Regulations Provide Guidance For Mandatory Internal And External Claims Appeals Process

August 15, 2010

The enactment of the Patient Protection and Affordable Care Act (“PPACA”) brought new rules for non-grandfathered plans concerning mandatory internal and external appeals processes for an adverse benefit determination. These rules will take effect for plan years beginning after September 23, 2010.

When a claim for health benefits is denied, a claimant has the option of appealing that decision. In general, the PPACA provides that a claimant must be informed about the appeal process, given access to his or her records, and coverage must be continued during a pending appeal.

To address the patchwork of rules applicable to different types of coverage under a variety of State laws and ERISA, Congress attempted to implement a more uniform internal and external appeals process, and to set a minimum standard of protections available to all covered persons. Because these regulations only apply to non-grandfathered coverage, it remains to be seen whether this new regime will be any more uniform in its application. However, as time goes on and plans begin to lose grandfather status, by design or due to revisions, the goal of uniformity may become more attainable.

Internal Appeals for Group Coverage

The first stage of appeal is internal, or to the plan administrator or insurer. With respect to group plans and group insurance coverage, this internal process must incorporate current ERISA claims procedures regulations, together with six new requirements added by interim final regulations issued on July 22, 2010.

The six new requirements applicable to the internal claim process are:

1. Adverse benefit determination defined. The internal appeals process applies to any “adverse benefit determination”, which is defined as the denial, reduction, termination or failure to make payment of a claim due to an eligibility determination; determination that a benefit is not covered for any reason; imposition of an exclusion on coverage; a determination that a benefit is experimental or not medically necessary; or rescission of coverage (i.e., retroactive cancellation).

2. 24 hour turnaround on urgent care claims. For claims involving urgent care, the plan or issuer must notify the claimant of the benefit determination as soon as possible, but not later than 24 hours after receipt of the claim. This is a significant change from the previous requirement of providing notice of a determination within 72 hours. The time period was shortened because electronic communications is expected to enable faster decision making. As a practical matter, claims administrators may need to increase staffing to meet this expedited turn-around time.

3. Notice and explanations in advance of decisions. In order to give the claimant a full and fair review, a plan or issuer must allow a claimant to review the claim file and to present evidence and testimony as part of the internal claims and appeals process. Further, a plan or issuer must provide a claimant with any new or additional evidence considered, relied upon or generated by the plan or issuer in connection with the claim. Notably, this information must be provided before a claim denial is issued. Similarly, before a plan or issuer can issue a denial based on a new or additional rationale, the claimant must be provided with that rationale. The regulations do not specify how far in advance either of these communications must occur, but indicate that such information must be provided “as soon as possible” and sufficiently in advance such that the claimant has a reasonable opportunity to respond before a notice of decision is required to be given.

4. Steps to minimize financial conflict of interest. In order to minimize the impact of financial conflicts of interest, the plan or
issuer must ensure that all claims and appeals are adjudicated in a manner designed to maintain the independence and impartiality of the decision makers. Accordingly, steps must be taken to ensure that decisions regarding financial compensation of individuals such as claims adjudicators or medical experts are not based on the likelihood that those employees or consultants will support a denial of benefits. For example, a plan or issuer cannot provide bonuses based on the number of denials made by a claims adjudicator. Steps taken in furtherance of this new requirement will also have the likely benefit of mitigating against the financial conflict of interest argument in a litigation, which otherwise may lead to increased discovery costs.

5. More robust claim decision and appeal process explanations. New notice standards must be followed for adverse benefit determinations. A plan or issuer must indicate the date of service, the provider, the claim amount (if applicable), the diagnosis code, the treatment code, the denial code, the corresponding meanings of all codes, and the standard used in denying the claim. For notices of final internal adverse benefit determinations, the notice must include a “discussion of the decision”. The plan or issuer must also provide a description of the internal and external review process, and how to obtain assistance with the appeal process through any applicable insurance consumer  assistance department or ombudsman. In the “very near future”, the Department of Labor (“DOL”) and the Department of Health and Human Services (“HHS”) will make available model notices at: and These requirements expand on the information contained in explanation of benefits communications typical of most current plans and policies.

6. Expedited exhaustion remedies. If a plan or issuer fails to strictly adhere to all of the foregoing requirements, then the claimant will be deemed to have exhausted the internal claims and appeals process, and the claimant can immediately initiate an external review or pursue all other applicable remedies, including filing a lawsuit. The regulations specify that neither substantial compliance nor a de minimis error will protect a plan or issuer from this acceleration of the appeal process.

Internal Appeals For Individual Insurance Coverage

The PPACA initially provided that individual policies would be governed by standards to be established by the Department of HHS. However, in order to avoid potential inconsistency, the interim final regulations indicate that an individual health insurer must comply with the same requirements for the internal claims and appeals process that apply to group health insurance coverage (except for special rules that apply only to multiemployer plans). This is intended to facilitate compliance, and to provide the same process and protections to the individual market that are available in the group market.

To address certain differences in the individual and group markets, an individual health insurance issuer must also comply with the following three new requirements.

1. Applicants in the individual market will have the opportunity to review a denial of eligibility of coverage to determine whether the insurer has complied with the new prohibition against preexisting conditions for children under age 19 beginning with policy years beginning on or after September 23, 2010, and for individuals of all ages for policy years beginning on or after January 1, 2014.

2. A second level of internal appeal is not allowed. Thus, after an insurer has reviewed an adverse benefit decision once, a claimant may seek external review by an outside entity.

3. Records of claims and notices associated with the internal claims and appeals process must be maintained for at least six years, and must be made available upon request.

State Standards For External Review

The PPACA requires that all non-grandfathered plans and issuers must comply with either a State external review process or the Federal review process. The interim final regulations explain which standards apply under particular circumstances. Although the PPACA and other Federal laws typically supersede the application of State law, the regulations provide that States may impose requirements that are more restrictive than the Federal law.

Group and individual health insurance coverage: If an applicable State external review process includes at minimum the recommended protections in the Uniform Model Act drafted by the National Association of Insurance Commissioners (“NAIC”), then the State, and not the Federal, process applies. However, if a State external review process does not include the minimum consumer protections of the NAIC’s Uniform Model Act, or if a State does not have an external review process, then the Federal external review process must be followed. For example, some States’ review processes apply only to HMOs and not to other types of coverage. Consequently, the insurer would be required to follow the Federal process for claims in those States.

Some of the requirements of the NAIC Uniform Model Act include:

• The issuer must pay the cost of an independent review organization (“IRO”) for conducting the external review;
• An IRO will be assigned on a random basis, or by another method to ensure independence and impartiality, and in no event selected by the issuer, plan or claimant;
• The decision is binding on the plan or issuer, as well as the claimant, except to the extent that other remedies are available under State or Federal law; and
• Expedited review must be provided in certain circumstances, such that notice of a decision must be provided no later than 72 hours after receipt of the request.

The full language and requirements of the NAIC Uniform Model Act is available at and The Department of HHS is charged with determining whether a State external review process satisfies the minimum consumer protections included in the NAIC Uniform Model Act. In order to encourage revision of States’ non-conforming processes, a transition period will be allowed during which existing State processes may be treated as conforming for plan years and policy years beginning before July 1, 2011. The applicable external review process will be based upon the process applicable at the time of the final internal adverse benefit decision.

Self-funded group health plans: The preemptive effect of ERISA prevents application of a State external review process from applying to most self-funded plans, except for those plans that are exempt under ERISA, such as a non-federal government plan (i.e., a local municipality) or a church plan. Thus, if a self-insured group health plan is subject to a State external review process (and is not preempted by ERISA), and the State process includes at minimum the consumer protections of the NAIC Uniform Model Act, then the plan must comply with the applicable State process, and not the Federal process. This is a significant change for governmental and church plans, which may not be subject to any State regulation currently.

Further, multiple employer welfare plans, which may be subject to both ERISA and State insurance laws, will need to comply with a State external review process that conforms with the NAIC Uniform Model Act.

Federal External Review Process

The Federal external review process is not yet fully developed, but is expected to contain requirements similar to those outlined in the NAIC Uniform Model Act. The interim final regulations indicate that the Federal external review process will apply to any adverse benefit determination other than one relating to eligibility for coverage, and that it will meet additional standards issued by the DOL and Department of HHS, including expedited external review and additional consumer protections with respect to claims involving experimental or investigational treatment.

The Departments are encouraging States to take the lead in establishing an external review process with appropriate consumer protections, such that the Federal external review process will be only a fallback measure.

Further regulatory guidance is expected concerning self-funded group health plans which currently follow a process that satisfies the Federal external review standards, and how those plans may comply or be brought into compliance with new Federal review process requirements.

Culturally and Linguistically Appropriate Notices

Claim denials under ERISA must generally be written in a manner designed to be understood by the claimant. The PPACA now requires that all notices of available claim and appeal processes be provided in a “culturally and linguistically” appropriate manner.

Non-English notices may be required depending on the thresholds of the number of people who are literate only in the same non-English language. In group markets, for a plan that covers fewer than 100 participants at the beginning of a plan year, the threshold is 25% of all participants who are literate only in the same non-English language. For a plan that covers 100 or more participants at the beginning of a plan year, the threshold is the lesser of 500 participants, or 10% of all plan participants, who are literate only in the same non-English language. Thus, for example, for a plan with 80 participants, if there are 20 participants (i.e., 25%) who are literate only in German, then notices to the German-speaking participants must be provided in German.

In the individual market, the threshold is 10% of the population residing in a county who are literate only in the same non-English language. The Department of HHS will publish guidance for determining county levels by September 23, 2010 at http://www. The regulations do not seem to take into account the number of individuals covered by any particular insurer in a particular county. Further guidance may be forthcoming.

If an applicable threshold is met, notice must be provided upon request in the respective non-English language. In addition, if a plan or issuer maintains a customer service assistance process, such as a telephone hotline, such assistance must be provided in the non- English language. These changes will likely lead to increased costs in terms of publication of new print materials, and the need for staffing of multi-lingual personnel or translators, as appropriate.

For more information, please contact:

Kimberly J. Ruppel is a member in the Troy
office. Her expertise is in Insurance & Healthcare and
ERISA Litigation, including defending benefit denial
disputes and breach of fiduciary duty allegations.
She can be reached at 248.433.7291 or kruppel@