The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
By Lauren Garraux
K&L Gates, Pittsburgh, PA
The first BNA Insert in this two-part series discussed three common issues facing out-of-network medical providers in asserting reimbursement claims against employee benefits plan administrators (whether an insurance company or otherwise) under the Employee Retirement Income Security Act of 1974 (ERISA). This BNA Insight delves further into one of those issues, specifically, the requirement that a provider "exhaust" the appeals process or other remedies for a payment denial available under the specific benefits plan prior to filing a reimbursement claim in court.
Briefly, insurers commonly raise the failure of a provider whether in- or out-of-network to exhaust plan remedies as an affirmative defense to reimbursement claims, creating an additional hurdle for providers to surmount before the merits of such claims can be litigated. Courts have created a number of exceptions to the exhaustion requirement that may assist providers in obtaining full reimbursement for services rendered under ERISA. Providers would be well-served to be aware of these exceptions before they begin to pursue plan remedies.
The Exhaustion Requirement
ERISA does not contain an express provision requiring that a provider exhaust a plan's appeals process or other remedies for a payment denial as a prerequisite to bringing a claim under ERISA in court. Rather, exhaustion is a wholly judicially-created prerequisite to filing suit. SeeHarding v. Provident Life & Acc. Ins. Co., 809 F. Supp. 2d 403, 420 (W.D. Pa. 2011) ("exhaustion under ERISA is a judicially-created affirmative defense").
According to the courts, the exhaustion requirement finds support in various public policy considerations, namely, "the reduction of frivolous litigation, the promotion of consistent treatment of claims, the provision of a nonadversarial method of claims settlement, the minimization of costs of claim settlement and a proper reliance on administrative expertise." Diaz v. United Agric. Employee Welfare Benefit Plan & Trust, 50 F.3d 1478, 1483 (9th Cir. 1995); see alsoDenton v. First Nat'l Bank of Waco, 765 F.2d 1295, 1300-01 (5th Cir. 1985) (exhaustion "is necessary to keep from turning every ERISA action, literally, into a federal case" by preventing "premature judicial intervention in [the plan administrators'] decision-making process") (citation omitted); Taylor v. Bakery & Confectionary Union & Indus. Int'l Welfare Fund, 455 F. Supp. 816, 820 (E.D.N.C. 1978) ("If claimants were allowed to litigate the validity of their claims before a final  decision [by the plan administrator] was rendered, the costs of dispute settlement would increase markedly for employers. Employees would also suffer financially because, rather than utilize a simple procedure which allows them to deal directly with their employer, they would have to employ an attorney and bear the costs of adversary litigation in the courts."). Significantly, from the perspective of the federal courts, exhaustion of plan remedies prior to filing suit is desirable because it "may render subsequent judicial review unnecessary… because a plan's own remedial procedures will resolve many claims." Communications Workers v. AT&T Co., 40 F.3d 426, 432 (D.C. Cir. 1994). Accordingly, in general, if a provider fails to exhaust available plan remedies prior to filing suit, the claim is barred. Watts v. BellSouth Telecommunications, Inc., 316 F.3d 1203, 1206 (11th Cir. 2003); see alsoSpringer v. Wal–Mart Assocs. Group Health Plan, 908 F.2d 897, 900 (11th Cir. 1990) (recognizing "the right to seek federal court review matures only after [the exhaustion] requirement has been appropriately satisfied or otherwise excused").
Whatever the precise rationale that a court endorses in applying the exhaustion requirement, the fact remains that actually navigating a plan's appeals process or other remedies for a payment denial, in practice, can prove to be an exhausting and exasperating ordeal fraught with roadblocks, setbacks and hurdles. For example, an insurer may refuse to provide copies of documents relating to its determination or a copy of the plan itself, or fail to provide information relating to the appeal itself, including deadlines and required content. Seemingly in recognition of how exhausting and exasperating navigating a plan's appeals process can be for providers, courts have also identified a number of exceptions to the exhaustion requirement including futility, lack of meaningful access to the claims process and unreasonable procedures imposed by the plan administrator.
It is important to note that the use of ERISA by a medical provider to obtain full reimbursement for services rendered is a fairly recent phenomenon. As a result of court decisions finding that ERISA provides the sole vehicle for reimbursement claims, reimbursement generally cannot be pursued under state law claims for tortious interference or unjust enrichment. As a result, caselaw discussing these exceptions generally arises in cases involving a plan participant, i.e., the insured-employee, as opposed to a medical provider. As discussed in the first Insight in this series, because a provider with an assignment of benefits from a participant generally will be deemed to "stand in the shoes" of the participant, the exceptions discussed below should apply with the same force in cases where a provider brings a claim for reimbursement under ERISA as in cases where the participant her/himself is the plaintiff.
Exceptions to the Exhaustion Requirement
The exception that providers perhaps most frequently resort to in response to an insurer's claim that they have failed to exhaust plan remedies is futility, i.e., that resort to plan remedies would be "clearly useless." Communications Workers, 40 F.3d at 432 (internal quotations and citation omitted). Some courts have set a high bar to establish futility and hold that, to do so, a provider must establish that "it is certain that [her/his] claim will be denied on appeal, not merely that [s/he] doubts that an appeal will result in a different decision." Lindemann v. Mobil Oil Corp., 79 F.3d 647, 650 (7th Cir. 1996) (citation omitted); Communications Workers, 40 F.3d at 432 (explaining that "[t]he futility exception is… quite restricted" and "to come under the futility exception, [plaintiffs] must show that it is certain that their claim will be denied on appeal, not merely that they doubt an appeal will result in a different decision.") (citation and internal quotations omitted); Davenport v. Harry N. Abrams, Inc., 249 F.3d 130, 133-34 (2d Cir. 2001) (a claimant must make a "clear and positive showing" of futility to come within the exception).
Courts have found futility in the following circumstances:
By contrast, where a claimant has not attempted to pursue plan remedies, futility may not apply. Bickley v. Caremark RX, Inc., 461 F.3d 1325, 1328 (11th Cir. 2006) (per curiam) (rejecting futility argument as speculative because participant had not attempted to pursue administrative remedies and explaining that "bare allegations of futility are no substitute for the `clear and positive' showing of futility required before suspending the exhaustion requirement.").
Lack of Meaningful Access
Many courts have also recognized a plan participant's lack of meaningful access to the claims process as an exception to exhaustion. Cases discussing and applying this exception arise in a variety of factual circumstances but generally relate to an insurer's failure to provide the participant with documents or information essential to a participant's ability to pursue the plan's appeals procedure. For example, the exception has been applied in the following circumstances:
Unreasonable Procedures/"Deemed Exhausted" Exception
A third exception to the exhaustion requirement relates to the reasonableness or, more precisely, unreasonableness of a plan's claims procedures. When a plan fails to "establish and follow reasonable claims procedures," a claimant "shall be deemed to have exhausted the administrative remedies" under the plan and, therefore, may "pursue any available remedies under [ERISA] section 502(a)," including filing a claim in court. See 29 C.F.R. §2560.503-1(1); see alsoBilyeu v. Morgan Stanley Long Term Disability Plan, 683 F.3d 1083, 1089 (9th Cir. 2012) ("when an employee benefits plan fails to establish or follow `reasonable claims procedures' consistent with the requirements of ERISA, a claimant need not exhaust because his claims will be deemed exhausted") (citation omitted). Accordingly, courts have excused exhaustion under this exception:
This "deemed exhausted" exception has also been applied in cases where a plan administrator fails to notify the participant whose claim has been denied of the specific reasons for the denial. Specifically, under ERISA, a plan is required to advise a claimant of the specific reasons for a claim denial and to include in its denial specific reference to the pertinent plan provisions on which the denial is based, so that the claimant has an opportunity for a full and fair review by the plan administrator. See 29 U.S.C. §1133; see also 29 C.F.R. §2560.503-1(g). Where an insurer fails to provide this information, the claimant may be held to have exhausted her/his remedies under the plan and be permitted to proceed with her/his claim in court. See, e.g., Haag v. MVP Health Care, 866 F. Supp. 2d 137, 143-44 (N.D.N.Y. 2012) (holding that plaintiff's claims were "deemed exhausted" where an administrator failed to follow the notice provisions applicable to the plan, including identifying a specific reason for the determination, referencing specific plan provisions on which the determination was based, describing any additional information that was needed to process the claim, and describing the plan's review procedures); Baptist Mem. Hosp.-Desoto Inc. v. Crain Auto. Inc., 392 Fed. App'x 288, 294 (5th Cir. 2010) (claims "deemed exhausted" where administrator failed to provide any written notice the claim was denied or specific reasons for denial, and never advised claimant of its administrative remedies).
Whether a medical provider can avail itself of an exception to ERISA's exhaustion requirement tends to be fact-specific and depends on the specific plan and circumstances at issue. That said, a provider's knowledge of these exceptions is important and the more informed that a provider is regarding the exhaustion requirement, the plan's appeals process and remedies and the exceptions described in this Alert, the better its prospects for recovery for services provided.
Simple steps such as (i) thoroughly reviewing and becoming familiar with the plan's appeals process prior to initiating an appeal; (ii) ensuring that the provider is aware of any deadlines or specific requirements relating to documentation; and (iii) creating a detailed paper trail of all communications with an insurer relating to the claim(s) for which the provider is appealing a payment denial, including the names of insurer representatives that a provider spoke to or corresponded with in connection with the appeal, the dates and times of those communications and a summary of the content of those conversations, may go a long way in proving to a court that the exhaustion should be excused if the provider is forced to litigate a reimbursement claim against the insurer under ERISA. And, while knowledge of the exceptions and taking some or all of these steps will not prevent an insurer from raising exhaustion as an affirmative defense to a reimbursement claim under ERISA, it may assist the provider in surmounting that defense and bring the provider one step closer to obtaining the reimbursement to which s/he is entitled.
For more information, in the Tax Management Portfolios, see Wagner, 374 T.M., ERISA — Litigation, Procedure, Preemption and Other Title I Issues, Cowart, 389 T.M. , Medical Plans — COBRA, HIPAA, HRAs, HSAs and Disability, and in Tax Practice Series, see ¶5920, Health & Disability Plans.
© 2015 K&L Gates LLP.
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