Guest Article

Non-Network Benefits Denied When Dependent Failed to Meet Out-of-Area Criteria

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Summary: A group health plan did not act arbitrarily and capriciously when it denied coverage for a plan beneficiary who received non-network services from a non-network facility that was located outside of the plan's service area.

(June 11, 2001) - A plan properly denied out-of-network benefits for a dependent who had moved out of the service area to attend a non-network residential care facility, but did not meet the plan's eligibility requirements for out-of-area dependents, a federal district court in Illinois held. The case is Renaldi v. Sears Roebuck and Co., 2001 WL 290372 (N.D. Ill., March 21, 2001).

The Sears Plan

Under the self-funded group health plan of Sears Roebuck & Co., one plan option was an HMO provided by HealthCare Alliance (HCA). Value Behavioral Health (VBH) administered the plan's mental health and substance abuse benefits, which had the following provisions:

1. Plan participants and beneficiaries had to call a toll-free number so a mental health specialist could make an appropriate referral; and comply with guidelines to receive coverage for inpatient, residential, partial hospital or intensive outpatient programs only through authorized providers.
2. Preauthorization was required for inpatient mental health and substance abuse treatment for both in- and out-of-network benefits.
3. No out-of-network benefits for mental health/substance abuse was provided for "inpatient/residential, emergency room admission and partial hospitalization or intensive outpatient treatment."

Furthermore, the plan had "out-of-area dependent" provisions for:

Dependents who live full-time and permanently outside of the eligible zip code area in which the employee resides. This Plan is available to dependents whose permanent residence is other than that of the employee due to changes in family status such as divorce or legal separation. The Plan is not available to dependents who reside outside of the eligible zip code area on a temporary basis or for educational purposes only.

The plan provisions for in-network benefits did not apply to eligible out-of-area dependents. A separate section of the health plan enrollment form had to be filled out for such dependents. Furthermore, a separate letter regarding this dependent plan required that the toll-free number be called "to ensure maximum coverage of mental health or substance abuse care."

The plan also had a pre-existing condition exclusion where it would not pay benefits for 12 months for any injury or sickness in which medical advice or treatment was received during a six-month look back period.

Renaldi's Claims

Michael Renaldi was a Sears employee in Illinois. He and his daughter "Jane Doe" were covered under HCA plan. Doe had various hospitalizations relating to the aftermath of brain tumor surgery. In 1994, she was placed in an Idaho residential treatment center, CEDU Family of Services and Rocky Mountain Academy (RMA), but would periodically make "home visits" to see her parents. Renaldi's intent was to keep Doe at RMA until her high school graduation.

When Renaldi enrolled himself and Doe in the plan in February 1995, he listed Doe as an "eligible out-of-area dependent" because she was staying at RMA. However, in other employment materials he listed her as residing in his home state. Upon enrollment, Renaldi did not ask whether the plan would cover Doe's stay at RMA. However, prior to that time, he did receive the out-of-area dependent letter. However, he did not recall calling the toll-free number noted in that letter.

Generally, Renaldi's claims for Doe's expenses were denied because of: (1) the lack of pre-certification: (2) no out-of-network benefits were available for inpatient mental health or substance abuse treatment; (3) CEDU Family of Services and RMA were not VBH contracted providers and were not reimbursable regardless of whether medical necessity existed; and (4) inpatient treatment was not medically necessary. Issues also existed regarding the pre-existing condition clause.

VBH suggested that it would work with Renaldi to find ABH approved providers, and that it could certify medically necessary treatment with pre-certification in an in-network partial hospitalization program. However, Renaldi sued Sears, VBH and HCA for wrongful denial of benefits and violating ERISA's disclosure rules by not providing a basis for the claims denial.

HCA countered that numerous independent reasons existed for the denial of Doe's benefits, including: (1) failure to pre-certify; (2) the application of the pre-existing condition clause; (3) no medical necessity for in-patient treatment; (4) if medical necessity did exist, the treatment had to occur at a VBH network provider; and (5) Doe did not qualify as an eligible out-of-area dependent.

Wrongful Denial of Benefits

Because the plan administrator was given discretionary authority to interpret plan terms, the court used the "arbitrary and capricious" standard. Therefore, the court would defer to the plan administrator's decision unless it was found to be unreasonable. The court then concluded that HCA did not act arbitrarily and capriciously for the following reasons:

1. Failure to pre-certify -- The plan documents "explicitly required" pre-certification, and Renaldi provided no evidence that he did so.

2. Pre-existing condition limitation -- When Renaldi became an employee and enrolled in the plan, Doe was already receiving care at RMA and therefore her claims were excluded under the pre-existing condition clause.

3. Medically necessary inpatient treatment and VBH-approved providers -- Very little admissible evidence from either party existed to evaluate medical necessity. However, even if the treatment was medically necessary, it still had to occur at an in-network facility based on the clear plan terms. Furthermore, VBH "repeatedly" and unsuccessfully urged Renaldi to work with it to obtain referrals to authorized providers and facilities.

4. Eligible out-of-area dependent plan -- The plan stated that this provision was available to dependents living out of the area due to familial changes such as divorce or separation. This was not the reason why Doe was in Idaho. Rather, it was to attend RMA.

Failure To Provide Notice

Here, Renaldi's notice failure claims against Sears and the plan administrator became moot, because the court noted that Renaldi signed a waiver agreement after later terminating his employment that relieved Sears of any federal or state legal liability connected with his employment and termination. Therefore, the court ruled in favor of Sears and the plan administrator on that claim.

Regarding HCA, the court noted that HCA's initial denial notices did not fully comply with ERISA in various ways. For example, one letter merely said that he claims were denied because "services not authorized are ineligible" but did not provide a specific reason for the denial or refer to the pertinent plan provision. On the other hand, the court noted that other letters did provide more details, although in some cases those details were incomplete, and Renaldi did receive the necessary information to "successfully navigate" the appeals process, albeit in a "piecemeal fashion." The court found that this was enough to show that HCA substantially complied with ERISA, and its violations were not severe. Therefore, the court ruled in HCA's favor.

Implications

Although much debate exists about the lack of remedies for individuals denied benefits -- which is much of the driving force behind patients' rights legislation -- a lack of remedy also exists when plan participants fail to follow plan procedures and sue their employers to force benefits coverage.

Such cases appear regularly. The lack of remedy for plan sponsors is apparent in current patients' rights legislation. Here, the plan repeatedly tried to help and obtain coverage for the daughter based on plan terms.

This case raises issues for Congress regarding participant responsibilities to follow plan terms, and the consequences of the failure to do so.

Excerpted from the June 2001 supplement to Employer's Guide to Self-Insuring Health Benefits, ©Thompson Publishing Group, Inc., 2001. All rights reserved.

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