Employee Benefit Plan Review – From the Courts

5th Circuit Applies Deferential Abuse-of-Discretion Standard of Review and Upholds Claim Administrator’s Application of Plan’s Weight-Loss Surgery Exclusion

The U.S. Court of Appeals for the Fifth Circuit has upheld the adverse benefit determination of a claim administrator of a health insurance benefits plan governed by the Employee Retirement Income Security Act of 1974 (ERISA) after finding that the claim administrator “satisfied the very low, very deferential abuse-of-discretion standard.”

The Case

The plaintiff, who was the beneficiary of an ERISA-covered employee benefit plan, asked the claim administrator to preauthorize coverage for bariatric surgery. The administrator denied preauthorization, writing, “We cannot approve coverage for weight loss surgery (bariatric surgery) or hospital care after this surgery. Bariatric or weight loss surgery is an exclusion in your health plan contract.”

The plan contained an exception to the exclusion for conditions including “excessive nausea/vomiting,” but none of the plaintiff’s preauthorization information mentioned excessive nausea or vomiting.

The plaintiff had the surgery and appealed the administrator’s coverage decision, and the administrator again denied coverage.

The plaintiff hired counsel and filed a second-level internal appeal. The plaintiff submitted materials about her medical history and the surgery. Emphasizing the exception for bariatric surgery where there was “excessive nausea/vomiting,” the plaintiff provided records showing that she suffered from Gastroesophageal Reflux Disease (GERD) and esophagitis,  asserting that GERD/esophagitis was linked to nausea and vomiting, and that she underwent surgery to address these problems.

The administrator convened a five-person “Grievance Advisory Panel” (GAP) to evaluate the plaintiff’s second-level appeal. The GAP quoted the exclusion, concluded it applied to exclude the plaintiff’s bariatric surgery, and affirmed the denial of coverage.

The plaintiff sued and the parties moved for summary judgment. Neither party disputed that the plan granted discretionary authority to the claim administrator.

The U.S. District Court for the Southern District of Texas decided that the claim administrator had abused its discretion in the second-level appeal. It decided that the administrator’s construction of the plan’s terms directly contradicted their plain meaning, and that the plaintiff’s evidence linking GERD/esophagitis to nausea/vomiting deserved more weight.

The claim administrator appealed to the Fifth Circuit.

The Fifth Circuit’s Decision

In reversing the district court, thereby, upholding the claim administrator’s benefit determination, the circuit court first considered the standard of review the court should apply. It applied the abuse-of-discretion standard of review, because the plan granted discretionary authority to the claim administrator to interpret the plan and make benefit eligibility determinations.  Nevertheless, the plaintiff argued that the court should review the benefit determination de novo, instead of for an abuse of discretion, because Texas law prohibited discretionary clauses in insurance contracts. Although the Fifth Circuit has not held that the Texas discretionary clause ban is saved from ERISA preemption, the court held that the ban did not apply in this case because the plan was established and maintained in Missouri. Thus, the court reviewed the benefit determination for an abuse of discretion.

According to the evidence in the administrative record, the plaintiff’s intake report at the clinic one month before the surgery noted that her “chief complaint[s]” were “morbid obesity and abdominal pain.” That same report, the court added, noted “no vomiting” and “no nausea.”

Moreover, the plaintiff’s medical records up to the time of surgery – records that the plaintiff attached to her preauthorization evaluation – did not include evidence of any nausea and vomiting. Indeed, these records demonstrated plaintiff sought treatment for “morbid obesity” and were coded for obesity “due to excess calories,” not excessive nausea or vomiting.

The court criticized the district court for weighing and balancing the evidence, when it only was supposed to review the benefit determination for abuse of discretion – whether the administrative record contained more than a scintilla of evidence, but less than a preponderance to support the determination. According to the court, the claim administrator did not need to supply original evidence or expert witnesses to support its decision but “only needed to clear the low, more-than-a-scintilla threshold.” The GAP members reviewed the evidence and determined that the plaintiff’s initial surgery was “for weight loss and acid reflux,” and not “excessive nausea/vomiting.” According to the court, it was rational, therefore, for the GAP to exclude coverage and not apply the excessive nausea and vomiting exception.

The court explained that, when faced with two competing medical views, it is reasonable for a plan’s claim administrator to exercise discretion and choose one of them. “We routinely recognize that plan administrators deserve substantial discretion in their decisions,” the court said, adding that “when a district court substitutes its own judgment for the plan administrator’s, we reverse.”

Accordingly, the court upheld the claim administrator’s determination under “the very low, very deferential abuse-of-discretion standard.” [Rittinger v. Healthy Alliance Life Ins. Co., No. 17-20646 (5th Cir. Jan. 31, 2019).]

2d Circuit Upholds Administrator’s Interpretation of Plan Despite Finding Plaintiffs’ Interpretation Was More Reasonable

The U.S. Court of Appeals for the Second Circuit, applying the arbitrary and capricious standard of review, recently upheld a retirement plan administrator’s interpretation of a plan governed by the Employee Retirement Income Security Act of 1974 (ERISA), even though the court found that the plaintiffs’ interpretation was more reasonable.

The Case

The plaintiffs sued Halliburton, Inc., alleging that the plan administrator had improperly denied them early retirement benefits.

The U.S. District Court for the Western District of New York found for Halliburton, and the plaintiffs appealed to the Second Circuit.

The Facts

Dresser Industries, Inc., established the plan on May 1, 1986. On January 1, 1987, Dresser entered a partnership with Ingersoll-Rand Company, known as the Dresser-Rand Company (DR).

On September 29, 1998, Halliburton acquired Dresser. Dresser then became a wholly-owned subsidiary of Halliburton, but continued as a partner in DR. In February 2000, Halliburton sold Dresser’s interest in DR to Ingersoll, making Ingersoll the sole owner of DR.

Halliburton adopted the plan when it bought Dresser, effective January 1, 1999. It designated an internal benefits committee as the plan administrator. In February 2000, the plan administrator determined that, for purposes of the plan, DR no longer existed once Halliburton sold Dresser’s interest in DR to Ingersoll.

The plaintiffs had been employees of Dresser who transferred to DR; thus, they were plan participants. They were not yet eligible for early retirement at the time Ingersoll purchased Dresser’s interest in DR. Their employment ended with DR after the sale to Ingersoll.

Under the plan, certain employees would be eligible for early retirement and receive plan benefits.  The plan stated:

no participant shall be eligible to commence benefits under this Plan until such participant terminates employment with DR, or any successor thereof.

The Second Circuit’s Decision

In its decision affirming the district court, the circuit court applied the deferential arbitrary and capricious standard of review to the plan administrator’s determination, because the plan granted discretionary authority to administer the plan, including to construe the terms of the plan.

The court stated that an administrator’s determination could be overturned only where it was “without reason, unsupported by substantial evidence or erroneous as a matter of law.” And where both the administrator’s interpretation and the claimants’ interpretation were reasonable, the court may not disturb the administrator’s.

The court then found that the administrator’s interpretation of the plan was “not without reason, unsupported by substantial evidence or erroneous as a matter of law.” The plan administrator interpreted “DR,” as used in the plan, to mean “the joint venture between Dresser and Ingersoll[]. . . and once Dresser no longer had an ownership interest, the ‘DR’ referenced in this provision no longer existed.” In other words, according to the plan administrator, DR “ceased to exist on February 28, 2000, when a wholly owned subsidiary of Ingersoll[] acquired Dresser’s interest in the joint venture.” “Accordingly, after the sale, the [plan administrator] deemed Plaintiffs and similarly situated [DR] employees to be employed by a successor and to have ceased to have ‘service with DR,’” meaning “that they ceased to accrue vesting service under the . . . Plan.” In support of its interpretation, the plan administrator argued that the words “or any successor” at the end of the plan provision quoted above “would be mere surplusage” if DR included successors. The plan administrator also noted that DR is “referred to as a specific partnership involving both Dresser and Ingersoll” in the plan.

The court also found that the plaintiffs’ interpretation of the plan was “reasonable.” In fact, the court concluded the plaintiffs’ interpretation of the plan was “more reasonable” than the plan administrator’s interpretation.

Nevertheless, the court concluded, under the arbitrary and capricious standard of review it would uphold the plan administrator’s interpretation. [Kirkendall v. Halliburton, Inc., No. 17-3487-cv (2d Cir. Jan. 24, 2019).]

9th Circuit Rejects Claim Administrator’s Efforts to Apply Preexisting Condition Exclusion

The U.S. Court of Appeals for the Ninth Circuit recently ruled that the claim administrator of an employee benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA) had not met its burden that a preexisting condition exclusion precluded coverage of a plaintiff’s claim for disability benefits.

The Case

The claim administrator determined that the plaintiff was ineligible for disability benefits, because it applied the plan’s exclusion for disabilities “caused or contributed by” a preexisting condition.

The plaintiff sued, and the U.S. District Court for the Eastern District of California found for the claim administrator.

The plaintiff appealed to the Ninth Circuit.

The Ninth Circuit’s Decision

In its decision reversing the district court, the circuit court held that in the Ninth Circuit a claim administrator could only apply an exclusion for disabilities “caused or contributed by” a preexisting condition if the disability was “substantially caused or contributed by” the preexisting condition.

Under this standard it was the claim administrator’s burden to establish that the plaintiff’s new left-sided symptoms were substantially caused or contributed to by the plaintiff’s preexisting right-sided herniated disk. The court determined that the administrator had not met its burden.

The court found “little explanation” in the record regarding a causal relationship between the plaintiff’s preexisting right-sided condition and his new, debilitating left-sided symptoms. According to the court, the only evidence of what caused the plaintiff’s left-sided symptoms was a letter from the plaintiff’s surgeon that noted that the symptoms were “caused by and related to the surgery.” The court explained that the letter did not discuss whether the manner in which the surgery caused the symptoms was reasonably foreseeable from the existence of the preexisting condition, or relatively uncommon and so not reasonably foreseeable. According to the court, the only reference to the physiological mechanism by which the plaintiff’s symptoms arose was the statement in the surgeon’s letter that “[t]he appearance of these left side symptoms is documented on [a medical scan] which shows a left side C6 lesion.”

Further, the court noted that although the plaintiff had been warned that he could have complications from the surgery, it was unclear whether the plaintiff’s left-sided symptoms were caused by any specific risk about which the plaintiff had been warned.

The court also noted that the claim administrator’s decision not to consult with a medical expert or to address the evidence the plaintiff provided in support of his administrative appeal likely affected the outcome of the case.

The court concluded that because the claim administrator had not explained the connection between the plaintiff’s original condition and his post-surgery condition, the claim administrator had not met its burden of proof that the preexisting condition exclusion applied. [Haddad v. SMG Long Term Disability Plan, No. 17-16729 (9th Cir. Jan. 22, 2019).]

8th Circuit Rejects Cross-Plan Offsetting by Claim Administrator of Multiple ERISA Plans

The U.S. Court of Appeals for the Eighth Circuit, affirming a district court’s decision, admonished the claim administrator of multiple health insurance plans governed by the Employee Retirement Income Security Act of 1974 (ERISA) for offsetting overpayments made to an out-of-network provider under one plan against another payment due to the provider under a different plan – a practice known as cross-plan offsetting.

The Case

In 2007, the claim administrator instituted cross-plan offsetting.

Plaintiffs filed two class action lawsuits against the claim administrator, challenging the practice. The U.S. District Court for the District of Minnesota consolidated the class actions and granted partial summary judgment to the plaintiffs.

The district court reviewed the underlying plan documents and concluded that, of the plans that addressed offsetting, all explicitly authorized same-plan offsetting, that is, offsetting overpayments made to an out-of-network provider under a plan against another payment due to the provider under the same plan, but none of them explicitly authorized cross-plan offsetting.

Accordingly, the district court determined that cross-plan offsetting was not reasonable.

The administrator appealed to the Eighth Circuit.

The Eighth Circuit’s Decision

In its decision affirming the district court, the court pointed out that although there were many different plans at issue, with varying plan language, each plan granted the claim administrator “broad authority to interpret and implement the plan.” Therefore, the court determined it would review the claim administrator’s interpretation for an abuse of discretion.

The court observed that “nothing in the plan documents” came close to authorizing cross-plan offsetting. The court said that to adopt the claim administrator’s argument that plan language granting it broad authority to administer the plans was sufficient to authorize cross-plan offsetting “would be akin to adopting a rule that anything not forbidden by the plan [was] permissible.”

The court added that the administrator’s assertion that it had the authority to engage in cross-plan offsetting could hardly be called an “interpretation” because it had “virtually no basis in the text of the plan documents.”

The court also found that the practice of cross-plan offsetting was “in some tension with the requirements of ERISA.” The court said that it did not have to decide whether cross-plan offsetting necessarily violated ERISA, but it added that, at the very least, cross-plan offsetting approached the line of what was permissible. The court said that if such a practice was authorized by the plan documents, it would have expected “much clearer language to that effect.”

The court noted that although the claim administrator was a fiduciary of multiple plans, each plan was “a separate entity” and the administrator’s fiduciary duties ran separately to each plan. Cross-plan offsetting, the court concluded, was in tension with this fiduciary duty because it arguably amounted to failing to pay a benefit owed to a beneficiary under one plan in order to recover money for the benefit of another plan. [Peterson v. UnitedHealth Group, Inc., No. 17-1744 (8th Cir. Jan. 15, 2019).]