RECENT CASE LAW DEVELOPMENTS

 

Prepared by:  Debra L. Mackey, Esq.

Johnston Barton Proctor and Powell, LLP

Birmingham, AL

 

 

 

Kentucky Association of Health Plans v. Miller, 123 S. Ct., 1471 (2003).  The Supreme Court held that two Kentucky “any willing provider” laws were not preempted by ERISA because they were saved from ERISA preemption as laws that regulate insurance.  This case settles a split in the circuits on this issue.  In rendering its decision, the Court deviated from the McCarran-Ferguson/common sense test in favor of a new test under which a law that relates to an ERISA plan is saved from preemption if (1) the law is specifically directed towards entities engaged in insurance and (2) the law substantially affects the risk-pooling arrangement between the insurer and the insured.  The second prong of the test does not require that the law spread or transfer risk; rather, it must simply affect the relationship or the bargain between the insurer and the insured.  While this case may have implications for health plans as states may become more aggressive in enacting any willing provider laws, the significance of this case may lie in where it leads to on the reach of state regulation of benefit plans.  Historically, ERISA preemption has been applied to prohibit regulation of self-insured ERISA plans by state insurance laws.  In a footnote, the Court suggested that a self-insured plan may well be the sort of arrangement Congress intended to reach in describing laws that regulate insurance, at least when the self-insured plan is administered by an insurer (e.g., the insurer is not acting as an insurer per se, but as a third party administrator or administrative services only provider).

 

Black & Decker Disability Plan v. Nord, 123 S. Ct. 1965 (2003).  This case involved the treating physician rule and the Supreme Court held that a disability plan is not required to defer to the opinion of the participant’s treating physician.  This does not mean, however, that the treating physician’s opinion can be ignored.  The treating physician rule is a rule applied in disability determination cases by the Social Security Administration.

 

Land v. Cigna Healthcare of Florida, 339 F. 3d 1286 (11th Cir. 2003).  The Eleventh Circuit held that ERISA does not completely preempt a medical malpractice claim against an HMO based on the recommendation of a nurse employed by the HMO that the participant receive out-patient rather than in-patient care.  The Court’s reasoning was based on Pegram as the decision involved a mixed eligibility and treatment decision.  The decision was mixed because it was not whether the plan would cover the participant’s illness, but whether the treatment ordered by the participant’s doctor for the covered illness was necessary.

 

Gregg v. Transportation Workers of America International, 2003 U.S. App. LEXIS 18796 (6th Cir. 2003).  The Sixth Circuit held that the Union acted as a fiduciary when it disclosed information to participants about premium increases.  As such, the Union had a duty to provide correct information.  The Court rejected the Union’s argument that it had no duty to disclose that the premium structure could be amended in the future because a plan amendment is not a fiduciary act.  The Court found that when an ERISA fiduciary begins affirmatively providing information to a participant/beneficiary, the fiduciary may not provide misleading information, even if this means disclosing information that ERISA does not require to be disclosed.  Furthermore, the fiduciaries had an affirmative obligation to provide material information whether requested or not.

 

Martinez, et al. v. Schlumberger, Ltd. 338 F. 3d 407 (5th Cir. 2003).  The Fifth Circuit rejected the “serious consideration” test developed in a number of circuits to determine whether an employer had a fiduciary duty to disclose future amendments to plans.  The Court focused on whether the participants would consider the information not disclosed material in making their benefit or benefit related decisions.  As with most of these cases, employees inquired about whether the company planned to offer an enhanced incentive program.  The Court determined that providing information to participants about likely future plan benefits is an exercise of discretion in plan administration and is, therefore, a fiduciary act.  In rejecting the serious consideration test, the Court disagreed that misrepresentations are actionable only if the employer has seriously considered the change.  The Court adopted a fact specific approach to determine whether there is a substantial likelihood that a reasonable person in the participant’s position would have considered the information about which an employer-administrator allegedly misrepresented important in making a decision to retire.  “We hold only that the lack of serious consideration does not equate to a free zone for lying.”  This is a broader standard than the serious consideration test.  The Court concluded, however, that an employer does not have a duty to affirmatively disclose future plan changes, but that if an employer chooses to communicate about the future of plan benefits, it has a duty to refrain from making misrepresentations.  “We believe that the two views we have promulgated – that an employer has no affirmative duty to disclose the status of its internal deliberations on future plan changes even if it is seriously considering such changes, but if it chooses in its discretion to speak, it must do so truthfully – coalesce to form a scheme that accomplishes Congress’s duel purposes in enacting ERISA of protecting employees’ rights to their benefits and encouraging employers to create benefit plans.”

 

Berger v. Xerox Corp. Retirement Income Guarantee Plan, 338 F. 3d 755 (7th Cir. 2003).  Participants who took lump sum distributions from a cash balance pension plan in lieu of a pension commencing at age 65 sued over whether future interest credits are part of the accrued benefit that must be included in calculating the lump sum.  Although Xerox added future interest credits, it did so at an interest rate equal to the discount rate prescribed by the PBGC rather than at the plan’s regular future interest credit rate.  In this instance, the method employed by Xerox resulted in smaller lump sum benefits.  Because interest rates vary, the Xerox method may not always produce a lower lump sum than if the other rate were used.  In either event, the calculation requires that the future interest rate credit be estimated at an employee’s termination.  The effect of the Xerox plan design was to provide future interest credits to a terminated participant only if he deferred distribution, but to deny future interest credits in calculating an immediate lump sum.  The Court held that this method of crediting interest violates ERISA.

 

Cooper v. IBM Personal Pension Plan, 2003 U.S. Dist. LEXIS 13223, 30 EBC 2511 (S.D. Ill. 2003).  At issue is whether two amendments to IBM’s define benefit plan discriminate unlawfully on the basis of age.  One amendment adopted a “pension credit formula” and a later amendment adopted a cash balance formula.  The Court held that the pension formula had an effect of reducing a participant’s accrued benefit based solely on a increase in age or service and for that reason, violated ERISA.  The Court noted that the phrase “accrued benefit” in ERISA § 204 (b)(1)(g) means the same thing as “benefit accrual” in ERISA  § 204 (b)(1)(h) so that even though a participant’s accrued benefit increased each year, the rate at which the benefit increased was lower as participants aged.  Therefore, the formula violates ERISA.  The Court also held that the method of crediting interest under the cash balance formula violated ERISA because the rate of accrual decreases with age.  The Court rejected IBM’s arguments which were essentially based on the time value of money because they ignore the statutory mandate.


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