Jessica M. Karmasek Feb. 26, 2013, 7:45pm

NEW ORLEANS (Legal Newsline) -- The U.S. Court of Appeals for the Fifth Circuit recently held that a third-party administrator of an Employee Retirement Income Security Act plan can be held liable for an abuse of discretion in its handling of benefit claims.

ERISA is a federal law that sets minimum standards for pension plans in private industry. It does not require any employer to establish a pension plan. It only requires that those who establish plans must meet certain minimum standards.

The law generally does not specify how much money a participant must be paid as a benefit. However, ERISA requires plans to regularly provide participants with information about the plan including information about plan features and funding; sets minimum standards for participation, vesting, benefit accrual and funding; requires accountability of plan fiduciaries; and gives participants the right to sue for benefits and breaches of fiduciary duty.

In its decision filed last month, the Fifth Circuit determined that a third-party administrator, or TPA, that exercises "actual control" over the administration of an ERISA plan can be held liable under the act.

In LifeCare Mgmt. Servs. LLC v. Ins. Mgmt. Administrators, the TPA was found to have abused its discretion in denying benefits for services provided to two patients covered under two different plans.

The TPA administered both plans. The two lawsuits were consolidated.

Andrew MacRae of Austin, Texas-based Levatino Pace LLP wrote for DRI: The Voice of the Defense Bar last week that the decision "may well send a shock wave of concern" through the community of third-party administrators, plans and plan administrators, and the attorneys who represent them.

"The LifeCare decision has potentially far-reaching consequences regarding the day-to-day administration of ERISA plans," MacRae wrote in a post Wednesday.

"Whereas ordinarily a TPA may handle the routine administration of claims, and not involve the plan or its administrator unless and until an appeal is filed, LifeCare may lead a TPA to send every single claim to the plan or its administrator for a decision, even in the first instance, for fear of being found to have exercised discretion, even though its contract with the plan expressly says no discretion is being exercised."

He continued, "This type of invited oversight is probably what most plans and administrators are seeking to avoid when they retain a TPA, and is likely to make plan administration much more time-consuming, cumbersome, and inefficient. Indeed, a plan administrator required to make routine claims decisions a TPA used to make may find having a TPA doesn't make a great deal of sense."

MacRae said another "potential consequence" of the Fifth Circuit's decision is the "chilling effect" it could have on a TPA.

"Whereas before LifeCare, a TPA may have made tough benefits decisions knowing that it would not be held liable for any perceived misstep, both under case law precedent and the express language of its contract, that same TPA after LifeCare may tend to be far more cautious with its decision-making, and even err on the side of safety (i.e., non-liability) by paying a claim it might previously have denied," he explained.

Then there is the "potential tension" between a TPA and its customer, the plan and/or plan administrator, he said.

"A TPA that knows it potentially can be held liable for making discretionary decisions even when its contract expressly states no discretion is being exercised, might want to take additional precautions in negotiating its contracts, including a request for indemnification," MacRae wrote.

"The plan and/or its administrator, on the other hand, may be less inclined, after LifeCare, to even hire a TPA, knowing that a TPA may be unwilling to make the type of day-to-day claims decisions for which it is being retained."

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