:: Worthless Payment Commitments – The ERISA Preemption Escape
These contracts are not truly independent from ARMC’s status as an assignee. The contracts have a significant “nexus†with the ERISA plan and its benefit system. See Hermann Hosp. v. MEBA Med. & Benefits Plan, 959 F.2d 569, 578 (5th Cir.1992) (finding ERISA preemption where state law claims of fraud and negligent misrepresentation had a nexus with an ERISA plan and its benefit system) ( Hermann II ). Given this “nexus,†ARMC is properly characterized as an assignee asserting a derivative claim for benefits, and not as an independent third-party provider. Abilene Regional Medical Center v. United Indus. Workers Health and Benefits Plan Slip Copy, 2007 WL 715247 C.A.5 (Tex.) (March 06, 2007)
Adding to the substantial body of Fifth Circuit law addressing provider claims for reimbursement, Abilene Regional Medical Center illustrates the dangers inherent in negotiating payment agreements with ERISA plans.
In this case, the provider agreed to accept a 15% reduction on the charges for its bills as payment in full and to give up any right to recover the balance from the patient or UIW plan in exchange for payment by April 29, 2004.
Then a problem arose, as the plan asserted that the lifetime benefit cap applied:
UIW began processing the claim only after ARMC had signed the forms and returned the negotiated settlement forms to UIW. During processing, UIW discovered that B.L. had almost exhausted his lifetime benefits cap of $500,000 and was only eligible for $20,562.25 in benefits. UIW informed ARMC that it would only pay $20,562.25 of the $93,318.58 owed because B.L. had reached his lifetime benefits cap.
The District Court Holds For the Plan
When the provider’s appeal of the claim denial was unavailing, it sued the plan for the balance in state court. The plan removed the case to federal court where it contended that the provider’s contract claims were preempted by ERISA. The provider amended its complaint to include a state law claim for negligent misrepresentation.
The district court ruled for the plan on its motion for summary judgment, holding that:
(1) ERISA preempted ARMC’s breach of contract claim, and (2) though ERISA did not preempt ARMC’s negligent misrepresentation claim, ARMC could not prove negligent misrepresentation as a matter of law.
No Independent Agreement As Basis For Claims
The Fifth Circuit affirmed the district court holding, distinguishing ARMC’s claims from those in other cases finding that suits based upon agreements independent of the plan terms will not be preempted. The distinction arose from the fact that ARMS’s claims were post-service claims and, in the view of the Fifth Circuit, essentially claims based upon its rights as an assignee.
The Court stated:
We agree with the district court that “[w]hen an ERISA plan [such as UIW] contracts with a third-party health care provider [such as ARMC] to settle a payment of services already rendered to a patient, a claim for breach of that settlement is invariably dependent upon and derived from the patient’s original assignment of benefits to the hospital.†. . . ARMC has attempted to avoid ERISA preemption by suing on the basis of “independent†contracts and not suing as an assignee, but it cannot escape the fact that those contracts arose from settlement negotiations about B.L.’s claim for benefits. These contracts are not truly independent from ARMC’s status as an assignee. The contracts have a significant “nexus†with the ERISA plan and its benefit system. See Hermann Hosp. v. MEBA Med. & Benefits Plan, 959 F.2d 569, 578 (5th Cir.1992) (finding ERISA preemption where state law claims of fraud and negligent misrepresentation had a nexus with an ERISA plan and its benefit system) ( Hermann II ). Given this “nexus,†ARMC is properly characterized as an assignee asserting a derivative claim for benefits, and not as an independent third-party provider
Anti-Assignment Clause Does Not Alter Assignee Status
The provider made an alternative argument that it could not be an assignee of the plan benefits since the plan contained an anti-assignment clause. The Fifth Circuit, however, concluded that the clause in the UIW plan did not constitute an effective anti-assignment clause against the provider since is was simply a generic spendthrift provision.
The distinction:
We have, however, enforced an anti-assignment clause in which the clause did not resemble a spendthrift provision and unambiguously stated that the plan would not be “liable to any third-party to whom a participant may be liable for medical care, treatment, or services.†LeTourneau Lifelike Orthotics & Prosthetics, Inc. v. Wal-Mart Stores, Inc., 298 F.3d 348, 351 (5th Cir.2002). In this case, [however] the anti-assignment provision is unenforceable against health care providers because it contains spendthrift language similar to the anti-assignment clause in Hermann II.
In other words, because the anti-assignment clause would not be interpreted as intended to prevent assignments to the provider, it was ineffective to prevent assignment status. Thus, the provider remained limited by the constraints applicable to plan beneficiaries, such as preemption and benefit caps.
No Independent Agreement = Contract Claims Preempted
Thus, failing to establish a basis for its claims other than as an ERISA assignee, the future of the provider’s claims was inevitably grim. Rather than acting as an independent third-party provider, the Court held that “a significant nexus exists between ARMC’s breach of contract claim and UIW’s benefits plan.”
The Court opined that:
Rather than bringing a truly independent contract claim, ARMC is actually suing as an assignee of [the patient]. Furthermore, ARMC’s breach of contract claim would directly affect the relationship among traditional ERISA entities. Accordingly, we hold that ERISA preempts ARMC’s breach of contract claim.
Negligent Misrepresentation Claim
The elements of negligent misrepresentation were restated as follows:
- the representation is made by a defendant in the course of his business, or in a transaction in which he has a pecuniary interest;
- the defendant supplies “false information†for the guidance of others in their business
- the defendant did not exercise reasonable care or competence in obtaining or communicating the information; and
- the plaintiff suffers pecuniary loss by justifiably relying on the representation.
The Court found a deficiency in element #4. Inasmuch as the provider failed to demonstrate that it could not assert a claim against the patient, the Court held that the provider failed to state a cause of action for negligent misrepresentation.
ARMC counters that it gave up the right to recover unpaid amounts from B.L. in both of its settlement agreements with UIW . . . Admittedly, [the settlement agreements] could mean that ARMC gave up its right to sue . . . the patient, for any unpaid amounts from UIW. However, the Texas Supreme Court has made clear that “[a] fundamental principle of contract law is that when one party to a contract commits a material breach of that contract, the other party is discharged or excused from any obligation to perform.†Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691, 692 (Tex.1994); see also Mead v. Johnson Group, Inc., 615 S.W.2d 685, 689 (Tex.1981) (stating “[d]efault by one party excuses performance by the other partyâ€). Once UIW refused to comply with the settlement agreements by not paying the full amounts, ARMC was no longer bound by those agreements and was free to seek recovery from [the patient]. Because ARMC may still seek recovery from [the patient] for any unpaid amounts, we hold that ARMC cannot, as a matter of law, prove that it has suffered a pecuniary loss.
Note: Several points may be taken from the Fifth Circuit opinion that may add to the provider’s perspective in negotiating reimbursement arrangements.
Pre-Service Versus Post-Service Agreements - The cases relied upon by the provider were Pasack Valley Hospital, Inc. v. Local 464A UFCW Welfare Reimbursement Plan, 388 F.3d 393 (3d Cir.2004), and Rogers v. CIGNA Healthcare of Texas, 227 F.Supp.2d 652 (W.D.Tex.2001). The distinction observed in Abilene Regional Medical Center places an important limitation on the rationale employed in those cases:
In essence, all of the cases cited by ARMC involved health care providers suing ERISA plans for breaching pre-existing fee-for-service contracts. Unlike ARMC’s contracts with UIW, those cases did not address contracts that arose from settlements after a specific claim for benefits had been made.
Whether the Third Circuit would agree with this limitation remains to be seen. See :: Participant Benefit Assignments Do Not Foreclose Hospital’s State Law Claims Against Health Plan
Verification of Payment Amount - In view of the unanticipated benefit cap, it stands to reason that providers would prefer to understand the plan’s position on any applicable limitations extraneous to the agreement. These agreements would still face a preemption challenge but might aid in a misrepresentation claim as well as simply gain a better insight as to the likelihood of actual payment.
Negligent Misrepresentation Claim - This claim offered the most promise for the provider, but failed because the Court concluded the provider had not demonstrated proof of pecuniary loss. This aspect of the opinion appears to offer some planning possibilities. For example, a proffer of proof of inability to execute on a judgment or that a patient is judgment-proof might aid the claim.
See also – :: Provider Claims Against Aetna Remanded To State Court: A Suggested Checklist of Removal Factors; and generally, the authorities collected under the PROVIDER REIMBURSEMENT category on this site.
