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Get Your Claim Paid: Understand How Your Claim Will Be Paid

It is always good to understand how your claim will be paid.

For example, if you assigned benefits to the provider, the check will be sent to the provider. You will pay any deductibles and co-insurance. But if you did not assign benefits, the check will come to you and you will pay your providers the entire amount. If your claim is denied, don't panic. Read your explanation of benefits to find out the reason for the denial.

If you disagree with your insurance company's reasons for denial, check your policy or employee booklet for information on appeal procedures. You might even want to contact a representative of your insurance company for procedural information.

If you decide to appeal, make your appeal in writing and include copies of any physician records.

The April 1997 federal appeals court decision Cypress Fairbanks Medical Center v. Pan-American Life highlights a very clean health insurance claim gone awry because of the lengthy and often convoluted claims process. In this case, the consumer let the hospital chase payment.

In December 1993, Deborah J. Meyer established an employee welfare benefit plan, which provided group health insurance for her employees and their families. The plan was funded through insurance purchased from Pan-American Life Insurance Company. National Insurance Services acted as PanAmerican's agent.

Jack Schwartz, an employee of Meyer's, was admitted to Cypress Hospital and ran up a bill of $178,215.44 in medical services related to a respiratory ailment. Prior to admitting Schwartz, the hospital was informed by National, that Schwartz was covered by Meyer's plan. However, Schwartz was not covered by the plan. National incorrectly informed Cypress about Schwartz's status under the ERISA plan.

Cypress submitted a bill for services to National, and National refused to pay on the ground that Schwartz's "coverage [was] rescinded as of [the] effective date."

As a result, Cypress brought suit against Pan-American and National in Texas state court alleging a violation of Texas's Insurance Code. Specifically, it alleged that the two negligently misrepresented Schwartz's coverage under the health insurance plan, and as such, were liable for deceptive and unfair trade practices.

The case was eventually removed to federal court on the basis of federal question jurisdiction and Pan-American and National filed a motion to dismiss, or in the alternative, a motion for summary judgment, arguing that Cypress's claim was preempted by Employee Retirement Income Security Act (ERISA). The district court agreed and entered a take-nothing judgment against Cypress. The hospital appealed.

On appeal, Cypress relied on the court's 1990 ruling in Memorial Hospital System v. Northbrook Life, in which it held that a state-law cause of action for negligent misrepresentation brought pursuant to Texas Insurance Code was not preempted by ERISA.

The district court had not relied on or cited the decision in Memorial. On the contrary, it concluded that "Cypress's claims are indistinct from a participant's claim that his employer misrepresented the plan benefits.... It does not matter whether it was the employee or his hospital that was misled by the benefit plan-related entities. Extensions of coverage, however sought, are not the plan; the preemption works like a [sic] omnipotent parole evidence rule to block all extension of amounts recoverable from entities whose involvement is related to plan benefits."

Pan-American and National argued that Memorial does not control this case because in its pleadings, Cypress admitted that it was inquiring about the extent rather than the existence of coverage for Schwartz. Pan-American and National also argued that because an ERISA plan was in place and Schwartz was enrolled in the plan, Cypress's state-law claim should be preempted by ERISA. Because Pan-American and National erroneously concluded that Memorial was inapplicable to the case and that the district court erred in not applying the 1990 ruling, the court reversed the district court's holding that Cypress's claims were preempted by ERISA.

Evidently, Pan-American's and National's position was unavailing because Schwartz, although enrolled in the plan, was not covered by the plan. It is undisputed that National refused to pay Cypress because "coverage [was] rescinded as of [the] effective date." However, the record is unclear as to the meaning of this phrase. And it is unclear why National's refused to pay for Schwartz's services. Nonetheless, said the court, neither National, Pan-American, nor the record suggest that "coverage rescinded" means anything else than Schwartz was not covered by the plan at the time of his hospitalization. So, the court ruled, "Cypress's cause of action does not relate to ERISA, but rather arises under state law. Memorial is therefore triggered. Cypress's state-law claim under s 21.21 for misrepresentation is not preempted by ERISA."

Finally, the district court's reasoning that for ERISA purposes, third-party providers such as Cypress are on no better footing than first-party beneficiaries was rejected because it was rejected in Memorial, as follows:

We have held under different circumstances that ERISA preemption may occur even though ERISA itself could not offer an aggrieved employee a remedy for alleged misrepresentations. That principle should not be extended, however, to encompass third-party providers, particularly when to do so would run counter to one of Congress's overriding purposes in enacting ERISA.

Because the district court erroneously determined that Cypress's state-law cause of action for violating the Texas Insurance Code was preempted by ERISA, the court reversed the district court's decision. "In addition, the district court's jurisdiction to hear this case was based on the federal question presented by ERISA preemption, and because we hold that ERISA is not implicated, we remand this case to the district court with directions to remand Cypress's claim to Texas state court.

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