In Disability Benefits Litigation, ERISA Does Not Preempt Montana's Mental Health Parity Law | Practical Law

In Disability Benefits Litigation, ERISA Does Not Preempt Montana's Mental Health Parity Law | Practical Law

A federal district court in Montana has ruled that Montana's mental health parity law was not preempted by the Employee Retirement Income Security Act (ERISA) in the context of disability benefits litigation. As a result, the ERISA disability plan at issue was required to provide the same benefits for mental illness that it would provide had the disability been physical in nature.

In Disability Benefits Litigation, ERISA Does Not Preempt Montana's Mental Health Parity Law

by Practical Law Employee Benefits & Executive Compensation
Published on 25 Sep 2017 • USA (National/Federal)
A federal district court in Montana has ruled that Montana's mental health parity law was not preempted by the Employee Retirement Income Security Act (ERISA) in the context of disability benefits litigation. As a result, the ERISA disability plan at issue was required to provide the same benefits for mental illness that it would provide had the disability been physical in nature.
A federal district court in Montana has ruled that ERISA did not preempt Montana's mental health parity law, as applied to an ERISA group disability income plan, and that the Montana law required the plan to provide a participant the same benefits for a mental health illness that it would apply if the disability had been physical (Sand-Smith v. Liberty Life Assurance Co. of Bos., (D. Mont. Sept. 20, 2017)).

Background

The plaintiff in this case, a claims adjuster and resident of Montana, was a covered participant in an ERISA-governed group disability income plan. The participant became disabled due to bipolar disorder in 2014 and was approved by the plan's insurer for long-term disability (LTD) benefits under the plan the following July (retroactively effective beginning in mid-June 2015). At the time, the plan included a mental illness provision limiting LTD benefits to 24 months. The plan also included provisions:
An amended version of the plan issued in 2016 did not change the plan's mental illness provision. However, under the 2016 version of the plan, any provision that conflicted with a statute for the state in which an insured resided would be conformed to the statute's minimum requirements.
In mid-2016, the participant contacted the Montana Insurance Commissioner to determine whether the plan's 24-month limit for LTD benefits under the mental illness provision was discriminatory, given her understanding that the plan did not impose a limit for physical disabilities. The participant then hired an attorney, who informed the insurer of his belief that the plan's mental illness provision violated Montana's mental health parity law (Mont. Code Ann. § 33-22-706). Concluding that ERISA preempted the Montana law, the insurer informed the participant (also in 2016) that her benefits would be terminated in June 2017 under the 24-month limit (see Practice Notes, ERISA Litigation: Preemption of State Laws (Overview) and ERISA Litigation: Preemption of Select State Laws, and ERISA Litigation Toolkit). In litigation initially filed in state court but later removed to federal court, the parties disagreed regarding whether Montana's mental health parity law voided the plan's mental illness limit.

Outcome

Ruling in the participant's favor, the district court concluded that ERISA did not preempt Montana's mental health parity law. As a result, the plan's 24-month mental illness limit was void because it conflicted with Montana's mental health parity law. The plan was required to provide the participant the same benefits for her mental illness that it would have provided had her disability been physical.

Governing Version of the LTD Plan

Resolving a threshold question, the court determined that the 2016 version of the plan governed the dispute (rather than an earlier version) because the participant's claim was first denied by the insurer in 2016. In reaching this conclusion, the district court observed that:
  • Disability benefits are classified as welfare (not pension) benefits under ERISA, a distinction relevant to whether the disputed benefits had vested and could be altered.
  • The participant's LTD benefits were clearly not vested (notwithstanding the insurer's arguments to the contrary) because the plan could be unilaterally changed or modified.
Because the 2016 version of the plan governed, the plan provision under which the plan amended itself to conform with statutory requirements in the state where the insured participant resided also applied. As a result, the 2016 plan incorporated Montana's mental health parity law (assuming that law was not ERISA-preempted).

ERISA Did Not Preempt Montana's Mental Health Parity Law

The district court next analyzed whether Montana's mental health parity law was ERISA-preempted, applying a saving clause analysis under ERISA's preemption provision and the two-part test announced by the Supreme Court in 2003 (Kentucky Ass'n of Health Plans v. Miller, 538 U.S. 329, 342 (2003); see also Practice Note, ERISA Litigation: Preemption of State Laws: Saving Clause Exception). Under the Miller test, the district court concluded that Montana's mental health parity law was not ERISA-preempted because the law:
  • Was directed towards entities engaged in insurance (that is, by specifically regulating health and disability insurance policies delivered in Montana).
  • Substantially affected the risk pooling arrangement between an insurer and insured (by requiring parity between mental illness and physical illness benefits).
Finally, the district court resolved issues generally involving the reach of Montana's mental health parity law in favor of the participant. In this regard, the court rejected the insurer's argument that lost wages were not a benefit covered under the Montana law. As a result, the court held that Montana's mental health parity law required equal treatment when the benefit is lost wages.

Practical Impact

This case underscores the complexity for health plan sponsors in providing mental health and substance use disorder (MH/SUD) benefits consistent with governing standards for mental health parity. Plan sponsors may be familiar with mental health parity requirements under the federal Mental Health Parity and Addiction Equity Act (MHPAEA) (which is not addressed in this court's decision; the court employed a standard ERISA preemption analysis). However, it should be noted that the individual states also have enacted parity requirements that may – as in this case – require analysis in a litigated dispute over MH/SUD benefits (see Practice Notes, Mental Health Parity: Overview and Mental Health Parity: NQTLs and Other Issues: Preemption: Interaction of the MHPAEA and State Insurance Law). Also, the MHPAEA contains its own preemption rule that may govern in disputes similar to this one. Under the MHPAEA's preemption provision, the MHPAEA generally does not supersede a state law that establishes, implements, or continues requirements for health insurers regarding health insurance coverage, unless the state requirement prevents application of an MHPAEA requirement.
Health plan sponsors may also find this case of interest for its arguably broad reading of the scope of Montana's mental health parity law. In concluding that the state parity law applies to lost wages, the district court reasoned that while some state legislatures have restricted their parity laws to health insurance, Montana's legislature expressly chose to include disability insurance (a concept that has been interpreted in Montana to mean insurance against lost wages).