Claims processing for health care and disability plans is a routine administrative task that is often taken for granted. If the employer has a fully insured plan, the insurer handles claims. If the employer has a self-funded health care plan, usually an outside third party administrator is hired to handle claims for benefits. Either way, the employer who sponsors the plan typically depends on someone else to ensure that the paperwork is being handled correctly.

In the past, this “hands off” approach to claims procedures made sense. If the plan document gave the administrator discretion to determine eligibility for benefits, the federal courts would like to see whether the plan’s claims procedure “substantially complied” with Department of Labor regulations. If so, a federal court would only overturn a denied claim for benefits if the plaintiff could show that the administrator’s decision was an “abuse of discretion” (a very high burden of proof). In other words, a less-than-perfect claims procedure usually would survive judicial scrutiny, and a denied claim would be upheld by the courts.

Two recent developments – one involving participant litigation, the other involving Department of Labor audit activity – justify a closer look at plan claims procedures. As explained below, both the federal courts and the Department of Labor are now strictly scrutinizing claims procedures for compliance with ERISA’s statutory and regulatory requirements.

By way of background, Section 503 of ERISA requires that if a participant’s claim for plan benefits is denied, the participant must receive a notice of the denial that sets forth “the specific reasons for such denial, written in a manner calculated to be understood by the participant.” Lengthy separate regulations for retirement, health care, and disability plans elaborate on this requirement. In Halo v. Yale Health Plan, 819 F.3d 42 (2d Cir. 2016), the Second Circuit rejected the traditional “substantial compliance” approach to claims procedures and held that the plan administrator had to demonstrate strict compliance with Department of Labor regulations or else lose the benefit of highly deferential abuse of discretion judicial review. In Halo, the plan administrator made two errors. First, the claim was denied beyond the time limit specified in the regulations. Second, in denying the claim, the notice simply stated “Service not Authorized” without further explanation. Based on these errors, the Second Circuit ruled that in reviewing the denied claim, the district court judge should apply a de novo standard of review. Under a de novo standard of judicial review, the federal judge (not the plan administrator) decides whether or not to grant the participant’s claim for plan benefits.

Since Halo was decided, the principle of strict compliance that underlies the decision has been applied by the district courts in the Second Circuit in other contexts. For example, in Salisbury v. Prudential Ins. Co. of America, decided on February 28, 2017, a district court judge decided to apply a de novo standard of review to a denied claim for disability benefits because the plan administrator failed to explain the “special circumstances” that made an extension of time to review the claim necessary. In Schuman v. Aetna Life Ins. Co., decided March 20, 2017, the district court judge decided to apply a de novo standard of review based on four technical violations. These violations included the fact that the insurer had problems determining which version of the summary plan description applied to the participant, the plan had failed to provide the participant with the internal policy guidelines used by the insurer to determine claims for benefits (which later came to light during discovery after the lawsuit was filed), and the final appeal denial letter did not fully address the participant’s objections to the initial claim denial letter.

Recent audit activity by the Department of Labor also indicates a shift in enforcement policy with a renewed emphasis on claims procedures. For example, we have seen audit letters requesting the employer to provide “all Participant complaints about claims payment or processing.” Plan sponsors are now being asked during audits to provide all codes used to deny claims and their related definitions, along with documents that describe the plan’s procedures for processing claim, complaints, grievances and appeals of denied claims for benefits. Finally, plan sponsors are being asked by Department of Labor auditors to provide any internal or externally conducted claims audits and any report on plan operations “completed by a service provider or consulting firm.” Our firm takes the position that internal audits conducted by attorneys for the employer are protected by the attorney-client privilege and would not have to be disclosed to a Department of Labor auditor.

In light of these developments, we suggest that plan sponsors take a proactive approach and reexamine their claims procedures. Below are a few initial key points to focus on when reviewing your plan’s procedures.

1. Timely Responses and Deadlines. Is there a tracking system in place for responding to participant requests for plan documents and notices of claims decisions and appeals? Who is responsible for ensuring that deadlines are met?
2. Providing the Correct Plan Documents. When a plan changes frequently, confusion may arise as to which version of the plan and related summary plan description governs a participant’s claim. Providing the wrong version provides a basis for the participant to later challenge the claims review process as flawed. Are safeguards in place to ensure that the correct plan documents are being provided in response to a participant’s request?
3. Internal Claims Guidelines. Insurers can be reluctant to release internal guidelines for determining claims for benefits. Does your insurer or third party administrator use internal guidelines, and if so, are they willing to produce these guidelines if requested by a participant?
4. Clear and Specific Reasons for Denied Claims. Who is responsible for reviewing a notice of a denied claim to ensure that the specific reasons for the denial are identified, and that the notice is written in a manner that is understandable to the plan participant?
5. Procedures and Decision-Makers. If asked by a plaintiff’s attorney or a Department of Labor auditor, could you produce documentation providing an overview of who reviewed what documents as part of the procedure for a particular claim? Who collects and responses to participant complaints about claims and payments? Who makes a final decision on a denied claim and related appeals – the insurer, the third party administrators, or the employer who sponsors the plan? These roles and responsibilities should be clearly defined. If the governing plan document gives the employer the power to review and approve or overrule claims decisions by an insurer or a TPA, then the employer is equally responsible for the decision as a co-fiduciary.

Claims processing and related administration is a routine task that is easily taken for granted. In today’s heightened compliance environment, however, it is important to revisit plan claims procedures for strict compliance with current regulations.

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