Employers sponsoring group-medical and other welfare plans for employees in Texas, Louisiana, and Mississippi may find themselves devoting more resources to ERISA benefits litigation if the U.S. Fifth Circuit Court of Appeals throws out long-standing precedent that requires courts to show deference to the claims administrator’s fact-finding process. Recently, the entire court agreed to rehear a case in which the original three-judge panel had openly questioned the validity of that precedent, even while applying it to dismiss ERISA claims by a group-medical beneficiary.
The case, Ariana M. v. Humana Health Plans of Tex., Inc., 854 F.3d 753 (Fifth Cir. 2017), is one employers should consider monitoring, since it could have repercussions beyond the Fifth Circuit.
Ariana M. arose from a health plan insurer’s decision to terminate partial hospitalization benefits for a beneficiary battling an eating disorder and other serious mental illness. The district court dismissed the beneficiary’s ERISA claims. In doing so, the court adopted the insurer-friendly “abuse of discretion” standard, instead of the more liberal de novo standard that applies in ordinary cases. On appeal, the beneficiary challenged the abuse-of-discretion standard used by the lower court, noting that the plan’s terms did not explicitly give the insurer discretionary authority to interpret and apply the plan’s definition of “medical necessity.”[1]
The three-judge panel affirmed, finding long-standing Fifth Circuit precedent (Pierre v. Conn. Gen. Life Ins. Co. of N. Am., 932 F.2d 1552 [Fifth Cir. 1991]) required abuse-of-discretion review of the plan administrator’s factual determinations, even where no plan language conferred interpretive discretion. However, all three judges on the panel joined a special concurrence questioning the validity of Pierre, noting that courts in most other jurisdictions had rejected this approach.[2]
On July 10, the Fifth Circuit ordered en banc reconsideration of the panel decision, prompting the Department of Labor and several public interest groups to submit amicus briefs calling for the court to overrule Pierre. A hearing before the entire Fifth Circuit is set for September 19, 2017. Most observers expect the Fifth Circuit to abrogate Pierre and to remand Ariana M. to the district court for reconsideration under a de novo standard.
How will this affect employers that sponsor group medical and other fully insured benefits programs? The appropriate standard of review is a significant issue since (as the panel concurrence noted) it often determines the outcome in benefits litigation. By the same token, a more liberal standard will make benefits claims easier to win in court, which in turn makes litigation more likely. A trend toward more litigation with more participants prevailing will drive up litigation costs both for plan sponsors and plan insurers, and will increase premiums for group health insurance over time.
The prospect of increased litigation could lead to renewed legal challenges to state-level prohibitions on discretionary clauses to be pre-empted under ERISA.
The widespread loss of plan-conferred discretion also might lead the Supreme Court to reconsider or clarify its holding in Firestone, either in an appeal in Pierre or elsewhere. Similarly, Congressional wrangling over the Affordable Care Act and the availability of health insurance might yield a political solution to the dispute over judicial review of benefits claims.
For now, however, employers sponsoring group medical should consider changes to plan design that offer protection against a more litigious environment. This could include establishing self-funded plans, which are generally exempt from state-level interference by insurance regulators, or creating a “wrap” plan, which incorporates various insured benefits programs into a larger plan arrangement that still permits some of the cost-control protections included in ERISA’s initial design. A knowledgeable ERISA practitioner can outline available options and help an employer make the choice tailored to its circumstances.
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[1] Like many other states, Texas has adopted laws that forbid insurers from including “discretionary clauses” in policies issued within the state. Most courts have rejected insurers’ claims that ERISA pre-empts state-law bans on discretionary clauses in group health policies. See, e.g., Standard Ins. Co. v. Morrison, 584 F.3d 837 (Ninth Cir. 2009).
[2] Courts rejecting the Pierre approach typically rely on the Supreme Court’s decision in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), which held that de novo review applies to a plan administrator’s interpretation of plan terms, unless the plan includes a discretionary clause. Pierre and its progeny distinguished plan administrators’ fact-finding determinations from interpretation of plan terms, which the Firestone court had treated as legal conclusions appropriate for de novo review by a court.
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Charles F. Seemann III is a principal in the New Orleans, Louisiana, office of Jackson Lewis P.C. His practice emphasizes ERISA and employment law, but encompasses a wide variety of litigation and counseling matters as well.
