The Harsh Consequences of Shoddy Claim Denials and Explanations of Benefits

August 1, 2008

Two recent district court decisions highlight the fact that administrators issuing unclear or incomplete claim denial letters do so at their own peril. In both Tinker v. Versata, Inc. Group Disability Income Insurance Plan, No. 2:06-CV-02906 (E.D. Cal. July 13, 2008) and O’Connell v. Northland Lutheran Retirement Community Employee Benefit Plan, No. 07-C-637 (E.D. Wis. July 15, 2008), judges imposed significant penalties on plans for failing to live up to ERISA’s standards in their explanations of claim denials.

Claim Denials Generally

ERISA requires that, when an employee benefit plan denies a claim for benefits, the plan must issue a written explanation of the denial. The Department of Labor’s (DOL’s) regulations require, among other things, that the written denial contain:

  • “The specific reason or reasons for the adverse determination”;
  • “Reference to the specific plan provisions on which the determination is based”; and
  • “A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary.”

The regulations also require that the written denial inform the participant of the timeframe for challenging the plan’s benefit denial.

These requirements are deceptively simple. The “specificity” requirement leaves plan administrators struggling to strike a balance between efficient claims processing and the provision of detailed rationales and plan provisions that may be difficult to decipher. Likewise, the one-size-fits-all explanation of benefits (“EOBs”) typically provided by health plan third-party administrators (“TPAs”) in lieu of a claim denial letter often contain little or no actual explanation, much less an explanation that fulfills ERISA specificity requirements.

An even higher burden of explanation applies to group health plans and plans providing disability benefits. Most notably:

  • Such plans are required to disclose any “internal rule, guideline, protocol, or other similar criterion” that the plan relied upon.
  • If the plan has based its denial on “a medical necessity or experimental treatment or similar exclusion or limit,” the claim denial must also include “either an explanation of the scientific or clinical judgment for the determination, applying the terms of the plan to the claimant’s medical circumstances, or a statement that such explanation will be provided free of charge upon request.”

As the following case discussions show, courts are sending the message that administrators would be wise to follow the guidelines set out in DOL regulations.

Tinker v. Versata, Inc.

Many administrators mistakenly assume that simply informing claimants that they may submit additional supporting information satisfies the plan’s burden of “describing” any additional information needed to perfect the claim. In Tinker, the plaintiff claimed that she was disabled and unable to work, but the plan administrator found that the medical information originally submitted with her claim for benefits – which included a letter from her doctor indicating that she could perform her job duties – did not support it.

The court held that, even though the denial letter advised Tinker of her right to present additional medical information, the administrator violated ERISA by failing to provide a description of the additional material needed to perfect her claim. The ERISA claims procedure rules do not specify the penalty for an administrator’s violation. However, as Tinker demonstrates, courts are taking the matter into their own hands. In Tinker, the court specifically found that the plan’s failure to describe the necessary additional medical information, combined with the denial letter’s misstatement that Tinker had 60 days to appeal when the plan documents actually provided a 180-day window, warranted de novo judicial review.

De Novo Standard of Review

The Tinker decision is significant, because it rejects the typical “arbitrary and capricious” standard applied to claim denial actions in favor of “de novo” review. As employers and TPAs know, claims decisions are often close calls, where two reasonable decision-makers looking at the same evidence could legitimately disagree. Generally, where arbitrary and capricious review is applied, the administrator’s decision will not be disturbed by the court if a reasonable decision-maker could agree with the administrator’s decision. In contrast, where de novo review is applied, the court makes its own decision based on its own opinion of the evidence, and the administrator’s determination is given no weight.

Effectively, the de novo standard of review permits the court to toss out an administrator’s reasonable claim decision under circumstances where the arbitrary and capricious standard would otherwise have required the court to defer to the administrator. Because of the defects in Tinker’s claim denial letter, the court rejected the deferential arbitrary and capricious standard and applied a more rigorous analysis.

As an additional remedy for the violation, the court also permitted Tinker to submit new medical information to the court. Ordinarily, plaintiffs are precluded from presenting to the judge any medical information that was not previously provided to the plan during the claims review process. After applying the stricter standard of de novo review and considering plaintiff’s newly submitted evidence, the court ultimately ordered the plan to reinstate Tinker’s benefits.

O’Connell v. Northland Lutheran

In O’Connell, the plaintiff required medical care after suffering injuries in a car accident, and the health plan’s claims administrator sent the plaintiff a letter requesting details about the accident. The plan’s terms required O’Connell to cooperate with the plan by providing this information, so that the plan might recover the cost of her treatment from the driver of the car that hit her. The administrator claimed that it never received any response to its request from O’Connell.

Meanwhile, O’Connell continued to submit claims for medical benefits based on injuries sustained in the accident. In response to each claim, the administrator sent O’Connell an EOB stating only that, “[a]ccident information requested under separate cover has not been received. Until this information is received in our office, no further action may be taken.”

The court ruled that this statement did not meet ERISA’s requirements and was, therefore, insufficient to inform O’Connell that her claims were actually being denied. This ruling means that, because there was no administrative denial for the court to defer to, the court will apply the de novo standard of review discussed above when it eventually decides O’Connell’s claim.

Lessons Learned for the Road Ahead

As Tinker and O’Connell illustrate, plaintiffs regularly leverage their plan administrator’s failure to provide required information to litigate benefit claims on more favorable terms than the law would otherwise allow. By giving short-shrift to the claims procedure rules, plan administrators lose credibility with the courts and risk forfeiting to the judge their discretion to decide claims. Administrators should heed this warning to avoid other unpredictable remedies crafted by the courts.

In addition:

  • Administrators (whether plan sponsors or TPAs) should review and update claims procedures relating to their plans to ensure that they have detailed guidelines that adhere to DOL regulations.
  • Administrators should focus on communication pieces used with claimants to ensure that all the language required by the regulations is included.
  • Personnel actually administering claim adjudications must be trained to carry out these procedures.
  • Administrators must adhere to appropriate timelines and keep records sufficient to defend their actions when a claim denial results in litigation.
  • Plan sponsors should note that they have a duty to review the claims procedures and communications used by any service provider that they engage, to ensure compliance with these rules.

For further information or help in complying with ERISA’s claims procedure rules, please contact any member of the McGuireWoods Employee Benefits or Labor & Employment Teams.