Employers who self fund their medical plans often have contracts with their third party administrators about claims processing. Some of those contracts provide that the claims processor has discretion to decide claims; others provide that the claims processor is simply acting in a ministerial fashion so that the employer ultimately retains discretion to decide contested claims. Under ERISA, if a claims processor has discretion to decide claims, then a court will overturn the decision only if it is arbitrary and capricious. This standard of review is quite favorable to the plan, and employers often take steps to ensure that they have the benefit of that standard of review.

A recent federal circuit court decision emphasizes the importance of properly providing for that discretion. The case involved an employee whose son incurred claims for a stay at a residential/educational mental health care facility. Blue Cross Blue Shield of Massachusetts denied payment of the claims for treatment in the facility based on a failure to show medical necessity. The parent employee challenged the denial which the plan upheld. The district court noted that the administrative services contract between the employer and Blue Cross Blue Shield had a clear designation of discretionary authority to Blue Cross to decide claims. The plan certificate, which was the only document delivered to the employee participant, was less clear. It simply said that Blue Cross Blue Shield “decides which health care services and supplies you receive (or you are planning to receive) are medically necessary and appropriate for coverage.” While the district court found that this language was sufficient to grant discretion to Blue Cross, the appeals court disagreed. According to the appeals court, the grant of discretion must be explicit. The certificate and the contract could not be read together to give Blue Cross the discretion to decide claims. The contract was not part of the plan document and the employee did not receive a copy of it.

The appeals court found that Blue Cross had complied with the claims procedure and had provided a full and fair review of the claim. However, because the district court reviewed that claim denial under an arbitrary and capricious standard and because that standard was inappropriate, the case was remanded back to the district court. The district court will need to review the claim denial under a “de novo” standard which will not give deference to the decisions that Blue Cross made.

Employers often rely on their third party administrators to decide claims and to generate documents that are delivered to participants describing the plan and the claims procedure. Employers may wish to check their documents to make sure that they understand whether their third party administrator is given discretion to decide claims or whether the employer itself has that obligation. If the employer does not want to decide claims and expects its third party administrator to assume that obligation, the employer should make sure that the contract with the third party administrator so provides. The employer should also check to make sure that both the summary plan description and the formal plan documents give an explicit grant of discretionary authority to the third party administrator to decide claims. Only in that way can the employer be confident that the courts will review denied claims using the favorable (to the plan) arbitrary and capricious standard.