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Employee Health Plans and the Employee Retirement Income Security Act (ERISA):
A brief introduction for AT advocates

by John Allen, Professor of Law
University of Iowa, College of Law, Iowa
July 29, 1998


Approximately 50 million people are beneficiaries of employee health plans covered by the Employee Retirement Income Security Act of 1974 (ERISA). Employee health plans are a common source of assistive technology, most often under "durable medical equipment" or "prosthetic device" provisions in plans. A basic understanding of ERISA and the rights and remedies it provides is essential for those representing and advising individuals seeking assistive technology under those plans. Understanding the scope and preemptive effect of ERISA is essential in the development of policy aimed at increasing the availability of assistive technology to consumers in the U.S.

ERISA is a federal law passed in 1974 to regulate the administration of employee benefits plans. By 1974, employee benefits plans had become common place, and concerns about the integrity and reliability of some of these plans had arisen. Congress sought to protect plan participants and beneficiaries through "requiring the disclosure and reporting to participants and beneficiaries of financial and other information ..., by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the Federal courts".

ERISA does not mandate that an employer provide particular benefits. The substantive protections of ERISA relate to the employer's administration of a plan, but do not dictate the specific benefits to be provided in connection with a plan. The Act does, however, provide a remedy for individuals who have been denied benefits under a plan. The Department of Labor is responsible for administering and enforcing the non-tax provisions relating to welfare plans.

Some employers provide employee health benefits through the purchase of insurance from third party insurance companies. Other employers are "self-insured", meaning that they fund benefits directly rather than through insurance. Both types of health plans can be subject to ERISA regulation.

Congress saw the regulation of pension and welfare plans as an exclusively federal concern. Thus, the law was intended to supplant and preempt most state laws that might otherwise affect these plans. This preemptive effect has frustrated attempts at the state level to make employee health plans more responsive to consumers.
Any law as pervasive as ERISA will have critics, and ERISA has more than its share. From a consumer perspective, many have complained that the remedial provisions are too cumbersome, and that courts are required to be too deferential to plan administrators about coverage issues. Recently, the chief complaint has been that plan administrators are unjustifiably insulated from state laws that would make them liable for damages suffered where benefits have been wrongfully denied. There are currently a number of proposals to amend various provisions of ERISA. After a brief review of the current law, this article will consider some of the key changes that have been proposed.

ERISA applies, with specified exceptions, to any "employee benefit plan" established or maintained by employers "engaged in commerce or in any industry or activity affecting commerce", as well as to plans established by labor organizations "representing employees engaged in commerce or in any industry or activity affecting commerce..." Almost any employer would meet this broad commerce test. The phrase "employee benefit plan" includes both "pension" plans and "welfare" plans. The phrase "welfare plan" is broadly defined to include:
any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers scholarship funds, or prepaid legal services....

The vast majority of group medical plans provided in connection with employment meet this broad definition.
There are five categories of plans that are specifically exempted from the coverage of ERISA. Plans that are maintained by federal and state governments and their subdivisions and instrumentalities are exempted. The law also exempts church plans, plans maintained solely to comply with workers' compensation laws or unemployment compensation or disability insurance laws, plans maintained outside of the U.S. primarily for persons who are nonresident aliens, and "excess benefit plans" that are unfunded.

The substantive rights created by ERISA for plan participants and beneficiaries relate to the manner in which plans are administered. Much of ERISA is concerned with maintaining the financial viability and integrity of plans. These provisions relating to the funding of plans are beyond the scope of this article. For purposes of this discussion, there are three significant substantive rights created under ERISA: the right to receive information about the plan, the right to certain procedures in connection with claims for benefits, and the right to be free from interference with the exercise of rights under the plan or ERISA.

Information about the plan
Plan administrators are required to provide each participant and beneficiary receiving benefits a "summary plan description". The summary plan description is supposed to be written in a manner that can be understood by the average plan participant. The summary plan description must include information concerning the administration of the program, and should be "sufficiently comprehensive to apprise the plan's participants and beneficiaries of their rights and obligations under the plan." The summary plan description must set out the procedures for presenting a claim for benefits, and the procedures for seeking review of a denial of benefits. In addition to the summary plan description, the plan administrator must provide various other categories of information about the plan when requested by a participant or beneficiary.
If an administrator fails to provide information which is required to be provided under ERISA by mailing it within 30 days from the date of the request for information, the law authorizes the participant or beneficiary to initiate a lawsuit. The court can order the administrator to provide the information. In addition, the court can, in its discretion, require the administrator to pay up to $100 a day from the date of the administrator's failure to provide the information.

Claims Procedures
ERISA requires that plan administrators follow certain procedures in connection with the handling of claims. If a claim for benefits is denied, the plan administrator must provide a written notice that sets forth the specific reasons for the denial. The participant or beneficiary must also be afforded "a full and fair review" of a denied claim. This review, however, is conducted by the administrator and not a disinterested third party.
The law does not set out a specific remedy for a plan administrator's failure to follow these procedures. The administrator's failure to provide an adequate notice or a full and fair review has been viewed as excusing a participant from meeting time limitations on seeking review and exhausting plan remedies prior to initiating a court action.

Interference with Protected Rights
The law provides that it is "unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provision of an employee benefit plan" or ERISA, or to interfere with the individual attaining any right under a welfare or pension plan. The law authorizes a civil action by the employee to vindicate this right. Most courts have held, however, that an individual is limited to contractual damages, and may not recover extra-contractual damages such as emotional distress and punitive damages.

The law authorizes a participant or a beneficiary to bring a lawsuit to recover benefits due under a plan. This federal cause of action is the exclusive remedy for enforcing a plan administrator's obligation to provide benefits under a plan. State law claims for breach of contract, and "bad faith" claims by which individuals can obtain compensatory and punitive damages where an insurer has refused to pay a claim in bad faith, are preempted by the federal law.
There is no question that the law authorizes an individual to bring a lawsuit to force a plan administrator to provide assistive technology called for under a plan. There are very few reported cases, however, in which individuals have sought judicial intervention to obtain assistive technology. The explanation for this lies in the nature of the exclusive federal remedy.

Most individuals contemplating a lawsuit do a simple cost-benefit analysis --parties weigh the costs of pursuing a lawsuit versus the benefits that a lawsuit might bring. In most instances involving assistive technology and ERISA, that analysis discourages pursuing legal action. Simply put, the potential benefits of a lawsuit seldom outweigh the costs associated with a lawsuit.

One of the chief deterrents to civil actions under ERISA is the complexity of the ERISA statute. There are very few attorneys representing individuals (as opposed to those representing employers and plan administrators) who have acquired a familiarity with the statute. Often an attorney will have to acquire a familiarity with the area, at significant cost, if she is to pursue a claim.

Another factor is the limited recovery available in most claims. The court may award only contractual damages -- in the case of assistive technology, the cost of the item sought. Although the cost of an item might be significant, without the prospect of the recovery of additional damages, there is seldom enough at stake to act as an incentive to attorneys to take these cases on a contingency basis. Thus, the individual is forced to pay on an hourly basis. Although attorneys fees may be recovered if successful, the individual must put substantial capital at risk.

There are also a number of pitfalls for unwitting parties. For example, although there is no explicit requirement in ERISA that an individual exhaust plan remedies prior to bringing a lawsuit, courts have generally required exhaustion prior to initiating a lawsuit. Individuals who have not followed all of the plan procedures for presenting their claims and seeking internal review, then, can have their claims in court dismissed. This is particularly problematic given that most individuals are not represented by counsel at the early stages of a claim for benefits under a plan.
Finally, in many instances the courts are deferential to the plan administrators who make the decisions in the first instance. Courts review benefits decisions under one of two standards, depending upon the terms of the plan itself. Where the plan administrator is conferred with "discretionary authority" to interpret the plan, the courts apply an "arbitrary and capricious" standard. Under this standard, courts will disturb the decision only if the plan administrator's decision is unreasonable -- the court can uphold the decision so long as it is not unreasonable, even if it might have made a different decision in the first place. Courts review decisions "de novo" where the plan administrator does not have this discretionary authority to interpret the plan. Even in these instances, however, the court acts as a reviewer of the administrator's decision, generally limiting itself to the evidence that was before the administrator.

Congress intended the regulation of employee benefit plans to be an exclusively federal task. ERISA provides that its provisions relating to welfare plans "shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan..."(emphasis added). The Supreme Court has interpreted broadly the "relate to" phrase. In both Shaw v. Delta Air Lines. Inc. and Metropolitan Life Ins. Co. v. Massachusetts, the Court gave the phrase its broad common sense meaning in determining that the State laws involved related to employee benefits plans.

Although the sweep of ERISA preemption is broad, there is a "savings clause". This clause provides that "nothing in this subchapter [relating to administration and enforcement] shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities". State laws that regulate insurance may be "saved" from ERISA preemption. Laws must have more than an "impact" on insurance to regulate insurance -- they "must be specifically directed toward that industry". Finally, the statute provides that employee benefits plans cannot be "deemed" to be insurance companies for purposes of state laws purporting to regulate insurance (referred to as the "deemer" clause).

Not surprisingly, these provisions have caused a great deal of confusion, and the Supreme Court has been called upon to decide several cases interpreting them. For purposes of the present discussion, there are two cases that warrant particular attention: Metropolitan Life Insurance Company v. Massachusetts and FMC Corporation v. Holliday. In Metropolitan Life, the Court reviewed a Massachusetts law that required group insurance plans to provide specified minimum mental health care benefits -- what the Court called a "mandated-benefit statute". The Court determined that although the statute clearly "related to" an employee benefit plan, it was not preempted by operation of the "savings clause". The Court held that the Massachusetts law "regulated insurance". The Court limited its decision to "insured plans" -- plans that purchased insurance to provide the actual benefits. In fact, Massachusetts had not required self-insured plans to provide the mandated minimum benefits.

In FMC Corporation, the Court considered State regulation of self-insured plans. In that case, the Court reviewed a Pennsylvania law that prevented a group health plan from seeking subrogation for medical expenses paid by the plan from a tort recovery. The Court determined that although the law fell within the "savings clause", the "deemer" clause exempted self-insured plans from treatment as insurance companies, and thus the coverage of the Pennsylvania law. The net effect of these cases is that insured plans are treated differently than self-insured plans in terms of State insurance regulation. While insurance companies providing health benefits can be subjected to State laws providing mandatory minimum benefits, self-insured plans are insulated from such State regulation.

Recent legislative proposals to amend ERISA could make employee health plans more consumer responsive. Both the Patients' Bill of Rights Act of 1998, S. 1890 and the Health Care Quality, Education, Security and Trust (QUEST) Act, S. 1712, would make available to consumers an external review of claims denials. These external reviews would not replace, but would be in addition to, the court review already available under ERISA. An external review process would provide a more readily accessible and no doubt cheaper opportunity for consumers to obtain a review by a disinterested (relatively speaking) party.

One of the most controversial provisions of the Patients' Bill of Rights Act would be the limitation on ERISA preemption. Under this provision, state causes of action for personal injury or wrongful death resulting from decisions in connection with the administration of health plans would not be preempted. Many think that this type of accountability would have a profound effect on the way that plan administrators respond to claims for benefits under plans.

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