit providers and negotiate discounts on pharmaceuticals from manufacturers or pharmacies. See Fed. Trade Comm’n, Pharmacy Benefit Managers: Ownership of Mail-Order Pharmacies 41-60 (2005).

A health benefit provider may find it difficult to judge the value of a pharmacy benefit manager’s services without information about the relationships between the manager and manufacturers or pharmacies. See Fed. Trade Comm’n & Dep’t of Justice, Improving Health Care: A Dose of Competition ch. 7, at 16 (2004). For example, a pharmacy benefit manager could work against the health benefit provider’s interest by substituting a more expensive drug than the one prescribed in order to receive a rebate from the manufacturer that is not passed on to-or shared with-the health benefit provider. O’Donnell & Fendler, 40 J. Health L. at 212; see also Pharmacy Benefit Managers at 59 (noting that large pharmacy benefit managers retained between 30 and 65 percent of rebate payments in 2003).

Pharmaceutical Care Management Ass’n v. District of Columbia, 2008 WL 1757553 (C.A.D.C.) (April 18, 2008)

The Federal Circuit vacated a district court decision in which the court had ruled that the PBM trade group, the PCMA, could not relitigate the ERISA preemption issue it lost in the First Circuit Court of Appeals. The District of Columbia’s AccessRx Act of 2004 was designed to force PBM’s to disclose important financial information about its dealings with the drug companies it purportedly bargains with for the benefit of health plans.

The validity of similar legislation in Maine was upheld through litigation in the First Circuit in Pharmaceutical Care Management Association v. Rowe, 429 F.3d 294 (1st Cir.2005), cert. denied, 126 S.Ct. 2360 (2006). After this decision in the Federal Circuit, the issue will now be considered on the merits in by the D.C. district court.

Important to the Circuit court’s opinion were the following:

• if the PCMA were not permitted to go forward, a member of the trade group could bring a challenge, and thus foreclosing litigation through collateral estoppel did not serve the interests of judicial economy
• the District amended its statute to conform to the Maine statute after the inception of the challenge
• changes in the DOL service provider disclosure rules could affect the preemption argument in a manner not considered in the First Circuit opinion.

Note: The opinion refers to health plans as “benefit providers” which can be initially disorienting since “providers” is a term not typically applied to health plan payers.

There are several levels of irony in this decision. Not the least of which is that the DOL disclosure rules might serve to advance the PBM’s preemption arguments. Add to that the amusing position of the PBM’s that have successfully argued they have no fiduciary responsibility under ERISA to plans or participants but vehemently argue they should be protected from state disclosure laws by virtue of ERISA preemption.

Implications - The Court expressed no opinion on the merits, but it’s comments could suggest a grounds for a PBM relitigation of the First Circuit opinion on the DOL rule changes.

See also - For additional background on this case and a discussion of the judicial doctrine of collateral estoppel (the basis for the vacated district court’s opinion), see:: PBM’s Defeated In Bellwether District Court Decision Over Transparency Statute

HOI’s own records admitted into evidence at trial demonstrated that HOI (a) sought to save itself $4.1 million annually by discontinuing these payments to clinical pathologists, (b) anticipated that litigation would follow that action, and (c) recognized that Medicare and Medicaid had established payment amounts that included the disputed component for the pathologists’ supervision and oversight of the clinical laboratories.

Health Options, Inc. v. Palmetto Pathology Services, P.A., 2008 WL 1733673 (Fla.App. 3 Dist.) (April 16, 2008)

In this health care provider versus HMO dispute, the providers chalked up a win. Having successfully moved for remand following the HMO’s attempt to convert the payment controversy into an ERISA action, the HMO asserted ERISA preemption as an affirmative defense. The trial court, and subsequently, the appellate court, found this defense unavailing.

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To improve the disclosure process, we have concluded that the initial submission must contain the following information:

(1) a complete description ofthe conduct being disclosed;

(2) a description ofthe provider’s internal investigation or a commitment regarding when it wil be completed;

(3) an estimate of the damages to the Federal health care programs ànd the methodology used to calculate that figue or a commitment regarding when the provider will complete such estimate; and

(4) a statement of the laws potentially violated by the conduct.

This information must be included in addition to the Basic Information described in the SDP. The provider must be in a position to complete the investigation and damages assessment within 3 months after acceptance into the SDP.

HHS Office of the Inspector General, An Open Letter to Health Care Providers: April 15, 2008

The OIG has announced changes to its Self-Disclosure Protocol. The OIG notes that “cooperative self-disclosers” may avoid or mitigate integrity sanctions.

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The administrator shall, upon written request of any participant or beneficiary, furnish a copy of the latest updated summary plan description, plan description, and the latest annual report, any terminal report, the bargaining agreement, trust agreement, contract, or other instruments under which the plan is established or operated.

29 U.S.C. § 1024(b)(4)

Ejusdem generis - “when general words follow the enumeration of specific words in a statute, courts are to construe the general words in a manner that limits them to the same class of things enumerated by the preceding specific words.”

In other words, if a statute begins listing a series of items followed by a phrase such as “and so forth”, or more to the point, “other instruments”, the courts will try to limit additions to the listed items to the same class of the items that preceded.

It is important to get the meaning of this particular statute right - at $110 per day, the Latin lesson could get expensive.

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More specifically, the sole issue we decide in this appeal is whether ERISA preempts a state law breach of contract claim and an alternatively pled state law unjust enrichment claim brought by a third-party company hired to perform only non-discretionary administrative services, under the self-funded portion of an employee health care benefit plan covered by ERISA, against the sponsor of such plan for reimbursement of $93,999.73 in nondiscretionary payments the third-party company fronted to satisfy self-funded benefit claims, when:

(1) the plan administrator, with full discretion to determine whether a claim for self-funded benefits should be paid or denied (and who also served as the sponsor’s chief financial officer) expressly acknowledged the debt and recommended to the sponsor’s chief executive officer that it should be paid; and (2) resolution of either claim requires no interpretation of the plan terms nor is it in any way dependant upon the plan being governed by ERISA.

Great-West Life & Annuity Ins. Co. v. Information Systems & Networks Corp. — F.3d —-, 2008 WL 1211993 (C.A.4 (Md.)) (April 11, 2008)

With that sentence of Faulknerian length, the Fourth Circuit framed the question of possible