The Departments of Labor, Treasury and Health and Human Services have recently issued regulations regarding external claims review procedures for self-insured employee health plans as mandated by the Obama Administration’s health care reform legislation. For self-insured plans, the regulations come along with guidance from the Employee Benefit Security Administration (EBSA) which provides a "safe harbor" to ensure compliance with the new law. The safe harbor includes provisions for how and when a claimant must be allowed to seek external review, the promptness with which the plan must respond to such a request, how the external review must be conducted including cooperation by the plan and payment by the plan upon reversal. The new regulations and safe harbor were effective September 23, 2010 and dramatically impact a self-insured plan's defenses under the Employee Retirement Income Security Act (ERISA). The new external review procedures and safe harbor follow recent changes to internal claims review procedures.

Employee health plan decisions, with some limited exceptions, had been governed by ERISA. Under ERISA, if the plan grants discretion to its claims review fiduciary in interpreting the plan and making benefit decisions, then a court will only reverse a decision denying benefits if it finds an abuse of discretion. As the Fifth Circuit recently reiterated, a plan does not abuse its discretion so long as its decision falls somewhere on a continuum of reasonableness — even if on the low end. Sanchez v. Life Insurance Company of North America (No. 09-51010) (5th Cir. Sept. 1, 2010).

Starting September 23rd, the new rules call for Independent Review Organizations (IROs) to review adverse benefit determinations, other than whether the claimant is eligible under the plan. The IRO does not apply the abuse of discretion standard but instead makes an independent judgment based on the facts presented. The IRO's reversal of an adverse benefit determination is binding on the plan and thus, the new regulations will likely increase the costs and liability of self-insured plans. The IRO is selected and paid by the plan, so there may be some financial incentive for the IRO to uphold plan decisions, but the regulations require the plan/IRO relationship to be structured to eliminate those incentives.

The procedure created by these regulations is not entirely new. Health insurers and HMOs have been subject to external review in the context of "medical necessity" determinations. Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355 (2002). It appears that the new law will expand the medical necessity holdings to all adverse benefit determinations made by insurers and self-insured plans alike.

The new external review regulations do not apply to “Grandfathered Plans” as defined by the health care reform legislation. For this reason, self-insured plans should weigh the costs of maintaining grandfather status against the costs of implementing the external claims review process and the likelihood of increased liability it will bring.