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Seventh Circuit Provides New Tool for Providers in ERISA Litigation

August 01, 2008

A new case from the U.S. Court of Appeals for the Seventh Circuit holds that not all suits seeking payment for medical services from ERISA welfare benefit plans are ERISA claims, entitled to federal court jurisdiction and limited ERISA remedies. Indeed, the court holds that health care providers who receive erroneous coverage information from plan representatives or TPAs can pursue state court remedies in state courts. The decision both provides a new potential tool for provider recovery as well as a new risk for plans and TPAs who give erroneous coverage information.

A Customer Service Error

A participant under the Plan went to Franciscan Skemp hospital in LaCrosse, Wisconsin for treatment. Before treatment was provided, a representative of Franciscan Skemp telephoned the Plan to verify coverage. The Plan representative told the hospital that the participant and procedure were covered, and the treatment was provided.

As it turned out, this representation turned out to be incorrect, as the participant had terminated her participation in the Plan and had also failed to make the COBRA contributions required for coverage to continue. When the Plan refused payment, Franciscan Skemp filed a lawsuit in Wisconsin state court against the Plan. The hospital sought payment from the Plan for the value of the services it provided under state common law theories of negligent misrepresentation and estoppel.

The Plan removed the case to federal court, arguing that the hospital's claim was truly a claim for benefits under section 502(a)(1)(B) of ERISA, which belonged in federal court. The federal court agreed, and proceeded to dismiss the suit for failure to state a claim upon which relief may be granted. The hospital appealed.

The Appellate Court Determines that the Hospital's Claim Was Not an ERISA Claim

The court of appeals recognized that, at first blush, this suit seemed to be a fairly ordinary case of a provider standing in the shoes of the plan participant seeking benefits from a health care plan. The appellate court noticed something, however, the significance of which had escaped the trial court. The court of appeals noted that the hospital's claim was not based on the participant's entitlement under the Plan to coverage for the services provided. Indeed, the hospital conceded that, due to her failure to make COBRA payments, the participant was not entitled to coverage.

Instead, the appellate court noted that the hospital was bringing its claims entirely on its own right, asserting that it was entitled to payment because it had provided the services only after being advised by the Plan that it would pay for them. In this sense, the Franciscan Skemp's claims were not ERISA claims at all, but rather were claims based on the same common law principles that the hospital plead in the original state court lawsuit.

Analyzed in this way, the normal ERISA preemption doctrines applied to claims against health care plans do not apply, and the claims may proceed on state common law theories in state court. The court of appeals therefore remanded the case back to the federal trial court for further remand to the state court.

Significant Consequences for Providers, Plans and TPAs

The ability of providers to pursue payment from welfare benefit plans under common law theories in state court has several important consequences. First, the case may proceed in local state trial courts, which may provide a "home field advantage" for the providers. Second, the cases will be decided by local juries, which may be sympathetic to providers who have provided needed health care to local residents but who have not been paid for their services.

In addition, the state law claims approved in the case would allow a victorious plaintiff to recover damages in addition to the value of the services provided, including consequential damages and, in an egregious case, punitive damages. Finally, as illustrated by the facts of the Franciscan Skemp case, a provider's ability to recover from the welfare benefit plan does depend upon actual coverage for either the procedure or the participant.

The Franciscan Skemp case provides another tool for providers seeking payment for their services should the Plan or a TPA erroneously confirm that coverage exists prior to the services being provided. It also provides an incentive for hospitals to communicate themselves with the Plan, as the providers likely will not be able to rely on communications between the plan and the participant.

The decision also highlights a new risk for plans and TPAs in their communications with providers regarding coverage. Plans and TPAs who provide erroneous information to providers may ultimately face state court lawsuits asserting claims and damages that ERISA does not allow.

The case is Franciscan Skemp Healthcare, Inc. v. Central States Joint Board Health and Welfare Trust Fund, 538 F.3d 594 (7th Cir. 2008).

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