Lefler v. United Healthcare of Utah, Inc., (10th Cir. 2003)

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UNITED

STATES COURT OF APPEALS

TENTH CIRCUIT

KATHY LEFLER, RAY JUDD,

MICHAEL TUFT, MATTHEW

SWAINSTON and the class of

similarly situated persons,

Plaintiffs/Appellants,

v.



UNITED HEALTHCARE OF UTAH,

INC., a Utah corporation, formerly

known as Physicians Health Plan of

Utah,,

Defendant/Appellee.

No. 01-4228

(Utah)

(D. C. No. 2:95-CV-1109-S)

ORDER AND JUDGMENT
name="txt*">(*)

Before TACHA, Chief Circuit Judge,
name="9">HARTZ and O'BRIEN, Circuit

Judges.

In 1995, Ms. Kathy Lefler and other plaintiffs (Class) brought this class

action against United HealthCare of Utah, Inc. (United), a health maintenance

organization, under the Employee Retirement Income Security Act of 1974

(ERISA)(2), seeking to recover benefits due

under an employee welfare benefit

plan, 29 U.S.C. 1132(a)(1)(B)(3), and

for other equitable relief, 29 U.S.C. 1132(a)(3). The Class challenged United's method of calculating co-payments,

which it alleged violated the terms of the plan because it effectively increased

their percentage contribution to the actual cost of covered services. Concluding

United's practice resulted from a reasonable interpretation of the benefit plan, the

district court granted summary judgment to United and denied summary judgment

for the Class. Exercising jurisdiction under 28 U.S.C. 1291 (2002), we affirm.

Factual Background

United is licensed in Utah, but owned by parent United HealthCare

Services, Inc., located in Minnesota. During the class period, 1992 to 1995,

United provided health insurance to approximately 100,000 people in Utah

through employer-sponsored health insurance plans governed by ERISA. In most

instances, employees contributed to the premiums. United was a fiduciary
href="#N_4_" name="txt4">(4) under

the plans. Policy terms were stated in a Certificate of Coverage, which along with

its Schedule of Benefits constituted the plan documents for an employer unit. The

Schedule of Benefits varied according to the coverage elected by a particular unit,

but provided for beneficiary co-payments stated as a percentage of eligible

expenses, usually ten or twenty percent.

The participants were required to obtain health services from "participating

providers" with whom United had negotiated contracts. Among other things,

those providers charged United discounted rates. United calculated participant

co-payments based upon full billed charges but paid providers against the

discounted rates.(5) That is

the source of the Class' dissatisfaction. As a

consequence of United's practice, the Class members claim to have unknowingly

and inappropriately paid a greater percentage of the actual cost of the service than

the co-payment percentage stated in their Schedule of Benefits.

In none of the plan documents did United promise to pay the difference

between the co-payment and the amount billed, or any other specified amount.
name="txt6">(6)

United did not disclose in the plan documents or in any Explanation of Benefits

provided to the Class members that it had negotiated a discount from participating

providers' regular, full billed charges. Nor did it reveal the amount it paid to

participating providers (the difference between the co-payment and the discounted

rate). The Certificate of Coverage only described a participating provider as one

with whom United had entered into "a written agreement . . . to provide health

services to covered persons." (R. at 246).

During the Class period, Utah Code Ann. §31A-26-301.5(2)(c) provided:

"[T]he insurer shall notify the insured of payment and the amount of payment made

to the provider."(7) On its Explanation of

Benefits, United only indicated the

amount it paid to a provider was a "contracted fee." (R. at 486-87). But

occasionally a bill from a participating provider to a participant would clearly state

the amount paid by United, and the co-payment methodology employed. There

were common instances where a co-payment was the only amount paid for the

service because of United's negotiated discounted fee with the provider.

Borrowing established Medicare practice, United routinely considered the

full billed charges submitted by participating providers to be "reasonable and

customary charges" under the plan. In support of this practice, it filed an

affidavit from Dr. William Cleverly, an expert in the health care industry.

According to Dr. Cleverly, hospitals submit a standard charge for services to

insurers and other payors on a form used industry-wide and generated by the

federal Health Care Financing Administration (HCFA), which administers the

Medicare program. But those standard charges are typically discounted in

accordance with individual contracts negotiated between payors and service

providers. Under Medicare, for example, the patient's percentage co-payment is

calculated against the full billed charge, even though Medicare pays the hospital

a reduced fee set by government regulation and tied to a provider's reasonable

cost.

United also submitted the affidavit of Terry Cameron, a consultant for

health care providers, who stated individual physicians also submit standard

charges on a widely used HCFA form. Like hospital fees, these charges are

based on a uniform schedule even though the amounts the physicians actually

receive often vary according to the payor. According to Mr. Cameron, the

standard charges are fed into databanks maintained by the Health Insurance

Association of America (HIAA) and others, and used to compile information on

reasonable and customary charges around the country. Significantly, in her

deposition, Class expert Mary Covington, an insurance claims auditor, pointed

out that United considers any charge at or below the eighty to eighty-fifth

percentile of the HIAA schedules to be "reasonable and customary." Charges

above the eighty to eighty-fifth percentile were considered ineligible.

United's evidence revealed that co-payment methods were routinely

explained to units enrolled in the plan and to the Class members, usually when

employers were comparing different insurance plans in the market or during

enrollment meetings with employees.(8) The

declared advantage of this practice

was lower premiums since United's premiums were experience-rated, that is,

directly tied to actual expenditures for health care service.
name="txt9">(9) The named Class

members denied knowledge of this practice. But, in affidavits submitted by

United, two participants who were not named members of the Class stated they

were aware of United's co-payment methodology. Each considered United's

practice an advantage since it lowered premium rates and slowed rate increases.

The Minnesota Department of Health, an agency with jurisdiction over United's

parent company, had approved an identical co-payment methodology. Prior to

1992, the Department's rules limited co-payments to twenty-five percent of the

provider's "costs or charges." To dispel confusion between "cost" and "charge,"

a 1992 amendment to the rules deleted the word "cost" and explicitly limited the

co-payment to twenty-five percent of the "provider's charge," defined as "the

fees charged by the provider which do not exceed the fees that provider would

charge any other person . . . ." Minn. R. 4685.0801 (1999).
name="txt10">(10) However, there

was no evidence any other insurer in Utah calculated co-payment percentages as

United did during the class period.

District Court Decision Under Review

In addition to its claims under 29 U.S.C. 1132(a)(1)(B),
name="txt11">(11) the Class

alleged United breached its fiduciary responsibility. It sought, under 29 U.S.C. 1132(a)(3),(12) to impose a

constructive trust for monies it contends were

improperly held as a result of United's co-payment methodology.

With respect to the §1132(a)(1)(B) claim, the district court found both the

Class's interpretation of the plan language (co-payment percentages should be

applied against a provider's discounted rate) and United's interpretation of the

same language (co-payment percentages should be applied against the full billed

charge) to be reasonable. Because the policy language was susceptible to two

reasonable interpretations, the district court concluded it was ambiguous.

However, since United enjoyed the prerogative to construe policy terms and

conditions, and since its construction was not arbitrary or capricious, the district

court granted summary judgment to United. Since the Class presented an

arguable § 1132(a)(1)(B) claim, the district court, relying on Varity Corp. v.

Howe, 516 U.S. 489 (1996), concluded its § 1132(a)(3) claims were foreclosed

and dismissed them.

Standard of Review

We review de novo the district court's grant of summary judgment under

Fed. R. Civ. P. 56(c), viewing the evidence and reasonable inferences to be

drawn from it in the light most favorable to the nonmoving party. Simms v. Okla.

ex rel. Dep't of Mental Health & Substance Abuse Servs., 165 F.3d 1321, 1326

(10th Cir. 1999), cert. denied 528 U.S. 815 (1999). However, there is a nuance

to the standard of review as it applies to a §1132(a)(1)(B) claim. It concerns

United's exclusive right, under its Certificate of Coverage, to construe the terms

and conditions of the plan. The Supreme Court has held "a denial of benefits

challenged under §1132(a)(1)(B) is to be reviewed under a de novo standard

unless the benefit plan gives the administrator or fiduciary discretionary authority

to determine eligibility for benefits or to construe the terms of the plan."

Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989). In such an

instance, the exercise of fiduciary discretion is reviewed under an arbitrary and

capricious standard. Chambers v. Family Health Plan Corp., 100 F.3d 818, 825

(10th Cir. 1996). But, if the fiduciary has a conflict of interest,
name="txt13">(13) a court

applying the standard "must decrease the level of deference given to the

conflicted [fiduciary's] decision in proportion to the seriousness of the

conflict." Id.; see also Firestone, 489 U.S. at 115. The conflict is weighed as a

factor in determining the level of deference, which "will be decreased on a

sliding scale in proportion to the extent of conflict present, recognizing the

arbitrary and capricious standard is inherently flexible." McGraw v. Prudential

Ins. Co. of America, 137 F.3d 1253, 1258 (10th Cir. 1998). If the conflict of

interest is so strong as to eliminate any deference, we will independently construe

the plan according to ordinary rules of contract interpretation. Otherwise, we

will uphold the fiduciary's interpretation if it is reasonable.

Like the district court, we conclude United is a conflicted fiduciary.

"[W]hen an insurance company serves as ERISA fiduciary to a plan composed

solely of a policy or contract issued by that company, it is exercising discretion

over a situation for which it incurs direct, immediate expense as a result of

benefit determinations favorable to plan participants." Pitman v. Blue Cross &

Blue Shield of Okla., 217 F.3d 1291, 1296 (10th Cir. 2000) (quotation marks and

citation omitted). As well, savings United realized from its challenged practice

contributed to the vitality of its business and its competitive position in the

insurance industry.(14) Id.

While we recognize United's conflict of interest, it is not so strong as to

eliminate deference to its interpretation of the plan if that interpretation is

otherwise reasonable. Its challenged practice, being systemic and not arbitrarily

or capriciously applied to individual plan participants or beneficiaries, diminishes

the level of its conflict. To be sure, the plan design purposefully results in cost

shifting to the Class members who access health services by requiring them to

pay a greater portion of the actual cost of those services. But plan design is

immune from judicial review. Jones v. Kodak Med. Assistance Plan, 169 F.3d

1287, 1292 (10th Cir. 1999). As we consider the reasonableness of United's

interpretation of the plan, we are reminded a fiduciary's interpretive decision

need not be the only logical one nor even the best one.

It need only be sufficiently supported by facts within

[its] knowledge to counter a claim that it was arbitrary

or capricious. The decision will be upheld unless it is

not grounded on any reasonable basis. The reviewing

court need only assure that the [fiduciary's] decision

fall [s] somewhere on a continuum of

reasonableness­even if on the low end.

Kimber v. Thiokol Corp., 196 F.3d 1092, 1098 (10th Cir. 1999) (quotation marks

and citations omitted) (emphasis in the original). Significantly, it is of no

moment that the Class's interpretation of the Certificate language is also

reasonable. We test only to determine if United's interpretation is reasonable.

As stated in Kimber, "[d]eferential review does not involve a construction of the

terms of the plan; it involves a more abstract inquiry­the construction of someone

else's construction." Id. at 1100 (quoting Morton v. Smith, 91 F.3d 867,

871 n.1

(7th Cir. 1996) (citations omitted)).

Discussion

§1132(a)(1)(B) Claim

With these principles in mind, we consider the reasonableness of United's

interpretation of the ambiguous language.
name="txt15">(15) Applying the appropriate standard of

review, the district court concluded United's interpretation was reasonable and

sustained by its evidence. We agree.

The Class first argues since co-payment is against eligible expense only

there must perforce be some portion of an expense which United considered

ineligible. While it is thus far correct, it further asserts the ineligible portion of a

claim is the spread between the full billed charge and the discounted fee with the

provider, especially since the provider is prohibited by agreement with United

and by Utah statute from collecting this amount from the class member. As a

result, claims the Class, the eligible expense against which the co-payment should

be applied is the discounted fee. This argument is strained.

A straightforward approach to determining "eligible expense" is more

reasonable. "Eligible expenses" under the policy are defined as "reasonable and

customary charges(16) for health services."

(R. at 244). Since covered "health

services"(17) include only those deemed

"medically necessary,"(18) when presented

with a claim United must apply a two-step test for eligibility. First, is the service

"medically necessary?" If not, the service charge is an ineligible expense.

Second, is the charge presented for the service "reasonable and customary?" If

not, it is ineligible. Reasonable and customary charges for medically necessary

services are thus eligible expenses and in turn determine the co-payment.

The Class next takes issue with United's interpretation of "reasonable and

customary charges" under the plan. It argues the Certificate language referring to

reasonable and customary charges "incurred," means those costs incurred by

United, and since the cost incurred by United is based on the discounted fee it is

this sum against which a class member's co-payment percentage ought to be

applied. This is, again, a strained reading of the Certificate. "Co-payment" is

defined as the class member's responsibility for "health services provided." (R.

at 243). Health services are provided to the Class members, not United.

Therefore the charge for the service is incurred by the Class member, not United.

The Class also claims United's interpretation of the phrase "reasonable and

customary charges" is unreasonable because United exercised no "judgment," as

the Certificate required, as to whether the full billed charge was "representative

of the average and prevailing charge for the same health service in the same or

similar geographic communities where the health services are rendered and which

do not exceed the fees that the provider would charge any other payor for the

same services." (R. at 247). According to the Class, United's only exercise of

judgment was in negotiating the discount rate, and thus the discount rate

constitutes the "reasonable and customary charge." However, the evidence from

the Class's own witness, Mary Covington, is contrary. United routinely

considered any charge at or below the eighty to eighty-fifth percentile of the

HIAA schedules to be "reasonable and customary." That is a rational exercise of

judgment and not unreasonable since the practice mirrored Medicare

methodology and was explicitly approved by the Minnesota Department of

Health.

Lastly in that vein, the Class argues the full billed charge is not a

"reasonable and customary charge" because it exceeds "the fees that the provider

would charge any other payor for the same services." As an example of such a

lower fee, the Class again points to the discount rate which United negotiated

with its participating providers. This argument breaks down if in fairness we

undertake to compare discount rates other payors might have negotiated with the

same providers, to see if those rates are lower than United's rates. The Class's

suggested interpretation of "reasonable and customary charge" demands this

comparison. As the district court ably pointed out, it is impossible to compare

other payor-provider negotiated rates because of the proprietary and confidential

nature of such competitor agreements. In the absence of this information, the

Class could never be assured United's negotiated rate did not exceed another

insurer's negotiated rate. Since the Class's interpretation of the Certificate,

offered to rebut the reasonableness of United's interpretation, would result in

impossibility of contract performance due to the inability to compare other

negotiated rates, the district court rightly favored United's position.

Moving to a new but related topic, the Class claims United violated Utah

law requiring an insurer to inform a claimant as to the amount it paid the

provider. That violation, the Class argues, makes United's co-payment

methodology impermissible.(19) This

argument was not presented to the district

court [on the Class's benefit recovery claim under §1132(a)(1)(B)] and we will

therefore not consider it on appeal. Tele-Communications, Inc. v. Commissioner

of Internal Revenue, 104 F.3d 1229, 1233 (10th Cir. 1997). Nor will we consider

the related theory, first presented on appeal by the Class in its Reply Brief, that

the doctrine of promissory estoppel under Utah law provides remedial relief. Id.

For the same reason, we will not consider the Class's argument that the policy

incorporated ERISA, and therefore fiduciary obligations set out in ERISA are

plan terms subject to enforcement under §1132(a)(1)(B). Id.

Finally, the Class urges application of the doctrine of contra proferentem

to construe the ambiguous language of the plan against the drafter, United. The

district court declined to do this, either on the basis of state or federal common

law, on the grounds of ERISA pre-emption. Were it not for the fact the plan

confers sole and exclusive discretion upon United to construe its terms, albeit

reasonably and subject to increased scrutiny in the case of a conflict of interest,

contra proferentem might apply. But the doctrine is plainly inapposite where a

reviewing court is determining the reasonableness of the construction of the

contract by one of the parties to it instead of construing the language of the

contract itself. "[W]hen a plan [fiduciary] has discretion to interpret the plan

and the standard of review is arbitrary and capricious, the doctrine of contra

proferentem is inapplicable." Kimber, 196 F.3d at 1100.

We conclude United's interpretation of the Certificate language was a

reasonable one. Considering a health service provider's full billed charge to be

"reasonable and customary" harmonizes well with Medicare practice, an identical

procedure explicitly approved by state regulators in Minnesota, and with the

Certificate requirement the charge of the provider cannot exceed charges to any

other payor for like services.

§1132(a)(3) Claim

The Class sought equitable relief under 29 U.S.C. 1132(a)(3), claiming

United, as a 29 U.S.C. 1002(21)(A) fiduciary, breached its fiduciary duty by

failing to inform the class of its discounting practice
name="txt20">(20)and improperly denying, de

facto, benefits under the plan. The Class also argues the plan, by its terms,

incorporated Utah law, specifically Utah Code Ann. §31A-26-301.5, requiring

detailed payment notification to an insured. The argument continues ­ since

United only vaguely described its practice, it violated Utah law and, a fortiori, the

plan itself.

We agree with the district court that consideration of a claim under 29 U.S.C. 1132(a)(3) is improper when the Class, as here, states a cognizable claim

under 29 U.S.C. 1132(a)(1)(B), a provision which provides adequate relief for

alleged class injury. "[W]e should expect that where Congress elsewhere

provided adequate relief for a beneficiary's injury, there will likely be no need for

further equitable relief, in which case such relief normally would not be

'appropriate'." Varity, 516 U.S. at 515. Dismissal of the §1132(a)(3) claim

was

proper as a matter of law.

Conclusion

For the reasons given, we AFFIRM the judgment of the

district court.

Entered by the Court:

TERRENCE L. O'BRIEN

United States Circuit Judge

FOOTNOTES

Click footnote number to return to corresponding location in the text.

*. This order and judgment is not binding

precedent except under the

doctrines of law of the case, res judicata and collateral estoppel. The court

generally disfavors the citation of orders and judgments; nevertheless, an order

and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.

2.29 U.S.C. 1001 through 1461

(1995).

3.The Class consists of employees and

dependents with average claims

between $100.00 and $200.00. The Class abandoned its claims for declaratory

and injunctive relief since United changed its challenged practice in 1995.

This

lawsuit is thus limited to what minimal individual refunds might be available to

members of the Class. Of course, attorneys fees and costs are also at stake.

4."[A] person is a fiduciary with respect to a

plan to the extent (i) he

exercises any discretionary authority or discretionary control respecting

management of such plan or exercises any authority or control respecting

management or disposition of its assets, . . . or (iii) he has any discretionary

authority or discretionary responsibility in the administration of such plan." 29 U.S.C. 1002(21)(A).

5.For example, if a health service was billed at

$1,000.00 and the plan

required a twenty percent co-payment, a participant would pay $200.00 directly

to the provider. And, if United had arranged a discounted fee of $800.00 for the

service, it would pay only $600.00. As a result, the participant's actual share

would be twenty-five percent, not twenty percent.

6.This plan contrasts with conventional

indemnity insurance in which the

insurer agrees to pay all covered charges exceeding the participant's co-payment.

7.Legislative history establishes the purpose of

this language was to pass

through to an insured discount rates negotiated between a health service provider

and a payor-insurer.

8.Affidavits of independent insurance agents

Donald Sparks.

9.Mr. Sparks's market research showed that if

United was to calculate co-payment percentages against a discounted fee it would result in an

increase of

one percent in cost of premiums for an employer.

10.In spite of protests from organizations

taking a position identical to that

of the Class in this case, an administrative law judge recommending adoption of

the amendment wrote, "[t]he proposed rules are intended to clarify that the

provider's charge is a proper basis for calculating the co-payment." Minn.

Office of Administrative Hearings, Report of Administrative Law Judge, 11-0900-6030-1, p.5

(1992), 1992 WL 811246, p.4.

11."A civil action may be brought ­

(1) by a participant or beneficiary . . .

(B) to recover benefits due to him under the terms of his plan, to enforce his

rights under the terms of the plan, or to clarify his rights to future benefits under

the terms of the plan." 29 U.S.C. 1132(a)(1)(B).

12."A civil action may be brought ­

(3) by a participant, beneficiary, or

fiduciary (A) to enjoin any act or practice which violates any provision of this

subchapter or the terms of the plan, or (B) to obtain other appropriate equitable

relief (i) to redress such violations or (ii) to enforce any provisions of this

subchapter or the terms of the plan. 29 U.S.C. 1132(a)(3).

13."[A] fiduciary shall discharge his duties

with respect to a plan solely in

the interest of the participants and beneficiaries . . . ." 29 U.S.C. 1104(a)(1).

14.United argues any savings it realized in

its co-payment methodology were

passed on to its enrolled units in the form of lower premiums, since premiums

were experience-rated. While this may have benefitted plan participants and

beneficiaries when employees contributed to premiums, they did not always do

so. Nevertheless, United argues premium savings realized by enrolled units

positively affected all plan participants and beneficiaries by enabling the enrolled

unit to maintain broad coverage and/or forestall rate increases. In this way,

United argues, lower premiums contributed to the overall health of the employer

unit, indirectly benefitting employees. While plausible, these arguments do not

diminish the market advantage enjoyed by United as a result of its co-payment

methodology.

15.To the district court, the Class argued the

terms of the plan were

ambiguous. On appeal, it continues that argument but adds an alternative. It

now claims the plan terms are not ambiguous and should be read in its favor.

Even if the alternative argument has merit, we decline to consider it since it is a

theory not presented to the district court. Tele-Communications, Inc. v.

Commissioner of Internal Revenue, 104 F.3d 1229, 1233 (10th Cir. 1997).

16."'Reasonable and Customary Charges' -

fees for Covered Health Services

and supplies which, in PLAN's judgment, are representative of the average and

prevailing charge for the same Health Service in the same or similar geographic

communities where the Health Services are rendered and which do not exceed the

fees that the provider would charge any other payor for the same services." (R. at

247) (emphasis added).

17."'Health Services' - the health care

services and supplies Covered under

the Policy, except to the extent that such health care services and supplies are

limited or excluded under the Policy." (R. at 245).

18."'Medically Necessary' - those Health

Services which are determined by

PLAN to be necessary to meet the basic health needs of an individual.

Determination of Medical Necessity is done on a case-by-case basis and considers

several factors including, but not limited to, the standards of the medical

community." (Id.)

19.The Class also argues violation of Utah

law renders United's

methodology unreasonable. This argument is not persuasive because if United

strictly complied with the statute the Class would, at most, have been explicitly

put on notice of United's co-payment methodology, which begs the question

presented here: the reasonableness of the methodology itself.

20."A summary plan description of any

employee benefit plan shall be

furnished to participants and beneficiaries . . . . The summary plan description . .

. shall be written in a manner calculated to be understood by the average plan

participant, and shall be sufficiently accurate and comprehensive to reasonably

apprise such participants and beneficiaries of their rights and obligations under

the plan." 29 U.S.C. 1022(a).

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