In Dispute Over Anti-Depressants, Claimant Challenges How Health Plan's Out-of-Pocket Limits Apply

Practical Law Legal Update w-027-8418 (Approx. 5 pages)

In Dispute Over Anti-Depressants, Claimant Challenges How Health Plan's Out-of-Pocket Limits Apply

by Practical Law Employee Benefits & Executive Compensation

Background

The plaintiff in this case was a beneficiary under an ERISA group health plan sponsored by her spouse's employer. The plan included the following three-tiered cost-sharing provision:

Before reaching a $4,000 deductible, participants and beneficiaries were responsible for their medical expenses.
After reaching the deductible but before reaching the out-of-pocket limit, the plan paid the difference between the covered service's cost and the copay (referred to as the "copay differential").
After reaching the out-of-pocket limit, the plan paid 100% of covered amounts for the rest of the plan year.

(See Practice Note, Cost-Sharing Restrictions Under the ACA.)

The plan also required participants and beneficiaries to pay the difference between the price of a brand name drug and its generic version, unless a doctor certified that the brand name version was medically necessary.

In 2015, the beneficiary purchased a brand name anti-depressant (Effexor), for which a generic version was available. The claims administrator denied the beneficiary's claim for benefits, concluding that:

The beneficiary was responsible for the difference in price between the brand name drug and generic drug.
The beneficiary was subject to the family, rather than individual, out-of-pocket limit, because she had family coverage.
The additional amounts for the brand name drug did not count toward the beneficiary's out-of-pocket limit.
The beneficiary was not entitled to reimbursement for the difference in copays between the brand name drug and the generic version.

The beneficiary sued the claims administrator, and a district court determined that the claims administrator's determinations were arbitrary and capricious and remanded for further consideration (see ERISA Litigation Toolkit and Practice Note, ERISA Litigation: Standard of Review: Arbitrary and Capricious (Deferential) Standard of Review). On remand, the claims administrator reversed its decision concerning reimbursement for the difference in copays (an amount totaling $64.32), but otherwise reached the same conclusions. The beneficiary again challenged the claims administrator's determinations. Although this time the court ruled for the claims administrator, the beneficiary sought reconsideration of that decision and attorney's fees.

Split Ruling on Out-of-Pocket Limit and Attorney's Fees

The district court denied the beneficiary's motion for reconsideration and granted in part the motion for attorney's fees. The court concluded that:

It did not fail to apply the ACA's cost-sharing provision, as construed by HHS regulations, when interpreting the plan language (see Out-of-Pocket Limit Dispute Turns on Whether Regulations Apply Retroactively).
The beneficiary was entitled to attorney's fees under ERISA, but in an amount significantly less than requested (see Attorney's Fees Under ERISA).

Out-of-Pocket Limit Dispute Turns on Whether Regulations Apply Retroactively

The beneficiary argued that, in determining that she had to satisfy the family, rather than the individual, out-of-pocket limit, the district court failed to consider whether that interpretation was allowed under the ACA's cost-sharing requirements (42 U.S.C. § 18022(c)). Under the ACA, annual cost-sharing under a non-grandfathered group health plan may not exceed certain ACA limits on an individual's out-of-pocket costs. The court noted that while the ACA provides that the family out-of-pocket limit should be twice the individual out-of-pocket limit, it does not specify which limit should apply when an individual has family coverage.

In support of her argument that the individual cost-sharing limit should apply, the beneficiary cited HHS regulations from 2015 that were effective beginning in 2016 (80 Fed. Reg. 10750-01 (Feb. 27, 2015)). In those regulations, HHS took the view that the ACA's annual limit on cost-sharing for self-only coverage would apply both to individuals with self-only and non-self-only coverage. Under this rule, as a result, plans could not require individuals with family coverage to spend more than the out-of-pocket limit for self-only coverage (known as an "embedded individual out-of-pocket limit"). The outcome of the beneficiary's challenge turned on whether HHS's 2015 regulations applied retroactively.

Distinction Between Legislative and Interpretive Rulemaking

In determining whether the 2015 regulations applied retroactively, the court analyzed whether the rule was interpretive or legislative. An interpretive rule may apply retroactively, but a legislative rule may not. Under Second Circuit precedent, an interpretive rule is one that clarifies an existing rule or regulation, whereas a legislative rule changes the law in some way. The court held that the 2015 rule was legislative, and therefore could not apply retroactively. In reaching this conclusion, the court reasoned that:

The rule involved a change, as evidenced by the ACA's silence on which limit applied in this situation and the fact that insurers generally required individuals to meet the family out-of-pocket limit before the regulations went into effect.
The regulations were issued using the notice-and-comment rulemaking process under the Administrative Procedure Act (APA).
HHS indicated that the rule applied prospectively.

According to the court, because the 2015 regulations were not retroactive, the court had not failed to apply the ACA's cost-sharing provision when it initially interpreted the plan's language, which required the beneficiary to meet the out-of-pocket limit for family coverage.

Attorney's Fees Under ERISA

The beneficiary also sought nearly $112,000 in attorney's fees and costs under ERISA (see Practice Note, ERISA Litigation: Attorney's Fees). The claims administrator, however, asserted that the beneficiary was not eligible for fees under ERISA because any success she obtained in the litigation was purely procedural. The district court observed that under the Supreme Court's Hardt ruling, a litigant may be awarded fees and costs if it achieves some degree of success on the merits (see Practice Note, ERISA Litigation: Attorney's Fees: Addition of "Some Degree of Success on the Merits" Standard). The court also noted that several district courts in the Second Circuit have held that a "remand simpliciter" (that is, returning the case to the plan decisionmaker without more) satisfies Hardt's "some degree of success" standard. These courts reasoned that such a remand:

Reflects a finding that the plan decisionmaker's claim determination was in some way deficient.
Affords the claimant a renewed opportunity to obtain benefits.

The district court indicated that—in addition to Hardt's "some degree of success" standard, which is the only factor courts are required to consider—courts also may apply the traditional five factor test in awarding fees. These factors include:

An offending party's degree of culpability or bad faith.
An offending party's ability to satisfy an award of attorney's fees.
Whether award fees will deter other persons from acting similarly in like circumstances.
The relative merits of the parties’ positions.

(Chambless v. Masters, Mates & Pilots Pension Plan, 815 F.2d 869, 871 (2d Cir. 1987).)

In partially granting the beneficiary's request for fees and costs, the district court reasoned that the beneficiary had achieved some degree of success on the merits based on the court's remand to the claims administrator (see Practice Note, ERISA Litigation: Attorney's Fees: Revised Standards for Awarding Attorney's Fees Under Hardt). Applying the Chambless factors, the district court also reasoned that:

The claims administrator acted culpably by refusing to pay the copay differential ($64.32) for almost three years.
The claims administrator could afford to pay an award of attorney's fees.
The deterrence factor weighed slightly in favor of an award of attorney's fees.

The district court acknowledged, however, that the beneficiary achieved only "limited success" on her claims, warranting a 75% reduction in the requested fees. The court further reduced the fee award to account for vague descriptions in the attorneys' billing entries and to exclude time spent responding to the court's order to show cause. Ultimately, as a result, the court awarded the beneficiary just over $15,000 in attorney's fees and $400 in costs.

In Dispute Over Anti-Depressants, Claimant Challenges How Health Plan's Out-of-Pocket Limits Apply | Practical Law