Appellate Court Ruling May Have Implications for Health Plans' Coordination of Benefits Provisions

The U.S. Court of Appeals in Chicago recently held that a health plan that provided secondary coverage for a participant's wife had to pay almost all of her approximately $160,000 in medical claims.* Although this decision will only directly affect plans covering people in the Seventh Circuit (Illinois, Indiana and Wisconsin) all sponsors of group health plans will want to be on the alert for cost-shifting devices such as the "sub-plan/no loss" provisions used here. This Compliance Alert explains the decision and discusses possible implications for plan sponsors.

THE FACTS IN THE CASE

An individual was covered by two ERISA-governed group health plans: one through her own employer (Plan A) and the other through her husband's job (Plan B).

Plan A had an eligibility rule providing that employees covered by another employer-sponsored group health plan will automatically be covered under a sub-plan that provided a maximum benefit of $1,000 per person for expenses incurred in the calendar year - obviously much less than the coverage otherwise provided by the company's major medical plan. Plan A also had a "no loss" provision stating that:

[I]f an individual ever receives less contractual benefits, when combined with benefits covered under another private or public group health plan, [than they would have] received were the individuals covered under Major Medical Benefits, then the Plan will pay the difference.

Finally, Plan A had a coordination-of-benefits (COB) provision stating that:

If you or a dependent have any other health care plan coverage, benefits will be coordinated so that no more than 100% of covered charges are paid or reimbursed.

Plan B, which provided the individual's other coverage, had a typical provision stating that the plan would pay primary for coverage of a patient who is the participant or active employee, and secondary for a patient who is a non-active employee or dependent (such as the individual in this case). COB language in Plan B also stated, "If the other plan has no guidelines for coordination of benefits, that plan will pay benefits before our medical plan," and "If part of the other plan coordinates benefits and part does not, each part will be treated as a separate plan."

The individual submitted her medical bill to both plans. Plan A contended that under its plan terms it only had to pay $1,000 as the primary payer because the individual was in the sub-plan rather than the major medical plan, leaving the rest to be covered by Plan B, the secondary payer. Plan B sued, contending that Plan A was responsible for the entire amount of the claims. The trial court ruled in favor of Plan A.

THE APPELLATE COURT'S DECISION

The case was appealed to the Seventh Circuit, which affirmed and held that Plan A clearly limits the benefits to which this person is entitled, as primary coverage, to $1,000 a year. Plan B's secondary coverage was responsible for claims exceeding that amount.

The Court stated that ERISA neither mandates the type nor amount of employee benefit and does not give guidance on COB issues. Therefore, where the provisions of two group health plans are clear and can be applied together the court will enforce the plans as written. According to the court, Plan A's sub-plan was a benefit design, not a COB rule, so it did not fall within Plan B's provisions disallowing coordination with a plan that does not respect the standard coordination priorities. The Court said that although the outcome of the decision is "somewhat inequitable," Plan A "turned out to be more efficaciously drafted" than Plan B.

IMPLICATIONS FOR PLAN SPONSORS

It is unfortunate that, given the costs of health care, some plan sponsors have felt compelled to resort to exotic plan designs to avoid paying expensive claims if those costs will be recognized by another plan. This commonly shows up in plans' eligibility rules regarding spousal coverage. Some plans try to bolster their position as secondary carrier by refusing to cover participants' spouses who are eligible for other coverage but do not take that other coverage. Others provide for "phantom" COB, paying only what they would pay as secondary coverage if the spouse's other coverage were in effect.

These provisions would not protect a plan in the Seventh Circuit against the kind of scenario played out in the case discussed here. To the extent that a spouse's primary coverage has special eligibility and benefit provisions like those in Plan A in this case, the plans providing technically secondary coverage could end up responsible for most of a claim.

Health plan sponsors in the Seventh Circuit will have to rely on their legal counsel for advice about whether there is standard language they can adopt to avoid being in the same situation as Plan B in this case. Plan sponsors may want to discuss the various options with their attorneys, including the following:

• Adopt a rule specifically excluding or limiting secondary coverage under the kind of situation represented here, where the individual is eligible for "token" or a stated low amount of coverage because of the availability of secondary coverage,
• Put a cap on what the plan will pay in secondary benefits for spouses with primary coverage,
• Require employees to contribute for their spouses' coverage, if the spouse has coverage available from his or own employer. Cap or eliminate all benefits for spouses.

For health plan sponsors in other federal circuits, it is unclear how other courts will view the "sub-plan" arrangement addressed in this case. In a Third Circuit decision from 1985, ILGWU Health and Welfare Fund v, Teamsters Welfare Fund, the court ruled that a plan provision that eliminated all health benefits for individuals who had other coverage violated ERISA's mandate against arbitrary and capricious conduct by plan fiduciaries, and declined to enforce it. That court stated that this type of provision has the potential to harm participants by leaving them with no coverage. The Third Circuit (covering Pennsylvania, New Jersey and Delaware), and other federal courts, may take a similar view of the sub-plan scheme addressed in the Seventh Circuit case.

Segal Company consultants can be retained to work with health plan sponsors and their attorneys to determine whether and how to respond to this court decision.

Compliance Alert, The Segal Company’s periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.

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