Avera McKennan v. Meadowvale Dairy Employee Benefit Plan, 2019 WL 1579722 (N.D. Iowa 2019)
A federal trial court has ordered a self-insured health plan to pay more than $760,000 in benefits to a hospital that provided care to a plan participant before his death. During treatment for a severe illness, it was discovered that the participant was an undocumented immigrant and had enrolled in the plan using a false name and Social Security number. The plan notified the participant it was rescinding his coverage, citing the employee’s misrepresentation of his identity. (The Affordable Care Act limits rescission to cases of fraud or misrepresentation of a material fact (see our Checkpoint article).) The hospital received an assignment of the participant’s rights under the plan and, after unsuccessfully seeking payment through the plan’s administrative process, sued in federal court.
First addressing the abuse-of-discretion standard of review, the court observed that the plan administrator responsible for deciding claims was also the plan sponsor responsible for benefit payments, creating a conflict of interest. Noting that the first-level administrative review was conducted by the superior of the employee who denied the claim and the second-level review was conducted by the first reviewer’s spouse (who simply copied and pasted the first reviewer’s written decision), the court concluded that the circumstances raised an inference that the conflict affected the decisionmaking process and had to be considered when determining whether the plan administrator abused its discretion. After rejecting technical challenges to the validity of the hospital’s assignment, the court remarked that the claim for benefits turned on whether the participant was an eligible employee and whether his misrepresentation canceled that status.
The court concluded that the participant was an eligible employee because he worked, and was paid for, 30 or more hours per week. The plan’s exclusions for part-time, temporary, leased, and seasonal employees were inapplicable, and nothing in the plan language excluded employees who were not authorized to work. Further, ERISA does not exclude non-citizens or limit its protections to those who are authorized to work. With regard to rescission, the court explained that a misrepresentation is material only if knowledge of the true facts would have influenced the plan’s decision to accept the risk or its assessment of the premium amount—but this employer submitted no evidence that it would be more expensive to provide coverage to an undocumented immigrant. Moreover, although the employer argued that knowledge of the employee’s immigration status would have impacted its hiring decision, plan coverage did not depend on whether the participant was a wise or legal hire, only on whether he was an employee. Thus, the court viewed the denial of coverage based on the “fortuity” of the participant’s immigration status as an attempt to avoid an expense, not remedy harm caused by a material misrepresentation.
EBIA Comment: This decision serves as a reminder that, typically, eligibility conditions must be included in plan documents to be enforceable. Also, retroactive termination of coverage is permissible for fraud or intentional misrepresentation of “material” facts only, and courts may view terminations for these reasons with skepticism—particularly when the plan terminates coverage after a participant incurs large claims. For more information, see EBIA’s Health Care Reform manual at Section X.D (“Prohibition on Rescissions”). See also EBIA’s Self-Insured Health Plans manual at Section XIV.G (“Termination of Eligibility and Participation”) and EBIA’s ERISA Compliance manual at Section XXXIV.H (“‘Full and Fair Review’ Procedures for Group Health Claims and Appeals”).
Contributing Editors: EBIA Staff.