Here is a case update on two important ERISA issues:
1. Does “conflict of interest” apply to third-party administrators of self-funded plans? Claimants may argue that de novo review applies to third party claim administrators (TPA) of self-funded plans due to a conflict of interest.
They will claim the TPA is in such a “competitive market” that it has an “incentive to keep claims down to be more attractive to potential plans.” There is some Supreme Court dicta that supports this argument.
How do you respond? This new case gives you a response: argue there was no evidence of a “meaningful conflict.”
2. What happens when the beneficiary spends all of the Social Security reimbursement before you get reimbursed?
Argue “equitable lien by agreement” and you can win.
Here is the case of Funk v. CIGNA et al, __F.3d __ (pdf) (3rd Cir. August 4, 2011)(third party administrator, of a self-funded plan, does not lose discretionary review due to “conflict of interest” just because it operates in a “competitive market” and has an “incentive to keep claims down to be more attractive to potential plans“).
FACTS: Funk was an “eligible employee” under a self-funded ERISA plan, administered by CIGNA. CIGNA had full discretionary authority. Funk was in a funk: he was depressed and paranoid. He sought long term disability benefits. To qualify for disability Funk had to establish he was incapable of performing any job for which he is qualified or may reasonably become qualified, other than a job that pays less than 60% of his pay before he claimed disability.
CIGNA’s independent record review found that Funk was not that depressed or paranoid, and that he could work his job. A peer-to-peer review and neuropsych exam also found he could work. CIGNA denied his long term disability claim.
Funk also received a retroactive Social Security award and owed CIGNA $24,817 in reimbursement. But apparently to get out of his funk, Funk spent funds and refused to pay. He contended there could be no lien because he did not have possession of the funds.
Funk appealed his claim denial. He contended CIGNA had failed to perform a vocational assessment to specifically assess whether he could earn 60% of his pre-disability income in some other job. CIGNA had another record review, which confirmed Funk’s records did not establish impairment severe enough to prohibit him from performing his own or any occupation. Funk appealed again, and CIGNA denied his second appeal. Funk sued.
TRIAL COURT RULES AGAINST CIGNA, with the following rationale:
- CIGNA abused its discretion because CIGNA did not specifically evaluate whether alternative jobs could exceed 60% of his predisability income.
- CIGNA had a conflict of interest and de novo review applied because CIGNA was a claim administrator “in a competitive market” and has an “incentive to keep claims down to be more attractive to potential plans.”
- CIGNA was not entitled to the Social Security reimbursement because Funk no longer had possession of the Social Security funds.
THIRD CIRCUIT REVERSES and HOLDS FOR CIGNA, with the following reasoning:
- Proper Denial. The Plan required that CIGNA determine whether Funk was capable of working in any job that would pay him 60% of his former pay. CIGNA complied by determining Funk could do his prior job. Because CIGNA’s determination did not turn on the existence of an alternative 60% job, it was unnecessary to discuss alternative jobs. Op. at 21-22.
- Discretionary Review Applies. “While the Supreme Court in Glenn did say that ‘for ERISA purposes a conflict exists’ when a third party administrator operates in a competitive market, … that Court also acknowledged that the conflict may be of little or no practical significance.” Op. at 23, citing Glenn, 554 U.S. at 114-5. Nothing showed hear that CIGNA was operating under a “meaningful conflict of interest.” Op. at 23.
- CIGNA Gets Reimbursement. Even though Funk no longer had the Social Security funds in his possession, there was an “equitable lien by agreement that attached to the Social Security award as soon as Funk received it. Dissipation of the funds was immaterial. Op. at 26-7.