Nazay v. Miller

• Decision Date: 06 December 1991
• Docket Number: No. 91-5369,91-5369
• Citation: 949 F.2d 1323
• Parties: , 14 Employee Benefits Cas. 1953 Richard NAZAY, Sr. v. L. MILLER, an individual; Bethlehem Steel Corporation; and Michael P. Dopera, Secretary Insurance Board Bethlehem Steel Corporation, Appellants.
• Court: U.S. Court of Appeals — Third Circuit

Page 1323

949 F.2d 1323

60 USLW 2398, 14 Employee Benefits Cas. 1953

Richard NAZAY, Sr. v. L. MILLER, an individual; Bethlehem Steel Corporation; and Michael P. Dopera, Secretary Insurance Board Bethlehem Steel Corporation, Appellants.

No. 91-5369.

United States Court of Appeals Third Circuit.

Argued Oct. 28, 1991.

Decided Dec. 6, 1991.

G. Daniel Carney (argued), Joseph Mack, III, Barbara K. Ross, Thorp, Reed & Armstrong, Pittsburgh, Pa., for appellants.

Robert J. Mulderig (argued), Ron Turo, Law Office of Ron Turo, Carlisle, Pa., for appellee.

Fred S. Sommer, E. Calvin Golumbic (argued), Jonathan H. Kureno, Helen L. Gemmill, Arent Fox Kintner Plotkin & Kahn, Steven A. Bokat, Robin S. Conrad, Mona C. Zeiberg, National Chamber Litigation Center, Inc., Washington, D.C., for amicus curiae Chamber of Commerce of the U.S.

Jeffrey S. Powell, Kirkland & Ellis, Chicago, Ill., for amici curiae Blue Cross and Blue Shield Ass'n, Blue Cross of Western Pennsylvania and Pennsylvania Blue Shield.

G. Stewart Webb, Jr., Jeffrey P. Ayres, Darrell R. VanDusen, Venable, Baetjer & Howard, Baltimore, Md., for amicus curiae American Iron and Steel Institute.

Arthur N. Lerner, Barbara H. Ryland, Michaels & Wishner, P.C., Washington, D.C., for amicus curiae Health Ins. Ass'n of America.

Before GREENBERG, ALITO and HIGGINBOTHAM, Circuit Judges.

OPINION OF THE COURT

GREENBERG, Circuit Judge.

Appellants, Bethlehem Steel Corporation ("BSC"), Larry Miller, an employee benefits administrator at BSC, and Michael Dopera, Secretary of the Insurance Board of BSC, appeal from the district court's order for summary judgment of April 19, 1991, 768 F.Supp. 124, in favor of appellee Richard Nazay, a retired employee of BSC in this action under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1132(a)(1)(B), to recover the balance due for Nazay's hospitalization. ¹ In its opinion, the district court relied on Northeast Dept. ILGWU Health and Welfare Fund v. Teamsters Local Union No. 229 Welfare Fund, 764 F.2d 147 (3d Cir.1985), to hold that a penalty provision in BSC's health benefit plan, imposed upon Nazay for his failure to certify according to the terms of the plan, was arbitrary and capricious. Further, the court held that it would not enforce any provision in a benefit plan that denied benefits unless the employer could establish prejudice to the plan by reason of the failure of the participant to comply with the provision.

We disagree with the district court's interpretation of Northeast and find the court's prejudice rule at odds with our jurisprudence on this subject. Accordingly, we will reverse the court's order for summary judgment and will remand the case with directions that the district court enter summary judgment in favor of appellants.

I.

The facts in this case are not in dispute. Nazay is a retired employee of BSC and a participant in BSC's Comprehensive Medical Program for Eligible Nonrepresented Salaried Pensioners and Surviving Spouses ("the Plan"), an ERISA plan subject to 29 U.S.C. § 1002. In the spring of 1989, Nazay experienced dyspnea, a shortness of breath associated with heart disease. On June 15, 1989, Dr. Conner, his internist examined him for this condition and referred him to Dr. Pease, a cardiologist who examined him on June 20, 1989. On June 21, 1989, Dr. Conner phoned Nazay and told him that, after consulting with Dr. Pease, he recommended that Nazay be hospitalized for treatment with Dobutamine, a drug which stimulates and improves heart muscle contraction. The doctors agreed that it was imperative that Nazay's hospitalization take place within a few days.

On June 22, 1989, pursuant to Dr. Conner's instruction, Nazay admitted himself to the Harrisburg Hospital through its admission desk for progressive cardiac decompensation with a severe, congestive cardiac myopathy. Although Nazay had been provided a Blue Cross card indicating that the Plan required certification, and he knew of the Plan's certification requirements before his hospitalization, he did not notify a BSC administrator before admitting himself to the hospital. Moreover, Nazay had mistakenly retained his outdated Blue Cross card that did not contain the certification requirements; thus, when he gave this outdated card to the hospital employees upon his arrival, they were not alerted to contact a BSC administrator. Further, neither Nazay, his doctor, a family member nor a hospital staff employee notified or attempted to notify BSC of Nazay's hospitalization during his stay. Indeed, Nazay admits that he did not think about the certification requirements until he received his bill.

BSC's certification procedure requires that either the participant, his doctor, the hospital or a family member contact a "health benefits coordinator" and provide information concerning the proposed medical care prior to the participant's admission to a hospital. This policy enables the administrator to review the merits of the proposed hospitalization and to discuss alternatives to hospitalization with the participant. Importantly, it also permits the patient and provider to ascertain how much of the proposed hospitalization will be reimbursed. Where the hospitalization is deemed necessary, 100% of the expenses will be reimbursed; if the hospitalization is deemed unnecessary, the provider will grant no reimbursement. If the participant does not obtain certification, a penalty, which was 30% of the otherwise covered expenses at the time of Nazay's hospitalization, is imposed. The Plan, however, contains a proviso which permits certification to take place within 48 hours of hospitalization when the patient is admitted on an emergency basis. ² While the Plan refers to certification in advance of admission as precertification and certification following an emergency admission as simply certification, as a matter of convenience we will refer to both procedures as certification.

BSC instituted the certification requirement in February 1984, in an effort to reduce unnecessary hospitalizations and to ensure that there would be informed decisions concerning hospitalization. Although the Plan administrator forgave the 30% penalty (by waiving the certification requirement) incurred by participants for a break-in period of approximately one year, the administrator has enforced the certification requirement and imposed the penalty consistently since 1985. Notably, the administrator has waived the certification requirement in only 14 cases since 1985, each of which involved extraordinary circumstances where compliance with the requirement was virtually impossible.

On the basis of Nazay's non-compliance with the Plan's procedure, he was billed $2,231.51 by Blue Cross reflecting the 30% penalty. ³ In response, Nazay wrote to Miller, a benefits administrator, on November 17, 1989, and requested, for the first time, that he waive the certification requirement. In a letter dated February 12, 1990, the assistant secretary of the board replied to Nazay's letter and denied a waiver on the ground that the Plan required a 30% reduction for hospitalization not properly certified. In the assistant secretary's words, "we are bound by the contract language and cannot, therefore, rescind the penalty imposed by Blue Cross for this service." Id.

On February 28, 1990, Nazay appealed from the assistant secretary's decision but on June 20, 1990, Dopera, the secretary of the insurance board, affirmed the assistant secretary's determination, holding that a complete review provided no basis on which to waive the certification requirement. ⁴ On July 3, 1990, Nazay's counsel submitted a further appeal on his behalf but by letter of August 9, 1990, Dopera again denied Nazay's request to waive the certification requirement.

Following his unsuccessful appeals within BSC, Nazay commenced this action on August 23, 1990, in a Pennsylvania state court, alleging that appellants violated 29 U.S.C. § 1132(a)(1)(B) ⁵ by denying him health benefits to which he was entitled under the Plan. Appellants filed a petition to remove the case to the United States District Court for the Middle District of Pennsylvania on September 10, 1990, pursuant to 28 U.S.C. § 1441(b), asserting that the district court had jurisdiction under 29 U.S.C. §§ 1132(e)(1) and (2).

In his argument to the district court on cross-motions for summary judgment, Nazay claimed that appellants violated ERISA in two respects: first, BSC unlawfully included a penalty provision in the Plan for failure to comply with its certification requirements; second, Miller and/or Dopera unjustifiably refused to waive the penalty imposed upon Nazay when he did not certify according to the terms of the Plan. ⁶ Nazay argued that this case was governed by Northeast Dept. ILGWU Health and Welfare Fund v. Teamsters Local Union No. 229 Welfare Fund, 764 F.2d at 147, which held, inter alia, that the incorporation of an "escape" clause by trustees of a multi-employer health benefit plan governed by ERISA constituted arbitrary and capricious conduct as a matter of law. He contended that the inclusion of a penalty provision by BSC, the employer, for the failure to properly certify similarly constitutes arbitrary and capricious conduct in violation of ERISA. ⁷

The district court accepted Nazay's argument and took the opportunity to create a far-reaching rule concerning judicial review of benefit plans. It analogized the certification requirement to notice provisions in liability insurance policies, which Pennsylvania state courts have refused to enforce absent a showing of prejudice to the insurance carrier by reason of non-compliance with the notice provisions. In the same way, the district court declined to enforce the certification requirement in this case because it believed there was no prejudice to the Plan from Nazay's failure to obtain certification. It held that its "rule requiring prejudice before benefits can be...