Health Plan Cannot Use Its Interpretation of “Reasonable and Customary” Because It Did Not Disclose Methodology

A health plan participant and his wife sued his employer (as plan administrator) after the wife had surgery performed by an out-of-network specialist and was reimbursed much less than anticipated. Under the terms of the plan, out-of-network services would be covered at 60% of the “reasonable and customary” rate. In this case, the plan—which determined “reasonable and customary” rates based on its negotiated discounted rates for in-network providers—paid about $700 of the nearly $28,000 surgery bill. After an unsuccessful internal appeal, the couple sued, asserting that the failure to explain the plan’s pricing methodology during the claim and appeal process violated ERISA’s claims procedure rules, and that the methodology used, as well as the plan’s failure to consider all evidence in the administrative record, resulted in a decision that was arbitrary and capricious.

The court first determined that when a claimant specifically challenges the calculation of the “reasonable and customary” amount for reimbursement purposes, ERISA’s requirement that claimants be afforded a full and fair review necessitates disclosure of the plan’s pricing methodology—including any fee schedule used. The court noted that this conclusion is further supported by the requirement to disclose (or furnish upon request) any internal rule, guideline, protocol, or similar criterion used in a claims decision. The court explained that the pricing method, despite deviating from industry custom, is not, on its face, arbitrary and capricious, but it is arbitrary to interpret a term in a way that contradicts the term’s plain reading without explaining that interpretation. If the plan does not describe its methodology, “reasonable and customary” should be determined according to its ordinary meaning—generally with reference to prevailing market rates in the relevant geographic area. The court also concluded that the plan administrator failed to consider a treatment code “modifier” (indicating that the procedure was more difficult or complicated than usual) that may have resulted in a higher reimbursement amount—or to explain why the modifier was not considered. Accordingly, the decision was arbitrary and capricious. The claim was remanded to the plan administrator with instructions to interpret “reasonable and customary” according to its ordinary meaning, provide a specific explanation of the fee calculation, and consider all evidence in the administrative record, including the modifier.

EBIA Comment: The decision may have been upheld had the plan administrator explained its pricing methodology during the administrative process, instead of revealing it in a court filing. Now it cannot apply its own interpretation of “reasonable and customary” in reconsidering the claim—and it seems that using prevailing market rates will almost certainly result in higher reimbursement for the surgery. For more information, see EBIA’s ERISA Compliance manual at Section XXXIV.H (“’Full and Fair Review’ Procedures for Group Health Claims and Appeals”). See also EBIA’s Self-Insured Health Plans manual at Sections XIII.E.2.c (“’Usual, Customary, and Reasonable’ Limitations”) and XXVI.G.6 (“Access to and Copies of Information ‘Relevant’ to Claim”).

Contributing Editors: EBIA Staff.