Sprentall v. Beacon Health Options, Inc.

Background

Sarah Sprentall and Barbara Tefft brought a breach-of-contract action against Beacon Health Options, Inc. They sought reimbursement under the Empire Plan’s Mental Health and Substance Abuse Program, which covered mental-health and substance-abuse care for participants in the New York State Health Insurance Program and eligible dependents. The opinion states that Tefft was a retired New York State employee and that Sprentall was Tefft’s eligible dependent. Beacon administered the mental-health and substance-abuse program.

Sprentall received treatment at Heritage Residential Community, a residential treatment center in Provo, Utah, from February 28, 2018, through December 20, 2019. The plaintiffs paid Heritage $263,130.99 and submitted claims for reimbursement. Beacon approved coverage for 151 days and reimbursed $27,983. The plaintiffs alleged that Beacon breached the plan certificate by denying coverage for medically necessary services.

The plan certificate described internal and external appeal procedures for denied coverage. It stated that an insured could request an internal review and, in certain circumstances, could seek external review of a medical-necessity denial. It also stated that lawsuits for benefits could not be started less than 60 days or more than two years after notice that benefits had been denied.

The plaintiffs pursued appeals for some periods of treatment but not all. They alleged that further appeal for the final period would have been futile. Beacon moved to dismiss the amended complaint under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not adequately state a legally valid claim.

Beacon’s Arguments

Beacon argued that the plaintiffs were not in privity of contract with it, meaning that they did not have the required contractual relationship with Beacon to sue it for breach of contract. Beacon also argued that the plaintiffs had not exhausted the plan’s administrative appeals, that they were required to proceed under Article 78 of the New York Civil Practice Law and Rules, and that they had not pleaded the requirements for such an Article 78 proceeding.

Court’s Analysis

Contract relationship. The court rejected dismissal based on the alleged lack of privity. Although the plaintiffs did not dispute that Beacon was not a signatory to the certificate, they argued that Beacon was functionally the party in a contractual relationship with them because it administered the program to which they submitted their claims. Accepting the amended complaint’s allegations as true at this stage, the court credited the allegation that Beacon administered the program. The certificate also identified Beacon, formerly known as ValueOptions, as the program administrator. The court further noted that Beacon had not cited a New York case dismissing a similar breach-of-contract claim brought by a plan participant against a third-party administrator.

Administrative appeals. The court held that the certificate did not require exhaustion of administrative remedies before a plan participant could sue. The certificate used permissive terms, stating that an insured “can request” review and “may appeal” to an external appeal agent. It did not make filing a lawsuit conditional on completing an external appeal. The court therefore declined to add an exhaustion requirement that the certificate did not express.

Article 78. The court also rejected Beacon’s argument that the plaintiffs had to bring their claim under Article 78. Article 78 is a New York procedure generally used to review actions by a state agency or officer. The court concluded that Beacon was a private company and that Article 78 was not the exclusive method for enforcing the plaintiffs’ contract claim against it. The court stated that Beacon had cited no authority establishing that a state employee or retiree’s claim against a third-party plan administrator for denied benefits had to be brought only under Article 78.

Because the court rejected Beacon’s Article 78 argument, it found Beacon’s additional arguments about the pleading requirements for an Article 78 proceeding moot. The court also declined to consider Beacon’s argument that the plaintiffs had not explained why the treatment was medically necessary, because Beacon raised that argument for the first time in its reply brief.

Disposition

The court denied Beacon’s motion to dismiss. The Clerk of Court was directed to terminate the motion. The order allowed the plaintiffs’ breach-of-contract claim to proceed, but it did not decide whether the treatment was medically necessary or whether Beacon ultimately owed the requested reimbursement.