California District Court Deems Independent Review Organization Functional Health Plan ERISA Fiduciary

A recent case before the U.S. District Court for the Northern District of California recently ruled that an Independent Review Organization would be considered a functional fiduciary in regard to ERISA regulations.

Independent Review Organization

In the case at hand, the independent review organization was a business that conducted independent medical review of records and made determinations regarding claim appeals. When a benefit organization, such as Blue Shield, denied a claim, the plan participant could request an outside party review the claim and make a determination on whether Blue Shield’s decision was accurate. While these outside organizations are supposed to be neutral third parties, there is some question about this due to the fact the benefit plan providers often repeatedly engage their services.

Josef K. v. California Physicians’ Service

In this case, an independent medical review (IMR) organization was found to be subject to ERISA and could be held liable for breach of fiduciary claims. This was due to their review of a medical necessity appeal from an ERISA benefit plan. The IMR organization denied the plaintiff a mental health benefit that the plaintiff claimed was medically necessary. The plaintiff was the plan participant, and the benefit was for his daughter, a plan beneficiary. The plaintiff submitted a claim for benefits to the employer’s welfare benefit plan for treatment of the daughter at two different mental health treatment facilities. The plan denied the claim as well as the appeal of the denial. The plaintiffs then requested an IMR of their claim, which was performed by Maximus Federal Services, Inc. The IMR concluded that the daughter’s treatment was not a medical necessity and upheld the denial of the claim.

First, because the decision of the IMR was core to the case, the court found that the plaintiff’s claim for interference of contract was preempted by ERISA. Second, the court found that Maximus was a fiduciary under the ERISA definition and thus subject to liability based upon breach of fiduciary duty. More specifically, the court ruled that a party such as Maximus that was not named in the plan could become a functional fiduciary if they exercise “any discretionary authority or discretionary control respecting management of such plan or exercises any control respecting management or disposition of its assets.” Further, they have “discretionary authority or discretionary responsibility in the administration of such plan.” While not a named fiduciary, the court found that Maximus functionally operated in the role of a fiduciary based on these premises because they were doing far more than “merely perform[ing] ministerial duties or process[ing] claims.”

The plan in question had a clause that guaranteed coverage for medically necessary treatment, but nowhere in the plan did it define “medical necessity.” Due to this vagueness, the court concluded that Maximus had discretion in reaching its determination of medical necessity of treatment for the plaintiff’s daughter. This discretionary authority established them as a functional fiduciary.

While this case will continue to play out, the takeaway from the current ruling is an expansion of the liability of fiduciaries beyond parties named in the plan to those who have the discretion to make significant decisions of approval or denial of claims for plan participants and beneficiaries. Plan sponsors may want to look at various ways to shift the liability off the IMR by having administrators step in and make a decision on the claim based on a variety of evidence. The experienced team at Hall Benefits Law helps clients make changes to their plans based on this and other court rulings in an effort to make sure plans function smoothly and in compliance with the latest law. Learn more by calling 678-439-6236 or visiting the Hall Benefits Law website.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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