Within days of one another, the U.S. Court of Appeals for the Ninth and Second Circuits ruled—on issues of first impression for both—that ERISA expressly preempts state law breach of contract and promissory estoppel claims asserted by out-of-network providers who allege that preauthorization communications with claim administrators impose reimbursement obligations independent and irrespective of the terms and conditions contained in a patient’s ERISA-governed health benefit plan. The decisions are Bristol SL Holdings, Inc. v. Cigna Health & Life Ins. Co., 103 F.4th 597 (9th Cir. 2024) and Park Ave. Podiatric Care, P.L.L.C. v. Cigna Health & Life Ins. Co., No. 23-1134-CV, 2024 WL 2813721 (2d Cir. June 3, 2024).

Preauthorization of benefits is a routine but vital part of the managed care system. It is a vehicle through which ERISA-governed health benefit plans (both plans that are self-funded by employers and plans that are fully insured by health insurers) maintain and promote the delivery of quality and affordable care, by ensuring that non-participating, also known as out-of-network (OON), providers deliver only services that are medically necessary.

Because OON providers typically charge rates that are either not negotiated in advance of treatment or are simply unknown, many ERISA-governed health benefit plans require preauthorization as a condition of coverage of OON services. Preauthorization, however, is not the only requirement for coverage of an OON provider’s services. Before the claim administrator of a health benefit plan can determine the appropriate reimbursement for charges billed by an OON provider, the administrator must also undertake a host of additional assessments relevant to a coverage determination—assessments that can only be performed after services are rendered and billed because they depend not only upon what services were performed, but also upon how the provider billed those services (and their specific components), and what the patient-beneficiary’s governing health plan requires for purposes of accepting and reimbursing the billed charges. These aspects of claim administration include, but are not limited to, evaluating which billed services (or, really, claim lines) were necessary for the approved treatment, whether the charges were correctly coded on the provider’s claim, whether the charges were correctly bundled on the provider’s claim, the appropriate reimbursement rate for each necessary service, and the patient’s cost-share. Put another way, a host of independent coverage-related variables exist between the moment of a preauthorization and the moment a reimbursement check issues. The existence of these variables prevents many essential coverage determinations from being made until after a preauthorized service has been rendered and the provider’s charges have been submitted for reimbursement. Thus, while preauthorization is a critical precondition that must be satisfied before a plan beneficiary can obtain coverage for OON services, ERISA-governed health plans contain a number of terms (which administrators have a fiduciary duty to follow) that may nonetheless result in denial of coverage for reasons independent of any determinations made during the preauthorization process.

Even though preauthorization is not designed to establish an independent contractual relationship, OON providers and their counsel have increasingly petitioned state and federal courts nationwide to turn preauthorizations into independent contractual commitments between the OON provider and the plan’s claims administrator to pay for all services billed for a preauthorized treatment, irrespective of the ERISA-governed plan’s terms of coverage or the administrator’s discretion to interpret and apply those terms. This argument was recently rejected by both the Ninth Circuit and the Second Circuit.

In Bristol SL Holdings, Inc., an OON provider’s successor-in-interest sued a health benefit plan administrator seeking to recover denied reimbursements on the theory that the OON provider’s preauthorization communications with the administrator created independent contractual obligations. Rejecting the OON provider’s theory, the Ninth Circuit Court of Appeals observed that preauthorization is a common condition to coverage of out-of-network services, and that preauthorization necessarily “entail[s] some form of communication between the plan administrator and the provider, through which the plan administrator relays the patient’s eligibility for benefits.”

The Ninth Circuit thus recognized that, as a practical matter, “the context for” a preauthorization call is to determine “whether reimbursement [i]s available under the ERISA plan[,]” not to secure a contractual commitment from a claim administrator on a specific payment amount:

By [the OON provider]’s theory of state contract law liability, however, every time a plan administrator verifies plan coverage in standard pre-treatment calls, but then later denies reimbursement …, the insurer would be legally bound to make payment based on the earlier call. That obligation would be at odds with the way ERISA plans operate, because reimbursement under a plan is ultimately contingent on information and events beyond the initial verification and preauthorization communications.

The Ninth Circuit’s understanding of the operation of the managed care system and ERISA’s application to that system is important. Bristol SL Holdings was, at its core, an invitation by OON providers to the Ninth Circuit to force upon claim administrators a black-and-white choice that risked unraveling the managed care system and its ERISA-secured protections: either abandon preauthorization requirements or risk contractual liability for preauthorized claims irrespective of the terms and conditions of a patient’s health benefit plan. As the Ninth Circuit observed, either outcome is legally untenable:

[P]lan administrators typically cannot determine [reimbursements] until after services have been preauthorized, rendered, and submitted for reimbursement. Subjecting plan administrators to the prospect of binding contracts through pre-treatment calls would thus risk stripping them of their ability to enforce plan terms that cannot be applied prior to treatment, whether related to fee-forgiving or otherwise. The resulting Catch-22—that administrators must abandon either their plan terms or their preauthorization programs—is the kind of intrusion on plan administration that ERISA’s preemption provision seeks to prevent.  …

[I]f providers could use state contract law to bind insurers to their representations on verification and authorization calls regardless of plan rules on billing practices, benefits would be governed not by ERISA and the plan terms, but by innumerable phone calls and their variable treatment under state law. This is the type of discordant regime that “ERISA’s comprehensive pre-emption of state law was meant to minimize.” Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 105 n.25, (1983).

 Rejecting the OON provider’s invitation to transform routine preauthorization calls into independent contractual commitments, the Ninth Circuit declared that the OON provider’s breach of contract and promissory estoppel claims were expressly preempted by ERISA because they were premised upon the existence of health benefit plans, unduly intruded upon central matters of plan administration, and impermissibly interfered with nationally uniform plan administration.

Just three days later, the Second Circuit reached a similar conclusion in Park Ave. Podiatric Care, wherein the Court ruled that ERISA expressly preempted an OON provider’s claims that its preauthorization communications formed an oral contract with a claim administrator completely independent of the terms of a patient’s ERISA-governed plan. Recognizing a number of themes similar to those implicated in Bristol SL Holdings, the Second Circuit Court of Appeals declared: “[A]ny legal duty Cigna has to reimburse [the OON provider] arises from its obligations under the patient’s ERISA plan, and not from some separate agreement or promise” allegedly entered in the preauthorization process.  

In Bristol SL Holdings and Park Ave. Podiatric Care, both the Ninth and the Second Circuit recognized that permitting state common law to dictate the design and administration of ERISA-governed health benefit plans subjects those plans to a morass of conflicting state rules that would defeat Congress’s central objective in enacting ERISA: provision of a single, uniform national scheme for plan administration. This interference violates ERISA’s express preemption statute, 29 U.S.C. § 1144(a). As rulings on issues of first impression within the Ninth and Second Circuits, Bristol SL Holdings and Park Ave. Podiatric Care, are important decisions that will substantially limit, if not outright bar, OON providers from establishing contractual liability merely because an ERISA-governed health benefit plan engaged in routine preauthorization processes.

In Hawkins v. Cintas Corp., No. 21-3156, __ F.4th __, 2022 WL 1236954 (6th Cir. Apr. 27, 2022), the U.S. Court of Appeals for the Sixth Circuit ruled that an arbitration clause contained in certain individual employment agreements may be insufficient to compel arbitration of putative class action claims asserted under ERISA § 502(a)(2). The Sixth Circuit reasoned, in a matter of first impression at the Circuit level, that Section 502(a)(2) claims generally “belong” to the ERISA Plan, not its individual participants, and may not be forced into arbitration absent plan consent.

In Hawkins, two former Cintas Corporation employees filed suit in the U.S. District Court for the Southern District of Ohio alleging that the company, its board of directors and its investment committee violated ERISA § 502(a)(2) by breaching their fiduciary duties of loyalty and prudence in managing the company’s retirement plan. 

Both of the named plaintiffs previously entered into multiple employment agreements with Cintas each of which contained provisions that (1) obligated the named plaintiffs to arbitrate “claims arising out of or in any way related to [their] employment with [Cintas], such as rights or claims arising under … [ERISA],” and (2) precluded the named plaintiffs from asserting “class action or representative claims” and barred them from  seeking “to represent the interests of any other person.” Hawkins, 2022 WL 1236954, at *2. Relying on these contracts, Cintas moved to compel arbitration and to stay the federal proceedings, arguing that the plaintiffs’ employment agreements covered their ERISA § 502(a)(2) claims.

The district court judge denied both motions, concluding that the action was brought on behalf of the Plan, and it was therefore irrelevant that the plaintiffs had consented to arbitration through their employment agreements. “Because the Plan itself did not consent, the court reasoned, the matter was not subject to arbitration.” Hawkins, at *3.

The Sixth Circuit affirmed on the facts before it, and without reaching the issue of whether Section 502(a)(2) claims are per se arbitrable under individual employment agreements. Hawkins, at *8 (“while we need not decide whether a § 502(a)(2) claim could ever be covered by an individual employment agreement’s arbitration provision, we hold that these Plaintiffs’ claims are not covered by the employment agreements in this case.”). 

Notably, the Sixth Circuit suggested that “Cintas could amend the plan documents to include an arbitration provision, which might accomplish the … goal” of arbitrating Section 502(a)(2) claims, but left open the ultimate question of “whether an arbitration provision in the plan documents would subject § 502(a)(2) claims to arbitration.” Hawkins, at *9. In this regard, the Sixth Circuit’s ruling in Hawkins stops short of the Ninth Circuit’s ruling in Dorman v. Charles Schwab Corp., 780 F. App’x 510, 514 (9th Cir. 2019) that a plan can consent to and enforce arbitration of ERISA § 502(a)(2) claims in plan documents (see our previous discussion of Dorman here).

Read in conjunction, Hawkins and Dorman indicate that an effective practice for plans wishing to arbitrate all ERISA Section 502 claims may be to expressly consent to arbitration within plan documents. Absent such consent, defendants run the risk of inadvertently excluding from arbitration derivative and representative claims under Section 502(a)(2).

The U.S. Supreme Court recently declined to review a significant decision of the Second Circuit which (1) clarified the scope of California’s statutory ban on discretionary clauses in life and disability insurance contracts, and (2) clarified the meaning of a “full and fair review” under the version of ERISA’s claims-procedure regulation applicable to all claims filed prior to April 1, 2018. See Mayer v. Ringler Assocs. Inc., 9 F.4th 78 (2d Cir. 2021), cert. denied, No. 21-879, 2022 WL 515943 (U.S. Feb. 22, 2022).

In an issue of first impression at the Circuit Court level, Mayer held that California’s statutory ban on discretionary clauses in insurances, Cal. Ins. Code § 10110.6(a), applies only to claims by California residents, and does not extend to claims by non-California residents under any circumstance—even under policies delivered in California.

Section 10110.6(a) states in pertinent part: “If a policy… offered, issued, delivered, or renewed, whether or not in California, that provides or funds life insurance or disability insurance coverage for any California resident contains a provision that reserves discretionary authority to the insurer, … that provision is void and unenforceable.”

In Mayer, a New York resident insured under a policy delivered in California argued that § 10110.6(a) voided all grants of discretion in any group policy delivered in California that provides benefits to even one California resident. The Second Circuit rejected this argument, holding that “it would raise concerns under the Commerce Clause of the U.S. Constitution because it would allow for the application of a state statute to commerce that takes place wholly outside of the State’s borders, whether or not the commerce has effects within the State.” Mayer, 9 F.4th at  85 (internal quotation marks and citations omitted).

The Second Circuit further observed that, “[i]n addition to the constitutional concerns,” adoption of the “expansive interpretation of § 10110.6(a)” advanced by the insured would also “‘undermine the significant ERISA policy interests of minimizing costs of claim disputes and ensuring prompt claims-resolution procedures’ because the standard of review applicable to a given claimant would depend on the residence of any other person insured under the policy, assuming one might be from California.” Mayer, 9 F.4th at 86 (quoting Locher v. Unum Life Ins. Co. of Am., 389 F.3d 288, 295 (2d Cir. 2004)); see also id. (citing Varity Corp. v. Howe, 516 U.S. 489, 497 (1996)).

Separately, resolving  an issue of first impression in the Second Circuit, the Mayer Court held that subsection (h)(4) of the old version of the ERISA claims-procedure regulation (29 C.F.R. § 2560.503-1) which governed claims filed prior to April 1, 2018, does not require claim administrators to provide claimants with documents considered for the first time during an administrative appeal while the appeal is still under review and in advance of a final determination. In so holding, the Second Circuit overruled Hughes v. Hartford Life & Accident Ins. Co., 368 F. Supp. 3d 386 (D. Conn. 2019), and joined ranks with the Third,  Fifth, Sixth, Eighth, Tenth, Eleventh, and D.C. Circuits.

In Ruderman v. Liberty Mut. Grp., Inc., No. 21-817, 2022 WL 244086 (2d Cir. Jan. 27, 2022), the U.S. Court of Appeals for the Second Circuit ruled that reclassification of a claimant’s disability from one that is physically-based to one that is psychiatrically-based does not constitute an “adverse benefit determination” within the meaning of 29 C.F.R. § 2560.503–1(m)(4)—even if the change in status results in a limitation of the maximum benefits available to a claimant.

The plaintiff in Ruderman filed a claim for long-term disability following a cycling accident in July 2011. Liberty accepted and paid the plaintiff’s claim through September 2017, at which time benefits terminated on the basis that the plaintiff failed to demonstrate that she remained disabled under terms and conditions of the governing policy. The plaintiff administratively appealed Liberty’s decision.

On September 10, 2018, Liberty sent the plaintiff a letter to inform her that it had reversed its decision to terminate her benefits. Then, on September 11, 2018, Liberty sent the plaintiff a second letter to inform her that her updated medical records did not support a finding of neurocognitive impairment (i.e., physical condition), but rather supported a finding of a mental health impairment (i.e., a mental/nervous condition) as of July 2018 forward. This reclassification of the plaintiff’s health status meant that her disability benefits would be capped at eighteen months from July 2018.

Liberty continued to pay disability benefits to the plaintiff through December 2019 (i.e., the maximum eighteen month period). On December 3, 2019, Liberty notified the plaintiff that her benefits would terminate on December 30, 2019, in accordance with the policy’s mental/nervous limitation, and that she had 180 days to administratively appeal the termination of her disability benefits. The plaintiff did not file an administrative appeal, and instead commenced a lawsuit against Liberty in August 2020.

Liberty moved to dismiss the plaintiff’s complaint for, among other things, failing to exhaust administrative remedies. In opposition to Liberty’s motion, the Plaintiff challenged that Liberty failed to comply with the ERISA claims procedures regulation, 29 C.F.R. § 2560.503–1, because its September 11, 2018 letter was “an adverse benefit determination,” id. §  2560.503–1(m)(4)(i), and did not contain “a statement of the claimant’s right to bring a civil action.” Id. § 2560.503–1(g)(1). According to the plaintiff, Liberty’s September 11, 2018 reclassification letter “unilaterally changed the scope of her benefits … as a subterfuge to avoid the consequences of the very appeal that she just won, literally the day before.” “[I]f an appeal was required,” the plaintiff argued, Liberty should have “apprised of her ERISA rights” on September 11, 2018, when her health status was reclassified in such a way as to limit the maximum benefits available to eighteen months.

Both the District Court and the Second Circuit rejected the plaintiff’s argument, ruling that the September 11, 2018 “letter ‘did not qualify as a denial, reduction, or termination of benefits’ requiring notice of the right to appeal” under the ERISA claims procedures regulation. Ruderman, 2022 WL 244086, at *3 (citing Ruderman v. Liberty Mut. Grp., Inc., No. 1:20-CV-945, 2021 WL 827693, at *4 (N.D.N.Y. Mar. 4, 2021)). See also 29 C.F.R. § 2560.503-1(m)(4) (“The term ‘adverse benefit determination’ means … [a] denial, reduction, or termination of … a benefit”).

According to the Second Circuit, the September 11, 2018 “letter announced [the plaintiff’s] new disability classification and provided a termination date for benefits based on that disability … follow[ing] [Liberty’s] initial termination of her long-term disability benefits and subsequent reversal of that decision. As a result, the letter did not mark a ‘reduction’ of her benefits but rather a continuation of her benefits under a different classification.” Ruderman, 2022 WL 244086, at *3.

Regulatory compliance challenges like that presented in Ruderman have are a common feature of ERISA litigation in the Second Circuit in light of its seminal ruling in Halo v. Yale Health Plan, Dir. of Benefits & Recs. Yale Univ., 819 F.3d 42 (2d Cir. 2016). Ruderman offers practical insight and analysis in one aspect of ERISA claims procedures litigation, by confirming that an administrator’s decision to reclassify a claimant’s health status while a claimant is receiving disability payments is not an “adverse benefit determination,” even when such a decision limits maximum benefits available to a claimant.

A federal District Court judge in Illinois sided with the U.S. Department of Labor (DOL) in ordering Alight Solutions, LLC, an ERISA plan services provider, to comply with an administrative subpoena seeking documents pertaining to alleged cybersecurity breaches. The Court’s order in the case, Walsh v. Alight Solutions, LLC, Dkt. # 20-cv-02138 (N.D. Ill.), is significant as it mandated production of a great deal of information concerning Alight’s cybersecurity practices, finding Alight’s objections on grounds of irrelevance and burdensomeness insufficient to overcome the DOL’s broad investigatory authority and the presumption that investigative subpoenas should be enforced.

According to the Court’s order, the DOL’s investigation of Alight began back in July 2019 based in part on its discovery that Alight had processed unauthorized distributions from its ERISA plan clients’ accounts as a result of cybersecurity breaches and, further, had failed to promptly report the breaches and restore the unauthorized distributions to the affected accounts. DOL’s subpoena sought documents on a number of topics, including Alight’s cybersecurity policies, procedures, assessment reports, and training of its workforce; its business continuity plans pertaining to information security; and communications or other documents regarding any cybersecurity incident pertaining to its ERISA plan clients, dating back to 2015. Continue Reading District Court Enforces DOL Investigative Subpoena Against Plan Service Provider Concerning Alleged Cybersecurity Breaches

On July 1, 2021, the Departments of Health and Human Services (HHS), Labor, and Treasury (together, “the Departments”), and the Office of Personnel Management, issued Requirements Related to Surprise Billing; Part I (Interim Final Rules (IFR) with Request for Comments).  This is the first set of regulations implementing the federal No Surprises Act (NSA), which was enacted as part of the Consolidated Appropriations Act of 2021.

Medicare and Medicaid already prohibit surprise billing/balance billing, and the NSA extends this protection to patients insured through employer-based and individual health plans. The NSA applies to fully insured and self-insured group health plans, including grandfathered plans, but they do not apply to excepted benefits (such as limited-scope dental and vision plans, and most health flexible spending arrangements), or to health reimbursement arrangements.

To be considered, written comments to the IFR must be received by 5 p.m. on September 7, 2021If the agency is persuaded by any of the comments and so chooses, the rule can be amended in light of those comments. Continue Reading Implementing Regulations for The No Surprises Act: Part I

ERISA-covered plans hold millions of dollars or more in assets and maintain a large amount of personal data on participants, therefore, such plans can be tempting targets for cyber-criminals. Recognizing this, the Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor issued its first-ever cybersecurity guidance concerning employee benefit plans this spring.  Further, in June 2021, just two months after issuing the guidance, government investigators began seeking information from plan sponsors about cybersecurity policies and procedures.  While such requests thus far have been limited to ongoing audits, plan sponsors and fiduciaries would be wise to review EBSA’s guidance and implement its suggestions as appropriate.

The EBSA guidance, which is directed to plan sponsors and fiduciaries as well as recordkeepers and plan participants, is set forth in three separate publications. Continue Reading Department of Labor Focuses on Cybersecurity for Benefit Plans

The Employee Benefits Security Administration issued Information Letter 06-14-2021 stating that 29 C.F.R. § 2560.503-1 requires plan fiduciaries to disclose, on request, recordings and/or transcripts of phone calls between the claimant and the fiduciary, even if the recording was made only for quality assurance purposes.

EBSA summarized the request:

You are seeking guidance because you represent a claimant whose request for such a recording was denied. You indicate that the stated reasons for denial of the request for the audio recording are that the actual recording is distinct from the notes made available to you, which contemporaneously documented the content of the recorded conversation, and which became part of the “claim activity history through which [the insurer] develops, tracks and administers the claim.” By contrast, the denial stated that the “recordings are for ‘quality assurance purposes,’” and “are not created, maintained, or relied upon for claim administration purposes, and therefore are not part of the administrative record.”

Continue Reading EBSA Issues Guidance On Disclosure of Phone Call Recordings

Below is an excerpt of an article that has been published in the April edition of The Voice, a signature newsletter of the Defense Research Institute (DRI).

It has been over a year since the first COVID-19 cases were diagnosed, and the pandemic started to evolve. This article discusses new trends in COVID-19-related disability claims that emerged in 2020 through early 2021 as a result of the pandemic. Read the full article.

Though there are many legal complexities that can arise in a typical ERISA lawsuit, one thing that is typically not in dispute is whether there is an ERISA Plan at issue. Pension plans, 401(k) plans, health plans, and group insurance plans are all easy to spot, categorize and confirm as ERISA plans. There are outliers, to be sure, like when the plan is established or maintained by a possibly exempt employer (like a religious organization, community college,  or Native American tribe). Or when the plan allows employees to purchase individual insurance policies at a discount. Or when the dispute involves a severance plan, as is demonstrated by Atkins v. CB&I, L.L.C., No. 20-30004, 2021 WL 1085807 (5th Cir. Mar. 22, 2021).

In Atkins, the defendant construction company established a Project Completion Incentive Plan (“PCIP”) that would pay eligible employees a bonus of 5% of their earnings while they worked on a particular construction project, if they stayed on the project until their work was completed. The plaintiffs, who acknowledged that they were not eligible for bonuses because they quit before their work on the project ended, sued in Louisiana state court, arguing that the PCIP involved a wage forfeiture that was illegal under Louisiana law. The employer removed the case to federal court on the grounds of ERISA complete preemption, and the district court agreed that ERISA governed. As the Fifth Circuit noted, “[t]hat jurisdictional determination also resolved the merits” because, if ERISA governs, “then everyone agrees the Plaintiffs do not have a claim” because ERISA preempts Louisiana law, and because the plaintiffs “are not eligible for the bonus under the terms of the plan.”

The Fifth Circuit held that the PCIP was not an ERISA plan. Continue Reading When is a Severance Plan NOT an ERISA Plan