An assessment of new appeals and external review processes - ERISA claimants get 'some kind of a hearing'.

• Author: Harmon, Roy F.

1. INTRODUCTION

   Enacted on March 23, 2010, the Patient Protection and Affordable Care Act ("PPACA"), (1) imposes a broad array of new requirements on group health plans and individual health insurance policies. (2) Included among these requirements are a set of rules governing internal appeals and external review of benefit denials. (3) This article will examine those rules as they apply to group health plans governed by the Employee Retirement Income Security Act of 1974 ("ERISA").

   To provide context, Section II notes the different insurance arrangements affected by the new rules. Following that overview, Section III addresses the historical antecedents of the rules in external review paradigms developed under state managed care laws. Section IV accepts as postulates (1) significant dissatisfaction with pre-PPACA internal appeals processes as well as standards of judicial review of denials upheld following the internal appeal process and (2) attribution of this dissatisfaction to a set of core procedural and substantive limitations on claims for benefits imposed by ERISA. Section IV will describe the operation of these core limitations on claimants in ERISA benefit denial litigation.

   The PPACA adds a new set of rules governing claim denial appeals, review of internal claims adjudication, and appeals by an external review organization. (4) Section V describes requirements of the new law as implemented by interim final regulations released on July 23, 2010 ("July 2010 regulations") (5) and other regulatory guidance, including amendments to the Interim Final Regulations released on June 24, 2011 ("June 2011 amendments"). (6) Section VI evaluates the claims made for the new processes and, specifically, the new law's effect in ameliorating ERISA's core limitations on claims described in Section IV.

   Granted, the new law provides new opportunities for ERISA claimants in claim disputes. Nonetheless, the fundamental ERISA protections remain in place for ERISA plans and fiduciaries that have drawn criticism from consumer advocates. The greatest opportunities for ERISA claimants lie in the alternative of external review. On balance, however, the inconsistency and complexity of the new rules, the historic underutilization of external review, and disparity in legal and medical resources between participants and plan administrators leave substantial doubt as to the advantages claimed for the new procedures.

2. OVERVIEW OF BENEFIT ARRANGMENTS SUBJECT TO RULES

   Group health plans are one form of employee welfare benefit plan under ERISA and constitute the predominant source of private funding of medical care in the United States. Approximately 138 million Americans are participants in ERISA group health plans, easily dwarfing the 16.7 million estimated to be covered by individual health insurance policies. (7)

   1. INDIVIDUAL HEALTH INSURANCE POLICIES & ERISA EXEMPT PLANS

      Given the focus of this article on ERISA governed group health plans, the following discussion will not attempt to detail the requirements applicable to individual health insurance policies or to group health plans exempt from ERISA. (8) Nonetheless, a few observations about such arrangements in this section may serve to provide a helpful contrast, particularly since they are frequently referred to in the regulations.

      1. DOL Claims Regulations & Internal Appeals

         In 2000, the Department of Labor ("DOL") issued final regulations requiring that ERISA governed plans establish reasonable claims procedures for claims adjudication, notification of payment decisions, and appeals of benefit denials. (9) At that time, the claims regulations only applied to ERISA governed plans. (10) Among other things, the claims regulations prohibited claims procedures from imposing more than two levels of appeals prior to judicial review under ERISA section 502(a).

         PHS Act section 2719 provides that plans and issuers must initially incorporate the internal claims and appeals processes set forth in 29 C.F.R. 2560.503-1 (i.e., the 2000 claims regulations) and update these processes as required by the DOL. (11) Thus, the prior DOL claims procedure regulation (applicable to internal claim denials and appeals) that has applied to ERISA governed group health plans now applies to individual policies and to plans exempt from ERISA. (12)

      2. State External Review Process

         Many states already have external review statutes though they vary in their requirements. (13) To the extent plans and issuers are already subject to a state external review process, the July 2010 regulations provide that the existing state process will continue to apply. The July 2010 regulations provided a transition period until July 1, 2011, during which the regulations contemplate that states will adopt or make changes to external review processes as necessary to qualify under the new law.

         To qualify, a state external process must comport "at a minimum" with the consumer protections in the NAIC Uniform Model Act in place on July 23, 2010, as modified by the Department of Health and Human Services (hereinafter, the "NAIC standards"). (14) If so, then the individual policy issuer or exempt plan must comply with the state external review process. (15) On the other hand, if the state external process fails to meet the NAIC standards, the individual policy issuer or exempt plan must meet the requirements of a federal external review process. (16)

      3. Identification of Exempt Plans

         The principal exemptions that take group health plans beyond the reach of ERISA are the church plan exemption and the governmental plan exemption.

         a. Church Plans

         ERISA section 4(b)(2) excludes from coverage under Title I any plan that is a church plan as defined in ERISA section 3(33). The determination of church plan status can be complex (17) and may constitute an issue appropriate for requesting an advisory opinion from the Department of Labor. (18)

         b. Governmental Plans

         Similarly, governmental plans, as defined in ERISA section 3(32) are exempt from ERISA by virtue of Title I coverage by section 4(b)(1). As in the case of church plans, the governmental plan exemption can present close questions. (19) Given the significant differences in compliance requirements, the determination of plan status must be approached with care.

   2. ERISA GOVERNED PLANS

      The manner in which the July 2010 regulations apply to ERISA governed group health plans will differ based on whether the plan is self-funded or fully insured. Since ERISA governed plans have been subject to the internal claims regulations promulgated in 2000, ERISA plan administrators will have experience with such procedures not shared by plan administrators of ERISA exempt plans. The new external review requirements, however, will pose an additional compliance burden, and whether state or federal external review processes apply depends on the source of funding of plan benefits. Before turning to these requirements, the essential features of self-funded plans as distinguished from insured plans should be noted.

      1. Self-Funded Plans

         Benefit claims under group health plans may be self-funded by employers or funded through insurance purchased from insurance carriers. In the case of self-funded plans, the employer will typically serve as plan administrator and employ a claims administrator to adjudicate and pay claims. The employer still maintains final discretion over eligibility and coverage.

         ERISA's framers did not intend for state insurance departments to claim jurisdiction over self-funded plans. To foreclose that result, ERISA section 514(b)(2)(B) provides that "[n]either an employee benefit plan ... nor any trust established under such a plan, shall be deemed to be an insurance company." (20) This "deemer clause" curtails the reach of the savings clause in the ease of self-funded plans. (21)

         Thus, State laws and regulations, including insurance laws, are preempted by ERISA in the case of self-funded plans. (22) For this reason, state external review requirements are preempted and a federal external review process will apply.

      2. Insured Plans

         With insured plans, the employer will typically be the policyholder of a group contract. The employees receive certificates of coverage from the carrier and the carrier typically reserves final discretion over decisions of eligibility and coverage.

         In recognition of the traditional role of states in regulating insurance practices within their borders, ERISA's framers provided an express exception for state laws that regulate the business of insurance. Under this exception, ERISA's preemptive force does not apply to state laws (23) that regulate the business of insurance by virtue of ERISA section 514(b)(2)(A), the "savings clause." (24)

         Thus, a qualifying state external review process will apply to such plans rather than the federal external review process.

      3. DOL Claims Regulations & Internal Appeals

         As observed above, all ERISA governed plans have been subject to the DOL claims regulation and remain so under the new law. The additional requirements added to the existing claims regulation will impose new compliance issues, however, as will be discussed below. In the case of internal appeals, however, the requirements will be the same whether a plan is self funded or insured.

      4. Federal External Review Process

         Following the distinction noted above, ERISA self-funded group health plans will be subject to the federal external review process. (25) This follows from the fact that ERISA preempts application of state external review law to self-funded plans by virtue of the deemer clause as noted above.

         On the other hand, ERISA governed insured group plans, will be subject to applicable state external review process if the process qualifies under the NAIC standards. If the state process does not meet these standards, the federal external review process will apply to the insured group health plan by default.

   3. SUMMARY

      We may summarize the foregoing analysis as...