Health insurance: The coverage for prosthetics in group health plans

How the Ninth Circuit, in Garcia v. Pacificare, gutted California Health & Safety Code section 1367.18 — and how you can fix it

2015 August

California Health & Safety Code section 1367.18 regulates the terms of coverage for prosthetic devices in group health plans. It does not require that plans provide such coverage unless the employer who purchases the plan agrees to include it. But if the coverage is purchased, the statute is very specific about what the coverage must include. It says that all medically necessary devices must be covered, “as prescribed by a physician,” and that the coverage must be provided without any special deductibles, co-pays, or other provisions. Yet, in Garcia v. Pacificare of Cal., Inc. (9th Cir. 2014) 750 F.3d 1113, the Ninth Circuit functionally gutted the statute, holding that it allowed insurers to categorically bar coverage for any type of exclusion they wanted to include in their plans, regardless of whether it was medically necessary.

Because most people get their health coverage through their employer, their claims will be governed by ERISA and the Garcia decision will control. But claims under group plans that are not subject to ERISA – mostly plans issued by governmental entities and religious organizations – can still be litigated in state court. This article will explain why the Garcia decision was wrongly decided, and provide a template for the arguments to convince the California courts not to follow it. It is the author’s hope that members of Advocate’s audience will pursue these state-court claims under section 1367.18 until the California Supreme Court agrees to interpret the statute and restore the full coverage for prosthetic devices that the California Legislature plainly intended when it enacted and amended the statute.

Mandates to cover versus mandates to offer

When legislatures want to require health plans or health insurers to provide a certain type of benefit to all their insureds, they enact a “mandated benefit” statute. In general, there are two species of mandated-benefit statutes, mandates to “offer” certain types of coverage, and mandates to “cover” certain kinds of illnesses or treatments.

The former generally requires the insurer only to “offer” some form of the specified coverage when the policy is purchased, leaving the terms and conditions of the coverage to the parties’ agreement. For example, section 1374.55 requires health plans to “offer coverage for the treatment of infertility . . . under those terms and conditions as may be agreed by the group subscriber and the plan.” This is a mandate to “offer” statute. It does not define the particular benefit for infertility treatment that plans must provide.

Hence, in Yeager v. Blue Cross of California (2009) 175 Cal.App.4th 1098, 1105, the court rejected a claim by a Blue Cross insured that the $2,000 maximum for infertility treatment was too small to satisfy the statute.

There are a several of these mandated “offer” statutes in the California Health & Safety Code, which regulates HMOs (called health-care service plans in California), including for treatment of alcoholism (§ 1367.2); special footwear for persons suffering from foot disfigurement (§ 1367.19); and acupuncture (§ 1373.10). Each of them directs that a health plan “shall offer coverage ... under such terms and conditions as may be agreed upon ...” by the parties.

By contrast, a mandate to “cover” a certain condition requires the plan to provide specified coverage for a given condition or treatment. For example, all health coverage sold in California must “include coverage for the management and treatment of insulin-using diabetes, non insulin-using diabetes, and gestational diabetes, as medically necessary. (§ 1367.51.)

The Health & Safety Code has quite a few mandated-benefit provisions, which include the treatment of breast cancer; post-mastectomy prosthetic devices and reconstructive surgery; diabetes; pediatric asthma; osteoporosis; surgical procedures on the jaw, congenital birth defects, and mental health care for severe mental illnesses. (§§ 1367.6, 1367.635, 1367.06, 1367.61, 1367.51, 1367.63, 1367.67, 1367.68, 1374.56, 1374.72.)

In addition to statutes that mandate coverage for a given condition or treatment, some statutes also mandate “parity” of benefits. That is, they require the specified coverage to be provided on the same terms as the plan’s coverage for general medical or surgical care, without any special limitations, restrictions, co-payments or deductibles. The Mental Health Parity Act, section 1374.72 includes such a parity provision.

Mandated coverage for prosthetics’ benefits

Now we turn to the mandated coverage for prosthetics’ benefits in California Health & Safety section 1367.18, and the decision in Garcia v. Pacificare gutting that provision. Section 1367.18 of the Health & Safety Code is a hybrid containing elements of all three species of mandated-benefit statutes. Subdivision (a) of the statute requires every plan to “offer” coverage for prosthetics and orthotic devices “under the terms and conditions that may be agreed upon between the group subscriber and the plan.” This is the typical language of mandated-offer statutes.

The statute continues, however, by stating that if the coverage is purchased, “Any coverage for prosthetic devices shall include original and replacement devices, as prescribed by a physician and surgeon . . . .” This subdivision also gives plans the right to conduct utilization review for medical necessity, hence restricting the scope of the mandate to medically necessary devices.

Subdivision (b) of the statute is a parity provision. It says that, notwithstanding subdivision (a), the benefit for prosthetics and orthotics coverage cannot be less than the plan’s annual and lifetime maximum benefits, and that “any copayment, coinsurance, deductible, and maximum out-of-pocket amount applied to the benefit for orthotic and prosthetic devices and services shall be no more than the most common amounts applied to the basic health-care services required to be provided under Section 1367.”

Garcia was an action filed under ERISA by Martha Garcia, challenging an exclusion in her Pacificare (United Healthcare) coverage, which included prosthetics’ coverage. Ms. Garcia contracted bacterial meningitis when she was 11. As a result, both of her forearms were amputated below her elbow, and her lower legs were amputated below her knees. She used conventional lower-extremity prosthetics to walk and myo-electric upper-extremity prosthetics as artificial hands. (A myo-electric device is actuated by the electrical impulses in the user’s remaining limbs.)

The lifespan for myo-electric devices is about three years. Ms. Garcia used her upper-extremity devices for almost ten years, until they simply ceased to function. Then she sought to have her insurer, Pacificare, replace them. Pacificare conceded that the devices prescribed for her by her physician were medically necessary, but it nevertheless refused to provide them because it had included in its plan an exclusion for any prosthetic devices that contain a computer chip, and for any myo-electric devices. (Pacificare/United Health basically agreed to provide the type of prosthetic devices that were the state of the art just after the Civil War.)

Despite the fact that section 1367.18 mandates that, if an employer purchases prosthetics’ coverage, that coverage must include medically necessary original and replacement devices “as prescribed by a physician,” the Ninth Circuit held that Pacificare/United Health could enforce the exclusion in its plan. In effect, the court held that the statute meant that insurers must provide full coverage for all medically necessary prosthetic devices that they choose to pay for.

In essence, the court construed the statute as if it were a bare mandate-to-offer statute, and ignored the mandatory coverage and parity provisions in the statute, rendering them nugatory. The balance of this article explains why that conclusion was wrong, and how to convince a state court construing the statute to construe it correctly.

The proper construction of section 1367.18

In order to properly construe the statute, it is important to understand its evolution. What is now section 1367.18 was originally enacted in 1985 and codified as Health & Safety Code section 1367.4. (The original bill and its later amendments all placed identical requirements concerning orthotics and prosthetics coverage on both health insurers and health-care service plans (HMOs). The provisions dealing with insurers were codified in the Insurance Code, at section 10123.7, and those dealing with health plans were codified in the Health & Safety Code, at section 1367.18.) It read:

Every health care service plan, except a specialized health-care service plan, that covers hospital, medical, or surgical expenses on a group basis shall offer coverage for orthotic and prosthetic devices and services under terms and conditions that may be agreed upon between the group subscriber and the plan. Every plan shall communicate the availability of that coverage to all group contract holders and to all prospective group contract holders with whom they are negotiating.

This provision was recodified as section 1367.18 three years later, without any substantive changes.

The statute was amended in 1991. As relevant here, the 1991 amendments added a third sentence that followed the existing provisions of the statute, which stated, “Any coverage for prosthetic devices shall include original and replacement devices, as prescribed by a physician.” The amendment also added a final sentence, which gave plans the right to conduct utilization review to determine medical necessity before authorizing payment for the devices.

In 2006, the statute was amended again in order to deal with the financial aspects of the required prosthetics coverage. The statute now states, in relevant part:

(a) Every health-care service plan . . . that covers hospital, medical, or surgical expenses on a group basis shall offer coverage for orthotic and prosthetic devices and services under the terms and conditions that may be agreed upon between the group subscriber and the plan. Every plan shall communicate the availability of that coverage to all group contractholders and to all prospective group contractholders with whom they are negotiating. Any coverage for prosthetic devices shall include original and replacement devices, as prescribed by a physician and surgeon or doctor of podiatric medicine acting within the scope of his or her license. . . . Every plan shall have the right to conduct a utilization review to determine medical necessity prior to authorizing these services.

(b) Notwithstanding subdivision (a), on and after July 1, 2007, the amount of the benefit for orthotic and prosthetic devices and services shall be no less than the annual and lifetime benefit maximums applicable to the basic health-care services required to be provided under section 1367. If the contract does not include any annual or lifetime benefit maximums applicable to basic health-care services, the amount of the benefit for orthotic and prosthetic devices and services shall not be subject to an annual or lifetime maximum benefit level. Any copayment, coinsurance, deductible, and maximum out-of-pocket amount applied to the benefit for orthotic and prosthetic devices and services shall be no more than the most common amounts applied to the basic health care services required to be provided under section 1367.

The legislative history of the 1991 and 2006 amendments make the purpose of the amendments clear. Between 1985 and 1999, the prosthetics’ coverage that insurers agreed to provide was quite limited, and was too little to actually pay for prosthetic devices. So, in 1991, the Legislature amended the statute to say that, if prosthetics coverage was purchased, it had to cover all medically necessary original and replacement devices as prescribed by a physician.

The legislative history of the 2006 amendment explains that after the 1991 amendment, insurers responded to the new coverage mandate purporting to “cover” all medically necessary devices, but in practice by shrinking the amount of coverage available by making prosthetic devices subject to special limitations or co-pays. In sum, in 1991 the Legislature told insurers to “cover” all medically necessary prosthetic devices, and in 2006, it told them that “coverage” meant actual coverage, not some artificially capped amount.

Given these provisions, it is difficult to see how an insurer could justify an exclusion for all computer-chip equipped or myo-electric devices. If they were medically necessary, and prescribed by the insured’s physician, the statute says that they must be covered.

But Pacificare/United Health argued, and the Ninth Circuit agreed, that the “terms and conditions” language in subdivision (a) of the statute allowed insurers to include exclusions in the prosthetics’ coverage. That is, they claimed that unless insurers can include whatever exclusions they choose in the prosthetics coverage, the provision in subdivision (a) stating that prosthetics coverage must be offered on terms and conditions agreed to by the plan and the employer would have no meaning.

Flaws in the court’s reasoning

There are at least four flaws in this approach:

First, it ignores the rest of the statute. The “terms and conditions” portion of the statute does not stand alone; it is modified by the sentence that follows it, and that sentence creates a coverage mandate that limits the scope of the terms and conditions that plans and employers are free to negotiate. Stated differently, the statute makes clear that, once an employer agrees to purchase prosthetics coverage, that coverage must include “original and replacement devices, as prescribed by a physician and surgeon” if they are medically necessary.

So the statute does preserve the ability of plans and employers to negotiate some terms and conditions concerning prosthetics coverage – such as its price. But the balance of the statute makes clear that the parties are not free to limit the scope of the coverage in a way that is inconsistent with the statutory mandate.

Second, it construes the statutory mandate as if the Legislature had required coverage for “some” original and replacement devices; not “original and replacement devices as prescribed by a physician. The word “as” in this phrase functions as an adverb that modifies the verb “prescribe.” In this context it means “denoting equality or likeness in kind, degree, or manner; or “in the same manner with” or “in accordance with.” (Webster’s Revised Unabridged Dictionary.) In short, by its terms, the statute says that, irrespective of the terms and conditions agreed to by the plan and the employer, if prosthetics coverage is purchased, it must include coverage for all medically necessary original and replacement devices, in accordance with the physician’s prescription.

Third, the courts in California and the Ninth Circuit have construed a statutory mandate directing plans to provide coverage for medically necessary treatment to extend to all medically necessary treatment, not simply the medically necessary treatments that plans chose to provide. This was the approach taken in Harlick v. Blue Shield of California (9th Cir. 2012) 686 F.3d 699, 721, where the court construed California’s Mental Health Parity Act, Health & Safety Code section 1374.72 (“Act”). That Act requires HMOs to cover medically necessary treatment for severe mental illness. Harlick interpreted the Act’s mandate to provide coverage for “medically necessary treatment” for the specified conditions to require coverage for all medically necessary treatment. The plan was therefore precluded from enforcing a categorical exclusion for residential treatment.

The California Court of Appeal interpreted the Mental Health Parity Act the same way in Rea v. Blue Shield of California (2014) 226 Cal.App.4th 1209, 1231. As in Harlick, the court invalidated an exclusion for residential treatment for anorexia nervosa. The court held that because the act mandates coverage for medically necessary care for various “severe mental illnesses” described in the Act, including anorexia nervosa, the plan was obligated to provide all medically necessary treatment for the specified conditions, and could not include categorical exemptions for certain types of treatment.

Fourth, the Garcia court ignored the specific discussion in the Legislative History of the 2006 amendment. The “terms and conditions” language was actually deleted from the statute in the original version of the 2006 amendment. The trade association for the California health insurers requested that the language be put back in the statute – but not for the purpose that the Garcia court allowed. Instead, the association said that the first sentence of the statute “allows the [prosthetics] benefit to be subject to all other terms and conditions of the contract.” The sole justification that it offered for retaining the language was the need to make it clear that generic contractual limitations – like “copayments” and “coinsurance” – still applied to prosthetics just like all other benefits.

The legislative history and evolution of section 1367.18 show that the Legislature started in 1985 by giving health plans unfettered discretion concerning the terms of prosthetics coverage. Then, in 1991, the Legislature acted to eliminate virtually all of this discretion, by requiring that all medically necessary prosthetics devices would be covered. The HMOs thwarted this amendment by placing new financial restrictions in their plans, which nominally “covered” prosthetic devices, but only provide a fraction of the coverage necessary to pay for one. So in 2006, the Legislature spoke again, telling plans that they had to actually pay for the prosthetic devices that they were required to cover.

In Garcia, the Ninth Circuit functionally nullified the 1991 and 2006 amendments, by construing the “terms and conditions” portion of the statute to allow plans to include categorical exclusions for whichever medically necessary prosthetic devices plan they chose not to pay for. In short, as construed in Garcia, the statute gives health plans exactly the same unfettered discretion that the Legislature systematically removed in 1991 and 2006. Hopefully, the California courts will be more willing than the Ninth Circuit to enforce the Legislature’s mandate and purpose in enacting and amending the statute, which was to ensure that people who require prosthetic devices and who have health insurance will receive coverage for the devices that they need.