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Ninth Circuit:
State Law Claims Based on Verification of Coverage Are Preempted by ERISA
Opinion Says Fact that Independent Entity Sought Reimbursement Did Not Change Analysis, Distinguishing Prior Decision
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals held Friday that the Employment Retirement Income Security Act of 1974 preempts state law breach-of-contract claims by a plaintiff—the successor-in-interest to a defunct drug rehabilitation center—against an insurer based on phone calls preauthorizing coverage of service in light of the out-of-network status of the center.
Reimbursements to the center had stopped due to allegations that it failed to collect co-pays in violation of the plans, and the successor holding company, made up of three former shareholders of the service provider, alleged that preemption did not apply to it as a third-party entity, an assertion the court rejected.
Circuit Judge Daniel A. Bress wrote the opinion affirming the dismissal of the action following summary judgment by Chief District Judge Phillip S. Gutierrez of the Central District of California. Senior Circuit Judge Sidney R. Thomas and Circuit Judge Anthony D. Johnstone joined in the opinion.
Fee-Forgiveness
Appealing the judgment was Bristol SL Holdings, Inc. which purchased the insurance claims of Sure Haven Inc. against Cigna Health and Life Insurance Company and Cigna Behavioral Health, Inc. from Sure Haven’s bankruptcy estate.
Sure Haven was an out-of-network provider for Cigna health plans, which meant that Cigna had not contractually agreed to reimburse Safe Haven’s services. When admitting a patient covered by a Cigna plan, Sure Haven would place a verification call to the insurer to determine whether the patient qualified for out-of-network benefits and to find out the reimbursement rate.
For several years, Cigna reimbursed Sure Haven without incident. However, in February 2015, the insurer sent a letter to Sure Haven accusing it of improperly failing to collect co-pays, deductibles and other contributions from the plan participants.
The letter indicated that the company would deny claims by Sure Haven unless they were accompanied by documentation showing that the Cigna customer actually paid.
The “fee-forgiving” practice inflates costs to the insurer by eliminating the financial incentive for patients to seek cheaper, in-network care. The plans permit Cigna to deny reimbursement of charges if a provider engages in fee-forgiving.
Cigna ultimately declined to reimburse the treatment of 106 Sure Haven patients, and Bristol alleges those unreimbursed claims total over $8.6 million. Sure Haven filed for bankruptcy in 2017.
Bristol sued in federal court, asserting an ERISA claim for recovery of plan benefits under 29 U.S.C. §1132(a)(1)(B) and various contract and fraud claims under California law, contending that Cigna’s representations during the verification calls created enforceable contracts to reimburse Sure Haven at the quoted rate, which were then breached when it refused payment due to the alleged fee-forgiving.
Gutierrez granted Cigna’s motion for summary judgment, ruling that ERISA preempts Bristol’s state law claims for breach of contract and promissory estoppel and that Cigna identified sufficient proof of Sure Haven’s fee-forgiving, precluding recovery under the plans.
First Test
Bress acknowledged that it is not disputed that the Sure Haven patients, and their treatment services, are covered under the plans and that the terms authorize the non-payment of claims in the event the provider engages in fee-forgiving, making the central question to the appeal whether the state law claims are preempted.
The jurist noted that 29 U.S.C. §1144(a) provides that ERISA preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan” and that there are two categories of state law claims that have been found to “relate to” an ERISA plan—claims that have a “reference to” an ERISA plan and claims that have an impermissible “connection with” such a plan.
Examining the first category, Bress explained that a state-law claim has a “reference to” an ERISA plan if the existence of the plan is necessary to the claim’s survival. Turning to the claims at issue, he wrote:
“When Sure Haven called Cigna to verify out-of-network coverage, the context for this communication concerned whether reimbursement was available under the ERISA plans that Cigna administers. There is no dispute that the patients were indeed covered by the plans, and when Sure Haven sought preauthorization to perform certain treatments, it was seeking clearance to provide what all agree were plan-covered services.”
Bress continued:
“This effort triggers preemption. That Bristol’s claims have a ‘reference to’ the Cigna-administered ERISA plans is only further confirmed by the fact that Bristol has brought a parallel claim for the denial of ERISA benefits as the plan participants’ assignee.”
Finding the state-law claims to be preempted, he wrote:
“Bristol strives to characterize its claims as ‘independently based on Cigna’s failure to make proper payment to Sure Haven pursuant to Cigna’s actions and representations on its verification calls,’ rather than on ‘any legal duty imposed by ERISA.’ But the record reveals that the terms of Cigna’s plans are central to the state law claims.”
Second Test
The judge said that a claim has an impermissible connection with an ERISA plan if it governs a central matter of plan administration, interferes with a nationally uniform plan of administration, or bears on an ERISA-regulated relationship.
Bress concluded that “Bristol’s state law claims would do at least two of the three,” saying:
“Subjecting plan administrators to the prospect of binding contracts through pre-treatment calls would…risk stripping them of their ability to enforce plan terms that cannot be applied prior to treatment, whether related to fee-forgiving or otherwise. The resulting Catch 22—that administrators must abandon either their plan terms or their preauthorization programs—is the kind of intrusion on plan administration that ERISA’s preemption provision seeks to prevent.”
He reasoned that allowing liability on the state-law claims would impermissibly interfere with nationally uniform plan administration, saying:
“[I]f providers could use state contract law to bind insurers to their representations on verification and authorization calls regardless of plan rules on billing practices, benefits would be governed not by ERISA and the plan terms, but by innumerable phone calls and their variable treatment under state law.”
In a memorandum opinion, also filed Friday, the panel affirmed the granting of summary judgment as to Bristol’s claim for benefits under the ERISA plan.
The case is Bristol SL Holdings v. Cigna Health and Life Insurance Company, 23-55019.
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