:: Equitable Defense Rejected In Health Plan Reimbursement Litigation

Schwade’s ERISA health benefits plan (“the Plan”) declined to pay medical expenses for Schwade’s son unless Schwade complied with the Plan by signing a subrogation agreement. Schwade refused. From August to November, 2007, the Plan sent Schwade an explanation of benefits denying each claim. The Plan requires Schwade to administratively appeal a denial within 180 days. Schwade failed to appeal on each occasion. For eighteen months (June, 2008, to December, 2009) after expiration of the time for administrative appeal, Schwade’s attorney sent sporadic letters to the Plan proposing that the Plan pay benefits but compromise the contractual right to subrogation. The Plan twice refused further consideration of a claim unless Schwade signed a subrogation agreement. The Plan plainly declined further negotiation. Another year passed, and in November, 2010, Schwade sued Total Plastics, which administers the Plan, for the benefits. A November 10, 2011, order (Doc. 31; 2010 WL 5459649) concludes that Schwade’s failure to exhaust her administrative remedy (that is, her failure timely to appeal) bars the action, and the order concludes further that under the Plan’s unambiguous terms the Plan correctly denied Schwade’s claims.

Schwade v. Total Plastics, 2012 U.S. Dist. LEXIS 37091 (D. Fla. 2012)

For group health plan administrators and their counsel, Schwade is important for two reasons. First, it affirms that a plan may require acknowledgment of the plan’s subrogation and reimbursement rights before payment of benefits. Second, the opinion offers a trenchant criticism of the Third Circuit opinion in US Airways, Inc. v. McCutchen, 663 F.3d 671 (3d Cir. Nov. 16, 2011).

Claim For Benefits & Exhaustion Requirement

As the Schwade opinion illustrates, a plan administrator enjoys a considerable advantage if it refuses to pay benefits based upon the participants’ refusal to acknowledge the plan’s reimbursement provisions. If the participant fails to appeal and carry the point forward in the context of the claim procedure requirements, the defense of failure to exhaust administrative remedies is available. I will quote the excerpt on this point in its entirety as it addresses a number of arguments against the defense, all of which are found to fail.

Schwade tries several new variations of an argument that the exhaustion requirement is excusable because the Plan never issued a sufficiently explicit claim denial. Even if the Plan never explicitly denied a claim — and further, even if 29 C.F.R. § 2560.503-1(l)’s “perfect compliance” requirement applies, and even if the Plan “waived” the appeal deadline that followed Schwade’s receipt of explanations of benefits in 2007 — this action remains barred by the exhaustion requirement.

Both the Plan’s terms and the ERISA regulation treat a “claim denial” and an “adverse benefit determination” as synonymous, (Doc. 3, Ex. 5 at 70-71); 29 C.F.R. § 2560.503-1(h)(1); Midgett v. Wash. Group Intern. Long Term Disability Plan, 561 F.3d 887, 894 (8th Cir. 2009), and under the Plan an “adverse benefit determination” includes “a failure to provide or make payment, in whole or in part, for a benefit.” (Doc. 3, Ex. 5 at 70) The 2007 explanations of benefits alerted Schwade that an “amount [was] not payable” (Doc. 31 at 20-21), and the 2008 letters confirmed that without a subrogation agreement the Plan would never pay the claims. Cf. Springer v. Wal-Mart Assocs. Group Health Plan, 908 F.2d 897, 899-901 (11th Cir. 1990). On the one hand, if before receiving the Plan’s letters in 2008 Schwade had “deemed” her administrative remedy exhausted and sued in federal court, whether 29 C.F.R. § 2560.503-1(l) applies might matter.

On the other hand, if in late 2008 Schwade had followed the Plan’s appeal procedure, whether the Plan’s “failure to provide or make payments” was official before the 2008 letters might matter. Neither occurred. Instead of suing in early 2008, Schwade wrote to the Plan for clarification and received a response unambiguously refusing payment absent a subrogation agreement. This rejection from the Plan foreclosed Schwade’s opportunity, if any, to “deem” the administrative remedy exhausted under 29 C.F.R. § 2560.503-1(l). See Tindell v. Tree of Life, Inc., 672 F.Supp.2d 1300, 1311-12 (M.D. Fla. 2009) (Howard, J.) (“if the claimant waits for the plan administrator to issue a determination, then [notwithstanding 29 C.F.R. § 2560.503-1(l)] the claimant should pursue the administrative route to its [*10] end”); Hall v. United of Omaha Life Ins. Co., 741 F.Supp.2d 1348, 1357-58 (N.D. Ga. 2010) (same).

Instead of challenging each claim denial by an appeal in late 2008, Schwade — in accord with the considered advice of counsel — waited more than three months, asked the Plan (not the appeal unit) to waive the subrogation requirement, waited more than a year, asked the Plan (not the appeal unit) to waive the subrogation requirement, waited nearly another year, and sued Total Plastics in November, 2010. Hence, even if the Plan’s 2008 responses (and not the 2007 explanations of benefits) started the 180 days for appeal, Schwade’s desultory (and enigmatic) colloquy with the Plan neither exhausted her administrative remedy nor excused the exhaustion of her administrative remedy.

Even if the plan participant does appeal, the plan administrator enjoys a highly deferential standard of judicial review assuming the plan document confers discretion. Therefore, the plan administrator’s denial of benefits is a good approach where plan language supports the decision and the plan member refuses to acknowledge the plan’s reimbursement rights.

Third Circuit Opinion Versus Eleventh Circuit Authority

Here, the plaintiff is in the Eleventh Circuit. Against that circuit’s authority  plaintiff cites a recent contrary opinion from the Third Circuit. Predictably, the plaintiff’s argument failed.

In Zurich American Insurance Company v. O’Hara, 604 F.3d 1232 (11th Cir. 2010), the Eleventh Circuit concluded that applying federal common law doctrines to alter ERISA plans is inappropriate where the terms of an ERISA plan are clear and unambiguous. The Third Circuit took a new tack in US Airways, Inc. v. McCutchen. The district court refused to consider that opinion as having any bearing in view of the position taken by the Eleventh Circuit in O’Hara.

The plaintiff’s counsel may have figured that since O’Hara cited a prior Third Circuit opinion in reaching its conclusion a new Third Circuit view might carry the day.  The district court was unwilling to read the tea leaves on that issue.

Note: The prior Third Circuit opinion is Bill Gray Enterprises, Inc. Employee Health and Welfare Plan v. Gourley, 248 F.3d 206, 220-21 n.13. (3d Cir. 2001).

Equitable DefensesSereboff v. Mid Atlantic Medical Services, 547 U.S. 356, (2006) explicitly rejected equitable defenses available to freestanding equitable claims as opposed to equitable liens by agreement.  The district court rambled on at some length about the importance of permitting plans to defray costs through subrogation or reimbursement without noting the most important point – Sereboff rejected equitable defenses in this context.  My views are presented in this previous post.