In MHPAEA Litigation, Court Awards ERISA Penalties of $123, 100 for Plan's Failure to Disclose ASA and Claims Criteria

Practical Law Legal Update w-032-2452 (Approx. 6 pages)

In MHPAEA Litigation, Court Awards ERISA Penalties of $123,100 for Plan's Failure to Disclose ASA and Claims Criteria

by Practical Law Employee Benefits & Executive Compensation

Plan Denies Coverage for Treatment at Mental Health Facility

A dependent with coverage under his parents' self-funded health plan suffered from anxiety, emotional issues, and pervasive developmental disorder and received treatment for autism, oppositional defiant disorder, and other conditions at a mental health residential treatment facility. However, following a preauthorization request, the plan's claims administrator denied coverage for the dependent's treatment at the facility (which ultimately lasted 16 months) as not medically necessary under the plan. The claims administrator concluded that:

The intensity of the dependent's symptoms did not satisfy a set of factors known as the McKesson InterQual Criteria for determining whether residential treatment care was appropriate for a mental health condition.
The intensity of the dependent's treatment at the facility also failed to meet the InterQual Criteria for a residential treatment center.

The dependent's parents appealed the claim denial and, in doing so, requested various plan documents related to the claim. In addition to all governing plan documents and the summary plan description (SPD), the claimants requested:

Any existing administrative services agreements (ASAs).
The mental health and substance use disorder (MH/SUD) criteria, including for skilled nursing facilities, used to evaluate the dependent's claim.

Although the claims administrator timely furnished the plan's SPD, it did not provide the InterQual Criteria until more than 31 months after the claimants' initial request. The plan never provided any ASAs to the family, including the agreement between the employer/plan sponsor, ERISA plan administrator, and claims administrator. Following review by an independent physician, the claims administrator also denied the claimants' appeal. In addition, an independent external reviewer upheld the denials and agreed with the claims administrator that the dependent's treatment was not medically necessary.

The claimants then sued the plan, employer, and claims administrator in federal district court, bringing claims under ERISA:

To recover benefits (see Practice Notes, ERISA Litigation: Causes of Action and Remedies Under ERISA Section 502 for Benefit and Fiduciary Breach Claims).
For MHPAEA violations (see Practice Note, Mental Health Parity: Overview).

The claimants also sought ERISA statutory penalties for the claims administrator's delay or total failure to provide requested documents. The parties filed cross-motions for summary judgment (that is, judgment without a trial).

Regarding Document Disclosures, Administrator's Conduct Suggested Bad Faith

Considering the claimants' three claims in turn, the district court concluded that:

The dependent's treatment at the residential treatment facility was not covered by the plan.
The plan violated MHPAEA.
The plan also ran afoul of ERISA's disclosure requirements.

Denial of Benefits

Rejecting the claimants' ERISA benefits denial claim, the court determined that the claimants failed to establish that the dependent's treatment at the residential treatment facility was medically necessary under the plan (and therefore a covered benefit). Among other reasons, the claimants failed to show that the dependent's symptoms satisfied the InterQual Criteria (which required weekly occurrences of certain behaviors, such as an inability to follow instructions). The court concluded that the claims administrator made a correct benefits decision, based on the plan's terms and use of the InterQual Criteria to assess medical necessity.

Use of InterQual Criteria Violated MHPAEA

Regarding the claimant's parity claim, however, the court held that the plan, employer, and claims administrator violated MHPAEA by using the InterQual Criteria to determine whether the dependent's residential treatment center benefits were medically necessary. For nonquantitative treatment limitations (NQTLs) such as medical necessity, MHPAEA's implementing regulations prohibit plans from imposing more stringent "processes, strategies, evidentiary standards, or other factors" to MH/SUD benefits than it does for medical/surgical benefits (see Practice Note, Mental Health Parity: Nonquantitative Treatment Limitations (NQTLs)). The claimants argued that use of the InterQual Criteria to apply the plan's medical necessity treatment limit to benefits received at residential treatment centers made the limit more restrictive as applied to MH/SUD benefits than for medical/surgical benefits in the same classification. This was because for medical/surgical benefits (for example, inpatient hospice services), the claims administrator relied on only the plan language itself—without any additional process or criteria—to make medical necessity determinations. The court assumed that inpatient hospice facilities offered an analogous level of care and were in the same classification as residential treatment centers. The court concluded that this approach violated MHPAEA.

However, the court ordered the claimants to provide additional briefing regarding the appropriate equitable remedy for the mental health parity noncompliance.

Statutory Penalties for Failure to Disclose Documents

Finally, the court addressed the claimants' request for ERISA statutory penalties regarding non-disclosure (and delayed disclosure) of plan-related documents (see Practice Note, ERISA Litigation: Penalties for Failing to Provide Documents). According to the court, the claimants first requested the InterQual Criteria and the ASA in February 2018, but the claims administrator did not furnish the Criteria until October 2020—and it failed to provide an ASA altogether.

The court held that, because the InterQual Criteria and the ASA are instruments under which the plan is operated under ERISA, the claimants were eligible for ERISA statutory penalties for the plan's failure to provide these two documents within 30 days of the claimants' request.

Evaluation Criteria and ASA Are Subject to Disclosure

The court observed that before MHPAEA implementing regulations were issued, the federal courts disagreed as to whether documents such as the InterQual Criteria were required to be disclosed under ERISA (and therefore subject to statutory penalties). Most courts, the district court noted, had concluded that the criteria could not be the basis for issuing penalties. But the MHPAEA regulations, the court held, clearly brought evaluation criteria within the scope of the penalties provision. Regarding ASAs, the court favorably discussed cases concluding that an ASA is subject to disclosure if plan administration is divided between a plan administrator and a claims administrator (so that the ASA speaks to the extent of each administrator's authority). Both the employer and its claims administrator in this case had plan-related obligations, the court reasoned, and so the ASA was necessary to inform the claimants of those respective obligations.

Penalty Factors Required Meaningful Penalty

From there, the court analyzed several factors that are commonly considered by the courts in awarding ERISA statutory penalties. These factors include:

The plan decisionmaker's bad faith or intentional conduct.
The length of the delay in providing documents.
The number of requests for documents.
The extent and importance of the documents withheld.
The existence of any prejudice to the participant or beneficiary.

(See Practice Note, ERISA Litigation: Penalties for Failing to Provide Documents: Factors Considered by Courts in Awarding Penalties.)

Starting with bad faith, the court concluded that these factors collectively cut in favor of imposing a "meaningful penalty." The court observed that the claims administrator's conduct suggested bad faith because (among other reasons) it:

Failed to engage with the controlling MHPAEA regulations indicating the need to disclose the evaluation criteria (even after those regulations were highlighted in the claimants' briefing).
Forced the claimants to engage in expensive and time-consuming discovery disputes.

Moreover, the court indicated that the number of documents request by the claimants and the length of delay also supported significant statutory penalties (for example, more than three years had passed since the claimants first asked for ASAs and the evaluation criteria). The claimants also requested these documents multiple times. Later, the plan disclosed more than 4,300 pages of documents without explaining which documents were responsive to the claimants' requests. The court added that the requested documents were reasonable in number and addressed important rights for the claimants under ERISA, especially concerning the division of responsibility between the plan administrator and claims administrator.

The court calculated the penalty based on two separate violations of ERISA's disclosure requirement, but it did not impose the statutory maximum penalty for the violations. Rather, it imposed a penalty of $100 per day from February 27, 2018 (the date of the family's first written request) through August 10, 2021 (the date of the court's decision) for the plan's failure to disclose the ASA. However, the court did not impose simultaneous penalties per violation for withholding both the ASA and the evaluation criteria documents. In total, the court imposed ERISA statutory penalties of $123,100. The court also invited a motion from the family to request attorney's fees and costs (see Practice Note, ERISA Litigation: Attorney's Fees).

Practical Impact

As this case illustrates, there can be significant litigation exposure for plans, insurers, and service providers that fail to comply with MHPAEA's parity requirements and related document disclosure rules. And the court's ERISA penalties analysis (particularly regarding the bad faith factor) paints an unflattering picture of a plan that declined to produce documents despite having access to benefit counsel with subject matter expertise regarding MHPAEA's document disclosures standards. Importantly, recent legislation (the Consolidated Appropriations Act, 2021) has expanded MHPAEA's disclosure requirements, and the administrative agencies view MHPAEA compliance as an important enforcement priority (see Legal Update, MHPAEA Guidance Expands on Comparative Analysis Disclosures Under the CAA-21).

In MHPAEA Litigation, Court Awards ERISA Penalties of $123,100 for Plan's Failure to Disclose ASA and Claims Criteria | Practical Law