Health Plans Seek Leverage Against Out-of-Network Providers

May 1, 2018Articles DRI's ERISA Report

The Network Incentive Structure

As the cost of health care coverage continues to rise, health plans struggle to preserve the integrity of one of the last cost-containment mechanisms available to them: provider networks. Since the rise of managed care in the 1980s and 90s, health plans have used networks to negotiate reduced reimbursement rates with health care providers, offering in exchange a streamlined claims process and increased patient volume. Provider networks became even more important following the enactment of the Patient Protection and Affordable Care Act (“ACA”), because the new ACA regime eliminated many of the mechanisms that health plans formerly used to reduce plan costs. Now, plans are strictly limited in their ability to control risk or vary benefits and the terms of coverage. Thus, the key to avoiding sky-rocketing premiums is cost containment.

Most plans give members the choice of seeing either an in-network or out-of-network provider. But plan terms create financial incentives for members to choose in-network providers. For example, a typical health plan may cover 80% of the member’s charges from an in-network provider, but only 60% of charges from an out-of-network provider. Thus, the out-of-pocket cost to the member, whether through deductibles, copayments, or coinsurance, will be lower when the member visits an in-network provider.

This system of cost-containment is undermined, however, when out-of-network providers create their own, contrary financial incentives. For example, an out-of-network provider may bill the health plan for its standard charges, expecting 60% of the billed charges to be paid by the health plan. At the same time, the out-of-network provider may charge the patient only 20% of the billed charges to ensure that the member’s out-of-pocket costs are similar to what they would have been had the member chosen an in-network provider. In some cases, the out-of-network provider may waive or forgive the member’s charges entirely, putting the member in a better position for having seen the out-of-network provider instead of an in-network provider. Because the out-of-network provider is not obligated to reduce his or her standard charges, the plan’s efforts to contain costs are thwarted, at least with respect to that member’s treatment.

Out-of-network providers are increasingly motivated to strike deals with their patients that do not comport with the complex incentive structure developed by managed care plans. Through these alternative billing arrangements, out-of-network providers can compete with their in-network counterparts without having to agree to network rates. These out-of-network billing arrangements also make plan members less sensitive to the cost of their health care, which can lead to overutilization. Thus, by engaging in these alternative billing arrangements, out-of-network providers can drive up the cost of health care, not only by charging more for treatment than an in-network provider, but also by upsetting the balance of incentives designed to motivate cost-saving behavior.

Health plans have implemented various strategies to curtail this behavior by out-of-network providers, but with mixed success. Plans that deny some or all of an out-of-network provider’s charges frequently find themselves parties to litigation. Even with the protections afforded by ERISA, a plan could have substantial liability for its recurring use of an improper strategy against an out-of-network provider. Health plans that are searching for effective leverage to address out-of-network provider costs should follow litigation trends to avoid pitfalls and identify low-risk methods to defend and enforce plan incentives.

Bad Faith Claims Decisions

In recent years, health plans have used claims decisions to try to enforce the financial incentives for members to see in-network providers. But, the claims process has proven to be an ineffectual, and rather prickly, means to deter plan members and out-of-network providers from creating alternative payment arrangements. First, health plans are limited in their ability to discover what and whether the plan member actually paid an out-of-network provider, since neither the plan terms nor the claims process requires the member to submit proof of payment before the claim can be approved. Second, regardless of the culpability of the out-of-network provider, claims administrators under ERISA are required to make claims decisions in good faith and in accordance with plan terms. A recent opinion from the Southern District of Texas illustrates this dilemma: North Cypress Medical Center Operating Co., Ltd. v. Cigna Healthcare, No. 4:09-CV-2556, slip op. at 1 (S.D. Tex. Sep. 28, 2016) (“North Cypress slip op.”).

The dispute in North Cypress began in 2007, when Cigna and North Cypress failed to negotiate an in-network agreement prior to the hospital opening its doors. North Cypress Med. Ctr. Operating Co., Ltd. v. Cigna Healthcare, 781 F.3d 182, 188 (5th Cir. 2015). When North Cypress opened as an out-of-network provider, it implemented a “prompt pay discount” program, under which Cigna’s members would receive a discount on their coinsurance obligation if they paid upfront or within a short period of time. Id.

Under the program, North Cypress would bill Cigna for the total cost of patient care under its standard fee schedule, usually four to six times Medicare rates. Under the terms of Cigna’s plans, the member was responsible for 40% of these rates, while Cigna would cover the other 60%. Under the discount program, however, the member’s charges were much less. Instead of calculating the member’s charges based on its standard rates, North Cypress would start with a lower base rate of 125% of Medicare. Then, instead of charging the member 40% of the lower rate, North Cypress would charge the member 20% of the lower rate, which would have been the patient’s in-network coinsurance rate. Id.

In response, Cigna adopted a “Fee-Forgiving Protocol” and began reimbursing North Cypress for covered services at drastically reduced rates. Id. at 189. Cigna claimed that the reduced payments were justified because members were not insured for medical costs unless they paid their coinsurance, as contemplated by the plan. Similarly, if North Cypress only charged the member a miniscule portion of the member’s coinsurance, Cigna was likewise only responsible for a miniscule portion of the total bill. On these grounds, Cigna would assume that the patient was billed a reduced amount, e.g., $100, and then calculate its portion of the bill based on that assumption. Cigna informed North Cypress that it would continue to reimburse the hospital this way until the hospital presented clear evidence that (1) the charges shown on the claim forms were actual charges for services rendered, and (2) the plan member had paid the applicable out-of-network coinsurance and deductible in accordance with plan terms. Id.

North Cypress brought suit, seeking more than $40 million in denied or underpaid claims. Id. at 190-191. The hospital claimed that Cigna failed to comply with the terms of the health plans, breached fiduciary duties, and underpaid for covered services, in violation of ERISA, the Texas Insurance Code, and the RICO Act. Cigna counterclaimed, originally asserting state-law claims for fraud, negligent misrepresentation, and unjust enrichment. The district court determined that Cigna’s state-law claims were preempted by ERISA, and Cigna filed an amended counterclaim to assert claims under ERISA. The district court made several early rulings regarding the viability of the parties’ claims, and both parties appealed. After the Fifth Circuit’s decision, North Cypress was left with its ERISA claims and a state-law breach of contract claim for certain discount arrangements between the hospital and Cigna. In the district court, North Cypress and Cigna filed cross-motions for summary judgment.

Relevant to this article, the district court considered North Cypress’s claims for benefits under ERISA § 502(a)(1)(B). North Cypress, slip op. at 4-19. As mentioned above, Cigna had denied full payment of the hospital’s claims based on the following interpretation of the relevant plan language: “if the member/patient was not obligated to pay all or part of the patient contribution for a particular medical service, then that service was not covered.” Id. at 6-7. A ruling from a similar case in the Southern District of Texas precluded Cigna from arguing that this interpretation was legally correct. Id. at 6-9. Thus, the only consideration for the district court in North Cypress was whether Cigna abused its discretion in interpreting the plan language.

To determine whether Cigna abused its discretion, the district court evaluated (1) whether Cigna had a conflict of interest, (2) the internal consistency of the plan, and (3) the factual background of the claims determinations and any inferences of a lack of good faith. 10. The evidence on the conflict of interest issue was inconclusive, and there was no evidence of an internal inconsistency in Cigna’s plan interpretation. Id. at 10-12. However, the factual background behind Cigna’s plan interpretation and claims decisions warranted an inference of a lack of good faith; thus the district court determined that Cigna had abused its discretion in interpreting the plan language. Id. at 10.

Cigna argued that it acted in good faith to try to curtail North Cypress’s fee-forgiving practices. Id. at 12-13. However, there was a great deal of evidence that Cigna’s primary motivation was not to root out fee forgiveness, but instead to pressure North Cypress into negotiating an in-network contract. Id. at 13. For example, Cigna’s medical director wrote an email stating that the goal of Cigna’s reduced reimbursement to North Cypress was “to bring [the] hospital to the table.” Id. Other documents indicated that the purpose of Cigna’s “Fee-Forgiving Protocol” was to “bring the desirable providers into the network at market rates” and either “drive a contract discussion or stop the [fee-forgiving] behavior.” Id. at 13-14. The district court determined that these, and other similar statements, “suggest[ed] that Cigna’s true motivation for the Fee-Forgiving Protocol was to negotiate an in-network contract, not to prevent harmful externalities in the insurance market.” Id. at 14. Thus, the district court determined that Cigna had abused its discretion in interpreting the plan and making its claims decisions. Id.

Crafting and Observing Anti-Assignment Provisions

One well-tested strategy for deterring litigation by out-of-network providers is to include a strong anti-assignment provision in the plan. Equally important, however, is the plan’s consistent observation and enforcement of the anti-assignment language. Providers are not generally considered statutory beneficiaries of an ERISA plan. See Merrick v. UnitedHealth Group Inc., 175 F. Supp. 3d 110, 116 (S.D.N.Y. 2016). Nevertheless, they may obtain standing to bring a claim under ERISA as an assignee of an ERISA participant or beneficiary. Id. at 117. Although a valid anti-assignment provision may prevent an out-of-network provider from acquiring standing, a claims administrator’s actions may constitute consent to an assignment or waiver of the anti-assignment language.

In Merrick, a group of out-of-network chiropractors brought a putative class action against United, as the plan or claims administrator of several health plans. The chiropractors contended that United violated ERISA by approving payment of claims, but then reversing its previously made benefit determinations and recouping the overpayment that resulted from the allegedly improper claim decision. Id. at 113.

United moved to dismiss the chiropractors’ claims due to lack of standing. The relevant plans barred assignments made without United’s consent, stating: “You may not assign your Benefits under the Policy to a non-Network provider without our consent.” Id. at 117. The district court noted that the Second Circuit has not yet spoken on the effect of assignments made in violation of anti-assignment provisions in ERISA plans. So, the court followed precedent from several other circuits, which held that where an ERISA-governed plan contains an unambiguous anti-assignment provision, assignments under that plan are invalid. Id. at 118. Although United’s anti-assignment language was unambiguous, the court’s inquiry did not end there.  Id. at 120.

The plaintiff-chiropractors argued that United’s long-standing pattern and practice of paying them directly for services established that United either consented to the assignments or waived its right to rely on the anti-assignment language. The plaintiffs alleged that they routinely submitted claims directly to United, and that United routinely paid those claims directly. Additionally, for the claims at issue in the litigation, United conducted a post-payment audit and requested documentation from plaintiffs to support their claims. After plaintiffs failed to submit the requested documentation, United recouped the allegedly overpaid amounts by offsetting these amounts from approved claim payments. Id.

United argued that its actions could not be interpreted as its consent or waiver, and that it was not estopped from enforcing the anti-assignment language. Id. The district court noted that, although the Second Circuit has found the equitable doctrines of estoppel and waiver to apply to ERISA actions, it has not yet addressed whether a health plan may waive, or be estopped from relying on, anti-assignment language in its plans. Id. Nevertheless, the district court determined that United’s actions did not constitute waiver and did not warrant an estoppel.

Importantly, the anti-assignment provision allowed United, in its discretion, to pay out-of-network providers directly, even in the absence of a valid assignment. Id. at 121. Thus, United’s direct payments were explicitly authorized by the plan and did not stop United from raising the anti-assignment provision to challenge the plaintiff’s standing. Likewise, the district court determined that United’s payments to the plaintiffs, as authorized by the plan, did not constitute a waiver of the anti-assignment provision. Id. at 122.

But, Merrick may be an anomaly in the Southern District of New York. The Merrick opinion cites a handful of other cases from that district which held that a plan’s long-standing pattern and practice of direct payment to an out-of-network provider was sufficient to establish the claims administrator’s consent to the member’s assignments. Id. at 123; see, e.g.,Neuroaxis Neurosurgical Assoc., PC v. Cigna Healthcare of New York, Inc., No 11 Civ. 8517, 2012 WL 4840807 (S.D.N.Y. Oct. 4, 2012); Biomed Pharm., Inc. v. Oxford Health Plans (N.Y.), Inc., No. 10 Civ. 7427, 2011 WL 803097 (S.D.N.Y. Feb. 18, 2011). Nevertheless, in Merrick, the court found more persuasive those decision that give effect to the plain language of anti-assignment provisions.

Another important consideration was whether United’s communications regarding its post-payment audit and United’s eventual recoupment constituted a waiver of the anti-assignment language. The plaintiffs’ failure to allege that United did not raise the anti-assignment provision in its post-payment letters was nearly sufficient, by itself, for the district court to reject this argument. Merrick, 175 F. Supp. 3d at 124. Nevertheless, the district court considered United’s letters to be conclusive, since “nothing in th[o]se communications plausibly suggest[ed] that United intended to waive its right under the provision.” Id. Accordingly, there was nothing to suggest that the plaintiffs were being treated as assignees, rather than as providers that United had discretion to pay directly.

Again, the district court noted decisions from several other district courts that reached the opposite conclusion based on the parties’ “course of dealing.” Id. at 125; see, e.g.DeMaria v. Horizon Healthcare Servs. Inc., No. 11-7298, 2015 WL 3460997 (D.N.J. Jun. 1, 2015); Premier Health Ctr., P.C. v. UnitedHealth Group, No. 11 Civ. 425, 2012 WL 1135608 (D.N.J. Apr. 4, 2012). The district court in Merrickdistinguished these cases, however. Merrick, 175 F. Supp. 3d at 125. While the plaintiffs in some of the other cases had gone through the plan’s appeals process, the plaintiffs in Merrick did not engage in the appeals process. Rather, the Merrick plaintiffs simply denied United’s request for information and filed suit to challenge United’s post-payment audit practices.

Thus, the district court in Merrick gave effect to the plan’s anti-assignment provision. The plaintiffs could not establish that they had standing under ERISA, as out-of-network assignees, despite their allegations regarding consent, waiver, and estoppel.

Lessons From Recent Decisions

Opinions like the one in Merrick demonstrate the difficulty health plans face in trying to deter out-of-network provider lawsuits. Although the outcome in Merrick was favorable for the plan, the district court’s citations indicate that, in front of a different judge, the plaintiffs’ claims could have easily survived the motion to dismiss, and the plan could have faced extensive and costly class discovery. Additional precedent will help health plans determine what actions they can and cannot take with respect to out-of-network providers. But, in many ways, the cases that have been decided thus far simply reinforce well-established ERISA precedent.

For example, in Metropolitan Life Ins. Co. v. Glenn, 554 U.S. 105 (2008), the Supreme Court discussed some of the steps an administrator might take to reduce potential bias and to promote accuracy in claims decisions. Id. at 117. The health plan in North Cypress probably would have fared better at the summary judgment stage if, as the Supreme Court suggested in Glenn, it had walled of the claims department from the team that was trying to bring providers in-network. In short, even the most egregious conduct by out-of-network providers will not justify a lack of good faith in plan interpretation and claims decisions. Therefore, when implementing a strategy to deter misconduct, health plans should continue to follow the Supreme Court’s guidance to reduce bias and promote accurate claims decisions.

Additionally, litigation involving out-of-network providers, as opposed to plan members, does not alter the importance of plan terms that are well-crafted to achieve the desired results. This new litigation trend reveals that the ingenuity of out-of-network providers may have outpaced the current wisdom regarding plan terms and claims procedures. Accordingly, plans that are struggling to cope with out-of-network provider costs should revise their plan language to bolster their plan interpretations, claims decisions, and eventually, their arguments in litigation. Plans should also consider whether their interactions with out-of-network providers could result in a waiver of the plan terms that currently exist for their protection, such as anti-assignment provisions.

Plans and providers are responding to new economic pressures created by the ACA. An effective strategy for coping with these new pressures must incorporate the proven strategies developed by plan administrators over the past decades. Even the most inventive plaintiffs cannot circumvent a disciplined approach to plan interpretation and claims decisions.

Article originally published in DRI's ERISA Report May 1, 2017. Reprint permission granted.