United States District Court, S.D. New York
February 17, 2004.
GEORGE KAST, Plaintiff -v- LIBERTY MUTUAL INSURANCE COMPANY, Defendant
The opinion of the court was delivered by: DENISE COTE, District Judge
OPINION AND ORDER
George Kast ("Kast") originally filed this action in the Civil Court
of the City of New York to recover benefits to which he alleges he is
entitled under the Liberty Mutual Medical Plan ("Medical Plan"). Liberty
Mutual Insurance Company ("Liberty") removed the action to federal court
on May 7, 2003. Kast's claims arise from an employee welfare benefit plan
governed by the Employee Retirement Income Security Act of 1974
("ERISA"), 29 U.S.C. § 1001, et seq. A conference with the
Court on October 31, failed to resolve this dispute. On December 5,
Liberty moved for summary judgment on the ground that Liberty's
determination of the benefits owed Kast was neither arbitrary nor
capricious. For the following reasons, the motion is granted.
The following facts are undisputed. Kast is a Liberty retiree and is
insured by its Medical Plan, under which he elected the $200 deductible
option. Kast was also covered by the Medicare program at the time the
present dispute arose. Under the terms of the Medical Plan, once a
retiree becomes eligible for Medicare, it serves as the individual's
primary insurer. The Medical Plan then coordinates with Medicare to offer
secondary coverage, or the "maintenance of benefits."
The Medical Plan provides as follows:
. . . . The Plan does not cover charges payable
by Medicare. In addition, the Company will pay no
more after Medicare than it would pay as primary
payer. For example, if Medicare has already paid
80% of a covered charge, Liberty will pay nothing
further, since Liberty's plan would not pay more
than 80%.*fn1 . . .
* * *
Here is how the Medical Plan coordinates when it
is the secondary plan:
The Medical Plan determines the benefit
that would be paid if it were the only plan.
This includes applying the appropriate co-pay,
deductible, co-insurance, and all other benefit
The amount of benefits paid by the
primary plan is subtracted, or "carved out" from
that would be paid by the Medical Plan. This
means that when the Medical Plan is secondary,
it will only pay the difference between its
usual benefit and the benefit paid by the
primary plan (including Medicare, if
The Medical Plan then offers this illustration of the coordination of
benefits with Medicare:
Original billed amount from hospital $2,000
Medicare approved charge $1,500
Medicare hospital deductible $792
Paid by Medicare $708
For coordination of benefits, Liberty would
consider the following:
Medicare approved charge $1,500
Liberty deductible $200
Liberty co-insurance x80%
Amount Liberty would have paid in the
absence of Medicare $1,040
Subtract amount already paid by Medicare $708
Liberty's payment $332
Now, in order to determine the balance you pay:
Medicare payment $792*fn2
PLUS Liberty payment $332
Total Plan payments (including Medicare) $1,040
Medicare approved charge $1,500
Subtract total Plan payments $1,040
Retiree payment $460
The $460 you pay will be applied toward your out-of-pocket maximum of
$1,200 for covered charges for the year.
Please note that if your health provider does not take assignment, the
Plan will continue to coordinate with Medicare using the Reasonable and
Customary charge at the 80th percentile of the HIAA tables.
Finally, the Plan contains a provision describing the Authority of
the Plan Administrator, Liberty:
The Plan Administrator has the authority, in its
sole discretion, to construe the terms of this
Plan and decide all questions of eligibility,
determine the amount, time and manner of payment
of any benefits and decide any other matters
relating to the administration or operation of the
Plan. Any such interpretations or decisions of the
Plan Administrator shall be conclusive and
Kast was hospitalized from September 4 through 7, 2002, at the Tisch
Hospital ("Tisch") in Manhattan. The charges for Kast's stay totaled
$12,201.47, of which Medicare approved $6,139.92. Tisch accepted the
assignment of Medicare benefits, thereby agreeing to charge no more than
the approved amount of $6,139.92. Medicare payed this sum, less a
Medicare hospital deductible of $812 that was billed to Kast. Aetna U.S.
Healthcare ("Aetna"), the claims administrator for the Medical Plan,
processed Kast's claim for additional benefits and determined that he was
entitled to a payment of $184.30. The form sent to Kast states "Benefits
have been reimbursed by your primary insurer an amount equal to or
greater than what our plan would pay if it were the only plan. Therefore,
benefits have been reduced." At the time of the hospitalization, Kast had
already paid $572.30 in medical expenses, which was applied to his
out-of-pocket maximum of $1,200. Therefore, any amount over $627.70
or $184.30 was covered by the Medical Plan.
Kast appealed this determination by letter to Aetna dated February 5,
2003. Aetna advised him that Liberty was the plan fiduciary responsible
for review of appealed claims and forwarded the appeal to Liberty. A
Liberty Benefit Specialist ("Specialist") responded to Kast's appeal by
February 18, stating that "when the Aetna Medical Plan is
secondary, it will only pay the difference, if any, between its usual
benefit and the benefit paid by Medicare." The letter offers a detailed,
albeit confusing, calculation of Kast's claim. The calculation differs
from the illustration provided in the pamphlet by incorporating in "the
amount Liberty would have paid in the absence of Medicare" the Medical
Plan's obligation after Kast had met his $1,200 annual out-of-pocket
maximum.*fn3 The Specialist affirmed the decision that Kast was only
entitled to a payment of $184.30.
Kast appealed the February 5 determination by letter dated March 12,
2003, again asserting that he was entitled to 80% of $812 charge. He did
not dispute Liberty's calculation of benefits, but disagreed with the
formula used by the Plan itself, which he argues is illogical and results
in underpayments to beneficiaries. Liberty rejected the appeal on March
26, 2003, restating the position of its earlier letter and providing
In Kast's Statement of Claim, submitted to the Civil Court of the City
of New York, he sought relief in the amount of $565.
When the case was removed to this Court, Kast submitted a second
Statement of Claim, in which he seeks an award of $4,015.70.*fn4
Under ERISA, a beneficiary is generally required to exhaust his
administrative remedies before bringing suit. See, e.g., Burke v.
Kodak Retirement Income Plan, 336 F.3d 103, 107 (2d Cir. 2003). The
exhaustion requirement is designed to ensure that ERISA trustees rather
than courts are responsible for the decisions that affect plan
beneficiaries. Davenport v. Abrams, 249 F.3d 130, 133 (2d Cir.
2001). When an employee benefit plan confers discretionary authority on a
fiduciary to construe the terms of the plan, a court employs an arbitrary
and capricious standard to review the fiduciary's decision. Fay v.
Oxford Health Plan, 287 F.3d 96, 104 (2d Cir. 2002); Kinstler
v. First Reliance Standard Life Ins. Co., 181 F.3d 243, 252 (2d Cir.
1999). The court's review is limited to the administrative record absent
a finding of "good cause" to warrant the introduction of additional
evidence. Krizek v. Cigna Group Ins., 345 F.3d 91, 97 (2d Cir.
ERISA provides that a plan fiduciary must administer the plan in
accordance with its language. 29 U.S.C. § 1104 (a)(1)(D). Under
the arbitrary and capricious standard of review, a plan administrator's
rational interpretation of the plan must be allowed to control even if a
claimant offers a conflicting, rational interpretation. Pulvers v.
First Unum Life Ins. Co.,
210 F.3d 89, 92-93 (2d Cir. 2000) (citation omitted). A court may
overturn a fiduciary's decision to deny benefits under this standard only
if the decision is "without reason, unsupported by substantial evidence
or erroneous as a matter of law." Id. at 92.
There is no dispute that the Medical Plan language providing that "the
Plan Administrator has the authority, in its sole discretion, to construe
the terms of this Plan and . . . determine the amount, time and manner of
any payment of benefits" constitutes a grant of discretionary authority
triggering arbitrary and capricious review. The section of the Medical
Plan entitled "Coordination of Benefits" provides a specific
illustration of how the Medical Plan offers secondary coverage to a
patient enrolled in the Medicare program. The numeric example and
accompanying text make clear that when a provider takes an assignment
from Medicare, the amount assigned is considered the baseline against
which the Medical Plan determines the amount it would pay at the 80%
rate. If Medicare pays more than 80% of the assigned charge, the Medical
Plan does not provide any benefits until the beneficiary has exceeded the
$1200 annual out-of-pocket maximum.
Medicare paid more than 80% of the approved charge of $6,139.92 for
Kast's hospitalization. Therefore, according to the model provided
demonstrating the coordination of benefits between the Medical Plan and
Medicare, the Medical Plan would not pay any part of the remaining charge
of $812 until Kast met his $1,200 annual out-of-pocket maximum. As a
result of prior medical expenses paid by Kast, he met the out-of-pocket
with a payment of $627.70, after which the Medical Plan covered the
remaining $184.30 of the Medicare deductible.
Kast argues that the formula employed by the Medical Plan is arbitrary
and capricious and is designed to avoid paying beneficiaries 80% of the
Medicare deductible, which is a reasonable and customary charge. It is
not the province of the Court to evaluate the coverage formula adopted by
the Medical Plan. Rather, the Court's review is limited to determining
whether Liberty resolved Kast's request for benefits based on a rational
interpretation of the Medical Plan as written.
Kast also contends that Liberty acted arbitrarily and capriciously by
using the "Medicare approved charge" of $6,139.92 as the baseline against
which Liberty calculated the amount it would have paid in the absence of
Medicare. His primary argument is that in the absence of Medicare,
Liberty would have paid 80% of the total hospital charge of $12,201.47,
less the $400 charge for a private room, and that the Medical Plan's
formula for coordination of benefits with Medicare therefore underpays
beneficiaries. The Medical Plan's formula for primary coverage provides
that the insurer pays 80% of "Reasonable and Customary" charges, limited
by definition to the 80th percentile of the Health Insurance Association
of America fee schedules. The discussion of the Medical Plan's
coordination of benefits with Medicare specifies that if a provider does
not take assignment by Medicare, the Medical Plan will continue to
coordinate using its definition of a Reasonable and Customary charge.
Once Tisch agreed to accept Medicare's approved charge in complete
satisfaction of its bill, however, it is no longer appropriate to
use the amount of its original bill which is almost twice
as high as the basis for computing Kast's reimbursement. Kast is
not entitled under the Medical Plan to payments calculated on the basis
of a bill which has been withdrawn.
The Medical Plan's illustration of the coordination of benefits with
Medicare makes clear that the Medical Plan will pay no more than 80% of
Medicare's approved charge when a provider accepts assignment. Liberty's
determination of Kast's benefits is consistent with this language and the
sample calculation. Under the applicable standard of review, Liberty's
rational interpretation of the Medical Plan must be allowed to control.
The defendant's motion for summary judgment is granted. The Clerk of
Court shall close the case.