Ninth Circuit Ruling Threatens Liability for Benefits Verification Calls

In a significant ruling that could reshape the health insurance landscape, the U.S. Court of Appeals for the Ninth Circuit has delivered a decision that narrows the longstanding protections under the Employee Retirement Income Security Act of 1974 (ERISA) for health plan administrators and sponsors. On August 11, the court ruled in Healthcare Ally Management of California, LLC v. WSP USA, Inc. that ERISA does not preempt claims of negligent misrepresentation arising from benefits verification calls made by out-of-network medical providers. This ruling has the potential to expose plan administrators to state tort liability based on the information provided during these calls, marking a pivotal shift in how health plans manage their communications with medical providers.

The decision stems from a case where an out-of-network provider contacted a plan administrator prior to a surgical procedure to confirm reimbursement rates. The administrator allegedly indicated that payment would occur at the usual, customary, and reasonable rate, which is a standard metric used to gauge what providers typically charge for similar services in a given area. However, when the surgery was completed, the provider received payment at the Medicare rate, which amounted to only five percent of the billed charges. The court found that the provider's injury was a direct result of the administrator's misrepresentation, subsequently ruling that ERISA's preemption shield did not apply.

Understanding ERISA and Its Implications

The Employee Retirement Income Security Act of 1974 (ERISA) was designed to protect employees' benefits by regulating health plans and providing a federal framework for their administration. It primarily preempts state laws that conflict with its provisions, allowing plan administrators a degree of immunity against certain legal claims. Historically, this preemption defense has been a powerful tool for health plan administrators, allowing them to dismiss lawsuits from out-of-network providers who felt wronged by claim denials or payment discrepancies.

However, the Ninth Circuit's ruling introduces a crucial distinction between claims based on the interpretation of plan terms and those based on misrepresentations made during benefits verification calls. As the court explained, when the injury arises from inaccurate information provided by a plan administrator rather than the denial of benefits, the shield offered by ERISA does not apply. This separation of claims represents a significant change in how health plans must navigate their interactions with out-of-network providers.

The Operational Impact on Plan Administrators

With the Ninth Circuit's ruling now in effect, plan administrators and their third-party administrators (TPAs) must reevaluate their operational protocols concerning benefits verification calls. This ruling impacts a nine-state region, including key areas like California, Washington, and Oregon, where out-of-network providers may now pursue claims based on negligent misrepresentation. The implications are profound:

• Increased Legal Exposure: Every benefits verification call in the Ninth Circuit could become a potential source of state tort liability if the information provided does not align with what the plan ultimately pays.
• Geographic Variability: The ruling aligns the Ninth Circuit with the Fifth, Eighth, and Eleventh Circuits regarding negligent misrepresentation claims. However, the Sixth Circuit recently ruled otherwise, creating a patchwork of legal standards across the country.
• Need for Compliance Conversations: Brokers advising multi-state employers must now engage in compliance discussions, ensuring that clients understand the legal landscape and operational requirements within each circuit.

Steps for Plan Sponsors and Brokers

In light of the Ninth Circuit's ruling, plan sponsors and their brokers are advised to take proactive measures to mitigate potential liabilities arising from benefits verification calls. International law firm Mayer Brown has outlined several concrete steps that health plan administrators should consider:

1. Conduct a TPA Audit

Plan sponsors should initiate an audit focused on benefits verification calls made by their TPAs. It's essential to determine whether these calls are being recorded. A recording can serve as an invaluable piece of evidence, documenting what was communicated and any disclaimers provided. Knowing whether your TPA records these interactions is crucial in preparing for potential claims.

2. Review Communication Protocols

Next, plan sponsors must assess the content of the information relayed during benefits verification calls. While the court noted that plan administrators do not owe a fiduciary duty to out-of-network providers, providers must demonstrate that they justifiably relied on the information given. Having TPAs provide written coverage terms, along with clear disclaimers advising providers to seek independent counsel, can significantly reduce the risk of liability stemming from oral statements.

3. Reassess Anti-Assignment Clauses

Finally, plan sponsors should reevaluate the anti-assignment clauses within their plan documents. These clauses traditionally prevent providers from suing under ERISA by blocking them from obtaining assigned rights from plan participants. However, the Ninth Circuit ruling clarifies that these clauses do not shield against state tort claims based on misrepresentation. While they remain useful, they are no longer an absolute barrier when claims arise from what a TPA communicated rather than from the plan’s terms.

Broader Implications for the Health Insurance Industry

The Ninth Circuit ruling does more than just alter the landscape for negligent misrepresentation claims in its jurisdiction; it also serves as a cautionary tale for health plan sponsors and administrators nationwide. The ruling's implications are likely to encourage out-of-network providers to pursue claims more vigorously, knowing that they may have a viable path to seek damages based on the information provided by plan administrators.

Moreover, as health insurance continues to evolve amid a changing regulatory environment, the need for clear communication and accountability becomes increasingly paramount. The potential for differing legal interpretations across circuits means that brokers and health plan sponsors must stay informed about the latest rulings and their implications for operational practices.

Key Takeaways

• ERISA's preemption defense is weakened: Claims of negligent misrepresentation are no longer automatically preempted in the Ninth Circuit.
• Plan administrators face new liabilities: Benefits verification calls may expose health plans to state tort claims.
• Compliance is critical: Brokers should initiate compliance conversations with multi-state employers regarding verification call practices.
• Recordkeeping is essential: Recording verification calls can provide critical evidence in potential lawsuits.

Frequently Asked Questions

What is the significance of the Ninth Circuit ruling?

The Ninth Circuit ruling is significant because it clarifies that ERISA does not preempt state tort claims based on negligent misrepresentation from benefits verification calls. This distinction exposes health plan administrators to potential legal liability, altering how they manage communications with out-of-network providers.

How can plan sponsors mitigate liability risks?

Plan sponsors can mitigate liability risks by conducting audits of their TPAs to ensure that benefits verification calls are recorded, reviewing the information provided during these calls, and reassessing anti-assignment clauses in their plan documents. These steps can help protect against potential claims arising from misrepresentation.

What should brokers advise multi-state employers to do?

Brokers should advise multi-state employers to engage in compliance conversations focused on understanding the legal landscape across different circuits. This includes confirming whether TPAs record verification calls, evaluating the content of these calls, and ensuring proper disclaimers are in place.

What are the potential consequences of the ruling for out-of-network providers?

For out-of-network providers, the ruling opens the door for pursuing claims against health plan administrators when they feel misled during the benefits verification process. This change could lead to increased litigation and a more vigilant approach to how providers interact with health plans.