United States: Refusal To Pay Claims To Gain Negotiating Leverage Is Abuse Of Discretion Under ERISA, Court Says

A federal district court found that Cigna Healthcare abused its discretion, and thus was liable under section 502(a)(1)(B) of ERISA, when its primary motivation for refusing to pay a hospital's claims was to enhance its leverage in negotiations to bring the hospital into its provider network. While Cigna argued that it had a valid justification for refusing to pay the hospital's claims because of the hospital's practice of forgiving balances owed by Cigna's members, the court found that Cigna's interpretation of its plan language was legally incorrect, and that the evidence demonstrated that refusing to reimburse the hospital was part of Cigna's plan for bringing the hospital in-network. The decision underscores that reliance on legal authority (here, a Seventh Circuit decision) may not shield a payor from liability under section 502(a)(1)(B) if there is evidence that the administrator favored one interpretation of plan language for reasons that amount to bad faith.

Given the number of lawsuits addressing fee forgiveness that have been filed by both providers and payors in recent years, this highlights the potential danger that payors may find themselves in if outside factors, such as contract negotiation leverage, influence reimbursement policies with providers. While payors may incentivize out-of-network providers to come in-network, this case illustrates that certain conduct—such as refusing to pay a provider's claims without a solid legal justification—may cross the line and subject payors to ERISA liability.


North Cypress Medical Center Operating Company ("North Cypress") sued Cigna Healthcare ("Cigna") in the United States District Court for the Southern District of Texas, alleging that Cigna violated section 502(a)(1)(B) of ERISA when it refused to pay anything to North Cypress, as assignee of its patients' benefits. Cigna justified its refusal to pay North Cypress, an out-of-network hospital, on the basis of plan language stating that "payment for the following is specifically excluded:...charges for which you [patients] are not obligated to pay or for which you are not billed." Because North Cypress generally did not bill the patients any amount (a practice commonly known as "fee forgiveness"), Cigna asserted that it was not obligated to pay anything to North Cypress under the terms of its members' plans. Cigna therefore implemented what it called a "Fee-Forgiving Protocol" under which it either paid nothing, or drastically reduced its payments to North Cypress and other providers who engaged in fee forgiveness.

In addition to claims seeking benefits based on ERISA and breach of contract theories, North Cypress sued for breach of fiduciary duty under section 502(a)(3) of ERISA, failure to provide full and fair review under section 503 of ERISA, and failure to provide requested plan documents under section 502(c) of ERISA. Cigna asserted a counterclaim under section 502(a)(3) of ERISA, alleging that North Cypress' artificial inflation of its claimed medical costs breached duties owed by North Cypress to Cigna.

After the court initially granted summary judgment in favor of Cigna on North Cypress' ERISA and breach of contract claims, the Fifth Circuit, finding that North Cypress had not established its standing to sue as an assignee of the patients' benefits, overturned the judgment and remanded in March 2015. North Cypress Med. Ctr. Operating Co., Ltd. v. Cigna Healthcare, 781 F.3d 182, 187 (5th Cir. 2015). The Fifth Circuit also affirmed dismissal of Cigna's counterclaim as time-barred. In June 2016, another district court in the Southern District of Texas found that Cigna's Fee-Forgiving Protocol was based on an incorrect interpretation of the plan language, and that Cigna abused its discretion in refusing to pay a hospital's claims despite its provision of medical services to Cigna's members. Connecticut Gen. Life Ins. Co., et al. v. Humble Surg. Hosp., LLC, No. 4:13-cv-3291, 2016 WL 3077405 (S.D. Tex. Jun. 1, 2016) ("Humble").


Because of the Humble decision, a principal issue at summary judgment was whether it had preclusive effect on Cigna and, if so, to what extent. The court found that the Humble court's ruling that the Fee-Forgiving Protocol was based on a flawed interpretation of the plan language was entitled to collateral estoppel effect. However, the court found that whether Cigna abused its discretion in applying the Fee-Forgiving Protocol to North Cypress was a factual inquiry that was not subject to collateral estoppel.

In resolving the abuse-of-discretion issue, the court looked at whether Cigna had a conflict of interest, whether the plan was internally consistent, the factual background of Cigna's determination, and whether it could infer bad faith on Cigna's part. On conflict of interest, the court found that there was a genuine issue of material fact because, while evidence showed that Cigna's cost containment program might provide a basis for finding a conflict, there was no evidence that the claims at issue were subject to the cost containment program. Accordingly, it did not weight conflict of interest in the analysis. The court found that Cigna's plan language was internally consistent, a factor that favored Cigna.

However, the court found that the final two factors strongly favored North Cypress. Specifically, the court pointed to internal communications that established that Cigna's motivation in applying the Fee-Forgiving Protocol to providers in general and to North Cypress in particular was to pressure North Cypress to join Cigna's networks on more favorable terms. While Cigna claimed that its Fee-Forgiving Protocol was motivated by its concerns about fee forgiveness and was supported by a 1991 Seventh Circuit decision, the court found that the evidence suggested otherwise. Accordingly, it found that Cigna abused its discretion in violation of section 502(a)(1)(B). The court reserved determination of damages, given the lack of summary judgment evidence.

The court's decision is important to payors for other reasons as well. First, the court found that North Cypress' inability to produce an assignment of benefits from each member on whose behalf it claimed to sue was not critical, given that Cigna established a genuine dispute of material fact by submitting an affidavit stating that it routinely has patients sign assignments upon admission.

The court granted summary judgment to Cigna on North Cypress' claims under ERISA sections 502(a)(3), 502(c) and 503. The court found the section 502(a)(3) claim impermissibly duplicated North Cypress' ERISA benefits claim. It also found that North Cypress could not sue under section 502(c), because it could not establish that it was a plan participant or beneficiary, and that North Cypress failed to show that Cigna failed to provide notice of the reasons for its denials or to provide an adequate administrative review process.


Cigna abused its discretion because it implemented its Fee-Forgiving Protocol to exert leverage in contract negotiations with providers. Though courts in some jurisdictions have been more favorable to arguments similar to Cigna's, this case, along with the Humble decision on which it relies, follows a trend in the Fifth Circuit and elsewhere, of courts taking a hard look at the motivations of ERISA payors in denying claims based on fee forgiveness, particularly when the plan language does not support the administrator's determinations. The decision especially highlights the potentially adverse consequences a payor may face if it allows outside factors, such as contract negotiations with a provider, to influence its reimbursement policies toward that provider. Given the prevalence of fee forgiveness programs among providers and the proliferation of lawsuits involving the practice, this opinion may have wide-ranging implications for payors.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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