:: Ninth Circuit Finds Abuse of Discretion Due to Procedural, Substantive, and Structural Flaws

We will customarily uphold an administrator’s decision if it is “grounded on any reasonable basis.”  This deference is tempered where, as here, the plan administrator has a structural conflict of interest, being the entity that both funds and administers the benefits plan.

Other case-specific factors heighten our judicial scrutiny of an administrator’s benefits decision, including procedural irregularities, the quality and quantity of the medical evidence, and the administrator’s reliance on a paper review of the claimant’s medical records.

Yox v. Providence Health Plan, 2016 U.S. App. LEXIS 16600 (9th Cir.) (September 9, 2016)

This recent 9th Circuit opinion offers a good overview of factors that might lead to a reversal of a claim denial even under the very forgiving abuse of discretion standard.

After a seizure-induced fall fractured the plaintiff’s jaw, her group health plan covered the costs for initial surgeries. Nonetheless, the plan denied preauthorization for additional trauma-related dental services under the Plan.

Failure to Follow Procedural Guidelines

The Court noted that Providence did not follow important procedural requirements.

For example, Providence failed to adequately notify Yox of her right to bring a civil action under ERISA § 502(a). See 29 C.F.R. § 2560.503-1(g)(1)(iv) and (j)(4). Moreover, Providence also failed to consult a professional with “appropriate training and experience in the field of medicine involved in the medical judgment.” See 29 C.F.R. § 2560.503-1(h)(3)(iii).

Ignoring these regulations “contravenes the purpose of ERISA” and weighs in favor of finding an abuse of discretion. Abatie, 458 F.3d at 974.

Failure to Meet Procedural Obligations

In assessing the substance of her claim. Providence continually asserted that the plaintiff’s treatment was dental rather than medical.  Yet, it provided no evidentiary basis for its decision.

Furthermore, Providence failed to consult with adequately trained professionals when analyzing her preauthorization request.  In addition, Providence arbitrarily refused to address the clinical evaluation submitted by her treating dentist. See Black & Decker Disability Plan v. Nord, 538 U.S. 822, 834, 123 S. Ct. 1965, 155 L. Ed. 2d 1034 (2003). When Providence did address the evaluation provided by another dentist, it discounted the dentist’s opinion as “insufficient” without further explanation.

Providence’s conclusory opinion does not satisfy its duty under ERISA. See Salomaa, 642 F.3d at 680. “An administrator does not do its duty under the statute and regulations by saying merely ‘we are not persuaded’ or ‘your evidence is insufficient.'”).

Presence of Structural Conflict of Interest

Based upon the foregoing, the Court concluded that a structural conflict of interest played a role in the benefits denial.

 Because of this manifest conflict of interest, we must view Providence’s decision with heightened skepticism; it is simply not enough for us to “scan[] the record for medical evidence supporting” Providence’s decision, even if such evidence exists. Montour, 588 F.3d at 630. The district court did not err in factoring Providence’s conflict of interest into its abuse of discretion analysis.

Note:   The district court’s decision was also affirmed on its ruling that the scope of the plaintiff’s claim did not include the expanded services she requested after starting her internal appeal.

Providence never had a chance for first review of the additional claim, because the appeals process addresses only the scope of the initial denial. That Providence did not change its appeals process to include Yox’s expanded claim is not arbitrary, nor does it conflict with the plain language of the Plan. See Schikore v. BankAmerica Supplemental Ret. Plan, 269 F.3d 956, 960 (9th Cir. 2001).

Practice Pointer – The plaintiff attacked the benefit denial on three grounds – procedural, substantive, and structural flaws.  The first two issues helped support the finding of a structural conflict of interest.

Treating Physician Rule –  Although plan administrators are not bound to give any special weight to the opinions of treating physicians, they may not arbitrarily refuse to credit a claimant’s reliable evidence, including the opinions of a treating physician.  Black & Decker Disability Plan v. Nord, 538 U.S. 822, 834 (U.S. 2003)

Claims Regulations – See,  Department of Labor, Employee Benefits Security Administration, http://www.dol.gov/ebsa/faqs/faq_claims_proc_reg.html, Question B-4

Ninth Circuit Authority – The key case on judicial review of benefit decision is Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955 (9th Cir. Cal. 2006).

Scholarship – I co-authored a law review article that might be helpful in this context:  “Weighing Medical Judgments: Explaining Evidentiary Preferences for Treating Physician Opinions in ERISA Cases after Black and Decker v. Nord” , 13 Michigan State Law School Journal of Medicine and Law 157 (2009)

:: Severance Arrangement Constitutes ERISA Plan – Factor Analysis of Plan Status

The dispositive issue in this case is whether Plaintiff’s state-law claims are preempted by the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq. and thus subject to the sixty-day appeal period.

Gordon v. AstraZeneca AB, No. 4:16-CV-40042-TSH, 2016 WL 4212250, at *2 (D. Mass. Aug. 9, 2016)

This case involves a preliminary issue of whether a severance pay arrangement is an ERISA plan.  If so, the plaintiff’s state law claims would be preempted – and even more significantly, the failure to appeal the denial of benefits gives rise to the defense of failure to exhaust administrative remedies.

Was the arrangement an ERISA plan?

Severance pay arrangements require a careful examination of the facts underlying the benefit obligations.  The Court turned to the seminal cases for guidance, noting:

“[A]n employee benefit may be considered a plan for purposes of ERISA only if it involves the undertaking of continuing administrative and financial obligations by the employer to the behoof of employees or their beneficiaries.” Belanger v. WymanGordon Co., 71 F.3d 451, 454 (1st Cir.1995) (citing Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 12, 107 S.Ct. 2211, 96 L.Ed.2d 1 (1987); District of Columbia v. Greater Wash. Bd. of Trade, 506 U.S. 125, 130 n. 2, 113 S.Ct. 580, 121 L.Ed.2d 513 (1992)).

When evaluating whether a given program falls under ERISA, the court looks to “the nature and extent of an employer’s benefit obligations.” O’Connor v. Commonwealth Gas Co., 251 F.3d 262, 266–67 (1st Cir.2001) (quoting Rodowicz v. Mass. Mut. Life Ins. Co., 192 F.3d 162, 170, amended by 195 F.3d 65 (1st Cir.1999)).

So the project of evaluating whether a plan exists becomes a “fact-intensive inquiry specific to each case” with no “authoritative checklist” that settles the question.
The Court finds that the arrangement constitutes an ERISA plan . . .
The reasons:
  1. the severance payment was only available to “eligible” employees, and one of the criteria for eligibility was that the employee cannot have been terminated “for cause.”
  2. the Plan granted discretion to the administrator to construe its terms, including the definition of “notice of termination,” which was the purported basis for benefits denial
  3. other benefits under the Plan—post-termination medical, dental, life insurance, and employee assistance—are the types of ongoing benefit payments that constitute a typical ERISA plan
  4. both the Plan and the Plan Summary contained clear statements of intent that this is an ERISA plan.

Note that #1 and #2 support the argument that the plan involved discretion which is factor indicating ERISA plan status.

The court finds the state law claims preempted . . .
Having found the existence of an ERISA plan, it was a short step for the Court to arrive at the conclusion that the plaintiff’s state law claims were preempted.  In short, the Court held that the Plaintiff sought to enforce the terms of the Plan through state-law causes of action—precisely the type of alternative enforcement that ERISA prohibits.
The Supreme Court has “identified three categories of state laws that ‘relate to’ ERISA plans” for purposes of preemption: “(1) state laws that ‘mandate [ ] employee benefit structures or their administration,’ (2) state laws that ‘bind plan administrators to [a] particular choice,’ and (3) state law causes of action that provide ‘alternative enforcement mechanisms’ to ERISA’s enforcement regime.” Id. at 51 (quoting New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., 514 U.S. 645, 658–59, 115 S.Ct. 1671, 131 L.Ed.2d 695 (1995)).
The third category applies to the state law causes of action in this case. “[I]n order to assess whether the state law cause of action is an alternative enforcement mechanism, [the court] must ‘look beyond the face of the complaint’ and determine the real nature of the claim ‘regardless of plaintiff’s … characterization.’ ” Id. (quoting Danca v. Private Health Care Sys., Inc., 185 F.3d 1, 5 (1st Cir.1999)).
. . . and that the Plaintiff failed to exhaust administrative remedies.
Regardless of the issue of whether an ERISA plan exists, the possibility that it might requires careful attention to the procedural aspects of ERISA appeals as set forth in the applicable documents.  Here, the Plaintiff did not appeal the initial denial of his claim.  The Court refused to accept his argument that an appeal would have been futile.
“blanket assertion[s], unsupported by any facts, [are] insufficient to call the futility exception into play.” Id. at 63. To show futility, the employee must produce evidence to show that the administrative review would have been futile. See id.; Drinkwater, 846 F.2d at 826. Plaintiff’s blanket statement about the inadequacy of the appeals procedure is insufficient to satisfy this requirement.
In sum, I find that Plaintiff’s state-law claims are preempted by ERISA and that he has failed to exhaust his administrative remedies.

Note:  Although the Court eschews the use of authoritative checklists, it does in fact quote opinions that do, more or less, provide a checklist for determining whether an ERISA plan exists.  For example:

Factors indicating no plan –
  • a benefits package that consists primarily of a non-discretionary, one-time, lump-sum benefit
  • voluntary termination program offering one-time lump-sum or incremental severance benefit was not ERISA plan
Factors indicating existence of a plan —
  • whether “the time period [was] prolonged, individualized decisions [were] required, and at least one of the criteria [was] far from mechanical.”
  • whether the payments are ongoing;
  • whether the employer’s obligation is triggered by the occurrence of a particular contingency;
  • whether the plan administrator has discretionary functions;
  • whether the plan contains a detailed claims procedure; and
  • whether the plan states that it is governed by ERISA.

Bottom line – A “one-shot, take-it-or-leave-it incentive” payment—the administration and application of is purely mechanical is not an ERISA plan.  As the arrangement increases in complexity and discretion, it will to that extent move on the spectrum toward ERISA plan status.

:: No Fault Carrier’s Claim Defeated By Health Plan’s ERISA Defense

When Timothy Van Camp (“Van Camp”) suffered injuries in a motor vehicle accident, he was insured by both Appellant Farm Bureau General Insurance Company of Michigan (“Farm Bureau”), a no-fault auto insurer, and an ERISA1 plan administered by Appellee Blue Cross Blue Shield of Michigan (“BCBSM”).

BCBSM contends that its Plan does not cover the medical services received by Van Camp because those services were not medically necessary. Although Farm Bureau had not yet paid for Van Camp’s medical bills, Farm Bureau brought an action under federal common law and, in the alternative, under ERISA § 502(a). Farm Bureau sought a declaration of coverage and reimbursement or recoupment from BCBSM for the cost of Van Camp’s medical care.

The district court dismissed Farm Bureau’s claims. Because Farm Bureau has no standing to bring a claim under federal common law or ERISA § 502(a), we affirm.

FARM BUREAU GENERAL INSURANCE COMPANY OF MICHIGAN, Plaintiff-Appellant, v. BLUE CROSS BLUE SHIELD OF MICHIGAN, Defendant-Appellee., No. 15-2323, 2016 WL 3924243, at *1 (6th Cir. July 21, 2016)

Farm Bureau first filed in state court.  Blue Cross removed the case to federal court on the grounds that the claims related to an ERISA plan.

No Fault Carrier Argues

Farm Bureau amended its complaint to seek:

(1) a declaratory judgment stating that BCBSM is first in priority to reimburse Van Camp’s medical claims,

(2) recoupment from BCBSM under federal common law for the payments that Farm Bureau made toward Van Camp’s medical claims, and

(3) as an alternative to its first two claims, equitable subrogation to the remedies available to Van Camp as a Plan participant or beneficiary under ERISA §§ 502(a)(1)(B) and 502(a)(3) (codified at 29 U.S.C. §§ 1132(a)(1)(B) and 1132(a)(3)).

Health Plan Responds

Blue Cross filed a motion to dismiss, asserting:

(1)  the dispute between the parties was an ERISA denial-of-benefits action under § 502(a)(1)(B), not a priority dispute governed by federal common law or an action for equitable subrogation under § 502(a)(3),

(2)  Farm Bureau lacked standing to bring an ERISA denial-of-benefits action because Farm Bureau had not paid Van Camp’s claims and, thus, was not a subrogee, and

(3)  even if Farm Bureau were a subrogee, Farm Bureau had failed to exhaust its administrative remedies prior to filing suit.

The Court Rules In Favor of Health Plan

Farm Bureau’s federal-common-law claim fails because it lacked standing to bring its claims. (See #2 above)

 The fact that Farm Bureau, a non-participant, non-beneficiary, and non-assignee, has no standing to assert a claim under ERISA § 502(a)(1)(B), is not evidence of an interstice. It is evidence of Congress’ intention to prohibit all but a narrow range of potential plaintiffs from bringing suit under § 502(a). What Farm Bureau sees as an interstice is, in reality, a deliberate limitation. The Court utilizes federal common law to fill inadvertent gaps, not to open avenues for relief that Congress intentionally closed. The Court declines to circumvent the clear wording of § 502(a).

Farm Bureau cannot bring a claim under federal common law to recoup the amount denied by the Plan when the ERISA provision that specifically provides for the recovery of denied benefits—§ 502(a)(1)(B)—would prohibit Farm Bureau’s claim.

Note:  The Court distinguished other cases relied on by Farm Bureau, stating that:

Here, by contrast, there is no coordination-of-benefits dispute. (Appellant Br. at vi.) And more fundamentally, there is no interstice in ERISA’s coverage. An ERISA provision—§ 502(a)(1)(B)—already addresses disputes over denial of benefits, see Weiner, 108 F.3d at 92, and Farm Bureau has no standing to bring a claim under that section because it is not a participant, beneficiary, or assignee, see 29 U.S.C. § 1132(a)(1)(B).

These cases were Prudential Property and Casualty Insurance v. Delfield Company Group Health Plan and Auto Owners Insurance Company v. Thorn Apple Valley, Inc.—who were permitted to bring federal-common-law claims purportedly because they failed to fall within any of the plaintiff categories elucidated in ERISA § 502(a).

In a nutshell:

We permitted the plaintiffs in Thorn Apple Valley and Delfield to bring claims under federal common law because their claims required the court to interpret conflicting coordination-of-benefit clauses. See Delfield, 187 F.3d 637 (Table), 1999 WL 617992, at *3; Thorn Apple Valley, 31 F.3d at 374. This Court relies on federal common law when addressing coordination-of-benefits disputes because neither ERISA nor any other federal statute “addresses the resolution of [a] conflict between [coordination-of-benefits] clauses.” Thorn Apple Valley, 31 F.3d at 374.

:: Exhaustion of Administrative Remedies – Exceptions Explained

Although “the text of ERISA nowhere mentions the exhaustion doctrine,” both “the legislative history and the text of ERISA” make clear that Congress “intend[ed] to grant . . . authority to the courts” to “apply that doctrine in suits arising under ERISA.” See Amato v. Bernard, 618 F.2d 559, 566-67, 569 (9th Cir. 1980) (affirming dismissal  of ERISA claim for benefits, where plaintiff had not exhausted administrative remedies available under plan; finding “sound policy requires the application of the exhaustion doctrine in suits under the Act”) . . .

Kaminskiy v. Kimberlite Corp., 2014 U.S. Dist. LEXIS 72061 (D. Cal. 2014)

Two recent cases provide an important reminder that the judicial gloss on ERISA’s claim procedure imposing exhaustion of remedies before filing suit must be carefully considered in any ERISA benefits case.  As noted in the excerpt above, the requirement will not be found in the statute so attentive regard to the pertinent case law.

Aside from compliance with the plan’s administrative review and appeal processes, the plaintiff must allege compliance with those procedures in any subsequent federal suit.

Form of Allegation

For example, in Kaminiskiy, the Court stated: “Here, plaintiff alleges she submitted a claim for benefits on August 29, 2013, and that her claim was thereafter denied. Such allegation is insufficient to allege exhaustion of the administrative remedies available under the ESOP.”

So what sort of allegation is required?  The allegation need not be complex (although providing factual details is undoubtedly the prudent course).   The essential formula according to the Kaminiskiy court reduces to an allegation that “following the denial of her claim for benefits, she submitted a written request for review and that any such request subsequently was denied.”

Exceptions to Requirement

The plaintiff argued that the exhaustion doctrine did not apply to her claims based upon Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir. Cal. 1984).  That case involved a distinction between claims that arise under the terms of a plan versus claims created by statute.

#1 Where a claim involves a determination of rights granted under the plan document, then internal appeal procedures apply and exhaustion of remedies is required.

#2 On the other hand, if the claim amounts to a challenge that the plan terms or application thereof violate the statute, then “[t]here is no internal appeal procedure either mandated or recommended by ERISA . . . ”

The court rejected the plaintiff’s argument, however, since it found that the plaintiff’s claims were encompassed in situation #1 above and thus exhaustion was required.  N.B., please see the circuit split below regarding which courts permit exception #2.

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:: Contractual Limitations Period Imposed – Equitable Tolling Argument Rejected

While it may be true that Plaintiff was never provided a copy of the Plan, despite his requests, it does not follow that Plaintiff had no way of discovering the shorter contractual limitation period. Primarily, Plaintiff could have, quite easily, requested information about the Plan from the assigning beneficiary. Plaintiff does not attempt to argue that L.N. had never received a copy of the Plan, and this Court does not believe it is inequitable to apply the Plan’s internal limitations period to someone who had the ability to learn of it. See Ortega Candelaria, 661 F.3d at 680 (citing I.V. Servs. of Am., 182 F.3d at 54).

Torpey v. Anthem Blue Cross Blue Shield, 2014 U.S. Dist. LEXIS 53342 (D.N.J. Apr. 16, 2014)

In this benefit claims case, the plaintiff was a physician who sought payment for services as an “out-of-network provider”.   Pursuant to an  “Authorization and Assignment” document he appealed the denial of claims to additional payments.


The Plaintiff  alleged that he submitted a claim to the Defendants on or about June 9, 2011 in the amount of $45,021.00 for medical services provided to the beneficiary.

On or about July 21, 2011, Defendant made an adverse benefit determination of Plaintiff’s claim by making a payment in the amount of $2,582.02, an amount that represented less than 6% of the submitted claim.

On or about September 27, 2011, Plaintiff submitted a First Level Appeal. Thereafter, Plaintiff received an appeal denial letter on or about October 19, 2011.  Continue reading

:: When Is Exhaustion of Administrative Remedies Required? – A Reappraisal Of The Division Of Authority

The Court agrees with the reasoning in Morales-Cotte and finds that an exhaustion of administrative remedies is not required when a plaintiff’s claim for denial of COBRA benefits is based on a statutory violation of ERISA. Here, neither party has referred to or proffered any argument regarding a plan-based denial of COBRA benefits. The Court therefore concludes that the parties at least implicitly acknowledge that the allegedly unlawful denial of COBRA benefits claim in this case is statutorily based. As a consequence, following the reasoning and analysis in Morales-Cotte, the Court holds that Plaintiff did not need to exhaust his administrative remedies before bringing a claim in this court for denial of COBRA benefits.

Sample v. City of Sheridan, 2012 U.S. Dist. LEXIS 52037 (D. Colo. Apr. 13, 2012)

ERISA Section 503 provides that every benefit plan shall establish an administrative review procedure for “any participant whose claim for benefits has been denied …” 29 U.S.C. § 1133.   From this template the federal judiciary crafted a number of administrative glosses for ERISA claims procedures including a requirement of exhaustion of administrative remedies.   The  courts have applied this requirement as a matter of “judicial discretion.” See, McGraw v. Prudential Ins. Co. of America, 137 F.3d 1253, 1263 (10th Cir. 1998).

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:: Do Benefit Plan Recoupment Claims Trigger Internal Appeal Rights?

Hopkins’ argument focuses on “what procedures an insurer must apply when seeking to recover an overpayment of benefits issued under ERISA health care plans.” Pl.’s Resp. at 3 (emphasis in original). She claims that defendants violated ERISA by seeking recoupment from MVH without providing her notice or an opportunity to appeal their decision to do so. She contends that MVH “balance billed” her “as a direct result of Defendants [sic] recoupment of benefits on her claim without complying with the processes mandated under ERISA. As such, Defendants deprived Hopkins the opportunity to challenge their recalculation of her benefits and the resulting increase in her liability to MVH.” Id. at 4-5. She asks the Court for an order that will “return the parties to the position they were in before Defendants recouped any funds – through restitution of all payments that had been improperly recouped or otherwise recovered.”

Pa. Chiropractic Ass’n v. Blue Cross Blue Shield Ass’n, 2012 U.S. Dist. LEXIS 7257 (D. Ill. 2012)

This case presents a question that I find quite interesting. The issue turns on the significance of a claim for refund or “recoupment” by a group health plan after services have been rendered and benefits paid. In the end, the court in this case decides that the refund request does not trigger any additional obligations under the ERISA claims regulations. It remains to be seen, as noted below, whether that conclusion will follow under the new claims regulations promulgated under the PPACA. (N.B. This opinion only relates to an individual claimant’s rights in the context of a refund to to alleged duplicate payments under the prior claims regulation relating to adverse benefit determinations.)

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:: Extension of Claims Regulations Enforcement Grace Period

Section 2719 of the Public Health Services  Act sets forth standards for plans and issuers that are not grandfathered health plans regarding internal claims and appeals and external review. These rules are aimed at bolstering ERISA’s “due process” requirements by amplifying the old claims regulation released back in 2000, namely, 29 CFR 2560.503-1.

The various departments engaged in publishing regulations under the new statute (DOL, IRS, HHS) published interim final regulations implementing PHS Act section 2719 on July 23, 2010, at 75 FR 43330 (the 2010 interim final regulations). The finished product bears the mark of a hurried assembly of rules with little comprehension of how claims adjudication actually works.

Thus, on September 20, 2010, the regulators retreated, with the Department of Labor issued Technical Release 2010-02 (T.R. 2010-02), which set forth an enforcement grace period for compliance with certain new provisions with respect to internal claims and appeals until July 1, 2011.

Based on comments, the regulators have retreated once again. Now, Technical Release 2011-01 extends, with a few modifications, the enforcement grace period set forth in T.R. 2010-02 until plan years beginning on or after January 1, 2012 “to give the Departments time to publish new regulations necessary or appropriate to implement the internal claims and appeals provisions of PHS Act section 2719(a).” Continue reading

:: NAIRO White Paper On External Review Questionable

The NAIRO released a white paper covering a number of points on the new external review requirements. A press release on the white paper appears here.

Under the DOL’s point of view, the decision of the external review organization is binding.  In other words, if Sue Smith requests external review of a benefit denial, the external review organization’s decision will be the final word, absent further judicial review to the extent available.

The drafters of the interim guidance show a woeful lack of perspective on the existing state of the law under Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989) and ancillary legal concerns over fiduciary status and deference in judicial review. Continue reading

:: Failure To Substantially Comply With Claims Procedures Proves Costly To Plan

“ERISA provides certain minimal procedural requirements upon an administrator’s denial of a benefits claim.” Wade v. Hewlett-Packard Dev. Co. LP Short Term Disability Plan, 493 F.3d 533, 539 (5th Cir. 2007). The plan administrator must “provide adequate notice in writing to any participant or beneficiary whose claim for benefits under the plan has been denied, setting forth the specific reasons for such denial, written in a manner calculated to be understood by the participant.”  29 U.S.C. § 1133(1).

Baptist Mem. Hosp. – Desoto v. Crain Auto., 2010 U.S. App. LEXIS 17518 (5th Cir. Miss. Aug. 19, 2010) (unpublished)

The plan fiduciary’s failure to follow the claims regulations had a surprisingly harsh effect on the outcome in this recent claim for benefits case.   Neither the standard of review nor the contractual limitations period served to deflect an award of benefits, attorneys’ fees and costs in favor of the claimant.

The Facts

Crain Automotive operates a series of automobile dealerships and related businesses in central Arkansas, and employs approximately 400 people. Crain Automotive sponsored a self-funded, ERISA-covered employee health plan for its employees.

CoreSource served as third party administrator and network discounts were secured for medical expenses through with NovaSys Health Network (“NovaSys”).  Under the network agreements, Baptist Health Services Group and its participant, Baptist Memorial Hospital—Desoto, Inc. (“BMHD”) agreed to discount charges for all inpatient and outpatient services by 15%.

After Dennis Brown, a plan beneficiary, had two cardiac stents implanted at BMHD during a November 6 to November 8, 2003 hospital confinement, BMHD rendered billed charges in the amount of $41,316.95. Before discharge, Brown assigned his benefits under the plan to BMHD.

BMHD submitted a claim to CoreSource on December 3, 2003, in the amount of $41,316.95, minus the 15% preferred-provider discount and CoreSource adjudicated the claim.  Crain did not fund the claim, however, and a dispute arose over the charges.

According to the opinion, Larry Crain (who had ultimate authority over payment) called BMHD’s billing office on April 12, 2004 and attempted to negotiate the bill.   When that approach failed, Crain called the next day to say that “he [was] not going to pay” until BMHD “answer[ed] all his questions.”

After some further exchanges between the parties failed to resolve the issue, BMHD ultimately filed suit on August 25, 2005, seeking recovery of plan benefits under 29 U.S.C. § 1132(A)(1)(B).  The district court t court found for BMHD in the amount of $39,751.08 plus prejudgment interest.  In addition, the district court awarded BMHD half of its requested fees and all of its requested costs, for a total award of fees and costs of $110,961.48.

On appeal, Crain argued that the district court erred in four respects (the fees and costs award analysis is omitted in the following discussion).

Failure To Exhaust Administrative Remedies

The district court found that because the plan never issued a formal denial letter to BMHD, the claim was “technically and practically . . . never denied.”   The Fifth Circuit agreed.

Noting that “ERISA does not require strict compliance with its procedural requirements,” the Court nonetheless found that the plan failed to meet the less demanding “substantial compliance” standard.  The Court further observed that the plan failed to timey provide written notice of the denial with specific reasons tied to the pertinent plan provisions.

One Year Contractual Limitations Period

The Plan appeared to have a good defense based on a one year contractual limitations period, a period which has been sustained in many similar cases.  In this case, however, the Court held that “the the Crain Plan’s one-year limitations period is unreasonable under the circumstances presented here.”

First, the one-year limitations period begins to run when a participant merely files a completed claim, potentially long before the claimant’s ERISA cause of action even accrues. The administrator’s initial denial of a claim could take as long as 90 days under the Crain Plan, depending on whether the administrator requests that the claimant submit additional information. The claimant then has an additional 180 days to administratively appeal the denial of a claim, and the administrator then has 60 days to issue a decision on the appeal. In total, the Crain Plan’s claim and internal appeal procedures could take as long as 330 days, leaving an unsatisfied claimant with only 35 days to file suit.

. . .

We know of no decisions, and Crain Automotive has pointed to none, approving such a short limitations period, particularly where the administrator utterly failed to adhere to its procedural obligations. Accordingly, we conclude that Crain Automotive’s failure to follow its obligation to properly deny the claim, coupled with its communications leading BMHD to believe that its claim was actively under consideration, caused the one-year limitations period to be unreasonably  [*18] short in this case.

Standard Of Review

The plan’s argument that the district court applied an incorrect standard of review met with equally unfavorable treatment based upon the procedures applied by the plan fiduciaries in reaching its decision.

We need not consider whether Crain Automotive applied a legally correct interpretation of the plan because, even under its interpretation, Crain Automotive abused its discretion in determining that the charges were not “customary and “reasonable.”

In sum, Crain Automotive and its responsible party, Larry Crain, had no evidence upon which to base its decision to deny BMHD’s claim. Rather, Larry Crain relied only on his own speculation and uninformed assessment of the reasonableness of the charges to conclude they were not customary and were unreasonable.

Note: The dissenting judge agreed with the majority that the plan’s failure to comply with the claims regulations precluded any need for the plaintiff to exhaust administrative remedies.

On the other hand, the dissenting judge found much to disagree with in the majority opinion:

I disagree, therefore, with the majority opinion’s attempt to divorce this exhaustion analysis from its assessment of the contractual limitations period. Instead, the majority opinion assesses the contractual limitations period under a “worst case scenario” approach to conclude that a fully exhausted claim could leave a party with only thirty-five days to file suit. But that did not happen in this case. Instead, BMHD’s claim was  fully accrued and exhausted upon the operation of § 2560.503-1(l). Thus, in ascertaining whether the period of limitations was “reasonable,” I would consider only how the limitations period applied under the facts of this case and not under a worst-case hypothetical.

On the reasonableness of the contractual limitations period, on the worst case analysis of when the claim accrued:

Additionally, I do not necessarily accept that thirty-five days  to file suit following a thorough and complete eleven month review process would leave a party with an unreasonably short period to bring an action. Previous courts have found short periods of limitations reasonable in light of the preparation for suit afforded by the administrative processing period. See, e.g., Northlake Reg’l Med. Ctr. v. Waffle House Sys. Employee Benefit Plan, 160 F.3d 1301, 1304 (11th Cir. 1998) (finding that a ten month appeals process combined with a ninety day limitations period provided an adequate opportunity to investigate a claim and file suit).

The dissenting judge actually felt that BMHD had much longer than 35 days to file:

At the latest, BMHD was on notice that Mr. Crain was not going to adhere to the parameters of the Crain Plan on April 12, 2004. At that point, BMHD had been informed by CoreSource, the claims processor, that Mr. Crain was refusing to release payment. Moreover, on that date, Mr. Crain contacted BMHD to try to settle the outstanding debt outside of the Crain Plan’s claims review process. Thus, BMHD appears to have had approximately 214 days to file suit from the time its cause of action accrued under § 2560.503-1(l).

On the accrual on the cause of action, the dissent made a very good point about jurisdiction.

I cannot accept the majority opinion’s reasoning that “BMHD’s ERISA cause of action had not yet accrued as of October 13, 2004.” By that logic, BMHD’s claim never accrued because it has not been formally denied even now. Not only does the majority opinion’s position conflict with the aforementioned exhaustion analysis, but, taken to its logical conclusion, the majority opinion’s position suggests this matter is not yet ripe for adjudication. Thus, if that position was correct, the court would be required to dismiss this case for lack of jurisdiction.

I disagree, therefore, with the majority opinion’s attempt to divorce this exhaustion analysis from its assessment of the contractual limitations period. Instead, the majority opinion assesses the contractual limitations period under a “worst case scenario” approach to conclude that a fully exhausted claim could leave a party with only thirty-five days to file suit. But that did not happen in this case. Instead, BMHD’s claim was  [*31] fully accrued and exhausted upon the operation of § 2560.503-1(l). Thus, in ascertaining whether the period of limitations was “reasonable,” I would consider only how the limitations period applied under the facts of this case and not under a worst-case hypothetical. 1 See Dye v. Assocs. First Capital Corp. Long-Term Disability Plan 504, 243 F. App’x 808, 810 (5th Cir. 2007) (unpublished) (holding that the actual application of procedural safeguards made a 120-day period reasonable “in this specific case” (emphasis added)) 2; see also Davidson v. Wal-Mart Assocs. Health & Welfare Plan, 305 F. Supp. 2d 1059, 1074 (S.D. Iowa 2004) (cited favorably by Dye after finding 45-day period reasonable as applied to the facts of that case); Sheckley v. Lincoln Nat’l Corp. Employees’ Ret. Plan, 366 F. Supp. 2d 140, 147 (D. Me. 2005) (cited favorably by Dye after finding that, under the pled facts, “there [was] no causal connection between the Plan’s failure to follow the claims procedures laid out in [the plan document] and Plaintiff’s failure to file this action . . . [until] after the Plan’s six-month limitation period had run”).
1 Additionally, I do not necessarily accept that thirty-five days  [*32] to file suit following a thorough and complete eleven month review process would leave a party with an unreasonably short period to bring an action. Previous courts have found short periods of limitations reasonable in light of the preparation for suit afforded by the administrative processing period. See, e.g., Northlake Reg’l Med. Ctr. v. Waffle House Sys. Employee Benefit Plan, 160 F.3d 1301, 1304 (11th Cir. 1998) (finding that a ten month appeals process combined with a ninety day limitations period provided an adequate opportunity to investigate a claim and file suit).
2 Although an unpublished decision is not precedent, it is cited for its persuasive reasoning. Moreover, Dye appears to constitute our court’s only direct attempt thus far to assess the reasonableness of an ERISA contractual limitations period.
In keeping with the exhaustion analysis, the first step in assessing the reasonableness of the contractual limitations period is pinpointing the exact date at which § 2560.503-1(l) cleared the way for BMHD to bring suit. 3 At the latest, BMHD was on notice that Mr. Crain was not going to adhere to the parameters of the Crain Plan on April 12, 2004. At that point, BMHD had been  [*33] informed by CoreSource, the claims processor, that Mr. Crain was refusing to release payment. Moreover, on that date, Mr. Crain contacted BMHD to try to settle the outstanding debt outside of the Crain Plan’s claims review process. Thus, BMHD appears to have had approximately 214 days to file suit from the time its cause of action accrued under § 2560.503-1(l).
3 I cannot accept the majority opinion’s reasoning that “BMHD’s ERISA cause of action had not yet accrued as of October 13, 2004.” By that logic, BMHD’s claim never accrued because it has not been formally denied even now. Not only does the majority opinion’s position conflict with the aforementioned exhaustion analysis, but, taken to its logical conclusion, the majority opinion’s position suggests this matter is not yet ripe for adjudication. Thus, if that position was correct, the court would be required to dismiss this case for lack of jurisdiction. Cf. Paris v. Profit Sharing Plan for Employees of Howard B. Wolf, Inc., 637 F.2d 357 (5th Cir. 1981) (“[C]laims filed before a pension actually has been denied might be challenged for lack of ripeness.”); Schwob v. Std. Ins. Co., 37 F. App’x 465, 469-70 (10th Cir. 2002) (unpublished)  [*34] (dismissing as unripe after plan administrators reopened administrative review to reconsider denial of benefits).

Benefit Accrual Cases – The Fourth Circuit held that a limitations period that begins to run before the ERISA cause of action accrues is unreasonable per se. White v. Sun Life Assur. Co., 488 F.3d 240, 247 (4th Cir. 2007) (holding that a plan limitations period that “start[s] the clock ticking on civil claims while the plan is still considering internal appeals” is categorically unreasonable).

The court did not go so far as to adopt that standard and collected the following cases on the issue:

Other circuits have disagreed with the Fourth Circuit’s approach, opting instead to consider reasonableness on a case-by-case basis—even when the limitations period begins to run before a cause of action accrues. See Salisbury v. Hartford Life & Accident Co., 583 F.3d 1245, 1249 (10th Cir. 2009); Burke v. PriceWaterHouseCoopers LLP Long Term Disability Plans, 572 F.3d 76, 81 (2d Cir. 2009); Abena v. Metro. Life Ins. Co., 544 F.3d 880 (7th Cir.2008); Clark v. NBD Bank, N.A., 3 F. App’x 500 (6th Cir. 2001); Blaske v. UNUM Life Ins. Co. of Am., 131 F.3d 763 (8th Cir. 1997).

The Second Circuit in Burke concluded that we also declined to follow the Fourth Circuit’s rule with our decision in Harris Methodist. Although Harris Methodist involved a three-year limitations period that began  to run with the filing a completed claim, and thus before the claimant’s ERISA cause of action accrued, we had no occasion to address this question because the parties did not dispute the reasonableness of the limitations period. See Harris Methodist, 426 F.3d at 337-38. This case similarly presents no occasion to decide the question because the limitations period is unreasonable in the circumstances of this case, even assuming arguendo that we would decline to follow the Fourth Circuit’s holding in White.

For claims administrators and fiduciaries, this case demonstrates the importance of careful attention to the claims regulations and supporting claims decision rationale on technical issues with expert opinion.

:: Plan Administrators Cannot Invoke “SPD Prevails” Rule To Cure Plan Language Deficiencies

Here, there are no terms in the plan which allow it to be amended by inserting into the SPD such critical provisions as the administrator’s discretionary authority to interpret the plan or to determine eligibility for benefits. Indeed, this particular plan wholly fails to comply with § 1102(b)(3)’s requirement to include a procedure governing amendment of the plan.

Thus, there is no basis for concluding that the purported grant of discretion in the SPD is a procedurally proper amendment of the policy, and therefore “the policy’s failure to grant discretion results in the default de novo standard.” Jobe, 598 F.3d at 486. “Consequently, the district court should not have reviewed the administrator’s decision for abuse of discretion but, rather, should have reviewed it de novo.” Id.

Ringwald v. Prudential Ins. Co. of Am. (8th Cir.) (06/21/10)

It is not unusual to see plan documents and summary plan descriptions merged into one document these days, or for summary plan descriptions to take on the role as the source of authority and documentation of administrative practices.   This recent Eighth Circuit opinion should give plan fiduciaries pause as they delegate such paperwork to their claims administrators and benefit communications consultants.

Here, the question was whether the plan granted discretionary authority to the plan administrator so as to invoke the benefit of an abuse of discretion standard of review.  The answer – the summary plan description did, but the plan document did not.  And therefore, a de novo standard of review applied.

Some of you may be saying, but I thought the summary plan description controlled in the case of a conflict between the plan and the SPD?   The Eighth Circuit observes that this rule of “SPD prevails” only applies where necessary to protect the plan participants.

the policy underlying the “SPD prevails” rule was ERISA’s important goal of providing complete disclosure to plan participants, such that where disclosures made in an SPD pursuant to 29 U.S.C. § 1022(a)(1) . . .  ERISA’s policy of full disclosure – inuring to the benefit of employees, not employers – would not be advanced by a blanket rule indicating an SPD “prevails over the policy in all circumstances.”

Thus, the door opens for the plan participant to introduce the plan document as a means of impeaching the SPD.   ERISA forbids a plan administrator from using the SPD “to enlarge the rights of the plan administrator at the expense of plan participants when the plan itself does not confer those rights.”

Note: This case does not address the combination of the plan and the SPD into one document.   It does illustrate, however, the risks incurred when plan administrators deviate from ERISA’s documentary scheme.

ERISA contemplates plan documents which control many important legal matters, such as allocation of fiduciary responsibilities, specification of amendment procedures, eligibility, participation and claims adjudication rules.  ERISA further contemplates an SPD or SMM that put these matters in the vernacular for the plan participants.

In view of Ringwald, if important language fails to appear in the plan document, such as a grant of discretion, the SPD cannot cure this deficiency. Plan fiduciaries should review and compare the plan language on this issue as well as other important issues, such as ERISA subrogation and reimbursement rights, to ensure consistency in plan documentation.

:: Tenth Circuit Notes Circuit Split On Contractual Limitations Periods

ERISA does not contain a limitations provision for private enforcement actions under 29 U.S.C. § 1132.  Thus, we generally “apply the most closely analogous statute of limitations under state law.”  “Choosing which state statute to borrow is unnecessary, however, where the parties have contractually agreed upon a limitations period.”

Salisbury v. Hartford Life & Accident Ins. Co. (1oth Cir.) (9/30/2009) (internal citations omitted)

The Tenth Circuit has rendered a decision resoundingly affirming the validity of an ERISA plan’s contractual limitations period in an opinion that highlights a circuit split on the issue.

In Salisbury, a disability case, the provision in issue read as follows:

“Legal action cannot be taken against us: 1. sooner than 60 days after due Proof of Loss has been furnished; or 2. three years after the time written Proof of Loss is required to be furnished according to the terms of the Policy.” Aplt. App. at 152. In turn, the section regarding Proof of Loss provides: “Written Proof of Loss must be sent to us within 90 days after the start of the period for which we owe payment.”

Citing Northlake Regional Med. Ctr. v. Waffle House Sys. Employee Benefit Plan, 160 F.3d 1301, 1303 (11th Cir. 1998), the Court stated that:

“An ERISA plan is nothing more than a contract, in which parties as a general rule are free to include whatever limitations they desire.”

The Tenth Circuit sustained the limitations period as against a challenge that it permitted the limitations period to commence before the claimant could bring suit.

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:: Data Mining & The HIPAA Privacy Rule – Can This Marriage Be Saved?

What is data mining?  Data mining has been described as process of extracting data from large databases of information in a manner that is meaningful to the extractor.

What kind of information?  Many different kinds.

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:: Proposed Cancer Treatment Deemed “Experimental”

There is a temptation here to argue that, because all other forms of treatment have not been successful with Mrs. Reimann, it must be “medically necessary” to keep trying even unproven therapies such as a multivisceral transplant. The argument takes on extra force when doctors as eminent as Dr. Lillemoe, Dr. Vianna, and Dr. Tzakis recommend this treatment. The argument has considerable emotional force, especially where the patient suffers from a progressive disease that will cause death if not treated successfully, and no other form of therapy offers hope.

The legal response to this appealing argument is that Anthem simply did not agree to cover the costs of any form of therapy that such a patient’s doctors – even extraordinarily talented doctors – might deem worth trying when they have run out of proven alternatives. . . . The standard of medical necessity applied here is not novel or selfish. It is an established mechanism for keeping medical costs under at least minimal control for all who pay for health insurance. It has been considered and applied in this case carefully and fairly. The court cannot find an abuse of discretion in Anthem’s denial of coverage for this unproven proposed treatment.

Reimann v. Anthem Ins. Cos.
, 2008 U.S. Dist. LEXIS 88562 (S.D. Ind. Oct. 31, 2008)

This lengthy opinion provides analysis of a benefit denial under a medical necessity exclusion, with particular emphasis on the “experimental” or “investigational” aspect of the proposed treatment.

The court decided the case under an abuse of discretion standard of review.

The key substantive question before the court is whether Anthem’s denial of coverage for the proposed multivisceral transplant to treat metastasized cancer was an abuse of discretion. See Metropolitan Life Ins. Co. v. Glenn, 554 U.S. , , 128 S. Ct. 2343, 2348 (2008). The Supreme Court has cautioned against formulas that will take the place of actual judging or that serve as “instruments of futile casuistry.” Glenn, 128 S. Ct. at 2352.

Noting that “identifying relevant factors can provide a useful way to organize thoughts”, the district court cited the following factors relied upon by the Seventh Circuit:

  • the impartiality of the decision maker,
  • the complexity of the issue, the process afforded to the parties,
  • the extent to which the decision maker used help from outside experts where necessary, and
  • the soundness of the fiduciary’s reasoning.

(citing, Chalmers v. Quaker Oats Co., 61 F.3d 1340, 1344 (7th Cir. 1995); Hughes v. Life Ins. Co. of North America, 112 F. Supp. 2d 780, 793 (S.D. Ind. 2000))

The court concluded that the administrator did not abuse its discretion, though several procedural irregulaties were noted.

Mrs. Reimann raises a host of procedural challenges to Anthem’s handling of her claim, arguing that individually and in sum the alleged violations show that Anthem abused its discretion in denying her claim. All of these challenges are subject to the substantial compliance standard. As explained below, the court rejects most of the challenges. And although there were some procedural errors, those errors either did not cause any substantive harm or have already been remedied by Anthem. None of the errors call for the remedy that Mrs. Reimann seeks.

Note: The court ruled against the plaintiff and permitted supplementation of the record as to the reviewing physician’s credentials.  The rationale may have more general applicability on the important question of when the record may be supplemented.  The court stated:

The court overrules plaintiff’s objection to the supplemental record with the more complete qualifications. In Semien, the Seventh Circuit recognized that even under the abuse of discretion standard, some discovery may be allowed into certain limited subjects when the plaintiff makes at least a preliminary showing that there is reason to question the fairness or impartiality of the decision. 436 F.3d at 813-14 (although discovery is normally disfavored in ERISA cases, limited discovery outside of the administrative record is appropriate to ensure that plan administrators have not acted arbitrarily and that conflicts of interest have not contributed to an unjustifiable denial of benefits). Mrs. Reimann has done so in her challenge to the credentials of the outside reviewers based on the more limited information that was initially available. When the challenge is raised, it seems only fair to allow a response, particularly in the wake of Metropolitan Life Ins. Co. v. Glenn, 554 U.S.    , 128 S. Ct. 2343 (2008). When there is a challenge to the objectivity and honesty of the plan administrator’s decision, Glenn recognized, the plaintiff must have the opportunity to supplement the record (and, presumably, to conduct at least some targeted discovery). For example, a reviewing court may consider evidence about the insurance company’s record of biased or unfair claims administration, or evidence about the insurance company’s efforts to ensure that decision makers will be objective and independent. 128 S. Ct. at 2531; accord, Hogan-Cross v. Metropolitan Life Ins. Co., 568 F. Supp. 2d 410 (S.D.N.Y. 2008) (allowing  discovery related to financial conflict of interest).

Evidence of both types will ordinarily not be included in the individual claim file that provides the usual administrative record in an ERISA case. This reasoning based on Glenn extends to Mrs. Reimann’s challenge to the qualifications and expertise of the outside reviewers. If the supplement were not allowed, the appropriate remedy for review by someone not shown to have the requisite expertise would probably be a remand for another review by someone more expert. That approach here would be pointless, especially in light of the excellent credentials of all four outside reviewers. In response to Mrs. Reimann’s challenge, it seems more reasonable to allow each side to supplement that limited administrative record, as each side has done in this case. Plaintiff’s objection to the record supplements with the reviewers’ credentials (Dkt. No. 74) is therefore overruled.

Substantial Compliance – What is the penalty if an administrator fails to substantially comply with procedural requirements?  The court appeared baffled:

By making this exaggerated claim about “special interest,” Dr. Lane and Anthem did not substantially comply with ERISA or its regulations.

What remedy is appropriate for such a violation? In ERISA cases, the court must base its remedy determination “‘on what is required in each case to fully remedy the defective procedures given the status quo prior to the denial or termination’ of benefits.” Pakovich v. Broadspire Services, Inc., 535 F.3d 601, 607 n.3 (7th Cir. 2008), quoting Schneider v. Sentry Group Long Term Disability Plan, 422 F.3d 621, 629-30 (7th Cir. 2005); Hackett v. Xerox Corp. Long Term Disability Income Plan, 315 F.3d 771, 776 (7th Cir. 2003).

Here, the first reviewer was qualified to render an opinion, but the exaggeration of his credentials might have led Mrs. Reimann to be less likely to question or appeal Anthem’s denial. The exaggeration did not produce that effect, which affects the appropriate remedy. A return to the status quo, in this situation, would not require remand to Anthem for a new evaluation; the first reviewer was  in fact well-qualified to evaluate Mrs. Reimann’s claim. For a different claimant who could show prejudice as a result of Anthem’s overstatement, a return to the status quo might require remand or referral for a new independent, binding outside review. Mrs. Reimann did not rely on Anthem’s statement, and she was not deterred in pursuing her appeal rights. Anthem’s and Dr. Lane’s exaggeration may warrant further scrutiny in other cases, see, e.g., Glenn, 128 S. Ct. at 2351 (noting that evidence of plan administrator’s violations in other cases may be relevant in evaluating whether denial of benefits was abuse of discretion), but the court sees no further suitable remedy in this case.

Consistent Explanation – The court observed that the case was distinguishable from one in which the basis for denial changed:

Mrs. Reimann is correct that in some cases a change in the basis for a denial of benefits from “not medically necessary” to “experimental” can demonstrate an abuse of discretion. Pl. Br. 27, citing Velez v. Prudential Health Care Plan, 943 F. Supp. 332, 343 (S.D.N.Y 1996). In Velez, the first denial letter the plaintiff received stated that the treatment she requested was “medically unnecessary,” without any explanation or specific grounds on which that determination was based. Id. at 336. The second denial letter stated that the  treatment was “experimental” but did not explain how the policy definition had been applied. The third denial letter stated that the treatment requested was both medically unnecessary and experimental, again, without further explanation. Id. at 337. U

Unlike the plan here, the plan in Velez did not define “medically unnecessary” to include “experimental” treatments, and the insurer offered no explanation for its decision that Velez’s treatment was excluded. Here, as previously explained, Anthem’s reliance on the “not medically necessary” exclusion and its later reliance on the more specific “experimental” exclusion was not evidence of abuse of discretion. In each denial letter, Anthem explained its reasoning in ways that have been sufficiently clear and consistent throughout the process.

:: Internal Appeals Processes Require Strict Compliance By Claimants

In support of its Motion for Summary Judgment, Unum argues that Smith cannot maintain a cause of action under ERISA because she failed to exhaust her administrative remedies. On this issue, the United States Court of Appeals for the Fifth Circuit has held: “This court requires that claimants seeking benefits from an ERISA plan must first exhaust available administrative remedies under the plan before bringing suit to recover benefits.” Bourgeois v. Pension Plan for Employees of Santa Fe Int’l Corps., 215 F.3d 475, 479 (5th Cir. 2000)(citing Denton v. First Nat’l Bank of Waco, 765 F.2d 1295, 1300 (5th Cir. 1985)).

Smith v. UNUM Life Ins. Co. of Am., 2008 U.S. Dist. LEXIS 80638 (S.D. Miss. Oct. 10, 2008)

Two important judicial doctrines converge in this case, both to the detriment of the plaintiff.  First, the court finds that the plan administrator “substantially complied” with the claims regulations; second, the court applied the failure to exhaust administrative remedies defense, rebuffing the plaintiff’s justification based upon futility.  The caselaw continues to demonstrate that claimants must carefully attend to all requirements of internal appeals processes and resolve any close cases with further application to the appeals avenues offered under the plan.

Smith involved a denied disability claim that apparently followed a denied workers’ compensation claim.   The disability claim became ensnarled in a dispute over who had to provide clarification – the disability carrier as to the reason for the denial or the claimant as to the circumstances of her accident.

The Factual Dispute

Though the compensatory regimes divide categorically into occupational and non-occupational fields, human experience is not as easily deconstructed.  Here, it appears that the claimant’s physician may have shown some equivocation in the cause of the accident at least one stage of the proceedings.  He attributed the accident to “uncertain etiology”.

Matters eventually reached the point of impasse:

On March 15, 2005, Unum sent Smith a letter informing her: “As you may recall, we previously requested additional information that was necessary to evaluate your claim for disability benefits. Since we did not receive the requested information within the specified time period, regrettably, we must close your file…” Id., Ex. C, at 141-43. The letter again cites to the policy provision that requires a claimant to provide information regarding the time of disability, place of disability,  circumstances of disability, nature of disability, and name and address of employee.

The Claims Regulations

After the claimant sued in state court, the case was removed and the issues consolidated in a motion for summary judgment.  The claimant contended that the carrier failed to comply with the claims regulations.

The Fifth Circuit has recognized that “ERISA provides certain minimal procedural requirements upon an administrator’s denial of a benefits claim”, which are “set forth in 29 U.S.C. § 1133 and the regulations promulgated by the Department of Labor thereunder.” Wade v. Hewlett-Packard Dev. Co. LP Short Term Disability Plan, 493 F.3d 533, 539 (5th Cir. 2007).

The district court ruled that the carrier had substantially complied with the regulations,noting the Fifth Circuit’s view on the issue:

Challenges to ERISA procedures are evaluated under the substantial compliance standard. Lacy v. Fulbright & Jaworski, 405 F.3d 254, 256-57 & n.5 (5th Cir. 2005). This means that the “technical noncompliance with ERISA procedures will be excused so long as the purpose of section 1133 has been fulfilled.” Robinson v. Aetna Life Ins., 443 F.3d 389, 393 (5th Cir. 2006). The purpose of section 1133 is “to afford the beneficiary an explanation of the denial of benefits that is adequate to ensure meaningful review of that denial.” Schneider v. Sentry Long Term Disability, 422 F.3d 621, 627-28 (7th Cir. 2005).

The “substantial compliance” test also “considers all communications between an administrator and plan participant to determine whether the information provided was sufficient under the circumstances.” Moore v. LaFayette Life Ins. Co., 458 F.3d 416, 436 (6th Cir. 2006). “All communications” may include oral communications. White v. Aetna Life Ins. Co., 341 U.S. App. D.C. 155, 210 F.3d 412, 417 (D.C. Cir. 2000)(citing Heller v. Fortis Benefits Ins. Co., 330 U.S. App. D.C. 39, 142 F.3d 487, 493 (D.C. Cir. 1998)). Wade, 493 F.3d at 539.

Thus, “Section 1133 and its corresponding regulations require that the Plan: (1) provide adequate notice; (2) in writing; (3) setting forth the specific reasons for such denial; (4) written in a manner calculated to be understood by the participant; and (5) afford a reasonable opportunity for a full and fair review by the administrator.” Id. at 540.

“Taken as a whole”, the court held that UNUM had sufficiently advised that she was required to provide information regarding her claimed disability – including the time, place, circumstances, and nature of the disability – to have her claim evaluated.

The Futility Doctrine

The claimant’s invocation of the futility doctrine fared no better than her challenge based upon the regulations.  The court stated the Fifth Circuit rule as follows:

Smith also argues that she was excused from exhausting her administrative remedies because an appeal of the decision regarding her claim for short term disability benefits would have been futile.

The Fifth Circuit has “recognized an exception to the affirmative defense of failure to exhaust administrative remedies when such attempts would be futile.” Bourgeois, 215 F.3d at 479 (citing Hall v. National Gypsum Co., 105 F.3d 225, 232 (5th Cir. 1997)). See also Ogden, 367 F.3d at 336 n.61.

The Fifth Circuit, however, has also recognized that the “failure to show hostility or bias on the part of the administrative review committee is fatal to a claim of futility.” McGowin v. ManPower Int’l, Inc., 363 F.3d 556, 559 (5th Cir 2004). See also Denton, 765 F.2d at 1302 (finding that the futility exception to the exhaustion requirement did not apply in a case in which there was no showing that the administrative review committee was hostile or bitter toward the plaintiff).

The court was dissatisfied with the plaintiff’s showing on this point.

Smith has not presented any evidence to show bias, hostility, or bitterness. Instead, she argues that appealing the administrative decision would have been futile because Unum had already ignored the medical findings of her treating physicians and denied her claim, thereby evidencing a predisposition to rejecting her claim. The Court first finds this argument is not supported by the record.

Finding that the plaintiff failed to exhaust her administrative remedies through appeal, and likewise failed to offer a justification under the futility doctrine, the court granted the carrier’s motion for summary judgment.

Note:  Since the failure to exhaust administrative remedies enjoys great favor with the courts, claimants have little choice but to persevere through the appeals process.   Repeated requests for clarification cannot be ignored.

Furthermore, another recent case, Wiggins v. Life Ins. Co. of N. Am., 2008 U.S. Dist. LEXIS 80500 (E.D. Wash. Oct. 10, 2008), shows that the denial of an appeal may be insufficient grounds to file suit without further recourse to internal appeals processes.  In that case, the attorney appealed a denial and the appeal was denied in a letter that offered a further appeal.  The attorney then wrote the plan administrator, stating:

Please be advised Ms. Wiggins does not wish to seek another written request for review with the Life Insurance Company of North America. In addition, there is no new documentation, other than what has previously been forwarded to the insurance company.

The district court found this insufficient exhaustion of administrative remedies, stating:

It is well established that a person seeking benefits under an ERISA plan “must avail himself or herself of a plan’s own internal review procedures before bringing suit in federal court.” Diaz v. United Agric. Employee Welfare Benefit Plan & Trust, 50 F.3d 1478, 1483 (9th Cir.1995) (citing Amato v. Bernard, 618 F.2d 559, 566-68 (9th Cir.1980)). Ms. Wiggins concedes she did not do so. Despite making this concession, she urges the Court not to dismiss her complaint. She argues that requesting further review would have been futile because LINA had repeatedly denied her appeals for benefits, both short- and long-term, and she had no new medical information with respect to her condition.

Futility is one of the exceptions to the exhaustion requirement. 50 F.3d at 1485. However, the fact a plan administrator has repeatedly denied an applicant’s appeals does not, by itself, excuse the applicant from exhausting her administrative remedies. Id. In order to establish futility, the applicant must demonstrate the administrator has prejudged the evidence and the outcome of the appeal is predetermined. See id. at 1486. Ms. Wiggins bears the burden [*5] of production on this issue. See id. at 1485-86. The defendants are entitled to summary judgment unless she identifies evidence from which a rational fact-finder could resolve this issue in her favor. She has failed to carry her burden. As the record now stands, a rational fact-finder could not find that LINA representatives had prejudged the evidence and, thus, the opportunity for internal review that Ms. Bedikian described in her letter of May 9th was illusory because the appeal was certain to be denied.

The Claims Regulations – Section 1133, at issue in Smith on the substantial compliance issue,  provides:

In accordance with regulations of the Secretary, every employee benefit plan shall –

(1) provide adequate notice in writing to any participant or beneficiary whose claim for benefits under the plan has been denied, setting forth the specific reasons for such denial, written in a manner calculated to be understood by the participant, and

(2) afford a reasonable opportunity to any participant whose claim for benefits has been denied for a full and fair review by the appropriate named fiduciary of the decision denying the claim.

29 U.S.C. § 1133. The applicable federal regulations in force at the time Smith’s claim [*16] was denied provide:

The notification shall set forth, in a manner calculated to be understood by the claimant –

(i) The specific reason or reasons for the adverse determination;

(ii) Reference to the specific plan provisions on which the determination is based;

(iii) A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary;

(iv) A description of the plan’s review procedures and the time limits applicable to such procedure …

29 C.F.R. 2560.503-1(g)(1)(i)-(iv)(2000).

See also:: District Court Rejects “Substantial Compliance” Argument As Justification For Failure To Exhaust Administrative Remedies

:: Eleventh Circuit Rejects Application Of “De Facto” Administrator Doctrine To Claims Administrator

We have also recognized the de facto administrator doctrine in several cases in addition to Hamilton. . . . Each of the foregoing cases, however, is distinguishable from the instant case in a significant respect: Hamilton, Garren, and Rosen applied the de facto administrator doctrine to employers, not to third-party administrative services providers. Oliver v. Coca Cola Company, Broadspire Services, Inc., — F.3d —-, 2007 WL 2429394 (C.A.11) (August 29, 2007)

In this ERISA claim for benefits case, the Eleventh Circuit augments its prior views on the scope of the de facto administrator doctrine. In effect, the opinion attempts to clarify when a party, not designated as a plan administrator, may nonetheless properly be named as a defendant as such based upon functional aspects of actual plan administration.

The decision ultimately reaffirms the applicability of the doctrine in the Eleventh Circuit, but circumscribes the ambit of the doctrine to exclude administrative service providers on the facts presented. In so holding, the Court reversed the district court’s judgment against Broadspire, the administrative service provider.

Prior Eleventh Circuit Cases

Though the plan document designated the employer as the plan administrator, the plaintiff drew upon prior Eleventh Circuit caselaw to argue that Broadspire was properly named as a defendant. In Hamilton v. Allen-Bradley Co, 244 F.3d 819, 824 (11th Cir.2001), the Court had held that the plan document is not dispositive with respect to the identity of the plan administrator, and that it is necessary to examine “the factual circumstances surrounding the administration of the plan, even if these factual circumstances contradict the designation in the plan document.”

In Hamilton, a plan participant sued her employer, Allen, arguing that she had been wrongly denied disability benefits under the applicable ERISA plan. 244 F.3d at 822-23. Under that plan, Allen was not designated as the plan administrator; rather, an insurance company, UNAM, was the named plan administrator. Id. The district court granted summary judgment in favor of the employer, Allen, on the ground that it was not the plan administrator, and on appeal, we reversed. We held that “[t]he key question” was “whether Allen had sufficient decisional control over the claim process that would qualify it as a plan administrator….” Id. at 824.

Additional Cases Recognizing The Doctrine

The Eleventh Circuit reviewed its prior holdings on the issue, as follows:

We have also recognized the de facto administrator doctrine in several cases in addition to Hamilton.

  • In Rosen v. TRW, Inc., we reversed the dismissal, for failure to state a claim, of a complaint against an employer not named in the plan document as an administrator, and permitted the plaintiff to pursue “the claim that the company was the de facto plan administrator and the committee was an inactive entity.” 979 F.2d 191, 193-94 (11th Cir.1992). We held that “if a company is administrating the plan, then it can be held liable for ERISA violations, regardless of the provisions of the plan document.” Id.
  • Similarly, in Garren v. John Hancock Mutual Life Insurance Co., we stated that “[t]he proper party defendant in an action concerning ERISA benefits is the party that controls administration of the plan.” 114 F.3d 186, 187 (11th Cir.1997) (per curiam).

A Significant Distinction

The Court noted that the prior cases applied the doctrine to employers. In the case at bar, Oliver sought to have the doctrine applied to the claims administrator. This was a distinction with a difference in the view of the Court:

Each of the foregoing cases, however, is distinguishable from the instant case in a significant respect: Hamilton, Garren, and Rosen applied the de facto administrator doctrine to employers, not to third-party administrative services providers. At issue in those cases were plans with frameworks similar to that in this case: an employer established an ERISA plan and then outsourced responsibility for administering claims to a separate entity.

In Hamilton and Rosen, plan participants brought suit against employers that had sought to avoid liability as plan administrators, not, as here, against the third-party claims administrator. . . . In Garren, the plaintiff brought suit against the third-party claims administrator, and the court held that the true plan administrator was the employer.

In fact, the Eleventh Circuit rejected the doctrine in a previous case where the plaintiff sought to have the doctrine applied to a third party administrator. See Baker v. Big Star Div. of the Grand Union Co., 893 F.2d 288 (11th Cir.1989). And so it was to be with Broadspire.

The Court opined:

Were we to find Broadspire a de facto plan administrator on these facts, we would undercut the ability of employers to contract out the administrative tasks associated with operating an ERISA plan, a practice we upheld in Baker. See id. at 290. Indeed, it is hard to imagine how an administrative services provider could fulfill its functions without engaging in the types of activity that, in Hamilton, triggered the application of the de facto administrator doctrine. See Hamilton, 244 F.3d at 824 (finding that employer was de facto administrator because, inter alia, it distributed disability benefit application forms and “field[ed] questions about the plan from employees”). . . . Because Broadspire is merely an administrative services provider, and because, under the Plan, Coca-Cola, through the Committee – not Broadspire – makes the final decision on benefits claims, we are bound by Baker to hold that Coca-Cola is the plan administrator. See Baker, 893 F.2d at 289-90. Accordingly, the appropriate standard of review was arbitrary and capricious, see Hunt, 119 F.3d at 912, and the district court erred in applying de novo review. Moreover, under Baker, Broadspire is not a proper defendant in this action. 893 F.2d at 290.

Note: The Eleventh Circuit noted a similar conclusion had been reached by the First Circuit:

The First Circuit, which also recognizes the de facto administrator doctrine in some contexts, see Law v. Earnst & Young, 956 F.2d 364, 372-73 (1st Cir.1992), has also declined to apply the de facto administrator doctrine to a third party administrative services provider in circumstances similar to those here. See Terry v. Bayer Corp., 145 F.3d 28, 35 (1st Cir.1998) (“[W]hen the plan administrator retains discretion to decide disputes, a third party service provider, such as Northwestern, is not a fiduciary of the plan, and thus not amenable to a suit under [ERISA].”) (citations omitted).

Proper Standard of Review – The plan language expressly granted discretion to the Committee-to which Coca-Cola delegated authority to determine final appeals-to interpret the Plan and to determine eligibility of Plan participants to receive benefits. Since the plan did not confer such discretion on Broadspire, which administered initial claims and first-level appeals, the plaintiff argued that the district court should review its conclusions de novo. Rejecting this view, the opinion states:

Accordingly, the appropriate standard of review turns on whether Coca-Cola-acting through the Committee-or Broadspire was the plan administrator. The district court found that Broadspire was the true plan administrator, and consequently applied de novo review, correctly observing that the Plan does not confer discretion upon Broadspire. As explained subsequently, however, we find that Coca-Cola was the plan administrator, that the appropriate standard of review was arbitrary and capricious, and that the district court erred in holding otherwise.

Claims Administrator As Fiduciary – Based upon the foregoing, it is evident why the “plan administrator” issue was so important – the issue implicated the proper standard of review. The case does not stand for the proposition that claims administrators cannot be proper defendants based on other facts and/or claims, such as functional fiduciary status.

Oliver Prevails – For the sake of completeness, note that the ultimate outcome of the case was in the claimant’s favor, even on the deferential arbitrary and capricious standard of review. The plan administrator’s interpretation of plan language as to benefit limitations was determined to be unreasonable.

Under the HCA Health Services analysis, we find that Coca-Cola’s interpretation of the Plan is both wrong and unreasonable, and that Oliver’s interpretation, while rendering the “offset” provision largely toothless, is nonetheless reasonable, given the text of § 4.2(a).

See also – The de facto administrator doctrine is discussed in more detail in :: Requests For ERISA Plan Information: Claims Administrator Held Not Subject To Penalties

:: “Substantial Compliance” Saves Deferential Review Standard In Dispute Over Untimely Review Of Appeal: Substantial Compliance Factor Checklist

This case presents the question of what is the appropriate standard of review in an ERISA case when the Claims Reviewer denies an appeal after expiration of the regulatory deadline for decision . . . For the reasons set forth below, the Court HOLDS that the standard of review applicable to this case is the modified abuse of discretion standard rather than de novo review. Hardt v. Reliance Standard Life Ins. Co, — F.Supp.2d —-, 2007 WL 2007941 (E.D.Va.) (July 12, 2007)

In this claim for disability benefits case, the specific issue was whether the applicable standard of review should be the modified abuse of discretion standard or a de novo standard.

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:: Review of Claim Denials (Unit 3): Limitation Of Argument To The Administrative Record

[P]laintiffs filed suit against the Plan on June 14, 2004 to recover benefits under § 502(a)(1)(B) of ERISA. See 29 U.S.C. § 1132(a)(1)(B). The district court certified the class on November 4, 2004, which was later enlarged to include four Spokane plaintiffs. The total amount of benefits sought by Plaintiffs is $6,701,626.32 . . . the Plan’s argument that the WFSP is not arranged by the Company for its employees generally is wholly unsupported and entirely inconsistent with its past practices. It would be unreasonable to deny benefits based on this ground. The Plan has articulated no other rationale for denying benefits, and we can conceive of none that is either apparent or meritorious. Thus, this is a case where a remand is unnecessary and we must award Plaintiffs the benefits to which they are clearly entitled. Flinders v. Workforce Stabilization Plan of Phillips Petroleum Co., — F.3d —-, 2007 WL 1894825 C.A.10 (Utah) (July 03, 2007)

This article follows two previous discussions on the theme of review of claim denials.

:: Review of Claim Denials (Unit 1): The Tenth Circuit Explains Its View On When “Remands” To Plan Administrators May Be Appealed

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

As in the previous two units, a Tenth Circuit opinion provides the background for this article.

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

Permitting a claimant to receive and rebut medical opinion reports generated in the course of an administrative appeal-even when those reports contain no new factual information and deny benefits on the same basis as the initial decision-would set up an unnecessary cycle of submission, review, re-submission, and re-review. This would undoubtedly prolong the appeal process, which, under the regulations, should normally be completed within 45 days. Metzger v. UNUM Life Ins. Co. of America, 476 F.3d 1161 (C.A.10 (Kan.)) (Feb 21, 2007)

In a previous article, the Metzger decision (“Metzger II”) provided a starting point for discussion of when “remands” by a district court to a plan administrator may be considered “final” for purposes of filing a judicial appeal. Readers of that article will recall that the issue arises in the context of federal court subject matter jurisdiction –

As a general rule, federal appellate courts have jurisdiction solely over appeals from “ final decisions of the district courts of the United States.” 28 U.S.C. § 1291. A final decision is one that “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” Catlin v. United States, 324 U.S. 229, 233, 65 S.Ct. 631, 89 L.Ed. 911 (1945). The issue is one of appellate jurisdiction.

This article addresses another aspect of Metzger II, namely, the scope of the plan administrator’s disclosure obligations during an administrative appeal of a claim denial.

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:: Sixth Circuit Holds Cash Balance Plan Benefit Calculations Violate ERISA

To rule in favor of AK Steel on this ground would present future plaintiffs who would otherwise qualify for the futility exception to the exhaustion requirement with an untenable dilemma-having to concede their claim on the merits in order to survive a motion to dismiss for failure to exhaust administrative remedies. AK Steel, in our view, oversimplifies West’s argument in an attempt to strip him of any remedy for the alleged violation of ERISA. West v. AK Steel Corp., — F.3d —-, 2007 WL 1159951 (C.A.6 (Ohio)) (April 20, 2007)

This case involves an application of the futility doctrine that merits consideration as well as an analysis of ERISA § 502(a)(3) and ERISA § 502(a)(1)(B). As the subjects arise in the context of cash balance pension plans, however, some background may be helpful for context. In the final analysis, the case arguably broadens the reach of ERISA § 502(a)(1)(B).

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:: Review of Claim Denials (Unit 1): The Tenth Circuit Explains Its View On When “Remands” To Plan Administrators May Be Appealed

We analyze the finality of an ERISA remand order, such as the 2004 order, “on a case-by-case basis applying well-settled principles governing final decisions.” Rekstad v. First Bank System, Inc., 238 F.3d 1259, 1263 (10th Cir.2001) (quotation omitted). In Rekstad, we compared ERISA cases to the administrative law context, in which “a remand order is ‘generally considered a nonfinal decision … not subject to immediate review in the court of appeals.’ Metzger v. UNUM Life Ins. Co. of America, 476 F.3d 1161 (C.A.10 (Kan.)) (Feb 21, 2007)

A series of recent appellate decisions address the administrative appeals process in claim denials as well as when district court orders are final so that they may be appealed. This article is one of a multi-part series. See Review of Claim Denials (Unit 2): Disclosure Requirements On Administrative Appeal

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:: Claims Denials – Denial Letter Must Properly State Reason

Assuming arguendo that Sun Life complied with § 1133(1), it violated § 1133(2) by failing to “afford a reasonable opportunity to [Wenner] for a full and fair review by the appropriate named fiduciary of the decision denying the claim,” 29 U.S.C. § 1133(2). Such language cannot encompass Sun Life telling Wenner it was denying his claim for one reason, and then turning around and terminating his benefits for an entirely different and theretofore unmentioned reason, without affording him the opportunity to respond to the second, determinative reason for the termination. As this court has repeatedly said, the purpose of § 1133 is to notify [ ] Plaintiff of [the plan administrator’s] reasons for denying his claims and affording him a fair opportunity for review,” Moore, 458 F.3d at 436. This Sun Life did not do. Wenner v. Sun Life Assur. Co. of Canada — F.3d —-, 2007 WL 1080307 C.A.6 (Tenn.) (April 12, 2007)

Thomas Wenner was initially granted disability benefits from Sun Life Assurance Company of Canada (“Sun Life”) under his employer’s disability benefits plan. Under the terms of the Plan, Wenner had to periodically submit to Sun Life updated medical and personal activity information.

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:: Eleventh Circuit Rebuffs Aetna For Preferring Nurses’ Opinions Over Treating Physician’s Assessment

We find it is unreasonable, and therefore arbitrary and capricious, for Aetna to have repeatedly sheathed its true justifications in boilerplate language in its first three denial letters to Helms. . . . To be clear, we are not holding that Aetna must always have a doctor perform a claims review or even that a failure to perform an IME is necessarily arbitrary and capricious. Rather, we find that, in this case, Aetna’s myopic and flawed reasoning and its procedural failures to properly inform Helms of the specific reasons for his denial in a timely fashion, coupled with the lack of an IME of an admittedly subjective condition, is arbitrary and capricious. Helms v. General Dynamics Corp., Slip Copy, 2007 WL 595877 (C.A.11 (Ala.)) (February 27, 2007)

In this unpublished opinion, the Eleventh Circuit Court of Appeals delivered a scathing rebuff to Aetna in its handling of a disability claim and the subsequent administrative review. The Court did not address the question of whether the disability policy required de novo review, holding that “Aetna’s decision to deny STD benefits does not survive even the more deferential arbitrary and capricious standard.”

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:: “Run Silent, Run Deep”: The Role of Silent PPO’s In the Health Care Delivery System (Unit 1)

For some of these PPOs, the aim is no longer to steer patients to providers in return for certain financial concessions; it’s to shop around their discounts, often without doctors’ knowledge. Collectively, these are known as “silent PPOs.” Medical Economics, “The Secret World of Silent PPO’s”

Healthcare provider challenges to “silent PPO” arrangements have faced a number of obstacles. In some cases, the issues have turned on the authority the providers conferred in the contractual documents. See, e.g., :: Arbitration of Provider Reimbursement Disputes

In a more recent set of cases, providers are running afoul of the new class action legislation designed to limit access to this collective remedy. For example, in Coy v. Country Mut. Ins. Co., Slip Copy, 2006 WL 3487653 (S.D.Ill.) (December 04, 2006), the providers challenged the taking of discounts without steerage. Continue reading

:: Role of In-House Legal Counsel In Claim Investigation Proper Delegation of Authority

[N]othing set forth in ERISA prohibits plan administrators from relying on information provided by and following the recommendations of either in-house or outside attorneys for the employer who sponsors the plan.

Ford v. Motorola Inc. Involuntary Severance Plan, Slip Copy, 2007 WL 162680 (D. Ariz. 2007)(January 18, 2007)

Plaintiff Jenny Ford claimed benefits under the Motorola, Inc. Involuntary Severance Plan. According to the facts of the case, Ford, having several weeks prior advised her supervisor she would be resigning to take a position at Intel, was nonetheless offered severance benefits under the involuntary severance plan. Upon investigation of Plaintiff’s claim, it was learned that the offer of benefits came about as an error, and the claim was subsequently denied.

Involvement of In-House Legal Counsel

The involvement of in-house legal counsel would form a basis of Ford’s claim that that the plan failed to follow procedural requirements. Continue reading

:: Fourth Circuit Joins Circuits Limiting Section 502(a)(3) Fiduciary Breach Claims

We join our sister circuits and hold that § 1132(a)(1)(B) affords the plaintiff adequate relief for her benefits claim, and a cause of action under § 1132(a)(3) is thus not appropriate. Plaintiff insists that § 1132(a)(1)(B) is inadequate because, “[u]nless MetLife is required to answer for its actions under [§ 1132(a)(3) ], its illegal practices will remain free from scrutiny.” But this is not the case. This court has held that review of a benefits determination under § 1132(a)(1)(B) should consider, among other factors, “whether the decisionmaking process was reasoned and principled,” “whether the decision was consistent with the procedural and substantive requirements of ERISA,” and “the fiduciary’s motives and any conflict of interest it may have.” Booth v. Wal-Mart Stores, Inc. Assocs. Health & Welfare Plan, 201 F.3d 335, 342-43 (4th Cir.2000). These factors address exactly the kinds of procedural deficiencies alleged by the plaintiff, in the context of review of actual benefits claims under § 1132(a)(1)(B). Korotynska v. Metropolitan Life Ins. Co.— F.3d —-, 2006 WL 3616275, C.A.4 (Md.) (December 13, 2006)

The recent case, Korotynska v. Metropolitan Life Ins. Co., highlights yet another split in the Circuits as to the proper interpretation of ERISA in the familiar battleground of ERISA Section 502(a)(3). Distilled to the core issue, the circuits disagree on whether Varity Corp. v. Howe, 516 U.S. 489, 514-15, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996), allows simultaneous claims under section (a)(1)(b) and section (a)(3).

In Korotynska, the plaintiff brought an action “on behalf of herself and others similarly situated” against defendant Metropolitan Life Insurance Company (“MetLife”). Nonetheless, no class action had been certified, and Korotynska was at this stage of review the sole plaintiff.

Korotynska, through previous employment, was a participant in a disability plan for which MetLife acted as insurer and fiduciary. Her dispute with MetLife arose after it terminating disability benefits some two years after having initially approved benefits on the claim that Korotynska was no longer disabled.

Review of Benefits Denial Versus Claims Of Breach of Fiduciary Duty

Critical to the case was the plaintiff’s decision to pursue Section 502(a)(3) (29 U.S.C. § 1132(a)(3)) claims against MetLife – not claims for review of the benefits determination under 29 U.S.C. § 1132(a)(1)(B).

In this action, Korotynska maintains that she is not seeking individualized review of her adverse benefits determination under 29 U.S.C. § 1132(a)(1)(B). Instead, Korotynska seeks equitable relief under 29 U.S.C. § 1132(a)(3). Section 1132(a)(3) provides, “A civil action may be brought ··· by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.” 29 U.S.C. § 1132(a)(3).

The plaintiff’s goal in so doing was to obtain judicial review of MetLife’s claims review practices. Thus, under § 1132(a)(3), the plaintiff alleged “systemic improper and illegal claims handling practices” which it used “to deny her and other ERISA beneficiaries a full and fair review of their claims for disability benefits and a full and fair review of claims.” To support this claim, the plaintiff alleged several examples, including:

a. Targeting types of claims that have self-reported symptoms, lack of objective medical findings supporting the claims, or an undefined diagnosis, without due regard for the actual impact of the claimants’ conditions on their ability to work;

b. Targeting low-benefit claimants for denial and/or termination with the expectation that such claimants will not have the wherewithal or financial incentive to engage counsel to pursue their rights, or have the physical or emotional fortitude to fight over these benefits;

c. Employing claim practices that ignore treating physician opinions, ignore subjective complaints of pain, and/or ignore the effects of medications upon claimants’ abilities to work;

d. Failing to consider in its handling of these claims, pursuant to 29 C.F.R. § 2560.503-1(h)(2)(iv), all comments, documents, records and other information submitted by the claimant relating to the claim;

e. Requesting inappropriate, unnecessary and burdensome materials from claimants, all in furtherance of delaying claims determinations;

f. Designing a system in which claimants cannot receive a full and fair review of their claims, by virtue of its reliance upon Medical Examinations from Interested Physicians (called “Independent” Medical Examinations), Functional Capacity Evaluations (“FCE’s”) and/or peer reviews;

g. Utilizing the services of professional entities that perform medical and/or vocational reviews, including but not limited to National Medical Review, that are biased against claimants based upon financial incentives provided by Met Life;

h. Developing and utilizing claim management plans that are designed to terminate benefits not based upon the actual condition of claimants, but, rather, upon duration guidelines used to determine when to terminate claims;

i. Developing claim management plans to deny or terminate claims without due regard for the actual impact of the claimants’ conditions on their ability to work; and

j. By employing numerous other practices that pressure claims handling personnel into denying or terminating legitimate claims.

Application of Varity To Preclude Section 502(a)(3) Relief

The Fourth Circuit rejected the plaintiff’s contention that she could elect to make out a case for breach of fiduciary duty rather than state a claim for benefits. In the Fourth Circuit’s view, Section 502(a)(3) relief is limited under Varity to instances in which relief under other ERISA provisions is inadequate. The Court stated:

Assuming that Korotynska’s previous denial of benefits and alleged subjection to improper claims procedures qualify her to bring a claim under § 1132(a)(3), that statutory provision is only available for claims of breach of fiduciary duty in the circumstances outlined by the Supreme Court in Varity. See 516 U.S. at 507-15. In Varity, the Supreme Court held that § 1132(a)(3) authorizes some individualized claims for breach of fiduciary duty, but not where the plaintiff’s injury finds adequate relief in another part of ERISA’s statutory scheme. Id. at 512, 515.

In Varity, the plaintiffs’ employer consolidated unprofitable divisions into a new subsidiary and then persuaded employees to transfer their benefit plans to the new subsidiary through deceptive depictions of its financial outlook. The subsidiary subsequently failed and the employees lost their nonpension benefits. The issue was joined when the plaintiffs sued for reinstatement of the benefits they would have been owed under their previous plan.

The pertinent portion of Varity in the view of the Fourth Circuit appears in the following excerpt:

The plaintiffs in this case could not proceed under [§ 1132(a)(1) ] because they were no longer members of the [original] plan and, therefore, had no benefits due them under the terms of the plan. They could not proceed under [§ 1132(a)(2) ] because that provision, tied to [§ 1109], does not provide a remedy for individual beneficiaries. They must rely on [§ 1132(a)(3) ] or they have no remedy at all.

From this treatment of Section 502(a)(3), the Fourth Circuit concluded that claims under the provision must be limited to claims not “redressable elsewhere in ERISA’s scheme”. The analysis can be reduced to the following points:

1. As an initial matter, there is no question that what plaintiff is pressing is a claim for individual benefits.

2. The plaintiff’s injury is redressable elsewhere in ERISA’s scheme inasmuch as under § 1132(a)(1)(B), a plan participant may bring a civil action “to recover benefits due to 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.” 29 U.S.C. § 1132(a)(1)(B).

3. Therefore, “[t]he fact that the plaintiff has not brought an § 1132(a)(1)(B) claim does not change the fact that benefits are what she ultimately seeks, and that redress is available to her under § 1132(a)(1)(B).”

Contrary View of the Second Circuit

The Fourth Circuit noted that the Second Circuit had taken a different view of Varity in Devlin v. Empire Blue Cross & Blue Shield, 274 F.3d 76, 89 (2d Cir.2001), cert. denied, 537 U.S. 1170, 123 S.Ct. 1015, 154 L.Ed.2d 911 (2003). The Court aligned itself, however, with “the great majority of circuit courts [that] have interpreted Varity to hold that a claimant whose injury creates a cause of action under § 1132(a)(1)(B) may not proceed with a claim under § 1132(a)(3)”, citing, Antolik v. Saks, Inc., 463 F.3d 796, 803 (8th Cir.2006); Ogden v. Blue Bell Creameries U.S.A., Inc., 348 F.3d 1284, 1287-88 (11th Cir.2003); Tolson v. Avondale Indus., Inc., 141 F.3d 604, 610-11 (5th Cir.1998); Wilkins v. Baptist Healthcare Sys., Inc., 150 F.3d 609, 615-16 (6th Cir.1998); Forsyth v. Humana, Inc., 114 F.3d 1467, 1474-75 (9th Cir.1997); Wald v. Sw. Bell Corp. Customcare Medical Plan, 83 F.3d 1002, 1006 (8th Cir.1996).

Note: This Fourth Circuit decision raises the bar even further for plaintiffs seeking remedies under Section 502(a)(3). None of the cases cited by the Fourth Circuit stated so clearly a distinction between challenging fiduciary duties of the plan administrator versus restating a claim for benefits in the guise of a fiduciary breach claim. In fact, the plaintiff in Korotynsky did not even allege a claim under 1132(a)(1)(B).

The stakes were significant in that the Fourth Circuit’s approach folds challenges to claims administration into simply a factor in evaluating the proper standard of review. This approach served the Court’s interests in limiting what it perceived as duplicative claims under two sections of ERISA. The Court stated:

Not only is relief available to the plaintiff under § 1132(a)(1)(B), but the equitable relief she seeks under § 1132(a)(3)-the revision of claims procedures-is pursued with the ultimate aim of securing the remedies afforded by § 1132(a)(1)(B). The plaintiff admits that she reserves her § 1132(a)(1)(B) claim so that she might bring it at a later date under reformed claims procedures achieved through the current litigation. It may be that plaintiff perceives in § 1132(a)(3) a clearer path to § 1132(a)(1)(B) relief while possibly circumventing § 1132(a)(1)(B)’s standard of review of abuse of discretion. But Varity allows equitable relief when the available remedy is inadequate, not when the legal framework for obtaining that remedy is, to the plaintiff’s mind, undesirable. “To permit the suit to proceed as a breach of fiduciary duty action would encourage parties to avoid the implications of section 502(a)(1)(B) by artful pleading.” Coyne & Delany Co. v. Blue Cross & Blue Shield of Va., Inc., 102 F.3d 712, 714 (4th Cir.1996).

Thus, the well-pleaded complaint rule has limited efficacy in the context of a Section 502(a)(3) claim in jurisdictions adhering to this view, and the relief granted the plaintiffs in Varity emerges as a further limitation on the reach of Section 502(a)(3) claims. Unless a claim cannot be redressed under any other provision of ERISA’s scheme, no claim will lie under Section 502(a)(3).

:: Claims Procedure Regulations Invalidate ERISA Plan’s Arbitration Provisions

Sosa v. PARCO Oilfield Services, Ltd., 2006 WL 2821882 (E.D.Tex.) (September 27, 2006) provides an example of how the ERISA claims procedure regulations apply to plans designed for employers that opt out of State workers’ compensation laws. The risks associated with rejection of the workers’ compensation laws have been historically addressed by a combination of employee waivers, arbitration agreements, and in most cases, creation of an ERISA plan providing benefits to employees suffering an occupational injury.

PARCO was a “non-subscriber” to the Texas Workers’ Compensation Act, and had an alternative ERISA Occupational Injury Benefit Plan in place. The plan required binding arbitration to resolve disputes.

Sosa sued PARCO after an occupational injury under several theories including negligence and denial of benefits under the plan. PARCO responded by filing various motions including a motion to compel arbitration under the ERISA plan. The issue before the Court was the validity of the plan’s arbitration clause under federal and State law.

The Court summarized Sosa’s attack on the arbitration clause as follows:

(1) Tex. Lab.Code Ann. § 406.033(e) prohibits pre-injury waiver of rights by employees of Texas workers’ compensation non-subscribers;
(2) PARCO’s occupational injury benefit plan and the alleged arbitration agreement fail to satisfy the Texas “fair notice” requirements;
(3) PARCO’s consideration for the occupational injury benefit plan was illusory;
(4) PARCO’s occupational injury benefit plan is unconscionable; and
(5) the alleged arbitration agreement is unreasonable per se under 29 C.F.R. § 2560.503-1(c)(4).

Noting the presumption in favor of arbitration under the Federal Arbitration Act, the Court found all of Sosa’s arguments wanting except the challenge under the claims procedure regulations, 29 C.F.R. § 2560.503-1(c)(4). Continue reading

:: Limitations Period In Plan Upheld

In Dye v. Associates First Capital Corp. Cafeteria Plan, 2006 WL 2612743 (E.D.Tex.), the plaintiff challenged the termination of her short term disability benefits and the denial of long term disability benefits. The plan provided that “no legal action may be commenced against an ERISA covered plan more than 120 days after your receipt of the decision on appeal.” In holding for the plan, the court determined that the plaintiff’s claims were barred by this 120-day limitations period.

Noting that under ERISA a cause of action accrues when a claim for benefits is formally denied (citing Harris Methodist Fort Worth v. Sales Support Services, Inc. Employee Health Care Plan, 426 F.3d 330, 337 (5th Cir.2005), the court reviewed the authorities applicable to limitations issues under ERISA. Since ERISA does not provide a statute of limitations for denial of benefits lawsuits, courts borrow the most analogous state statutes of limitations which, in Texas, is the statute governing suits on contracts. (Tex. Civ. Prac. & Rem.Code § 16.004(a) – four years). Continue reading

:: Stop Loss Carrier’s Refusal To Pay Insufficient Reason To Deny Claims

“Defendants have pointed to no provision of the Plan that permits them to deny a claim for benefits solely on the ground that their reinsurance carrier denied their claim for reinsurance. The Court has discerned no such provision after reviewing the Plan. Indeed, [the plan’s representative] admitted that the Plan did not contain such a provision, but that it simply was the Plan’s policy not to pay until the reinsurer had paid.”

Harris Methodist Fort Worth v. Sales Support Services, Inc. Employee Health Care Plan, 2006 WL 2577826 (N.D.Tex.) (Sept. 7, 2006), illustrates the confusion that often attends the self-funded plan sponsor’s relationship to its stop loss carrier. In this case, a plan participant delivered twins prematurely and the ensuing medical bills reached a sum exceeding $600,000. The plan sponsor had stop loss insurance with a $15,000 specific retention limit. That’s where things became interesting. Continue reading

:: Applying The Claims Procedure Regulations To Provider Claims

The minimum requirements for employee benefit plan claims procedures are set forth in 29 CFR 2560.503-1. These regulations apply equally to health benefit plans and other plans and implement the ERISA § 503 requirement that plans to “afford a reasonable opportunity to any participant whose claim for benefits has been denied for a full and fair review by the appropriate named fiduciary of the decision denying the claim.

The vast majority of cases draw upon the aspect of the regulations pertaining to participant claims, as would be expected. Nonetheless, the regulations are frequently cited in demand letters by healthcare providers and hospitals, or their collection agents. How do the claims regulations apply in this context? This post provides a starting point for the plan fiduciary in answering this question. Continue reading