iWithin days of one another, the U.S. Court of Appeals for the Ninth and Second Circuits ruled—on issues of first impression for both—that ERISA expressly preempts state law breach of contract and promissory estoppel claims asserted by out-of-network providers who allege that preauthorization communications with claim administrators impose reimbursement obligations independent and irrespective of the terms and conditions contained in a patient’s ERISA-governed health benefit plan. The decisions are Bristol SL Holdings, Inc. v. Cigna Health & Life Ins. Co., 103 F.4th 597 (9th Cir. 2024) and Park Ave. Podiatric Care, P.L.L.C. v. Cigna Health & Life Ins. Co., No. 23-1134-CV, 2024 WL 2813721 (2d Cir. June 3, 2024).
Preauthorization of benefits is a routine but vital part of the managed care system. It is a vehicle through which ERISA-governed health benefit plans (both plans that are self-funded by employers and plans that are fully insured by health insurers) maintain and promote the delivery of quality and affordable care, by ensuring that non-participating, also known as out-of-network (OON), providers deliver only services that are medically necessary.
Because OON providers typically charge rates that are either not negotiated in advance of treatment or are simply unknown, many ERISA-governed health benefit plans require preauthorization as a condition of coverage of OON services. Preauthorization, however, is not the only requirement for coverage of an OON provider’s services. Before the claim administrator of a health benefit plan can determine the appropriate reimbursement for charges billed by an OON provider, the administrator must also undertake a host of additional assessments relevant to a coverage determination—assessments that can only be performed after services are rendered and billed because they depend not only upon what services were performed, but also upon how the provider billed those services (and their specific components), and what the patient-beneficiary’s governing health plan requires for purposes of accepting and reimbursing the billed charges. These aspects of claim administration include, but are not limited to, evaluating which billed services (or, really, claim lines) were necessary for the approved treatment, whether the charges were correctly coded on the provider’s claim, whether the charges were correctly bundled on the provider’s claim, the appropriate reimbursement rate for each necessary service, and the patient’s cost-share. Put another way, a host of independent coverage-related variables exist between the moment of a preauthorization and the moment a reimbursement check issues. The existence of these variables prevents many essential coverage determinations from being made until after a preauthorized service has been rendered and the provider’s charges have been submitted for reimbursement. Thus, while preauthorization is a critical precondition that must be satisfied before a plan beneficiary can obtain coverage for OON services, ERISA-governed health plans contain a number of terms (which administrators have a fiduciary duty to follow) that may nonetheless result in denial of coverage for reasons independent of any determinations made during the preauthorization process.
Even though preauthorization is not designed to establish an independent contractual relationship, OON providers and their counsel have increasingly petitioned state and federal courts nationwide to turn preauthorizations into independent contractual commitments between the OON provider and the plan’s claims administrator to pay for all services billed for a preauthorized treatment, irrespective of the ERISA-governed plan’s terms of coverage or the administrator’s discretion to interpret and apply those terms. This argument was recently rejected by both the Ninth Circuit and the Second Circuit.
In Bristol SL Holdings, Inc., an OON provider’s successor-in-interest sued a health benefit plan administrator seeking to recover denied reimbursements on the theory that the OON provider’s preauthorization communications with the administrator created independent contractual obligations. Rejecting the OON provider’s theory, the Ninth Circuit Court of Appeals observed that preauthorization is a common condition to coverage of out-of-network services, and that preauthorization necessarily “entail[s] some form of communication between the plan administrator and the provider, through which the plan administrator relays the patient’s eligibility for benefits.”
The Ninth Circuit thus recognized that, as a practical matter, “the context for” a preauthorization call is to determine “whether reimbursement [i]s available under the ERISA plan[,]” not to secure a contractual commitment from a claim administrator on a specific payment amount:
By [the OON provider]’s theory of state contract law liability, however, every time a plan administrator verifies plan coverage in standard pre-treatment calls, but then later denies reimbursement …, the insurer would be legally bound to make payment based on the earlier call. That obligation would be at odds with the way ERISA plans operate, because reimbursement under a plan is ultimately contingent on information and events beyond the initial verification and preauthorization communications.
The Ninth Circuit’s understanding of the operation of the managed care system and ERISA’s application to that system is important. Bristol SL Holdings was, at its core, an invitation by OON providers to the Ninth Circuit to force upon claim administrators a black-and-white choice that risked unraveling the managed care system and its ERISA-secured protections: either abandon preauthorization requirements or risk contractual liability for preauthorized claims irrespective of the terms and conditions of a patient’s health benefit plan. As the Ninth Circuit observed, either outcome is legally untenable:
[P]lan administrators typically cannot determine [reimbursements] until after services have been preauthorized, rendered, and submitted for reimbursement. Subjecting plan administrators to the prospect of binding contracts through pre-treatment calls would thus risk stripping them of their ability to enforce plan terms that cannot be applied prior to treatment, whether related to fee-forgiving or otherwise. The resulting Catch-22—that administrators must abandon either their plan terms or their preauthorization programs—is the kind of intrusion on plan administration that ERISA’s preemption provision seeks to prevent. …
[I]f providers could use state contract law to bind insurers to their representations on verification and authorization calls regardless of plan rules on billing practices, benefits would be governed not by ERISA and the plan terms, but by innumerable phone calls and their variable treatment under state law. This is the type of discordant regime that “ERISA’s comprehensive pre-emption of state law was meant to minimize.” Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 105 n.25, (1983).
Rejecting the OON provider’s invitation to transform routine preauthorization calls into independent contractual commitments, the Ninth Circuit declared that the OON provider’s breach of contract and promissory estoppel claims were expressly preempted by ERISA because they were premised upon the existence of health benefit plans, unduly intruded upon central matters of plan administration, and impermissibly interfered with nationally uniform plan administration.
Just three days later, the Second Circuit reached a similar conclusion in Park Ave. Podiatric Care, wherein the Court ruled that ERISA expressly preempted an OON provider’s claims that its preauthorization communications formed an oral contract with a claim administrator completely independent of the terms of a patient’s ERISA-governed plan. Recognizing a number of themes similar to those implicated in Bristol SL Holdings, the Second Circuit Court of Appeals declared: “[A]ny legal duty Cigna has to reimburse [the OON provider] arises from its obligations under the patient’s ERISA plan, and not from some separate agreement or promise” allegedly entered in the preauthorization process.
In Bristol SL Holdings and Park Ave. Podiatric Care, both the Ninth and the Second Circuit recognized that permitting state common law to dictate the design and administration of ERISA-governed health benefit plans subjects those plans to a morass of conflicting state rules that would defeat Congress’s central objective in enacting ERISA: provision of a single, uniform national scheme for plan administration. This interference violates ERISA’s express preemption statute, 29 U.S.C. § 1144(a). As rulings on issues of first impression within the Ninth and Second Circuits, Bristol SL Holdings and Park Ave. Podiatric Care, are important decisions that will substantially limit, if not outright bar, OON providers from establishing contractual liability merely because an ERISA-governed health benefit plan engaged in routine preauthorization processes.
