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:: Strike 2 For Health Care Reform

A second federal judge ruled on Monday that it was unconstitutional for Congress to enact a health care law that required Americans to obtain commercial insurance, evening the score at 2 to 2 in the lower courts as conflicting opinions begin their path to the Supreme Court.

“Federal Judge Rules That Health Law Violates Constitution”, New York Times (January 31, 2011)

Here’s the link to the NYT article and the opinion.

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:: Defendant’s Counterclaim Dismissed In Provider Reimbursement Dispute

Under ordinary circumstances, the Court likely would not require a party making a breach of contract claim to identify the contractual terms on which it relies; alleging the nature of the breach would be enough. In this case, however, Regence’s claim is premised not on one or a small number of contracts. Rather, it relies in significant part on a large number of underlying contracts — the subscriber agreements. And, as the Court has indicated, the claim may be preempted in whole or in part, depending on the nature of the alleged breaches of the provider agreement and what underlying subscriber agreements are involved. These factors together require further detail before the Court can conclude whether, and to what extent, Regence has stated a non-preempted claim.

Pa. Chiropractic Ass’n v. BCBS Ass’n, 2011 U.S. Dist. LEXIS 6446 (N.D. Ill. Jan. 21, 2011)

In this litigation between BCBS and a group of health care providers, the defendant BCBS filed a counterclaims seeking alleged overpayments.  The alleged overpayments were claimed due under the terms of collateral subscriber agreements.

Defendant The Regence Group has filed a counterclaim against plaintiff Larry Miggins and third party defendant Miggins & Miggins, Inc. (collectively, Miggins) alleging breach of contract and unjust enrichment. Regence’s breach of contract claim is premised, at least on the surface, on a provider agreement that it had with Miggins under which Miggins agreed to provide health care services to patients covered by Regence’s subscriber agreements and to receive payment for those services on specified terms.

Specifically, BCBS alleged that the plaintiff breached its contract by:

  • failing to charge and make reasonable attempts to collect coinsurance payments;
  • submitting and obtaining claims for reimbursement using incorrect diagnosis codes and modifiers; and
  • submitting and obtaining claims for reimbursement for services that were not medically necessary as defined in the provider agreement and that were otherwise not covered under the patients’ subscriber agreements.

Plaintiff Miggins moved to dismiss the counterclaim on the ground that it is preempted by ERISA and because it does not include sufficient detail.

ERISA Preemption

Argument # 1:

Miggins argues that Regence’s claim is preempted by ERISA section 514(a), which provides that ERISA supersedes state laws that “relate to any employee benefit plan.” 29 U.S.C. § 1144(a). State law relates to a benefit plan if is has connection with or reference to such a plan. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 47, 107 S. Ct. 1549, 95 L. Ed. 2d 39 (1987). This occurs in  [*10] various ways, only one of which is relevant here: if the state law “provides an alternative enforcement mechanism to ERISA.” Trustees of the AFTRA Health Fund v. Biondi, 303 F.3d 765, 774 (7th Cir. 2002). That happens if the benefit plan’s existence is a critical element of a state law claim, such that the state law relies on a direct and unequivocal nexus with an ERISA plan. Id. at 778.

The court agreed that “at least some parts of Regence’s claim are, in fact, preempted by ERISA”, stating that:

Regence relies in part on a contention that Miggins obtained payment on claims that were not covered under patient subscriber agreements. Regence does not disclose whether any of those agreements are ERISA benefit plans, but it is overwhelmingly likely that some or even most of them are. In addition, it is conceivable that other parts of Regence’s claim rely on the terms of one or more ERISA benefit plans.

Lack of Specificity

Argument # 2

Demonstrating that the Twombly standard can trip up plaintiff and defendant alike, the court ruled that the counterclaim failed the specificity requirement.  The court observed that:

Even after Bell Atlantic v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007), and its progeny, federal courts follow a notice-pleading regime under which a plaintiff (here, Regence) need provide only enough detail to give the defendant (here, Miggins) fair notice of what the claim is and the grounds on which it rests. See,  [*11] e.g., Tamayo v. Blagojevich, 526 F.3d 1074, 1083 (7th Cir. 2008). In complex case, however, a fuller set of factual allegations may be necessary. See, e.g., Limestone Dev. Corp. v. Village of Lemont, 520 F.3d 797, 803 (7th Cir. 2008).

Note:  The court granted the motion to dismiss with leave to amend.

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:: PPACA Individual Mandates Unconstitutional

So argued Professor James Ely today in a symposium on the PPACA sponsored by the Charleston School of Law.  And a federal district court judge agreed in a case in which he and fellow academics brought in U.S. District Court for the Eastern District of Virginia.  Brian Galle, Assistant Professor of Law, Boston College Law School presented an opposing point of view.   I found Professor Ely’s position more convincing, as did Judge Hudson.

There is one case going the other way and we will have to see how the matter turns on on appeal.  Aside from the ethereal world of constitutional law, we must also ask if the individual mandate is enforceable as a practical matter.  Seriously, do you really think that the tax can be collected against the vast majority of uninsured Americans?  Constitutional or not, the individual mandate is a bankrupt idea as Massachusetts’ experiment proves for anyone interested in empirical data.

For my part, I discussed the internal appeals and external review regulations as a part of a panel discussion on how the PPACA affects the practice of law.  The interim final regulations on this topic make some huge changes in current law that are likely unwarranted by the statute.  I will review some highlights in my next newsletter.

For now, congratulations to the Charleston School of Law faculty and their Federal Courts Law Review on an excellent contribution to scholarship and debate on this important policy issue.

Brian Galle, Assistant Professor of Law, Boston College Law Schoo
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:: Attachment Of Proof Of Benefit Assignment May Prove Critical To Removal

The second prong of the Pascack test is also satisfied. Plaintiff identifies no other “independent legal duty” that would support its claims. Plaintiff’s argument that this is a “rate of payment” case is of no avail. 6 Plaintiff admits that it has no contractual relationship with any Defendants. At the same time, it argues that its right to payment is dependent upon assignments of benefits. The amount of payment (i.e., the “rate”) at issue would necessarily implicate the rates in the ERISA plans under which Plaintiff claims it has received assignments.

Sportscare of Am., P.C. v. Multiplan, Inc., 2011 U.S. Dist. LEXIS 6295 (D.N.J. Jan. 24, 2011)

The plaintiff in this case,  Sportscare of America, P.C. (“Plaintiff”), is a physical therapy facility.  The plaintiff filed its complaint in New Jersey Superior Court, naming twenty-one insurance providers and one medical claim processing company.

The gravamen of the complaint, “couched in terms of fraud, negligence, and interference with contract,” consisted of a claim for additional reimbursement.

In short, Plaintiff submitted claims to the health insurers and received some payment but at a rate that it claims is improper. Plaintiff apparently sues for the difference between what Plaintiff was paid and what it thinks it should have been paid on various insurance claims . . .

ERISA intrudes upon these controversies, of course, and requires its due, whether in argument and satisfaction that it does not apply, or in acknowledgment that it does and the consequences that flow from that fact.  In this case, ERISA claimed the field.

The Third Circuit has some distinctive and influential case law on provider reimbursement issues stemming from Pascack Valley Hosp., Inc. v. Local 464A UFCW Welfare Reimbursement Plan, 388 F.3d 393 (3d Cir. N.J. 2004).

In this case, however, the Court found most important the lack of foundation for removal of the case to federal court.

On its face, the Hospital’s complaint does not present a federal question. Rather, the complaint asserts state common law claims for breach of contract. The complaint does not expressly refer to ERISA and the rights or immunities created under ERISA are not elements, let alone essential elements, of the plaintiff’s claims. The possibility–or even likelihood–that ERISA’s pre-emption provision, 29 U.S.C. § 1144(a), may pre-empt the Hospital’s state law claims is not a sufficient basis for removal.

So the defendant’s removal was found wanting inasmuch as the only claims asserted by the plaintiff were state law claims.  Undoubtedly, the court could have found the image of a claim for benefits here.  Had the defendant proved assignments of benefits the matter may turned out that way.  But no assignments were before the court in the removal papers.

The court observed that:

As the party seeking removal, the Plan bore the burden of proving that the Hospital’s claim is an ERISA claim.  Accordingly, the Plan bore the burden of establishing the existence of an assignment. The Plan concedes that the record contains no evidence of an express assignment, whether oral or written, from either Psaras or Rovetto to the Hospital.

The mere argument that assignments should be assumed from the facts did not carry any weight.

The Plan argues that the Hospital’s claims arise under “the federal common law” of ERISA. On several occasions, we have predicated jurisdiction on a plaintiff’s invocation of the federal common law of ERISA.

Here, the Hospital’s complaint asserts a state law claim for breach of contract, and the federal common law of ERISA does not provide an element–essential or otherwise–of such a claim. The Plan may be correct that, in interpreting the Subscriber Agreement, the federal common law of ERISA displaces state law.

The capstone of the court’s decisional analysis rested on a key principal of preemption jurisprudence:

Nevertheless, potential defenses, even when anticipated in the complaint, are not relevant under the well-pleaded complaint rule.

Note: The importance of assignments varies from jurisdiction to jurisdiction.  This case illustrates that attachment of assignments to the removal papers (if they are available) is a good practice.

Testimony as to business practice may not carry the day:

The Plan offers the certification of Kathy Pridmore, the Plan’s Director of Medical Benefits, to support a finding of an assignment. Pridmore broadly declares that, in her experience, the Plan has “consistently followed the claims and claim review procedures” contained in the Summary Plan Description. The Plan argues that Pridmore’s declaration constitutes evidence of “routine practice” that supports an inference of an assignment. See Fed. R. Evid. 406. We disagree. Pridmore does not declare that the Plan routinely receives assignments prior to payment. In her recitation of the Plan’s “standard procedure for processing claims,” she does not even mention the execution of assignments by Plan participants or beneficiaries. As such, Pridmore’s certification cannot establish a routine practice relevant to this appeal, let alone satisfy the Plan’s burden of establishing federal subject-matter jurisdiction by a preponderance of the evidence.

On Remand – The plan can still argue ERISA preemption as a defensive proposition in state court.  It just failed to justify complete preemption warranting removal.

Practice Pointer - This case suggests that a provider reimbursement case filed in state court may have some advantages, subject to the point noted above regarding the situation on remand.

See also:  Beach Erosion On The ERISA Waterfront

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:: New Scholarship – ERISA Section 510 Relief

Adam B. Gartner, Fordham University – School of Law, has published a note, “Protecting the ERISA Whistleblower: The Reach of Section 510 of ERISA” in the Fordham Law Review, Vol. 80, Fall 2011. The Note “addresses the unresolved circuit split over the reach of ERISA’s whistleblower protection provisions.”

Gartner, Adam B., Protecting the ERISA Whistleblower: The Reach of Section 510 of ERISA (January 24, 2011). Fordham Law Review, Vol. 80, Fall 2011.

The Note is Available at SSRN as a part of the Accepted Paper Series:

http://ssrn.com/abstract=1747286

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:: ERISA Plan Subrogation Provisions Eliminate Attorneys’ Fee Claim

Johnson Controls v. Flaherty, 2011 U.S. App. LEXIS 969 (11th Cir.) (January 18, 2011) (unpublished) presents a typical subrogation scenario. The plan brought suit under 29 U.S.C. § 1132(a)(3), for medical benefits that the employee benefits plan, Johnson Controls, Inc. Welfare Plan (“the Plan”), had paid resulting from a bicycle injury. The Defendant had successfully settled a personal injury case and recovered proceeds for the injury from a third party.

The defendant and his lawyer argued that attorneys’ fees and costs incurred in obtaining the settlement — amounting to $14,467.44 — must be deducted from the settlement proceeds before the funds are subject to the Plan’s reimbursement claim.

In a short unpublished opinion, the Court disagreed, stating:

Section 6.06 of the Plan expressly provides, however, that when an employee receives benefits under the Plan and thereafter recovers for his injuries from a third party, the Plan “has the right to be reimbursed for such benefits in full,” and “no portion of the [Plan]‘s recovery shall be reduced by[] the fees or costs (including attorney’s fees) associated with any claim, lawsuit, or settlement agreement in connection with any recovery, without the express written consent of the Plan Administrator no portion of the [Plan]‘s recovery shall be reduced by[] the fees or costs (including attorney’s fees) associated with any claim, lawsuit, or settlement agreement in connection with any recovery, without the express written consent of the Plan Administrator.” (Emphasis added). The Summary Plan Description also plainly says that the Plan “ha[s] the right to be reimbursed in full before any amounts (including attorneys’ fees) are deducted from any policy, proceeds, judgment or settlement,” and that the Plan’s “right to . . . reimbursement takes preference over any other claims against the recovery, . . . regardless of how settlement proceeds are characterized.”

Where the terms of an ERISA plan are clear and unambiguous — as they are here — we must enforce them as written. See Zurich Am. Ins. Co. v. O’Hara, 604 F.3d 1232, 1239 (11th Cir. 2010) (holding that “full reimbursement according to the terms of the Plan’s clear and unambiguous subrogation provision [wa]s necessary . . . to effectuate ERISA’s policy of preserving the integrity of written plans”). The district court correctly applied the unambiguous terms of the Plan, requiring Flaherty to reimburse Johnson Controls for the entire amount it paid in medical expenses on Flaherty’s behalf, without deduction for attorneys’ fees and costs.

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:: Discovery Permitted To Determine Scope Of Administrative Record

In the present case, the plaintiff asserts its procedural challenge on the grounds that, given the different versions of the administrative record produced during discovery, many of which lacked important medical records initially provided by the plaintiff, it is impossible to determine what comprises the full administrative record on which the defendants relied when denying the plaintiff’s claim. The Court concludes that this claim justifies discovery beyond the administrative record. The plaintiff’s allegation that the defendants may have failed to consider significant portions of the record may give rise to a procedural challenge of the kind discussed in Killian and may also give rise to an inference of a structural conflict of interest.

Pediatric Special Care, Inc. v. United Med. Res. (UMR), 2011 U.S. Dist. LEXIS 3795 ( E.D. Mich. Jan. 14, 2011)

In review of benefit denials, the federal judiciary treats the plan administrator’s determination as it would that of a administrative agency. Never mind that ERISA does not require or even mention this sort of deference. In any event, it follows on this train of thought that evidence considered in judicial review should be limited to the “administrative record”, i.e., the evidence before the plan administrator.

Nonetheless, discovery may be available in the case of procedural irregularities, as indicated above, or into possible conflicts of interest. Typically, some sort of evidentiary showing is required as a predicate.

For example, as noted in the Michigan case cited above, “in the context of a procedural challenge to an administrator’s decision, some discovery of evidence not contained in the administrative record is permissible.” In short,

The district court may consider evidence outside of the administrative record only if that evidence is offered in support of a procedural challenge to the administrator’s decision, such as an alleged lack of due process afforded by the administrator or alleged bias on its part. This also means that any prehearing discovery at the district court level should be limited to such procedural challenges.

This exception stems from a form of due process:

The Sixth Circuit has held in the procedural challenge context that due process is denied when the administrator fails to provide the insured with proper notice under the plan’s hearing procedures, VanderKlok v. Provident Life & Accident Ins. Co., 956 F.2d 610, 617 (6th Cir. 1992), and when the administrator refuses to consider evidence favorable to the insured while actively seeking out and considering evidence unfavorable to the insured, Killian v. Healthsource Provident Adm’rs, Inc., 152 F.3d 514, 522 (6th Cir. 1998).

Of course, the “due process” consists of the full and fair review requirements of ERISA, not constitutional due process. (I do not believe there is sufficient state action involved to invoke constitutional due process, at least prior to the PPACA.)

Another recent case to this effect is Dandridge v. Raytheon Co., 2010 U.S. Dist. LEXIS 5854 (D.N.J. 2010)

Aside from this category, some courts have permitted discovery of “documents about employee compensation criteria or standards . . . for employees involved in that claim.” Hughes v. CUNA Mut. Grp., 257 F.R.D. 176, 180-81 (S.D. Ind. 2009); see also, e.g., Santos v. Quebecor World Long Term Disability Plan, 254 F.R.D. 643, 650 (E.D. Cal. 2009); Myers v. Prudential Ins. Co. of Am., 581 F. Supp. 2d 904, 914 (E.D. Tenn. 2008).

See also, Denmark v. Liberty Life Ins. Co., 566 F.3d 1, 10 (1st Cir. 2009) (”The majority opinion in Glenn fairly can be read as contemplating some discovery on the issue of whether a structural conflict has morphed into an actual conflict.”); Kalp v. Life Ins. Co. of N. Am., No. 08-1005, 2009 WL 261189 (W.D. Pa. Feb. 4, 2009) and McGahey v. Harvard University Flexible Benefits Plan, Civil Action No. 08-10435-RGS September 14, 2009.

Note: The PPACA does not directly alter ERISA jurisprudence in this area but the possibility of external review process may indirectly affect the scope of the administrative record.

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:: New Scholarship Tests Heightened Pleading Requirements Against Empirical Data

Alexander A. Reinert, Assistant Professor of Law, Benjamin N. Cardozo School of Law, has published a meticulously researched article that examines effects of the heightened pleading requirements under recent United States Supreme Court jurisprudence.

Entitled “The Costs of Heightened Pleading”, the article appears in the Winter 2011 issue of the Indiana Law Journal ( 86 Ind. L.J. 119).

Professor Reinert observes that Twombly v. Bell Atlantic Corp., 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) have created a pleading standard that “heightens attention to ‘conclusory’ pleading, treats state of mind allegations in a manner at odds with prior precedent, and encourages lower courts to apply their own  intuitions to decide whether a plaintiff’s legal claims and allegations are sufficient to proceed to discovery.”

Have these developments aided judicial economy and the cause of justice by eliminating a measurable number of meritless claims?  Through a carefully designed research project, this work parses  ”empirical data to question the widespread assumptions about the costs and benefits of heightened pleading.”   This work illustrates a gap in the supposed link between the heightened pleading standards and filtering of meritorious claims.

Nor does the heightened pleading standard come without costs. In this regard, the author suggests “a heightened pleading standard may function in the same way that randomized dismissal would, amounting to a radical departure from pleading standards that few would find satisfactory.”

See, Reinert, Alex A., The Costs of Heightened Pleading (August 16, 2010). Indiana Law Journal, Vol. 86, 2011; Cardozo Legal Studies Research Paper No. 307.

Available at SSRN: http://ssrn.com/abstract=1666770

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:: District Court Permits Supplementation Of Record But With Instruction On Law

ERISA provides federal courts with jurisdiction to review benefits determinations made by fiduciaries or plan administrators. 29 U.S.C. § 1132(a)(1)(B); see also Lopez ex rel. Gutierrez v. Premium Auto Acceptance Corp., 389 F.3d 504, 509 (5th Cir. 2004). A district court’s function when reviewing ERISA claims is like an appellate court’s.

“[The court] does not take evidence, but, rather, evaluates the reasonableness of an administrative determination in light of the record compiled before the plan fiduciary.” Leahy v. Raytheon Co., 315 F.3d 11, 18 (1st Cir.2002). Courts cannot consider additional evidence “resolve the merits of the coverage determination—i.e. whether coverage should have been afforded under the plan-unless the evidence is in the administrative record, relates to how the administrator has interpreted the plan in the past, or would assist the court in understanding medical terms and procedures.” Crosby v. La. Health Serv. & Indem. Co., — F.3d —, No. 10-30043, 2010 U.S. App. LEXIS 26323, *8, 2010 WL 5356498 (5th Cir. Dec. 29, 2010).   A claimant is not permitted to explore, through discovery in an ERISA lawsuit, what information a plan administrator “should have considered” in making its benefits determination, as opposed to analyzing the information that the plan administrator “did consider” in making its decision. Griffin, 2005 U.S. Dist. LEXIS 18720, 2005 WL 4891214, at *2.

Bullard v. Life Ins. Co. of N. Am., 2011 U.S. Dist. LEXIS 47 (S.D. Tex. Jan. 3, 2011)

In this claim for accidental death benefits, a factual dispute arose over policy exclusions given the circumstances of death. The deceased, Darnell Berryman, died six days after receiving 17 stitches for a knife wound to his face. He was on prescribed medication after the stitches but h also had a history of sleep anea. The death certificate and autopsy report listed the cause of death as “Acute Toxicity due to the Combined Effects of Hydrocodone, Alprazom, Carisprodol, and Promethazine.”

As explained in more detail below, the carrier denied the parents’ claim for death benefits. The issue before the court, however, was not simply whether that denial should be overturned.

In fact, the insurer and the claimants agreed that further proceedings were appropriate before judicial review — they just couldn’t agree on the extent of those proceedings. [Read more...]

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:: 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. [Read more...]

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:: EBSA Regulatory Projects Underway

From the Employee Benefit Security Administration’s website:

EBSA Unified Agenda Entries

DOL Fall 2010 Semi-Annual Agenda

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:: Compliance With External Review Requirements

The new group health plan external review requirements require analysis on several levels.

Some of the more obvious issues involve whether the external review requirements apply, and if so, whether state or federal external review requirements will apply.   As the  note below suggests, these issues are just the beginning of the analysis.

Unless grandfathered, a group health plan must comply with either a federal or a state external review process.  Thus, the first level of inquiry might be something like this:

#1 Is the plan a grandfathered plan? If so, the rules don’t apply.

#2 Does a state law external review process apply to the plan?

Point #2  involves consideration of several factors.  As a general matter, plans that provide coverage through health insurance are typically subject to state external review laws (due to ERISA’s savings clause – see Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355 (2002)).

On the other hand, the state external review process must be  equivalent to the minimum requirements imposed by the interim procedures for external review . . . so if the state law does not comport with the minimum standards set forth in the interim regulations, then the federal external review procedures apply.

#3  Is the plan a governmental plan, a church plan or a multiple employer welfare arrangement (“MEWA”)?  If so, a state external review process may apply.

Point # 3 will require careful consideration – first, to ascertain the plan’s status under ERISA, second, to determine if state external review processes could apply, and third, even if they might otherwise apply, whether the state external review process meets the minimum standards.

A plan or issuer is subject to the  Federal external review process where the State external review process does not meet, at a minimum, the consumer protections in the NAIC Uniform Model Act, as well as where there is no applicable State external review process.

Note:  The requirement of external review poses a major change in plan administration for self funded ERISA plans.  Moreover, several important additional issues remain to be sorted out.

For example, under the interim guidance, the standards will:

provide that an external review decision is binding on the plan or issuer, as well as the claimant, except to the extent other remedies are available under State or Federal law.

If an external review affirms the benefit denial, the regulations appear to contemplate that the decision can be challenged in a claim for benefits under ERISA (Section 1132(a)(1)(B)).  What, however, are the plan’s options if the external review is in favor of the participant?

The quoted language above suggests that the external review decision must be binding – but then further adds the proviso regarding remedies under federal law.   The form of  the plan challenge to the external review decision is not clear from the regulations.

Further, assuming that the employer challenges the decision in federal court, does the independence of the external review become a factor to be reviewed under the analysis in MetLife v. Glenn?  Does it serve, for example, to mitigate a conflict of interest whether the plan fiduciary both adjudicate claims and pays benefits?

Similar issues have arisen in the context of state external review statutes requiring “binding” external review.  These administrative regimes raise substantial questions of due process and separation of powers.

I anticipate supplementing this line of inquiry with research acquired during work on an upcoming law review article.  In the meantime, the interim rules remain the only official source of guidance and careful regard should be given to the effective dates and the technical releases concerning implementation.

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:: Virginia District Court Rules Individual Mandate Unconstitional

More on this later, but Judge Henry Hudson has ruled that the PPACA individual mandate is unconstitutional:

Judge Henry E. Hudson ruled Monday for the state’s claim that the requirement for people to purchase health care exceeds the power of Congress under the Constitution’s Commerce Clause or under the General Welfare Clause.

http://www.foxnews.com/politics/2010…alth-care-law/

The opinion can be read here:

http://www.foxnews.com/projects/pdf/…_ACA_Order.pdf

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:: Fiduciary Duties Not Implicated In Managed Care Rate Negotiations

Thus, in a nutshell, Blue Cross lowered rates for its own subsidiary by effectively raising them for Flagstar and other self-insured plans. The letter agreements between Blue Cross and the hospitals spell out these facts in black and white.

But that does not mean that Flagstar knew about the deals. To the contrary, Blue Cross has admitted (in interrogatory responses in this case) that it never told Flagstar it had raised the Plan’s rates in order to lower them for its own subsidiary. And it appears that Flagstar was otherwise clueless about the change, because Blue Cross did not provide backup data for the bottom-line charges it sent Flagstar each month.

Deluca v. Blue Cross Blue Shield of Mich., 2010 FED App. 0371P (6th Cir.) (6th Cir. Mich. Dec. 8, 2010), Kethledge, J, dissenting.

This unpublished Sixth Circuit opinion spotlights a business practice that rarely gets such close scrutiny.  A Blue Cross subsidiary failed to meet its profitability numbers which inspired the idea to lower its reimbursement rates.

That solution did not sit well with health care providers, of course, so Blue Cross promised to make the transaction “budget neutral” in this way:

BCBSM agreed to make the rate adjustments budget-neutral for the health-care providers by increasing the PPO and traditional plan rates to make up for the decrease in the HMO rates. Some of these rate adjustments were retroactive to the beginning of the year in which they were negotiated.

A plan participant in one of the self-funded plans Blue Cross administered sued Blue Cross alleging breach of fiduciary duty.

DeLuca, a practicing attorney in Grosse Point Park, Michigan, was a beneficiary of the Flagstar Bank Group Health Plan through his wife’s participation as a Flagstar Bank employee. In 2006, he filed the present action against BCBSM alleging that BCBSM violated its duties as a fiduciary under two provisions of ERISA, 29 U.S.C. § 1104 and § 1106(b), by agreeing to increase its traditional and PPO plan rates in exchange for decreases in the HMO rates.

The district court granted Blue Cross’ motion for summary judgment, concluding that BCBSM was not acting as a fiduciary for the Flagstar Plan when it negotiated the rate adjustments, and DeLuca appealed.

Two Issues

On appeal the issues were:

#1 What Blue Cross acting as an ERISA fiduciary under 29 U.S.C. § 1104 when it negotiated the rate changes?; and

#2 Must Blue Cross be “acting in a fiduciary capacity” to be liable under 29 U.S.C. § 1106(b)(2)?

[which provides that "A fiduciary with respect to a plan shall not . . . in his individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries."]

Not Acting As A Fiduciary

The Court held that Blue Cross was not in fact acting as a fiduciary when it negotiated the rates with providers.

We conclude, as did the district court, that BCBSM was not acting as a fiduciary when it negotiated the challenged rate changes, principally because those business dealings were not directly associated with the benefits plan at issue here but were generally applicable to a broad range of health-care consumers.

The Court concluded that “a business decision that has an effect on an ERISA plan not subject to fiduciary standards.”In this case, the “conduct at issue” clearly falls into the latter category, “a business decision that has an effect on an ERISA plan not subject to fiduciary standards.

. . . And Thus Not Liable For A Prohibited Transaction

The Court held that the foregoing conclusion defeated the prohibited transaction claim, stating that:

DeLuca’s argument, as we understand it, is that the terminology “in any other capacity” imposes liability on a fiduciary even when not acting in a fiduciary capacity, at least with regard to those activities prohibited by section 1106. Such an interpretation, however, flies in the face of our holding that, “by its own terms, § 1106 applies only to those who act in a fiduciary capacity.” Hunter, 220 F.3d at 724. Because BCBSM was not acting in a fiduciary capacity when it negotiated the rate changes at issue in this case, BCBSM did not violate § 1106(b)(2).In this case, the “conduct at issue” clearly falls into the latter category, “a business decision that has an effect on an ERISA plan not subject to fiduciary standards.”

Note: The dissent saw the matter as involving factual issues that made the case one for trial, not summary judgment. In a thoughtful opinion, Judge Kethledge wrote:

Whether Blue Cross functioned as a fiduciary when it established and maintained provider networks for Flagstar depends on how one characterizes their agreement. DeLuca says—and I think no one disagrees—that the function of negotiating rates with provider hospitals surely would have been fiduciary in nature had the Plan’s trustees kept that function in-house; and in DeLuca’s view, the Contract merely delegated that function from the trustees to Blue Cross. He therefore contends that Blue Cross was acting as a fiduciary when, as part of the services it provided under the Contract, it negotiated rates for the Plan. In contrast, Blue Cross argues that it actually provided a product—off-the-shelf access to its provider network at whatever rates Blue Cross cared to negotiate with them—rather than services.

The difference matters because, while selling a product tends not to create fiduciary duties under ERISA, providing services quite frequently does. And that is especially true for discretionary services that directly impact a plan’s finances. The nub of this case, therefore, is which conception of the parties’ agreement is right.

I do not think this issue is one we can fairly decide—at least in Blue Cross’s favor—as a matter of law.

29 U.S.C. § 1106(b)(2) - The dissent also disagreed on the elements required for a prohibited transaction under this provision, stating:

In Pegram v. Herdrich, 530 U.S. 211 (2000), the Supreme Court stated that, “[i]n every case charging breach of ERISA fiduciary duty, then, the threshold question is . . . whether that person was acting as a fiduciary (that is, was performing a fiduciary function) when taking the action subject to complaint.” Id. at 226 (emphasis added). But Pegram was only a § 1104 case, so that statement is pure dicta as to § 1106(b)(2).

A similar statement by our court, however,  cannot be so characterized. In Hunter v. Caliber System, Inc., 220 F.3d 702 (6th Cir. 2000), we said that, “by its own terms, § 1106 applies only to those who act in a fiduciary capacity.” Id. at 724. The Hunter court characterized that statement as a holding (albeit an alternative one), and I cannot fairly recast it as dicta. It is binding precedent for our circuit.

Policy Issues – The dissent reviewed the policy issues raised by Blue Cross and proposed some interesting rebuttals.  In the end, however, Judge Kethledge concluded that:

More fundamentally, I reject the unspoken premise of the preceding two arguments, which is that we should be acutely concerned about Blue Cross’s business model in the first place. Cases have consequences, and we should be mindful of them. But our task in this case is not to divine the business model that best serves the plans’ interests and those of everyone else; our task, instead, is the comparatively simple one of determining whether the letter deals violated ERISA. The wisdom of business models can be determined elsewhere.

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:: Plaintiff’s Section 502(a)(3) Claim Prevails Over Varity-Based Defense

The Courts of Appeals disagree as to whether Varity prohibits a plaintiff from simultaneously pursuing equitable relief pursuant to Section 502(a)(3) and benefits due under the terms of the plan pursuant to Section 502(a)(1)(B).  The Third Circuit has not ruled on the issue, and district judges within the Third Circuit are split.

Trechak v. Seton Co. Supplemental Exec. Ret. Plan, 2010 U.S. Dist. LEXIS 124750 (E.D. Pa. Nov. 24, 2010)

This recent district court opinion addresses several recurring issues about available civil remedies under ERISA. The facts involve a “top hat” plan which is essentially a supplemental retirement benefit plan. The issues were presented in the context of a motion to dismiss.

The district court ultimately permitted the plaintiff to plead a claim for benefits under the terms of the plan (ERISA Section 502(a)(1)(B)) as well as equitable relief under ERISA Section 502(a)(3). The court noted a division in the Third Circuit among the district courts.

Before arriving at that analysis, however, the Court had to determine whether the plaintiff’s claim for equitable relief was preempted. The Court determined that it was not, stating:

Plaintiff has conceded that his unjust enrichment claim is preempted to the extent it is grounded in state law, as discussed above . . . However, Plaintiff contends that the claim survives as a claim for equitable relief under ERISA. Plaintiff clarified in his Response brief that Count Four was pled in the alternative as an ERISA claim for equitable relief pursuant to 29 U.S.C. § 1132(a)(3)(B) (“Section 502(a)(3)”).

In Nagy v. De Wese, 705 F. Supp. 2d 456 (E.D. Pa. 2010) (Yohn, J.), the plaintiff, whose benefit payments pursuant to an ERISA plan had ceased, clarified in his response to the defendant’s motion for judgment on the pleadings that his unjust enrichment claim was “more properly characterized as a demand for equitable relief” under Section 502(a)(3). Id. at 461. Judge Yohn held that the unjust enrichment claim, as pled in the alternative as a claim for equitable relief, was not preempted. Id.

Here, as in Nagy, Plaintiff has clarified that his unjust enrichment claim was pled in the alternative as a claim for equitable relief pursuant to Section 502(a)(3).

The Plaintiff’s next hurdle appeared in the frequently encountered defense that the equitable relief claim was unavailable because the Plaintiff had asserted a claim for benefits.

. . . the Court must determine whether Plaintiff can plead a Section 502(a)(3) claim simultaneously with his claim in Count One for wrongful denial of benefits under 29 U.S.C. § 1132(a)(1)(B) (“Section 502(a)(1)(B)”).

Since Varity Corp. v. Howe, 516 U.S. 489, 116 S. Ct. 1065, 134 L. Ed. 2d 130 (1996) held that Section 502(a)(3) is a “catchall” provision that “offer[s] appropriate equitable relief for injuries caused by violations that § 502 does not elsewhere adequately remedy”, courts have often held that (a)(3) claims cannot be asserted where a claim for benefits has also been asserted.

The district court distinguished Varity, however, and permitted the (a)(3) claims to stand, at least at this stage of the proceedings, stating:

The Courts of Appeals disagree as to whether Varity prohibits a plaintiff from simultaneously pursuing equitable relief pursuant to Section 502(a)(3) and benefits due under the terms of the plan pursuant to Section 502(a)(1)(B).

The Third Circuit has not ruled on the issue, and district judges within the Third Circuit are split. For example, in Parente v. Bell Atlantic Pennsylvania, No. Civ. A. 99-5478, 2000 U.S. Dist. LEXIS 4851, 2000 WL 419981 (E.D. Pa. Apr. 18, 2000), Judge Reed held that “under Varity, a plaintiff is only precluded from seeking equitable relief under § 1132(a)(3) when a court determines that plaintiff will certainly receive or actually receives adequate relief for her injuries under § 1132(a)(1)(B) or some other ERISA section.” 2000 U.S. Dist. LEXIS 4851, [WL] at *3.

Judge Reed found that Fed. R. Civ. P. 8(e) specifically contemplated pleading in the alternative. Id. Therefore, Judge Reed reserved judgment on “the question of whether (and what kind of) equitable relief under § 1132(a)(3) is appropriate” until later in the litigation, when it could be determined “whether § 1132(a)(1)(B) will in fact provide the plaintiff adequate relief.” Id. (denying the motion to dismiss). See also Tannenbaum v. UNUM Life Ins. Co. of Am., No. Civ. A. 03-CV-1410, 2004 U.S. Dist. LEXIS 5664, 2004 WL 1084658, at *4 (E.D. Pa. Feb. 27, 2004) [*17] (Surrick, J.) (denying the motion to dismiss a claim for breach of fiduciary duty based on Section 502(a)(3) because “[a]t this stage, we cannot know whether Plaintiff will be able to prove his entitlement to benefits under § 1132(a)(1)(B)”).

If the plaintiff proceeds on both claims in the alternative, the defendant may properly reassert the argument that the plaintiff cannot recover under both ERISA sections at the summary judgment stage. Koert v. GE Grp. Life Assur. Co., No. Civ. A. 04-CIV-5745, 2005 U.S. Dist. LEXIS 14132, 2005 WL 1655888, at *3 (E.D. Pa. July 14, 2005) (Stengel, J.) (denying motion to dismiss and allowing plaintiff to proceed on claims for wrongful denial of benefits and breach of fiduciary duty simultaneously).

Note: For a contrary outcome, the Court noted the opinion in Cohen v. Prudential Ins. Co., Civ. A. No. 08-5319, 2009 U.S. Dist. LEXIS 71422, 2009 WL 2488911 (E.D. Pa. Aug. 12, 2009), where the judge ruled that held that the Plaintiff could “only permit the § (a)(3) claim to progress if the plaintiff can demonstrate that § (a)(1) (B) alone may not provide an adequate remedy.” 2010 U.S. Dist. LEXIS 32166, [WL] at *4; and see Miller v. Mellon Long Term Disability Plan, Civ. A. No. 09-1166, 2010 U.S. Dist. LEXIS 63167, 2010 WL 2595568, at *6 (W.D. Pa. June 25, 2010)

Other Circuits – The Court noted decisions in Katz v. Comprehensive Plan of Group Ins., 197 F.3d 1084, 1088 (11th Cir. 1999), Tolson v. Avondale Indus., Inc., 141 F.3d 604, 610 (5th Cir. 1998), Frommert v. Conkright, 433 F.3d 254, 270 (2d Cir. 2006) and Forsyth v. Humana, Inc., 114 F.3d 1467, 1475 (9th Cir. 1997) which align with the Cohen reasoning.

Claim Against Individuals - The Court held that a claim for equitable relief under Section 502(a)(3) may be pled against an individual defendant, citing Harris Trust & Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 120 S. Ct. 2180, 147 L. Ed. 2d 187 (2000) (“502(a)(3) admits of no limit . . . on the universe of possible defendants.”)

Section 510 Claim - I am not a big fan of Section 510 theories, but when they are appropriate then they have a place.  It just seems they so often don’t.  In any event, the Defendants also moved to dismiss Plaintiff’s claim for interference with benefit rights, pursuant to Section 510.

The Court noted that:

A plaintiff must make a three-pronged showing to establish a prima facie case under section 510: “1. prohibited employer conduct; 2. taken for the purpose of interfering; 3. with the attainment of any right to which the employee may become entitled.” Dewitt v. Penn-Del Directory Corp., 106 F.3d 514, 522 (3d Cir. 1997) (quoting Gavalik v. Cont’l Can Co., 812 F.2d 834, 852 (3d Cir. 1987)).

. . .

In this case, Plaintiff does not allege that he was discharged, fined, suspended, expelled, or disciplined by his employer. Furthermore, Plaintiff has not pled facts that show unlawful discrimination within the employer-employee relationship, such as demotion or termination. Plaintiff’s allegations that Defendants decided to suspend payments owed him, improperly influenced the Plan Administrators, and sent him an unauthorized notice terminating his benefits all pertain to actions outside of the employer-employee relationship for purposes of Section 510. Id

Defendants also moved to dismiss Plaintiff’s claim for interference with benefit rights, pursuant to Section 510. Section 510 of ERISA states:
It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan . . . for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan . . . The provisions of section 1132 of this title shall be applicable in the enforcement of this section.
29 U.S.C. § 1140. A plaintiff must make a three-pronged showing to establish a prima facie case under section 510: “1. prohibited employer conduct; 2. taken for the purpose of interfering; 3. with the attainment of any right to which the employee may become entitled.” Dewitt v. Penn-Del Directory Corp., 106 F.3d 514, 522 (3d Cir. 1997) (quoting Gavalik v. Cont’l Can Co., 812 F.2d 834, 852 (3d Cir. 1987)).
Congress intended for Section 510 to protect beneficiaries from dismissal and adverse employment actions such as “termination  [*13] motivated by an employer’s desire to prevent a pension from vesting.” Ingersoll-Rand, 498 U.S. at 143. The Third Circuit interpreted “discriminate against,” the broadest term in Section 510, as being “limited to actions affecting the employer-employee relationship.” Haberern v. Kaupp Vascular Surgeons Ltd. Defined Benefit Pension Plan, 24 F.3d 1491, 1503 (3d Cir. 1994) (holding that amending the defined benefit plan to eliminate life insurance benefits for beneficiaries over a certain age, which affected only the plaintiff, did not constitute “discrimination” in the employer-employee relationship).
In this case, Plaintiff does not allege that he was discharged, fined, suspended, expelled, or disciplined by his employer. Furthermore, Plaintiff has not pled facts that show unlawful discrimination within the employer-employee relationship, such as demotion or termination. Plaintiff’s allegations that Defendants decided to suspend payments owed him, improperly influenced the Plan Administrators, and sent him an unauthorized notice terminating his benefits all pertain to actions outside of the employer-employee relationship for purposes of Section 510. Id

Thus, the Court provides a kind of roadmap for what a Section 510 claim has to look like – if it can fit the facts.

(I uploaded this case on erisaboard.com)

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:: Feds Ease Grandfather Rule Requirements For Insured Plans

The federal agencies regulating under the PPACA have determined that changing issuers should not result in a loss of a plan’s grandfathered status.

The new guidance was anticipated inasmuch as a change in insurers is frequently necessary and the distinction between self-funded plans (that could change claims administrators) and insured plans (which heretofore could not change insurers) was arbitrary and senseless. Individual insurance policies remain subject to the rule forbidding changes in insurers.

From the fact sheet on the new guidance:

On June 17th, the Departments of Health and Human Services, Labor, and the Treasury (the Departments) issued the “grandfather” regulation which, by addressing how health plans can retain a “grandfathered” exemption from certain new requirements, helps protect Americans’ ability to keep their current plan if they like it. At the same time, Americans in grandfathered plans will receive many of the added benefits that the new law provides. The regulation also minimizes market disruption and helps put us on a path toward the competitive, patient-centered market of the future.

The grandfather regulation includes a number of rules for determining when changes to a health plan cause the plan to lose its grandfathered status. For example, plans could lose their grandfather status if they choose to make certain significant changes that reduce benefits or increase costs to consumers. This amendment modifies one aspect of the original regulation.

Previously, one of the ways an employer group health plan could lose its grandfather status was if the employer changed issuers – switching from one insurance company to another. The original regulation only allowed self-funded plans to change third-party administrators without necessarily losing their grandfathered plan status. Today’s amendment allows all group health plans to switch insurance companies and shop for the same coverage at a lower cost while maintaining their grandfathered status, so long as the structure of the coverage doesn’t violate one of the other rules for maintaining grandfathered plan status.

(cross posted on erisaboard.com)

The amendment to the interim rule can be read in its entirety here.

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:: Florida District Court Rules That PPACA Challenge May Proceed

It appears that the individual mandate under the PPACA may be headed for rough sailing. Here is an excerpt from an opinion today in which the Obama administration’s motion to dismiss was denied.

The government has never required people to buy any good or service as a condition of lawful residence in the United States.” See Congressional Budget Office Memorandum, The Budgetary Treatment of an Individual Mandate to Buy Health Insurance, August 1994 (emphasis added). Of course, to say that something is “novel” and “unprecedented” does not necessarily mean that it is “unconstitutional” and “improper.” There may be a first time for anything. But, at this stage of the case, the plaintiffs have most definitely stated a plausible claim with respect to this cause of action.

You can pick up a link to the opinion and other pertinent information here.

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:: PPACA FAQ Resources Page

The Employee Benefit Security Administration has published several “frequently asked questions” installments.   These FAQ’s supplement the several interim rules providing guidance on some of the many vague standards set forth in the PPACA.

The regulatory effect of a FAQ is perhaps an untested legal point, but presumably the FAQ’s give some insight on the intentions of the regulators as they contemplate promulgation of further regulations under the PPACA.  I have added a resources page that contains a collation of three FAQ installments published on the EBSA website.  You may access that page here.

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:: ERISA’s Plan’s Reimbursement Claim Enforced Against Disbursed UIM Benefits

Here, US Airways seeks the restoration of particular funds, the lawsuit settlement and UIM benefits, as distinct from McCutchen’s general assets, traceable to the Plan and subject to an equitable lien for the benefit of the Plan. Therefore, even if the monies paid to McCutcheon are not specifically traceable to McCutchen’s current assets because of commingling or dissipation, such monies remain subject to the Plan’s equitable lien.

U.S. Airways v. James McCutchen et al, (W.D. Pa.) (August 30, 2010)

This is a very significant opinion addressing ERISA health plan subrogation.   I uploaded the opinion on erisaboard.com and this is a cross-post of the commentary on the case.

U.S. Airways v. James McCutchen et al presents a set of facts typical of an ERISA health plan subrogation case. After suffering injuries in an automobile accident, James mcCutchen engages plaintiff’s counsel, “RL&P” for purposes herein, and ultimately settles his case:

McCutchen’s claims were eventually settled for $10,000.00 from the driver whose vehicle struck McCutchen’s, and $100,000.00 in underinsured motorist benefits (the “UIM Claim”), the limits of the policy, under McCutchen’s automobile insurance policy.

McCutchen rejected the ERISA plan’s reimbursement claims. Upon receipt of settlement funds, RL&P deducted its fee and a proportionate share of the expenses from the total settlement and placed $41,500.00 in its trust account for any lien against McCutchen found to be valid.

The plan sues for reimbursement under the terms of 29 U.S.C. 1132(a)(3). In the suit, the plan seeks the $41,500.00 held by RL & P, as well as $25,365.82 allegedly in the possession of McCutchen.

The Court finds that the plan has properly framed its claims under ERISA:

ERISA expressly authorizes fiduciaries of ERISA-governed plans to sue to seek redress of violations or enforce provisions of ERISA or of particular plans. 29 U.S.C. § 1132(a)(3). Further, where an ERISA-governed plan seeks to impose a constructive trust or equitable lien on “particular funds or property in the defendant’s possession,” such plan is seeking equitable restitutionary relief as contemplated by ERISA under § 502(a)(3). Sereboff v. Mid-Atlantic Medical Services, 547 U.S. 356, 361-362 (2006). Here, US Airways is seeking to enforce certain subrogation/reimbursement provisions of the Plan.

The court quickly rejects the notion of “make whole” as a defense to the plan’s claims. A more interesting issue arose in the context of whether the UIM coverage was subject to the plan’s claims:

Defendants argue that, in the area of personal injury law, the term “third party” is universally accepted as referring to the at-fault tortfeasor. Defendants argue, therefore, that the language “[y]ou will be required to reimburse the Plan for amounts paid for claims out of any monies recovered from a third party, including, but not limited to, your own insurance company . . .” creates an ambiguity because one “cannot recover money from the third
party from one’s own insurance company.”

The Court finds the issue resolved by prior Third Circuit authority:

In Bill Gray, the Third Circuit was presented with the same issue and found:

The term “third party” is not ambiguous because the term clearly
refers to any person or entity other than the Plan and the covered
individual. “Third party” broadly refers to a variety of individuals
and entities who are not “a party to a lawsuit, agreement, or other
transaction.” Black’s Law Dictionary 1489 (7th ed. 1999). As the
District Court noted, the term third party “in common parlance
refers to a person or entity not an initial party to a suit or
transaction who may have rights or obligations therein.” Bill Gray
Enter., Inc., slip op. at *15. While this provision contemplates
broad rights to reimbursement, we do not believe this translates
into ambiguity.

Bill Gray Enters. v. Gourley, 248 F.3d at 220. Similar to the language in the US Airways’ Plan, the Plan document in Bill Gray explicitly provided that reimbursement also applied “when a Covered Person recovers under an uninsured or underinsured motorist plan . . .” Id. Based upon that language, the court found that a “reasonable plan participant . . . would understand the Plan document clearly mandates any recoveries from an uninsured motorist plan are subject to reimbursement.” Id.

Based on the above, this Court finds that the term “third party” as it is used in the passage related to subrogation and reimbursement is clear and unambiguous. The Plan document clearly requires reimbursement by McCutchen of monies recovered including the UIM benefits paid by his insurance company. The Court finds that the interpretation on the Plan document was not arbitrary and capricious, and the Plan is, therefore, entitled to reimbursement from the monies McCutchen received in settlement of his tort claims including the uninsured motorist benefits received from his insurance company.

The Court then turned to the issue of attorneys’ fees. The Defendants argued that the plan had not expressly addressed this issue and that the Court should thus find deduction of attorneys’ fees from the settlement permissible. The Court rejects this argument, stating:

A plan or agreement, however, need not specifically address attorney’s fees in order to unambiguously require full reimbursement. See Bollman Hat Co. v. Root, 112 F.3d at 117; see also Ryan by Capria-Ryan v. Federal Express Corp., 78 F.3d at 127-128. The ERISA plan in Ryan required “100% reimbursement for any plan benefits paid.” Ryan by Capria-Ryan v. Federal Express Corp., 78 F.3d at 125.

The US Airways Plan is unambiguous and requires reimbursement of any payments made by the Plan to the participant and clearly provides for subrogation to all of McCutchen’s rights of recovery. Third Circuit precedent does not permit federal common law to override a subrogation provision in an ERISA-regulated plan. US Airways, therefore, is entitled to full reimbursement of benefits paid under the Plan without reduction for the proportionate share of attorneys’ fees.

Probably the most interesting outcome of the case is the finding that the plan’s equitable lien extended to funds which had not been held in trust. The Court states that:

Here, US Airways seeks the restoration of particular funds, the lawsuit settlement and UIM benefits, as distinct from McCutchen’s general assets, traceable to the Plan and subject to an equitable lien for the benefit of the Plan. Therefore, even if the monies paid to McCutcheon are not specifically traceable to McCutchen’s current assets because of commingling or dissipation, such monies remain subject to the Plan’s equitable lien. See e.g. Gutta v. Standard Select Trust Ins. Plans, 530 F.3d 614, 621 (7th Cir. 2008) (allowing a claim under “29 U.S.C. § 1132(a)(3) even if the benefits it paid [the beneficiary] are not specifically traceable to [the beneficiary’s] current assets because of commingling or dissipation.”); Bombardier Aerospace Employee Welfare Benefits Plan v. Ferrer, Poirot & Wansbrough, 354 F.3d 348, 350, 362 (5th Cir. 2003) (allowing an ERISA plan to recover the settlement proceeds that the plan beneficiary’s law firm had deposited into its trust account).

US Airways, therefore, has a claim for equitable relief over the “specifically identifiable” fund consisting of the $100,000.00 from the UIM Claim and the $10,000.00 from the personal injury settlement.

This decision is definitely one for plan fiduciaries and plaintiff’s attorneys to add to the “must read” stack on ERISA subrogation.

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:: Resource On False Claims Act & Qui Tam Claims

There are a number of federal criminal, civil and administrative enforcement provisions set forth in the Medicare statutes which are aimed at preventing fraudulent conduct, including hospice fraud, and which help maintain program integrity and compliance. Some of the more prominent enforcement provisions of the Medicare statutes include the following: 42 U.S.C. § 1320a-7b (Criminal fraud and anti-kickback penalties); 42 U.S.C. § 1320a-7a and 42 U.S.C. § 1320a-8 (Civil monetary penalties for fraud); 42 U.S.C. § 1320a-7 (Administrative exclusions from participation in Medicare/Medicaid programs for fraud); 42 U.S.C. § 1320a-4 (Administrative subpoena power for the Comptroller General).

Other criminal enforcement provisions which are used to combat Medicare and Medicaid fraud, including hospice fraud, include the following: 18 U.S.C. § 1347 (General health care fraud criminal statute); 21 U.S.C. §§ 353, 333 (Prescription Drug Marketing Act); 18 U.S.C. § 669 (Theft or Embezzlement in Connection with Health Care); 18 U.S.C. § 1035 (False statements relating to Health Care); 18 U.S.C. § 2 (Aiding and Abetting); 18 U.S.C. § 3 (Accessory after the Fact); 18 U.S.C. § 4 (Misprision of a Felony); 18 U.S.C. § 286 (Conspiracy to defraud the Government with respect to Claims); 18 U.S.C. § 287 (False, Fictitious or Fraudulent Claims); 18 U.S.C. § 371 (Criminal Conspiracy); 18 U.S.C. § 1001 (False Statements); 18 U.S.C. § 1341 (Mail Fraud); 18 U.S.C. § 1343 (Wire Fraud); 18 U.S.C. § 1956 (Money Laundering); 18 U.S.C. § 1957 (Money Laundering); and, 18 U.S.C. § 1964 (Racketeer Influenced and Corrupt Organizations (“RICO”)).

Joseph P. Griffith, Jr., Hospice Fraud in South Carolina & the U.S. – A Review for SC Hospice Attorneys, Lawyers, Law Firms and Qui Tam Whistleblowers (2010)

Joe Griffith is a former federal prosecutor now in private practice in Charleston, SC.  Joe handles white collar crime cases and select litigation matters. I met Joe when giving a presentation on the PPACA for the South Carolina Bar last month. I have previously posted information on the criminal aspect of ERISA enforcement.  Joe was kind enough to give me permission to make his article on hospice fraud available to supplement the criminal enforcement material available on this site.

I uploaded the above-referenced article on erisaboard.com in the Resources/Scholarship forum.  It is an excellent resource for those seeking an overview of the False Claims Act and Qui Tam arena.   (For those who are not registered with erisaboard.com, that particular forum should be open for public viewing next week .)

I hope to soon have an excerpt from a health care fraud book Joe is co-authoring with Bart Daniel, Esq., also of Charleston (and also a former federal prosecutor and U.S. Attorney), which I will make available on this site and erisaboard.com as well.

The federal and state governments are recovering billions of dollars through simultaneous criminal and civil litigation initiatives.  These illustrate the issues and risks that arise under a myriad of statutory and regulatory regimes, many of which were enhanced under the PPACA.

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:: 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”).
FOOTNOTES
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).
FOOTNOTES
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.

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:: Equitable Reformation Of Plan Permitted As § 502(a)(3) Relief

We have never considered whether § 502(a)(3) authorizes equitable reformation of an ERISA plan due to a scrivener’s error, but our case law addressing the related problem of ambiguous plan language suggests that such relief may be appropriate.

Young v. Verizon’s Bell Atl. Cash Balance Plan, 2010 U.S. App. LEXIS 16483 (7th Cir. Ill. Aug. 10, 2010)

In the typical ERISA case, the scope of relief under § 502(a)(3) poses a challenge for plan claimants.  In Young v. Verizon, however, the plan sought relief under (a)(3) to avoid paying benefits according to a benefit formula that it contended contained an error.

The formula itself was rather complicated, but the facts concerning its function do not really add much to appreciation of the key point of the opinion.

The following excerpt captures the essential issue:

“People make mistakes.  Even administrators of ERISA plans.” Conkright v. Frommert, 130 S. Ct. 1640, 1644, 176 L. Ed. 2d 469 (2010).  This introduction was fitting in Conkright, which dealt with a single honest mistake in the interpretation of an ERISA plan.  It is perhaps an understatement in this case, which involves a devastating drafting error in the multi-billion-dollar plan administered by Verizon Communications, Inc. (“Verizon”).

Verizon’s pension plan contains erroneous language  that, if enforced literally, would give Verizon pensioners like plaintiff Cynthia Young greater benefits than they expected. Young nonetheless seeks these additional benefits based on ERISA’s strict rules for enforcing plan terms as written.

The interesting twist here is that the plan defended by asserting by counterclaim the right to equitable reformation of the plan.   This strategy, apparently intimated as a possibility by the district court, required some foundation from the introduction of extrinsic evidence.

Taking the district court’s cue, Verizon counterclaimed for equitable reformation of the Plan to remove the second transition factor in § 16.5.1(a)(2) as a “scrivener’s error.”   The court took up Verizon’s counterclaim in the second phase of the trial, in which the court conducted a de novo review of the Plan and allowed the parties to introduce extrinsic evidence on the intended meaning of § 16.5.1(a)(2).   And that evidence overwhelmingly showed that the inclusion of the second transition factor was indeed a scrivener’s error.

After a survey of authorities, the court concludes that equitable relief is appropriate in this case, stating:

Although Young raises some forceful arguments, we conclude that ERISA’s rules are not so strict as to deny an employer equitable relief from the type of “scrivener’s error” that occurred here. We will accordingly affirm the district court’s judgment granting Verizon equitable reformation of its plan to correct the scrivener’s error.

Note: The surveyed authorities include the following cases:

  • Mathews v. Sears Pension Plan, 144 F.3d 461 (7th Cir. 1998) (“Although the plain language of the plan suggested a benefits formula more favorable to employees, the employer offered objective, extrinsic evidence showing an “extrinsic ambiguity” in this language.”)
  • Grun v. Pneumo Abex Corp., 163 F.3d 411, 420-21 (7th Cir. 1998) (“Reformation was inappropriate in Grun because the employee relied on the literal plan language to predict his right to severance compensation.”)
  • Int’l Union v. Murata Erie N. Am., Inc., 980 F.2d 889, 907 (3d Cir. 1992) (“Third Circuit . . . found equitable reformation appropriate because holding the employer to the scrivener’s error would produce “what is admittedly a ‘windfall’”)
  • Wilson v. Moog Auto., Inc. Pension Plan, 193 F.3d 1004, 1008-10 (8th Cir. 1999) (“Reformation was possible because extrinsic evidence showed that none of the plaintiffs actually relied on the erroneous plan language or believed that they would be eligible for early retirement.”)
  • Cinelli v. Sec. Pac. Corp., 61 F.3d 1437, 1444-45 (9th Cir. 1995) (rejecting an employee’s claim that the absence of a plan provision entitling him to vested life insurance benefits was a mistake)
  • Blackshear v. Reliance Standard Life Ins. Co., 509 F.3d 634, 643-44 (4th Cir. 2007), abrogated on other grounds as stated in Williams v. Metro. Life Ins. Co., Nos. 09-1025 & 09-1568, 2010 U.S. App. LEXIS 13328, 2010 WL 2599676, at *5 (4th Cir. June 30, 2010) (court declines to equitably reform an ERISA plan where the plan language was clear and neither the summary plan description nor other plan documents supported the employer’s claim of a scrivener’s error.)

Recurring factors noted in the cases are the potential for windfall, reliance by the parties (with some attention to administrative practice) and the parties’ expectations.

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:: Claims Appeals – The New Order Of Affairs For ERISA Plans (Part I)

As Tennyson said, “the old order changeth, yielding place to new”, and so it is in claims appeals after the PPACA. This is one of several segments on the claims appeals and review process for health plans after the new legislation.

In this segment, let’s look at the appeal process. Before the PPACA, ERISA only mandated internal review. Regulations on that process were promulgated.

Nothing is lost here in the new law. PHS Act section 2719 provides that plans and issuers must initially incorporate the internal claims and appeals processes set forth in 29 CFR 2560.503–1.

So much for the old order. Now what about the new?

Under the new law, the plan must give notice in a “culturally and linguistically appropriate manner” of claim denial and appeal processes. (Is that different than the old standard of “written in a manner calculated to be understood by the average plan participant”?)

Furthermore, the plan must provide information on available internal and external appeals processes. And the plan must allow participants to “review their file”. The whole file it would seem – but what in fact is the file? That should provide fodder for the litigation mill for quite a while.

But there is more. The participant must be allowed to present evidence and testimony as part of the appeals process. Evidence from what quarter? Does this speak implicitly to discovery rights or would that be reading too much into the new law?

In any event, here’s the kicker – coverage continues pending outcome of appeal. I will have more to say about that later. For now, let’s take some time to absorb the fact that the PPACA has altered the old order and replaced it with something, and something that appears quite new.

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:: Attorneys’ Fees & Costs Awards In The Fourth Circuit

As we stated in Williams v. Metropolitan Life Insurance Co., a district court in an ERISA action may, in its discretion, award reasonable attorneys’ fees to either party under 29 U.S.C. § 1132(g)(1), if that party has achieved “‘some degree of success on the merits.’” ___ F.3d ___, No. 09-1025, 2010 U.S. App. LEXIS 13328, **25-26 (4th Cir. June 30 2010) (quoting Hardt v. Reliance Std. Life Ins. Co., ___ U.S. ___, 130 S.Ct. 2149, 2152, 176 L. Ed. 2d 998 (2010)).

We review a district court’s award of attorneys’ fees to an eligible litigant to determine whether the court has abused its discretion. Williams, ___ F.3d at ___, 2010 U.S. App. LEXIS 13328, *25; Mid Atl. Med. Servs., LLC v. Sereboff, 407 F.3d 212, 221 (4th Cir. 2005). The district court’s factual findings in support of such an award are reviewed for clear error. Williams, ___ F.3d at ___, 2010 U.S. App. LEXIS 13328, *25; Hyatt v. Shalala, 6 F.3d 250, 255 (4th Cir. 1993).

Rinaldi v. CCX, Inc., 2010 U.S. App. LEXIS 14611 (4th Cir. N.C. July 16, 2010)

Rinaldi provides a useful overview of factors considered in whether to award of attorneys’ fees and costs.  The Court begins with a foundation question, “whether Rinaldi achieved ‘some degree of success on the merits’ in the district court. ‘”

The Court concludes” [b]ecause the district court found in Rinaldi’s favor and awarded him the severance benefits due under the Employment Agreement, we conclude that Rinaldi was eligible for an award of attorneys’ fees.”

The District Court’s Opinion

Although Rinaldi was eligible for an award of reasonable attorneys’ fees, the district court retained the discretion to decline to award Rinaldi such fees.

The Court observes that,

In Williams, we restated the familiar guidelines that assist a district court’s discretionary determination whether attorneys’ fees should be awarded to an eligible litigant.

The guidelines are as follows:

(1) degree of opposing parties’ culpability or bad faith;

(2) ability of opposing parties to satisfy an award of attorneys’ fees;

(3) whether an award of attorneys’ fees against the opposing parties would deter other persons acting under similar circumstances;

(4) whether the parties requesting attorneys’ fees sought to benefit all participants and beneficiaries of an ERISA plan or to resolve a significant legal question regarding ERISA itself; and

(5)  the relative merits of the parties’ positions.

Williams, ___ F.3d at ___, 2010 U.S. App. LEXIS 13328, **27-28 (quoting Quesinberry v. Life Ins. Co. of N. Am., 987 F.2d 1017, 1029 (4th Cir. 1993) (en banc)).

Although Rinaldi was eligible for an award of reasonable attorneys’ fees, the district court retained the discretion to decline to award Rinaldi such fees. In Williams, we restated the familiar guidelines that assist a district court’s discretionary determination whether attorneys’ fees should be awarded to an eligible litigant. These guidelines include the following five factors:
(1) degree of opposing parties’ culpability or bad faith;
(2) ability of opposing parties to satisfy an award of attorneys’ fees;
(3) whether an award of attorneys’ fees against the opposing parties would deter other persons acting under similar circumstances;
(4) whether the parties requesting attorneys’ fees sought to benefit all participants and beneficiaries of an ERISA plan or to resolve a significant legal question regarding ERISA itself; and
(5)  [*19] the relative merits of the parties’ positions.
Williams, ___ F.3d at ___, 2010 U.S. App. LEXIS 13328, **27-28 (quoting Quesinberry v. Life Ins. Co. of N. Am., 987 F.2d 1017, 1029 (4th Cir. 1993) (en banc)).

Denial Of Attorneys’ Fees Award

The standard is difficult for the challenging party.  Here, the district court’s opinion stood the challenge by the appellant.

. . . we cannot conclude that the district court abused its discretion in declining to award Rinaldi attorneys’ fees. We therefore affirm the district court’s holding denying Rinaldi’s request.

Denial Of Costs

We next address Rinaldi’s argument that the district court erred in denying his request for costs. We agree with Rinaldi that there is a presumption in favor of awarding costs to a prevailing party.

Here we turn to the Federal Rules of Civil Procedure.

Under Rule 54(d)(1) of the Federal Rules of Civil Procedure, costs “should be allowed to the prevailing party” unless a federal statute provides otherwise.

Presumption Indulged

As we stated in Williams, the ERISA statute does not alter this general rule in favor of presumptively awarding fees to the prevailing party, and instead expressly permits a district court to award costs in the court’s discretion. ___ F.3d at ___, 2010 U.S. App. LEXIS 13328, *32 (citing 29 U.S.C. § 1132(g)(1)).

We therefore agree with Rinaldi’s argument that he was entitled to a presumption in favor of costs.

Error Found

The district court bound up its decision on awarding attorneys’ fees with that of awarding costs.  This, absent an articulated grounds, could not stand.

[I]n Teague v. Bakker, . . . we stated that if a district court chooses to depart from the general rule favoring an award of costs to the prevailing party, the court must justify its decision by “articulating some good reason for doing so.” 35 F.3d 978, 996 (4th Cir. 1994) (citations omitted). Because the district court did not state any reason for its decision, we reverse the district court’s holding denying Rinaldi’s request for an award of costs, and remand the case to the district court for reconsideration of Rinaldi’s request in light of the standard that we have discussed here.

And thus,

For these reasons, we reverse the part of the district court’s judgment denying Rinaldi an award of costs, and remand the case to the district court for reconsideration of that issue.

We affirm the balance of the district court’s judgment.

Note: Aside from procedural issues of fees and costs, the case has larger application, namely, application of the “after-acquired evidence rule.”

Upon agreement of the parties, the district court applied a test requiring that CCX prove its claim of after-acquired evidence by establishing the following three elements:

(1) Rinaldi was guilty of some misconduct of which CCX was unaware;

(2) the misconduct constitutes “acts of dishonesty” in connection with CCX’s business, “gross neglect” of his obligations, or “illegal acts;” and

(3) []CCX would have discharged Rinaldi for cause had it known of the misconduct.

More on this point here:

Although we have not previously considered an after-acquired evidence defense in an ERISA case, we have considered this defense in other types of civil cases. In our decisions in those cases, we have applied a three-part test that is essentially the same as the test employed here by the district court. See, e.g., Dotson v. Pfizer, Inc., 558 F.3d 284, 298 (4th Cir. 2009) (involving alleged violations of the Family and Medical Leave Act of 1993, 29 U.S.C. §§ 2601-2654); Miller v. AT&T Corp., 250 F.3d 820, 837 (4th Cir. 2001) (same); Russell v. Microdyne Corp., 65 F.3d 1229, 1240 (4th Cir. 1995) (involving alleged violations of Title VII of the Civil Rights Act of 1964, 42 U.S.C. §§ 2000e-2000e-17).

The three-part test used by the district court also is essentially the same as the Supreme Court’s test for after-acquired evidence set forth in McKennon v. Nashville Banner Publishing Co., 513 U.S. 352, 362-63, 115 S. Ct. 879, 130 L. Ed. 2d 852 (1995), a case arising under  the Age Discrimination in Employment Act of 1967 (ADEA), 29 U.S.C. §§ 621-634.

We have a review of this case on erisaboard.com which addresses this aspect of the decision in more detail.

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:: ERISA Preemption Notes After PCMA v. District Of Columbia

The Supreme Court has not prescribed a standard for determining whether a state law sufficiently constrains an EBP’s decision-making in an area of ERISA concern that the law is pre-empted, but it has indicated a law that “bind[s] plan administrators to any particular choice” is pre-empted. Travelers, 514 U.S. at 659. We need go no further: Sections 48-832.01(a), (b)(1), and (d) bind plan administrators because the “choice” they leave an EBP between self administration and third-party administration of pharmaceutical benefits is in reality no choice at all.

For most if not all EBPs, internal administration of beneficiaries’ pharmaceutical benefits is a practical impossibility because it would mean forgoing the economies of scale, purchasing leverage, and network of pharmacies only a PBM can offer.  By imposing requirements upon third-party service providers that administer pharmaceutical benefits for an EBP, §§ 48-832.01(a), (b)(1), and (d) “function as a regulation of an ERISA plan itself.” Travelers, 514 U.S. at 659. Because these provisions also regulate an area of ERISA concern, they are pre-empted.

Pharm. Care Mgmt. Ass’n v. District of Columbia, 2010 U.S. App. LEXIS 13991 (D.C. Cir. July 9, 2010)

The decision by the D.C. Circuit in PCMA v. D.C. touches on issues that at first glance appear somewhat remote in the average benefits practice, but I think readers will find some useful analysis in the opinion.

On the big picture, the Court of Appeals found that a substantial part of the District’s  law regulating pharmacy benefit mangers (Access Rx Act of 2004, D.C. Code § 48-832.01 et seq.) was preempted.   Some contractual provisions that could be waived by benefit plans survived the preemption challenge.   Additional argument remains for consideration on remand, so the case will likely be around for a while yet.

On a decidedly less rarefied level, we find development of some recurring themes that arise in everyday concerns about which claims are preempted and why.    Of course, in the PCMA case, the key theme was state law preemption.

A state law “relates to” an EBP “if it [1] has a connection with or [2] reference to such a plan.” Egelhoff v. Egelhoff, 532 U.S. 141, 147, 121 S. Ct. 1322, 149 L. Ed. 2d 264 (2001) (quoting Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 97, 103 S. Ct. 2890, 77 L. Ed. 2d 490 (1983)).

The PCMA argued that Title II of the law intruded on plan administration.   As such, the law would be preempted if it had an impermissible effect upon employee benefit plans.   Bypassing the discussion of these legally freighted terms, I think the District’s defense of the statute is really more interesting for my purposes.

The District found itself inconveniently stuck with the fact that its law regulating PBM’s impinged plan benefit administration.  (The law imposes fiduciary responsibilities, disclosure of rebates and pass through of discounts, among other things.)

This point had to be admitted.

The District does not deny the administration of employee benefits is an area of core ERISA concern or that PBMs administer benefits on behalf of EBPs; indeed at oral argument  it conceded as much.

The District sought refuge in case law suggesting that garden variety breach of contract of malpractice claims are not preempted:

Rather, the District argues the various provisions of Title II nonetheless fall within the scope of state law the Congress did not intend to pre-empt with ERISA because they do not regulate “relationships among ERISA entities,” such as a plan and an ERISA fiduciary or a plan and its beneficiaries.

The District points to no support for this limitation upon pre-emption either in ERISA itself or in any Supreme Court case interpreting it. Instead, the District relies upon decisions of other circuits holding ERISA did not pre-empt breach of contract or professional malpractice claims against third-parties who provided services to an EBP.

This argument failed, as the preceding excerpt would suggest.

The Court says that the District read too much into the cases it relied upon.   A law affecting the  ”relationships among ERISA entities,” such as a plan and an ERISA fiduciary or a plan and its beneficiaries is a concern – but that is not a touchstone for preemption.

As the PCMA points out, in none of the cases cited by the District did the state law regulate a third party who administered employee benefits on behalf of a plan. Those cases therefore suggest only that the relationship among ERISA entities is an area of ERISA concern, not that the objective of uniformity in plan administration is for some reason inapplicable simply because a plan has contracted with a third party to provide administrative services.

Given the restrictions the law would impose on plan administrators in their dealings with PBM’s, the Court found an impermissible effect on ERISA plan administration and held Title II preempted.

Note: The non-preempted state law claims relied upon by analogy in the opinion are quite important for benefit practitioners in the prosecution or defense of negligence and contractual cases against plan administrators and other service providers.

A case by a participant against a service provider has at least two strikes against it – #1 the traditional ERISA entities are involved – and #2 the case will likely consist of complaints about administration issues.    Here the Court’s observation distinguishing the cited authorities is of interest:

Indeed, dicta in two cases central to the District’s argument   suggest a state law regulating a third party’s performance of administrative functions on behalf of a plan could be pre-empted. See Gerosa v. Savasta & Co., 329 F.3d 317, 324 (2d Cir. 2003) (noting that although courts are “reluctant to find that Congress intended to preempt state laws that do not affect the relationships among [ERISA entities]” they have “typically” held ERISA pre-empts “state laws that would tend to control or supersede central ERISA functions–such as state laws affecting the determination of eligibility for benefits, amounts of benefits, or means of securing unpaid benefits”); Airparts Co. v. Custom Benefit Servs. of Austin, 28 F.3d 1062, 1066 (10th Cir. 1994) (holding claims for negligence, indemnity, and common-law fraud not pre-empted where defendant “was simply an outside consultant which did not directly perform any administrative act vis-a-vis the plan”).

Furthermore, when actually confronted with a malpractice claim challenging a third party’s performance of administrative services on behalf of a plan, the Third Circuit held the claim was pre-empted by ERISA. See Kollman v. Hewitt Assocs., 487 F.3d 139, 148 (2007) (holding ERISA pre-empts malpractice claim  against non-fiduciary service provider responsible for plan administration; goal of uniformity reflected in ERISA is “equally applicable to agents of employers … who undertake and perform administrative duties for and on behalf of ERISA plans”).

Note, however,  that the plaintiff in Kollman was a plan participant. (#1 above)  Compare: Custer v. Sweeney, 89 F.3d 1156, 1167 (4th Cir. 1996) (trustee’s state law legal malpractice claim against an ERISA plan’s attorney not subject to ERISA preemption), where trustee was plaintiff.

What Is Plan Administration? From the opinion:

Plan administration includes “determining the eligibility of claimants, calculating benefit levels, making disbursements, monitoring the availability of funds for benefit payments, and keeping  appropriate records in order to comply with applicable reporting requirements.” Fort Halifax, 482 U.S. at 9.

Voluntary Provisions Prevail – It was not all downside for the District:

The District’s point is well-taken with regard to the usage pass back provision, § 48-832.01(b)(2), because it expressly provides that it “does not prohibit the covered entity from agreeing by contract to compensate the [PBM] by returning a portion of the benefit or payment,” and with regard to § 48-832.01(c), which requires disclosure (and imposes a corresponding duty of confidentiality) only “[u]pon request by a covered entity.” Those provisions are in essence voluntary provisions for the covered entity.

Circuit Conflict – As the Court observed:

This holding differs from that of the First Circuit in Rowe, which held no part of a nearly identical Maine statute was pre-empted by ERISA. See 429 F.3d at 303. In our view the uniform administrative scheme encouraged by ERISA includes  plan administrative functions performed by a third party on behalf of an EBP.

See also - :: PBM’s Prevail In Controversy Over ERISA Preemption Of Disclosure Legislation

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:: EBSA Publishes Guidance On Health Care Reform (PPACA)

The Department of Labor’s Employee Benefits Security Administration has posted the following related to preexisting condition exclusions, lifetime and annual limits, rescissions and patient protections under the Affordable Care Act:

The EBSA has published guidance regarding preexisting condition exclusions, lifetime and annual limits, rescissions and patient protections under the Patient Protection And Affordable Care Act:

Published version of Interim Final Regulation, available at

http://www.dol.gov/federalregister/HtmlDisplay.aspx?DocId=23983&AgencyId=8&DocumentType=2Model Notice on Patient Protections, available at

http://www.dol.gov/ebsa/patientprotectionmodelnotice.docModel Notice on Lifetime Limits No Longer Applying and Enrollment Opportunity, available at

http://www.dol.gov/ebsa/lifetimelimitsmodelnotice.docModel Notice of Opportunity to Enroll in Connection with Extension of Dependent Coverage to Age 26, available at

http://www.dol.gov/ebsa/dependentsmodelnotice.doc

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:: 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.

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:: DOL Releases Guidance On Grandfathered Health Plans

The Department of Labor’s Employee Benefits Security Administration has posted the following related to grandfathered health plans under the Affordable Care Act:

Interim Final Regulation, available at

http://www.federalregister.gov/OFRUpload/OFRData/2010-14488_PI.pdf

Fact Sheet, available at

http://www.healthreform.gov/newsroom/keeping_the_health_plan_you_have.html

FAQs, available at

http://healthreform.gov/about/grandfathering.html

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:: Conkright In The Courts – A Summary Review

Following Metropolitan Life Insurance Co. v. Glenn, 554 U.S. 105 (2008), the U.S. Supreme Court’s opinion in  Conkright v. Frommert,  ___ U.S.  ___  , 130 S. Ct. 1640, 176 L. Ed. 2d 469 (2010), added another layer of protection for plan fiduciaries.  Glenn held that a conflict of interest is but one factor to be considered by a reviewing court.  Conkright held that a “single honest mistake”  did not forfeit deference. 

Here’s a quick look at how Conkwright has been applied in the short time since its decision.

A recent Third Circuit non-precedential opinion demonstrates the wide berth a Glenn/Conkright analysis gives plan fiduciaries:

Also waived is Goletz’s argument that, because Prudential’s handling of this case has already been faulted once by the District Court, we should now forego extending any deference to Prudential’s decision and subject it to de novo review. This position was all but rejected by the Supreme Court in Conkright, in which the Court explained that ERISA plan administrators “make mistakes” and that a “single honest mistake in plan interpretation” does not justify “stripping the administrator of . . . deference for subsequent related interpretations of the plan.” ___ U.S. ___, 130 S. Ct. 1640, 176 L. Ed. 2d 469, 2010 WL 1558979, at *3.

Goletz v. Prudential Ins. Co. of Am., 2010 U.S. App. LEXIS 11501 (3d Cir. Del. June 7, 2010)

On the other hand, a recent district court decision reveals some limitations on the application on Conkright.  In this case, the decision of which interest rate is appropriate did not warrant deference, in the opinion of the court:

This leaves the question of what interest rate or rates defendant should use to estimate plaintiffs’ future interest credits. Defendant’s motion to file a surreply brief will be granted to allow defendant to argue that under the recent decision by the United States Supreme Court in Conkright v. Frommert, 130 S. Ct. 1640 (2010), the court should allow defendant to choose a new method  for determining an unbiased rate. I conclude that Conkright has no bearing on the issue to be decided in this case. Deferring to the plan fiduciary would be inappropriate in a matter such as this one, involving the method for reflecting future interest credit, on which the plan administrator enjoys no discretion.

Larson v. Alliant Energy Cash Balance Pension Plan, 2010 U.S. Dist. LEXIS 55420 (W.D. Wis. June 3, 2010)

And a pattern of “deliberate actions” may serve to undo the plan fiduciary seeking the cover of Conkright:

This Court is also aware of the U.S. Supreme Court decision in Conkright and finds it inapplicable to the facts of this case. “The question here is whether a single honest mistake in plan interpretation justifies stripping the administrator of that deference for subsequent related interpretations of the plan. We hold that it does not.” Conkright v. Frommert, 130 S. Ct. 1640, 176 L. Ed. 2d 469, 2010 WL 1558979, 3 (2010) v. Frommert, 130 S. Ct. 1640, 176 L. Ed. 2d 469, 2010 WL 1558979, 3 (2010). This case involves not “a single honest mistake,” but a number of deliberate actions by the plan administrator.

Nolan v. College, 2010 U.S. Dist. LEXIS 53997 (N.D. Cal. May 6, 2010)

A predicted trend toward more frequently “remands” of cases to plan administrators finds support in a recent district court opinion.

As the Supreme Court recently reiterated, “ERISA law [is] already complicated enough without adding special procedural or evidentiary rules to the mix.” Conkright v Frommert,     US    , 130 S. Ct. 1640, 176 L. Ed. 2d 469, 476 (2010) v Frommert,     US    , 130 S. Ct. 1640, 176 L. Ed. 2d 469, 476 (2010) (citation and internal quotation omitted). When, a plan administrator (or here, a plan’s clerical staff) makes a simple mistake, the plan remains entitled to deference. 130 S. Ct. 1640, 176 L. Ed. 2d 469, 476 at 476-477. This court, however, would face a difficult challenge evaluating plaintiff’s claims through such a deferential lense, while, at the same time, independently scrutinizing the Carteron report. It is thus appropriate, rather than to substitute its judgment for that of the plan  administrator or, perhaps more accurately, to adopt the plan’s post hoc rationales for why the Carteron report is of no value, for the court to follow the Ninth Circuit’s preferred “usual remedy” in such circumstances and to remand the file for further consideration for a full an fair review.

Fortlage v. Heller Ehrman, LLP, 2010 U.S. Dist. LEXIS 50634 (N.D. Cal. Apr. 27, 2010)

Note:  Much remains to be learned about how the standard of judicial review will evolve after the latest Supreme Court intervention in Conkwright.  At present, however, it appears that certain issues may eludeapplication of the opinion, e.g., interest rate determinations, certain conduct may override application of the opinion, e.g., repeated “deliberate actions”, but that overall, the opinion will expand the scope of deference and, in any event, generate more instances wherein the district court will send the case back to the plan administrator for another go at the disputed issue.

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:: “Grandfathered Plans” – NAIC Guidance On Essential Points

PPACA SEC. 1251. PRESERVATION OF RIGHT TO MAINTAIN EXISTING COVERAGE.
(a) No Changes to Existing Coverage-
(1) IN GENERAL- Nothing in this Act (or an amendment made by this Act) shall be construed to require that an individual terminate coverage under a group health plan or health insurance coverage in which such individual was enrolled on the date of enactment of this Act.
(2) CONTINUATION OF COVERAGE- With respect to a group health plan or health insurance coverage in which an individual was enrolled on the date of enactment of this Act, this subtitle and subtitle A (and the amendments made by such subtitles) shall not apply to such plan or coverage, regardless of whether the individual renews such coverage after such date of enactment.

PPACA SEC. 1251. PRESERVATION OF RIGHT TO MAINTAIN EXISTING COVERAGE.

(2) CONTINUATION OF COVERAGE- With respect to a group health plan or health insurance coverage in which an individual was enrolled on the date of enactment of this Act, this subtitle and subtitle A (and the amendments made by such subtitles) shall not apply to such plan or coverage, regardless of whether the individual renews such coverage after such date of enactment.

(a) No Changes to Existing Coverage-

(1) IN GENERAL- Nothing in this Act (or an amendment made by this Act) shall be construed to require that an individual terminate coverage under a group health plan or health insurance coverage in which such individual was enrolled on the date of enactment of this Act.

This oddly-worded provision in the PPACA is Orwellian reform-speak intended to assure that the new law will not result in any changes to existing coverage for the 85% of Americans satisfied with their health insurance coverage.  Of course that is not true, as many Americans will lose their coverage,  but that is another subject altogether.

For plan sponsors trying to understand the “grandfathered plan” exception to several (but not all) provisions of the PPACA, the NAIC has published a succinct set of guidelines here.

Questions awaiting regulatory guidance include the following as noted by the NAIC:

The statutory language of PPACA raises a number of questions that will have to be decided in the regulatory
process. The House legislation included a requirement that there be no changes in terms or conditions of
grandfathered plans.iv The final bill, however, did not contain this requirement. A case could be made, however, that
if substantial changes are made to a grandfathered health plan, it is no longer the same plan, and would lose its
grandfathered status. A related question will be whether or not states may change state laws governing
grandfathered plans, and if so, whether compliance with these changes would cause plans to lose their grandfathered
status.

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:: Ninth Circuit Upholds Ban Of Discretionary Clauses

[Regarding discretionary clauses,] the Commissioner’s practice is “specifically directed toward entities engaged in insurance,” Kentucky Ass’n, 538 U.S. at 342, and it “substantially affect[s] the risk pooling arrangement between the insurer and the insured,” more so than other laws which have been upheld by the Supreme Court. The practice of disapproving discretionary clauses is thus saved from preemption under 29 U.S.C. § 1144(a) by the savings clause in section 1144(b)

Standard Insurance Co. v. Morrison (08-35246)

Dan Schelp noted on erisaboard.com today that the Supreme Court denied the petition for writ of certiorari in the case ofStandard Ins. Co. v. Lindeen, leaving in place the 9th Circuit’s decision in Standard Ins. Co. v. Morrison.

This opinion concludes the issue first raised in :: State Regulation Barring Grants Of Discretion To ERISA Plan Administrators Sustained

For fully insured plans, this is another indication that state regulations banning discretionary clauses will survive ERISA preemption challenge.   Bear in mind that these regulations, in states adopting them (often based upon the NAIC model act) will apply to disability plans as well as health plans.  The consequence will be de novo review of claim denials with augmented discovery in many cases.

For a similar decision, see American Council of Insurers v. Ross here.

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:: New Federal Rules Target MEWA’s

The health reform legislation contains several provisions directed at Multiple Employer Welfare Arrangements (“MEWA’s”). A new criminal enforcement section contains broad language prohibiting false statements.

Sec. 6601(a) of the PPACA addes ERISA Sec. 519 which prohibits false statements about a MEWA as to:

the MEWA’s financial condition or solvency, the benefits provided, or the regulatory status of the MEWA under state or federal law, including specifically the exemption of the MEWA from state regulatory authorities.

Any person that violates section 519 shall upon conviction be imprisoned not more than 10 years or fined under Title 18, United States Code or both.

Preemption

In addition, the Sec. 6604 of the PPACA authorizes the Secretary of Labor to issue “standards” or “orders” “relating to a specific person” establishing that a MEWA is subject to state regulatory jurisdiction notwithstanding ERISA Section 514(b)(6) or the Liability Retention Act of 1986, regardless of whether state law is otherwise preempted under those provisions.

This regulatory grant appears quite broad – perhaps too broad. I’m no fan of MEWA’s as a general rule, but a grant of discretion to the DOL to determine when federal law does or does not apply regardless of other federal statutes is pretty sloppy work in my opinion.

Summary Seizure Orders

Sec. 6605 of the PPACA authorizes ex parte cease and desist orders as well as summary seizure if a MEWA appears to be financially distressed.

Registration

MEWA’s will be required to file registration and annual reports which will be designed to ensure financial solvency.

Note: Given the new requirements, understanding when a benefit plan is a MEWA or not takes on new significance.  For more on this topic, see A Short Course in MEWA’s.

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:: District Court Remands ERISA Subrogation Case

Prior to settling and releasing the tortfeasors in exchange for a proffered settlement of $606,488.99, this personal injury plaintiff (and ERISA participant) persuaded the Washington state trial court to enter an Order To Show Cause against the ERISA Plan, causing it to appear in the state court action for the purpose of resolving the lien issues.

The participant argued that the lien of $525,601 would “consume his entire settlement.” The Order To Show Cause directed the ERISA plan to “show cause why [it] should not substitute its draft in favor of the plaintiffs in the amount of [settlement]” offered by the tortfeasors.

Upon receipt of the Order to Show Cause, the ERISA Plan filed a Notice of Removal in Federal Court. The U.S. District Court for the Western District of Washington in Thomas v. Powell, Case No. C10-53 MJP, grants the Plaintiff’s Motion for Remand and awards the Plaintiff reasonable costs and attorney fees.

The Court enforces the language of 28 U.S.C. 1441(a), holding that only the defendant or defendants are permitted to remove a case from state court. Merely being the recipient of an Order to Show Cause does not transform the ERISA Plan into a defendant.

post by Professor Roger Baron, erisaboard.com

Thanks to my friend Roger Baron for notifying me of this recent important opinion in an ERISA subrogation case.  For more information, including an upload of the district court opinion, please visit erisaboard.com.

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:: Rescissions After The PPACA – A Preview

Under the PPACA, rescission is prohibited except in cases of fraud or misrepresentation. (PPACA Sec. 1001, amending the PHSA, 42 USC 300gg et seq.)

The health insurance industry agreed to comply with this requirement ahead of the September effective date.

The House bill required “clear and convincing” evidence and external review. The law as passed does not. Some insurers have agreed to this standard without regulation or requirement. Regulations may, however, impose an external review requirement on claims of misrepresentation.

Interestingly, the House bill would have required continuation of coverage during a challenge. The law as enacted does not.

This area will be interesting to follow.

Questions – what is the standard of review? Presumably, that under Firestone v. Bruch in the group plan setting. Are benefits continued if misrepresentation is alleged? In the case of individual policies, could a retroactive increase in premiums be required as in Werdehausen v. Benicorp Ins. Co., 487 F.3d 660 (8th Cir. Mo. 2007)? If not paid, then could the policy be cancelled for failure to pay premiums? What is the burden of proof?

The anticipated regulations have much to address. I do not expect this to be a very significant issue in the group market, but after the dust settles, I think there are still some surprises in store in the individual policy market.

__________________

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:: “Clear Repudiation Rule” Applied In Determination That Benefits Claim Was Time-Barred

Underpayment of a benefit constitutes a repudiation of full benefits and triggers the statute of limitations. Id. at 521. The record is clear that the plaintiff was well aware of the underpayment more than four years before filing suit, as evidenced by a number of letters between the defendant and Mr. Bryer’s then-counsel, culminating in the letter of March 4, 2005, appealing the denial of increased benefits.

Bryer v. Metro. Life Ins. Co., 2010 U.S. Dist. LEXIS 42867 (E.D. Pa. May 3, 2010)

The district court in Bryer v. Metro. Life Ins. Co. applied the “clear repudiation rule” to find that the plaintiff’s claims were time-barred.

The disability plan that covered the plaintiff provide for an increase in benefits that he did not receive according to the complaint:

According to the complaint, the plaintiff was awarded long-term disability benefits effective July 21, 2002, and pursuant to the relevant benefits plan, he is entitled to a seven percent increase in his monthly benefit amount each year beginning 13 months after the award of benefits (i.e., starting on August 21, 2003). The plaintiff never received the increase.

Correspondence concerning an appeal played an important role by indicating the denial of the claimed benefits:

By letter dated March 4, 2005, then-counsel for Mr. Bryer appealed the denial  of the disputed benefits; the request for an adjustment of benefits was denied by letter dated May 4, 2005, in which the defendant writes that the decision “concludes the administrative review process” and the plaintiff has “the right to bring a civil action under Section 502(a)” of ERISA.

In evaluating when the limitations period began to run, the court stated that:

In this Circuit, the “statute of limitations begins to run when a plaintiff discovers or should have discovered the injury that forms the basis of his claim.” Miller v. Fortis Benefits Ins. Co., 475 F.3d 516, 520 (3d Cir. 2008). A cause of action for unpaid benefits accrues when there has been “a repudiation of the benefits by the fiduciary which was clear and made known [to] the beneficiary.” Id. at 520-21. Underpayment of a benefit constitutes a repudiation of full benefits and triggers the statute of limitations. Id. at 521.

The opinion underscores the importance that correspondence may play in indicating a repudiation that begins the limitations period. For example, the court observed that:

The record is clear that the plaintiff was well aware of the underpayment more than four years before filing suit, as evidenced by a number of letters between the defendant and Mr. Bryer’s then-counsel, culminating in the letter of March 4, 2005, appealing the denial of increased benefits. Accord Lutz v. Philips Electronics North Am. Corp., 347 Fed. Appx. 773 (3d Cir. 2009) (unpublished) (holding that an ERISA claim accrued “when the [plaintiffs] began their ‘repeated’ complaints about the incorrect calculation of benefits.”)

Note:  The Third Circuit’s “clear repudiation rule” is discussed more detail in :: Third Circuit Extends “Clear Repudiation” Rule To Erroneous Benefit Award Claims.

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:: Health Care Providers Warn Of Failure In HIT Compliance

The proposed rule takes an “all-or-nothing” approach, where failure to meet any one of the requirements means the provider will not receive an incentive payment.

Letter to Health and Human Services Secretary Kathleen Sebelius

Healthcare providers need additional time and greater flexibility to meet criteria of the Centers for Medicare and Medicaid Services’ proposed electronic health record rule, according to an article in Healthcare Leaders Media.

If the current rule is finalized, it would likely result in providers with advanced HIT systems not meeting requirements in fiscal 2011. For those physicians in small practices and rural providers, the letter notes, “the unrealistic timeframes are even more problematic because they have further to go in their implementation of EHRs compared to larger providers.”

Here’s another take:

Under the Medicare incentive plan, if physicians meet stage 1 requirements by 2011 or 2012, they can earn a total of $44,000 over five years, starting with $18,000 the first year. But if meeting the requirements takes longer, the totals are lower: $39,000 in 2013 and $24,000 in 2014. The bonuses turn into penalties in 2015 if meaningful use has not been reached.

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:: Mandates Require Cheapening Of Health Care Coverage

The PPACA contains some specific mandates as to what affordable health insurance should look like, in that as of 2014, companies must offer plans in which employees’ contributions are no more than 9.5% of their household incomes. If a company fails on that measure, and employees apply for government assistance through the yet-to-be-built health insurance exchanges, the company will be fined $3,000 per affected employee. (The fine drops to $2,000 after the first 30 employees).

Mercer Analysis:  Study: Many Health Plans Not Affordable

In short, coverage must be cheapened for those presently covered to extend coverage to those who are not covered.

Either way, experts say the level of health coverage would likely degenerate compared with current levels, in order to make the plans cheaper. Particularly if all plans must be affordable, “you’ll probably see the level of coverage going down,” says Umland, with employers making additional, richer coverage available for workers to purchase with aftertax dollars.

So much for Obama’s claim that you can keep your present coverage under his vision for reform.

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:: “Appropriate” Equitable Relief Under ERISA Section 502(a)(3) – Another Silver Bullet Misses The Mark

O’Hara contends that, as a matter of equity and in order to effectuate ERISA’s policy of protecting plan beneficiaries, the make-whole rule must be applied because allowing Zurich to recoup the medical expenses it paid on his behalf unduly punishes him by requiring him to forfeit a substantial portion of the compensation he received for his other losses, including  future wages and bodily integrity, and unjustly enriches Zurich. We disagree.

Zurich Am. Ins. Co. v. O’Hara, 2010 U.S. App. LEXIS 8570 (11th Cir. Ga. Apr. 26, 2010)

The Eleventh Circuit takes up the issue of “appropriate” equitable relief in this recent opinion.  The Court rejects the argument that the plan’s reimbursement fails to satisfy the terms of statutory relief authorized under ERISA Section 502(a)(3).

The Facts

On 22 February 2005, the personal injury plaintiff, O’Hara, was seriously injured in a head-on collisions. The ERISA-governed group health plan providing his medical benefits paid $ 262,611.92 for his accident-related medical treatment. O’Hara later sued the other driver, and the parties to that action settled for $ 1,286,457.11.

The plaintiff disputed the plan’s right to reimbursement using one predictable argument and several innovative arguments. The dispute ended up before a federal district court judge who ruled for the Plan under its claim for reimbursement under ERISA Section 502(a)(3).

Framing The Argument

First, what was not in dispute:

#1 The parties did not dispute the premise that the plaintiff was not “made whole” by the recovery.

# 2 The parties had “no quarrel” that the plan’s claim was authorized under ERISA Section 502(a)(3) as “equitable” in nature.

# 3 The funds were held in an identifiable account, so there was no issue of a res upon which equitable remedies could be imposed.

#4  The parties did not argue that the plan provision failed to disavow the “make whole” doctrine.

Equitable Claim Versus “Appropriate” Claim

The plaintiff’s case tested the limits of what may be considered “appropriate” equitable relief.   For those who regularly follow ERISA subrogation issues, the argument will be clear enough.  A full explication of the issue must take into account the foundation laid for this query in the Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006).

There, while holding for the plan, the Court dropped a footnote in which it rejected consideration of whether the relief was “appropriate” since the issue had not been raised below.

Allow me here to insert the question as formulated in an Eighth Circuit opinion:

The remaining issue is whether the relief the Committee sought was “appropriate.” The Supreme Court in Sereboff declined to expound on the meaning of this term, because Sereboff’s argument on that point had not been raised in the court below. 126 S. Ct. at 1877 n.2. The Shanks contends that full reimbursement to the Committee is not “appropriate” under section 502(a)(3), and asks us to apply either the “make-whole” doctrine or a pro rata share requirement as a rule of federal common law in order to reach this conclusion.

Admin. Comm. of Wal-Mart Stores, Inc. Assocs.’ Health and Welfare Plan v. Shank, 500 F.3d 834, 838-39 (8th Cir. 2007) (noting the “primacy of the written plan” under ERISA and rejecting appellant/beneficiary’s argument that the make-whole doctrine precluded insurer from exercising its contractual right to recovery)

“Appropriate” Delimiter Does Not Equal “Make Whole” Requirement

As in Shank, and with even shorter shrift, the Eleventh Circuit rebuffed the notion that the statute’s requirement of “appropriate” equitable relief, even in view of the mischievous Sereboff footnote, had any effect on the plan’s right to recovery.

The Court tersely concluded that:

Applying federal common law to override the Plan’s controlling language, which expressly provides for reimbursement regardless of whether O’Hara was made whole by his third-party recovery, would frustrate, rather than effectuate, ERISA’s “repeatedly emphasized purpose to protect contractually defined benefits.”

Note: As is becoming increasingly clear, whatever “appropriate” means in this context, it does not mean an implicit make whole requirement.   So what does it mean?  It may be worth considering whether a misrepresentation might make relief inappropriate.  In any event, an example of inappropriate relief has not found its way into an important opinion yet.

Make Whole - The doctrine:

“Under the make-whole doctrine, an insured who has settled with a third-party tortfeasor is liable to the insurer-subrogee only for the excess received over the total amount of his loss.” Cagle v. Bruner, 112 F.3d 1510, 1520 (11th Cir. 1997) (per curiam).

Cited Authorities - The Court’s cited a number of cases upholding reimbursement rights including its own opinion in Popowski v. Parrott, 461 F.3d 1367, 1373 (11th Cir. 2006) was well as United McGill Corp. v. Stinnett, 154 F.3d 168, 172 (4th Cir. 1998), Admin. Comm. of Wal-Mart Stores, Inc. Assocs.’ Health and Welfare Plan v. Varco, 338 F.3d 680, 691-92 (7th Cir. 2003) and Admin. Comm. of Wal-Mart Stores, Inc. Assocs.’ Health and Welfare Plan v. Shank, 500 F.3d 834, 838-39 (8th Cir. 2007).

Most interesting was the footnote cite to the blockbuster opinion in Longaberger Co. v. Kolt, 586 F.3d 459, 472 (6th Cir. 2009).

For further reading – Susan Harthill, “A Square Peg in a Round Hole? Whether Make Whole Relief Is Available Under Erisa Section 502(A)(3)”, Florida Coastal School of Law, SSRN Working Paper Series (2008, Last Revised: October 5, 2009); Thomas Allen Comment: ERISA Subrogation and Reimbursement Claims: A Vote to Reject Federal Common Law Adoption of a Default “Make Whole” Rule, Spring, 2009, 41 Ariz. St. L.J. 223 J.; Kristin L. Huffaker, Note: Where the Windfall Falls Short: “Appropriate Equitable Relief” after Sereboff v. Mid Atlantic Medical Services, Inc., Spring, 2008, 61 Okla. L. Rev. 233.

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:: District Court Orders Personal Injury Plaintiff To Reimburse ERISA Plan

Here, it is undisputed that the Colliers are in possession of the $ 70,000 currently being held in a non-interest bearing account. The fund is specifically identifiable and within the Colliers’ possession, thus satisfying the Sereboff standard for cognizable relief under § 502(a)(3). Accordingly, the Court must enforce the Plan’s subrogation terms as a matter of law.

Brown & Williamson Tobacco Corp. v. Collier, 2010 U.S. Dist. LEXIS 36505 (M.D. Ga. Apr. 13, 2010)

This is a useful ERISA health plan subrogation case that touches on all the typical issues that arise in the reimbursement context. This case appears in the new cases forum on erisaboard.com and may be accessed there.

Georgia has a robust consumer protection statute that applies in health plan subrogation cases. In this instance, however, the plan was self-funded and the statute did not apply.

Neither the Savings Clause nor the McCarran-Ferguson Act applies in this case. Thus, federal law preempts Georgia’s anti-subrogation statute, O.C.G.A. § 33-24-56.1, and consequently, the subrogation clause in Brown & Williamson’s Plan stands.

The “make whole” doctrine also made a cameo appearance and then exited the stage:

While the Colliers correctly assert that the “make-whole” doctrine is the default rule in the Eleventh Circuit, the Colliers fail to acknowledge that the doctrine can be expressly excluded. . . .

Here, the Plan explicitly rejects the “make-whole” doctrine by stating that the reimbursement provisions apply “whether or not you are made whole.”   This express rejection of the “make-whole” doctrine within the terms of the Plan indicates that the doctrine does not apply in this case.

And then a novel argument, which is also rejected:

Finally, the Colliers argue that the present case is devoid of necessary expert testimony establishing proximate causation. The case before this Court does not require the parties to prove the elements of medical malpractice. Instead, this case focuses on whether a claim brought under § 502(a)(3) is appropriate. Thus, this argument is without merit.

Thus, summary judgment was granted to the plan.   Since the plan had identified funds in the possession of the defendant, the Court ordered the funds restored to the plaintiff.

Here, the Plan explicitly rejects the “make-whole” doctrine by stating that the reimbursement provisions apply “whether or not you are made whole.” (Doc. 31-3). This express rejection of the “make-whole” doctrine within the terms of the Plan indicates that the doctrine does not apply in this caseWhile the Colliers correctly assert that the “make-whole” doctrine is the default rule in  [*14] the Eleventh Circuit, the Colliers fail to acknowledge that the doctrine can be expressly excluded. . . .
Here, the Plan explicitly rejects the “make-whole” doctrine by stating that the reimbursement provisions apply “whether or not you are made whole.” (Doc. 31-3). This express rejection of the “make-whole” doctrine within the terms of the Plan indicates that the doctrine does not apply in this case.
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:: PPACA Imposes External Review On ERISA Plans

SEC. 2719(b) of the PPACA imposes new external review requirements on group health plans.    (Grandfathered plans, i.e., a health plan in which an individual was enrolled on March 23, 2010, escapes Sec. 2719.)

This is a significant augmentation of plan participant rights.

(b) EXTERNAL REVIEW.—A group health plan and a health insurance issuer offering group or individual health insurance coverage—

(1) shall comply with the applicable State external review process for such plans and issuers that, at a minimum, includes the consumer protections set forth in the Uniform External Review Model Act promulgated by the National Association of Insurance Commissioners and is binding on such plans;
or

(2) shall implement an effective external review process that meets minimum standards established by the Secretary through guidance and that is similar to the process described under paragraph (1)—

(A) if the applicable State has not established an external review process that meets the requirements of paragraph (1); or

(B) if the plan is a self-insured plan that is not subject to State insurance regulation (including a State law that establishes an external review process described in paragraph (1)).

(my emphasis)

The NAIC model act on available for review on the NAIC website.

http://www.naic.org/documents/commit…_model_act.pdf

Note particularly the sections pertaining to the binding effect of the external review.* Are those sections a part of the process that must be incorporated into self-funded plans that are not grandfathered? It would seem so. I’d be interested in your comments on that particularly, and any general comment on external review from prior experience with state laws imposing similar requirements.

* From the NAIC Model Act:

Section 11. Binding Nature of External Review Decision

A. An external review decision is binding on the health carrier except to the extent the health carrier has other remedies available under applicable State law.
B. An external review decision is binding on the covered person except to the extent the covered person has other remedies available under applicable federal or State law.
C. A covered person or the covered person’s authorized representative may not file a subsequent request for external review involving the same adverse determination or final adverse determination for which the covered person has already received an external review decision pursuant to this Act.

Note:  Certain plans are exempt from Subtitles A and C of the PPACA.  These are group health plans that were in existence on March 23, 2010.

We don’t know yet what regulations will be forthcoming on this issue but it would be an expensive mistake to, say, subject a plan to the new external review requirements because of plan amendments.  So be careful.

From a Leonard Street & Deinard commentary:

As with the implementation of many other aspects of health care reform, the finer details pertaining to retaining grandfathered status are still to be determined. It is clear that enrolled individuals may add family members to their coverage if on March 23, 2010, the plan permitted this enrollment. It is also clear that new employees and their families can be enrolled without jeopardizing the plan’s grandfathered status.

Apart from these two allowances, PPACA is silent on the changes that may be made to a grandfathered plan without losing grandfathered status or even if grandfathered status can be lost. There is hope that some design changes are permissible, because earlier versions of health reform bills expressly prohibited changes. But before more guidance on this is issued, any changes to a grandfathered plan should be very carefully considered.

Further caution - Grandfathered plans are still subject to a number of the new requirements, such as PHSA Sec. 2708 (excessive waiting periods), PHSA Sec. 2711 (lifetime limits),PHSA Sec. 2712 (rescissions) and  PHSA Sec. 2714 (extension of dependent coverage).

Effective Date - Plan years beginning six months after enactment.  Since most plans are calendar year, 1/1/2011 will be the first plan year for the majority of plans.

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:: Online Resources On The Patient Protection Act

“Health Care Reform” is now the subject of a variety of excellent summaries which are accessible online for the employee benefits practitioner:

This alert summarizes the major provisions of the Patient Protection and Affordable Care Act (“PPACA”) and the Health Care and Education Reconciliation Act of 2010 (together with the PPACA, the “Act”) that will impact employers and their group health plans (“GHPs”).

http://www.martindale.com/employee-benefits-law/article_Haynes-Boone-LLP_984758.htm

The Patient Protection and Affordable Care Act (PPACA) of 2010 brings both promise and peril for primary care. This Act has the potential to reestablish primary care as the foundation of US health care delivery.

http://www.annals.org/content/early/2010/04/15/0003-4819-152-11-201006010-00249.full?aimhp

On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care weeping measure designed to expand access to health insurance, reduce health care spending (particularly in the Medicare program); expand federal fraud and abuse authorities and transparency requirements; impose new taxes and fees on health industry sectors; and institute a variety of other health policy reforms.

http://dpc.senate.gov/dpcdoc-sen_health_care_bill.cfm

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:: Healthcare Legislation In Perspective

Edward A. Zelinsky, Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University, questions the significance of the Patient Protection and Affordable Care Act in his post The Bi-Partisan Rhetoric of Health Care Apocalypse is Wrong on the OUPblog.

Professor Zelinsky writes:

First, the Patient Protection and Affordable Care Act, while significant, is more incremental in nature than either side cares to acknowledge.

Second, many provisions of the Act have delayed effective dates.  It is questionable whether future Presidents and Congresses will permit these provisions to go into effect as written.

Third, the Act merely postpones many tough decisions which must be made about health care and about health care cost control in particular.  At its core, the Act’s efforts to control health care costs are tepid and deferred.  Indeed, for the long run, the Act is likely to exacerbate the nation’s problem of health care costs and will thus require further confrontation with this intractable problem.

I am in agreement on points two and three,  but skeptical on the first point. As always, his comments are thought-provoking and informative.

You can read the post in its entirety here.

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:: Medical Loss Ratios As Opportunity For Political Theater

The goal of many health care reformers is actually to get to a single payer system. President Obama has espoused this point of view and the “public option” was one track to get there.

The Patient Protection and Affordable Care Act (”PPACA”) will get there as well, but in two steps rather than one. The first step will be to force private sector options into untenable economic arrangements while all the while decrying the profit motive as the critical problem as premiums increase. This will make for great political theater and the actors are already taking positions on stage.

For example, I posted yesterday about the unworkable tangle of parameters that are embedded in the medical loss ratio strictures under the PPACA. Today we have Senator Rockefeller complaining about the characterization of expenses under the MLR rules.

The Senate Commerce Committee investigation began in August, 2009. The Committee staff report Chairman Rockefeller released today includes a review of recently filed 2009 medical loss ratio (MLR) information and highlights health insurance companies’ new efforts to “reclassify” their administrative expenses as medical expenses in the wake of health care reform. This staff report updates an analysis of 2008 insurance industry data that the Senate Commerce Committee released last November.

The Huffington Post finds this report an opportunity to accuse health insurance industry of ” starting to game a key element of health care reform months before it even takes effect . . .”

Really?  I don’t think so.

Other than individual policies, the insurance industry appears to have met the MLR standard.  The Wall Street Journal carries a more balanced view of the Senate Report, stating that:

In most instances, among the large, publicly managed-care companies–including Aetna Inc. (AET), WellPoint and UnitedHealth Group Inc. (UNH)–MLRs for individual policies last year didn’t reach the upcoming 80% minimum, though most met that mark for small-group plans. Most of the big insurers also met or came close to the 85% MLR for large group plans, according to the committee report. Cigna Corp. (CI) was the only major insurer with an individual-market MLR that surpassed the upcoming minimum, the report showed.

Those numbers represent an average of each of the companies’ many subsidiaries with varying MLRs. The report cites an Oppenheimer analysis that says the markets where WellPoint subsidiaries have low MLRs are “the most profitable tail” of WellPoint’s business.

. . .

Cigna said Thursday it is too early to say how the new MLR minimums will affect the company and that since the definitions are being worked on, the insurer doesn’t intend to restate its MLR at this time.  UnitedHealth Group said it doesn’t intend to change how it calculates the ratios before new guidance is provided. Aetna said recently it hasn’t reclassified any costs.

Robert Zirkelbach, spokesman for industry trade group America’s Health Insurance Plans, said government data show that “the percent of premiums spent directly on medical care has increased for six straight years. At the same time, health plans are doing more in the areas of disease management for chronic conditions, care coordination, prevention and wellness, and health information technology.

“It is important to ensure that the new MLR requirements do not undermine essential programs and services that are working to improve the quality and safety of patient care,” Zirkelbach said.

Last year, he said, the percentage of premiums used on overhead costs and profits declined for the sixth straight year.

(emphasis added)

The Procrustean MLR concept is flawed as explained by James Robinson in his influential Health Affairs article noted in my prior post.  If the predictable “accounting nightmare” is troublesome, it is only the fault of the politicians that voted for a bill they most assuredly did not understand.

For those who hope to undermine the private sector insurance industry in favor of a Canadian-style single payer system, however, the real gaming is the notion that any of these bureaucratic hurdles has any goal other than the migration to a single payer system.

That change in the American system will likely disappoint affluent Canadians, however, who have heretofore chosen the U.S. for their own health care.

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:: Comments Sought On Medical Loss Ratio Requirements

The EBSA Request for Comments Regarding Section 2718 of the Public Health Service Act (Medical Loss Ratios), as added by the Patient Protection and Affordable Care Act (“PPACA”) has been published in the April 14 issue of the Federal Register and can be viewed here.    Comments are to be submitted by May 14, 2010.

Section 2718 of the PHS Act (among other provisions), requires health insurance issuers offering individual or group coverage to:

  • submit annual reports to the Secretary on the percentages of premiums that the coverage spends on reimbursement for clinical services and activities that improve health care quality, and
  • to provide rebates to enrollees if this spending does not meet minimum standards for a given plan year.

Under the PHS amendments, the National Association of Insurance Commissioners (“NAIC”) will establish (subject to approval by HHS) uniform definitions of the activities being reported and standardized methodologies for calculating measures of these activities no later than December 31, 2010.

The law imposes a crude and complex control mechanism based on medical loss ratios that is enforced by rebate requirements, taxes and penalties.  In a nutshell, the amount expended on medical services and “quality” must be at least 85% of premium revenue (as defined) for large group plans and 80% for small plans and individual plans.

Ironically, the concept of assessing value through MLR’s appears to have made its way into the law despite serious deficiencies in its usefulness as a metric of quality or efficiency. From “Use And Abuse Of The Medical Loss Ratio To Measure Health Plan Performance”, Health Affairs (July/August 1997), by James C Robinson:

The medical loss ratio is not a straightforward indicator of either medical or administrative expenditures. It certainly is not a measure of clinical quality or social contribution. The medical loss ratio is an accounting monstrosity, a convolution of data from myriad products, distribution channels, and geographic regions that enthralls the unsophisticated observer and distorts the policy discourse.

Given the short comment period, the rapidly approaching effective date and the lack of regulatory guidance, the MLR feature of health care reform will undoubtedly create substantial confusion for health plan insurers. The “accounting monstrosity” fails to recognize the blended features of claims payment, administrative and profit functions in the contemporary health insurance industry.

In short, the MLR requirement’s greatest defect lies in its failure to constitute a useful metric of what it purports to measure.

Note: Section 1004(a) of the PPACA provides that the provisions of Section 2718 of the PHS Act shall become effective for plan years beginning on or after the date that is 6 months after the date of enactment of PPACA. (The date of enactment of PPACA is March 23, 2010).

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:: Health Care Providers’ RICO Claims “Reversed Preempted”

Plaintiffs argue that Medical Mutual, in its processing of insurance claims, violated the federal RICO statute. Specifically, Plaintiffs allege that Medical Mutual “acted to delay, diminish and deny payment of . . . lawful claims of patient-insureds as submitted by out-of-network health providers . . . through a scheme or artifice, utilizing the U.S. Mail and demonstrating a specific intent to defraud the patient-insureds and out-of-network health-care providers.” (Compl. P 51.). . . .

Defendants contend, and the district court agreed, that Riverview’s RICO claims are reverse preempted in accordance with the McCarran-Ferguson Act. Plaintiffs argue that McCarran-Ferguson does not apply to its RICO claims

Riverview Health Inst. Llc v. Medical Mut. of Ohio, 2010 FED App. 0097P (6th Cir.) (6th Cir. Ohio 2010)

This recent unpublished Sixth Circuit opinion applies reverse preemption to defeat the RICO claims of out of network health care providers.

The health care providers advanced seven claims for relief:

(1) conspiracy to violate 18 U.S.C. § 1962(a) in violation of 18 U.S.C. § 1962(d) (RICO);
(2) violation of 18 U.S.C. § 1962(c)(RICO);
(3) conspiracy to violate 18 U.S.C. § 1962(c) in violation of 18 U.S.C. § 1962(d)(RICO);
(4) denial of benefits under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1132(a)(1)(B);
(5) state-based breach of contract;
(6) state-based common-law fraud; and
(7) state-based tortious interference with business relationships.

Gravamen Of Complaint

The gravamen of the complaint was that Medical Mutual:

  • “acted to delay, diminish and deny payment of . . . lawful claims of patient-insureds as submitted by out-of-network health providers
  • acted unlawfully and inaccurately to underestimate and reduce the ['usual, customary and reasonable'] amounts due to out-of-network health providers
  • and inappropriately bundled provider services and procedures through scheme or artifice

The district court granted a motion to dismiss, agreeing withe the Defendants that the Plaintiffs’ RICO claims were reversed preempted by the McCarran-Ferguson Act. The other claims were dismissed without prejudice.

The Sixth Circuit panel agreed with the district court that the RICO claims were reversed preempted.


The McCarran-Ferguson Act

The McCarran-Ferguson Act states that “[t]he business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.” 15 U.S.C. § 1012(a). In the health plan context, the reverse preemption of RICO is triggered when RICO would invade the province of state insurance laws. This is because the McCarran-Ferguson Act declares that “[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance.” Id. § 1012(b).

Ohio Insurance Law

The Court held that the application of federal RICO would impair Ohio’s insurance regulatory scheme. The Plaintiff’s complaint essentially involved the payment of claims and that issue was subject to insurance department authority.

The conduct at the heart of Plaintiffs’ complaint implicates Ohio’s law regarding payment of claims and the Ohio Department of Insurance is charged with administering the applicable state law. In this case, Plaintiffs have no common law remedy or private right of action. The state RICO statute is inapplicable and the damages available pursuant to federal RICO would far exceed the damages contemplated by the Ohio legislature when enacting its insurance regulatory scheme.

Moreover, the State of Ohio has filed a brief as amicus curiae in support of Defendants, arguing that the imposition of the federal RICO statute will impair Ohio’s ability to detect insurance fraud and reverse preemption will not prevent insurers from using state or federal RICO to combat fraud. Accordingly, Plaintiffs’ RICO claims are reverse preempted by the McCarran-Ferguson Act and we, therefore, affirm the district court’s dismissal of Plaintiffs’ RICO claims.

Thus the RICO claims were reversed preempted.

Note: The Court applied several factor-based tests in reaching its conclusions.

Three Factor Reverse Preemption Test – Determining whether the reverse preemption applies involves three questions:

[#1] we must decide “whether the federal statute at issue ‘specifically relates to the business of insurance.’” . . . If it does, then the McCarran-Ferguson Act, by its own terms, does not permit reverse preemption. (Neither party disputed that RICO does not specifically relate to the business of insurance.)

[#2]. . . “whether the state statute at issue was enacted . . . for the purpose of regulating the business of insurance” and

[#3] “whether the application of the federal statute would invalidate, impair, or supersede the state statute.”

Three Factor “Business Of Insurance” Inquiry – The Court applied a a three factor test set forth in Union Labor Life Insurance Co. v. Pireno, 458 U.S. 119 (1982) to determine whether an activity is part of the “business of insurance” (#2 above):

(1) “whether the practice has the effect of transferring or spreading a policyholder’s risk,”

(2) “whether the practice is an integral part of the policy relationship between the insurer and the insured,” and

(3) “whether the practice is limited to entities within the insurance industry.”

Seven Factor “Impairment Test - The Court applied the seven factor test articulated by the Supreme Court in Humana Inc. v. Forsyth, 525 U.S. 299 (1999) on the question of impairment (#3 above).  (There the Court held that a federal statute that “proscribes the same conduct as state law, but provides materially different remedies” did not “impair” state law under the McCarran-Ferguson Act.)

The factors are:

(1) the availability of a private right of action under the state insurance scheme;
(2) the availability of a state common law remedy;
(3) the possibility that other state statutes provide the basis for suit;
(4) the availability of punitive damages;
(5) whether the damages available under the state insurance scheme could exceed the damages recoverable under RICO, even taking into account RICO’s treble damages provision;
(6) the absence of a position by the State regarding any interest in state policy or the administrative scheme; and
(7) the fact that insurers have relied on RICO to eliminate insurance fraud.

Estoppel Claim - The Plaintiff’s estoppel claim involves an interesting discussion of anti-assignment clauses and warrants careful review by health care providers and their counsel.  I will likely review that issue in a separate post.

See also -:: “Reverse Preemption” Rejected: The Emergence of RICO Claims In Lieu Of ERISA Claims; :: Sixth Circuit Rejects Reverse Preemption Of RICO Claims

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:: Health Care Legislation Creates Uncertainty For Employer Plans

The text of H.R.3590, dubbed the Patient Protection and Affordable Care Act, may be viewed here and here.

Readers of this page will find the following exception to “TITLE I — QUALITY, AFFORDABLE HEALTH CARE FOR ALL AMERICANS” of interest:

(B) EXCEPTION FOR SELF-INSURED PLANS AND MEWAS- Except to the extent specifically provided by this title, the term ‘health plan’ shall not include a group health plan or multiple employer welfare arrangement to the extent the plan or arrangement is not subject to State insurance regulation under section 514 of the Employee Retirement Income Security Act of 1974.

And then there is also the provision regarding “grandfathered plans” which reads as follows:

PART II–OTHER PROVISIONS

SEC. 1251. PRESERVATION OF RIGHT TO MAINTAIN EXISTING COVERAGE.

(a) No Changes to Existing Coverage-

(1) IN GENERAL- Nothing in this Act (or an amendment made by this Act) shall be construed to require that an individual terminate coverage under a group health plan or health insurance coverage in which such individual was enrolled on the date of enactment of this Act.

(2) CONTINUATION OF COVERAGE- With respect to a group health plan or health insurance coverage in which an individual was enrolled on the date of enactment of this Act, this subtitle and subtitle A (and the amendments made by such subtitles) shall not apply to such plan or coverage, regardless of whether the individual renews such coverage after such date of enactment.

(b) Allowance for Family Members To Join Current Coverage- With respect to a group health plan or health insurance coverage in which an individual was enrolled on the date of enactment of this Act and which is renewed after such date, family members of such individual shall be permitted to enroll in such plan or coverage if such enrollment is permitted under the terms of the plan in effect as of such date of enactment.

(c) Allowance for New Employees To Join Current Plan- A group health plan that provides coverage on the date of enactment of this Act may provide for the enrolling of new employees (and their families) in such plan, and this subtitle and subtitle A (and the amendments made by such subtitles) shall not apply with respect to such plan and such new employees (and their families).

(d) Effect on Collective Bargaining Agreements- In the case of health insurance coverage maintained pursuant to one or more collective bargaining agreements between employee representatives and one or more employers that was ratified before the date of enactment of this Act, the provisions of this subtitle and subtitle A (and the amendments made by such subtitles) shall not apply until the date on which the last of the collective bargaining agreements relating to the coverage terminates. Any coverage amendment made pursuant to a collective bargaining agreement relating to the coverage which amends the coverage solely to conform to any requirement added by this subtitle or subtitle A (or amendments) shall not be treated as a termination of such collective bargaining agreement.

(e) Definition- In this title, the term ‘grandfathered health plan’ means any group health plan or health insurance coverage to which this section applies.

And then there is the possibility of state waivers as provided in Section 1332(a), entitled: “WAIVER FOR STATE INNOVATION.”

(1) IN GENERAL- A State may apply to the Secretary for the waiver of all or any requirements described in paragraph (2) with respect to health insurance coverage within that State for plan years beginning on or after January 1, 2017 . . .

These various conditions are likely to create substantial controversy as the boundaries of the exceptions are worked out through judicial interpretation. Still undecided, of course, is the fate of the set of amendments proposed by the House which the Senate must consider. Add to that the imminent litigation over the constitutionality of the bill and it appears fair to say that it may be some time before employers can sort out their compliance burdens under the health care legislation.

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:: Ninth Circuit Checklist of Abuse Of Discretion Factors

In ERISA cases, abuse of discretion review is “informed by the nature, extent, and effect on the decision-making process of any conflict of interest that may appear in the record.” Abatie, 458 F.3d at 967. Thus, where, as here, a structural conflict exists because the insurance company administrator both funds and administers the Plan, “the court must consider numerous case-specific factors, including the administrator’s conflict of interest, and reach a decision as to whether discretion has been abused by weighing and balancing those factors together.” .

Sterio v. HM Life, 2010 U.S. App. LEXIS 4615 (9th Cir. Cal. Mar. 4, 2010) (unpublished) (citing Montour v. Hartford Life & Acc. Ins. Co., 588 F.3d 623, 630 (9th Cir. 2009)).

This recent Ninth Circuit opinion provides a nice checklist of issues that may turn a structural conflict of interest into a claimant’s victory even in the face of the lenient abuse of discretion standard of review.

The Facts

In this case, Sterio, a former receptionist, claimed she was disabled “primarily due to sciatic pain, restricted mobility and depression following several hip surgeries.” HM Life, was both the insurer and the administrator of the ERISA-governed disability plan.

The Benefit Dispute

Sterio’s benefit claim was denied by the plan, a denial upheld by the district court:

HM Life engaged Broadspire Services to process Sterio’s claim. Broadspire, in turn, hired six independent physicians to review Sterio’s medical records. The reviewing physicians all concluded that Sterio was not disabled. Broadspire initially denied Sterio’s claim and HM Life denied Sterio’s appeal, both concluding that the objective medical evidence did not support her disability claim. The district court conducted a bench trial and concluded that HM Life did not abuse its discretion in light of “conflicting evidence.”

The Appeal

On appeal, the Ninth Circuit reversed. The Court agreed that the abuse of discretion standard of review applied, but disagreed with the district court’s application of the standard.

The critical points are as follows:

# 1  First, the quantity and quality of the medical evidence supports Sterio’s disability claim. HM Life failed to credit this reliable medical evidence which included the following:

  • An EMG test confirmed that Sterio had right sciatic neuropathy after her last hip revision surgery.
  • Two MRI exams revealed excess metal artifacts in Sterio’s pelvis region. Two x-ray exams revealed bone thinning in Sterio’s right foot.
  • Sterio’s records show consistent use of strong pain medication.
  • A Functional Capacity Evaluation (“FCE”) submitted by Sterio’s treating physician reported that Sterio could not sit, stand or walk for more than 1-hour a day.
  • Both of Sterio’s treating physicians concluded that she was permanently disabled, which is consistent with the evaluations of Sterio’s treating neurologist and two orthopedists.

# 2  HM Life failed to distinguish or even acknowledge the SSA’s contrary disability determination despite having knowledge of it, raising the question of whether the denial was the product of a principled and deliberative reasoning process.”

# 3  HM Life failed to conduct an in-person medical evaluation of Sterio. HM Life’s choice to rely on a pure paper review, “raises questions about the thoroughness and accuracy of the benefits determination . . . as it is not clear the Plan presented [the six reviewing doctors] with all of the relevant evidence.”

# 4  HM Life failed to adequately investigate Sterio’s claim and request necessary evidence.

For example:

  • HM Life did not procure the SSA file or ask Sterio to do so.
  • Nor did HM Life request any specific evidence that it, or its reviewing physicians, concluded was necessary to prove up Sterio’s claim.
  • HM Life failed to communicate these specific deficiencies to Sterio or ask her to supplement the record.

# 5   HM Life violated ERISA’s procedures by “tack[ing] on a new reason for denying benefits in [its] final decision, thereby precluding [Sterio] from responding to that rationale for denial at the administrative level.”

In its final decision, HM Life added for the first time that Sterio’s hospitalizations did not entitle her to long term benefits because she was not deemed disabled at the onset of her disability effective date and because mental health coverage ends at 24 months.

HM Life’s last-minute addition of a new reason for denial suggests not only a conflict of interest, but can also be “categorized as a procedural irregularity where, as here, [Sterio was] foreclosed from presenting any response to the new reason.”

These factors, taken together, persuaded the Court that HM Life abused its discretion in denying Sterio benefits.

Note: This case illustrates an application of the recent opinion in Montour v. Hartford Life & Accident Ins. Co., 588 F.3d 623 (9th Cir. Cal. 2009) which in turn applies the seminal Ninth Circuit opinion in Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 962 (9th Cir. 2006) (en banc).

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:: EBSA Cites Statistics Showing Effective “Targeting” Of ERISA Plans

In FY 2009, EBSA closed 3,669 civil investigations, with 2,833 (77.21%) resulting in monetary results for plans or other corrective action.

“Civil Investigation Statistics Demonstrate Success In Targeting” Employee Benefit Security Administration Fact Sheet

The EBSA cites its targeting protocols as contributing to the success of enforcement efforts against ERISA plans and fiduciaries during 2009. The news release does not provide information on the methods involved in the targeting process, but that information is generally described in the EBSA Enforcement Manual.

For example, regarding the sources of data indicating selection of targets for review, the manual provides:

3. Targeting

Sources for Potential Limited Review Cases.

Computer generated compilations of selected employee benefit plans or service providers derived from reports filed with EBSA.

Information derived from detailed review and analysis of annual reports, supporting financial statements, schedules, exemption application files, ERISA section 502 complaints, and other internal EBSA sources.
Information concerning employee benefit plans or service providers derived from other governmental agencies such as the IRS, the SEC, and state insurance agencies.

Information concerning employee benefit plans or service providers derived from non-governmental sources such as newspapers, industry journals and magazines, or leads from knowledgeable parties.

Information received as a result of complaints from participants, fiduciaries, informants, or other sources in the community, other than allegations of acts against a participant or beneficiary for exercising any right to which he/she is entitled under the provisions of an employee benefit plan, or interfering with the attainment of any right to which the participant may become entitled, which should be handled as described in Chapter 43.

Compilations of selected employee benefit plans or service providers derived by using combinations of the sources listed in (1) through (5) above.

EBSA Enforcement Manual, Chapter 53, “Targeting and Limited Reviews”

Regarding group health plans, the Manual provides some specific guidance:

12. Limited Review Cases Involving Health Plans. Part 7 of ERISA was amended by four separate statutes: the Health Insurance Portability and Accountability Act of 1996 (HIPAA); the Mental Health Parity Act of 1996 (MHPA); the Newborns’ and Mothers’ Health Protection Act of 1996 (Newborns’ Act); and the Women’s Health and Cancer Rights Act of 1998 (WHCRA).

During the course of an investigation involving an ERISA-covered health plan, Investigators/Auditors will ordinarily determine whether a plan is in compliance with these statutes. An investigative guide to assist in this effort is found at Figure 3. If the investigator finds that a large firm sponsors several covered group health plans, a compliance review for each of the plans should be conducted. Claims procedures for the plan should be reviewed to determine if they are in compliance with ERISA Section 503.

A checklist of potential review items is included in the Enforcement Manual materials. That checklist can be reviewed here.

In the case of any contact by regulators, plan fiduciaries should be aware that one thing frequently leads to another. The agenda contemplated by the auditor/investigator will likely not be conveyed to the plan fiduciary in advance.

The targeting guidelines provide that:

Generally, other than stating that the purpose of the limited review is to determine whether a violation of Title I of ERISA has occurred or is about to occur, the Department has adopted the policy of not informing plan officials or others as to the basis of its investigation.

The limited review (Program 53) is designed to expedite a decision on conversion of the case to a more serious review, such as a fiduciary violation investigation (Program 48).

The sole objective of a Program 53 case is to look at one or more issues and to determine whether to convert the case to a Program 48 case or to conclude the inquiry as quickly as possible. . .

In those instances where the limited review case identifies violations in areas such as bonding, reporting and disclosure, improper administrative practices of a de minimis nature, or prohibited transaction(s) already corrected, the case should generally remain as a Program 53.

A voluntary compliance letter will issue on matters of a de minimis nature whereby the plan is given an opportunity to correct minor violations.

In cases where fiduciary violations are found or suspected the plan is to be advised and follow up action will be taken.

In the case of potential criminal violations, the Manual provides as follows:

Apparent Criminal Violations Found.

Whenever the limited review case uncovers evidence of possible criminal violation(s), the assigned Investigator/Auditor must apprise the group supervisor at the earliest possible time. Normally, the civil case will proceed and no investigation of the criminal case will be performed until the RD has decided whether and by whom such criminal investigation(s) will be conducted.

Note: Plan fiduciaries should be aware of the stage and scope of the audit based upon the targeting criteria provided in the Enforcement Manual. The investigator is under no obligation to apprise the fiduciary of these matters, but some indication can be inferred from the nature of the inquiries as suggested by a review of the excerpts noted above from the targeting protocols. Completion of a civil case before a criminal investigation obviously poses serious risks to the targets of the audit. Therefore, plan fiduciaries and counsel must be alert to the intentions of the investigator and make appropriate judgments as to the risks posed in the course of the investigation.

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:: Medicare Cuts Leave Seniors Seeking Care Among A Shrinking Pool Of Physicians

Physicians say they are shunning Medicare because they are tired of dealing with the yearly threat of a payment cut under federal law requiring that reimbursement rates be adjusted annually based on a formula tied to the health of the economy.

“Ditched by your doctor – blame Medicare“, CNN Money, Parija Kavilanz, senior writer (March 2, 2010)

Choice of doctor is vital to any notion of health care reform.   As Congress considers health care reform, however, here is a startling fact.  Medicare is already constricting physician choice by cutting pay to physicians.

Now President Obama is on record as stating that Americans will still be able to choose their doctors under the health care reform.  Yet, he and his Democratic cohorts are responsible for a 21% cut in Medicare reimbursement rates.  And that is before the cuts planned in the health care reform legislation.

The AARP has inexplicably  failed seniors abysmally on the issue.   If Medicare continues to reduce benefits to physicians, seniors will be hard pressed to find medical care from any doctor, much less their preferred physician.  If those are the promises of health care reform, seniors would be well advised to pass on Obamacare.

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:: Equitable Liens In Restitution – An Alternative Under ERISA Section 502(a)(3)?

Werner also sought restitution, asking the district court to impose a constructive trust or an equitable lien on the $ 3895 that Primax obtained from Progressive. The court found that request to be moot, however, because Primax had returned those funds to Progressive nearly 20 months prior to Werner’s filing of this action. Werner argues that the district court erred by assuming that a specific res had to be identifiable before it could impose an equitable lien.

Werner v. Primax Recoveries, Inc
., 2010 FED App. 0112N (6th Cir.) (6th Cir. Ohio 2010)

The Sixth Circuit’s unpublished opinion in Werner v. Primax Recoveries touches on an interesting issue regarding the nature of “equitable liens by agreement” as distinguished from “equitable liens in restitution” and the scope of ERISA Section 502(a)(3). .

The Facts

Werner was involved in a traffic accident on June 28, 2002, and required medical treatment for his injuries.

In addition to coverage through an employer-sponsored health-insurance policy through Medical Mutual of Ohio he also had “medpay” coverage through his automobile insurance policy that covered up to $ 5000 in medical-expense benefits.

Some of his medical bills were submitted to his health plan and some were submitted against his medpay coverage. The health plan apparently paid the bills submitted to it, but then asserted a claim against Werner’s medpay coverage. This subrogation claim exhausted the $ 5000 medpay limit.

For reasons undisclosed, some of the providers ended up with their bills unpaid. In fact, one of Werner’s medical providers sued him for non-payment.

Demand On Progressive

Rather than pursue payment of the outstanding bills through the health plan, Werner demanded that Progressive seek a refund from the health plan’s recovery agent (Primax) of what had been previously paid to the health plan out of his medpay coverage. (The reasons for this approach are not clear from the opinion.)  The repayment would apparently restore the medpay coverage in sufficient amount to satisfy the health care provider’s claims.

Werner added claims against Primax in the course of the personal injury claim based upon its claim on the medpay coverage.  In an effort to settle the controversy, Primax refunded the money it had recovered to Progressive.

The matter did not end there, however.  Werner sought class action relief in an independent action in federal district court – a case which was ultimately dismissed.   The district court based its holding on a number of grounds, including standing, mootness, and preemption.

Appeal Of Denied ERISA Claims

Of the arguments asserted on appeal, the most interesting argument was Werner’s attempt to impose liability under ERISA in terms of equitable relief under ERISA Section 502(a)(3).  (We will ignore the standing and mootness problems with his claims for purposes of discussion.)

In the words of the Court:

Werner also sought restitution, asking the district court to impose a constructive trust or an equitable lien on the $ 3895 that Primax obtained from Progressive. The court found that request to be moot, however, because Primax had returned those funds to Progressive nearly 20 months prior to Werner’s filing of this action.

Werner argues that the district court erred by assuming that a specific res had to be identifiable before it could impose an equitable lien. He relies solely on a passage in Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356, 126 S. Ct. 1869, 164 L. Ed. 2d 612 (2006), in which the Court explained that “strict tracing” of funds is not necessary when an equitable lien is established by an agreement. See id. at 364-65.

But that reliance is misplaced: Werner has no agreement with Primax that creates an equitable lien. Rather, he seeks an equitable lien in restitution, i.e., the return of something that he alleges Primax wrongfully took. Sereboff expressly distinguishes such claims.

The return of the funds by Progressive proved fatal to this claim:

Moreover, Sereboff still requires that a request for restitution under § 502(a)(3) target “‘particular funds or property in the defendant’s possession.’” Id. at 362 (quoting Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 213, 122 S. Ct. 708, 151 L. Ed. 2d 635 (2002) (emphasis added)).

Werner does not dispute that Primax returned the $ 3895 to Progressive. We fail to see why that would not already amount to restitution here, thus mooting the request–unless what Werner actually seeks is possession of the $ 3895 for himself. But for that, presumably he may now file reimbursement claims with Progressive. Restitution certainly does not require that Primax pay twice.

Our review of Sereboff also leads us to conclude that Werner’s restitution claim is for relief that a court cannot grant under § 502(a)(3), because he seeks legal rather than equitable restitution. See id. at 361-62 (distinguishing the two types and explaining that only equitable restitution is available under § 502(a)(3)); Fed. R. Civ. Pro. 12(b)(6).

The district court properly granted summary judgment on this claim.

Note: The “agreement” required to impose a Sereboff-like remedy is an intriguing issue.  In Sereboff, of course, the Court did not based its finding of an “agreement” on any contractual document.  The “agreement” was implied from the terms of the plan which contained a reimbursement provision.

So when may such an agreement be implied?  When Primax recovered funds as the health plan’s recovery agent, it did no more than act under the terms of the plan.   The Court was correct in finding that no equitable lien by express or implied agreement supported Werner’s claims.

The Court goes further, however, and makes an observation that may have some value beyond a typical subrogation case.  The Court describes the relief sought by Werner as an “equitable lien in restitution”.  Note that the Court does not find that claim to be “legal” (and thus unavailable under (a)(3) as “other equitable relief”).  Rather, since the funds have been returned, the claim was legal inasmuch as no res remained upon which to impose an equitable remedy.

This notion of equitable relief in restitution may just the remedy that an ERISA plan should dial up when seeking refunds from recalcitrant health providers.  The troubling issue of whether an equitable lien by agreement can be found may perhaps by sidestepped by this arabesque.  What the plan asserts is simply an equitable lien in restitution.   The Werner opinion, though unpublished, should go in the desk file.