Imagine you’re a plan administrator who receives an angry letter from an out-of-network provider. The letter explains that before treating a plan participant, the provider called to confirm the participant’s eligibility for out-of-network coverage and to authorize treatments at certain rates under the plan. Now that treatment has been rendered, the provider is demanding payment for its services and threatening to bring state law breach of contract claims to recover amounts owed by the plan.
Time to pay up, right? Not so fast; a recent Ninth Circuit case may provide a means for plans that receive such letters to avoid such claims. In Bristol SL Holdings, Inc. v. Cigna Health & Life Ins. Co., 2024 U.S. App. LEXIS 13096 (9th Cir. 2024) (“Bristol”), the Ninth Circuit Court of Appeals held that an out-of-network provider’s state law claims for reimbursement were preempted by ERISA (and therefore could not be brought against the plan administrator) where the provider had engaged in a plan-prohibited practice called “fee forgiving,” on the grounds that the claims had both a “reference to” and a “connection with” the plan administrator’s plan. The decision is a good reminder for plan administrators to confirm that administrative practice is consistent with plan terms or, at minimum, well-documented plan procedures, which, under the Bristol court’s reasoning, could result in preempted state law claims.
What Is Fee Forgiving?
“Fee forgiving” is a practice in which a provider charges an ERISA plan for a rendered service but does not charge the patient the copay or deductible owed for the service under the plan. While fee forgiving may be great from a patient perspective (free health care!), it’s not always as generous as it seems. For example, an out-of-network provider that routinely waives costs for patients may be attempting to hide the true cost of what it is billing—such as unnecessary or expensive services. In addition, fee forgiving theoretically can drive up insurance costs by eliminating financial incentives for patients to seek cheaper care from their plans’ in-network providers. As a result, some ERISA health plans contain language permitting insurers to deny reimbursement to providers that engage in fee forgiving.
Bristol Decision
Facts of the Case
In Bristol, a drug rehabilitation and mental health treatment center received reimbursements from an ERISA plan administrator for services the center rendered to plan participants as an out-of-network provider. Before accepting plan participants as patients, the center would call the plan administrator to confirm participant eligibility for out-of-network benefits and to determine appropriate reimbursement rates. The plan administrator reimbursed the center under this system until it suspected the center was “fee forgiving”—a practice directly addressed in the plan documents through language permitting the plan administrator to deny reimbursement of charges for which participants were not billed (i.e., for which fees were forgiven). Based on the plan language, the plan administrator stopped reimbursing the center for claims suspected to involve fee forgiving. The plan administrator sent the center a letter detailing its concerns and requesting proof of patient payment amounts owed under the plan.
Following the center’s bankruptcy, its successor-in-interest brought state law claims for breach of contract and promissory estoppel against the plan administrator, seeking reimbursement for service claims denied on account of the fee forgiving. The Ninth Circuit Court of Appeals held that although the administered plans technically covered the patients and treatment for which plaintiff sought reimbursement, the claims “related to” the plans and were therefore preempted by ERISA.
ERISA Preemption
The Supreme Court has created two tests to determine whether a state law “relates to” an employee benefit plan and is preempted by ERISA.[1] Under the first test, courts consider whether a state law has a “reference to” an ERISA plan. The “reference to” test requires ERISA preemption if a state law claim is premised on the existence of an ERISA plan, the plan’s existence is essential to the claim’s survival, or the claim provides alternative enforcement mechanisms for ERISA plan obligations. Under the second test, courts consider whether a state law has a “connection with” an ERISA plan. The “connection with” test requires ERISA preemption if a state law governs a central matter of plan administration, interferes with nationally uniform plan administration, or if acute economic effects of the law force the plan to adopt a particular coverage scheme or restrict its choice of insurers.
Bristol Holding
In reaching its decision in Bristol, the Ninth Circuit explained that the plaintiff’s claims had both a “reference to” and an “impermissible connection” with the plans at issue and were thus preempted by ERISA.
Under the “reference to” test for ERISA preemption, the Ninth Circuit explained that by using state law claims to try to recover plan-covered payments discussed over the phone with the plan administrator, plaintiff sought to obtain a remedy that is not available under ERISA. As a result, plaintiff’s state law claims were preempted for attempting to provide an alternative enforcement mechanism. The Court also noted that by using plan reimbursement rates to calculate damages, plaintiff’s state law claims specifically relied on the terms of the plan administrator’s plan and thus were preempted as being premised on the existence of an ERISA plan.
Under the “connection with” test for ERISA preemption, the Ninth Circuit explained that allowing liability on the state law claims would intrude on a central matter of plan administration—specifically, the plan administrator’s system of first verifying out-of-network coverage and authorizing treatment by phone, and subsequently conditioning reimbursement on whether a provider had secured payments owed by plan participants. The Court noted that plaintiff’s theory—which would require reimbursement based on the verification calls in clear violation of plan’s prohibition on fee forgiving—would render the prohibition moot and would impermissibly force plans to choose between their plan terms and their prior authorization programs. Additionally, the Court reasoned that using state contract law to bind insurers to their verbal representations—rather than determining reimbursements in accordance with ERISA plan terms—would interfere with national uniform administration of ERISA plans. For each reason, the Court determined the plaintiff’s claims had an impermissible connection with an ERISA plan and were therefore preempted.
Thompson Hine’s Takeaways
Although its holding specifically addresses ERISA’s preemption of state law claims where a plan administrator denied payment based on fee forgiving provisions, plan administrators threatened with state law litigation to recover out-of-network provider payments should consider the implications of the Bristol decision. Plans looking to protect themselves against such claims denied on a similar basis should consider whether the plan document prohibits fee forgiving, and if not, whether such a provision should be added. To the extent a plan does prohibit fee forgiving and plan administrators have relied on the prohibition to deny out-of-network provider reimbursements, such reliance should be well-documented. More broadly, plan administrators should assess whether the plan reflects administrative practices in approving or denying claims and, if not, consider making necessary amendments to the plan or formalizing plan procedures; this could support ERISA preemption if a claims decision were challenged under state law.
Plans should also keep in mind that Bristol does not eliminate all types of state law claims by out-of-network providers. The Bristol holding itself explains that some circuits have allowed state law misrepresentation claims to proceed where providers rendered certain services based on insurers’ misrepresentations regarding participant eligibility for the services. Similarly, some courts have held that ERISA will not preempt third-party reimbursement claims triggered by the absence of an ERISA plan (i.e., claims seeking reimbursement for costs of care provided when patients lacked ERISA plan coverage). However, Bristol could provide a compelling preemption defense—at least in the Ninth Circuit—to ERISA plans against conflicting state-imposed liabilities that run contrary to established plan procedures, and in support of processes (such as fee forgiving exclusions, preauthorization, and benefits verification) critical to plan administration.
Ultimately, although ERISA preemption is a largely fact-specific inquiry, the Bristol decision may serve as an additional tool for plans and plan administrators to protect themselves against state law claims for services denied in accordance with plan terms.
[1] Gobeille v. Liberty Mut. Ins. Co., 577 U.S. 312, 319 (2016).