Although the Patient Protection and Affordable Care Act (ACA) has engendered much controversy (pro and con) in the business community, one area that has received less discussion is whether ACA may increase employers’ exposure to high-stakes class action litigation. If history is any guide, the answer is “yes.” ACA created a host of complex coverage mandates for individual and group health plans. For group health plans that are “established or maintained” by employers, these mandates are incorporated into ERISA.
Historically, ERISA has been a source of substantial class action litigation because it authorizes private civil actions to enforce statutory requirements and benefit payments. Thus, an employer’s failure to satisfy ACA’s new coverage requirements may lead to “planwide” – hence potential classwide – exposure. ERISA’s remedial framework includes contractual-type remedies and (recently enhanced) equitable relief, as well as attorney’s fees. The Department of Labor (DOL) also can enforce ACA through ERISA, and has begun laying the groundwork for enforcement through inquiries about ACA compliance in its audits of employer-provided plans.
This article first addresses ACA’s link to ERISA and what this may mean for ERISA-based employer health care litigation. It then discusses some of the coverage mandates that may be at issue in coming litigation, and ends with some thoughts on potential defenses and strategies to minimize exposure to this litigation.
ACA’s Enforcement Under ERISA’s Remedial Provisions
Section 1201 of ACA amended the Public Health Services Act2 (PHSA) and ERISA3 to make its coverage mandates applicable to individual and group health plans, including self-insured employer-sponsored plans. The coverage mandates for private sector group health plans “established or maintained” by employers are incorporated by reference into Section 715 of ERISA.4 Because ACA’s coverage mandates were incorporated into Title I, Part 7 of ERISA, participants of employer-provided health plans have a private cause of action to enforce their rights to these ACA benefits through ERISA’s remedial provisions.5
Additionally, ACA grants broad enforcement powers to the DOL and the Department of Treasury (Treasury). DOL may bring suits against employers or plan fiduciaries for violation of ACA’s provisions,6 while Treasury may impose various excise taxes. In addition, ACA provides for the collection and reporting of data to DOL and Treasury to direct later enforcement activities.7 Separately, via plan audits, DOL has commenced collecting data directly from plan sponsors regarding ACA implementation efforts.8
ERISA’s Remedial Framework
ERISA authorizes various private causes of action by plan participants, including lawsuits to clarify their rights to benefits, to recover benefits owed, and for “appropriate equitable relief” to redress any other “act or practice” violating the plan or ERISA.9 The plaintiffs’ bar is most likely to invoke Sections 502(a)(1)(B) and 502(a)(3) of ERISA to enforce ACA’s coverage mandates. Either provision can be used to seek redress for alleged violations of ACA’s coverage mandates.
Section 502(a)(1)(B) provides for contractual-type remedies, i.e., the failure to provide the benefits described by the terms of the plan. To the extent that ACA’s coverage mandates are included in the terms of the plan, they can be enforced through this section. Section 502(a)(3) goes further, however, and authorizes suits for any “act or practice” that violates Title I of ERISA which, as noted, now incorporates ACA’s coverage mandates. Although Section 502(a)(3) is limited to “appropriate equitable relief,” in its recent Amara ruling, the Supreme Court indicated that this relief may, if certain requirements of equitable remedies are met, include plan reformation or monetary relief.10 Thus, plaintiffs may attempt to invoke Section 502(a)(3) against plan fiduciaries to pursue claims that they failed to properly conform a plan to ACA’s coverage mandates or that the fiduciaries failed to communicate clearly with participants about these plan changes. Under either remedial provision, plaintiffs likely will contend that they can recover their out-of-pocket costs when plans fail to provide ACA’s mandated benefits.
ERISA’s fee shifting provision may also increase the likelihood of class litigation.11 In contrast to the American rule, which provides that regardless of who wins, each side pays for its own attorneys’ fees, ERISA allows the award of attorneys’ fees to plaintiffs who show “some success on the merits.”12 Previous ERISA litigation has resulted in large “common fund” fee awards for class actions,13 as well as large lodestar fee awards,14 making ERISA class litigation particularly attractive to the plaintiffs’ bar.
Similar Pre-ACA ERISA Health Care Litigation
Congress previously imposed certain health care mandates in the Consolidated Omnibus Budget Reconciliation Act (COBRA) and various provisions of the Health Insurance Portability and Accountability Act (HIPAA), but with no private cause of action. Thus, the area that may be most analogous to ACA from a litigation perspective may be the cases regarding “retiree rights” to health care benefits under ERISA. Unlike retirement benefits, there are no vested rights to health care benefits under ERISA. The “retiree rights” cases have been based on common law contractual vesting principles, estoppel, and breach of ERISA’s fiduciary duties.15
In the “retiree rights” area, drastically rising retiree health care costs have created quandaries for employers. Even if prior commitments may preclude an employer from ceasing these benefits altogether, there may be legal issues as to what, if any, cost-shifting measures or changes in benefit structures, e.g., managed care, an employer may impose on retirees consistent with the governing plan documents. For example, in Devlin v. Empire Blue Cross and Blue Shield, 274 F.3d 76 (2d Cir. 2001), promises of lifetime health benefits precluded the employer from shifting health care costs onto retirees. In contrast, in Wood v. Detroit Diesel Corp., 607 F.3d 427 (6th Cir. 2010), the court held that the plan documents and collectively bargained agreements permitted the company to cap its total payments for retiree health costs.
When these retiree health care cases turn on the scope of permitted costs or changes, they often require complex actuarial analyses of health care costs and benefit structures. These analyses are made even more complex by the fact that the state of best medical practices, and the benefit structures used to deliver these services, are constantly evolving. These cases thus may raise issues analogous to the ones expected to arise from litigation over ACA’s coverage mandates.
ACA Coverage Mandates at Risk of Generating Class Actions
With its constitutionality confirmed in pertinent part16 and subject, perhaps, to the vagaries of the electoral process,17 plaintiffs can begin using ERISA to enforce ACA’s mandates against employers and plan fiduciaries. This litigation, often of a “planwide” and hence potential “classwide” nature, will focus on numerous issues, including whether employers and plan fiduciaries have made “good faith” efforts to comply with ACA’s mandates.18 Below, we discuss certain ACA implementation issues and mandates that are at risk of generating class litigation.
ACA allows health plans that were in effect on ACA’s effective date, March 23, 2010, to continue as “grandfathered” plans without having to comply with certain of ACA’s coverage mandates. For example, grandfathered plans do not have to provide an external appeals process, nor do they have to provide coverage for preventative care without cost-sharing.19 Under DOL’s interim final regulations,20 grandfathered plans must include a statement, in any plan materials provided to participants, noting the plan’s grandfathered status, describing the plan’s benefits, and providing contact information for questions and complaints.21 A plan may lose its “grandfathered” status when:
- it eliminates all or substantially all plan benefits to diagnose or treat a particular condition; > it increases a percentage cost-sharing requirement (measured from March 23, 2010);
- a fixed-amount co-payment is increased above a certain amount;
- fixed-amount cost-sharing, other than a co-payment (e.g., deductible or out-of-pocket limit), is increased above a certain amount;
- the employer contribution to the cost of any tier of coverage decreases more than a certain amount; or
- the plan is amended to create new annual benefit limits.22
It is unclear whether technical notice failures will forfeit grandfathered status, and the hope is that good faith or substantial compliance on notice and changes in benefits will prevent loss of such status.23 Because the loss of grandfathered status triggers compliance with certain of ACA’s coverage mandates on preventative care and, beginning in 2014, imposes limits on cost sharing and deductibles, it is likely that plaintiffs will often look to challenge grandfathering on a class basis. Plaintiffs also will be expected to contend that the “appropriate equitable relief” section of ERISA allows them to seek recovery of benefits that otherwise would have been provided from the date that such status elapsed.
Coverage Mandates Likely To Trigger Class Litigation
All plans, including grandfathered plans, are prohibited from imposing certain preexisting condition exclusions and may not impose lifetime and annual24 limits on essential health benefits (EHB).25 Section 1302 of ACA notes that EHB will include items and services in the following benefit categories, but leaves to DOL and Department of Health and Human Services (HHS) the task of specifying the items and services falling into these categories:26
- ambulatory patient services;
- emergency services;
- maternity and newborn care;
- mental health and substance abuse;
- prescription drugs;
- rehabilitative services and devices;
- laboratory services;
- preventive and wellness services and chronic disease management services; and
- pediatric services.
There is currently no list of EHBs issued by the agencies, and employers are left to implement EHBs in a regulatory environment in which “good faith” compliance is the standard. A DOL bulletin does state, however, that EHBs must equal the scope of benefits provided under a typical employer plan and that such coverage must be determined by considering the health needs of diverse segments of the population and may not discriminate based on age, disability, or expected length of life.27 HHS also has already noted that:
[A]cross the markets and plans examined, it appears that the following benefits are consistently covered: physician and specialist office visits, inpatient and outpatient surgery, hospitalization, organ transplants, emergency services, maternity care, inpatient and outpatient mental health and substance use disorder services, generic and brand name prescription drugs, physical, occupational and speech therapy, durable medical equipment, prosthetics and orthotics, laboratory and imaging services, preventive care and nutritional counseling services for patients with diabetes, and well child and pediatric services such as immunizations.28
Additionally, non-grandfathered plans must provide coverage for preventative care without cost-sharing.29 Beginning in 2014, ACA also places limits on deductibles and out-of-pocket maximums for non-grandfathered plans.30
These coverage mandates can result in litigation exposure because of their sheer complexity and the uncertainty that surrounds implementation. In addition, many of these mandates will upset existing practices (e.g., the potential lifting of annual limits on durable medical equipment, therapy services), and will impose substantial costs on employers. For example, plaintiffs may be expected to test whether limits on doctor visits, mental health sessions, and the like (which are often imposed by plans) are permitted, or instead constitute impermissible forms of annual limits. Finally, if a court later determines that the benefit at issue was required by ACA, the employer or plan fiduciary may face planwide exposure, with plaintiffs seeking to use ERISA’s remedial provisions to acquire these benefits, including payment of money for any lost benefits.
Proskauer’s Perspective: Avoiding or Defending ACA-Based ERISA Litigation
Because of the complexity of ACA and its coverage mandates, the first and most important line of defense is to consult with your health plan counsel and advisers. This can build the record on compliance efforts, including establishing defenses of “good faith” or “substantial” compliance. For example, one obvious point of exposure is maintaining grandfathered status. The key to limiting this exposure is documenting (i) the plan terms in effect on March 23, 2010, (ii) the notices to participants regarding grandfathered status, and (iii) the efforts to maintain compliance with the grandfathering rules, including how any plan changes were permitted under those rules. Working with counsel and advisers, employers and plan fiduciaries should analyze and memorialize any cost-sharing increases or any decreases in employer contributions to show that such changes fall within the permissible limits for grandfathered plans.
Another area of potential high exposure is the yet undefined contours of EHBs. Because the extent of what qualifies as an EHB is not yet clear, plaintiffs may challenge annual or lifetime limits on certain items and services, e.g., durable medical equipment as violating the prohibition on such limits for EHBs. Again, employers and plan fiduciaries should work closely with counsel and health plan advisers during the implementation phase to, among other reasons, show compliance with the “good faith” implementation standard set forth in the governing regulations.31
If and when litigation does come, it is important to hire experienced litigation counsel, knowledgeable both on the substance of ACA and on the defenses to employ against complex ERISA class litigation. Defenses may include establishing “substantial” and “good faith” compliance and what constitutes reasonable fiduciary conduct under the circumstances, including protecting the plan from unreasonable costs. This may require engaging health plan actuaries and consultants to support these defenses by building the record on standard plan practices and on the current state of medical procedures and costs. There are also critically important procedural defenses to consider, such as whether the plaintiff has properly exhausted his administrative remedies, whether the plaintiff has standing to bring the claims alleged, and whether individualized issues, conflicts, or defenses defeat any attempt by the plaintiff to bring class claims. With regard to remedies, under the ERISA provision most likely used to enforce ACA (Section 502(a)(3)), there are substantial defenses to limit the scope of “appropriate equitable relief.” Finally, there may be defenses that an agency regulation is inconsistent with ACA or even unconstitutional in certain instances.
In conclusion, using ERISA’s enforcement mechanisms, ACA has imposed substantial, complex, planwide coverage mandates on employers. ERISA did this for pension benefits when it was originally enacted, and ACA has now extended this to the even more complex and evolving world of health benefits. In this environment, it is quite likely that the plaintiffs’ bar, or perhaps even DOL, will test the limits of grandfathered status, as well as of the employers’ and plan fiduciaries’ good faith efforts to comply with ACA’s myriad of coverage mandates. By seeking sound advice and documenting compliance efforts, however, employers can take actions now to avoid, or at least limit, their exposure to these claims.