Employee Benefits
The “War” Between Out-of-Network Providers and Insurers Spreads Into COVID-19 Territory
ERISA litigators know that a war has been raging between “out-of-network” medical providers, on one hand, and the entities that insure and administer group health plans, on the other (collectively, “Insurers”). For years, out-of-network providers have been suing plans and Insurers claiming they were “underpaid” for their medical services, often to the tune of millions of dollars. Hundreds of these cases have cropped up around the country in recent years. COVID-19 has now opened up a new front in this war, and the first skirmishes have already started. On April 10, 2020, Columbus Specialty Hospital (“Columbus”) filed a complaint in New Jersey state court seeking $36 million from various New Jersey insurance companies (the “Defendant-Insurers”) for payment of treatment it provided during the “COVID-19 crisis.” See Columbus Specialty Hosp. v. Amerigroup Corp., et al., No. ESX-L-002635-20 (N.J. Sup. Ct. April 10, 2020). According to Columbus, it provides “long term acute care” to “immunocompromised seniors”—the “prime targets for COVID-19 infection.” Columbus claims the Defendant-Insurers grossly underpaid it “for the live-saving treatment” it provided to those “vulnerable patients.” Columbus’s lawsuit is similar in some ways to the out-of-network provider cases that have cropped up around the country—but it adds a few new twists. The Common Elements Columbus’s lawsuit shares common features with the out-of-network provider lawsuits that came before it. Like the providers in those cases, Columbus does not directly sue for benefits under the terms of the health plans at issue. Instead, it asserts various contractual and quasi-contractual claims, alleging (among other things) that the Defendant-Insurers promised to pay Columbus its “usual and customary rates” for the services in question. This is a common tactic by out-of-network providers because their “usual” rates are much higher than the rates called for in the plan documents. In another relatively common move, Columbus asserts claims under state “prompt pay” statutes, which regulate the length of time in which an Insurer must pay providers for submitted claims. The New Elements While Columbus’s lawsuit shares a common structure with other out-of-network provider cases, it introduces new elements and could set new trends in this area of litigation. First, Columbus tries to bolster its claims by highlighting the emotional aspects of the “national and state emergency” related to COVID-19. According to Columbus, the Defendant-Insurers’ failure to pay does not simply affect its bottom line; it means members of the “greatest generation” are not receiving “the live-saving care” they deserve. Columbus also accuses the Defendant-Insurers of putting health care workers at risk by preventing Columbus from purchasing personal protection equipment. By tying its claims to the COVID-19 crisis, Columbus is hoping to tilt the scales of equities in its favor—a potentially effective move, especially for claims tried before a jury. Expect other medical providers to follow suit and tie their claims to the COVID-19 crisis. Second, Columbus’s lawsuit indicates that out-of-network providers may be shifting tactics for how they attempt to bind Insurers to “contractual” promises to pay the providers’ rates. As mentioned above, these out-of-network provider lawsuits often turn on whether the Insurer and provider formed a “contract” through communications about reimbursement rates. Traditionally, providers have alleged that such a contract or promise arose from phone calls with an Insurer’s billing department, during which the Insurer allegedly confirmed a patient’s coverage and reimbursement rates. Here, by contrast, Columbus claims it actually faxed formal contracts to the Defendant-Insurers, which they accepted by their conduct. This tactic is plainly an attempt to avoid the contractual formation and ERISA preemption defenses that defendants usually assert in these cases. Expect other out-of-network providers to employ similar tactics in their efforts to bind Insurers to commitments outside the four corners of the relevant health plan document. Third, Columbus’s lawsuit illustrates the astonishing size of provider bills for COVID-19 treatments and the limited time that Insurers have to process those claims. Columbus alleges, for example, that it billed $8.9 million for one patient for services related to COVID-19. While that sum is just an allegation, it is nonetheless a staggering number. And Columbus invokes New Jersey’s “prompt pay” statutes to insist that the Defendants-Insurers should have processed its multi-million dollar bills at breakneck speeds. This combination of large bills and pressure to pay those bills quickly puts enormous pressure on Insurers’ billing departments. This flurry of large bills also opens the door to fraud and abuse by unscrupulous providers. Insurers will have to find a way to manage this risk, while still ensuring that proper bills are paid in a timely fashion. But inevitably, Insurers will discover overpayment after the fact, which may trigger recoupment actions by Insures and the group health plans, which they administer. Should you seek additional information about these types of claims, feel free to contact us.
April 29, 2020
by Andrew Holly and Nick Bullard
Employee Benefits
What All Employers Should Know About Disaster Relief Funds to help with COVID-19
The COIVD-19 pandemic is placing new and unprecedented demands on both taxable and tax-exempt employers and their employees. One option many employers may not have previously considered is the use of a tax-exempt employee assistance fund. Depending on the structure of the fund, declaration of qualified disaster is an important requirement for the fund to issue financial assistance to individuals. Although the Internal Revenue Service (“IRS”) has yet to issue official guidance confirming the COVID-19 pandemic as a “qualified disaster” under Section 139 of the Internal Revenue Code (the “Code”), the President declared a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (“Stafford Act”) due to extraordinary circumstances resulting from COVID-19. A qualified disaster relief payment is defined under Section 139(c)(2) of the Code to include a federally declared disaster as defined by Section 165(i)(5)(A) of the Code, which defines the term as any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Stafford Act. If employers do not already have an established employee assistance fund, deciding and implementing the most beneficial structure during a crisis can seem daunting. We have experience forming and implementing employee assistance funds, and quickly and efficiently navigating the application for tax-exempt status with the IRS. Below is an overview of issues employers should consider when contemplating a new employee assistance fund program. What is an employee assistance fund? The term employee assistance fund (“EAF”) is generally used to describe several types of employer-sponsored Section 501(c)(3) (all subsequent references to “Section” shall mean Sections of the Code) charitable tax-exempt organizations designed to provide emergency, need-based financial assistance to an employer’s work force in the event of disaster or personal hardship impacting individual employees or their families. EAFs are typically structured as a public charity, a donor advised fund, or a private foundation. A Section 501(c)(3) EAF must serve a charitable class, which must be large enough or sufficiently indefinite that the community as a whole, rather than a pre-selected group of people, benefits from the EAF grants. EAFs may restrict benefits to a certain company’s employees and still serve a charitable class so long as the EAF’s assistance policy is open-ended and include employees affected by any current or future disasters or emergencies. What are the distinguishing characteristics of an EAF structured as a public charity? An EAF established as a public charity described in Sections 509(a)(1) and 170(b)(1)(A)(vi) receives its funding primarily through donations from the general public, usually through donations from the company’s individual employees. A public charity EAF can provide financial assistance in response to any type of disaster or employee emergency hardship, so long as the related employer does not control the organization. Generally, these requirements are met when non-executive (i.e., rank and file) employees comprise a significant portion of both the board of directors and the committee that selects eligible individuals for need-based distributions from the EAF. Unlike a donor advised fund or a private foundation, a public charity EAF can provide assistance to eligible individuals in response to any type of disaster or employee emergency hardship situation. What are the distinguishing characteristics of an EAF structured as a donor advised fund? A donor advised fund is a community foundation-type of organization that maintains separate funds or accounts on behalf of individual or corporate donors. The donors then receive advisory privileges over the distribution of the donated funds, but such distributions must still be made for charitable purposes. While a donor advised fund is usually classified as a public charity, important distinctions for donor advised EAFs are subject to additional restrictions. Typically, a donor advised fund (whether or not an EAF) cannot make grants to individual persons. However, a donor advised EAF can make grants to individual employees and their family members if: the EAF makes need-based distributions adequately documented by the EAF; the EAF’s sole purpose is to provide relief after a qualified disaster as defined in Section 139; and eligible recipients are selected by a committee independent from the sponsoring employer. What are the distinguishing characteristics of an EAF structured as a private foundation? EAFs structured as private foundations are typically funded solely through donations by an employer, and not by contributions from individual employees or the general public. Like the donor advised EAFs, an EAF structured as a private foundation may only provide need-based assistance to employees or family members impacted by a qualified disaster as defined in Section 139. Also, the private foundation EAF’s selection committee must be independent from the employer, and payments to or for the benefit of individuals who are directors, officers, or trustees of the private foundation may subject the foundation to the self-dealing rules under Section 4941. Are payments from an EAF taxable to the individual recipients? No. Payments from a Section 501(c)(3) EAF as a result of a disaster or emergency hardship are considered to be gifts and are excluded from the recipient’s gross income under Section 102. Are disaster relief payments taxable if received directly from an employer and not made through an EAF? It depends. If the payment meets the definition of a qualified disaster relief payment under Section 139 for qualified disaster expenses that are not otherwise covered by insurance or other reimbursements, such payments are not subject to income tax, self-employment tax, or other employment taxes even if made directly from an employer. Are donations to an EAF tax-deductible? If recognized by the IRS as a Section 501(c)(3) organization, donations by individuals or corporations to an EAF may eligible as a deduction as a charitable contribution under Section 170. Changes included in the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) includes expanded Section 170 deductions for both individuals (itemizers and non-itemizers) and corporations. Are there restrictions on EAF payments to individuals? Yes, particularly when made by an EAF structured as a donor advised fund or a private foundation that are limited to Section 139 qualified disaster relief payments. As relevant to payments from an EAF, qualified disaster relief payments are defined in Section 139(b) to include any amount paid (regardless of the source) for the benefit of an individual: to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster; to reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster; and by a person engaged in the furnishing or sale of transportation as a common carrier by reason of the death or personal physical injuries incurred as a result of a qualified disaster. Qualified disaster relief payments do not include payments for expenses paid for by insurance or other reimbursements, or income replacement payments, such as payments of lost wages, lost business income, or unemployment compensation. Can an EAF provide assistance to other businesses? It depends, but an EAF structured as a public charity likely has the most latitude to provide financial assistance to other businesses as it is not limited to qualified disaster relief-type payments. For example, a charitable organization may provide assistance to a for-profit business if the assistance is a reasonable means of accomplishing a charitable purpose (e.g., relief of the poor and distressed or lessening the burdens of government), and any benefit to private interests is incidental to the accomplishment of such charitable purpose.
April 1, 2020
by Claire H. Topp and Mackenzie McNaughton
Employee Benefits
FFCRA Employment Benefit Exclusions for Health Care Providers and Emergency Responders
The Dorsey Health Law blog team keeps readers up-to-date on relevant topics in the health care industry. In order to do so, the members of the blog team communicate regularly with other practice groups within the firm for applicable updates from client publications. For this post, we would like to thank Dorsey’s Jillian Kornblatt and Anabel Cassady for the linked article: FFCRA Employment Benefit Exclusions for Health Care Providers and Emergency Responders
March 25, 2020
by Jillian Kornblatt and Anabel Cassady
Employee Benefits
Supreme Court holds “actual knowledge” in ERISA statute means “what it says”
On February 26, 2020, the Supreme Court held that the term “actual knowledge” in the ERISA statute of limitations clause found in 29 U.S.C. §1113(2), ERISA §413 applicable to breach of fiduciary duty cases means “what it says”: “to have ‘actual knowledge’ of a piece of information, one must in fact be aware of it.” The ruling came out of the case Intel Corp. Investment Policy Committee v. Sulyma, No. 18–1116, filed in 2015 by an ERISA plan participant on behalf of a putative class alleging that the Intel Corp. Investment Policy Committee (“Intel”) breached its fiduciary duties when it increased investments in “alternative” investments (e.g. hedge funds, private equity, and commodities) that generated sub-par returns in the post-recession market. Sulyma received disclosures from Intel regarding the Committee’s investment decisions in 2011 and 2012, but he testified that he did not remember viewing them. After Sulyma filed suit in 2015, Intel moved for summary judgment, arguing that because he received the disclosures more than three years earlier, his claim was time barred under the three-year statute of limitations set forth in §1113(2). Rejecting Sulyma’s argument that his claim was instead subject to ERISA’s six-year statute of repose, the district court agreed with Intel and granted its motion for summary judgment. The Ninth Circuit reversed on the basis that “actual knowledge” required more than proof of sufficient disclosure, further widening a circuit split created by a 2010 Sixth Circuit opinion holding that actual knowledge required only such disclosure. See Brown v. Owens Corning Investment Review Comm., 622 F.3d 564, 571 (6th Cir. 2010). The Supreme Court affirmed the Ninth Circuit, thereby resolving the circuit split. To arrive at this holding, the Supreme Court relied on dictionary definitions, past precedent, and Congress’s repeated “linguistic distinctions” in the ERISA statutory scheme regarding what a plaintiff should know or actually knows. Specifically, the Court placed great stock in the fact that in some parts of the ERISA statutory scheme, Congress created statutes of limitation based on “the earliest date on which the plaintiff acquired or should have acquired actual knowledge of the existence of such cause of action,” while in others it specified only actual knowledge. Compare 29 U.S.C. §1303(e)(6), (f)(5) (emphasis added) with §1113(2). Because section 1113(2) provides only for “actual knowledge” without explicitly identifying any other forms of knowledge, the Court ruled that constructive knowledge was not enough to trigger the statute. Although Sulyma involved a retirement plan, it has implications for employer-sponsored health plans that are also governed by ERISA. While the Court’s ruling makes it harder for defendants to win summary judgment on ERISA’s three-year “actual knowledge” statute of limitation, the Court did not entirely foreclose such relief. The Court stated defendants can still prove actual knowledge through inferences from circumstantial evidence, such as evidence of disclosure, electronic records showing receipt and reviews of those disclosures, and actions taken in response to the information contained within them. But such evidence may be disputed as a factual matter, making judgment on an early dispositive motion more difficult. Nevertheless, some plan sponsors may wish to consider implementing additional procedures associated with the distribution of plan documents and the disclosure of plan information to create a stronger evidentiary record of when participants become aware of a particular development. In addition, the Court opened a potential window for defeating motions for class certification. Under the Federal Rules of Civil Procedure, a class may be certified only when plaintiffs present “common issues” of law and fact, and when their claims are “typical” of those of others in the class. Fed. R. Civ. P. 23. Whether a participant had “actual knowledge” of a particular communication or disclosure that might trigger the statute is inherently individual in nature, arguably precluding certification of a class. Thus, although Sulyma may provide ERISA plan participants with additional ammunition for defeating statute of limitation defenses in fiduciary misconduct cases, such claims may be more difficult to certify. Finally, although the Sulyma Court did not address the subject, employers should be mindful of potential opportunities to manage ERISA risk by incorporating shorter limitation periods in plan documents. In Heimeshoff v. Hartford Life & Acc. Ins. Co., 571 U.S. 99 (2013), the Supreme Court ruled that plans could impose shorter statutes of limitations on ERISA claims for benefits. Sponsors who choose to include such plan terms should be careful to ensure that these limits are consistent with updated case law and are properly communicated to participants and claimants. Although there is little case law providing that this same rule will apply to breach of fiduciary duty claims, compare Hewitt v. W. & S. Fin. Group Flexible Benefits Plan, 17-5862, 2018 WL 3064564, at *2 (6th Cir. Apr. 18, 2018) (enforcing plan provision for shorter statute of limitations to fiduciary claim) with Chelf v. Prudential Ins. Co. of Am., 3:17-CV-00736-GNS, 2018 WL 4219424, at *7 (W.D. Ky. Sept. 5, 2018) (declining to enforce plan provision for shorter statute of limitations to fiduciary claim), courts may provide greater clarity in future litigation.
March 23, 2020
by Vanessa J. Szalapski and Stephen P. Lucke
Employee Benefits
Don’t Get Bitten by Your COBRA Notices
In a growing wave of class action lawsuits, plaintiffs are targeting employers who have allegedly failed to provide proper notice of health care coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”). The wave prompted at least six new lawsuits in 2019 alone, and some have already netted seven-figure settlements. To avoid this litigation trend, employers should take a hard look at their COBRA notices to ensure they comply with governing regulations. COBRA requires employers who sponsor group health plans to allow plan participants to continue coverage at their own cost when a “qualifying event” occurs that would otherwise terminate coverage. 29 U.S.C. § 1161(a). The most common “qualifying event” is termination of employment, but there are several others, including the death or divorce of a covered employee. Under COBRA, plan administrators must provide an individual with notice of the right to continued COBRA coverage (a) when the individual first joins the plan and (b) when a qualifying event occurs. 29 U.S.C. § 1166(a). That COBRA notice must explain the right to continue coverage “in a matter calculated to be understood by the average plan participant.” 29 C.F.R. § 2590.606-4(b)(4). Federal regulations specify 14 items that the notice should include—for example, an explanation of how to enroll in COBRA. 29 C.F.R. § 2590.606-4(b)(4)(i)-(xiv). In addition, the Department of Labor (“DOL”) has published a model COBRA notice. Use of the DOL model notice “is not mandatory.” 29 C.F.R. § 2590.606-4(g). But according to DOL official publications, use of the model notice represents “good faith compliance with COBRA’s general notice content requirements.” The recent wave of class action lawsuits challenges whether employers’ COBRA notices were sufficient. While the precise allegations differ, the plaintiffs generally allege that the notice they received did not include all the information set forth in the regulations or in the DOL’s model notice, and that the average plan participant could not understand the notice. Failure to comply with COBRA’s notice requirements can be costly, especially in the context of a class action. COBRA provides a statutory penalty up to $110 per day per person for failure to provide the required notices. 29 U.S.C. § 1132(c)(1). The penalty adds up quickly. Take, for example, a class of 100 employee who lost their coverage one year ago and received a deficient COBRA notice. The penalty for the employer could be several million dollars, before accounting for an award of legal fees and costs (which COBRA allows). Thus far, employers have been unsuccessful in defeating these COBRA notice lawsuits at the pleading stage. Some employers have argued that the plaintiff lacked constitutional standing to sue because the alleged defects in the notice—often seemingly innocuous—did not cause any concrete injury. Other employers have argued they were in substantial compliance with the DOL regulations. To date, however, those arguments have not convinced courts to dismiss complaints at the pleading stage. A few of the lawsuits have already settled for seven- and six-figure numbers. The rest are proceeding forward. There are steps employers can take now to minimize the risk of being swept into this COBRA notice litigation. To begin, employers should check whether their COBRA notices contain the 14 items suggested by the regulations. See 29 C.F.R. § 2590.606-4(b)(4) (i)-(xiv). Employers should also draft their notices in as simple, straightforward language as possible. In addition, employers should seriously consider using the DOL’s model notice to gain the protection of “good faith compliance.” Even when using the model notice, it may be appropriate to supplement with additional, plan-specific information. Regardless of whether your COBRA notices could use minor or major changes, now is the time to make those changes. Doing so could save you from a class action complaint.
January 21, 2020
by Nick Bullard
