Enacted on March 23, 2010, the Patient Protection and Affordable Care Act ("PPACA"), (1) imposes a broad array of new requirements on group health plans and individual health insurance policies. (2) Included among these requirements are a set of rules governing internal appeals and external review of benefit denials. (3) This article will examine those rules as they apply to group health plans governed by the Employee Retirement Income Security Act of 1974 ("ERISA").
To provide context, Section II notes the different insurance arrangements affected by the new rules. Following that overview, Section III addresses the historical antecedents of the rules in external review paradigms developed under state managed care laws. Section IV accepts as postulates (1) significant dissatisfaction with pre-PPACA internal appeals processes as well as standards of judicial review of denials upheld following the internal appeal process and (2) attribution of this dissatisfaction to a set of core procedural and substantive limitations on claims for benefits imposed by ERISA. Section IV will describe the operation of these core limitations on claimants in ERISA benefit denial litigation.
The PPACA adds a new set of rules governing claim denial appeals, review of internal claims adjudication, and appeals by an external review organization. (4) Section V describes requirements of the new law as implemented by interim final regulations released on July 23, 2010 ("July 2010 regulations") (5) and other regulatory guidance, including amendments to the Interim Final Regulations released on June 24, 2011 ("June 2011 amendments"). (6) Section VI evaluates the claims made for the new processes and, specifically, the new law's effect in ameliorating ERISA's core limitations on claims described in Section IV.
Granted, the new law provides new opportunities for ERISA claimants in claim disputes. Nonetheless, the fundamental ERISA protections remain in place for ERISA plans and fiduciaries that have drawn criticism from consumer advocates. The greatest opportunities for ERISA claimants lie in the alternative of external review. On balance, however, the inconsistency and complexity of the new rules, the historic underutilization of external review, and disparity in legal and medical resources between participants and plan administrators leave substantial doubt as to the advantages claimed for the new procedures.
II. OVERVIEW OF BENEFIT ARRANGMENTS SUBJECT TO RULES
Group health plans are one form of employee welfare benefit plan under ERISA and constitute the predominant source of private funding of medical care in the United States. Approximately 138 million Americans are participants in ERISA group health plans, easily dwarfing the 16.7 million estimated to be covered by individual health insurance policies. (7)
A. INDIVIDUAL HEALTH INSURANCE POLICIES & ERISA EXEMPT PLANS
Given the focus of this article on ERISA governed group health plans, the following discussion will not attempt to detail the requirements applicable to individual health insurance policies or to group health plans exempt from ERISA. (8) Nonetheless, a few observations about such arrangements in this section may serve to provide a helpful contrast, particularly since they are frequently referred to in the regulations.
1. DOL Claims Regulations & Internal Appeals
In 2000, the Department of Labor ("DOL") issued final regulations requiring that ERISA governed plans establish reasonable claims procedures for claims adjudication, notification of payment decisions, and appeals of benefit denials. (9) At that time, the claims regulations only applied to ERISA governed plans. (10) Among other things, the claims regulations prohibited claims procedures from imposing more than two levels of appeals prior to judicial review under ERISA section 502(a).
PHS Act section 2719 provides that plans and issuers must initially incorporate the internal claims and appeals processes set forth in 29 C.F.R. 2560.503-1 (i.e., the 2000 claims regulations) and update these processes as required by the DOL. (11) Thus, the prior DOL claims procedure regulation (applicable to internal claim denials and appeals) that has applied to ERISA governed group health plans now applies to individual policies and to plans exempt from ERISA. (12)
2. State External Review Process
Many states already have external review statutes though they vary in their requirements. (13) To the extent plans and issuers are already subject to a state external review process, the July 2010 regulations provide that the existing state process will continue to apply. The July 2010 regulations provided a transition period until July 1, 2011, during which the regulations contemplate that states will adopt or make changes to external review processes as necessary to qualify under the new law.
To qualify, a state external process must comport "at a minimum" with the consumer protections in the NAIC Uniform Model Act in place on July 23, 2010, as modified by the Department of Health and Human Services (hereinafter, the "NAIC standards"). (14) If so, then the individual policy issuer or exempt plan must comply with the state external review process. (15) On the other hand, if the state external process fails to meet the NAIC standards, the individual policy issuer or exempt plan must meet the requirements of a federal external review process. (16)
3. Identification of Exempt Plans
The principal exemptions that take group health plans beyond the reach of ERISA are the church plan exemption and the governmental plan exemption.
a. Church Plans
ERISA section 4(b)(2) excludes from coverage under Title I any plan that is a church plan as defined in ERISA section 3(33). The determination of church plan status can be complex (17) and may constitute an issue appropriate for requesting an advisory opinion from the Department of Labor. (18)
b. Governmental Plans
Similarly, governmental plans, as defined in ERISA section 3(32) are exempt from ERISA by virtue of Title I coverage by section 4(b)(1). As in the case of church plans, the governmental plan exemption can present close questions. (19) Given the significant differences in compliance requirements, the determination of plan status must be approached with care.
B. ERISA GOVERNED PLANS
The manner in which the July 2010 regulations apply to ERISA governed group health plans will differ based on whether the plan is self-funded or fully insured. Since ERISA governed plans have been subject to the internal claims regulations promulgated in 2000, ERISA plan administrators will have experience with such procedures not shared by plan administrators of ERISA exempt plans. The new external review requirements, however, will pose an additional compliance burden, and whether state or federal external review processes apply depends on the source of funding of plan benefits. Before turning to these requirements, the essential features of self-funded plans as distinguished from insured plans should be noted.
1. Self-Funded Plans
Benefit claims under group health plans may be self-funded by employers or funded through insurance purchased from insurance carriers. In the case of self-funded plans, the employer will typically serve as plan administrator and employ a claims administrator to adjudicate and pay claims. The employer still maintains final discretion over eligibility and coverage.
ERISA's framers did not intend for state insurance departments to claim jurisdiction over self-funded plans. To foreclose that result, ERISA section 514(b)(2)(B) provides that "[n]either an employee benefit plan ... nor any trust established under such a plan, shall be deemed to be an insurance company." (20) This "deemer clause" curtails the reach of the savings clause in the ease of self-funded plans. (21)
Thus, State laws and regulations, including insurance laws, are preempted by ERISA in the case of self-funded plans. (22) For this reason, state external review requirements are preempted and a federal external review process will apply.
2. Insured Plans
With insured plans, the employer will typically be the policyholder of a group contract. The employees receive certificates of coverage from the carrier and the carrier typically reserves final discretion over decisions of eligibility and coverage.
In recognition of the traditional role of states in regulating insurance practices within their borders, ERISA's framers provided an express exception for state laws that regulate the business of insurance. Under this exception, ERISA's preemptive force does not apply to state laws (23) that regulate the business of insurance by virtue of ERISA section 514(b)(2)(A), the "savings clause." (24)
Thus, a qualifying state external review process will apply to such plans rather than the federal external review process.
3. DOL Claims Regulations & Internal Appeals
As observed above, all ERISA governed plans have been subject to the DOL claims regulation and remain so under the new law. The additional requirements added to the existing claims regulation will impose new compliance issues, however, as will be discussed below. In the case of internal appeals, however, the requirements will be the same whether a plan is self funded or insured.
4. Federal External Review Process
Following the distinction noted above, ERISA self-funded group health plans will be subject to the federal external review process. (25) This follows from the fact that ERISA preempts application of state external review law to self-funded plans by virtue of the deemer clause as noted above.
On the other hand, ERISA governed insured group plans, will be subject to applicable state external review process if the process qualifies under the NAIC standards. If the state process does not meet these standards, the federal external review process will apply to the insured group health plan by default.
We may summarize the foregoing analysis as follows:
29 CFR 2560.503-1 State External Federal Claims Regulation Process External Process Exempt Plans [check] [check] * Insured Plans [check] [check] * Self-Funded Plans [check] [check] [check] * Provided state external review process meets NAIC Standards--if not, the federal external review process applies.
D. GRANDFATHERED PLANS
Group health plans and health insurance coverage existing as of March 23, 2010, (the date of enactment of the PPACA), are exempt from the new claims appeal and external review requirements. On June 17, 2010, the Department issued guidance on preservation of the status of these plans, known as "grandfathered health plans." (26) Though beyond the scope of this article, the status of a group plan under this guidance must be determined as a preliminary matter.
E. ADDITIONAL GUIDANCE & EFFECTIVE DATES
The July 2010 regulations' preamble advises that future regulations will propose "additional, more comprehensive updates to the standards for plan internal claims and appeals processes." (27) Likewise, "more guidance in the near future on the Federal external review process will be issued. (28)
1. Internal Claims & Appeals
On September 20, 2010, the Department of Labor issued Technical Release 2010-02 (T.R. 2010-02), which set forth an enforcement grace period for compliance with certain new provisions with respect to internal claims and appeals until July 1, 2011. On March 18, 2011, Technical Release No. 2011-01 extended (with certain exceptions) this enforcement grace period set forth in T.R. 2010-02 until plan years beginning on or after January 1, 2012 "to give the Departments time to publish new regulations necessary or appropriate to implement the internal claims and appeals provisions of PHS Act section 2719(a)."
2. External Review
On August 23, 2010, the Department of Labor issued Technical Release 2010-01 (T.R. 2010-01) that provided for an interim enforcement safe harbor regarding external review for self-insured plans. T.R. 2010-01 provided that the Department of Labor and the Internal Revenue Service (IRS) would not take enforcement action against a group health plan that either: (1) complied with the standards set forth in the technical release; or (2) voluntarily complied with a State external review process.
On June 22, 2011, the Department of Labor issued Technical Release No. 2011-02 which, among other things, extended the transition period for States to implement external review processes until December 31, 2011. Should the state external process fail to meet the NAIC standards, TR 2011-02 provides temporary standards that will apply to health insurance issuers (and, if applicable, self-insured nonfederal governmental plans) in a State until January 1, 2014.
III. HISTORICAL ANTECEDENTS OF REFORM CONCEPTS
The PPACA eclectically appropriates from consumer protection initiatives previously proposed or implemented on the state level. A brief historical survey will provide some helpful context for understanding the policy aspirations behind the new law.
The emergence of health care costs as a contemporary public policy problem can be traced to the 1960s. In that decade, the federal government's intervention into the health care economy and emerging medical technologies combined to fuel a surge in health care expenditures. Aside from fostering the development of hospital growth originating in the prior decade, the federal government took on a major role in purchasing medical services through public programs such as Medicare and Medicaid. At the same time, medical science began a period of growth in sophisticated technologies and treatment modalities.
The expansion of health care infrastructure, the evolving complexity of medical care, and the concomitant costs ultimately burdened the prevailing fee for service reimbursement model to the point that benefit payers sought relief through managed care alternatives. Of the various models of managed care, health care maintenance organizations ("HMO") attained preeminent notoriety for controversial benefit denials that ERISA and existing insurance laws seemed inadequate to address. (29)
Meanwhile, as consumers balked at the control over healthcare asserted by managed care entities, they discovered a paucity of available civil remedies at their disposal. State law insurance regulation arose in an era of medical indemnity plans in a fee for service environment where the treating physician made the important medical decisions. Managed care and cost containment presented conflict of interest issues, clinical judgments by third parties, and similar concerns that were essentially new legal issues.
Furthermore, the arrival of ERISA in 1974, with its broad preemption provisions, heralded a new era for the many Americans covered under plans subject to its jurisdiction. In a series of landmark cases, the United States Supreme Court gave ample boundaries to the ERISA domain. To promote national uniformity in plan administration, an objective of its drafters, ERISA substituted a new set of civil remedies that significantly limited claimants in disputes over benefit denials. (30)
Against this backdrop, one may appreciate the significance of what appeared to be a modest gain against ERISA preemption in the 1995 case, New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co. (31) In that case, the Supreme Court held that New York's surcharge provisions favoring one insurance company over another did not relate to employee benefit plans within the meaning of section 514(a) and, thus, were not preempted. The Court candidly acknowledged the open texture of its prior definition of ERISA preemption and appeared to set a new limit on the reach of ERISA's preemptive field.
During this period, several states enacted laws aimed at providing consumer protections as against managed care entities through relief from preemption provided by ERISA's savings clause. (32) Travelers appeared to signal a willingness by the Court to permit a more expansive role by the states in the regulation of health plan payers. (33)
The subsequent Supreme Court decision in Rush Prudential HMO, Inc. v. Moran (34) further confirmed a change in the Court's jurisprudence. (35) In addition to suggesting a more restricted view of ERISA preemption, Rush Prudential condoned a state insurance regulatory mechanism by which managed care decisions were reviewed by a third party.
Rush Prudential presented the Court an opportunity to determine whether state requirements for third party review of managed care organizations' payment decisions could co-exist with ERISA's civil remedies provisions. The Illinois statute (36) at issue required health maintenance organizations to provide independent medical review of certain benefit denials.
The Court concluded that the Illinois review statute imposed no new obligation or remedy. Thus, the law escaped ERISA preemption.
Rather than a new remedy, in the view of the Court, the external review requirement more closely resembled "second-opinion requirements" as distinguished from "arbitration schemes." The Court observed that:
Deferential review in the HMO context is not a settled given; section 4--10 operates before the stage of judicial review; the independent reviewer's de novo examination of the benefit claim mirrors the general or default rule we have ourselves recognized; and its effect is no greater than that of mandated-benefit regulation. (37)
The Court held that, in effect, Illinois had chosen to regulate insurance "as one way to regulate the practice of medicine[.]" (38) This approach consisted of no more than "garden variety insurance regulation through the imposition of standard policy terms ..." even though: (1) the statute "undeniably eliminates whatever may have remained of a plan sponsor's option to minimize scrutiny of benefit denials ..." and (2) "benefit litigation in some federal courts may have to account for the effects of [the external review statute]." (39)
Though the Court would take a more restrictive reading of ERISA's savings clause in its subsequent decision in Aetna Health Inc. v. Davila, (40) the window of opportunity heralded by Rush Prudential encouraged a trend toward adoption of external review under the imprimatur of state insurance regulation via the savings clause. The state law mechanism in Rush Prudential fell significantly short of constituting a robust external review process, but the opinion nonetheless presented a wedge of opportunity that would be exploited in full measure. Following the decision in Rush Prudential, a plethora of state external review initiatives emerged such that, by the enactment of the PPACA, all but six states had some version of external review mandated for managed care benefit denials. (41)
Putting these events in historical perspective, the decades following the expansion of medical services and technology led to new forms of dispute resolution. While the ERISA governed plans averted the state mandated external review, ERISA's savings clause appeared to permit states to subject insurance carriers and managed care entities to claims review processes.
One commentator sees the transition during this historical period as an emergence of a new attitude toward disputes over medical benefits. (42) On this view, dissatisfaction with managed care led the courts from an era of health process exceptionalism, entailing deference to treating physician opinions, to an emphasis on procedural due process. (43) Rather than the traditional common law emphasis on truth seeking, involving deference to physician opinion, a legal model substitutes a new objective--that of "procedural fairness." (44)
Under the medical or "exceptionalist" model, courts originally afforded substantial deference to medical judgment. (45) The decline of deference to physician opinion stemmed from a divergence of the interests of physicians and patients under the managed care paradigm. (46)
In any event, opposing medical opinions on necessary medical care created a need for an informed third party adjudicator. The emergence of external review as a dispute resolution shows a preference for expert third party opinion in an administrative setting.
Drawing on the states' experience in requiring external review of managed care claims decisions, Congress embedded one form of state law external review process in the PPACA by incorporating the essential "consumer protections" contained in the NAIC Uniform Health Carrier External Review Act.
The Congressional concept of reform consists of: (1) expansion of the existing ERISA claims procedure regulation to non-ERISA plans and individual policies and; (2) federalizing an external review scheme, originally designed for HMOs and managed care organizations, so as to require all health plans to adhere to the regulations, including ERISA plans exempt from state regulation by virtue of the deemer clause.
The choice of implementing external review as a reform brought with it the problems and policy choices inherent in the state model. For example, even as states enacted statutes that required external review, issues of due process and constitutionality arose. (47) The most significant constitutional issue arises in state statutes that foreclose the …