United States: Regulating ERISA Claims Procedures: New Rules for Handling Benefit Claims

The chances of defeating most ERISA lawsuits can be greatly enhanced by effective use of the plan’s ERISA-required claims procedures. Effective utilization means

• Making sure that the plan invokes the abuse of discretion standard of review to the fullest possible extent by explicitly giving the fiduciaries deciding claims the discretion to interpret the plan, the facts, and applicable law (recognizing, of course, that courts may limit that discretion only to plan interpretations), and by stating that claim decisions are to be reviewed only under the abuse of discretion standard.
• Following the plan’s claims procedure, so as to avoid procedural impropriety disputes that might undercut the finality of the claims decision or preclude it from being afforded deference.
• When a claim is denied, producing a written claim decision with exhibits that constitutes the entire written record, addresses every argument the claimant raised, and sets forth every plausible reason for denying the claim that plan fiduciaries will ever want to assert. The decision should be written with three goals in mind: (1) to demonstrate to the claimant that all his or her theories have been fairly considered and rejected; (2) to demonstrate to a potential lawyer for the claimant the futility of suing; and (3) to permit a court asked to decide the matter to issue summary judgment solely on the basis of the written denial and exhibits on the grounds that they irrefutably show on their face that the denial was reasonable and must be upheld.

Yet, even if this blueprint for effective utilization is followed to the letter, the entire effort likely would be thoroughly undermined if the plan’s claims procedures do not comply with new Department of Labor regulations that take effect this year and next. These new regulations require employers and plan administrators to dramatically overhaul health and disability plan claims procedures and change other plans’ claims procedures in more modest ways. The understandably natural tendency towards inertia makes us fear that full compliance with the new regulations all too often will not coincide with their effective dates. Coupled with traditionally spotty claims procedure regulation compliance, this makes us fear that many claim denials will be challenged in court and overturned because of procedural improprieties that easily could have been avoided.

A plan administrator faces two potentially very adverse consequences when it fails to either establish claims procedures that comply with the regulations or to administer claims in accordance with those procedures. First, the new regulations expressly permit a participant to bypass the plan’s administrative procedures and file an ERISA civil suit. Second, the court may elect to review the participant’s claim on a de novo basis (meaning the court makes its own independent decision on the claim without deference to the plan’s claim determination).

Please note that many states have enacted "external review" laws requiring insurers and HMOs to participate in binding, third-party reviews of disputed claims. The Supreme Court just recently concluded that Illinois’s external review law was not preempted by ERISA. This means that plans may be required to comply with both a state external review law and the ERISA claims regulation.

Yes, including "top-hat plans", e.g., pension plans that are underfunded and maintained primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees. The most extensive changes, however, are limited to plans providing group health benefits (including dental, vision and prescription drugs) and disability benefits (including pension plan benefits that are payable in the event of a disability).

For ERISA plans other than group health plans, the new regulations apply to claims submitted on or after January 1, 2002. For group health plans, the regulations apply to claims submitted on or after January 1, 2003 (or, if earlier, the first day of the plan year beginning on or after July 1, 2002).

• Plans have a much shorter time to review benefit claims (e.g., 72 hours for urgent health care claims) and review appeals of initial benefit determinations. See Q&A-1 and -4 of the Appendix for the rules regarding initial benefit determinations and Q&A- 6 and -7 of the Appendix for the rules regarding appeals.

• Group health plan fiduciaries have an obligation to promptly notify the claimant if his or her claim is procedurally defective and the procedures for properly filing the claim. See Q&A-2 of the Appendix.
• Plans may not require more than two levels of administrative appeals. A plan may offer an additional voluntary level of appeal, which may include binding arbitration, if certain requirements are satisfied. See Q&A- 7 of the Appendix.
• A named fiduciary must handle appeals and make a new and independent review of each claim. Hence, the reviewing fiduciary cannot be the person or entity that decided the initial claim or a subordinate of the person or entity that made the initial decision. Likewise, if the initial claim decision was based on a health care professional’s medical judgment, the named fiduciary deciding the review must consult with a different, independent health care professional. See Q&A-7 of the Appendix.
• If the outcome of an initial benefit determination or an appeal of such a determination is based on internal guidelines, criteria, protocols, on an exclusion for experimental treatment, or a showing of medical necessity, then such guidelines, criteria, protocols or exclusions must be disclosed or made available to the claimant. See Q&A-5 and -7 of the Appendix.

• Plans that decide to pay a claimant the full amount of benefits that he or she is entitled under the plan will still be required to treat the claim as a denied claim under the new regulations if the amount of benefits approved is less than the amount that the claimant requested. See Q&A-3 of the Appendix.
• Under the old regulations, plans were not required to provide claimants with written notification that their claim was denied. Instead, the claim was deemed denied if the claimant did not receive a response within the requisite time period. The new regulations require plans to provide detailed disclosures to claimants of the initial benefit determination. For urgent care and pre-service group health claims, disclosure is required even if the claim is fully granted. For all other claims, including post-service group health claims and disability claims, disclosure is required only if the claim is denied in whole or part. See Q&A-5 of the Appendix.
• The claims procedures must contain administrative processes and safeguards designed to ensure and verify that claim determinations were made in accordance with governing plan documents and that, where appropriate, the plan provisions have been applied consistently with respect to similarly situated claimants.

• The claims procedures must not contain any provision, or be administered in any way, that unduly inhibits the initiation or processing of claims. For example, a plan may not require the payment of a fee as a prerequisite to making a claim for benefits or appealing a denial of benefits.
• Plans must permit authorized representatives to act on behalf of claimants in pursuing a benefit claim or appealing a denial of benefits. A plan may establish reasonable procedures for determining whether an individual is authorized to act on behalf of a claimant (e.g., completion of a form by the claimant identifying the representative), although treating physicians are deemed to be authorized representatives for claims involving urgent medical care.
• On appeal, all "relevant" information must be made available to claimants. See Q&A-6 of the Appendix. Claim procedures and the applicable times frames must be described in summary plan descriptions (SPDs).

They should take steps to ensure that a full claims procedure is adopted for each affected plan and that each plan’s summary plan description is amended as soon as possible to reflect these new rules. We believe the most efficient and straight-forward method of achieving this is to (i) create a universal set of plain English claims procedures, consist with the style and format requirements applicable to SPDs, that delineate the procedures for every type of benefit claim described in the regulations, (ii) have each plan adopt these procedures, (iii) include a statement in each SPD that the claims procedures for the plan are being furnished automatically, without charge, as a separate document, and (iv) attach the claims procedures to each SPD and distribute the SPD and the attachment to participants as soon as administratively feasible.

• Employers that rely on insurers, third party administrators (TPAs), or other outside vendors to process claims should confirm that they are taking the steps required to comply with the new rules and that the employer will have recourse against them if they fail to do so, resulting in harm or cost to the employer.
• If an employer currently decides group health or disability plan claims, or reviews of denied claims, internally, it should consider shifting this fiduciary function to an insurer, TPA, or other entity or retaining health care professionals to assist in the decision making process. They may be in a better position to process claims quickly, particularly for urgent health care claims, which may have to be decided in the evening or on weekends, or better able to identify the criteria, protocols, and medical opinions relevant to the decision. Assigning claims adjudication responsibilities to an independent party may also reduce a group health plan’s exposure to protected health information and the privacy requirements of the Health Insurance Portability and Accountability Act of 1996 (HIPAA).
• The employer should make sure that its claims forms are revised to reflect new claims procedures, and it should make sure that model notices to claimants for benefit determinations and model requests for additional information are prepared in advance of actual need.
• Personnel who will be handling claims need to be trained about the new procedures.

Rather than 90 days (or more) under the old rules, the new regulations require initial benefit determinations to be made within the following time periods, which begin to run when the claim is filed in accordance with the plan’s reasonable filing procedures, regardless of whether the plan has all of the information necessary to decide the claim at the time of filing. Please see Q&A-4 below for actions the plan should take if the claimant does not submit all the information necessary to grant or deny the claim.

• "Urgent care" claims – as soon as possible, but within 72 hours (even if the claim is approved). A claim for medical care is urgent if taking the longer time otherwise allowed could seriously jeopardize the claimant’s life, health, or ability to regain maximum function, or unnecessarily subject the claimant to severe pain. The Department of Labor has advised that a plan has the obligation to determine whether a claim is urgent based on the information provided by the claimant and by applying the judgment of a prudent layperson who possesses an average knowledge of health and medicine. If a physician with knowledge of the claimant’s medical condition determines that a claim involves urgent care, however, the claim must be treated as an urgent care claim.
• "Pre-service" claims – within a period of time reasonable given the medical circumstances, but within 15 days (even if the claim is approved). Pre-service claims are any non-urgent claim that requires preapproval before obtaining medical care. The 15-day period may be extended once for an additional 15-day period if the extension is required due to circumstances beyond the plan’s control and the plan notifies the claimant prior to the expiration of the original 15-day period of the extension and why it is needed.
• "Post-service" claims – Adverse benefit determination must be decided within a reasonable period of time, but within 30 days. Post-service claims are claims for payment after the claimant has already received medical care. The 30-day period may be extended once for an additional 30-day period if the extension is required due to circumstances beyond the plan’s control and the plan notifies the claimant prior to the expiration of the original 30-day period of the extension and why it is needed.
• "Disability" claims – Adverse benefit determinations must be decided within a reasonable period of time, but within 45 days. A claim is for disability benefits if the plan conditions the benefit’s availability to the claimant upon a showing of disability. The Department of Labor has advised that disability benefits provided through pension plans would fall under this definition, unless the disability determination is made by a party other than the pension plan e.g., the benefit is payable when the participant is determined to be disabled by the Social Security Administration or becomes eligible for disability benefits under the employer’s long term disability plan. The 45-day period may be extended up to two additional 30-day periods if the extension is required due to circumstances beyond the plan’s control, and the plan notifies the claimant prior to the expiration of the original 45-day period (or first 30-day extension) of the extension and why it is needed.

Generally. A claim for benefits is a request for a plan benefit or benefits that a claimant (or the claimant’s authorized representative) makes in accordance with a plan’s reasonable procedure for filing benefit claims. The Department of Labor has advised that a claim for benefits does not include causal inquiries about benefits or the circumstances under which benefits might be paid.

Special notification requirements for defective urgent care and pre-service claims under group health plans. Group health plan fiduciaries have an obligation to promptly notify the claimant if his or her claim is procedurally defective and the procedures for properly filing the claim. The regulations provide that if (i) the claimant or the claimant’s authorized representative (e.g., physician) communicates verbally or in writing to the person or unit that is responsible for handling benefits matters (e.g., personnel office), (ii) names a specific claimant, specific medical condition or symptom, and (iii) requests a specific treatment or product for which approval is requested, then the plan must follow the procedures discussed under Question 4 and notify the claimant or authorized representative of the steps that must be taken to properly file a claim.

A benefit determination is adverse if it denies, reduces, terminates, or fails (in whole or in part) to provide or pay for a benefit, including determinations made on the basis of eligibility, utilization review, and restrictions involving medical necessity or experimental treatments, as well as any reduction or termination of a course of treatment before the expiration of a previously approved time period or before completion of a previously approved number of treatments. The Department of Labor has advised a determination will be treated as adverse whenever the plan pays less than the total amount of expenses submitted for the claim even if the reduction is required under the terms of the plan (e.g., because of co-payment or deductible requirements).

A plan administrator may deny any claim submitted without adequate backup information. To the extent a plan administrator desires additional information before deciding the claim, the plan administrator must notify the claimant (or the authorized representative) of the specific information that is needed and give the claimant sufficient time to respond, as follows:

Once the plan notifies the claimant (or the authorized representative) that additional information is needed, the benefit determination periods outlined in Q&A-1 above are tolled until the claimant provides the missing information. A plan administrator may include with the request for additional information a notice of benefit denial that will become effective if the claimant does not provide the requested information within the deadline.

When a benefit is denied, the plan must provide the claimant with a written or electronic notification of the following information. For urgent care claims the information may be provided orally so long as a written or electronic notification is provided within 3 days of the oral notification.

• The specific reasons for the adverse determination.
• The plan provisions on which the determination is based.
• A description of additional information that is necessary to perfect the claim and an explanation of why the information is necessary.
• A description of the plan’s appeal procedures, the time limits applicable to such procedures, and a reminder that the claimant may file an ERISA lawsuit following the conclusion of the administrative review.
• An adverse group health or disability plan benefit determinations also must describe any internal rule, guideline, protocol or similar criterion used in making the determination, or a least a statement that any such criterion will be provided upon request, and if the determination is based on restrictions involving medical necessity or experimental treatments, the notice must include an explanation of the scientific or clinical judgment behind the determination or at least indicate that such explanation is available upon request.
• An adverse urgent care benefit must provide a description of the expedited appeal process applicable to such claims.

• The plan must provide the claimant, upon request and free of charge, with reasonable access to and copies of all documents and other information that is "relevant" to the claimant’s claim for benefit. Documents will be considered relevant to a given claim if: (i) they were relied on by the fiduciary making the benefit determination, (ii) they were submitted, considered, or generated in the course of making the benefit determination (even if the plan did not rely on them); (iii) they demonstrate that, in making the determination, the plan complied with its own processes for ensuring appropriate decision making and consistency (e.g., documents produced during an internal audit); or (iv) the information constitutes a statement of policy or guidance with respect to the plan concerning the denied treatment option or benefit for the claimant’s diagnosis, without regard to whether such advice or statement was relied on in making the benefit determination.

• The appeal must provide for a full and fair review of the claim that takes into account all comments, documents, records, and other information submitted by the claimant even if the information was submitted after the initial benefit determination.
• The plan administrator must provide the claimant with a written or electronic notice of the plan’s benefit determination on review. The notice must include: (i) the specific reasons for the adverse determination; (ii) reference to the specific plan provisions on which the determination is based; (iii) a statement that the claimant is entitled to receive, upon request and free of charge, access to and copies of all documents and other information that is relevant to his or her claim; and (iv) a statement describing any voluntary appeal procedures offered by the plan and a statement of the claimant’s right to file an ERISA civil suit if he or she disagrees with the plan’s benefit determination on review.

• The claimant has a longer time – 180 days instead of the usual 60 days – to appeal an adverse benefit determination.
• The plan must decide the appeal within a period of time that is generally shorter than the usual 60-day period applicable to plans that are not group health or disability plans, as follows:

• The administrative review must be made by a named fiduciary who did not make the initial benefit determination and who is not the subordinate of the person that made the initial decision. The named fiduciary is to (i) perform an independent review without deference to initial adverse benefit determination, and (ii) in reviewing determinations based in whole or part on medical judgment, consult with a health care professional who has the appropriate experience and training involved in the medical judgment and who was not consulted in connection with adverse initial benefit determination and is not a subordinate of the individual who was initially consulted.
• Claims procedures for urgent care claims must provide an expedited appeal process that permits appeals to be submitted orally or in writing by the claimant and permits the transmission of all necessary information (including the plan’s benefit determination on review) between the plan and the claimant via telephone, facsimile, or similar methods.
• In addition to the information described in Q&A-6 of this Appendix, the notification of the plan’s benefit determination on review must contain the following additional information: (i) any internal rule, guideline, protocol or similar criterion used in making the determination, or a least a statement that any such criterion will be provided upon request, and if the determination is based on restrictions involving medical necessity or experimental treatments, the notice must include an explanation of the scientific or clinical judgment behind the determination or at least indicate that such explanation is available upon request; and (ii) the following statement: "You and your plan may have other voluntary alternative dispute resolution options, such as mediation. One way to find out what may be available is to contact your local U.S. Department of Labor Office and your State insurance regulatory agency."

• The plan may provide for two levels of administrative appeals, including mandatory arbitration as one of these two levels. If mandatory arbitration is required, however, it may not preclude a claimant’s ability to pursue remedies available under ERISA or other applicable law after the claimant has exhausted his or her administrative remedies. If two levels of appeals are required, the second level of review is subject to the same standards as the first level.

• A plan may offer a voluntary level of appeal after the claimant has exhausted his or her administrative remedies under the plan, which may include binding arbitration if (i) the plan waives any right to assert that the claimant has failed to exhaust administrative remedies because the claimant did not elect to submit the dispute to the voluntary level of appeal, (ii) the plan agrees that any statute of limitations or other defenses based on timeliness is tolled during the time that the voluntary appeal is pending, (iii) no fees or costs are imposed on the claimant as part of the voluntary level of appeal, and (iv) the plan provides the claimant, upon request, with information about the voluntary level of appeal that is sufficient to enable the claimant to make an informed judgment about whether to submit the dispute to the voluntary level of appeal.

© 2002 Paul, Hastings, Janofsky & Walker LLP