Issue: Winter 2019

The Impact of External Reviews on Discretion in ERISA Health Litigation

By: Elizabeth K. Green, Kantor & Kantor LLP

The uptick in external medical reviews for ERISA health claims has potential consequences when plan administrators seek to assert a discretionary standard of review in federal court. The Affordable Care Act has increased the usage of the federal external review process, in addition to state external review programs. As the final, and optional, appeal opportunity, external reviews make medical necessity decisions that are binding on ERISA administrators. In doing so, the external reviews may result in ERISA administrators relinquishing discretionary authority over health claims.

De Novo is the Default Standard of Review in ERISA Cases

The default standard of review in an ERISA matter is de novo because an administrator is presumed to have no discretion to interpret the terms of an ERISA plan. The administrator bears the burden of showing that the written ERISA plan unambiguously confers such discretion on the administrator. Where that burden is met, the administrator’s denial of benefits is reviewed for abuse of discretion. Where that burden is not met, the court reviews the administrator’s decision de novo.

ERISA Plans Bear the Burden of Proving Discretion Was Delegated and Exercised

To alter the standard of review from de novo to abuse of discretion, ERISA plan administrators have the burden of establishing a delegation evident in an ERISA plan document. ERISA explicitly states that an outside party not named in the plan may only be vested with discretion “pursuant to a procedure specified in the plan.”

In addition to the delegation of discretion, there must be an actual exercise of that discretion. When an administrator is delegated with discretion, that fact alone is insufficient to confer a discretionary standard of review if an administrator fails to actually exercise discretion in the claims decision. If there is no exercise of discretion, it follows that the benefit decision cannot be reviewed for abuse of discretion. For example, numerous courts have held that where a plan fiduciary fails to act within time limits prescribed by ERISA regulations, a “deemed denied” decision is not entitled to deference under Firestone regardless of any grant of discretionary authority. In the same vein, courts hold that decisions made by an entity that was not delegated discretionary authority are to be reviewed de novo.

Decisions Addressing External Reviews and ERISA Health Claims

External reviewers are usually called upon to decide questions of medical necessity pursuant to plan terms. The external reviewers are not named in the ERISA plan and are independently chosen. Therefore, the reviewers remain relatively unknown to claimants. Numerous courts have held “[d]ecisions made outside the boundaries of conferred discretion are not exercises of discretion, the substance of the decisions notwithstanding.” In such cases, because the decision of the external reviewer is not within the boundaries of the discretion conferred on the administrator, and the external reviewer had not itself been granted discretionary authority, courts must consider whether the decision on external review is entitled to deference. The question is further complicated by the fact that external reviews are binding on the administrator but not binding on the claimant who is still entitled to additional remedies, including legal action.

The few decisions addressing ERISA health claims and external reviews offer some guidance. In Bailey v. Chevron Corp. Omnibus Health Care Plan, the court held that the external review process was not mandatory and the Affordable Care Act did not require an external review to exhaust administrative appeals pursuant to ERISA.

In Adele E. v. Anthem Blue Cross, the court held that the state law banning discretionary clauses applied to the policy and that the claimant did not forgo a de novo standard of review by availing herself of the state’s external review process.

In B. v. Horizon Blue Cross Blue Shield of New Jersey, the court held that documents reviewed during an external review were part of the ERISA administrative record. But the opposite conclusion was reached in Yox v. Providence Health Plan.

Courts are also split on whether an external review decision causes an ERISA administrator to relinquish its discretionary authority. In K.F. ex rel. Fry v. Regence Blueshield, the court held that the state’s external review procedure extinguished the administrator’s discretionary authority because the administrator was compelled by law to implement the external review’s final determination:

As discussed in Rush Prudential, 536 U.S. at 2169 n. 16 and 2170, states are permitted to remove the administrator’s discretionary authority to determine an insured’s eligibility for benefits by incorporating binding external review procedures into the terms of the plan. Washington has done so through RCW 48.43.535, and the mandatory implementation provision set forth in subsection 7 became part of the benefit plan. In such circumstances, Regence’s adoption and implementation of the IRO’s decision was mechanical and did not involve the exercise of discretion. The de novo standard of review therefore applies.

Likewise, in Alexandra H. v. Oxford Health Ins., Inc., the court held that the New York external appeal process “requires a plan to divest its discretion in favor of the external reviewer’s decision” and therefore a de novo standard of review is appropriate. Although most courts have declined to follow the Fry decision, the question remains the extent to which discretion and standard of review are affected by external reviews in ERISA health cases.