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'New News' From The Labor Department: Increased Enforcement Activity Presents New Compliance Challenges

January 1999

Co-Authors: Thomas P. Gies and Kris D. Meade.

Other things are going on here in Washington these days that have nothing to do with Monica Lewinsky. Really. An example is a series of regulatory initiatives announced by the Department of Labor during the last three months. These initiatives reflect DOL's increasingly aggressive enforcement posture. They are likely to result in increased compliance costs and greater potential legal exposure for many employers. On the assumption that many of our readers would appreciate some advance warning of these developments, and as modest confirmation of the fact that other government business is being conducted, we thought it would be useful to summarize four of these more important efforts.

1. The Backlash Against Managed Care-New DOL Regulation of Employer-Sponsored Health Plans

DOL's authority under the Employee Retirement Security Act of 1974 (ERISA) includes responsibility for regulating most employee benefit plans maintained by U.S. corporations. In September of last year, DOL issued proposed regulations that would rewrite the agency's current rules for benefit claims procedures for group health plans. Among other things, the proposed regulations would shorten the time periods in which plan administrators must process benefit claims. See 63 Fed. Reg. 48390 (September 8, 1998).

The proposed regulations revise significantly the DOL claims procedure regulations first implemented in 1977. See 29 C.F.R. '2560.503-1. Many of the concepts in the proposed regulations derive from the Administration's "Patients' Bill of Rights" initiative, which was introduced in the 105th Congress and which will be a major priority of the Administration in the new Congress. The proposed regulations are thus another entry in the current public debate concerning the cost and availability of health care provided by managed care plans.

The proposed regulations would require group health plan administrators to notify participants of their initial decision concerning a benefit claim within 15 days of the filing of the claim. In cases involving an urgent need for medical treatment, this notice must be made within 72 hours. The proposed regulations also impose an abbreviated deadline (a reasonable period of time not to exceed 5 days) for notice from the plan administrator in cases where a claim does not comply with the plan's claims procedures. In that event, the participant would be afforded an additional 45 days in which to provide the information necessary to complete the claim application. In cases involving urgent care, this notice must be provided within 24 hours.

The proposed regulations make significant changes in procedures following denial of a claim. DOL adopts the notion of an "adverse benefit determination" (ABD) to replace the reference to a "claim denial" in the current regulations, stating that this broader concept is appropriate to insure that the new deadlines apply to decisions as to access to medical care (such as precertification determinations) that are made in connection with the administration of most managed care health plans, as well as to requests for payment for medical services already rendered. The proposed regulations also provide participants with significant new rights to information from the plan in connection with an appeal of an ABD.

The proposed regulations include several measures intended to make sure that a participant gets a "full and fair" review of an ABD. All appeals are be decided by an appropriate named fiduciary, who is neither the person who made the ABD nor her subordinate. Where a claim has been denied on the basis of a medical judgment, the plan administrator must consult with a health care professional who must be independent of any health care professional involved in the initial ABD. Appeals from an ABD must be reviewed by the plan administrator on a de novo basis, and must consider whatever new information is provided by the claimant, or his representative, in addition to the information used to make the initial decision. Under the proposed regulations, a request for review of an ABD may be filed within 180 days of the determination, compared to 60 days under the current rules. Group health plan administrators must decide an appeal within 30 days of receipt, or within 72 hours in urgent care cases. The proposed regulations provide that a plan's failure to comply with these new procedures will mean that the participant will be deemed to have satisfied the exhaustion of remedies provision of Section 503 of ERISA, permitting the participant to proceed directly to court to challenge a claim denial, under Section 502 of ERISA.

The proposed regulations have been widely criticized. In total, more than 600 comments were received from employers, plan sponsors and other interested parties. Two major industry groups asked that the regulations be withdrawn in their entirety. Many commentators believe that the new deadlines would be expensive and disruptive; others contend the new appeal procedures exceed DOL's regulatory authority by effectively requiring plans to provide external review of claims decisions. In response to this criticism, DOL has announced it will hold a public hearing on the proposed regulations. The hearing will take place here in Washington, beginning February 17. In announcing the hearing, DOL reiterated its intention to issue final regulations by the end of March.

In another foray into the politics of managed care, DOL has filed an amicus brief in an ERISA case currently pending before the Supreme Court. UNUM Life Insurance Co. of America v. Ward, 135 F.3d 1276 (9th Cir.), cert. granted, No. 97-1868 (Oct. 5, 1998) 67 U.S.L.W. 3229. In Ward, the Court is presented with the question whether a state tort law rule requiring actual prejudice to an insurance company before a late-filed claim for benefits will be dismissed, is applicable in a claim for benefits filed under an insured ERISA plan. The Ninth Circuit held that ERISA did not preempt the California "notice/prejudice" rule. The DOL's amicus brief in Ward argues that the California rule is saved from ERISA preemption as part of a state law regulating insurance within the meaning of Section 514(b)(2) of ERISA. Industry critics argue that DOL's position in Ward is an abrupt departure from the agency's historical position in ERISA preemption cases. Critics also fear that an affirmance in Ward could open the door to importation of other state court tort rules in ERISA actions, including the right to sue for tort damages.

2. OFCCP Enforcement

Employers that do business with the government have come to know that DOL's Office of Federal Contract Compliance Programs (OFCCP) takes its mission very seriously. In our experience, this dedication is most evident in OFCCP's conduct of so-called "glass ceiling audits," in which the agency reviews contractor affirmative action measures to make sure the employer has not imposed any artificial and improper impediments to the advancement of women and minorities to the executive suite, and in its recent emphasis on compensation disparities. The agency has publicly announced that it will conduct approximately 40 glass ceiling audits in fiscal year 1999, targeting corporate headquarters of Fortune 1000 companies employing 4,000 or more employees. At the same time, the agency continues to obtain six- and seven-figure settlements based on alleged discrimination in compensation, the most recent of which was a $3.1 million settlement obtained from Texaco in the first week of January.

The Administration is also planning significant extensions in OFCCP's jurisdiction. Last month, the agency issued proposed revisions to its inter-agency memorandum with the Equal Employment Opportunity Commission (EEOC). See 63 Fed. Reg. 68764 (December 14, 1998). The proposed revisions will authorize OFCCP to assume responsibility for investigating claims of employment discrimination filed against government contractors under Title VII of the Civil Rights Act of 1964, as amended. The proposed revisions will likewise permit OFCCP to seek Title VII remedies in its efforts to conciliate alleged violations and will vest OFCCP with authority to investigate and resolve allegations of systemic or class-wide discrimination on the basis of race, color, religion, sex or national origin. No employer in the contracting community who has dealt with both agencies is likely to prefer dealing with OFCCP on such matters.

Finally, it appears that OFCCP will be even more aggressive in the way in which it obtains an employer's confidential and proprietary compensation data. In years past, OFCCP auditors typically sought compensation data only during the on-site phase of a compliance review. Recognizing the confidential nature of such information, OFCCP auditors frequently agreed not to take compensation data off-site. This arrangement provided comfort to contractors wary of the agency's ability to shield such data from Freedom of Information Act requests. Through a notice dated December 22, 1998, the agency has announced that it is seeking Office of Management and Budget (OMB) approval to require contractors to submit a "current employee roster," including the current annual salary of each employee, prior to the on-site phase of a compliance review. If OMB approves the agency's request, contractors will no longer retain control over their compensation data and, instead, will be required to submit such information to OFCCP within 30 days of receiving notice of a compliance review.

3. HIPAA Enforcement Activity

DOL has announced that the agency will soon begin "serious" enforcement of The Health Insurance Portability and Accountability Act of 1996 (HIPAA) during 1999. HIPAA established standards applicable to all group health plans and health insurance issuers (including insurance companies and HMOs) in a number of areas, including: limiting exclusions for preexisting medical conditions, broadening and clarifying participants' COBRA rights, establishing a system for crediting prior health coverage and certification of such coverage, and prohibiting discrimination based on health status in enrollment and eligibility for benefit coverage. The primary goal of HIPAA is to make easier for those who remain continuously covered under employer-sponsored health plans to change jobs without having to satisfy new eligibility requirements.

DOL and other government regulators have announced their intention to issue regulations implementing the non-discrimination provisions of HIPPA. See ERISA Section 702, 29 U.S.C. '1172. That provision broadly prohibits group health plans or health insurance issues from discriminating in eligibility or enrollment against an individual on the basis of a number of enumerated health status-related factors. These include: health status, medical condition, claims experience, receipt of health care, medical history, genetic information, evidence of insurability, or disability. At the same time, Section 702 does not prevent a group health plan from offering a premium discount, rebate, or modification of copayments or deductibles in return for an individual's participation in a bona fide wellness program. Under the interim HIPAA rules issued in April of 1997, Section 702 also does not require plans or insurance issues to provide any particular benefits under the plan. See 62 Fed. Reg. 16941, 16952 (April 8, 1997). The interim rules similarly do not prevent a plan from establishing limitations or restrictions on the amount, level, extent or nature of the benefits or coverage for "similarly situated enrolled individuals." DOL officials promise that the new regulations will attempt to provide guidance to employers and plan administrators concerning numerous enforcement issues not specifically addressed in the text of HIPAA.

4. The Contingent Workforce - Employee Classification Issues

Current Labor Secretary Alexis Herman has adopted her predecessor's antipathy towards the increased use by employers of outsourcing and other non-traditional forms of staffing as a way of controlling costs. DOL has decided that ERISA precludes the use of some of these strategies.

A leading example is a lawsuit brought by DOL in October of last year against Time-Warner. The suit alleges numerous violations of ERISA in the way Time classified certain individuals as independent contractors, or as temporary employees ineligible for participation in various employee benefit plans maintained by the company. The complaint asserts that individuals were wrongfully denied coverage under Times benefit plans, and seeks appointment of an independent fiduciary to audit Time-Warner's classification of workers. The company has strongly denied the allegation, calling the complaint a "classic example of bureaucratic overreaching and posturing."

Among the remedies sought in the DOL complaint is retroactive coverage in the company's benefit plans. The potential cost of that remedy, particularly in a rising stock market, was one of the principal reasons for the wave of publicity surrounding a private plaintiff case brought two years ago on similar legal theories against Microsoft. The DOL complaint against Time-Warner is also significant in that it represents the first time the government has interpreted ERISA as permitting the government to bring a lawsuit under Section 502(a)(1)(B) of ERISA, seeking to recover benefits under the terms of a plan. Secretary Herman's press conference announcing the filing left little doubt that DOL intends to be aggressive in invoking ERISA in cases where the agency believes workers have been misclassified as independent contractors or temporary employees.

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There will be no predictions from this corner concerning the ultimate fate of these efforts. DOL officials have been candid in saying that the proposed claims procedure rules are an attempt to implement aspects of the "Patients' Bill of Rights" initiative in a way that does not require Congressional approval. Managed care and affirmative action are likely to be two of the hottest political issues in Washington later this year. The agency's involvement in both of them suggests that 1999 will be a busy year at DOL. More (rather than less) regulation in these areas is almost a certainty. Please stay tuned.

Thomas P. Gies
Partner – Washington, D.C.
Phone: +1.202.624.2690

Kris D. Meade
Partner – Washington, D.C.
Phone: +1.202.624.2854