“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 Aug. 19, 2010) (unpublished)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.
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.
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.