ERISA ruling highlights need to update plan documents

DENVER—A health benefits dispute wending through the federal courts underscores that plan sponsors with dated plan documents risk turning over disputed benefit decisions to courts for a full, trial-like review, according to benefits and legal experts.

Although a federal appellate court ruled that the plan documents of the health plan involved in the case contained language that make any coverage disputes subject to only a narrow review by courts, many other plans do not contain those vital clauses, experts say.

In a split ruling, a 10th U.S. Circuit Court of Appeals panel on Nov. 15 overturned a lower court's decision to conduct a trial-like review of the benefits decision that a plan's claims administrator had made. The appeals panel ruled that the lower court should have determined only whether the claims administrator's decision was arbitrary and capricious, which is a much less stringent standard for plan sponsors and does not allow plan participants to introduce additional evidence into the case.

The case, Michael Geddes and Kari Geddes vs. United Staffing Alliance Employee Medical Plan et al., stemmed from a coverage dispute over nearly $186,000 of medical treatment for a spinal cord injury suffered by the plaintiffs' son, Andrew Geddes, after he dived into shallow water while on an out-of-state trip to a lake in 2002.

He was transported by air ambulance to a hospital that was not part of the network of his parents' medical plan, which was sponsored by U.S.A. United Staffing Alliance L.L.C. United Staffing is a Provo, Utah-based professional employment organization that provides coverage through a self-insured plan, which is governed by the Employee Retirement Income Security Act.

The plan's claim administrator, Everest Administrators Inc. of Springville, Utah, refused to cover nearly 80% of the claim on the grounds that the out-of-network hospital's charges exceeded the "usual and customary" rate covered by the plan and that nearly all of the follow-up in-network treatment was rehabilitative care, which is subject to a $2,500 cap under the plan.

The Geddes' sued alleging, among other things, that the benefits denial was improper under ERISA.

A district court determined that the case should be subject to a full, trial-like review, known as a de novo review, rather than the narrower arbitrary and capricious standard of review that United Staffing claimed it was entitled to under ERISA as a plan fiduciary. The lower court ruled that the plan sponsor forfeited that standard of review by failing to exercise its so-called discretionary authority to make benefit decisions when it delegated those decisions to Everest, which is not a plan fiduciary.

The court then conducted a de novo review of the claim and considered not only the administrative record but also an affidavit from the treating physician in the case and deposition testimony. Such "extrinsic" evidence would not have been allowable under a narrower review of the claim. In a summary judgment, the court ruled for the plan participants.

On appeal, the 10th Circuit panel ruled, among other things, that the lower court misinterpreted ERISA and a 1989 U.S. Supreme Court ruling on the issue in Firestone Tire and Rubber Co. vs. Bruch. In Firestone, the Supreme Court instructed courts to defer to the benefits decisions of ERISA plan fiduciaries if plan documents explicitly give fiduciaries discretionary authority to make benefit decisions.

As in most situations, the claims administrator in the Geddes case was not a plan fiduciary, and the Firestone ruling did not address that point.

But, under its interpretation of ERISA and the Firestone ruling, the appeals panel ruled 2-1 that the court should have shown "judicial deference" in the case by reviewing only whether Everest's decision was arbitrary and capricious.

The court ruled that judicial deference should be extended to claims administrators when they have acted as agents for plan sponsors—as long as plan documents contain so-called Firestone language on discretionary authority.

A provision in United Staffing's plan documents contains the necessary language specifying that United Staffing is the "named fiduciary" and the "plan administrator" and that it "makes all final decisions about benefits paid from the plan," according to the ruling.

In addition, United Staffing exercised its discretionary authority by accepting Everest's benefits decision, the appellate panel ruled.

The appellate panel suggested that the lower court reached its decision in part because of its "misleadingly truncated reading" of an ERISA provision. Quoting ERISA, the appellate panel ruled that the statute's provision, in its entirety, allows plan fiduciaries "to designate persons other than named fiduciaries to carry out fiduciary responsibilities," except trustee responsibilities, under the plan.

"There is nothing in the language of the ERISA statute, the logic of Firestone, or the background principles of trust law that requires fiduciaries, when delegating authority, to delegate only to other fiduciaries," the appellate panel ruled. "For purposes of liability, decisions made by third parties are decisions made by the fiduciary."

The appellate panel remanded the case to the lower court with instructions to conduct another review—this time applying the arbitrary and capricious standard—of the United Staffing plan's benefit decision.

The decision potentially sets up a Supreme Court review of the issue, because the three appellate courts that have ruled on it have interpreted the Firestone decision differently (see box). The plan participants in the 10th Circuit case, however, asked the full appeals court last week to review the panel's decision, said their attorney, Jeffrey J. Droubay, a senior associate with Parsons Behle & Latimer P.C. in Salt Lake City.

Predicting what cases the Supreme Court will agree to review is difficult, but "I think a time is coming soon when they will take a case" on when courts should defer to benefit plan decisions, said employer attorney Michael Graham, a partner with McDermott, Will & Emery L.L.P. in Chicago.

"You can seriously see the loser in this case going to the Supreme Court" with a request to review the issue, said J.D. Piro, a principal in the Norwalk, Conn., office of Hewitt Associates Inc.

Meanwhile, although the 10th Circuit panel ultimately sided with the plan sponsor on the standard-of-review issue, the case is a reminder that the benefits decisions of many plan sponsors are vulnerable to extensive court reviews, experts said.

An important factor in the United Staffing's success in the case was that is plan documents stated that it would delegate claims handling to a nonfiduciary third party but would reserve the authority to make final claim decisions and interpret plan provisions.

"The problem is that older plans that haven't been updated in awhile" often do not contain that language, Mr. Graham noted.

Mr. Piro agreed. "There are some employers that still don't have the necessary documents in place" defining which parties are plan fiduciaries and what duties are delegated to nonfiduciaries, he said.

Even with that plan document language in place, benefit decisions still might be subject to de novo reviews if other appellate courts or the Supreme Court rules that claims administrators' decisions should not be given judicial deference, Mr. Graham noted.

He and Mr. Piro agreed that the only way to ensure judicial deference is if claims administrators accept fiduciary responsibilities for the plans they handle. But claims administrators historically have refused to accept that responsibility so that they cannot be sued for breach of fiduciary duties, they said.

Michael Geddes and Kari Geddes vs. United Staffing Alliance Employee Medical Plan et al., 10th U.S. Circuit Court of Appeals, Nov. 15; No. 05-4142.