Gayle M. Meadors, P.C.*

NEW SUPREME COURT DECISION ON ERISA AND "ANY WILLING PROVIDER" LAWS

Under the facts of the case, Kentucky Association of Health Plans v. Miller (No. 00-1471, slip op, US Sup Ct, April 2, 2003), the state of Kentucky had passed a law that said a health insurer could not discriminate against any health care provider who was willing to meet the terms and conditions for participation established by the health insurer. A lawsuit was filed by several health maintenance organizations The HMOs objected to the law on principle because it interfered with their ability to negotiate a discount rate with health care providers in exchange for an assurance of a certain volume of patients. As a legal matter, the HMOs contended that the federal benefits law, ERISA, preempted such a statute, because the statute purported to tell an HMO how to operate it plans. ERISA pre-empts state laws that relate to employee benefit plans unless the law is considered to regulate insurance, a power traditionally reserved to the states.

On April 2, 2003 the U.S. Supreme Court handed down an important decision on the interaction of the Employee Retirement Income Security Act of 1974 (ERISA) and state laws regulating managed care. The Supreme Court first addressed the issue of whether the "any willing provider" law truly regulated insurance. The HMOs claimed the law did not regulate insurance, because it did not control the terms of insurance policies but rather the relationship between the insurer and a third-party provider. The Court said that it does not follow that a law that mandates certain relationships fails to regulate insurance. The Court concluded that a "willing provider" law regulates insurance by imposing conditions on the right to engage in the business of insurance.

This case is . . . a victory for physicians (and their patients) who want to join a managed care network . . .

The HMOs argued that the "any willing provider" law did not affect the terms of insurance policies but only the relationship between insured and third-party providers. The Court said a state law does not need to alter the terms of the insurance policies themselves to be considered a law which regulates insurance as long as it affects the risk pooling arrangement. As the Court said, "No longer may Kentucky insureds seek insurance from a closed network of health-care providers in exchange for a lower premium. The AWP prohibition substantially affects the type of risk pooling arrangements that insurers may offer."

The Court concluded by stating that from now on, ERISA cases concerning state laws regulating insurance will have nothing to do with the McCarran-Ferguson law (an insurance regulation statute) and instead will focus on just two requirements:

1. State law must be specifically directed towards entities engaged in insurance, and

2. State law must substantially affect the risk pooling arrangement between the insurer and the insured. Because the Kentucky statute met these requirements, it was upheld as regulating insurance and was not preempted by ERISA. Furthermore, the Court hinted in a footnote that states might even be able to regulate HMOs that do not insure the benefits, but merely act as third-party administrators to self-insured plans.

This case is either good news or bad news depending upon one's perspective. The decision is a victory for physicians (and their patients) who want to join a managed care network; however, the probable decrease in patient volume per physician will likely result in higher costs for plan participants, because most physicians will be unlikely to agree to a reduced fee with no assurance of higher patient volume in return.

MAJOR CHANGES TO OVERTIME RULES

For many years, employers have complained about the complexity of the federal rules on exempt versus nonexempt status of employees. It is these rules that determine which employees must be paid overtime and which employees do not.

[Federal] rules . . . determine which employees must be paid overtime and which employees do not.

The gist of the current rules is that they provide a salary level test along with a job responsibility test for an employee to be considered exempt. The salary level is $250 a week ($13,000 a year) and the job responsibilities must be considered executive, administrative or professional as shown in Table 1. Under the Department of Labor proposed changes, the minimum salary would be increased to $425 a week ($22,100) and the job duties test would be revised as shown in the third column.

Of course, the above description is just a thumbnail sketch of how the new rules will work. At this point, there is a 90-day comment period on these proposed changes. Because no Congressional action is required, it is anticipated that the regulations will be finalized in substantially the same form as proposed soon after the end of the comment period. If finalized as proposed, the Department of Labor expects 1.3 million low-wage workers to gain overtime protection.

What is important to take away from these proposed regulations (as well as the current law) is the fact that exempt status is not determined solely by paying an employee a salary. If the duties do not fall into the categories described above the employee will still not be exempt from overtime regardless of the form of compensation.

NOT RESPONDING TO PARTICIPANT DOCUMENT REQUEST PROVES COSTLY

Participants and beneficiaries under ERISA plans have legal rights to request certain plan-related documents, and the plan administrator has the obligation to respond to such requests in a prompt manner. ERISA spells out the time frame for responding, which is generally a 30-day period.

A recent case out of the Northern District of Illinois shows what can happen when the plan administrator does not take this responsibility seriously. In Lowe v. SRA/IBM MacMillan Pension Plan, decided in March 2003, a participant retired in 1992 and received a monthly pension until her death in 1999. When the participant's husband inquired about a surviving spouse's pension, the plan administrator told him he was entitled to nothing because the deceased participant had elected a form of pension that continued for her lifetime alone. The plan administrator provided at this time a copy of the participant's election form.

In July 1999, the husband found a copy of an election form in his wife's papers that did not indicate the single life form of payment and was convinced that the wife had elected a joint and survivor form of pension, asked the plan administrator for a copy of the pension plan and signed documents that started the wife's pension payment along with other documents. The husband received no response from the plan administrator, wrote another letter in September 1999, and likewise received no response. The husband then filed a complaint with the Department of Labor. Although the plan administrator did respond to the Department of Labor, it did not get around to sending the relevant documents to the husband until July 2001 after a lawsuit had been filed.

During the course of the lawsuit, it was determined by the judge that the plan administrator knew all along that the election form in its possession purporting to document an election of a single life annuity was invalid due to the fact that the signatures were not notarized or witnessed as required by ERISA. Hence, there was no valid waiver of the ERISA normal form of payment in the form of a joint and survivor annuity.

The magistrate judge fined the plan administrator $50 a day for each day of delay (over $35,000) plus ordered the plan administrator to pay all of the husband's attorney's fees. The magistrate judge found the plan administrator totally unjustified in refusing to provide plan documents to the surviving spouse, especially in light of the fact that the plan administrator knew that the election form it had in its files was invalid.

. . . a plan administrator who fails to respond to proper inquiries under ERISA plans could face thousands of dollars in penalties.

The plan administrator appealed the magistrate judge's decision to the US District Court arguing the $35,000 penalty was unfair, because the failure to provide the documents was due to disorganization and a belief that the husband had waived survivor benefits and was not entitled to the plan documents. The District Court made short shrift of these arguments. A lack of organization does not excuse a duty to comply with statutory duties and the plan administrator was on notice of a differing election form that had been provided by the husband. Hence, the award of $35,000 in penalties and $20,000 in the husband's legal fees was upheld.

The plan administrator's behavior in this case was particularly troublesome, because it had knowledge the election form in its possession was invalid; however, this case serves as a reminder that a plan administrator who fails to respond to proper inquiries under ERISA plans could face thousands of dollars in penalties.

CASH BALANCE PLAN REGULATIONS WITHDRAWN

In the last Compensation and Benefits Briefs (Volume 18, pages 270&271), there was discussion of new regulations that addressed compliance with age discrimination laws by cash balance pension plans. Due to numerous comments by members of the public stating certain plan provisions currently found under some defined benefit plans would be made illegal with a corresponding detrimental effect on plan participants, the IRS has decided to withdraw the regulations altogether and rework them taking the public comments into account.