Federal Court Expands Participant Rights to Sue Insurer-Administrators of Health Care Plans

13 March 2007 Publication

FOCUS on the Insurance Industry

A recent federal court decision has concluded that a participant in a selfinsured ERISA health plan has standing to sue the plan’s insurer-administrator for breach of fiduciary duty and for monetary relief on behalf of the plan, regardless of whether the plaintiff can show that he personally suffered or will suffer a concrete injury as a result of the administrator’s alleged misconduct. This holding, if upheld and followed, arguably expands the rights of participants to seek redress on behalf of the ERISA plan and could result in a substantial increase in the number of actions brought against ERISA plan fiduciaries.

In Deluca v. Blue Cross & Blue Shield of Michigan1, the plaintiff filed a class action lawsuit against Blue Cross and Blue Shield of Michigan (“Michigan Blue Cross”). In this case, Michigan Blue Cross administered a self-funded health benefit plan sponsored by a bank that employed the plaintiff’s spouse. Plaintiff alleged that Michigan Blue Cross obtained the agreement of certain hospitals to accept lower payments from an HMO operated by Michigan Blue Cross in exchange for higher payments fromself-funded ERISA plans administered by Michigan Blue Cross. Plaintiff claimed that the self-funded plan of which he was a participant accordingly paid excessive reimbursement rates and that the participants and beneficiaries of his plan paid excessive contributions, deductibles and/or co-payments.

It was unquestioned that plaintiff (as a participant in the plan) had a statutory right under ERISA to bring the action against Michigan Blue Cross. Michigan Blue Cross, however, argued on the basis of prior court decisions that the plaintiff lacked the requisite standing under Article III of the U.S. Constitution to pursue the claim. The U.S. Supreme Court has held that Article III requires, as a minimum, (1) that the plaintiff has suffered an “injury in fact,” i.e., the invasion of a legally protected interest that is (a) concrete and particularized and (b) actual or imminent, (2) a causal connection between the alleged misconduct and the injury and (3) a likelihood that the injury can be redressed by a favorable decision.2 Michigan Blue Cross argued that plaintiff could not meet these requirements because (1) plaintiff had not incurred any greater costs on account of the alleged fiduciary violations (particularly since he enrolled as a beneficiary only seven days before the lawsuit), and (2) plaintiff could not establish a casual connection between the alleged misconduct and any alleged increase in monthly benefit contributions, coinsurance payments or deductibles.

Other federal courts, in prior decisions, have been unwilling to allow a plaintiff to proceed under such circumstances. They have noted that it is uncertain whether either the harm suffered by the plan or the relief obtained by the plan would affect the individual participant or beneficiary personally. In Central States Southeast v. Merck-Medco3, the 2nd Circuit stated that the financial impact of an over-costly drug plan “would in all probability” not affect individual plan participants unless they had purchased drugs based on percentage coinsurance payments. And in Glanton v. AdvancePCS4, the 9th Circuit stated that plan participants in an allegedly over-costly drug plan could not show a likelihood that a favorable outcome would provide relief for them, because nothing would force the plans to reduce the participants’ contributions or co-payments, “nor would any onetime award to the plans for past overpayments inure to the benefit of participants.”

In Glanton, the 9th Circuit rejected the plaintiff participants’ contention that they had standing on the ground that they could not show a likelihood that a recovery by the plan would result in a benefit to them5. In DeLuca, the district court similarly noted that the plaintiff participant could not show that a financial injury to the plan had caused any injury to himself and noted that the plaintiff accordingly could not have sued if he were seeking a monetary recovery on behalf of himself.6

The 9th Circuit in Glanton, however, also rejected the plaintiffs’ contention that they had standing solely as representatives of the plan.7 On this question, the district court in DeLuca expressly declined to follow Glanton. The court allowed the plaintiff to seek full ERISA remedies on behalf of a plan, “regardless of whether he can show that he personally suffered or will suffer a concrete injury” as a result of the alleged misconduct.8 In so doing, the court relied on (among other things) a Supreme Court decision holding that Congress can grant standing to sue for generalized harm where the courts otherwise would deny standing under Article III (while recognizing that Article III standing requirements remain)9 and on ERISA statutory provisions allowing a plaintiff to seek recourse on behalf of a plan. The courts thus seem divided on the question of whether a plan’s participant or beneficiary may sue to recover monetary relief on behalf of a plan, where the participant or beneficiary cannot show that he or she has suffered a concrete injury. Further litigation (perhaps up to the Supreme Court) may be necessary to fully resolve this question.

If the DeLuca approach is upheld and followed, plan fiduciaries may face more claims of plan participants who no longer need to show an “injury in fact” to themselves. The courts in such situations must then resolve the substantive issues presented — which in DeLuca includes an interesting and yet unresolved issue regarding the fiduciary obligations of an insurer–administrator providing services to ERISA plans. The courts may also have to face other issues which they have thus far sought to avoid — such as the measure of the harm to the plan and its beneficiaries.

1 2007 U.S. Dist. LEXIS 5698 (E.D. Mich. January 25, 2007).

2 Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992).

3 433 F.3d 181, 202-03 (2d Cir. 2005).

4 465 F.3d 1123, 1125 (9th Cir. 2006).

5 Id. at 1125.

6 2007 U.S. Dist. LEXIS 5698, supra, at *15.

7 465 F.3d at 1125-27.

8 2007 U.S. Dist. LEXIS 5698, supra, at *12-16.

9 Warth v. Seldin, 422 U.S. 490, 499-501 (1975).

This article is a part of the FOCUS on the Insurance Industry Spring 2007 Newsletter.