How ERISA Affects Medical Practices

June 30, 2013
Martin Merritt

Here's a primer on ERISA, how it works, and what it means for you and your medical practice.

The Employee Retirement Income Security Act of 1974 (ERISA) is one of the most unusual and fascinating of all federal laws. Originally intended to protect employee benefits and pensions, ERISA was supposed to be helpful to employees.

In a twist of judicial interpretation, ERISA provides the basis for health insurance companies to deny employee benefit claims with impunity. ERISA Section 514 preempts all state laws that relate to any employee benefit plan, with certain, enumerated exceptions. The U.S. Supreme Court has created another limitation on the insurance exception, in which even a law regulating insurance will be pre-empted if it purports to add a remedy to a participant or beneficiary in an employee benefit plan that ERISA did not explicitly provide. This means state laws providing a penalty against bad faith insurance claims practices, deceptive trade practices, fraud, misrepresentation, and even attorney’s fees are preempted.

Simply put, ERISA somehow stepped through the looking glass where everything is backward. Employee benefit protection became a license to cheat beneficiaries. Governments and charities were excluded from ERISA, which was supposed to benefit them. Instead, governments and charities are the only employers who can be sued for punitive damages and attorneys fees for bad faith claims practices.

Many commentators observe, that judicial decisions under the ERISA have been so constrictive and anti-employee, over such a long time, that it can now be said that participants in employer-sponsored pension and health insurance plans would have been better off, on balance, if the statute had never been enacted. Given that the act’s stated purpose was to protect benefit plan participants, this is a surprising conclusion to have to reach. Nonetheless the argument is strong, and is validated in part by the thousands of cases that have accumulated in which plan participants/plaintiffs have been forced to argue ERISA does not apply to their claims, as a precondition to salvaging those claims.

More recently the battle over ERISA has moved into the area of benefit review audits, as I wrote in January. [Providers fighting back] There, I cited the case of Tri3 Enterprises v. Aetna,  where Aetna, administering an employer-provided plan authorized insertion of a DME device. After the horse had left the barn, a Special Investigations Unit (SIU) reversed the authorization and denied payment (because it determined the equipment to be "experimental," and therefore not covered by the plan.) In order to attempt to get paid, the providers who took assignment of benefits had to argue ERISA does apply (which is usually a good thing for the health plan). Health plans paradoxically argue that ERISA applies to prevent a patient from suing for extra-contractual damages (punitive damages and attorneys fees); while arguing ERISA does not apply to claims filed by a provider who is merely suing for the face amount of the claim.

If this sounds confusing, it is. In fact, if you were to envision someone plucking petals from a daisy, while chanting "ERISA loves me, it loves me not," you would have a far better understanding of how the law works than Congress did 1974.

The way all of this works in the real world is, however, far simpler. If a patient is covered by an employer-provided plan, and the plan denies a claim, ERISA likely applies, (unless the employer is the government or a charity.)

In the absence of ERISA, the patient could hire a lawyer without paying up front, because most states allow the recovery of attorney’s fees. But ERISA forbids the recovery of anything but the amount of the benefit. This has the practical effect of taking plaintiff's lawyers out of the equation. While a patient has little incentive to hire a lawyer out of pocket, the provider who has accepted an assignment of benefits certainly does. ERISA provides the framework for making such a claim. Unlike the patient, if the provider wins, the provider leaves with money in its pocket.

ERISA’s claims procedure and preemption of punitive damages and attorney’s fees has stood the test of time because as a matter of policy, many people do not like the idea of tort lawyers suing for huge punitive damage awards. However, most everyone is in favor of some simple mechanism for at least recovering the amount of the charges. More recently, states have been carefully crafting slow-pay laws, which thread the needle between what is considered a "coverage dispute," from a distinct dispute over merely the timing of payment; not whether the benefits were covered.