Elizabeth Schwartz was covered under a group health plan insured by Oxford Health Plans, Inc. In 1991, she was diagnosed with cancer and began receiving regular treatment at Sloan-Kettering. Because Sloan-Kettering was not in Oxford´s provider network, Schwartz enrolled in her plan´s "out-of-network" option, which fully reimbursed charges that did not exceed the "usual, customary and reasonable" (UCR) rates for services and procedures. Once a $300 annual deductible was satisfied, Oxford reimburses 80 percent of any further charges until an out-of-pocket maximum of $2,300 per year in deductibles and coinsurance was met. At that point, Oxford reimburses 100 percent of the UCR, which the plan defined as a compilation of maximum allowable charges for various medical services. Fee schedules were calculated using data compiled by, among other sources, the Health Insurance Association of America (HIAA).
However, the "Definitions" portion of the plan defined UCR as the lesser of the amount charged or what Oxford determined to be reasonable. In a section entitled "Exclusions and Limitations," the plan said that:
Charges that are in excess of the UCR charges as determined by Us for Covered Services are excluded from coverage and are the Member´s responsibility.
Oxford bases its out-of-network charges on information on HIAA´s Prevailing Healthcare Charges System (PHCS), which is not mentioned in the plan. Although the PHCS published a hospital edition, Oxford did not use that version to calculate its UCR for Schwartz´s treatments at Sloan-Kettering. Rather, it used the medical and surgical editions, which only list the charges of independent physicians for office visits and do not provide data on hospital outpatient or pharmaceutical charges. Therefore, it excluded certain Sloan-Kettering charges for outpatient treatments, chemotherapy drugs and supplies.
Similarly, Oxford did not use PHCS´ pharmaceutical edition to calculate its UCR for Schwartz´s medication charges. Instead, it reimbursed out-of-network providers at 110 percent of either the "lowest observed average wholesale price" of the drug, or the "Medicare fee," which was not in the plan.
In 1997, Oxford "cut back drastically" on Schwartz´s benefits, and attempted to convince her to seek treatment from an in-network provider. Schwartz alleged that during this period, Sloan-Kettering´s rates had not substantially increased; however, her treatments intensified and Oxford announced that it had incurred substantial operating losses.
Schwartz sent Oxford a letter protesting its exclusion of certain Sloan-Kettering charges and seeking complete reimbursement for the excluded amounts. Oxford rejected her request, and for the first time provided her with details on its reimbursement structure.
Schwartz appealed the decision, which was affirmed by a grievance committee made up entirely of Oxford employees. She sued Oxford to recover benefits under ERISA´s civil enforcement provisions. They ultimately settled some of Schwartz´s reimbursement claims, and agreed to let the court rule on the remaining claims.
Generally, when the plan gives the administrator discretion to interpret the plan terms, the court´s inquiry is whether the administrator´s decision was reasonable. However, when a conflict of interest exists, the administrator´s decision is no longer given the highest degree of deference. In some jurisdictions, the degree of deference is based on a sliding scale according to the degree of conflict of interest.
The court found that Oxford had a conflict of interest because it was both the plan administrator and paid claims out of its own assets. Therefore, it had a financial interest in denying benefits and encouraging beneficiaries to use less expensive in-network providers. The court also found that, in determining its UCR for various procedures and drugs, Oxford had an incentive to use methodology that would reduce the UCRs at the beneficiaries´ expense, which would reduce the benefits that Oxford had to pay. Therefore, it would review Oxford´s charges for out-of-network medical and pharmaceutical services under a heightened review standard.
The court concluded that Oxford´s method for determining UCR for medical services was not reasonable because, among other things:
(1) Oxford used data based on rates charged by individual physicians for office visits - not for outpatient hospital services like Schwartz received - and didn´t use the more applicable PHCS hospital edition;
(2) prior to mid-1997, Oxford routinely reimbursed Sloan-Kettering for Schwartz´s cancer treatment and never complained about excessive charges or UCR rates. These actions "certainly" suggested that Oxford believed Sloan-Kettering´s rates were UCR.
Next, the court also concluded that Oxford´s decision to set the UCR for pharmaceuticals based on 110 percent of the average wholesale price was unreasonable because:
(1) nothing in the plan supported the use of that reimbursement rate;
(2) using wholesale prices as a base made no sense because Schwartz was not a wholesaler and had to purchase medications at retail prices, and no evidence suggested that Oxford´s reimbursement rate represented the UCR for retail prescriptions;
(3) PHCS data was available for pharmaceuticals but Oxford chose to ignore it; and
(4) Oxford unilaterally reduced the dosage of drugs for which it would reimburse Schwartz.
For similar reasons as to the medical services, the court concluded that Oxford´s benefits decision was influenced by its conflict of interest. Therefore, the court ruled in Schwartz´s favor, and required Oxford to reimburse her for all of Sloan-Kettering´s charges for medical, surgical, diagnostic and prescription drug services that do not exceed the UCR rates charged by other comprehensive cancer centers in New York City.
From Employer''s Guide to Self-Insuring Health Benefits, ©Thompson Publishing Group, Inc.