:: Should Employer Claims Against Stop Loss Carriers For Processing Errors & Delays Be Preempted By ERISA?

A defendant pleading preemption must prove that: (1) the claim addresses an area of exclusive federal concern, such as the right to receive benefits under the terms of the Plan; and(2) the claim directly affects the relationship among traditional ERISA entities, the employer, the plan and its fiduciaries, and the participants and beneficiaries.

Mayeaux v. La. Health Serv. and Indem. Co., 376 F.3d 420, 432 (5th Cir.2004).

This test for preemption, noted in Bank of La. v. Aetna US Healthcare, Inc., 2008 U.S. Dist. LEXIS 58090 (E.D. La. July 31, 2008). This framing of the preemption requirements, not uncommon, appears at odds with finding that an employer’s allegations of delays in claims processing are preempted.

The reason for thinking that the claims are preempted stems, I believe, from a misconception of the nature of stop loss insurance. In my earlier post on the Fifth Circuit opinion in Bank of Louisiana, I noticed that the Court cited an article that described stop loss as if it were some kind of high deductible medical indemnity policy, to wit:

As an aside, the Court cited an article describing stop loss insurance as insurance that “kicks in” when claims exceed a certain level. See, Stop-Loss Insurance, State Regulation, and ERISA: Defining the Scope of Federal Preemption, 34 Harv. J. LegisS. 233, 249 (1997) This notion of stop loss insurance is troublesome, and in fact, inconsistent with the Court’s analysis. While policies may contain “advance accommodation” features, the principle that permits the employer-carrier relationship to exist outside the core area of preempted plan administration depends on the reimbursement obligation running from the carrier to the employer – the article seems to blur that distinction.

If one thinks of stop loss that way, then naturally it appears that the policy has a closer relationship to the “traditional ERISA entities, the employer, the plan and its fiduciaries, and the participants and beneficiaries” that is actually the case.

If the stop loss carrier fails to reimburse, that should have no effect on claims payment. That’s why the purchase of stop loss insurance does not convert a self-funded health plan to an insured plan. Cf. Thompson v. Talquin Bldg. Products Co., 928 F.2d 649 (4th Cir. 1991) (”The stop-loss insurance does not pay benefits directly to participants, nor does the insurance company take over administration of the Plan at the point when the aggregate amount is reached.”)

So I doubt that employer-stop loss carrier disputes should be preempted by ERISA.

Note: But see, an older Fourth Circuit opinion on the issue, Tri-State Mach. v. Nationwide Life Ins. Co., 33 F.3d 309, 313 (4th Cir. W. Va. 1994):

Moreover, there can be little doubt that the claims relate to the plan. Tri-State’s complaint particularizes a list of wrongs committed by Nationwide Life, including its paying claims to wrong medical providers, issuing coverage cards in the names of employees never associated with Tri-State, charging claims to accounts of individuals who had not submitted claims, paying claims not covered, denying claims that were covered, and delaying processing of claims in a year when the stop-loss limit had been reached in order to deflect them into a new policy year to be charged against Tri-State under its self-funding obligations.

All of these allegations are essentially complaints about the processing of claims under an employee benefit plan and, therefore, relate to the plan in the common sense meaning of that phrase. Indeed the Supreme Court in Pilot Life specifically stated: “The common law causes of action raised in Dedeaux’s complaint, each based on alleged improper processing of a claim for benefits under an employee benefit plan, undoubtedly meet the criteria for preemption under 514(a).” 481 U.S. at 48 (emphasis added). See also Custer, 12 F.3d at 420.

Is Tri-State Still Viable? At least court has give some reason to think the Fourth Circuit might revisit the issue.

Consider this comment on Tri-State (from Tie Communs. v. First Health Strategies, 1998 U.S. Dist. LEXIS 5022, 13-14 (D. Kan. Mar. 3, 1998):

First Health’s reliance on Tri-State Machine, Inc. v. Nationwide Life Ins. Co., 33 F.3d 309 (4th Cir. 1994), cert. denied, 513 U.S. 1183, 130 L. Ed. 2d 1128, 115 S. Ct. 1175 (1995), is misplaced. In Tri-State, a plan sponsor sued a third party administrator who also was an excess insurer for “paying claims to wrong medical providers, issuing coverage cards in the names of employees never associated with Tri-State, charging claims to accounts of individuals who had not submitted claims, paying claims not covered, denying claims that were covered, and delaying processing of claims in a year when the stop-loss limit had been reached in order to deflect them into a new policy year to be charged against Tri-State under its self-funding obligations.” Id. at 313-14. The court found that all of these claims essentially involved the improper processing of benefit claims and therefore were preempted under ERISA. Id. at 314.

In Tri-State, protection of plan participants and their beneficiaries clearly was involved and therefore ERISA preemption may have been appropriate. In addition, the Fourth Circuit decided Tri-State prior to the Supreme Court’s decision in Travelers, which more clearly defined the scope of ERISA preemption. Several of the other authorities cited by First Health also predate the Supreme Court’s decision in Travelers or are inconsistent with the decision.

(emphasis added)