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From the Employer's Guide to Self-Insuring Health Benefits, Thompson Publishing Group

Guest Article

Despite Ambiguous Exclusion Provision, Plans' Denial of Coverage Was Not Unreasonable

Summary: A federal appeals court ruled that a group health plan's denial of coverage for in-home nursing care for an invalid plan participant was reasonable because the plan presented evidence that such nursing care was not the most appropriate treatment option.

Although a group health plan's exclusion language was deemed to be ambiguous because it allowed coverage on a limited basis if a determination of medical necessity was made, a federal appeals court found that a plan beneficiary's coverage was properly denied because the plan presented ample and reasonable evidence that the care at issue was not his most appropriate treatment option. The case is Fay v. Oxford Health Plan, 2002 WL 483464 (2nd Cir., March 27, 2002).

A key factor in this ruling was that the plan gave the medical director the explicit authority to determine medical necessity as defined in the plan. This case underscores the value of plan drafting and the delineation of plan drafting, as well as coordinating plan coverage and exclusionary provisions.

Facts of the Case

Louis Fay, who has received 24-hour nursing care because of various debilitating conditions since 1992, is a dependent under his wife Anna's group health plan, sponsored by her employer, Mt. Sinai Medical Center. Before Jan. 1, 1996, the Fays' coverage was provided by Aetna and included a benefit for 24-hour in-home private duty nursing. However, on Jan. 1, 1996, Mt. Sinai switched from Aetna to Oxford Health Plans. The Oxford plan covered all medically necessary care and services authorized in advance by a member's primary care physician and/or Oxford Health Plan. This also includes "home health care," which was limited to 200 four-hour visits per contract year (33 days). The plan also provided 200 days worth of Skilled Nursing Facility (SNF) benefits, but excluded private or special-duty nursing such as full-time, in-home care, unless such care was determined to be medically necessary and was approved in advance by the plan.

Between 1996 and 1997, although plan terms provided for only 33 days of in-home care, Oxford agreed to convert the SNF benefits (200 days) to cover Fay's home care, provided that his condition met the plan's home health care criteria. Accordingly, Oxford provided Louis Fay with 233 days of private-duty coverage. However, Oxford informed him that, once these benefits were exhausted, he could not receive any such further care for the remainder of the year. Mt. Sinai agreed to cover the remaining days on an interim basis (and as an exception to the plan terms), but would not extend those benefits into 1997. In 1998, Oxford ceased to cover Louis Fay's in-home care.

The Fays sued Oxford and Mt. Sinai in federal district court to recover benefits under ERISA's civil enforcement provision. The court ruled in the defendants' favor, holding that the plan terms did not require Oxford to provide unlimited 24-hour private duty nursing care, even if the care was determined to be medically necessary, because such an interpretation of the exclusion contradicted the plan's plain language. Even if the exclusion could be interpreted that way, the court added, the determination by Oxford's medical director -- who had discretion under plan terms to make medical necessity determinations -- that Louis Fay could be best cared for in an SNF would be sustained. Significantly, the lower court said that even if it were to review the decision under the stricter de novo standard -- giving deference to the court's interpretation of plan terms -- the claim would be denied under plan terms.

Oxford Proved That Treatment Was Not Medical Necessity

The Fays appealed to the 2nd U.S. Circuit Court of Appeals, arguing that the district court, among other things: (1) incorrectly concluded that the plan unambiguously excluded coverage for private duty nursing care; and (2) erroneously deferred to the medical director's opinion regarding the medical necessity of in home care.

The 2nd Circuit noted that the plan terms gave Oxford's medical director the authority to determine what is medically necessary, but did not grant it the authority to interpret other plan terms. As such, the 2nd Circuit reviewed the medical director's determination of medical necessity under an arbitrary and capricious standard, but stated that it would review other plan terms under a de novo standard. Regardless of the standard, the 2nd Circuit added, the Fays' claim failed.

The 2nd Circuit said that, although the exclusionary language suggested that private duty care may be available on a limited basis, availability was confined to special cases based on a finding of medical necessity and prior approval. As such, the 2nd Circuit held that the lower court correctly found that the plan did not generally allow the type of care that Louis Fay requested.

Exclusion Upheld Despite Ambiguity

The 2nd Circuit then noted that even if placing the private duty provision in the exclusion section suggested that Oxford did not intend to provide such benefits, that exclusion was ambiguous because it left open the possibility of care by including the phrase "unless determined to be medically necessary and approved in advance by the plan." In light of this, the 2nd Circuit had to determine whether Oxford's decision that the private duty nursing care was not medically necessary was unreasonable, unsupported by substantial evidence or erroneous as a matter of law.

The 2nd Circuit said that, despite opposing arguments presented by the Fays' physicians, it could not find the Oxford medical directors' determinations -- which were based on ample evidence -- to be unreasonable. Therefore, the 2nd Circuit found that despite the fact that the Fays understandably preferred in-home care, Oxford's conclusion that such care was not medically necessary as defined in the plan was not arbitrary or capricious.


This case underscores the need for plan sponsors to coordinate coverage provisions and exclusions. It is difficult to write plan language that is not capable of more than one interpretation. But desperate participants and beneficiaries will, when the stakes are high enough, look for discrepancies and ambiguities in an effort to find coverage when none was intended. The exposure to liability that can occur from the difficulty in drafting perfectly clear language can be minimized, as this plan did, by granting authority to the plan administrator or other fiduciary to interpret plan terms consistent with the plan's intent.

While some ambiguity existed in this plan document, the relatively clear language of coverage prevailed, as appropriate, due to the grant of authority to the medical director to interpret certain terms and provisions.

Excerpted from the June 2002 supplement to Employer's Guide to Self-Insuring Health Benefits, © Thompson Publishing Group, Inc., 2002. All rights reserved.

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