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Elite Center: New Case Law Casts Doubt on Health Plans' Favored Recoupment Theory Concerning Waiver of Patient Co-Payments

The past year has seen a number of developments in the ongoing national dialogue about whether out-of-network providers are obligated to collect patient co-payment, co-insurance and deductible amounts (patient responsibility), and what the consequences might or might not be for providers who do not do so.

Every so often over the years some payors have sued providers accused of waiving patient responsibility, either under the Employment Retirement Security Income Act of 1974 (ERISA), under common law causes of action like fraud, misrepresentation, and unjust enrichment theories, or both.  Recent decisions on the merits in these cases have shown some approaches that courts may take to resolve these types of allegations, both for and against providers.

A new federal case out of Texas, Connecticut General Life Insurance Company v. Elite Center for Minimally Invasive Surgery LLC, No. 4:16–CV–00571, 2017 WL 607130 (S.D. Tex. Feb. 15, 2017) (Elite Center), granted in part and denied in part a provider’s motion to dismiss a payor’s recoupment action.  This is one of the most recent court decisions to criticize a theory of recoupment under ERISA commonly asserted by payors.  The decision also dismissed some of CIGNA’s state law claims as preempted by ERISA, though it permitted other state law claims to proceed.

Cases like Elite Center reflect what appear to be two conflicting trends: on the one hand, an increasing skepticism and level of scrutiny of payors’ actions for “recoupment” as being nothing more than a form of economic warfare; but on the other hand, a willingness to allow payors to seek recoupment based on at least some legal theories.

Providers Must Be Aware of State-Specific Laws and Decisions

Whether providers are required to collect patient financial responsibility from patients depends, in part, on the type of payor involved.  Waiving or discounting patient responsibility is not permitted for Medicare patients, for instance.  For commercial payors, the laws vary state-by-state, sometimes are unclear even where the issue is addressed, and sometimes do not address the issue at all.  In California, for example, there is a statute providing that health care providers may offer discounts for prompt payment of claims or as part of charity policies (Cal. Bus. & Prof. Code §§ 657(b), (c)); and in the emergency context, there are both permissive and mandatory discount and charity policies (Cal. Health & Safety Code §§ 127400 et seq.).  But there is no California state law definitively permitting or prohibiting the waiver of patient responsibility as a general practice outside these contexts. 

Conversely, some states, such as Colorado, Florida, Georgia, and Texas, have enacted statutes specifically prohibiting the regular business practice of waiving patient financial responsibility.  See Colo. Rev. Stat. Ann. § 18-13-119(3); Fla. Stat. Ann. § 17.234(7)(a); Ga. Code Ann. § 43-1-19.1(a); Tex. Ins. Code § 1204.055.  But what constitutes a regular business practice versus a case-specific one is not well established under these laws. 

Providers must always be cognizant of any statutory and case law prohibitions in the state(s) in which they operate.  That being said, the landscape presently is fragmented because courts have split as to whether waiving patient responsibility is permissible. On the one hand, in Connecticut General Life Insurance Company v. Humble Surgical Hospital, LLC, 4:13-CV-3291, 2016 WL 3077405 (S.D. Tex. June 1, 2016) (“Humble Surgical I”) the U.S. District Court for the Southern District of Texas rejected the payor’s waiver argument (and awarded a hospital nearly $11.4 million in underpayments against CIGNA).  The federal court flatly rejected CIGNA’s defense that CIGNA did not have to pay any benefits at all due to provider waivers of patient financial responsibility. 

Yet, in a different federal case in the same Texas jurisdiction, another judge found that the same activity by the same provider resulted in “dishonest bills and illegal payments” (see Aetna Life Insurance Company v. Humble Surgical Hospital, LLC, CV H-12-1206, 2016 WL 7496743 (S.D. Tex. Dec. 31, 2016) (“Humble Surgical II”), and as a result, the court reduced the out-of-network provider’s reimbursement to the in-network level.  Similarly, a jury in California state court awarded a large verdict in favor of Aetna against a network of surgery centers that was accused of fraud and interference in several respects, one being the waiver of patient financial responsibility, and another being alleged improper referrals.  See Aetna Life Insurance Company v. Bay Area Surgical Management, et al., 2016 WL 1717439 (Cal. Super. April 14, 2016) (“Bay Area”).  The fact that the Bay Area case combined different alleged frauds makes it difficult to know whether the jury found the wrongdoing to be the alleged improper referrals or the waiver of patient financial responsibility, and it is unclear what would have occurred if the case had just involved the waiver issue.

These varying decisions also are fact-specific, and reflect a divide in views about whether waivers of patient responsibility are permissible at all, and if so, under what circumstances. 

What Does Elite Center Add?

Elite Center is notable in two respects: first, because it casts significant doubt on payors’ primary theory of ERISA liability for waivers of patient responsibility at such a preliminary stage (other decisions have ruled against this theory only after full adjudication on the merits); and second, it reflects an increased willingness to dismiss state law causes of action based on the doctrine of ERISA preemption.

Elite Center Found that CIGNA’s ERISA Theory is “Not Legally Correct”

Certain payors, most notably CIGNA, have long contended that they are not obligated to pay any benefits on behalf of patients whose financial responsibility has been waived – and that as a result, they can recoup all benefits from the provider in cases where they discover after payment that such waivers have occurred.  These payors typically rely on language in benefit plans that they administer that state that the Plan will not pay for “charges which you are not obligated to pay or for which you are not billed.”  See, e.g., North Cypress Medical Center Operating Co., Ltd. v. CIGNA, 781 F.3d 182, 187 (5th Cir. 2015) (“North Cypress”); see also Kennedy v. Connecticut General Life Ins. Co., 924 F.2d 698 (7th Cir. 1991).  Elite Center is the latest in a growing body of decisions that suggest that courts have become increasingly skeptical of this health plan position.

North Cypress was the first court decision to openly question the validity of this theory.  Several federal courts – all based in Houston, Texas, which is within the Fifth Circuit – have now adopted this logic, and concluded that CIGNA’s position is wrong as a matter of law.  For instance, in awarding millions of dollars to a hospital, the Humble Surgical I court rejected Cigna’s defense that Cigna was either obligated to pay some small amount or nothing at all due to the hospital’s alleged waiver of co-pays.  Echoing North Cypress, the court reasoned that an “average plan participant” who read the plan documents would not believe that their benefits were conditioned upon whether their provider had waived co-pays.  2016 WL 3077405 at *17-18.  Just a few months later, the district court in North Cypress – upon remand from the Fifth Circuit – reached a similar conclusion.  North Cypress v. CIGNA, 2017 WL 484108 at *2 (February 6, 2017).  The North Cypress district court also found that CIGNA had acted in bad faith by using the alleged waiver of co-pays to “pressure North Cypress into negotiating an in-network contract,” id.).  Finally, last month Elite Center agreed with both Humble Surgical I and North Cypress in dismissing CIGNA’s ERISA recoupment claim.  2017 WL 607130.

Elite Center Recognizes that Many of the Companion State Law Causes of Action, Including Fraud, May Be Preempted by ERISA

The Elite Center court also narrowed the scope of CIGNA’s state law claims under the doctrine of ERISA conflict preemption, 29 U.S.C. § 1144.  It preempted CIGNA’s claims for unjust enrichment, promissory estoppel and money had and received because “[e]ach of these claims depends on the interpretation of the plan.”  2017 WL 607130 at *14.  The court also came close to finding CIGNA’s state law fraud claims to be preempted.  It acknowledged that “the fraud claims directly relate to the interpretation of the plan terms” because CIGNA could “only [allege that the providers had made] a material misrepresentation if the [ERISA] plan prohibits” the sorts of things that CIGNA complained about – specifically, “submitt[ing] charges to Cigna without actually billing the patient or obligating the patient to pay her portion of the charge.”  Id. at *12. 

But, though “it would appear that ERISA preempts the fraud claims,” the court nevertheless allowed the fraud and misrepresentation claims to proceed.  The court appears to have been persuaded by CIGNA’s argument that its fraud claim was not preempted because it was actually grounded in “independent legal duties” – namely, Texas state laws that expressly forbid the waiver of co-pays and the submission of false insurance claims.”  2017 WL 607130 at *13. 

Will the Reasoning in these ERISA Rulings Be Adopted Beyond the Fifth Circuit?

The Elite Center, Humble Surgical I, and North Cypress decisions all arise from the same court—the United States District Court for the Southern District of Texas, in the Fifth Circuit.  These decisions certainly reflect a trend of favorable outcomes under ERISA for providers in a state that has not enacted a prohibition on the waiver of patient financial responsibility.  It is fair to question, however, whether these outcomes will be adopted beyond the Fifth Circuit.

This question may or may not hinge on how the Fifth Circuit evaluates the benefit decisions of claims administrators like CIGNA that have the “discretion” to interpret the terms of ERISA health benefit plans.  Specifically, Fifth Circuit courts apply a two-step standard to determine the level of deference that they will give to such decisions (known as an “abuse of discretion” test).  First, as a threshold inquiry, those courts must ask “whether the [administrator’s] interpretation is ‘legally correct,’” meaning “whether the contested interpretation is consistent with a fair reading of the plan.”  Elite Center, 2017 WL 607130 at *8. 

If the court determines that the health plan is taking an aggressive or unreasonable stance, it is far more likely to find – under the second prong of the test – that the administrator abused its discretion, e.g., that the denial of payment was wrong and must be overturned.  Thus, by ruling, at the preliminary motion to dismiss stage, that CIGNA’s interpretation was not “legally correct,” the Elite Center court may have set up the provider for an early summary judgment on the abuse of discretion issue.  This bifurcated standard has proved helpful to the providers in these cases.

Not every court uses this legal test, however.  For instance, courts in the Ninth Circuit, in which California is located, use a different abuse of discretion standard, which instructs that a plan administrator’s decision “should be upheld ‘if it is based upon a reasonable interpretation of the plan’s terms and was made in good faith.’”  Estate of Shockley v. Alyeska Pipeline Serv. Co., 130 F.3d 403, 405 (9th Cir. 1997) (emphasis added), quoting MacDonald v. Pan Am. World Airways, Inc., 859 F.2d 742, 744 (9th Cir.1988).  This doesn’t mean the same argument in the Fifth Circuit would have a different outcome in the Ninth Circuit.  But it does mean a potentially different approach to each side’s arguments.

Ninth Circuit courts, like Fifth Circuit courts, evaluate whether an administrator has adopted a “reasonable interpretation” of plan language.  Unlike the Fifth Circuit, however, they do not couch this inquiry in terms of whether the interpretation is “legally correct”.  And unlike the Fifth Circuit, the Ninth Circuit’s inquiry is not bifurcated.  This suggests that Ninth Circuit courts might focus less on the “interpretation” of plan language per se, and more on the totality of the circumstances.  To date, there are no electronically available published or non-published decisions from Ninth Circuit courts examining the Elite Center line of cases.  What is likely, however, is that when courts outside of the Fifth Circuit are presented with the Elite Center line of reasoning they will have to satisfy themselves that such reasoning is consistent with the particular standard that court is required to apply. 

Finally, the preemption holdings of Elite Center are likely to be applicable across circuits.  While each circuit has its own standards for ERISA preemption, the variation among circuits is somewhat less than the potential variation with respect to “abuse of discretion” standards.  Especially in states where specific statutes prohibiting waiving or discounting do not exist, there is a strong argument that ERISA can and should preempt the general fraud claims that are pled by payors alongside ERISA.  And even in states where such statutes do exist, there is a strong argument that fraud claims should still be preempted, and that the Elite Center court erred in giving weight to CIGNA’s argument about independent legal duties – a factor that is more relevant to complete preemption under ERISA (29 U.S.C. § 1132), which was not at issue.  As Elite Center itself recognized, the alleged truthfulness of the providers’ claim submissions depends in part on the terms of ERISA plans.  This is a substantial enough conflict with ERISA’s statutory scheme that such claims should be preempted.

Concluding Thoughts

The intricacies of legal doctrine aside, perhaps the biggest impact of the Elite Center line of cases is the doubt that they cast upon payors’ position that the waiver of patient financial responsibility completely negates the plan’s duty to pay benefits.  Courts have clearly begun to recognize that this position is unreasonable from the perspective of the average plan beneficiary – which counts for a lot under ERISA.  Does the average beneficiary realize that the health plan contends he or she has no right to get a discount from the provider?  Doesn’t the average health plan negotiate discounts with providers, and if so, why are beneficiaries not allowed to do the same?  Stated another way, is it really up to the health plan to decide what the patient must pay to the provider, or is the health plan’s power limited to deciding what the health plan will pay, and the beneficiary and provider can work out between themselves who bears the expense for what the plan does not pay?

Elite Center also reaffirms that ERISA is a powerful tool for preempting many of payors’ state law recoupment claims, to the extent those claims depend upon the language of the ERISA plans themselves.  There may soon be more guidance on this issue from the appellate courts, as appeals of the rulings in favor of Aetna are pending in both the Bay Area and Humble Surgical II cases.  Providers are well-advised to monitor developments in this quickly changing area of law.

For more information, please contact Katherine M. Dru at 310-551-8107 or Eric D. Chan at 310-551-8158 in the Los Angeles office.

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