HLD, v. 32, n. 6 (June 2004)
U.S. Court In New York Says TPA Not Liable Under ERISA For Unpaid
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
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).