Addressing Employee Health Plan Exception Requests: Part IX

By Brian Gilmore | Published February 2, 2023

Question: What are the main employer considerations when responding to employee requests to override a self-insured health plan third-party administrator’s adverse benefit determination?

Short Answer: The main concerns are 1) the ERISA plan precedent created by the plan benefit determination, 2) ensuring stop-loss coverage for the benefits provided under the plan, and 3) avoiding loss of the deferential Firestone standard of review for failure to have appeals determined by the plan’s named appeals fiduciary.

Note: This is the ninth in a ten-part series addressing employee health plan exception requests.

Claims and Appeals Exceptions: Requests for Employer to Override the TPA’s Determination

Employers that sponsor self-insured health plans have greater flexibility with respect to many aspects of plan administration than a typical fully insured plan. However, there are three main issues for employers to consider upon receiving an employee request to overturn the third-party administrator’s (TPA’s) adverse benefit determination to deny a claim or appeal for the self-insured health plan.

The three main issues are:

The ERISA Plan Precedent;
The Stop-Loss Provider Limitations; and
Preserving the Firestone Deferential Standard of Review.

Issue #1: The ERISA Plan Precedent

ERISA requires that employers administer and maintain the plan pursuant to its written terms. Nonetheless, employees frequently ask employers to intervene and approve a benefit claim or overturn a denied appeal despite the TPA’s determination that such benefit is not covered pursuant to the plan terms.

Within this framework, employers should not make “exceptions” to act contrary to plan terms because doing so could be a breach of fiduciary duty. Rather, employers can exercise their discretionary authority to interpret plan terms when making a plan benefit determination. Employers that approve coverage in these situations have therefore interpreted the plan’s terms to be flexible enough to accommodate coverage for the benefit at issue.

An employer’s broad interpretation of the plan’s terms beyond the standard denotation (as determined by the TPA in its adverse benefit determination) to override the TPA and permit coverage effectively acts in the same manner as a plan amendment because the employer must then apply that approach consistently for all similarly situated employees. For example, a plan permitting in-network coverage for a procedure that would otherwise be subject to the plan’s out-of-network cost-sharing provisions would generally have to accommodate the same in-network coverage for all similar claims.

In other words, a health plan benefit “exception” to approve coverage for a benefit creates an ERISA plan precedent requiring the plan to offer coverage for all employees and dependents in similar circumstances. An employee or dependent denied benefits in similar circumstances (e.g., the same type of out-of-network claim) would have a potential claim for ERISA breach of fiduciary duty or claim for benefits.

How to address the issue: Unfortunately, there is no good way to solve for the unavoidable establishment of an ERISA plan precedent. The only mitigating factor could be an argument as to the scope of the precedent. How broadly or narrowly the precedent applies in practice is a matter of interpretation based on the specific facts and circumstances of the exception. Employers should keep in mind that an aggressive argument as to the narrowness of the precedent’s scope could always be challenged by the DOL or a participant lawsuit if it were unreasonable.

Instead of considering making an “exception,” employers should instead consider the following two options where they disagree with the TPA’s adverse benefit determination:

The first approach is to amend the plan for all participants to modify the plan terms and specifically cover or exclude the item or service at issue.
Alternatively, employers have the discretionary authority to interpret plan terms on a consistent basis for all participants. Employers can direct the TPA in writing to interpret the plan provision in a matter consistent with the employer’s understanding of those plan terms.

Issue #2: The Stop-Loss Provider Limitations

Stop-loss providers for self-insured plans generally will cover only claims consistent with the terms of the plan. If a stop-loss provider were to discover that the employer made an exception to permit coverage for a claim beyond the terms of the plan, the stop-loss provider would be within its right to deny coverage for the claim. That could ultimately make the employer responsible for fully self-funding the claims related to the employer intervention, which could in turn create a significant unexcepted liability for employers who otherwise rely on the protection from stop-loss to prevent excessive liability from plan benefits.

How to address the issue: Employers intending to override the health plan TPA’s adverse benefit determination should first seek approval from the stop-loss provider to ensure continuing stop-loss coverage for the plan benefits at issue. Even if the stop-loss provider does approve, the employer would still need to carefully consider issues #1 and #3 before proceeding with the exception.

**Issue #3: Preserving the Firestone Deferential Standard of Review**

Employers that sponsor self-insured health plans have greater flexibility with respect to many aspects of plan administration than a typical fully insured plan. However, a common misconception about moving to a self-insured health plan is that the employer will be able to make plan exceptions to approve employee appeals. In the vast majority of self-insured plan arrangements, the employer does not have the authority under the plan terms to make appeals determinations.

ERISA requires that appeals be determined by “an appropriate named fiduciary of the plan” to ensure a full and fair review of the claim and adverse benefit determination. Employers sponsoring a self-insured health plan will almost always delegate the role of the named fiduciary for appeals to the TPA. Such delegation is appropriate because, for example, employers in almost all cases do not want to be responsible for making medical necessity determinations (which would require an experienced medical professional’s judgment) or work within the confines of the strict ERISA appeals procedure timing requirements (which can be as short as 24 hours for urgent care claims). It would generally not be practical or appropriate for employers to assume that role.

How to address the issue: Employers have two options where they disagree with the TPA’s (named appeals fiduciary’s) determination:

The first approach is to amend the plan for all participants to modify the plan terms and specifically cover or exclude the item or service at issue.
Alternatively, employers have the discretionary authority to interpret plan terms on a consistent basis for all participants. Employers can direct the TPA in writing to interpret the plan provision in a matter consistent with the employer’s understanding of those plan terms.

Reminder: Participant Right to Bring Claim in Federal Court

ERISA provides plan participants with the right to appeal an adverse benefit determination. If an employee receives a final adverse benefit determination from the TPA in the plan’s administrative review process after exhausting all levels of appeal under the plan, the participant generally has the right to bring a civil action in federal court to recover benefits under ERISA §502(a)(1)(B).

Summary

For the reasons outlined above, employers should generally avoid overturning a TPA’s adverse benefit determination. The issues associated with making an exception in most cases far outweigh the typical hardship case or other motivation presented by the employee or dependent requesting the plan coverage exception.

Employers wishing to cover a benefit denied by the self-insured health plan’s TPA do have the option of amending the plan for all participants to change the plan terms and specifically cover the item or service at issue. Alternatively, employers can direct the TPA in writing to interpret the plan provision in accordance with the employer’s understanding of those terms and on a consistent basis for all similarly situated claims.

Employers taking either of these approaches should first seek approval from the TPA and stop-loss provider. They should also consider the potential budgetary effects of expanding plan coverage.