I Heard that Insurance Companies are required to pay healthcare providers directly. Is this true?
Yes and No.

An assignment of benefits is exactly what it sounds like. One person – the patient in this scenario — assigns the benefits he or she is entitled to receive to another "person" — the hospital. Absent an assignment of benefits, the patient's insurer would pay him directly so that he could pay the hospital for any covered care he received during his hospitalization. Under an assignment of benefits, the hospital in effect cuts in front of the patient by permission from the patient. The insurer then pays the hospital directly without involving the patient. Problems can and do arise when the insurance policy itself forbids the patient to assign benefits.

In a recent United States 5th Circuit Court of Appeals case, the court reviewed Louisiana's assignment of benefits statute as it relates to insurance carriers. Louisiana Health Service & Indemnity Co. v. Rapides Healthcare System, 2006 WL 2361696 (5th Cir. La.), might be dubbed as the "Clash of the Titans" or the "Battle of the Behemoths." Louisiana Health Service & Indemnity Co. does business as BlueCross BlueShield of Louisiana. For the sake of efficiency, it will be referred to as BlueCross in the rest of this article.

BlueCross had a business practice of allowing assignment of patient benefits only if providers contracted with BlueCross. This would allow the provider to receive direct payment from BlueCross. Otherwise, payment was made to patients and assignment of benefits to a provider was flatly prohibited.

Two Louisiana hospitals — Rapides Healthcare and Dauterive Hospital – terminated their participating provider contracts with BlueCross and demanded direct payment by virtue of a state law. La. R.S. § 40:2010 provides that no insurance company should pay benefits directly to a patient when the patient has assigned those benefits to a hospital which had rendered services to him or her. Instead, the insurer should pay the hospital. Therefore, state law forbade exactly what BlueCross was trying to do. The law went even further by stating that paying the patient directly would not relieve an insurer from having to pay the hospital under a valid assignment of benefits if the insurer had notice of the assignment. The battle lines were drawn, because BlueCross had notice of valid assignments, but refused to pay the hospitals directly for services rendered to its insureds.

The two hospitals complained to the Louisiana Department of Insurance that BlueCross was in violation of the state assignment statute. In response, BlueCross filed suit in federal district court, seeking a declaratory judgment — which is a legal determination of parties' rights and obligations — that the state assignment was preempted by federal law, specifically ERISA. BlueCross named Rapides Healthcare as defendant. Dauterive Hospital intervened in the case as a defendant. At the trial court level, BlueCross admitted that its conduct in prohibiting assignment of patient benefits violated state law, but argued that it was entitled to do so because federal law trumped state law based on ERISA.

The 5th Circuit held that ERISA does not preempt the Louisiana assignment statute. Though the court went to great lengths to explain its reasoning, the bottom line seems to be efficiency and state legislative intent. Paying the hospital directly is efficient and the legislature has blessed the idea by enacting a law mandating that insurers honor assignment of benefits by a patient to a hospital. ERISA's overall goal of protecting individuals in health plans would not be thwarted by allowing benefits to be validly assigned, but would instead be aided by the increased efficiency of the process.

The holding in the BlueCross case only extends to hospitals, not to other types of providers.

The legal healthcare specialists of Gachassin Law Firm in Lafayette provide "Legal Review" content. Gachassin Law Firm attorneys serve diverse healthcare clients throughout Louisiana and Mississippi, covering the wide range of services needed in today's competitive healthcare industry. All content © 2006 Gachassin Law Firm and Louisiana Medical News Partners, LLC, dba Acadiana Medical News. Acadiana Medical News makes no warranties either expressed or implied as to the accuracy to the information contained herein. All information provided herein is general in nature and does not constitute specific legal advice for any specific situation.

December 2006

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