• Give Your Health Plan a Check-Up
  • April 20, 2005 | Author: M. Sean Sullivan
  • Law Firm: Waller Lansden Dortch & Davis, LLP - Nashville Office
  • With medical costs increasing each year, human resource specialists are caught in a never-ending battle to keep costs down while providing competitive benefits to company employees. Thankfully, there are a few maintenance items for health and disability plans that can not only keep the plans in legal compliance, but also result in cost savings for the company. Two of those items -- claims procedures and subrogation -- are discussed in this bulletin.

    Claims Administration

    In 2002 and 2003, new rules from the U.S. Department of Labor (DOL) became effective governing the manner in which health and disability plans process benefit claims. These rules placed significant new burdens on plan administrators. In particular, the DOL shortened the time period for plan administrators to approve or deny claims. Further, the new rules required that denial letters include detailed information about the reason for the denial and the claimant's appeal and litigation rights. Appeals must be determined by a different committee from that which initially denied the claim and no person on the appeals committee may be a subordinate of a person on the first committee.

    Many companies have outsourced the general administration of their health and disability plans to third-party administrators, and so are unaware of whether their plans comply with the new claims administration rules. In our experience, many of these plans still are not in compliance with the new rules. Noncompliance can have a significant financial impact on self-funded plans. Although a court will generally defer to a plan administrator's decision unless that decision was arbitrary, many courts will not give this discretion if the plan administrator failed to follow the new claims administration rules. As anyone who has been involved in benefits litigation knows, this can mean the difference between winning and losing a benefits case. In addition, as a fiduciary of the plan, a plan sponsor has a legal duty to its employees and their beneficiaries to ensure that claimants receive a fair hearing of their claims for benefits.

    Ensuring compliance with DOL claims procedures is relatively simple. We recommend that plan sponsors request sample claims files from their in-house or third-party administrators at least once a year. The plan sponsor should review the files and any denial letters to determine whether the plan administrator is responding to claims in a timely manner. Denial letters should be reviewed to ensure that they provide a detailed reason for the denial, references to the specific plan provisions upon which the denial is based, an explanation of the plan's review procedures, the time limits for appeals and an explanation of the claimant's rights to bring a civil action. In addition, the plan sponsor should make certain that the letters are written in a manner that is easily understood by the average plan participant.


    Most health and disability plans include a subrogation clause. This clause gives the plan the right to recover benefits from a claimant if the claimant is later paid by another source. Although subrogation clauses give plan sponsors the right to recover thousands of dollars every year, the difficulty of enforcing subrogation rights discourages many plan sponsors from pursuing recovery at all. Other plan sponsors outsource the enforcement of subrogation to third-party administrators. Recent decisions from the U.S. Supreme Court and certain Circuit Courts have increased the difficulty of enforcing subrogation rights.

    Despite these challenges, we believe it is still wise for companies to revisit their subrogation rights and procedures. Subrogation clauses in benefit plans should be reviewed to ensure that they allow a full recovery and do not exclude expenses incurred by the claimant, such as attorney fees. In addition, some courts have developed a default "make whole doctrine" in which the plan's right to subrogation of any proceeds a claimant recovers against a third party is limited to the extent that the recovered funds exceed the claimant's actual damages. Accordingly, each plan's subrogation clause should specifically state that subrogation applies without regard to the make whole doctrine.

    Before paying benefits, plan sponsors can require a claimant to sign a separate subrogation agreement in which the claimant affirmatively recognizes the plan's subrogation rights. If the claimant is potentially covered by another insurance policy, the plan sponsor should send a letter to the insurance company explaining the plan's subrogation rights. Similarly, if the plan sponsor becomes aware that the claimant has brought a lawsuit with respect to his or her injuries, the plan sponsor should send letters to both the plaintiff's and defendant's attorneys informing them of the plan's subrogation rights. All letters should demand that the plan be paid before the claimant. If a company has outsourced the enforcement of its subrogation rights, it should contact its third-party administrator at least annually to check on the administrator's procedures for enforcing those rights.