Mostly, working on any given subrogation file for a private, self-funded benefit plan is all about the hurry up and wait. Hurry to communicate with the injured party, their attorney, the adjusters, investigators, and make sure everyone knows to about the plan’s involvement and rights. Then wait for the completion of treatment, the compilation of damages and some initial negotiations before racing to remind everyone of those rights, and potentially racing to the courthouse to make sure those rights are preserved. As the Supreme Court reminded us in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, timing is everything. 136 S. Ct. 651 (2016).
For the most part, the bulk of the plan’s cost-containment opportunity has always come at the resolution of some liability claim, which is usually years after the bulk of the treatment and payments. Although many states require Medical Payments Coverage, Personal Injury Protection or some other form of no-fault coverage, they are typically in very small amounts. There are exceptions, of course, Michigan’s unlimited PIP scheme, potential advancement of funds in Montana under Ridley v. Guaranty National Insurance Co., and high-minimum states like New York and New Jersey, but usually very little coverage is available to alleviate the burden on a plan to pay up front or leave a member to address bills with providers directly. 951 P 2d 987 (Mont. 1997).
In some circumstances, however, acting quickly when the case begins does turn up a policy that will meaningfully impact the plan’s liability from the start, where there is a policy for a specific loss or a high no-fault policy. The problem arises when these policies are designed to be excess, which they usually are. An excess policy is a policy designed to provide coverage only when no other coverage exists. They are often inexpensive because they are designed to often only bear liability for a patient’s copayment or deductible obligations, rather than the bulk of the responsibility for medical claims. Some are also only designed to cover bills associated with a specific event or activity, such as high school sports.
This issue frequently arises not only in the context of automobile no-fault coverage, but with school and recreational policies. Schools will often secure excess policies for athletes or even students hurt in gym class, and they are common in adult recreational leagues (usually soccer, but I’ve handled a case where an adjuster was shocked to find that his company had issued a policy for a lawnmower racing league…).
So what happens when a health plan has a valid excess provision, but the accident or automobile policy that covers a specific incident does as well? Although ERISA might allow a plan to preempt state laws, policy or plan provisions may call for a slightly different analysis.
Various Federal Circuit Courts of Appeal have heard this question and have reached a somewhat surprising conclusion, especially following the Montanile decision from the Supreme Court in 2016. There is a long-standing split between the circuits on this question. See Auto Owners Ins. Co. v. Thorn Apple Valley, Inc., 31 F.3d 371 (6th Cir. 1994) (terms of an ERSIA plan are enforceable over conflicting policy language of an insurer) c.f. Winstead v. Ind. Ins. Co., 855 F.2d 430 (7th Cir. 1988) (apportioning liability for claims pro rata). Both of these cases addressed Michigan PIP policies, which provide unlimited coverage for, among other things, medical bills related to automobile accidents. Both the PIP policy and the health plans involved in the dispute had excess provisions, and in both cases the auto insurer filed suit, asking the court to declare that the that the health plan should pay the bills as primary.
The 6th Circuit concluded that the ERISA plan terms were not entitled to any deference over the terms of the auto policy and ordered the two litigants to pay the claims on a prorated basis. Straightforward enough. Neither policy had a cap on coverage, and the outstanding bills could be split on a 50/50 basis. One significant problem with this decision as applied to slightly different facts, is how does one pro-rate a theoretically infinite policy with a more standard PIP policy which might have limits of $10,000 or less. McGurl v. Trucking Emps. of N.J. Welfare Fund, Inc. , 124 F.3d 471, 485 (3d Cir. 1997) (noting that it is “unclear how the rule [prorating] would operate in practice”).
The 7th Circuit, when faced with the same issue, gave more weight to the primary purpose of ERISA. These conclusions were perfectly in line with what the Supreme Court would later point out, the whole reason that the plan, “in short, is at the center of ERISA” and “[t]his focus on the written terms of the plan is the linchpin of ‘a system that is [not] so complex that administrative costs, or litigation expenses, unduly discourage employers from offering [ERISA] plans in the first place.’” Helimeshoff v. Hartford, 134 S.Ct. 604, 612 (2013) (quoting Varity Corp. v. Howe, 516 U.S. 489, 497 (1996)). Without giving force to valid and clear terms, uniform nationwide enforcement would be undercut.
In the last 5 years, this issue has been somewhat frequently litigated in the context of non-automobile excess policies. In addition to the existing split on what weight to give the terms of an ERISA plan, courts have now drawn a distinction based on if the plan paid claims before initiating suit. Courts have allowed plans to pursue declaratory relief, obligating the insurer to issue payment in the future, but not recover from insurance policies with excess provisions once the plan has already paid claims.
This pre/post payment distinction is based on the idea that plans can only seek a monetary award with a court if they can identify a specific pool of money that they have a right to, like a settlement fund, which does not exist when benefits are being coordinated between two payors. Additionally, some insurers have argued that ERISA is irrelevant even to the determination of primary liability for payment, asking courts to leave these “run-of-the-mill contract disputes” to state courts.
As one court noted:
The paradoxical result [of this argument] is that as an ERISA plan, has fewer remedies than it would if it were a non-ERISA plan, and its beneficiary, through no fault of his own, is considerably worse off for having two policies that coincidentally had conflicting language than he would be if he had only one. One might think that the underlying purposes of ERISA and of equitable relief generally would permit a court to fashion an appropriate remedy.
Cent. States, Se. & Sw. Areas Health & Welfare Fund v. Gerber Life Ins. Co., 771 F.3d 150, 159 (2d Cir. 2014).
As long as these issues remain unresolved, health plan liability will remain uncertain, and insurers and plans alike will be encouraged to leave claims denied and turn to courts before issuing payments. This leaves plan participants to deal with bills everyone agrees will not ultimately be their responsibility, and forces plans into a position where they may risk loss of discounted rates or access to other benefits that are only available if payment is made within a specific timeframe. Health plans can seek to preserve enforcement of their terms through diligent investigation and coordination with – and education of – all parties and payors as soon as claims are incurred.
 Dakotas & W. Minn. Elec. Indus. Health & Welfare Fund v. First Agency, Inc., 865 F.3d 1098 (8th Cir. 2017); Cent. States, Se. & Sw. Areas Health & Welfare Fund v. Am. Int'l Grp., Inc., 840 F.3d 448 (7th Cir. 2016); Cent. States v. Student Servs., 797 F.3d 512, 60 EBC 1857 (8th Cir. 2015); Cent. States, Se. & Sw. Areas Health & Welfare Fund v. Gerber Life Ins. Co., 771 F.3d 150 (2d Cir. 2014); Cent. States, Se. & Sw. Areas Health & Welfare Fund v. First Agency, Inc., 756 F.3d 954 (6th Cir. 2014); Cent. States, Se. & Sw. Areas Health & Welfare Fund v. Health Special Risk, Inc., 756 F.3d 356 (5th Cir. 2014); Cent. States, Se. & Sw. Areas Health & Welfare Fund v. Bollinger, Inc., 573 F. App'x 197 (3d Cir. 2014).
The abuse of discretion standard has long been a proverbial ace in the hole for self-funded employee benefit plan administrators in making factual determinations that, while perhaps not popular with the participant, they believed were consistent with the terms of the plan document. While the recent Ariana M. v. Humana Health Plan of Tex., Inc. is noteworthy for many reasons, the most immediate effect will be on the Fifth Circuit’s allowance of plan administrator discretion in making factual determinations.
The Fifth Circuit finally joined the fraternity of all other circuit courts that has held decisions made by plan administrators under ERISA Section 1132(a)(1)(B), whether legal or factual, are to be reviewed using a default de novo standard. In addition to introducing consistency across the circuit courts regarding standard of review, the en banc holding in Ariana M. v. Humana Health Plan of Tex., Inc. greatly reduced the amount of inherent deference granted to plan administrators for factual determinations. Self-funded employee benefit plans should be aware of the repercussions of no longer having the abuse of discretion standard available in the Fifth Circuit if there is an appeal regarding its factual determinations relating to, for instance, a denial of benefits.
Prior to this decision, every other circuit court except the Fifth Circuit had applied a de novo review when an ERISA plan document does not expressly grant discretion to plan administrators. These courts based their rationale on the fact that the famed Firestone Tire & Rubber Co. v. Bruch case does not make a distinction between a trustee’s legal interpretations versus their factual decisions regarding the requirement for de novo review. Ariana M. v. Humana Health Plan of Tex., Inc. is legally significant because Fifth Circuit had long held that, under ERISA, a plan administrator was entitled to an abuse of discretion standard of review with respect to its factual determinations. In short, the court to this point had given plans the benefit of the doubt for factual determinations unless the plan had made an unreasonable decision. Now these administrators will be held to the de novo standard, without deference to its factual findings. This shift the court considering an issue for the first time without this deference will likely affect how and under what circumstances plan decisions are made. Thus, it is critical to also consider the practical impact that the holding will have on plan administrators that have relied for years upon Fifth Circuit providing them with this high degree of discretion in making factual determinations even when a plan has not expressly granted them that discretion.
Fifth Circuit Standard of Review Background
Employers, and the plan administrators, traditionally have broad discretion to determine how plan terms will be used, as well as to decide which entities will have the authority to make benefits determinations, factual determinations, appeals determinations, and language interpretations. The Supreme Court in Firestone held that only if a plan explicitly delegated authority to a plan administrator, the decision would be reviewed under a heightened “abuse of discretion” standard. The Court famously stated a “denial of benefits challenged under § 1132(a)(1)(B) is to be reviewed under a de novo standard unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan.” If there was no express delegation, however, the Court held that courts would need to review a denial of benefits challenged under ERISA using a de novo standard. The holding did not directly clarify whether it was referring to both legal interpretations and factual determinations for the de novo standard.
In Ariana M. v. Humana Health Plan of Tex., Inc., the Humana Health Plan of Texas argued that it had a discretionary clause granting to Humana “full and exclusive discretionary authority to: [i]nterpret plan provisions; [m]ake decisions regarding eligibility for coverage and benefits; and [r]esolve factual questions relating to coverage and benefits.” Due to a Texas antidelegation statute making discretionary clauses unenforceable, Humana agreed not to use the argument that the plan document gave it direct authority. Notably, the court remained silent on whether ERISA preemption came into play because Humana did not raise the argument. Instead, Humana relied upon the Fifth Circuit’s holding in Pierre v. Conn. Gen. Life Ins. Co. to argue that for factual determinations under ERISA plans, the abuse of discretion standard of review is the appropriate standard and therefore it had not abused its discretion in making its determination. The Fifth Circuit granted en banc review to reconsider Pierre and determine the default standard of review that would apply in these situations.
The Fifth Circuit’s decision in Ariana v. Humana Health Plan of Texas essentially reversed its own interpretation of Firestone in Pierre. According to Pierre, without delegation of authority to a plan administrator, challenges to a legal interpretation of a plan should be considered under a de novo standard of review while factual determinations were to be under an abuse of discretion standard of review. The Pierre court based its reasoning on the concept that an administrator's factual determinations are inherently discretionary and the Restatement (Second) of Trusts supports giving deference to an ERISA plan administrator's resolution of factual disputes even when the plan does not grant discretion.
The Ariana court essentially held that Pierre’s interpretation is no longer good law, despite some strong dissenting opinions, including from Judge E. Grady Jolly, who authored Pierre. The dissent focused its dissatisfaction with the majority’s opinion on the discrepancy between legal analysis and credibility determinations and a lack of express authority in Firestone.
Factual Determinations That May Now Be Subject to De Novo Review
Now that Ariana held that Firestone's default de novo standard applies when the denial is based on a factual determination, it is worthwhile to see how this change would play out in the types of factual determinations that plan administrators make on a regular basis. This is not intended to be an exhaustive list of decisions that will be affected, but instead meant to illustrate the types of complications that Ariana could create for plan administrators if they are a party to case that reaches the Fifth Circuit.
First and foremost, Humana Health Plan of Texas in Ariana used its discretion to decline to allow partial hospitalization for Ariana beyond June 5th, claiming it was no longer medically necessary. Using Pierre’s precedent, the district court concluded only that "Humana did not abuse its discretion in finding that Ariana M.'s continued treatment at Avalon Hills was not medically necessary after June 4, 2013." Plan administrators are often making factual decisions as to whether treatment is “medically necessary” and therefore whether it should provide coverage according to the terms of the plan document. In the Fifth Circuit, these plans were granted broad deference regarding these determinations because of its decision in Pierre. Similar to the rest of the circuit courts, medical necessity determinations are now subject to de novo review. However, Ariana is merely the tip of the iceberg in that these types of factual determinations are not limited only to questions of medical necessity.
Another determination in which plan administrator discretion is paramount is the application of plan document exclusions, such as excluding coverage if the treatment or care was the result of illegal or hazardous activity. Each plan document has its own set of exclusions that it can choose whether or not to apply to a given set of facts, but the Fifth Circuit had traditionally separated itself from the rest of the circuit courts up until this point as to the standard by which these exclusion determinations would be judged. Anyone who works in the self-funded industry knows how controversial and fact-dependent the practice of excluding participant claims can be for a plan administrator. Without an abuse of discretion standard and de novo standard now in place, however, these administrators may potentially be more wary to automatically exclude a plan participant’s claims due to an illegal or hazardous activity exclusion if, for example, the facts are unclear.
Next, plan administrators often make plan eligibility decisions that will be affected by the Ariana decision in the Fifth Circuit. These determinations will include, for instance, whether spouses are eligible for coverage after they dropped their own plan based on the plan’s eligibility language. Previously free from the potential second-guessing involved in with the de novo standard of review, administrators now more than ever will need to be sure to document their coverage decisions based on the plan document language and be able to defend them in court if necessary.
Administrators also make factual determinations regarding administration of high-deductible health plans (HDHPs), health savings accounts (HSAs), flexible spending accounts (FSAs). Some prime examples of these administrative issues would be deciding which items covered under an HSA would be deemed “preventive” or whether the plan had avoided first-dollar coverage under an HDHP. Similar to the above, the Fifth Circuit will now view the process of how these factual decisions were made in a much different light.
Finally, now that these plan administrators are subject to the de novo standard of review instead of abuse of discretion review, they should remember the ERISA requirement that factual determinations must be made consistently in similar scenarios in the future. Though this is not necessarily a novel consideration for plan administrators, it is a worthwhile reminder that decisions made under this “new” standard of review will be used as precedent for its decisions made in the future as well, adding to the weight of these determinations.
Patrick Ouellette, Esq., is an attorney with The Phia Group, LLC.
Patrick joined the Phia Group in 2017. He earned his B.A. in journalism and writing from the University of Rhode Island and spent time as a sports writer and also as a healthcare technology journalist. He later graduated from the Suffolk University Law School evening program with a health and biomedical concentration with distinction. Patrick has legal experience with healthcare providers and in state government. He was also a published staff member of the Suffolk University Law School Journal of Health and Biomedical Law and later served as Chief Content Editor on the journal’s executive board.
The challenges of setting up and administering an employer-sponsored, self-funded health plan are many. One of the largest challenges a self-funded plan sponsor faces is reconciling the vast number of documents that make a self-funded health plan “go.”
When navigated correctly, these challenges yield immense results in terms of rich benefit delivery within a fiscally responsible health plan mechanism. Still, challenges remain and should be discussed openly so that we can continue to grow and strengthen our industry.
The task of reconciling governing documents is challenging for anyone, but it can be an especially daunting job for any plan sponsor, broker/consultant, or interested party mostly familiar with the fully insured platform. In that relatively simple world, everything “goes” with minimal paperwork – at least in the front of the house – but, this simplicity comes at a significant cost and with a significant lack of control and customization.
Clearly, for most employers that really look into the options, self-funding is the way to go. But, if you want to play in the self-insured world and reap the significant financial benefits of the self-funded model – get ready to read, re-read, audit, reconcile, and review more paperwork than a forensic accountant scouring financial records written in invisible ink.
In the interest of staging the optics for this brief piece, let me be incredibly clear that I am 10,000% a believer that self-funding is the best model to deliver rich and affordable health benefits, and the success of the self-funded industry is a personal goal and passion of mine. I am a firm believer that all stakeholders in the self-funded space are vital for the success of this model.
The comments made herein are not meant to demonize any one player, nor am I out to state that any particular stakeholder causes more complication than anyone else. Rather, I hope that through an honest, and a little self-critical conversation (laced with humor), we can identify some brutal truths regarding our great industry so that we can continue to work together for the betterment of self-funding, as a whole!
To approach this in an organized fashion, let’s make a list of some of the array of paperwork needed for a self-funded health plan to fully function (at least the top documents most commonly involved). From there, we can explore one or two examples that reflect “problem areas,” and/or bullet points that we should all think about when reflecting on these documents. Not all problems will be (or should be) explored in this article, but, hopefully, this conversation gets the wheels turning and points us toward improvements and solutions.
Governing Plan Document / Summary Plan Description – This is the cornerstone of every self-funded health plan. Without a governing plan document, you have.... Well... a nebulous concept of a health plan devoid of any defining rules or benefit structure, with all the details living in someone’s head and likely spread across a series of emails and meeting notes! Good luck with a government audit on that one!
Items that could be “problem areas” include:
Summary of Benefits and Coverage (SBC) – Thank you Affordable Care Act! As we all know, health insurance is confusing and saturated with paperwork. Well, thankfully the ACA saw fit to “simplify” health coverage by requiring, yes, you guessed it, more paperwork! Better hope your SBC lines up with your SPD or you might be SOL with the DOL while listening to OPP in the LBC.
PBM Agreement – And then, let’s add drugs. No, I don’t mean “let’s add drugs” in the context of a 1970s Grateful Dead, San Francisco acid test – rather, and as if it’s not confusing enough, let’s take a completely separate entity, bring them to the party to assist with a plan’s Rx benefits, and then, in the frantic insanity that is a 60 hour work week, hope that we all read over the PBM agreement to see if it lines up with the intent of our health plan and that the language in the plan document echoes that same alignment – oh, and maybe stop-loss to?
Items that could be a “problem area” include:
Network Agreement – Where to start...?
Stop-Loss Policy / Agreement – Too often we see material variances in the wording of definitions and exclusions, as between plan documents and stop-loss policies. To state the obvious, this can create significant coverage gaps, manifesting in reimbursement denials that are not necessarily invalid. Common discrepancies include a disconnect in a “medical necessity” definition or an “experimental and investigational” definition.
Additionally, what about notice provisions? While not directly related to a misalignment between plan document and stop-loss terms, this concept can create havoc when a plan-sponsor does not pay especially close attention to the notice requirements present in a stop-loss contract. More specifically, does the contract require the sponsor to provide notice to the carrier any time the Plan modifies benefits? If so, and if the Plan fails to do so, a significant (and likely valid) coverage gap may exist.
Administrative Services Agreement (typically with a TPA or a carrier on its ASO platform) – This document can tend to be the “unifier” or the “great divider.” So many solutions and pieces that make up a self-funded plan all fall together in the ASA. This document is key. I’ll say it again, KEY.
Employee / Employer Handbooks – This one just splashed onto the scene in a pretty incredible way over the past year or so.
Plan Amendments – I had a dream once, about a Plan that had not had its plan document restated in 8 years, and, during that time, the Plan Sponsor had amended the plan 16 times. All amendments existed as separate documents, referencing one another from time to time, and, oftentimes, referencing various vendors that no longer worked for the Plan. Then, the Plan Sponsor came to me and hired me in November to restate the plan for a January 1 kick off. I woke up screaming. That kept me up at night.
Notifications (of material modification; open enrollment; HIPAA privacy notifications; etc.) – While many of these may not need to line up with a plan’s specific benefit grid, network alignment, or the definition of “maximum allowable,” you can easily see how a bit more paperwork, directly impacting the member’s understanding of a plan, can be cumbersome and can easily cause confusion if not handled carefully, especially when bundled into an envelope (or email) containing a plan document and an SBC!
Miscellaneous Vendor Contracts – Take everything discussed above and add in a few more. Time to turn up the volume! All the above is enough to strike fear into the heart of the most diligent and thorough paper pushing accountants, advisors, and attorneys. But, it is the price of admission and a piece of our business that we should be aware of and work through carefully. As a best practice, every Plan Sponsor should engage in expert gap reviews of all documents and should do so on a routine basis.
To conclude, and hopefully provide some closure and definition to my thoughts, I will leave you with this: our industry is complicated. There is no denying it. Let’s acknowledge it, be willing to criticize it, and even be willing to poke fun at it.
But, at the end of the day, let’s recognize that our industry – our platform – is the best. So, we owe it to each other, as stakeholders in this space, to work hard to accomplish the goal of aligning the documents that govern the administration of a self-funded health plan.
Should the first and foremost guardian of this alignment be the Plan Sponsor? Absolutely –and with expert guidance! We are all in this together and should strive to achieve harmony in a Plan’s governing documents, wherever possible, together. All boats rise.