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U.S. Court In New York Says TPA Not Liable Under ERISA For Unpaid Benefits

 
 

HLD, v. 32, n. 6 (June 2004)

U.S. Court In New York Says TPA Not Liable Under ERISA For Unpaid Benefits

A third-party administrator (TPA) that lacked final decision-making authority was not a plan fiduciary and therefore could not be liable for unpaid benefits under the Employee Retirement Income Security Act (ERISA), a federal district court in New York held recently. But the plan sponsor, which employed four patients who had been treated by a physician and assigned to him their right of reimbursement, retained final authority over the plan and could be liable under ERISA, the court said.

John S. Artandi is a physician who practices as a physiatrist providing physical and rehabilitation therapy. From December 1995 to November 1996, Artandi treated four individuals who were covered under a group health insurance plan established by their employer, Sam Ash Music Corporation (Sam Ash). Each of the four patients assigned their right to reimbursement under the plan to Artandi. The plan's TPA, First Health Group Corp. (First Health), did not pay the majority of Artandi's claims. According to Artandi, he is owed roughly $99,600 for the treatment he provided to the four patients.

Artandi and his professional corporation sued the four patients, First Health, and Sam Ash in state trial court. The action was removed to federal district court on the basis of ERISA pre-emption. First Health and Sam Ash moved for summary judgment. First Health argued that it was not a fiduciary of the plan and therefore could not be held liable for the unpaid benefits. Sam Ash contended that it was not liable because it was never in privity with Artandi. Sam Ash also maintained that the denial of the claims was proper because the services Artandi provided were medically unnecessary and his charges were excessive. Artandi cross-moved to disqualify the law firm that was representing all of the defendants jointly. According to Artandi, ethical principals barred the firm's joint representation because the individual patients had inconsistent interests with those of Sam Ash and First Health.

The U.S. District Court for the Southern District of New York granted summary judgment to First Health but denied summary judgment to Sam Ash. The court deferred its decision on Artandi's cross motion for disqualification pending a hearing.

The court held that First Health could not be liable under ERISA because it was not a plan fiduciary. In so holding, the court looked to the administration agreement and determined that First Health's responsibilities did not include final authority over major decisions. Rather, the court noted, final decision-making authority for major decisions rested with Sam Ash, the plan sponsor. "Because First Health lacks the discretion necessary to deem it a fiduciary, it cannot be liable for unpaid benefits under ERISA, and it is entitled to summary judgment," the court concluded.

By contrast, the plan specifically identifies Sam Ash as the fiduciary and therefore it can be liable. The court held the fact that Sam Ash had no relation of privity with Artandi did not preclude him from suing Sam Ash for the unpaid benefits. Here, the plan explicitly permitted the assignment of the right to reimbursement by a patient to a healthcare provider. This assignment therefore conferred standing on Artandi to bring an action under ERISA for unpaid benefits against Sam Ash.

The court found more persuasive Sam Ash's argument that Artandi provided treatment that was not medically necessary and charged fees in excess of what was customary and reasonable for the services rendered. But the court nonetheless concluded that Sam Ash failed to provide sufficient facts on these issues to warrant summary judgment.

On the disqualification motion, the court acknowledged a significant conflict between Sam Ash as the insurer and the individual patients as the insureds. Specifically, the court noted that the patients had an interest in showing that the services were covered by the plan so they would not have to pay, while Sam Ash had an interest in showing that the services were not covered by the plan so it would not be liable.

The court found insufficient evidence that the individual patients knowingly waived this conflict in the interest of a "unified" defense as Sam Ash contended. Thus, the court said it would hold a hearing to further examine the disqualification issue. The court instructed Sam Ash and the individual patients to be ready to explain how their interests could be reconciled and to detail their unified defense.

Artandi v. Buzack, No. 02 Civ. 5759(JCF), 2004 WL 764907 (S.D.N.Y. April 9, 2004).

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