Health Insurers, Employers May Battle Lawsuits, Pay Out Big-Ticket Claims Under US Health Reform

September 9, 2010

Health insurers and their employer customers may be battling more lawsuits and paying out costly, big-ticket claims they may have previously denied as a result of the U.S. health care reform law.

The law requires new plans, and non-grandfathered existing plans, and policies in the individual market, to meet the new claim and appeal rules — including an external review requirement — for plan years starting after Sept. 23, 2010, said Edward C. Fensholt, senior vice president, director of compliance services, Lockton Benefit Group.

While most individual market insurance was already subject to state-law external review requirements, the federal Employee Retirement Income Security Act, which governs employment-based health benefits, generally pre-empted those requirements, said Brian D. Boyle, co-chairman of the health care and life sciences practice at O'Melveny & Myers, Washington, D.C. Unless they maintain grandfathered status, self-insured ERISA plans will now be subject to these external review requirements under the health reform law, he said.

Not requiring plan members to use their external review options as a precondition to filing a lawsuit could increase legal costs, Boyle said. Plans must make available external review mechanisms with independent review organizations, but going directly to court is allowed.

Some courts have held that the plan administrator is the proper defendant on a claim for denial of benefits. Some have held that there are others, including a health insurer/third-party administrator functioning as the administrator by making claim decisions, Boyle said. In these courts, it's tough for an insurer to get dismissed from a benefit claim lawsuit without first going through discovery, he said. Self-insured employers often hire health insurers who act as third-party administrators. Decisions about what is covered in a policy are made by the employer, said Robert Zirkelbach, a spokesman for America's Health Insurance Plans.

The new claim and appeal regulations also require plans to strictly adhere to the rules — they "don't get a free pass for coming close," Fensholt said. In ERISA cases, as long as the plan substantially complied with the claim and appeal rules, courts tended not to substitute their judgment for the plan's, as long as the plan's decision wasn't capricious, he said.

Where a plan failed to play by the rules, however, courts could substitute their judgment for the plan's, Fensholt said. "That's not where a plan wants to be because courts — in those David vs. Goliath fights — seem to often tend to want to find a way to rule for the little guy."

In cases like experimental and investigational treatments, such as new, expensive drugs, "it's possible for a plan in a given case to take a meaningful cost hit," Fensholt said.

Many group health plans operate on a calendar-year basis, meaning they'd must comply by Jan. 1, 2011, Fensholt said.

Non-grandfathered existing plans are plans that existed on March 23, 2010, and made changes since then that are significant enough to cause the loss of grandfathered status, Fensholt said. Changes, such as increases in co-payments, deductibles or new exclusions, could trigger the loss of grandfathered protection, he said.

"Virtually all ERISA medical plans will have to comply with these before very long at all," Fensholt said.

The process would start with an appeal through the health plan's standardized internal appeal system. But patients who still receive a denial in that appeal may move their case to the independent external review, under rules announced in July by the U.S. Department of Health and Human Services.

The minimum standards for the new external appeal process were developed by the National Association of Insurance Commissioners.

Frank N. Darras, founding partner of DarrasLaw, says the rules amount to "putting shiny Armor All on a 1929 piece of junk."

Under any employer ERISA plan, there's no punitive, extra-contractual or emotional distress damages, Darras said.

He cited an example of a 40-year-old woman, a mother of two children, who earns $50,000 a year. She gets diagnosed with a "curable" breast cancer but her insurer delays her high-dose chemotherapy based on experimental or investigational language and she dies. She should have worked 25 more years, with income of $1 million-plus, Darras said.

Her family couldn't sue for wrongful death but only the value of the benefit denied, or about $60,000 in this case, he said. "I can kill under ERISA and not go to prison but if I use a gun at the 7-11 when I steal my coffee, I'm going right to jail."

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)