A federal appeals court has held that the Medicare Secondary Payer (“MSP”) Act authorizes a medical provider to sue an employer health plan for double damages when the plan fails to comply with the MSP Act, thereby forcing the provider to accept the lower level of reimbursement available under Medicare. This Sixth Circuit decision, in Bio-Medical Applications of Tennessee, Inc. v. Central States Southeast and Southwest Areas Health and Welfare Fund, definitely raises the stakes for health plans that fail to comply with the MSP rules.
In its lengthy opinion, the Sixth Circuit was essentially required to make sense of nonsense. This is because the relevant provisions of the MSP Act have been amended over the years in ways that allow for multiple interpretations. Ultimately, this Bio-Medical court adopted a different interpretation than a sister appellate court (the Eleventh Circuit) in a case it decided back in 2006.
The facts at issue in the Bio-Medical decision were as follows. In August of 2005, an individual who had coverage under the Central States Plan was diagnosed with end-stage renal disease (“ESRD”) and began receiving kidney dialysis treatment at a Bio-Medical facility. Pursuant to the patient’s assignment of her right to benefits, the Plan began paying Bio-Medical for that treatment. Three months later, on November 1, 2005, the patient became entitled to Medicare (presumably, on the basis of her ESRD).
The Central States Plan contained the following provision: Coverage under this Plan shall terminate on the earliest of the following dates: … “the date [the insured] first becomes entitled to Medicare benefits ….” On learning of the patient’s Medicare entitlement, the Plan retroactively terminated her coverage as of November 1, 2005. It also recouped most of the benefits it had paid since that date by offsetting the alleged overpayments against amounts otherwise payable to Bio-Medical for the treatment of other Plan participants.
Bio-Medical continued to treat the patient until her death on May 18, 2006. The total charges from November 1, 2005, through that date were approximately $210,000. Although Medicare eventually paid a portion of this amount (not disclosed in the opinion), Bio-Medical sued the Plan for the remainder.
Bio-Medical’s lawsuit was based on two different statutes: (1) under ERISA, for unpaid benefits (as the patient’s assignee), and (2) under the MSP Act (and particularly that Act’s provision of a “private cause of action” for “double damages”). The trial court held for Bio-Medical on its ERISA claim, but it dismissed the MSP claim. That dismissal was based on a 2006 Eleventh Circuit decision (subsequently followed by several other lower courts) holding that such a private cause of action could be brought only if the defendant’s responsibility for the payment had been “previously demonstrated.”
The Sixth Circuit’s Analysis
On appeal, the Sixth Circuit affirmed the trial court’s ERISA ruling, but it reversed as to the MSP Act. The analysis under ERISA was fairly straightforward. Although ERISA requires that fiduciaries administer a plan in accordance with its terms, and although a plan administrator’s interpretation of a plan will be upheld unless it is arbitrary and capricious, any denial of benefits is deemed to be arbitrary and capricious if it results in a violation of federal law.
Here, it was clear that, for the first 30 months of the patient’s Medicare entitlement due to ESRD, the Plan could not “take into account” that entitlement. But that is exactly what the Plan did by terminating the patient’s coverage as of her Medicare entitlement date. To cure that MSP violation, the Plan was required to reinstate her coverage – and to pay the patient’s claims on a basis that was primary to Medicare.
Bio-Medical wanted more than this, however; it wanted to force the Plan to pay double damages for this MSP violation. This double damages claim was based on a provision added to the MSP Act in 1986 (six years after the law was enacted). This provision grants a private party (i.e., other than Medicare) the right to sue a “primary plan” that fails to honor its obligations under the MSP Act, thereby forcing Medicare to make a “conditional payment” (which is what Medicare did in this case).
This is where the legal thicket becomes virtually impenetrable. Around the turn of this century, individuals (later followed by Medicare) began suing tobacco companies to recover the expenses Medicare was required to pay for the treatment of diseases attributable to cigarette smoking. Those private lawsuits were based on this double damages provision. The courts’ reactions to those lawsuits – which were almost uniformly negative – led Congress to amend the MSP Act in various respects.
For instance, those amendments made clear that tortfeasors (as the tobacco companies were alleged to be) could be considered “primary plans” for this purpose. At the same time, however, the Act was amended to condition liability for double damages on a defendant’s responsibility for the expenses at issue having already been demonstrated before the suit was filed. Presumably, that liability would be demonstrated in a “products liability” or similar lawsuit.
Relying on this “demonstrated responsibility” provision, the Eleventh Circuit had dismissed the earlier claims against the tobacco companies. In reaching this result, the Eleventh Circuit read this requirement quite broadly, in a way that would apply to an insurer or health plan, and not simply a tortfeasor. The Bio-Medical court held that this was an improper reading of the statutory language.
According to the Sixth Circuit, the “demonstrated responsibility” requirement applies only when the target of a double damages lawsuit is a tortfeasor. Citing regulations issued by the Centers for Medicare and Medicaid Services, the Sixth Circuit held that an insurer or other health plan with contractual liability for the payment of medical benefits could be sued on the basis of that liability – with no need to obtain a determination of legal responsibility before seeking the double damages.
It is this holding that may expose employer health plans to liability for double damages when they violate the MSP Act. Although the Bio-Medical decision arose in the relatively narrow context of ESRD benefits, the MSP rules also apply to individuals who are entitled to Medicare on account of their age or total disability. The implications of this decision are therefore far broader than the ESRD context.
Recommended Next Steps
Given this Sixth Circuit decision, sponsors and administrators of employer health plans will want to proceed as follows:
- Review their plan provisions to determine whether they comply in all respects with the MSP Act. If they do not, immediately adopt appropriate corrective amendments.
- Assuming the plan provisions are in compliance, verify that claims have always been processed and paid in accordance with those provisions.
- If claims have not been processed and paid in accordance with the MSP rules, consider correcting that failure before either Medicare or a private payer files a lawsuit seeking to obtain double damages.