Question: What are the main employer considerations when responding to employee requests to override a self-insured health plan third-party administrator’s adverse benefit determination?

Short Answer: The main concerns are 1) the ERISA plan precedent created by the plan benefit determination, 2) ensuring stop-loss coverage for the benefits provided under the plan, and 3) avoiding loss of the deferential Firestone standard of review for failure to have appeals determined by the plan’s named appeals fiduciary.

Note: This is the ninth in a ten-part series addressing employee health plan exception requests.

• Part I: Mid-Year Enrollment Requests Outside of Permitted Election Change Event

• Part II: Ineligible Part-Time Employee Enrollment Exception Requests

• Part III: New Hire Exception Requests to Enroll Prior to Satisfying the Plan’s Waiting Period

• Part IV: Independent Contractor Exception Requests to Enroll Non-Employees in the Health Plan

• Part V: Employee Exception Requests to Enroll an Ineligible Dependent

• Part VI: Specialty HRAs Address Requests for Employer to Reimburse Health Expenses

• Part VII: Correcting Erroneous Elections Under the IRS Doctrine of Mistake

• Part VIII: How to Address Post-Open Enrollment Employee Election Change Requests

**Claims and Appeals Exceptions: Requests for Employer to Override the TPA’s Determination **

Employers that sponsor self-insured health plans have greater flexibility with respect to many aspects of plan administration than a typical fully insured plan.  However, there are three main issues for employers to consider upon receiving an employee request to overturn the third-party administrator’s (TPA’s) adverse benefit determination to deny a claim or appeal for the self-insured health plan.

The three main issues are:

1. The ERISA Plan Precedent;

2. The Stop-Loss Provider Limitations; and

3. Preserving the _Firestone _Deferential Standard of Review.

Issue #1: The ERISA Plan Precedent

ERISA requires that employers administer and maintain the plan pursuant to its written terms.  Nonetheless, employees frequently ask employers to intervene and approve a benefit claim or overturn a denied appeal despite the TPA’s determination that such benefit is not covered pursuant to the plan terms.

Within this framework, employers should not make “exceptions” to act contrary to plan terms because doing so could be a breach of fiduciary duty.  Rather, employers can exercise their discretionary authority to interpret plan terms when making a plan benefit determination.  Employers that approve coverage in these situations have therefore interpreted the plan’s terms to be flexible enough to accommodate coverage for the benefit at issue.

An employer’s broad interpretation of the plan’s terms beyond the standard denotation (as determined by the TPA in its adverse benefit determination) to override the TPA and permit coverage effectively acts in the same manner as a plan amendment because the employer must then apply that approach consistently for all similarly situated employees.  For example, a plan permitting in-network coverage for a procedure that would otherwise be subject to the plan’s out-of-network cost-sharing provisions would generally have to accommodate the same in-network coverage for all similar claims.

In other words, a health plan benefit “exception” to approve coverage for a benefit creates an ERISA plan precedent requiring the plan to offer coverage for all employees and dependents in similar circumstances.  An employee or dependent denied benefits in similar circumstances (e.g., the same type of out-of-network claim) would have a potential claim for ERISA breach of fiduciary duty or claim for benefits.

For more details, see our Newfront ERISA for Employers Guide.

**How to address the issue: **_Unfortunately, there is no good way to solve for the unavoidable establishment of an ERISA plan precedent.  The only mitigating factor could be an argument as to the scope of the precedent.  How broadly or narrowly the precedent applies in practice is a matter of interpretation based on the specific facts and circumstances of the exception. Employers should keep in mind that an aggressive argument as to the narrowness of the precedent’s scope could always be challenged by the DOL or a participant lawsuit if it were unreasonable.  _

Instead of considering making an “exception,” employers should instead consider the following two options where they disagree with the TPA’s adverse benefit determination:

1. _The first approach is to amend the plan for all participants to modify the plan terms and specifically cover or exclude the item or service at issue.  _

2. _Alternatively, employers have the discretionary authority to interpret plan terms on a consistent basis for all participants.  Employers can direct the TPA in writing to interpret the plan provision in a matter consistent with the employer’s understanding of those plan terms.  _

Under either approach, the employer should first confirm the approach with the TPA (for administrative claim processing purposes) and stop-loss provider (for stop-loss coverage purposes) before proceeding.

Issue #2: The Stop-Loss Provider Limitations

Stop-loss providers for self-insured plans generally will cover only claims consistent with the terms of the plan.   If a stop-loss provider were to discover that the employer made an exception to permit coverage for a claim beyond the terms of the plan, the stop-loss provider would be within its right to deny coverage for the claim. That could ultimately make the employer responsible for fully self-funding the claims related to the employer intervention, which could in turn create a significant unexcepted liability for employers who otherwise rely on the protection from stop-loss to prevent excessive liability from plan benefits.

Note that even in the situations where the stop-loss provider (and TPA) approves the exception, the stop-loss provider does not have the same concerns as the employer regarding the need to consider the scope of the ERISA plan precedent (issue #1 above) and avoid loss of the Firestone deferential standard of review (#3 below) because the carrier is not responsible for that issue.  In almost all cases, the employer is designated as the ERISA plan administrator.  Employers (as the ERISA plan administrator) will often incorrectly assume that the green light from the stop-loss provider (and TPA) absolves them of any additional concerns arising from ERISA compliance.

**How to address the issue: **Employers intending to override the health plan TPA’s adverse benefit determination should first seek approval from the stop-loss provider to ensure continuing stop-loss coverage for the plan benefits at issue.  Even if the stop-loss provider does approve, the employer would still need to carefully consider issues #1 and #3 before proceeding with the exception.

Issue #3: Preserving the Firestone Deferential Standard of Review

Employers that sponsor self-insured health plans have greater flexibility with respect to many aspects of plan administration than a typical fully insured plan.  However, a common misconception about moving to a self-insured health plan is that the employer will be able to make plan exceptions to approve employee appeals.  In the vast majority of self-insured plan arrangements, the employer does not have the authority under the plan terms to make appeals determinations. 

ERISA requires that appeals be determined by “an appropriate named fiduciary of the plan” to ensure a full and fair review of the claim and adverse benefit determination.  Employers sponsoring a self-insured health plan will almost always delegate the role of the named fiduciary for appeals to the TPA.  Such delegation is appropriate because, for example, employers in almost all cases do not want to be responsible for making medical necessity determinations (which would require an experienced medical professional’s judgment), or work within the confines of the strict ERISA appeals procedure timing requirements (which can be as short as 24 hours for urgent care claims).  It would generally not be practical or appropriate for employers to assume that role. 

ERISA’s fiduciary duties include the duty of prudence, requiring all actions be taken with the skill, prudence, and diligence of an expert in the context of plan administration.  An employer determining appeals without a comprehensive team of experts and sophisticated committee to make determinations could be exposed to a potential breach of fiduciary duty claim for not acting prudently in determining appeals.  Such an approach may also expose the employer to a potential breach of fiduciary claim for imprudently selecting and monitoring a TPA that does not act as appeals fiduciary.

Important Note: Employers always have the fiduciary duty to prudently select and monitor plan service providers.  If an employer becomes aware of a TPAs consistent practice of incorrectly determining claims and appeals, the employer will need to take action to address the failure by ensuring the TPA corrects its practices or by changing TPA vendors.

In the typical situation where the TPA is acting as the named fiduciary for appeals determinations, the employer should not override the final adverse benefit determination of the TPA.  An employer’s attempt to override the named appeal fiduciary’s (i.e., TPA’s) appeal determination could violate the requirement that appeals be determined by the named appeals fiduciary.  This violation could result in loss of the deferential standard of review in federal court for any claim for benefits brought in federal court. 

The deferential standard of review, known as the “Firestone standard” in reference to the seminal U.S. Supreme Court case Firestone Tire & Rubber Co. v. Bruch, provides that the participant can prevail on the claim in court only if the plan abused its discretion by acting in an arbitrary and capricious manner in making the adverse benefit determination.  This “Firestone standard” (sometimes referred to as “Firestone deference”) provides that the court will generally defer to the plan’s determination—even if the court might independently have come to a different conclusion—unless the determination was beyond the scope of a possible reasonable interpretation.

Where the “Firestone standard” does not apply, ERISA claims for benefits brought in federal court would be subject to the “de novo” standard of review with no deferential treatment.  Under the “de novo” standard of review, the court will make its own independent decision as to whether it agrees with the decision—without affording any deference to the plan’s determination. 

In other words, where the “Firestone standard” begins with the presumption that the plan’s determination was correct (and will overturn that determination only if the plan’s determination was clearly wrong), the “de novo” standard of review is a fresh and new decision by the court without any presumption that the plan initially made the correct determination.

An employer’s failure to have appeals determined by the named appeals fiduciary could therefore cause the “de novo” standard of review to apply in claims that reach litigation—thereby making it much more likely the plaintiff participant would prevail against the plan.

For more details, see our Newfront Compliance Considerations for Self-Insured Plans Guide.

**How to address the issue: **

Employers have two options where they disagree with the TPA’s (named appeals fiduciary’s) determination:

1. _The first approach is to amend the plan for all participants to modify the plan terms and specifically cover or exclude the item or service at issue.  _

2. _Alternatively, employers have the discretionary authority to interpret plan terms on a consistent basis for all participants.  Employers can direct the TPA in writing to interpret the plan provision in a matter consistent with the employer’s understanding of those plan terms.  _

Under either approach, the employer should first confirm the approach with the TPA (for administrative claim processing purposes) and stop-loss provider (for stop-loss coverage purposes) before proceeding.

Reminder: Participant Right to Bring Claim in Federal Court

ERISA provides plan participants with the right to appeal an adverse benefit determination.  If an employee receives a final adverse benefit determination from the TPA in the plan’s administrative review process after exhausting all levels of appeal under the plan, the participant generally has the right to bring a civil action in federal court to recover benefits under ERISA §502(a)(1)(B).

Summary

For the reasons outlined above, employers should generally avoid overturning a TPA’s adverse benefit determination.  The issues associated with making an exception in most cases far outweigh the typical hardship case or other motivation presented by the employee or dependent requesting the plan coverage exception.

Employers wishing to cover a benefit denied by the self-insured health plan’s TPA do have the option of amending the plan for all participants to change the plan terms and specifically cover the item or service at issue.  Alternatively, employers can direct the TPA in writing to interpret the plan provision in accordance with the employer’s understanding of those terms and on a consistent basis for all similarly situated claims.

Employers taking either of these approaches should first seek approval from the TPA and stop-loss provider.  They should also consider the potential budgetary effects of expanding plan coverage.

Relevant Cites:

ERISA §402(a)(1):

_(1) _Every employee benefit plan shall be established and maintained pursuant to a written instrument. Such instrument shall provide for one or more named fiduciaries who jointly or severally shall have authority to control and manage the operation and administration of the plan.

ERISA §404(a)(1)(D):

_(1) _Subject to sections 403(c) and (d), 4042, and 4044, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—

…

(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this title and title IV.

ERISA §502(a)(1)(B):

(a) Persons empowered to bring a civil action. A civil action may be brought—

_(1) _by a participant or beneficiary—

(A) for the relief provided for in subsection (c) of this section , or

(B) to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan….

29 CFR §2560.503-1(h)(1):

(h) Appeal of adverse benefit determinations.

_(1)  _In general. Every employee benefit plan shall establish and maintain a procedure by which a claimant shall have a reasonable opportunity to appeal an adverse benefit determination to an appropriate named fiduciary of the plan, and under which there will be a full and fair review of the claim and the adverse benefit determination.

Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989):

Consistent with established principles of trust law, we hold that 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. 

Sanford v. Harvard Industries, Inc., 262 F.3d 590 (6th Cir. 2001):

As a general principle of ERISA law, federal courts review a plan administrator's denial of benefits de novo, “unless the benefit plan gives the plan administrator discretionary authority to determine eligibility for benefits or to construe the terms of the plan.” _Wilkins v. Baptist Healthcare Sys., Inc., _150 F.3d 609, 613 (6th Cir.1998) (citing Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989)). When a plan administrator has discretionary authority to determine benefits, we will review a decision to deny benefits under “the highly deferential arbitrary and capricious standard of review.” _Yeager v. Reliance Standard Life Ins. Co., _88 F.3d 376, 380 (6th Cir.1996).

…

Having identified no clear error in the district court's finding that Harvard did not comply with the plan procedures in rescinding Sanford's benefits, we also hold that the court did not err by reviewing Harvard's decision de novo, rather than under the more deferential “arbitrary and capricious” standard. Our circuit has not previously addressed the standard of review applicable to a decision to revoke benefits when that decision is made by a body other than the one authorized by the procedures set forth in a benefits plan. We adopt the view espoused by the Second Circuit in Sharkey v. Ultramar Energy Ltd., 70 F.3d 226, 229 (2d Cir.1995) (holding that a federal court reviews de novo a decision to revoke benefits when that decision is made by an unauthorized body), and by the First Circuit in Rodriguez-Abreu v. Chase Manhattan Bank, 986 F.2d 580, 584 (1st Cir.1993) (same). The logic behind these decisions is that deferential review under the “arbitrary and capricious” standard is merited for decisions regarding benefits when they are made in compliance with plan procedures. When an unauthorized body that does not have fiduciary discretion to determine benefits eligibility renders such a decision, however, this deferential review is not warranted. See Sharkey, 70 F.3d at 229; _Rodriguez-Abreu, _986 F.2d at 584.

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship.  Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).