Fink v. Dakotacare: Who Pays Damages When COBRA Is Improperly Denied?

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Fink v. Dakotacare: Who Pays Damages When COBRA Is Improperly Denied?
April 10, 2003 Santa Rosa, CA
This recent opinion from the Eighth Circuit Court of Appeals illustrates the risk an employer takes when it relies on its TPA or carrier to collect COBRA premiums. It also points up how important clear communication is when an employer switches group health plans. Although the facts of this case are a bit confusing, the bottom line is simple enough: The employer, the TPA, and the carrier may all turn out to be liable to some degree for damages because they did not properly apply a premium payment and denied COBRA coverage to a qualified beneficiary. On appeal, the court ordered a trial to determine the amount of medical expenses incurred by the dependent of a former employee, and how to apportion liability. The parties: The appeals court noted that "all three defendants are potentially liable" because they each owed a duty to properly administer COBRA under the federal law, ERISA. The qualified beneficiary in this case sued three entities: her former employer, Platte Community Memorial Hospital; the employer's third party administrator, Dakotacare Administrative Services (DAS); and the group health plan carrier, Dakotacare. Dakotacare contracted with Platte to provide group health care to its employees; DAS agreed to administer coverage for Platte's qualified beneficiaries and to receive and appropriately distribute payments from qualified beneficiaries to the applicable health plan. How did the employer end up in court? Margaret Fink, a former employee of Platte Community Memorial Hospital, elected COBRA coverage for herself and her daughter, Sarah, a 24-year-old college student. Both were covered under COBRA by Platte's group health provider, Dakotacare, as of February 1, 1997. Platte switches group health plans: In November 1997, Platte decided to switch group health providers from Dakotacare to Lincoln Mutual Insurance, effective January 1, 1998. Although Platte sent Margaret a letter informing her of the impending switch, there was a dispute as to whether that letter also informed Margaret that she was required to switch to Lincoln Mutual if she wished to continue COBRA coverage. Neither party retained a copy of the letter. [Note: This points up the importance of keeping accurate records of all COBRA-related matters.] The qualified beneficiary pays premium to old carrier: On December 23, 1997, Margaret informed Platte that she did not want coverage under Lincoln Mutual because she was going to obtain health coverage with a new employer. But a few days later, Margaret's daughter, Sarah, became hospitalized for treatment of a schizo-affective disorder, and on December 29, Margaret paid the COBRA premium for January 1998 with a check payable to Dakotacare COBRA Services, enclosing the appropriate payment voucher. She testified that she paid this premium to ensure there would be no gap in her family's health insurance coverage because she didn't know when she would be covered by her new employer's plan, or when Platte's switch to Lincoln Mutual would take effect. Carrier confirms, then refuses coverage: Early in January, Dakotacare repeatedly assured Margaret that Sarah's treatment was covered under her COBRA plan. But on January 20, the carrier told her that COBRA coverage was terminated retroactively to January 1, and refunded her premium payment after first cashing her check. Margaret was informed that she would be billed for all of Sarah's medical expenses between January 1 and February 4, when she was discharged from the hospital. Who is liable for Sarah's medical expenses? According to the appeals court, Margaret and Sarah are "legalIy entitled to continuation coverage for January 1998." Margaret made her payment on time, in the right amount, payable to the proper payee, and prior to formally canceling her continuation coverage. The court went on to say: "Sorting out which defendant is liable for the denial of Margaret's continuation coverage in January 1998 may be difficult…[but] it was not Margaret's obligation to learn whether her January 1998 continuation coverage premium should be paid to Dakotacare or Lincoln Mutual." She paid the January 1998 premium in accordance with the plan in effect when the payment was made. Dakotacare and DAS, who were under contract to provide COBRA coverage and administer Platte's plan, were responsible for tendering Margaret's payment to the proper provider, according to the court. Joint liability. It may turn out that Dakotacare was at fault for cashing Margaret's check and assuring her that Sarah's care was covered, then denying coverage retroactively. Or, it may be that DAS, under contract to administer Platte's COBRA plan was responsible for seeing that payment was properly credited and coverage provided. And, as plan administrator, the employer retains liability for everyone's errors! Qualified beneficiaries, however, may look to all the parties for redress when coverage is improperly denied. The appeals court noted that each of these parties, including the employer, owed a legal duty to the Finks to properly maintain Sarah's COBRA coverage, and any one or all of them can be held liable for the damages incurred. Was Sarah entitled to an extension of benefits? To further complicate an already muddy situation, the court stated: "There remains the thorny question whether Sarah was a qualified beneficiary of Margaret's continuation coverage when the psychiatric treatment expenses were incurred." Sarah was under 25 years of age and a full-time student when Margaret elected COBRA coverage under Platte's health plan and, as such, she was entitled to continuation coverage. But she withdrew from school shortly after being hospitalized. According to the court, Sarah's eligibility for COBRA benefits may have ended at that time, or may have been extended due to the occurrence of a second qualifying event. It was undisputed that Platte failed to give Sarah notice of her right to extend COBRA benefits. But Platte claimed it had no duty to extend coverage to Sarah because it was not notified she had quit school. (Under COBRA law, a qualified beneficiary has 60 days in which to tell the employer that a dependent is no longer eligible for benefits under the plan.) Margaret countered that she didn't notify Platte that Sarah was no longer a student because Dakotacare had erroneously informed her during the 60-day period that her group health plan had been terminated. Court orders a trial. Ultimately, the federal district court will decide at trial whether the faulty advice by the carrier excused Margaret's failure to advise Platte of the second qualifying event. If so, then Sarah would be entitled to receive notification of her right to elect extended coverage. The trial court will also have the job of deciding the amount of damages incurred and how to apportion liability between the parties. (Fink v. Dakotacare, Eighth Circuit Court of Appeals, Dkt. No. 02-1679, March 31, 2003.) The Eighth Circuit Court of Appeals covers the following states: Arkansas; Iowa; Minnesota; Missouri; Nebraska; North Dakota; and South Dakota.



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