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September 27, 2017
9th Circuit Faults Retiree Plan’s Disclosure of Lifetime Maximum
By David Slaughter, JD, Senior Legal Editor

A federal appeals court recently confirmed that the Affordable Care Act’s (ACA) prohibition of lifetime benefits maximums does not apply to retiree-only group health plans. However, the court ruled, the plan had failed to disclose this adequately as required by the Employee Retirement Income Security Act (ERISA). The case is King v. Blue Cross & Blue Shield of Ill., No. 15-55880 (9th Cir. Sept. 8, 2017).

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Background

ACA planUnited Parcel Service (UPS) sponsors and administers a group health plan for its employees, and a separate one for retirees until they turn 65 and become eligible for Medicare. The retiree plan is self-funded, but much of the claims administration is contracted out to Blue Cross and Blue Shield of Illinois.

Plan disclosures.UPS issued a summary plan description (SPD) in 2006 that applies to both the active employee and retiree plans. The company subsequently issued 12 summaries of material modification (SMMs) between May 2006 and 2012. Because the SMMs were not cumulative, nor was the 96-page SPD amended to reflect them, a plan beneficiary would have to read the relevant SPD section plus each SMM to learn the current language for a given benefit provision.

In 2010, after the ACA was enacted, UPS issued an SMM to reflect the resulting changes being made to the plan terms, effective in the 2011 plan year. The SMM first noted that items marked by an asterisk would not apply to retirees or their dependents. A heading on “Health Care Reform” was marked with an asterisk, but subsequent headings such as “Elimination of Lifetime Maximum Benefits” were not. These were apparently intended to be subheads, but whether this was clear enough would be the subject of dispute.

Linda King’s claim. In 2012, Linda King suffered an infection that required immediate back surgery and extensive rehabilitative care. Beginning in November 2012, she sought and was granted precertification for her treatment as “medically necessary.” All of the precertification letters contained the qualifier that they were “not a guarantee of payment of benefits,” but the SPD did not warn that even if a participant obtained precertification, the plan or claims administrator still could deny benefit claims for other reasons.

On February 19, 2013, Blue Cross sent King an explanation of benefits (EOB) informing her that only $133,601 of her $949,755 in costs was covered by the plan because she had reached the lifetime benefits maximum in November. She responded with a letter to Blue Cross citing conflicting information she had received at various times from plan representatives.

Procedural history. After Blue Cross denied her appeal, King filed suit, alleging that UPS, the plan, and Blue Cross had breached the retiree plan contract and their fiduciary duties in violation of ERISA. The defendants asked the federal district court to dismiss the suit, arguing that the 2010 SMM did not eliminate the lifetime benefit maximum in the retiree plan.

The court initially declined to dismiss the suit, finding the SMM ambiguous and both parties’ interpretations reasonable. Later, however, the UPS Claims Review Committee (CRC) came back with a denial of King’s second-level appeal, detailing its reasons why the SMM should properly be read to exclude retiree benefits from the elimination of lifetime limits.

Based on this determination, and plan language granting the administrator discretion to interpret plan terms, the district court granted the defendants summary judgment, ruling that they had not abused their discretion or violated their fiduciary duty. Gary King, who took over as representative of his wife’s estate after her death, appealed this decision to the 9th U.S. Circuit Court of Appeals—which covers Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington.

Effect of ACA

In considering the appeal, the 9th Circuit first addressed the underlying substantive question of whether the ACA’s ban on lifetime limits actually applied to retiree-only plans.

The ACA’s detailed amendments to the Public Health Service Act (PHSA) included a prohibition on group health plans or their insurers setting lifetime limits on benefits for any participant or beneficiary. ERISA was not amended in detail. Instead, a blanket provision was added stating that the amended PHSA provisions would apply to ERISA group health plans “as if included in this subpart.”

This part of ERISA (Part 7) includes an exception for certain plans with fewer than two active employees. However, King argued that the ACA superseded this provision, especially since it eliminated a similar PHSA provision for certain retiree-only plans.

The court ruled that the ACA ban did not apply to retiree plans, noting the longstanding presumption against “implied repeal.” Any inconsistency that was created between PHSA and ERISA is not so drastic that plans cannot comply with both, Judge Morgan Christen wrote for the unanimous three-judge panel. “Thus, we cannot say that the ban on lifetime benefit limits in the PHSA and the exception for certain retiree-only plans in ERISA are in irreconcilable conflict, nor conclude that the ERISA exception was impliedly repealed by the Affordable Care Act.”

ERISA Disclosure Requirements

King also contended that the SPD and SMMs violated ERISA by failing to “reasonably apprise the average plan participant that the lifetime benefit maximum continues to apply to the Retiree Plan.”

ERISA requires these documents to be understandable to the average participant, the court noted, and identify any “circumstances which may result in disqualification, ineligibility, or denial or loss of benefits.” Under the U.S. Department of Labor’s ERISA regulations, any such exceptions, limitations, or other restrictions on benefits “shall not be minimized, rendered obscure or otherwise made to appear unimportant.”

The court agreed with King that the UPS plan’s SPD was not “written in a manner calculated to be understood by the average plan participant,” as ERISA rules require.

“First, rather than issue an amended SPD, or even cumulative [SMMs], UPS announced plan amendments in a series of summaries, all of which must be read in conjunction with the 2006 SPD to determine available benefits,” Christen wrote. There is no comprehensive table of contents, and the 2010 SMM “does not cross-reference the Retiree Plan’s lifetime benefit maximum.”

Even within the 2010 SMM itself, the relevant provisions are a challenge to parse out, the court added:

“[T]he defendants’ interpretation requires the average plan participant to read the entire document, notice the subtle shift in font type and size between the ‘Health Care Reform*’ heading and the other headings that follow, and somehow intuit that all of the text between the ‘Health Care Reform*’ heading on the first page and the ‘Mental Health Parity’ heading on the second page describes required changes under the [ACA]. But the fact that all of these paragraphs relate to the [ACA] is not apparent from the text. In fact, the ‘Elimination of Lifetime Maximum Benefits’ paragraph does not mention the [ACA] at all.”

The defendants noted that the “Health Care Reform*” heading was followed by a single paragraph that referred to “the following changes,” implying that it encompassed the subsequent subheads. But the court found that even if a retiree read this paragraph (knowing that it did not apply to her), she could not necessarily tell how many of the changes it described—especially since the text under the first subhead referred to the ACA but the subsequent ones did not.

“Congress mandated that ERISA disclosures must be designed to prevent plan participants from having to engage in such close parsing of the text, format, and font to determine whether a benefit limitation applies to their plan,” Christen wrote. “For these reasons, we conclude that the SPD, as amended by the 2010 [SMM], violates ERISA’s statutory and regulatory disclosure requirements.”

Fiduciary Duty

The court next considered whether UPS, its plan, and Blue Cross had breached their fiduciary duties to Linda King under ERISA.

Since the SPD as modified did not comply with ERISA’s disclosure requirements, “the district court erred by granting summary judgment to UPS and the Retiree Plan on the breach of fiduciary duty claims,” the court ruled. Specifically, UPS and the plan “had a duty to ‘provide sufficiently detailed information’ about whether the lifetime benefit maximum applied to the Retiree Plan after the September 2010 amendments,” and the 2010 SMM failed to do so, Christen wrote. “Therefore, we reverse the district court’s order granting summary judgment to UPS and the Retiree Plan on the breach of fiduciary duty claims.”

Blue Cross maintained that it was not an ERISA fiduciary and had not provided “inaccurate or misleading information regarding the terms of Mrs. King’s benefit plan.” Again, the court disagreed.

ERISA defines a plan fiduciary to include anyone who exercises discretionary authority or control over plan management, the court noted. Courts previously have found a plan’s insurer to be a fiduciary if it had the authority to grant, deny, or review denied claims—and Blue Cross did all three. Although CRC reviews second-level appeals, Blue Cross’s job processing claims and deciding initial appeals “requires that Blue Cross interpret the Retiree Plan to determine whether to pay claims and whether to uphold benefit denials on appeal,” Christen wrote.

Blue Cross also denied having misled Linda King about her benefit terms, but the court found that the district court should not have granted summary judgment because factual questions remained. “Although the approval letters all contained a disclaimer that they were ‘not a guarantee of payment of benefits,’ they did not mention the lifetime benefit maximum,” Christen explained, and the evidentiary record was incomplete on the alleged inconsistencies in the EOBs and the statements Blue Cross representatives made on the phone with Mrs. King.

“A reasonable juror could conclude that Blue Cross made misrepresentations to Mrs. King about the lifetime benefit maximum,” the court found.

Conclusion

For the foregoing reasons, the 9th Circuit reversed the district court’s summary judgment and remanded the case to the district court.

The appellate panel also directed the lower court to determine the appropriate remedy once Gary King specified what he was seeking. Linda King originally had sued for benefits due under ERISA Section 502(a)(1)(B), and for “equitable relief” to redress ERISA violations under Section 502(a)(3). However, because her original ACA argument failed, it was now unclear under which of these sections her husband was seeking relief, Christen explained.

Additional Resources

David Slaughter David A. Slaughter, JD, is a Senior Legal Editor for BLR’s Thompson HR products, focusing on benefits compliance. Before coming to BLR, he served as editor of Thompson Information Services’ (TIS) HIPAA guides, along with other writing and editing duties related to TIS’ HR/benefits offerings. Mr. Slaughter received his law degree from the University of Virginia and his B.A. from Dartmouth College. He is an associate member of the Virginia State Bar.

Questions? Comments? Contact David at dslaughter@blr.com for more information on this topic.

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