An Alternative Approach to an ERISA Litigation Conundrum

17 February 2021 Legal News: Employee Benefits Insights Publication
Authors: Michael H. Woolever

Recently, a three-judge panel in the Court of Appeals for the Ninth Circuit overturned a district court dismissal of an out-of-network provider’s claims against Blue Cross and Blue Shield of Illinois (“BCBSIL”). The unanimous panel found that BCBSIL had waived its right to raise the anti-assignment clauses in the applicable plan documents as a basis for dismissal of the provider’s claims because BCBSIL did not raise the anti-assignment clauses as a defense to the provider’s claims during the administrative appeal of the claims. (Beverly Oaks Physicians Surgical Ctr., LLC v. Blue Cross and Blue Shield of Illinois, No. 19-55820 (9th Cir. 12/17/20) (motion for reconsideration and reconsideration en banc currently pending).)

After providing some additional background, this article considers an alternative legal theory that courts could consider in similar cases that would have affirmed the district court’s dismissal of the case, but with no harm to the plan member whose claim was being appealed. This approach may more closely align with the approach taken by most courts in other Circuits when ruling on motions to dismiss provider claims based the existence of a valid anti-assignment provision.

Background on Provider Rights under ERISA

In all Circuits a federal court may only allow a provider’s claim for benefits under an ERISA plan to proceed if the provider has a valid assignment of plan benefits from the plan member. That is because Section 502 of ERISA, which sets forth the exclusive remedies available under ERISA, expressly identifies plan participants or beneficiaries (jointly “plan members”) as the only persons authorized to bring judicial claims for plan benefits under Section 502(a)(1)(b).

In addition, while ERISA prohibits the assignment of retirement plan benefits, there is no similar restriction on the assignment of welfare plan benefits under ERISA plans to providers. As a result, the courts have generally recognized that a provider with a valid assignment of benefits “steps into the shoes” of a plan member and may seek judicial review of an adverse benefit determination under Section 502(a)(1)(b). In such a case, a federal court would have subject matter jurisdiction under ERISA to hear the provider’s claim.

Background on Anti-Assignment Provisions

The courts also generally hold that anti-assignment provisions in ERISA plans are enforceable and will invalidate a purported assignment of benefits. Where an ERISA plan has a valid anti-assignment provision a court will generally grant a motion to dismiss a provider’s claim for failure to state a claim for relief under Section 12(b)(6) of the Federal Rules of Civil Procedure based on an anti-assignment provision invalidating the assignment. In addition, case law also limits the assignment-based rights that a provider may assert to those rights that were clearly assigned by the member.

An exception may arise when, based on the specific facts in the case, a court finds that the ERISA plan, through its conduct, either waived the anti-assignment provision or should be equitably estopped from raising it under general principles of law. While there is not complete unanimity among the Circuits in how these principles apply in this context, generally the mere fact of direct communication by the ERISA plan with the provider - or even exercising a contractual right to elect to make payment directly to the provider - is not sufficient to result in a waiver of, or estoppel with respect to, the anti-assignment defense.

Background on DOL Claims Regulation

In addition to ERISA Section 502, which identifies the various judicial remedies available under ERISA, Section 503 requires administrators of ERISA plans to (i) provide plan members with adequate and timely notice of any adverse benefit determination (i.e., any determination giving rise to any financial responsibility for the plan member) and (ii) afford plan members a reasonable opportunity for a full and fair review by an appropriate fiduciary of any decision denying a claim.

The DOL in turn has promulgated detail regulations governing what constitutes a reasonable claims procedure for purposes of Section 503. DOL Reg. § 2560.503-1 et seq. One such portion of the regulation expressly provides that the plan’s claims procedure may “not preclude an authorized representative” of a plan member from acting on behalf of the plan member in pursuing an appeal of an adverse benefit determination.

Background on the Case

BCBSIL approved the provider’s claims for payment at issue in Beverly Oaks but reimbursed the provider an amount less than the provider’s billed charges.

The provider unsuccessfully appealed the amount of payments and then sued BCBSIL under Section 502(a)(1)(B) of ERISA in order to recover additional professional fees for the same surgical services.

In its original and multiple amended complaints, the provider argued that BCBSIL either had waived or was equitably estopped from asserting any anti-assignment provisions in the ERISA plans because it had failed to raise the anti-assignment provision either during the provider’s initial coverage confirmation calls or during the appeal of the claims.

After dismissing two prior versions of the complaint based on the anti-assignment provisions in the plans, the district court granted BCBSIL’s motion to dismiss with prejudice citing two recent unpublished opinions from the Ninth Circuit involving a similar pricing dispute and anti-assignment defense. (Brand Tarzana Surg. Inst. v. Intl. Longshore and Warehouse – Union Pacific Maritime Welfare Plan, 706 F. App’s 442 (9th Cir. 2017) and Eden Surgical Ctr. v. Cognizant Tech. Solutions Corp. 720 F. App’x 862 (9th Cir. 2018).) The courts in both cases found that the failure of the plan to notify a provider during the ERISA appeal of the anti-assignment defense did not result in a waiver of the anti-assignment defense. Both cases distinguished their holding from that in Harlick v. Blue Shield of California, 686 F.3d 299 (9th Cir. 2012), in which the Ninth Circuit first indicated that failure to address a potential defense to a plan member’s claim during an administrative appeal could result in waiver of the defense. In distinguishing the case, both panels reasoned that the anti-assignment defense did not go to the merits of the claims being appealed, but rather only to the provider’s right to litigate the claims, which was an appropriate defense to raise for the first time during the litigation.

In Harlick, an actual plan member, not a provider, appealed a denial of her claims for coverage for benefits received while staying in a residential treatment facility. The insurer of the ERISA plan relied on the fact that such services were not covered under the plan when denying the appeal. However, the Ninth Circuit in Harlick determined that to the extent the services were medically necessary the insurer was required to cover them under the California Mental Health Parity Act. When the insurer sought to challenge that finding, the court held that the insurer could not raise a substantive defense based on the lack of medical necessity, as that defense was not raised during the administrative appeal as a defense to the claim.

The Ninth Circuit had also interpreted the scope of Harlick in the context of an anti-assignment clause in Spindex Physical Therapy USA, Inc. v. United Healthcare of Arizona, Inc., 770 F. 3d 1382 (9th Cir. 2014). The panel in Spindex held that an insurer acting on behalf of an ERISA plan had not waived the anti-assignment provision by paying the provider directly, which it had the discretion to do, notwithstanding the anti-assignment provision. Moreover, the panel held that there was no waiver because there was nothing in the record to prove that the insurer knew that the provider was pursuing an administrative appeal based on an assignment, rather than as an authorized representative of the plan member. As noted above, a properly authorized representative must be allowed to represent the plan member (but not its own interests) under the U.S. Department of Labor’s claims regulations.

In Beverly Oaks, the panel distinguished the holding in Spindex based simply on the fact that a provider had checked the assignment box on its claim form and, therefore, the ERISA plan had notice that the provider had an assignment. However, nothing in the DOL’s claims regulations gives a provider with an assignment the right to step into the shoes of the plan member and represent its own interests, not those of the plan member, during an administrative appeal. Moreover, the DOL’s claims regulations allow a provider to act as the authorized representative of a plan member in pursuing an administrative appeal with or without an assignment.

The panel in Beverly Oaks had before it the actual assignments that in theory were signed by the plan members and the assignment forms clearly listed the provider as the plan member’s “designated authorized representative.” Nevertheless, contrary to the holding in Spindex, the panel held the mere existence of an assignment was determinative.

The Alternative

In the Ninth Circuit, a failure by an ERISA plan to raise a substantive defense during the administrative review process can result in a waiver of the defense at the litigation stage. However, nothing in Spindex or other binding Ninth Circuit authority required the panel in Beverly Oaks to find that the rule should apply to non-substantive defenses that only become relevant at the litigation stage or to apply Harlick just because the ERISA plan knows that the provider has an assignment. The holding in Spindex should be limited to situations where the ERISA plan knows the provider is appealing in its capacity as an assignee of the claim and not as an authorized representative.

From an ERISA perspective, the DOL has concluded that a full and fair review procedure requires that a plan member be able to designate a third party to represent the interests of the plan member in an appeal of a claim denial or other adverse benefit determination. The DOL has not extended that right to a third party who is only taking its own interests into account and not representing the interests of the plan member.

A better approach would be for courts either to limit the holding in Harlick to defenses that apply to the plan member or limit the holding in Spindex to situations, as was the case in Spindex, where the provider has made it clear that it is filing an appeal in its capacity as an assignee (i.e., acting at least in part in its own interest) and not as an authorized representative of the plan member.

In the latter case, the ERISA plan would be free to confirm with the plan member that the plan member is comfortable with allowing the provider to proceed in the capacity as an assignee and not as a representative of the plan member. Further, it would allow the plan member to understand the consequences of the provider’s approach. Finally, this alternative would also create a less subjective and more definitive rule that would protect ERISA plans from unknowingly waiving a non-substantive defense.

There would not appear to be any downside from the plan member’s perspective with this approach, only more knowledgeable decision-making. Even if the provider itself might be precluded from suing the ERISA plan to dispute the amount of the payment received, the plan member would remain free to seek such a remedy and the provider free to assist in the process.


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