On September 19, 2017, the en banc (full) Fifth Circuit Court of Appeals — in a health benefits case in which the Plan Administrator denied benefits to a plan participant — held oral argument regarding the applicable standard of review for factual determinations in Employee Retirement Income Security Act (ERISA) denial of benefits cases. The court has yet to reach a decision, though the final result will almost certainly have a significant effect on denial of benefit claims moving through the Fifth Circuit.
In April, the Fifth Circuit court in Ariana M v. Humana Health Plan of Texas, Inc., 854 F.3d 753 (5th Cir. 2017) reviewed a summary judgment in favor of the Plan Administrator who initially denied benefits to the teenage plan participant with an eating disorder and various mental health issues, and affirmed the trial court’s grant of summary judgment, deferring to the “abuse of discretion” standard it developed in Pierre v. Connecticut General Life Insurance Co., 932 F.2d 1552 (5th Cir. 1991), which defers to the factual determinations made by Plan Administrators.
Despite choose to apply the existing Pierre standard of review — and thus coming out in favor of the Plan Administrator — all three judges on the panel signed a special concurrence that requested the full Court reevaluate whether it should remain the only Circuit court in the country that reviews ERISA factual determinations with an abuse of discretion standard of review, as opposed to a de novo standard.
Fifth Circuit Departure from the Norm
Currently, the Fifth Circuit is the only Circuit court in the country that applies the “abuse of discretion” standard of review to factual determinations made by an ERISA Plan Administrator in denying benefits to a plan participant..
In the Fifth Circuit, the abuse of discretion standard in the ERISA denial of benefits context has been interpreted to require conduct that is arbitrary and/or capricious, thus giving a wide berth to the discretion of the Plan Administrator in choosing to deny benefits to plan participants. The special concurrence by the three-judge panel noted that Texas is one of a growing subset of states that prohibits discretionary clauses in insurance plans. As such, if the court departed from their policy of applying the abuse of discretion standard, as per Pierre, the question of whether the state’s prohibition of discretionary clauses is preempted by ERISA would likely become a hot-button issue.
Consequences of the Fifth Circuit Stance
Continued deference to the Pierre abuse of discretion standard in ERISA denial of benefits cases has led to a number of negative consequences for plan participants.
A brief look at the facts in the current case, Ariana M v. Humana, reveals the extent to which the Fifth Circuit’s application of the abuse of discretion standard has negatively affected the rights of ERISA plan participants. In Ariana M v. Humana, our client — the plan participant — is a teenaged patient suffering from significant mental health issues, including a severe eating disorder. The Plan Administrator, Humana, initially approved intensive inpatient therapy, but later recanted, having determined that inpatient therapy was not medically necessary. Relying on its internal criteria, Humana ignored the opinions of our client’s treating physician and made determinations that were based on cost-effectiveness and the possibility of relapse. Our client was therefore subject to the discretionary whims of the Plan Administrator and denied benefits on the basis of cost considerations as opposed to the actual effectiveness of such treatment.
Application of the abuse of discretion standard to factual determinations made by an ERISA Plan Administrator results in outcomes that generally benefit insurers and Plan Administrators thereof. Outcomes that heavily favor insurers and Plan Administrators is essentially in conflict with the fundamental principles and intention of ERISA legislation, which was enacted to establish minimum standards for fiduciaries of covered insurance plans, for the purpose of protecting plan participants from mismanagement and damaging discretionary powers.
Despite the fact that ERISA-covered plans are intended to provide greater protections to plan participants, the Fifth Circuit’s application of the abuse of discretion standard results in fewer protections. In Texas, the prohibition on discretionary clauses in insurance plans is designed to protect participants in both ERISA and non-ERISA plans from the broad discretion of a Plan Administrator in denying benefits.
By contrast, continued application of the Pierre standard by the Fifth Circuit has practically resulted in an automatic discretionary clause in every ERISA-covered plan. The Plan Administrator is given broad discretionary powers in denying benefits even when the plan itself does not contain a discretionary clause granting such powers. This conflict — which is not only inconsistent, but has also led to weakened ERISA protections in the state of Texas— has not escaped the notice of the Fifth Circuit judges. The decision made by the en banc Fifth Circuit court will clarify whether this inconsistency is to continue. If the court makes the decision not to defer to the Pierre standard, and to instead apply the de novo standard (as do all other Circuit courts), then ERISA plan participants in Texas will be well-positioned to challenge their denial of benefits going forward.