A recent health insurance case, Vaught v. Scottsdale Healthcare Corp. Health Plan, 2008 U.S.App.LEXIS 20918 (9th U.S. Circuit Court of Appeals, Sept. 29), dealt with the issue of whether medical expenses incurred in a drunken driving motorcycle accident were covered under the plaintiff’s health insurance plan. However, before addressing the merits of the underlying claim, the question before the court turned on whether the plaintiff adequately exhausted his pre-suit appeals before bringing suit. The court discussed the ERISA claim exhaustion requirement and noted that exhaustion was excused if such procedures would be futile or the available remedy inadequate. The court also pointed out that 29 C.F.R. section 2560.503-1(l) excuses exhaustion where a plan fails to establish or follow reasonable claims procedures. Although there was no dispute in this case as to whether the plaintiff sought an appeal, the focus of the dispute was on whether the plaintiff’s appeal letter offered a sufficient explanation as to why the claim determination was incorrect because the arguments challenging the claim decision in court had not previously been raised before the plan administrator. The court ruled for the plaintiff, focusing on ”issue exhaustion.”

The plan asserted that because the plaintiff’s argument in the district court was different from the issues raised in his letter to the plan administrator, the new theory raised by the plaintiff should be barred. The court disagreed, citing Sims v. Apfel, 530 U.S. 103, 107 (2000), a Social Security disability benefit dispute, in which the Supreme Court held that issue exhaustion was unnecessary in Social Security claims. Sims ruled that issue exhaustion is usually required only when a statute or agency regulation imposes such a requirement. The ERISA law, like the Social Security Act and regulations, contains no issue exhaustion requirement, nor, according to the court, is it a requirement of the insurance contract.

Another argument raised in support of imposing an issue exhaustion requirement is the rule in appeals that issues not presented to the lower court are waived. However, the 9th Circuit found that principle inapplicable as well. Again citing Sims, the court explained that the Social Security system is inquisitorial, and it is unfair to impose an issue-exhaustion requirement when the agency does not notify the claimant that all issues must be first presented to the agency.

Hence, the court found: ”Sims leads to the conclusion that issue exhaustion is not applicable in the ERISA context. First, the internal review process mandated by ERISA and set forth in the EOB [explanation of benefits form] provides for an inquisitorial process, in which the plan must provide the opportunity for ‘a full and fair review’ of any claim denial. See 29 U.S.C. § 1133(2). While the ERISA statute and regulations do not explicitly describe these procedures as non-adversarial, we recognized in Amato that the institution of these review procedures ‘was apparently intended by Congress to,’ among other things, ‘provide anon adversarial method of claims settlement.’ 618 F.2d at 567 (emphasis added).”

Finding ERISA’s pre-suit appeal shares the same non adversarial characteristics of Social Security claims, and because it is contemplated that many claimants will lack representation by attorneys, the court of appeals deemed it inappropriate to impose such strict requirements. Also weighing against an issue-exhaustion requirement is the plan’s failure to notify claimants that all issues would need to be presented in the pre-suit appeal. The court also found support for its conclusion in Wolf v. Nat’l Shopmen Pension Fund, 728 F.2d 182, 186 (3d Cir. 1984), which found: ”Section 502(a) of ERISA does not require either issue or theory exhaustion; it requires only claim exhaustion.”

There was a strong dissent, however, which contained the following colorful language: ”By transforming the Plan’s review requirement in this manner, however, the majority allows an ERISA claimant to engage in a court-sanctioned game of Texas Hold ‘Em against a Plan playing with all of its cards face up. An ERISA claimant challenging his plan’s denial of coverage can keep his cards close during the administrative appeals process, rolling the throwaways, and waiting until his action in district court and after the Plan Administrator has stopped playing, to play his trump card: the real reason he challenges his plan’s denial of coverage. An action challenging an ERISA plan’s denial of benefits, however, should not be a game of poker. Indeed, a primary purpose of the exhaustion requirement is to give an ERISA fiduciary the first opportunity to interpret its plan and fully to consider its determination before a claimant seeks court intervention. Requiring an ERISA claimant to present to the ERISA fiduciary the reasons upon which he claims error for the Plan’s denial of coverage – at least where, as here, the policy itself contains this express requirement – is critical to effectuate this purpose.”

This is an especially difficult issue because there is substantial law which imposes on the plan administrator a duty to set forth all reasons for the denial and to not present a post hoc justification after the fact. The ERISA statute (29 U.S.C. § 1133(2)), the regulations (29 C.F.R. § 2560.503-1(g)(i)), and several cases (See, e.g., Halpin v. W.W. Grainger Inc., 962 F.2d 685 (7th Cir. 1992)) prohibit benefit plans from enunciating new reasons for the denial. Why should benefit claimants, but not plan administrators, be allowed the opportunity to generate new reasons after the pre-suit appeals are exhausted? After examining all relevant factors, the answer to the question posed above favors the claimants. In addition to the pro-claimant purpose behind the ERISA law (29 U.S.C. § 1001(b)), the citation to Sims and the reasoning behind that ruling fully justifies not having an issue-exhaustion rule in ERISA cases. But there is one additional reason left unstated in the opinion. The court remarked in passing that pre-suit appeals are adjudicated by neutral decision makers, a point the Supreme Court recently refuted in Metro.Life v. Glenn, 123 S.Ct. 2343 (2008), which ruled that insurers act under a structural conflict since ”every dollar provided in benefits is a dollar spent by [the insurer]; and every dollar saved … is a dollar in [the insurer’s] pocket.” 123 S.Ct at 2348, citing Bruch v. Firestone Tire & Rubber Co., 828 F.2d 134, 144 (3d Cir. 1987). Hence, there is no neutrality.

The pre-suit appeal is also not at all analogous to an administrative procedure governed by the Administrative Procedures Act or a law such as the Social Security Act. The statutory history of 29 U.S.C. section 1133, the statutory provision from which ERISA exhaustion arises, also makes it clear that unlike administrative hearings, pre-suit appeals under ERISA are devoid of any type of evidentiary hearing or even an arbitral forum. According to the House Conference Report, section 1133 was included as a compromise between the original House Bill, which had no such provision and the Senate Bill, which provided for review and arbitration of benefit disputes. H.R.Rep.No.93-1280, 93d Cong., 2d Sess., reprinted in 1974 U.S.Code Cong. & Ad.News 5038, 5108. Also entirely absent from pre-suit appeals are discovery proceedings or the opportunity to cross-examine any individual involved in the claim determination.

These points were also made by the 7th Circuit in Ramsey v. Hercules Inc., 77 F.3d 199, 204 (7th Cir. 1996), where the court acknowledged: ”Crucial differences exist between findings of fact made by a private entity such as a plan administrator, and findings made by duly authorized administrative law judges, agencies, or federal district courts. Underlying the deferential review that fact findings of the latter bodies enjoy is a well established set of procedural protections that stem from the Constitution and individual statutes. Plan administrators, in contrast, neither enjoy the acknowledged expertise that justifies deferential review for agency cases … nor are they unbiased fact finders like the courts.”

Thus, for all of the foregoing reasons it would be grossly unfair and inappropriate to subject ERISA benefit claimants to issue as well as matter exhaustion prior to suit.

This article was initially published in the Chicago Daily Law Bulletin.

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