Administrator Flubs Stop-loss Claim; State-law Charges on Administrator Not Preempted
Employer’s Guide to Self-Insuring Health Benefits January 2012 | Vol. 19, No. 4
A claims administrator lost an attempt to dismiss negligence and breach of contract charges relating to its failure to process and pay a large claim before the final day of a stop-loss policy’s run-out period.
The self-insured Hebrew Home health plan sued administrator CoreSource and stop-loss insurer Sun Life for negligence and breach of contract under state law, alleging that the administrator dragged its feet paying the claim and ended up missing a March 31 deadline that would have enabled the plan to collect $180,000 in stop-loss reimbursement. The U.S. District Court for Maryland rejected CoreSource’s attempt to dismiss the case. The plan’s complaint was not time barred because Hebrew Home was not subject to its own plan language limiting plan beneficiary lawsuits, and ERISA only partially preempted the state-law claims, it ruled.
Claims relating to the improper processing of benefit claims were preempted by ERISA, but alleged violations of service agreement clauses on submitting stop-loss claims were not preempted, the court said, because they did not relate closely enough to the plan. The case is Hebrew Home of Greater Washington Inc. v. CareSource, 2011 WL 5513229 (D. Md., Nov. 3, 2011).
The court, however, did dismiss breach of contract charges against Sun Life.
The Facts
Under the Plan Supervisor Agreement (PSA), CoreSource agreed to help the Hebrew Home with plan administration. It reviewed beneficiary claims, determined plan eligibility and denied ineligible claims when necessary. It was also responsible for properly submitting stop-loss claims to Sun Life.
The Hebrew Home started stop-loss coverage with Sun Life on Jan. 1, 2003; it renewed its policy on Jan. 1, 2007, but it expired on Dec. 31, 2007. The policy included a three-month “run-out” period, meaning if the plan paid an eligible claim by March 31, 2008, Sun Life would have to reimburse it.
In 2007, a Hebrew Home employee incurred large medical costs to the plan. Hebrew Home sent the employee’s claim to CoreSource for eligibility determination, processing and filing with Sun Life. However, CoreSource did not approve or process her claim until March 31, 2008, the final day of the run-out period. Unbeknownst to the Hebrew Home, the claim could not be paid on that date due to insufficient funds; and the date was missed, a situation the Hebrew Home blamed on CoreSource.
Not surprisingly, Hebrew Home was unable to obtain reimbursement from Sun Life for the claim. On Aug. 20, 2008, Sun Life denied Hebrew Home’s $181,433 claim because the plan sponsor failed to fund and pay out the claim before the run-out period expired. The plan appealed twice, but Sun Life in May 2009 issued a final ruling that it wouldn’t reverse its position.
Hebrew Home brought two counts against Core- Source and one count against Sun Life.
• Count I asserted breach of contract against CoreSource for failing to comply with PSA and ERISA plan rules on reviewing, processing and securing payment for the disputed claim.
• Count II asserted negligence against CoreSource for failing to approve, pay and ensure stop-loss funding for the disputed claim.
• Count III asserted a breach of contract claim against Sun Life for failing to reimburse Hebrew Home for the $181,433 it paid out on the claim under the stop-loss policy.
CoreSource and Sun Life moved to dismiss. CoreSource said the plan’s breach-of-contract and negligence claims were time-barred by the plan’s two-year limit on lawsuits and preempted by ERISA. Sun Life said it was not liable for another party’s breach of the stop-loss contract.
Plan’s Limits on Lawsuits Do Not Apply
CoreSource argued that Hebrew Home’s claims were time barred by the plan’s own language limiting beneficiary lawsuits.
The court would not allow that because the plan limits were designed for beneficiaries in disputes with the plan. The plan clause said a beneficiary seeking benefits from the plan has two years from the date its final appeal was rejected to sue the plan. Since Hebrew Home was not a plan beneficiary, but rather the plan sponsor itself, the court rejected the notion that this lawsuit was time barred.
Partial ERISA Preemption
The court would render a split decision on ERISA preemption: Claims relating to the improper processing of benefit claims were preempted; but alleged violations of service agreement clauses on submitting stop-loss claims were not preempted. The court explored case law on the limits of preemption.
A failure to manage relations with an insurer can be remote enough from plan operations to avoid preemption. For example, in Coyne v. Delany Co., 98 F.3d 1458 (4th Cir., 1996), an employer alleged violations of state negligence laws by insurance agents who failed to obtain replacement insurance. The court refused to preempt the negligence charge because ERISA is not meant to preempt “traditional state-based laws of general applicability” when they do not affect relations among traditional ERISA entities: employers, fiduciaries, plans and beneficiaries, the court said.
On the other hand, processing plan benefits is sufficiently related to the plan and charges involving that are preempted by ERISA, as indicated by the 4th Circuit ruling in Tri–State Machine, Inc. v. Nationwide Life, 33 F.3d 311 (4th Cir., 1994), the court said.
CoreSource’s liability for poor claims processing could not be resolved without reference to the plan, therefore ERISA would preempt on that claim.
In contrast, delivery of the stop-loss claim was governed by the PSA. Hebrew Home’s complaint about that issue was not preempted by ERISA because CoreSource’s duties relating to properly executing and securing stoploss reimbursement were imposed by an agreement that was “separate and distinct” from the ERISA plan, the court said, referring to Great-West Life v. Infosys & Networks Co., 523 F. 3rd 267 (4th Cir., 2008).
Further, the plan’s claims alleging PSA violations did not fall under one of the preemption categories set out by the U.S. Supreme Court in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995). They did not: (1) mandate employee benefit structures or their administration; (2) bind employers or plan administrators to particular choices or preclude uniform administrative practices; or (3) provide alternative enforcement mechanisms to ERISA’s civil enforcement provisions. The court said much of the claim was about the PSA and not plan benefits.
Hebrew Home’s claims are not aimed at obtaining ERISA benefits. Rather, the claims seek damages proximately caused by CoreSource’s failure to fulfill its duties under the Plan Supervisor Agreement. The gravamen of these claims is that CoreSource failed to diligently seek reimbursement of Hebrew Home’s claim under the [PSA], and thus these claims are premised upon that agreement rather than the ERISA Plan.
CoreSource’s assertion that the conduct in question arose through its administration of an ERISA plan might prevail later in the process, the court said. When considering a motion to dismiss by defendants, however, courts accept the plaintiff’s allegations as true and see them in the light most favorable to the plaintiff. Since the court found that failure to secure stop-loss reimbursement was not sufficiently related to plan administration to be preempted, it refused to dismiss Counts I and II entirely.
Insofar as the claims related to a failure to submit stop-loss claims to Sun Life, those counts would stand; insofar as they related to processing plan benefits and paying routine claims on the health plan, they would be preempted, the court concluded.
S-L Insurer Walks Free
The stop-loss insurer, however, was dismissed from the case, because its position was straightforward: Hebrew Home failed to comply with the stop-loss contract’s requirements of coverage.
There was no dispute that Hebrew Home failed to pay the employee’s claim before the end of the run-out period. Therefore, Hebrew Home had no breach of contract case against Sun Life for the denial, which the court deemed was proper.
The final day of a stop-loss run-out period has a real meaning, the court said, disregarding the plan’s attempt to argue that Sun Life was bound because Hebrew Home complied with the spirit of the agreement.
Hebrew Home claims that its obligation to make timely payments under the Reinsurance Policy constitutes not a condition precedent to Sun Life’s duties, but a covenant with which Hebrew Home substantially complied. This argument is unpersuasive. The clear language of the Insurance Policy supports the claim that the parties intended to enter into a contract, the terms of which required Sun Life to provide reimbursement only on claims paid out by Hebrew Home prior to the expiration of the run-out period.
Implications
When discussing preemption, the court drew a line when it found ERISA preempted some of claims against CoreSource but did not preempt other claims.
Plan Supervisor Agreement (PSA) vs. Plan Language This assessment was due in part to the applicability of two varying documents. For example, the ERISA plan document contained specific language that related to how health care claims should be processed. In order to accurately process those claims, CoreSource needed to reference the plan document.
However, a separate document (the PSA) governed how the stop-loss insurer should be notified of major claims. To properly submit stop-loss claims to Sun Life, CoreSource needed to reference the PSA.
As this case illustrates, in handling issues between a plan and stop-loss insurer, it is important to identify the source from which the conflict arose. Here, the court found that the plan’s claims that related to plan administration (that is, based on plan language) qualified for ERISA preemption.
Funding of Claims
Another noteworthy aspect of the case is the proper funding of claims for stop-loss reimbursement.
There is no argument that CoreSource was responsible for claims submission to Sun Life. However, it appears that part of the issue here related to the funding of the claim.
An important “missing” piece of this funding issue related to communication. It seems that the plan was unaware of the claim and the lack of funding for the claim.
This element of the case illustrates the significance of clear and timely communication when it comes to stoploss reimbursement issues. The case may have ended differently if the plan had known of the funding issue and discussed it with Sun Life.
Timeliness
Related to communication, is the timeliness issue. The stop-loss policy had language that specifically provided the terms for reimbursement of stop-loss claims. The language set forth clear timelines, and the claims were not paid within those timelines.
This case shows the court acceptance of a strict timely payment rule where the plan must pay within the confines of the stop-loss contract.
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