Health plans and administrators subject to the Employee Retirement Income and Security Act have been warned: failure to comply with ERISA’s procedural requirements—and interpret plan terms as a non-industry expert would—may strip them of the deference their benefit determinations enjoy and result in higher payments to providers.

The Second Circuit recently affirmed a decision from the Southern District of New York that granted summary judgment in favor of an out-of-network medical provider and required a health plan to recalculate the benefits owed to the provider at the maximum amount that the health plan would have paid to any other in-network provider offering similar services, pursuant to the terms of the health plan’s plan documents. See Montefiore Med. Ctr. v. Goodman, No. 17-1303-cv, 2018 WL 1081219, at *1 (2d Cir. Feb. 28, 2018). Montefiore Medical Center is a Bronx hospital that had submitted claims to the Local 272 Welfare Fund for reimbursement for hospital services provided to Fund participants and beneficiaries. See id. Because Montefiore did not have a contract with the Fund or applicable third-party network that set a negotiated rate for such services, and was thus an “out-of-network” provider, the Fund’s reimbursement to Montefiore was governed by the following provision in the Fund’s Summary Plan Description (“SPD”):

Out-of-network services are services provided by a licensed provider outside of the Plan’s network. When you select out-of-network services that are covered by the Plan:
  • In addition to your normal copay or coinsurance, you must also pay any difference between the amount that an out-of-network provider charges and the maximum amount the Plan would have paid an in-network provider for the same service.

Id. (alteration and emphasis in original).

When the Fund reimbursed Montefiore at rates that were comparable to another area hospital, but allegedly not the highest rates that the Fund pays in-network providers for the same service, Montefiore brought a claim for benefits under ERISA to recover its underpayments according to the terms of the SPD. See Montefiore Medical Center v. Local 272 Welfare Fund, No. 14-CV-10229 (RA), 2017 WL 1194704, at *1 (S.D.N.Y. March 31, 2017).

The district court entered summary judgment in favor of Montefiore, concluding that the Fund’s interpretation of the SPD was subject to a de novo standard of review and, under that non-deferential standard, the Fund failed to adjudicate Montefiore’s claims in accordance with the terms of the SPD. The court explained that, although “the SPD contains an express grant of discretionary authority to the Board of Trustees”—which typically means that a plan administrator’s decision must be upheld unless it is arbitrary and capricious—the Second Circuit’s recent decision in Halo v. Yale Health Plan, Director of Benefits & Records Yale Univ., 819 F.3d 42 (2d Cir. 2016), requires a de novo review when the plan fails to follow the Department of Labor claims-procedure requirements in rendering an adverse benefit determination, namely to outline “the specific reason or reasons for the adverse determination” and refer “to the specific plan provisions on which the determination is based.” Id. at *2-3 (alterations and internal quotation marks omitted) (quoting 29 C.F.R. § 2560.503-1(g)(1)(i)-(ii)).

In this case, the Fund’s Explanations of Benefits stated only that claims were “Paid as Out-of-Network Provider Under Plan,” or “Code No Longer Used in Plan,” without citing any provision of the SPD or otherwise explaining why significant sums were not covered. Id. at *3. As a result, the court concluded that the Fund’s benefit determinations lacked the requisite specificity to warrant a deferential standard of review, and constituted a “systematic noncompliance” with Department of Labor requirements that could not be considered “inadvertent and harmless.” Id.

On the merits, the district court concluded that “the out-of-network provision unambiguously requires the Fund to determine what it pays its various in-network providers for a particular service, and then select the ‘maximum,’ or highest, amount.” Id. at *6 (internal quotation marks omitted). The Fund had argued that the “maximum amount the Plan would have paid an in-network provider” means that “the Fund will pay out the maximum amount it determines for a service, rather than electing to pay some lower amount,” but the provision “in no way details how the maximum will be calculated.” Id. at *4 (internal quotation marks omitted). The Fund contended that this calculation is instead based on “the rate paid by the Fund to a hospital in the geographic vicinity of the out-of-network hospital that provided the same services.” Id. (internal quotation marks omitted).

But the district court emphasized that the plain meaning of “maximum” is “the most of several alternatives,” and the SPD offered neither a qualification of that term nor an indication that the maximum amount would be limited by “geographic proximity or caliber of provider.” Id. at *5. Because the court is obligated to “interpret the text of this ERISA plan in an ordinary and popular sense, as would a person of average intelligence and experience,” and may not rewrite its terms “under the guise of interpretation,” the court held that the SPD required the Fund to determine the maximum amount to pay to an out-of-network provider “by comparing the amounts paid for the same service to in-network providers and selecting the greatest number.” Id. The district court ordered the case to be remanded back to the Fund to reconsider Montefiore’s claims at the rate required by the SPD. Id. at *7.

The Second Circuit affirmed the district court’s interpretation of the SPD. Montefiore, 2018 WL 1081219, at *2. The Second Circuit “agree[d] that the Plan’s language is unambiguous and mandates that the Fund determine the rate it pays all of its in-network providers for a certain service and then select the maximum rate among the various in-network provider rates.” Id. Although the terms of the SPD may have been “unartfully drafted by (and against the interest of) the Fund,” to apply the Fund’s requested interpretation “would require [the court] impermissibly to overlook, and rewrite, the Plan’s language.” Id. The Second Circuit also found the Fund’s remaining arguments “abandoned or without merit.” Id. at *2 & n.1.

This decision sends two strong and important messages. First, it reinforces that ERISA binds health plans and their administrators to strict and concrete requirements when issuing adverse benefit determinations to participants and beneficiaries, and, by extension, the medical providers who receive assignments of benefits from their patients. The regulations prescribing the information required in an adverse benefit determination must be followed to the letter, and it is not sufficient to issue generic denials without specific support in the governing plan documents. For administrators, failure to adhere to the regulations can strip them of the deference to their plan interpretations to which they would otherwise be entitled. For providers, knowing and understanding the ERISA requirements can produce significant leverage in litigation, as the deference ordinarily shown to plan decisions is often dispositive, and the opportunity to have a court review a claim for benefits de novo could be outcome-determinative.

Second, the decision illustrates that ERISA can be a medical provider’s friend. All too often, providers shy away from pursuing the assigned rights they get from their patients under ERISA, preferring to pursue state law causes of action. But this case demonstrates that ERISA, and specifically the terms of an ERISA plan, may well provide the best remedy. When a court reviews the terms of an ERISA plan, ordinary principles of contract interpretation apply—and courts will interpret plan terms as would a person of average intelligence and experience, i.e., from the perspective of the patients, not based on expertise in the healthcare industry or even based on what the plan intended in drafting it. Providers will be well advised to access their patients’ plan documents and evaluate whether the plan terms, based on their ordinary meaning, actually support the payment calculation made by the plan.