Newell v. Prudential Ins. Co. of America

Citation904 F.2d 644
Decision Date28 June 1990
Docket NumberNo. 89-8634,89-8634
Parties12 Employee Benefits Ca 2193 Joe Rodger NEWELL, Jr., individually and as natural parent and guardian of minor Joe Rodger Newell, III., Plaintiff-Appellant, v. PRUDENTIAL INSURANCE COMPANY OF AMERICA, Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (11th Circuit)

James Lee Ford, Ford & Haley, Atlanta, Ga., for plaintiff-appellant.

Ben Kingree, III., Carter & Ansley, Atlanta, Ga., for defendant-appellee.

Appeal from the United States District Court for the Northern District of Georgia.

Before FAY and COX, Circuit Judges, and TUTTLE, Senior Circuit Judge.

FAY, Circuit Judge:

This appeal addresses the issue of the fiduciary obligations of an ERISA trustee that is also an insurance company. Plaintiff-appellant Newell and his family had health insurance coverage under his employer's group contract with defendant-appellant The Prudential Insurance Company of America (Prudential). When Newell's son suffered a medical problem requiring extended hospitalization, however, Prudential denied the greater part of the claim, declaring that its review of the medical records revealed that Newell's claim contained charges excludable under the policy. After unsuccessfully appealing Prudential's decision, Newell sued Prudential in Georgia state court. Prudential removed the case to federal court on the dual bases of diversity and federal question jurisdiction, the latter basis derived from the fact that Newell's claims were governed entirely by the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. Sec. 1001, et seq., which preempted Newell's state causes of action. The district court ruled in favor of Prudential, holding that Prudential did not violate ERISA as a matter of law in authorizing a Prudential employee to make the determination of whether or not charges were excludable, that Prudential did not arbitrarily or capriciously deny the majority of Newell's claim for benefits, and that Prudential provided sufficient notice to Newell of its denial of his claims. We AFFIRM the district court on the first two issues; we REVERSE and REMAND for further findings on the matter of notice.

I.

At all times relevant to this case, Joe Rodger Newell was an employee of Massey Fair Ingredient Sales, Inc. He and his family participated in Massey Fair's group insurance policy No. GSP-86888M with Prudential, under which they received term life, accidental death or dismemberment, and major medical insurance. The health insurance policy contains several limitations on eligible charges; most pertinent to this case is the following paragraph in the section entitled "Generally Excluded Charges":

The term "Generally Excluded Charges" is used only in a health care expense Coverage. When it is used, it includes all of the following....

....

(3) Charge for Unnecessary Services or Supplies: 1 A charge for services or supplies, including tests and check-up exams, that are not needed for medical care of a diagnosed Sickness or Injury. To be considered "needed", a service or supply must meet all of these tests:

(a) It is ordered by a Doctor.

(b) It is commonly and customarily recognized throughout the Doctor's profession as appropriate in the treatment of the Sickness or Injury.

(c) It is neither educational nor experimental in nature.

(d) It is not furnished mainly for the purpose of medical or other research.

Also, in the case of a Hospital stay, the length of the stay and Hospital services and supplies will be considered "needed" only to the extent Prudential determines them to be:

(a) related to the treatment of the Sickness or Injury; and

(b) not allocable to the scholastic education or vocational training of the patient.

Plaintiff's Exh. 1 at 6 [GCS 1011-(CR 011C)-1].

The policy also carries a Pre-Admission and Concurrent Review Service (PACRS) rider. As described by the district court in its factual findings,

[t]he rider provides that the general policy includes the tests for determination of need. However, pursuant to the rider, claimants must request that Prudential make a "determination of need." A determination of need is "a determination by Prudential, under the terms of the Coverage, that approves or disapproves a day or days of Inpatient Hospital Stay ... as needed for medical care of a diagnosed Sickness or Injury." [Plaintiff's Exh. 1 at] 45. The determination of need is to be made prior to admission. If Prudential finds "medical necessity" for admission, it will inform the doctor and the hospital, by phone, of the number of days of inpatient hospital stay that Prudential approves. The Policy provides that written notice will be sent to the claimant, the doctor and the hospital, indicating the number o[f] pre-authorized days.

The Policy also provides that it may be possible to extend the number of days of inpatient hospital stay that Prudential approves as needed for the medical care of the patient's condition; upon request being made, Prudential will make a new determination of need upon information received [from] the doctor.

Newell v. Prudential Ins. Co. of America, 725 F.Supp. 1233, 1235-36 (N.D.Ga.1989).

During the fall of 1986, it became apparent that Newell's son, Joe III, nicknamed "Bear," had a substance abuse problem and suffered from related depression. At first Bear underwent outpatient therapy, but after two months, his attending physician, Dr. Schmits, determined that Bear would be best served by intensive inpatient treatment. Bear was admitted on December 2, 1986, to Greenleaf Center Inc. (Greenleaf), a hospital that provides health care for people with psychiatric or substance abuse problems and has a specialized inpatient program for adolescents with such disorders.

On the day of Bear's admission, Cindy Sedman, the admissions and discharge coordinator for Greenleaf, contacted Prudential to find out about Bear's coverage. She learned that Bear was in fact covered under the policy, but that PACRS would have to make a determination of need for the inpatient hospital stay. Sedman then called PACRS and orally informed them of the estimated length of hospitalization, the diagnosis, and the treatment plan. On December 4, 1986, PACRS sent a form letter to Dr. Schmits confirming Bear's admission and requesting the admission notes and the estimated length of stay. Sedman mailed the requested information to PACRS on the same day.

PACRS approved seven days of hospital stay on December 5, 1986, and relayed that information to Sedman on December 9, 1986. On that same date PACRS apprised Greenleaf and Dr. Schmits of the procedure to obtain extensions of approved days. A PACRS internal memorandum dated December 17, 1986, reflects that 21 additional days were certified and that Sedman was so notified by telephone. When Dr. Schmits contacted PACRS two days later to request a further extension, PACRS advised him that the policy allotted a maximum of 30 days for psychiatric treatment and that the limit had been reached. Dr. Schmits clarified to PACRS that the diagnosis comprised not merely depression, a purely psychiatric malady, but substance abuse as well. PACRS responded with a request for additional records to substantiate this "change" in diagnosis.

Upon receiving the entire chart, on December 24, 1986, PACRS pre-certified coverage through January 13, 1987, a total of 42 days. PACRS notified Sedman of this extension on December 29, 1986. PACRS internal records indicate that after January 13, 1987, the case was to be put on "retro review"; that is, no further days would be pre-authorized, but rather the entire chart would be reviewed upon Bear's discharge and the days, services and supplies deemed necessary at that time would be approved for payment. The record is very unclear, however, about whom, if anyone, PACRS informed of the impending retro review status until long after the decision was made.

Meanwhile, Newell, having heard nothing from either Prudential or PACRS, contacted Gloria Buxton, a regional claims officer for Prudential, on December 29, 1986, to ascertain the situation regarding coverage for Bear's hospitalization. Buxton agreed to look into the case for Newell. The record shows several Prudential internal notes indicating that Buxton's office and Newell communicated by telephone throughout the following months, but the district court only found that Newell again heard from Buxton in a letter dated May 13, 1987.

On January 13, 1987, a Prudential employee called Sedman to notify her that the benefits for substance abuse were unlimited, subject to certification of need by Prudential. Greenleaf on the same day again was advised that Bear's stay had been approved through January 13, 1987. After January 13, 1987, the only communication between PACRS and Greenleaf or Sedman or Dr. Schmits for the next one and a half months consisted of requests for and the submission of hospital records. No information ever went to Newell. Finally, on March 5, 1987, PACRS conducted a full review of all the records received. Dr. Jed Goldart, the staff psychiatrist at PACRS, determined that no medical necessity existed for Bear's hospitalization after January 25, 1987. PACRS sent letters to Greenleaf, Dr. Schmits and Newell on March 9, 1987, informing them of PACRS' decision to deny benefits subsequent to January 25, 1987. The letter further advised that they could forward additional information to PACRS for supplemental review.

After the March 9, 1987, letter, there was a flurry of communication between Greenleaf and PACRS, Drs. Schmits and Goldart, Buxton and Newell, and the Prudential claims office and PACRS. Bear was discharged on April 3, 1987, at which time PACRS requested the entire record. After some difficulties with PACRS receiving the documents, PACRS finally secured the full record on April 29, 1987. On May 13, 1987, based on information obtained from Dr. Goldart, Buxton wrote Newell, essentially restating Prudential's position that...

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