McKennan v. Meadowvale Dairy Emp. Benefit Plan, 2020 WL 5085954 (8th Cir. 2020)
A federal appeals court has reversed a judgment ordering a self-insured health plan to pay more than $760,000 in benefits to a hospital that provided care to a plan participant, concluding that the hospital was not authorized to sue on the participant’s behalf. While the participant was hospitalized with a severe illness, the plan sponsor rescinded his coverage after discovering that the participant had applied for employment and enrolled in the plan using a false name and Social Security number. The plan permitted rescission in cases of fraud or intentional misrepresentation of material fact. Although the participant died before appealing the rescission, the hospital tried to appeal on the participant’s behalf based on an assignment of rights, remedies, benefits, and causes of action. The plan denied the appeal on the bases that the hospital wasn’t the participant’s authorized representative; the assignment was invalid; and the participant committed fraud and misrepresented material facts when he used false identification. In the hospital’s suit to recover plan benefits, the trial court concluded that the assignment was valid; the hospital exhausted administrative remedies; and the attempted rescission was invalid because the participant was eligible under the plan’s terms, and any misrepresentation of his identity was not “material” (see our Checkpoint article). The plan sponsor appealed.
The Eighth Circuit did not address the appropriateness of rescission, instead reversing the trial court’s judgment on procedural grounds. The court ruled that the plan’s administrative remedies were not exhausted because the participant failed to appeal the rescission himself and the hospital lacked authority to appeal on the participant’s behalf. According to the court, the participant failed to follow the plan’s procedures for designating the hospital as his authorized representative, and even if the assignment was valid, the plan’s terms precluded the assignment from making the hospital an authorized representative. Because administrative remedies were not exhausted, a cause of action never accrued under the plan and the hospital had no cause of action to pursue under the assignment. The court also rejected contentions that the assignment constituted substantial compliance with the plan’s authorized representative procedures and that administrative exhaustion should have been excused as futile.
EBIA Comment: The court’s ruling seems harsh given that the participant died well before the appeal deadline expired, but this approach sidestepped the question of whether a plan can rescind the eligibility of an undocumented worker based on misrepresentation. By focusing on procedural issues, this case highlights distinctions between claim assignments and authorized representative designations. Plans generally can prohibit or limit assignments, but they must allow appointment of authorized representatives, subject to reasonable procedures. Plan documents and summary plan descriptions should clearly distinguish between assignees and authorized representatives and describe the requirements and limitations for each. For more information, see EBIA’s Self-Insured Health Plans manual at Sections XIV.G (“Termination of Eligibility and Participation”), XXVI.D.1 (“Authorized Representative Documentation”), and XXVI.F.2 (“Reasonable Procedures for Identifying Authorized Representatives”). See also EBIA’s ERISA Compliance manual at Sections XI.E (“Assignment of Benefits”), XXXIV.D.3 (“Definition of Authorized Representative”), XXXIV.E.1 (“Authorized Representative Paperwork”), XXXIV.G.3 (“Reasonable Procedures for Identifying Authorized Representatives”), and EBIA’s Health Care Reform manual at Section X.D (“Prohibition on Rescissions”).
Contributing Editors: EBIA Staff.