State Parity Law Trumps ERISA Plan’s Exclusion, So Case Against Plan Advances
Employer’s Guide to Self-Insuring Health Benefits January 2012 | Vol. 19, No. 4
As illustrated here, ERISA did not preempt the Washington Mental Health Parity Act.
Even though it correctly applied an insured ERISA plan’s coverage restrictions on neurodevelopmental therapy for children over six years old, the administrator’s refusal to pay a 10-year-old dependent’s mental health treatment violated a state law that bound insurers and HMOs.Accordingly, fiduciary breach, ERISA benefits and money damage claims against the administrator and plan could proceed, the U.S. District Court for the Western District of Washington held in Z.D. v. Group Health Coop., 2011 WL 5299592 (W.D. Wash., Nov. 4, 2011).
The Facts
Z.D. was a 10-year-old girl who was covered through her parents by the Technology Access Foundation Health Benefit Plan (the TAF plan), which in turn was insured and administered by Group Health Options, Inc., a Washington state insurer.
She was diagnosed with mental disorders recognized by the Diagnostic and Statistic Manual of Mental Disorders (the DSM-IV-TR), but the plan would not reimburse care she received to treat them.
The TAF plan language did not require the plan to cover Z.D.’s treatment. Instead, it stated:
Neurodevelopmental Therapies for Children Age Six (6) and Under. Physical therapy, occupational therapy and speech therapy services for the restoration and improvement of function for neurodevelopmentally disabled children age six (6) and under shall be covered. Coverage includes maintenance of a covered Member in cases where significant deterioration in the Member’s condition would result without the services.
Group Health Options refused to reverse itself on administrative appeal, the plaintiffs contended.
Beneficiary Seeks Coverage under State Law
Z.D. and her parents sued the administrator and the plan under Washington’s Mental Health Parity Act and ERISA. They argued that the state mental health parity law (see box on p. 12) supplemented the plan, thereby requiring Group Health Options to cover the treatment.
They alleged that Group Health Options’s reading of its policy resulted in “the exclusion and improper limitation of certain services to treat conditions listed in the DSMIV-TR” and “have acted on grounds generally applicable to a broad group of individuals” situated similarly to Z.D.
They demanded: (1) coverage for Z.D.’s services; (2) a court injunction forcing Group Health Options never to issue another denial that violates Washington’s Parity Law at RCW 48.46.291; and (3) any equitable relief available under ERISA Section 1132 (a)(3).
Group Health Options moved to dismiss the case, contending that:
• the family failed to exhaust the plan’s internal appeals process;
• Group Health’s denial was consistent with plan terms;
• Z.D.’s family had no basis for alleging Group Health acted in a fiduciary capacity or that the plan was harmed;
• Z.D.’s family was not entitled to equitable relief; and
• ERISA preempted any claim based on the Washington Mental Health Parity Act.
The court rejected Group Health Options’s argument that Z.D. failed to exhaust administrative remedies. Exhaustion is an affirmative defense and not a pleading requirement (further, Z.D. claimed she had fruitlessly appealed to the plan), it said.
State Law Governed
As for ERISA preemption, even though plan terms did not require coverage for neurodevelopment treatment of children over the age of six (and the denial was consistent with that), Washington law governed the plan. The following language, from the Group Health Medical Coverage Agreement required the plan and the HMO to:
comply with all applicable state and federal laws and regulations in performance of this Agreement. This Agreement is entered into and governed by the laws of the state of Washington, except as otherwise preempted by ERISA and other federal laws.
Washington law required Group Health to cover the mental health services at issue in this case, the court noted.
The court cited a U.S. Supreme Court decision in FMC Corp. v. Holliday, 498 U.S. 52 (1990), saying an ERISA plan is bound by state insurance regulations insofar as they apply to the plan’s insurer. (Note: The court in Holliday presumed a higher level of state regulation for insured plans than for self-funded plans.)
Not Negated by Another State Law
Group Health Options countered that the state parity law at RCW 48.46.291 conflicted with Washington’s Neurodevelopmental Therapy Mandate at RCW 48.44.450, an earlier statute that required group health plans to cover neurodevelopmental therapies for beneficiaries ages six and under. The more limited earlier statute superseded the newer more general statute, the administrator argued.
The court rejected that, saying just because two state laws overlap does not mean that both cannot apply. If two overlapping statutes can be harmonized, and they’re not in actual conflict with one another, a plan is obliged to comply with both to the extent possible, the court said, citing Walker v. Wenatchee Valley Truck & Auto Outlet, Inc., 155 Wash. App. 199 (2010). In this case, however, the newer statute enhanced and built on the previous statute — rather than contradicting it or creating problems of interpretation. RCW 48.44.450 was a “floor” not a “ceiling,” the court said, and RCW 48.46.291 merely built on the coverage required in the former.
Not Preempted by ERISA
The court then ruled that ERISA did not preempt RCW 48.46.291, after holding that the state’s mental health parity law governs insurance. Normally ERISA preempts state laws insofar as they govern ERISA employee benefit plans. However, the “savings clause” allows state laws to impact ERISA plans if such laws regulate insurance, (banking or securities).
A two-pronged test determines if a statute is spared preemption by the savings clause, according to the Supreme Court decision in Kentucky Ass’n of Health Plans, Inc. v. Miller, 538 U.S. 342 (2003). First, the state law must be specifically directed toward entities engaged in insurance. Second, the state law must substantially affect the risk pooling arrangement between the insurer and the insured.
RCW 48.46.291 “readily satisfied” both prongs of Miller’s saving clause test, the court said. First, the statute is directed at “health benefit plans” that are underwritten by an insurer. Second, a state law mandating mental health care services “obviously regulates the spreading of risk” and reflects “legislative judgment that the risk of mental-health care should be shared,” the court ruled.
Fiduciary Duty
Group Health Options argued against the breach of fiduciary duty claim, saying: (1) because the state law was not included in the plan, there was no discretion exercised in the denial; and (2) Z.D. alleged harm to beneficiaries but not harm to the plan (which would negate any relief except for “benefits due under the plan,” provided in ERISA’s recovery-of-benefits provisions at Section 1132(a)(1)(B)).
The court rejected the administrator’s first argument, saying that the plan did incorporate Washington law into the plan when it said state law must not be violated “in the performance of the plan agreement.” It then cited cases affirming that benefit determinations generally are considered to be a fiduciary act.
It rejected the second argument, holding that Z.D.’s claim was broader than a mere claim for “benefits due under the plan.” The family alleged that Group Health Options systematically failed to properly process claims and administer all plans it insures. The complaint sought to have Group Health “restore to the plan all losses resulting from its breach,” the court said. And the plaintiff sought an injunction stopping Group Health Options from enforcing terms in violation of the Washington state law, which was a broader claim in scope than “benefits due under a plan.”
Equitable Relief
Group Health Options claimed that equitable and injunctive relief were unavailable because: (1) it was not acting in a fiduciary capacity; (2) “benefits due under the plan” were adequate to fix any injuries Z.D. suffered; and (3) money damages was not an available remedy under ERISA.
The court said the third argument was eliminated by the new U.S. Supreme Court ruling in CIGNA Corp. v. Amara, 131 S.Ct. 1866 (2011). In that ruling, the Supreme Court decided that monetary “compensation” (under Section 1132(a)(3) — for “relief typically available in equity”) could be used to rectify a trustee’s breach of duty, or to prevent a trustee’s unjust enrichment. Further, the court had already rejected the first two arguments. Accordingly, it rejected the administrator’s motion to dismiss.
Implications
This case offers an important consideration for plans subject to state laws.
A minor, who was a dependent participant of an insured ERISA plan, sought treatment for mental disorders. The plan denied the claims, arguing that Washington’s Mental Health Parity Act was preempted.
In addition to the federal Mental Health Parity and Addiction Equity Act (MHPAEA), more than 40 states have parity laws. For the states with strong parity laws, MHPAEA is protective of state law. However, if a provision in state parity law offers less protection than the federal law, the federal law must prevail.
In this case, however, there were two applicable laws relating to mental health. The administrator argued that the earlier more limiting law was applicable (which the plan compiled with) and the more recent (and broader) law did not apply.
While there were two laws involved, the laws did not conflict; they could both apply. Thus, when the more recent law came into effect the plan should have updated the language to ensure compliance.
The 2010 Health Reform Law
Another consideration for plans relates to the Patient Protection and Affordable Care Act.
Recently, FAQs were released that in part provided that certain nonquantitative limits on availability of mental health and substance use disorder benefits are prohibited under MHPAEA unless they also (and equally) apply for medical and surgical benefits (see story, p. 10).
For example, a group health plan is not permitted to require prior authorization from its utilization reviewer for use of mental health and substance use disorder benefits if it does not require prior authorization for use of medical or surgery benefits.
Washington State’s
Mental Health Parity Law
(at RCW 48.46.291)
(2) All health benefit plans offered by health maintenance organizations
(a) that provide coverage for medical and surgical services shall provide: (a) For all group health benefit plans for groups other than small groups … delivered, issued for delivery, or renewed on or after January 1, 2006, coverage for:
(i) Mental health services. The copayment or coinsurance for mental health services may be no more than the copayment or coinsurance for medical and surgical services otherwise provided under the health benefit plan. Wellness and preventive services that are provided or reimbursed at a lesser copayment, coinsurance, or other cost sharing than other medical and surgical services are excluded from this comparison; and
(ii) Prescription drugs intended to treat any of the disorders covered in subsection (1) of this section to the same extent, and under the same terms and conditions, as other prescription drugs covered by the health benefit plan.
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