The U.S. Court of Appeals for the Second Circuit recently ruled that when a plan denies a claim for benefits, a court can review a claim “de novo” and show no deference to the plan’s sponsor unless certain conditions are met. Halo v. Yale Health Plan (2nd Cir. 2016).
Courts generally defer to a plan sponsor’s judgment in reviewing claim denials, whereas a de novo ruling allows a court to review the record from the beginning, giving no deference to the plan sponsor. In this case, the court ruled that no deference would be given to the employer plan decision, unless the plan administrator could show that (1) the plan had established procedures that complied with applicable U.S. Department of Labor (DOL) regulations, and (2) the failure to comply with those procedures was inadvertent and harmless.
Under the Employee Retirement Income Security Act (ERISA), the DOL requires each employee benefit plan to provide a “reasonable” administrative procedure to review benefit claims and appeals upon a participant’s request. More specifically, the DOL regulation requires that a denial notice specify the reason for the denial, the plan provisions on which it is based, and available appeal procedures. Where an employer fails to establish a reasonable claims and appeals process, or worse, if it establishes one but does not follow it, the participant may file a claim for benefits directly with the court.
Conversely, where an employer establishes and follows reasonable claims and appeals processes, a participant is required to fully exhaust them prior to filing a claim in court. More often than not, the claims never reach the courthouse steps. When a claim does make it to court, the court generally only reviews the administrative record developed during the claims review process and gives deference to the plan’s decision, as long as the plan confers discretion on the administrator (most of them do). A claim denial upheld through a plan’s claims and appeals process will most likely not be reversed by a court. That is, of course, as long as the process worked as ERISA intended and the plan sponsors made no decisions that were “arbitrary and capricious.”
Ms. Halo was a Yale University employee who participated in the Yale Health Plan (the Plan). In May 2008, Halo developed a vision problem and was seen at Yale’s Urgent Care Center, which subsequently referred her to the hospital. On June 1, 2008, her retina was surgically reattached. Following a second opinion, she had another operation on June 13, 2008. Within days, she obtained further treatment for severe eye pain. Up to this point, the Plan had paid all claims at 100 percent with no required co-payments. After a series of specialists and procedures, including another operation in August, her medical bills accumulated.
The Plan document called for denial of coverage if the illness or injury did not meet the Plan definition of an emergency or urgent condition. The Plan further explained that coverage would be denied “for conditions that could have been treated at Yale’s Urgent Care Center but were not.”
On September 18, 2008, the Plan’s Claims Committee sent a letter approving payment for two office visits in June and upheld the denial of payment for Halo’s August surgery. More precisely, the decision read, “Services not authorized.” It offered no reasons for the denial, no reference to applicable plan provisions, no reference to medical records, and no indication the Committee had considered whether the surgery might be covered as emergency or urgent care. (Indeed, the record indicates the Committee did not have any medical records from the specialist relating to the August diagnosis or surgery.) The Plan also failed to inform Halo of her appeal rights. There is also no indication that Halo was ever contacted, as the Plan stated she would be, if further information were needed to assist in the determination of coverage. Essentially, by not providing the information required by the DOL’s regulation, the Plan was no longer entitled to deference from the court.
This is a good reminder for employers to review their plan claims procedures to retain the important deferential standard of review should one of their participants challenge their decision in court. Some important takeaways follow:
1. Review each of your plan’s claims review procedures to confirm they comply with DOL’s claim procedure regulation. Note that the regulation applies not only to health plans but also to 401(k), 403(b), pensions, and other qualified retirement plans. (See ERISA claims procedure § 2560.503-1.)
2. Ensure that your plan documents have language that clearly authorizes discretion on the plan administrator for claim review and appeal decisions.
3. Confirm that your employer plan administrator actually follows the reasonable process that is established and communicated to participants.
4. Upon receipt of a participant complaint, follow up with your plan administrator. If necessary, request a review of their “administrative record” to confirm that all necessary steps were taken during their review process.
5. While most non-qualified executive arrangements are exempt from ERISA, this DOL regulation was published under section 503, which includes Top Hat Plans. These are unfunded plans maintained primarily for a select group of management employees. They are also subject to these DOL claims review procedures. Where a Top Hat Plan is not required to furnish a Summary Plan Description, the plan may satisfy the notice requirements by taking steps reasonably designed to ensure that participants are made aware of the existence of the plan’s claims procedures when they are enrolled. They must also be advised regarding how to obtain a written copy of the procedures.
This decision should remind all employer plan administrators to establish and follow a reasonable claims and appeals procedure in each of their benefit plans. Members that have not done so recently may wish to undertake a review of their plan’s administrative claims and appeals procedures (including those conducted by third-party claims administrators that perform services for their plans). MSEC ERISA services may be able to assist on a project basis.