August 1, 2005

COBRA problems can be very expensive for an employer. Just a few days ago, the 5^th Circuit Court of Appeals handed down a decision illustrating this point. In Lifecare Hospitals, Inc. v. Health Plus of Louisiana, Inc., an employer became ensnared in expensive litigation after it failed to provide a timely COBRA election notice to a terminated employee. But for a technicality in the insurance document, the employer would have been responsible for reimbursing the insurance company for $252,000 in medical claims.

In this case, Custom Bilt Cabinet & Supply had established a group health plan with Health Plus of Louisiana. James Sloan, a Custom Bilt employee, became seriously ill and was hospitalized in July of 2001. By the end of July, his condition had stabilized and he was transferred to Lifecare Hospitals, where he remained for several months. Custom Bilt terminated Mr. Sloan in August of 2001. Mr. Sloan’s coverage under the Health Plus plan ended on August 31, 2001. Custom Bilt did not provide written COBRA information to Mr. Sloan or his spouse until the end of November. In December, Mr. Sloan mailed Health Plus his completed COBRA election form along with full payment for premiums for September through December. Lifecare Hospitals then submitted claims for $252,000 in medical services to Health Plus. Health Plus denied the claims, alleging that Mr. Sloan was not covered because he had not made a timely COBRA election.

Lifecare Hospitals sued both Health Plus and Custom Bilt, alleging that Mr. Sloan’s COBRA election was timely and that Health Plus and Custom Bilt were obligated to pay the $252,000 in claims. Health Plus and Custom Bilt filed claims against each other, contending that if one was found liable to Lifecare then it should be indemnified by the other. The district court found that Custom Bilt did not provide a valid COBRA notice until November, and consequently Mr. Sloan’s COBRA election in December was timely. The court ordered Health Plus to pay the claims, and then held that Custom Bilt had to reimburse Health Plus because Custom Bilt had failed to satisfy its duty to properly notify Mr. Sloan of his COBRA rights.

In the appeal, Custom Bilt argued that its delay in providing a COBRA notice to Mr. Sloan did not make Custom Bilt liable to reimburse Health Plus for its payment of the claims. The Court of Appeals agreed. The Court observed that COBRA establishes a minimum election period (60 days) but no maximum. The Court held that Mr. Sloan’s election was timely because the Health Plus plan document failed to set a deadline for making the election. Thus, a technicality allowed Custom Bilt to avoid liability to Health Plus.

This case serves as a reminder that employers must be diligent in complying with COBRA. Employers need to review their group health plans and make sure they understand their COBRA responsibilities. Employers also should be sure they understand their obligations under the Department of Labor’s new COBRA notice regulations—including the obligation to update forms and procedures. Those employers that outsource COBRA administration need to be sure their administrators are following adequate procedures and that service contracts provide adequate protection to the employer. Finally, employers that sponsor self-funded plans should review COBRA provisions of their documents to be sure that notice periods and deadlines are clear and that the language is otherwise up-to-date.

If you have any questions regarding this alert or other Employee Benefits Law related issues, please contact Hugh Davis at 919.783.2908 or hwdavis@poynerspruill.com.