Proceed with Caution - The New DOL Claims Procedures Regulations

Although sponsors of employee benefit and welfare plans may be busy amending their plans and filing determination letter requests to comply with the new law, they need to remember that their plans also need to meet the requirements of the new Department of Labor (DOL) claims procedures regulation finalized on November 21, 2000 (the Regulation). Generally, the rules of the Regulation apply to claims filed on or after January 1, 2002. Group health plans with calendar years have an additional year within which to comply, while non-calendar year group health plans have until the first day of the first plan year beginning on or after July 1, 2002. Even with the delayed effective date, sponsors should review their plan procedures now to ensure full compliance with the law.

The Regulation makes substantial changes in the way in which employee benefit plans must process claims for group health benefits, including shorter time frames for decision-making, new procedural standards for appeals of denied claims, and increased disclosure to claimants. The Regulation also affects non-welfare benefit plans such as 401(k) plans and defined benefit plans by incorporating longstanding interpretations of the 1977 DOL claims procedures regulations, which applied uniformly to all employee benefit plans. The DOL has stated that the Regulation will affect plan participants and their beneficiaries, plan sponsors, insurers and service providers, fiduciaries, HMOs and third party administrators.

As described below, although the rules may provide for a faster, fairer and fuller determination process for a claimant, the rules of the Regulation are extremely exacting and require substantial revisions to almost all of group health plan’s operating documents. Plan sponsors of non-group health plans must also make revisions to their operating documents by year-end to incorporate some of the new "interpretations" that are now codified into the law. In addition, compliance with the Regulation may require a revamping of many administrative procedures associated with the review of benefit claims and appeals. Failure to meet the requirements of the Regulation entitles a claimant to bypass all administrative remedies and seek action in court against the plan for failure to provide reasonable claims procedures.

This article sets forth a detailed description of the key provisions of the Regulation and describes the impact of the Regulation and the steps plan sponsors or administrators should take to remain compliant.

The Regulation evolved in part from a memorandum from former President Clinton directing the Secretary of the DOL to "propose regulations to strengthen the internal appeals process for all ERISA health plans to ensure that decisions regarding urgent care are resolved not more than 72 hours and generally resolved within 15 days for non-urgent care" and "to endure the information [group health plans] provide to plan participants is consistent with the Patients Bill of Rights." There was some speculation that the proposed version of the Regulation would not be finalized by the DOL due to the number of comments in opposition to the law and because many of the provisions contained in the proposed version of the Regulation were being debated in Congress. Presumably, because Congress was unable to pass a consensus bill on managed healthcare reform, the DOL finalized the Regulation in the form it appears now.

Under current law, a plan administrator or other decision-maker has 90 days¹ to review a claim for benefits with a possible extension of up to 180 days. If a participant appeals the initial decision, the plan administrator or other decision-maker has up to 60 days to decide the appeal with a possible extension of up to 120 days. These rules apply across the board to all plans.

The new Regulation retains the old timing rules for all plans except for group health and disability plans. With respect to such plans, the Regulation deviates from prior law by dividing claims into various categories, based on exigency. The Regulation then imposes new time frames for claims decisions at both the initial claims decision stage and on review. While there was relatively little objection by commenters with respect to the time frames for urgent care group health claims, many commenters expressed dissatisfaction about the time frames proposed for other decisions. As a result of these comments, the DOL split non-urgent claims into "pre-service" and "post-service" claims and gave each type of claim a different time period within which a decision has to be made.

As a general matter, it should be noted that the DOL takes the position that, when a decision is required to be made within a reasonable time, a plan should not automatically take until the specific "last date" (e.g., the "but no later than" date) mentioned in the Regulation. In some cases, states the DOL, delaying a decision until the end of the applicable maximum period may be unreasonable under the circumstances and a violation of the procedural standards.

The first category of claims is "urgent health care" claims. A claim involving urgent care is defined as any claim for medical care or treatment with respect to which the application of the time periods for making non-urgent care determinations (a) could seriously jeopardize the life or health of the claimant or the ability of the claimant to regain maximum function or, (b) in the opinion of a physician with knowledge of the claimant’s medical condition, would subject the claimant to severe pain that cannot be adequately managed without the care or treatment that is the subject of the claim. Clause (a) above is determined by an individual acting on behalf of the plan applying the judgment of a prudent layperson who possesses an average knowledge of health and medicine. A claim that is determined by a physician with knowledge of the claimant’s medical condition is automatically a "claim involving urgent care" and obviates the need of a decision by someone acting on behalf of the plan.

A plan administrator must decide an urgent claim and notify the claimant of the plan’s determination as soon as possible, taking into consideration all medical exigencies, but no later than 72 hours. If the claim is insufficient, the plan administrator must notify the claimant as soon as possible, but in any case within 24 hours, of the information necessary to cure any deficiencies. The claimant must then be afforded a reasonable time, but not less than 48 hours, under the circumstances to provide the specified information. Notice of an adverse benefit determination may be provided orally, but must be followed up with an electronic or written notification no later than 3 days after the oral notification. No oral determination may be given if written notification is requested.

The Regulation poses even more onerous requirements where a claimant makes an urgent care claim to extend his or her course of treatment beyond the period of time or number of treatments for which he is currently covered (termed "concurrent care"). The plan administrator must decide such a claim as soon as possible but in no event later than 24 hours after receipt of the claim. The claim, however, must be presented to the plan at least 24 hours prior to the expiration of the prescribed period of time or number of treatments.

Pre-service claims have a commonsense definition under the Regulation. A pre-service claim is defined as any claim for a benefit under a group health plan with respect to which the terms of the plan condition receipt of the benefit, in whole or in part, on approval of the benefit in advance of obtaining medical care. This would encompass all requests for pre-approval or pre-certification for treatment.

A plan administrator must decide a pre-service claim within a reasonable period of time appropriate to the medical circumstances, but no later than 15 days after receipt of the claim by the plan. The 15-day period may be extended for an additional 15 days, provided that the plan administrator both determines that such an extension is necessary due to matters beyond the control of the plan and notifies the claimant prior to the end of the initial 15-day period of the time and date by which the plan expects to render a decision. If a plan is unable to make a decision because the claimant has failed to submit all necessary information, the plan must notify the claimant of the failures and afford him or her at least 45 days from receipt of the notice to provide the missing information.

If a claimant fails to follow the plan’s procedures for filing a pre-service claim, the plan must generally notify the claimant (orally is permitted unless written notice is requested) as soon as possible, but no later than 5 days after the failure, about such failure and the steps to be taken to properly file a claim. This requirement applies only if the claim takes the form of a communication that is sent by the claimant or a health care professional representing him or her and is received by a person customarily responsible for handling benefit matters. Receipt of a claim by the company janitor, therefore, would not be sufficient. In addition, the claim must name a specific claimant, medical condition or symptom and a specific treatment, service or product for which approval is requested. Therefore, it appears that if a plan is unable to make a decision because the claimant fails to submit necessary information and submission of that information is part of the plan’s procedures for accepting pre-service claims, then the plan is subject to the more onerous 5 day notification rule rather than providing notice prior to the end of the original 15-day period. This means the plan administrator will need to look quickly for missing information!

A post-service claim is defined as any claim for a benefit under a health plan that is not a pre-service claim. Although not specifically mentioned in the definition, an "urgent care" claim would also trump this definition. A plan administrator must notify a claimant of its decision with respect to any post-service claims within a reasonable period of time, but in no event later than 30 days after receipt of the claim. As with pre-service claims, this period may be extended one time by the plan for up to 15 days and a claimant must be given up to 45 days to provide any missing information.

With respect to a disability benefit claim, a plan must notify a claimant of the plan’s adverse benefit determination within a reasonable period of time, but no later than 45 days after receipt of the claim by the plan. This period may be extended for an additional 30-day period for matters beyond the control of the plan as long as the claimant is notified prior to the end of the initial 45-day period. The plan may then extend the determination period for an additional 30-day period (for a total of 105 days at the initial review level) if, prior to the end of the initial 30-day period, the administrator finds that a decision cannot be made due to circumstances beyond the control of the plan and notice is provided. The notice must specifically explain the standards on which entitlement to a benefit is based, the unresolved issues that prevent a decision on the claim, and the additional information needed to resolve those issues. A claimant is given at least 45 days within which to provide the specified information. The DOL provided disability plans with the extended level of review in response to comments that disability claims take longer to review than other claims because they present complex issues requiring consideration of a claimant’s medical condition as well as the claimant’s continuing vocational capabilities. Many commentators have expressed the view that the claims processing timeframes are not workable for disability plans and that President Clinton’s directive was aimed at group health plans and not disability plans.

The Regulation expands the type of information that must be furnished to participants upon an adverse determination. This requirement applies to all types of plans unless otherwise noted. Specifically, the notice must now set forth (1) the specific reason for the adverse determination, (2) reference to the specific plan provisions on which the determination is based, (3) a description of any additional material or information necessary for the claimant to perfect the claim as well as an explanation of why the information is necessary, (4) a description of the plan’s review procedures and the applicable time limits, as well as, (5) when a health or disability benefit is denied, a copy of any internal rule, guideline, protocol or other similar criterion relied upon by the plan administrator in making the decision or a statement that the criterion was relied on and that a copy can be provided free of charge upon request. The notice may now be given in electronic form.

All plans must now provide a statement of a claimant’s right to bring a civil action under Section 502(a) of ERISA following an adverse benefit determination on review. This means that many plan sponsors may have to amend their SPDs to reflect this new disclosure. In addition, the Regulation goes further to provide that if an adverse determination was based on a determination that the claim was for goods or services that were either not medically necessary or were experimental, the written notice must include an explanation of the scientific or clinical judgment upon which the determination was based as applied to the claimant’s medical circumstances, or a statement that such an explanation will be provided upon request without charge.

The notice of an adverse determination on appeal for group health plans and plans offering disability benefits must now include the following statement:

The Regulation provides that all participants must be permitted to have a full and fair review of a claim and adverse benefit determination. This means that all claimants must have 60 days following receipt of an adverse determination to appeal. In addition, the procedures must provide claimants the opportunity to submit written comments, documents and other information that are relevant to the claim² as well as receive access to, or copies of, all documents and materials relevant to the claimant’s claim for benefits. The review itself must take into consideration any materials submitted for review even if such material was not relied on at the initial determination stage.

Generally, notice of a determination on appeal must be given within a reasonable period of time, but no longer than 60 days after the appeal was received. The 60-day period can be extended for up to 60 days longer if there are special circumstances that require an extension of time (e.g., the need to hold a hearing). The plan must provide written notice to the claimant within the original 60-day period and must state the special circumstances as well as the date by which the plan expects to render the determination on review. Presumably, if the plan renders its decision past the date identified in the notice, there will be no problem as long as the date is within the additional 60-day extension.

The aforementioned rules do not apply if the plan has a committee or a board of trustees designated as the appropriate named fiduciary that holds regularly scheduled meetings at least quarterly. In that case, a plan has until the next meeting to make a benefit determination as long as the appeal is filed at least 30 days prior to the meeting. If the appeal is filed after such date, the plan may wait until the second meeting following the submission of the appeal. Again there is a special circumstances extension that provides that the decision may be held over until the third meeting. Notice of the extension must be provided to the claimant. Once the board or committee makes its decision, the claimant must be notified as soon as possible, but in no event later than 5 days after a decision is reached.

With respect to disability and health benefits, claimants must be permitted to have a full and fair review of a claim and adverse benefit determination. However, the definition of what constitutes "a full and fair review" is substantially different with respect to health plans. The Regulation provides that a "full and fair review" means that the participant has at least 180 days in which to appeal an adverse determination. The appeal is de novo and may not give any particular deference to the initial determination. Also, the appeal must be decided by a named fiduciary of the plan who did not make the initial determination and who is not a subordinate of the person who made that determination. This is quite problematic in that it overrides the general ERISA concept that the initial determination be afforded deference and may require a court, at a later stage, to make claims decisions on behalf of the plan.

The plan administrator must also provide that the review of any determination based on a medical judgment, including determinations of whether a particular treatment, drug, or other item is experimental, investigational, or not medically necessary or appropriate, be conducted through consultation with a health care professional who is independent of any health care professional involved in the initial decision and who has appropriate training and experience in the field of medicine involved in the medical judgment. The plan administrator must also inform the claimant of the identity of any medical or vocational experts consulted by the plan in connection with a particular claim. This information must be provided even if the advice was not relied upon in making the benefit determination. It is interesting to note that the health care professional who provides the consultation on review need not be independent from the Company; he or she just needs to not have been involved in the initial review decision or be a subordinate of the person whose judgment is being reviewed.

In the case of a request for urgent care, the plan must provide an expedited claim review process. This means that the plan must permit appeals to be submitted orally as well as in writing. All communications between the plan and the claimant must be expeditious in nature as well (e.g., telephone communications, faxes or return receipt emails). An appeal of an urgent claim must take place within 72 hours after receipt of the appeal.

In the case of a pre-service claim, appeals must be decided within a reasonable period of time appropriate to the medical circumstances, but no later than 30 days after the claim is received. If a group health plan provides for two appeals of an adverse determination, the notification must be received within 15 days at each level of appeal. A group health plan may not require a claimant to file more than two appeals of an adverse benefit determination prior to bringing a civil action under ERISA section 502(a).

In the case of a post-service claim, the plan must notify the claimant within a reasonable period of time as well, but in no case longer than 60 days after the appeal is submitted. If there are two levels of appeal, notice must be provided within 30 days of the date the appeal is submitted.

Notwithstanding the foregoing, multi-employer plans with a committee or board of trustees that meets at least quarterly have until the next meeting following the submission of the appeal to make a decision with respect to a post-service claim, as long as the appeal was filed at least 30 days prior to the meeting. If the appeal is filed after such date, the plan may wait until the second meeting following the submission of the appeal. A special circumstances extension provides that the decision may be held over until the third meeting. Notice of the extension must be provided to the claimant. Once the board or committee makes its decision, the claimant must be notified as soon as possible, but in no event later than 5 days after a decision is reached. The DOL believes that an extension by a committee should be used only where it is necessary and not harmful to the claimant.

There are certain rules that apply if a group health plan provides voluntary levels of appeal, including voluntary arbitration or any other form of dispute resolution. If the claimant requests information about any voluntary levels of appeal with respect to any group health benefit, the plan must now provide any information relating to such appeal as well as a statement describing the process for selecting a decision-maker and the circumstances, if any, that may affect the impartiality of the decision-maker, such as any financial or personal interests in the result or any past or present relationship with any party to the review process. Failure to do so will deem the claims procedures unreasonable.

In addition, no costs may be imposed on the claimant as part of the voluntary level of appeal. The claimant would still be responsible for his own costs, however (e.g., his or her own attorneys’ fees).

The claims procedures must also contain no provision for the mandatory arbitration of adverse benefit determinations unless the arbitration is conducted as one of two appeals and the claimant is not precluded from challenging the decision under ERISA section 502(a) or other applicable law. This means that plans will no longer be able to "force" participants into binding arbitration. Voluntary arbitration (including voluntary binding arbitration), on the other hand, is permissible, but the plan must waive any right to assert that the claimant failed to exhaust administrative remedies, any statute of limitations or other defenses are tolled during the arbitration and all information enabling the claimant to make an informed judgment about whether or not to submit a benefit to voluntary arbitration must be provided upon request. In light of the rule that a claimant may not be charged costs associated with an appeal of his benefit denial, the plan administrator must remember that the costs of the arbitration process itself may not be imposed on the claimant.

State laws governing claims reviews are not preempted under the Regulation unless the state law prevents the application of the Regulation. An external review conducted by a state will also not be preempted so long as the external review is conducted by parties other than the insurer, the plan, its fiduciaries, the employer or any agent of the foregoing.

The Senate passed the Bipartisan Patient Protection Act of 2001 on June 29, 2001. The House version was passed in early August, 2001 but is not as controversial as the Senate bill. The Senate version contains numerous provisions impacting claims procedures and failure to follow such provisions can be extremely costly. These provisions include a requirement that health plans (whether a private, state or local governmental plan or federal health benefit program) submit patients’ grievances to independent reviewers if participants request such an appeal. The plan is then bound by the external decision. The independent reviewer may give no deference to the plan’s determination or to the treating provider’s recommendation. External reviewers are also to take into consideration, but are not bound by, the plan’s definition of what is "medically necessary," experimental or investigational and any other equivalent terms. Failure to follow any of the timeframes for compliance allows the participant to obtain services from any provider and submit the costs to the plan for civil action. Failure to abide by a review decision also subjects the plan to penalties of up to $1,000 per day for each failure. Additional penalties may also be imposed.

As stated above, if a plan fails to make a timely decision or otherwise fails to comply with the Regulation, an affected participant will not be required to appeal the decision and will be deemed to have exhausted all his or her administrative remedies. This means that the participant will be able to bypass the entire administrative process and go directly to court to enforce his or her rights. This rule is onerous in that most ERISA plans provide for a review of benefits claims using an abuse of discretion standard – a much less stringent requirement than a "total compliance" standard. It appears that under the new Regulation, the smallest deviation would entitle the participant to forego exhaustion of administrative remedies.

What you should be doing depends on the type of plan. Sponsors of non group-health plans or non-disability plans need to take action before the end of 2001, or, if it has already passed, as soon as possible. Even though the Regulation generally adopts the provisions of the 1977 regulation, it does codify DOL interpretations of that regulation. Because the Regulation provides that a copy of all claims procedures must be included as part of an SPD and the preamble to the Regulation intimates that all information concerning the filing of claim forms, notification of benefit determinations and review of denied claims must be spelled out in the SPD, it is likely that all the new changes to the regulation will need to be reflected in the SPD (and plan as well, if the plan details all of the claims procedures). It is likely that the following changes to the 1977 regulation that affect non-group welfare plans will need to be reflected and outlined in an SPD:

1. a statement of the claimant’s right to bring a civil action under Section 502(a) of ERISA following an adverse benefit determination on review;
2. a statement that a claimant will be provided, upon a request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claimant’s claim for benefits;
3. the fact that the appeals procedures will take into account all comments, documents, records and other information submitted by the claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination;
4. the five-day notification requirement after a committee or board of trustees requests an additional review extension for special circumstances;
5. a statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to a claim for benefits; and
6. a statement in the notice of determination on appeal describing any voluntary appeal procedures offered by the plan and the claimant’s right to obtain information on these procedures.

Most group health plans will likely not revise their claim procedures right away given the applicable deadline has been extended, that the DOL likely will issue additional guidance on the claims procedure regulation, and that the Patient’s Bill of Rights will have language directly affecting the procedural requirements for group health plans addressed in the final rules. However, the fact remains that language in most group health and disability benefit plans will need to be amended and the sooner an employer starts the process, the better. In addition, summary plan descriptions and internal claims administration policies and procedures will need to be substantially revised.

The changes involving urgent health care claims are probably the most exacting. For example, the requirement that a plan administrator respond to an urgent health care claim to extend concurrent care within 24 hours is a significant change from the prior rules and may require a great deal of administrative re-haul. This means that weekly or monthly meetings of benefit determination committees are no longer practical if a decision must be made within 24 hours. Under the new rules, a plan would need to have a system in place to make benefit determinations right away. However, this may not be as big an issue for group health plans. The DOL states in the preamble to the Regulation that most group health plans supported the accelerated timeframes and, in fact, were already operating their procedures within such timeframes.

To the extent an internal review on how the Regulation will affect a plan’s claim procedures has not yet been initiated, the time to start is now. Given the myriad of particular rules in the Regulation, it is likely that such a review will be a lengthy process and will require substantial revision of plan documents, summary plan descriptions as well as the internal administrative procedures themselves. The plan sponsor will then want to talk with any service providers it uses in the review/appeals process to ensure compliance. For example, since notice of adverse determinations must now include any internal rule, guideline or protocol used in making the determination, plan administrators with outside service providers that provide scientific or medical judgment with respect to any benefit claim should ensure that all notices to claimants adhere to these new notification rules by including a statement of the rule or guideline used by the service provider (or a statement that a copy is available upon request).

Lastly, a plan sponsor will need to train its employees and staff on how to administer reviews and appeals and the timeframes within which they must act. It is advisable that a plan seek consultation with an experienced employee benefits attorney at all stages.

Shaun L. Terrill is an associate at Steptoe & Johnson LLP in Washington, D.C. He primarily advises clients with respect to qualified plan issues under Title II of ERISA. He also provides clients with advice on executive compensation issues and benefits issues arising under health plans.

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