Pre-authorization for Surgery, but Insurance Denies Claim After the Procedure (Again)

Yet another case in the Midwest (Wisconsin to be exact) went up on appeal to the Seventh Circuit Court of Appeals in Chicago where an employee sought the necessary pre-authorization for a surgery, received it from the health insurance administrator, and later the plan administrator denied coverage for the surgery. Strikingly similar to a case we previously covered, Kenseth v. Dean Health Plan, Inc., 610 F.3d 452 (7th Cir. 2010), the court was faced with a clear breach of fiduciary duty, but a difficult to ascertain remedy.

In Smith v. Medical Benefit Administrators Group, Inc., No. 09-3865 (7th Cir. Mar. 15, 2011), Mr. Smith alleged that the plan required him to notify the administrator and obtain pre-authorization before having any non-emergency surgery. Mr. Smith and his physician notified the administrator that Smith had been advised to undergo gastric bypass surgery to alleviate his congestive heart failure. Medical Benefit Administrators Group, d/b/a Auxient took 4 months, but nevertheless pre-authorized the surgery. Smith had the surgery, and 6 weeks later Auxient refused to pay for it, causing the hospital and doctors to bill Smith.

The Court wrestled with the lower court’s dismissal of Smith’s case. While a breach of fiduciary duty to Smith by Auxient was clear, the lower court dismissed because it held there was no remedy. The lower court held “Even if Smith was harmed by his reliance on Auxient’s pre-authorization, he still received the proper amount due under the plan.” 665 F. Supp. 2d 989, 994 (E.D. Wis. 2009). Unlike the plaintiff in Kenseth, Smith did not allege that money was wrongfully in the administrator’s possession that belonged to Smith, so the lower court saw no available remedy. Also, Smith conceded that the plan did not cover the surgery he had. Why Smith did not pursue these theories is unknown to this author. Nevertheless, it was error for the lower court to dismiss the complaint.

Smith did request declaratory and injunctive relief under ERISA § 502(a)(3). Smith requested Auxient be enjoined from invoking coverage exclusions after pre-authorization where Auxient did not note the coverage exclusions and did not obey regulations on timing of determinations on pre-service claims for benefits. See, e.g., 29 C.F.R. 2560.503-1(f)(2)(iii)(A) (requiring pre-service claim determinations to be made in not more than 15 days). Even if Smith could not obtain payment for the surgery in this case, the relief would benefit all other participants, and Smith the next time he seeks pre-authorization for a procedure. The Seventh Circuit therefore took the common sense approach that even if a breach of fiduciary duty cannot compensate a claimant for the cost of the procedure, the health insurer should not be permitted to eternally breach its fiduciary duty to participants. The lower court would have apparently permitted Auxient to lie to each and every participant over, and over, and over again.

If you have been billed for any health care services that your insurer or plan administrator pre-approved or pre-authorized, contact an ERISA lawyer.