The Expansion of the CA Mental Health Parity Act's Requirements for Treatment of Eating Disorders

In 1999, the California legislature enacted the California Mental Health Parity Act (“Parity Act”) to remedy what it perceived to be a deficiency in coverage for mental illness on the part of private health insurance policies. Within the broad realm of mental illness, tens of millions of Americans suffer from eating disorders, most notably anorexia nervosa (“anorexia”) and bulimia nervosa (“bulimia”). Recently, insureds prevailed in two decisions regarding health insurance coverage for such eating disorders. In Harlick v. Blue Shield of California, 686 F.3d 699 (9th Cir. 2012), and Rea v. Blue Shield of California, 2014 WL 2584433 (Cal. Ct. App. June 10, 2014), courts found that the Parity Act requires health insurance providers to cover certain services used to treat eating disorders that were excluded from coverage in the insureds' policies. This article summarizes these decisions and discusses the implications for health insurance providers.

The Parity Act

Enacted in 1999, the Parity Act is part of the Knox-Keene Health Care Service Plan Act (“Knox-Keene Act”) found in ” 1340'1399 of the California Health and Safety Code. California first enacted the Knox-Keene Act in 1975 to provide a legal framework for the regulation of California's individual and group health care plans. Located within the Knox-Keene Act, the Parity Act mandates that health care service plans that provide “hospital, medical, or surgical coverage shall provide coverage for the diagnosis and medically necessary treatment of severe mental illnesses.” CAL. HEALTH & SAFETY CODE ' 1374.72(a). The California legislature enacted the Parity Act to address the imbalance between medical coverage for physical and mental illnesses. The legislature found that the majority of “private health insurance policies provide coverage for mental illness at levels far below coverage for other physical illnesses.” 1999 Cal. Legis. Serv. Ch. 534 (A.B. 88), ' 1. As a result of this gap in coverage, the legislature determined that inadequate treatment for mental illness led to “relapse and untold suffering” as well as general increases in crime and homelessness, with an accompanying negative impact on the state budget. Id .

The Parity Act specifically enumerates anorexia and bulimia as severe mental illnesses, and mandates health insurance coverage for these disorders under any plan that also provides hospital, medical or surgical coverage. CAL. HEALTH & SAFETY CODE ' 1374.72(d)(7), (8). Within this list of enumerated mental illness, the “medically necessary treatment” that plans must provide is undefined. The statute does, however, require that plans provide certain benefits, including: 1) outpatient services; 2) inpatient hospital services; 3) partial hospital services; and 4) prescription drugs if the plan includes coverage for such drugs. Id . at (b)(1'4). Notably absent from these enumerated benefits is residential treatment.

As part of the Knox-Keene Act's regulatory scheme, many of its subsections require that insurance plans include basic health care services. The statute specifically defines “basic health care services” as the following: 1) physician services; 2) hospital inpatient and ambulatory care services; 3) laboratory and radiologic services; 4) home health services; 5) preventative health services; 6) emergency health care services to include ambulance services; and 7) hospice care. Id. ' 1345(b). As with the Parity Act, similarly absent from the Knox-Keene's Act enumeration of “basic health care services” is residential treatment.

Harlick v. Blue Shield

In a 2012 decision involving a challenge to an insurer's exclusion of coverage for residential care as part of a treatment plan for anorexia, the Ninth Circuit ruled that even though the specific health care plan did not cover residential treatment, the Parity Act requires health care providers to cover residential treatment for anorexia if medically necessary.

The plaintiff in Harlick suffered from anorexia for over 20 years, and was enrolled in Blue Shield's health insurance plan that was governed by the Employee Retirement Income Security Act (“ERISA”). The plan at issue specifically excluded residential treatment for mental illnesses. However, after the plaintiff spent eight months at a residential treatment center, she filed a claim with Blue Shield to cover those residential treatment costs, which Blue Shield denied.

To establish that Blue Shield ought to have covered her residential treatment, the plaintiff argued that her treatment was medically necessary for two principal reasons. First, her doctors stated that her then-current treatment was insufficient to address her underlying illness. Second, she entered the residential treatment at 65% of her ideal body weight, and consequently needed a feeding tube while there. Blue Shield, in defense, argued that despite the plaintiff's claims, it was not required to cover all medically necessary treatment, especially since the Knox-Keene Act only mandates that health plans cover basic health care services as specifically defined in ' 1345(b). Blue Shield further maintained that the coverage required for mental illnesses under the Parity Act is no greater than that under the Knox-Keene Act for physical illnesses. Importantly, the Knox-Keene Act does not require coverage for all medically necessary treatments, even for physical illnesses.

Ultimately, the court agreed with the plaintiff. It held that insurance plans that fall within the scope of the Parity Act must provide coverage for all medically necessary treatments administered to treat the Parity Act's enumerated severe mental illnesses and that residential treatment for eating disorders was medically necessary. In so holding, it reasoned that subsection (b) of the Parity Act “says that the benefits 'shall include' the four listed treatments, but it does not explicitly say whether that list is exhaustive.” Determining that the list was not limited to the four specific treatments, the court cited favorably to a California Department Managed Health Care regulation implementing the Parity Act stating that the list of benefits was not meant to be exhaustive. Thus, even though the health plan in Harlick excluded residential treatment for eating disorders, the Ninth Circuit read in a requirement to cover such medically necessary treatment.

The court distinguished the Parity Act from the Knox-Keene Act, pointing out that because the Knox-Keene Act requires coverage for all physical illnesses, while the Parity Act only covers severe mental illnesses, “it makes sense that the [Parity] Act requires insurers to cover all medically necessary treatments” even when the Knox-Keene Act does not. Crucial to the court's holding was the distinction that the Parity Act limits insurer liability by only covering enumerated illnesses, while the Knox-Keene Act functions differently and limits insurer liability by limiting the scope of medically necessary treatments. Further, the court rejected Blue Shield's argument that the Knox-Keene Act's coverage for physical illnesses limited the Parity Act's required coverage for mental illnesses because some “medically necessary treatments for severe mental illness have no analogue in treatments for physical illnesses.” Thus, in order to adhere to the Parity Act's purpose, the court held that these plans must provide coverage for all medically necessary treatment for severe mental illnesses, including residential treatment. Even if a plaintiff's plan “does not itself require that [the defendant] pay for residential care,” the court ruled that the Parity Act nonetheless requires that a health insurance plan “'shall provide coverage for the diagnosis and medically necessary treatment' of 'severe mental illnesses.'”

Once making this threshold ruling, the court then turned to the specific question of whether the plaintiff's residential treatment was in fact medically necessary. In resolving this issue, the court endorsed the inherent power of plan administrators to make “the medical necessity determination in the first instance.” It then commented that failing to exercise such power in the first instance, which Blue Shield failed to do given that that the plan expressly did not cover residential treatment, can preclude the insurer from later defending its denial of coverage on the basis of a purported lack of medical necessity. Because Blue Shield never claimed during the administrative process that the treatment was not medically necessary, it waived its ability to subsequently dispute medical necessity in light of the court's holding.

Nevertheless, even if Blue Shield had initially defended its denial of coverage on the grounds that residential treatment was not medically necessary, the court would not have agreed, given the extreme set of facts related to the plaintiff's entry into the treatment center. In sum, the court ruled that anorexia is a severe mental illness and because Blue Shield's plan falls within the scope of the Parity Act, Blue Shield must pay for residential care as a medically necessary treatment.

Rea v. Blue Shield

In 2014, a California appellate court reached a similar result as that in Harlick, explicitly agreeing that health care service providers must provide coverage for residential treatment for eating disorders even where such treatment is not set forth in the plan. The court held that “the language and background of the Parity Act establish that residential treatment for eating disorders must be covered by health care service plans,” even where similar treatment does not exist for physical illnesses. The court concluded that “parity” under the Parity Act requires “treatment of mental illnesses sufficient to reach the same quality of care afforded physical illnesses,” not that the treatments for mental and physical illnesses be identical.

In Rea , the plaintiffs suffered from anorexia and bulimia and were advised by doctors to enter into residential treatment for their eating disorders on the grounds that such treatment was medically necessary. Upon denial of their claims for that treatment ' because their health plans excluded residential care ' the plaintiffs claimed that Blue Shield had violated the Parity Act. In arguing that their treatment should be covered, the plaintiffs relied on Harlick for the proposition that some medically necessary treatments for mental illnesses simply “find no analog” in traditional treatment for physical illnesses.

Blue Shield, meanwhile, emphasized that the statutory language and scheme of both the Parity Act and Knox-Keene Act indicated that the California legislature intended to limit parity in mandated coverage for physical and mental illnesses to basic health services. Any contrary interpretation, it argued, would result in the scope of treatment for mental illnesses far exceeding that of physical illnesses. In Blue Shield's view, the difference in language between subsection (b) of the Parity Act, which states that health plans' benefits “shall include ' ” and that in subsection (c) which, in reference to terms and conditions, contained the phrase “ shall include, but not be limited to” was evidence that the legislature intended for subsection (b) to be an exhaustive list. Noting that the Parity Act is contained within the Knox-Keene Act, Blue Shield further argued that the Knox-Keene Act only requires basic health care service coverage, as defined by ' 1345(b), and if the legislature intended coverage of all medically necessary treatment for mental illnesses, it would have inserted such language into the statute.

The court first explained that while the legislature did not expressly include or exclude residential treatment as a required treatment necessary to achieve parity, it nonetheless recognized the need for flexibility when addressing mental illness care. Rejecting Blue Shield's textual argument about the exhaustive nature of the language used in subsection (b), the court reasoned that the word “'include' is generally used as a word of enlargement and not limitation and that the language of subsections (b) and (c) should not be read as having different meanings.” The implementing regulation also unambiguously stated that mental health services under the Parity Act would not be limited to basic health care services.

From a policy perspective, Blue Shield put forth two arguments: 1) the economic strain an expansive interpretation of “parity” would have on the California health care market; and 2) that from a comparative standpoint, other states with laws analogous to the Parity Act indicate that the legislature could not have intended to require residential treatment coverage for eating disorders. The court disagreed with both policy implications, and ruled that Blue Shield's desired interpretation of the Parity Act “would exclude one of the most effective treatments for anorexia and bulimia [and] one of the primary purposes of the Parity Act [would] be thwarted because victims of eating disorders [would] not receive effective treatment.”

Limits on the Parity Act

Despite these seemingly significant expansions of what health care plans now must cover under the Parity Act, courts have imposed limits on mental health parity acts on sovereign immunity and preemption grounds in certain limited circumstances. In Brazil v. Office of Personnel Management, 2014 WL 1309935 (N.D. Cal. Mar. 28, 2014), the plaintiff, an enrollee in a Federal Employee Health Benefits Act plan (“FEHBA”), sued for relief under the Parity Act after her plan refused to cover her treatment at a residential facility for anorexia. Rather than dispute the medical necessity of the plaintiff's treatment, the defendant raised two constitutional defenses. First, the defendant argued that there was no waiver of sovereign immunity for the plaintiff's suit as Congress had not consented to be sued under the Parity Act. The court agreed, holding that the plaintiff failed to show any explicit waiver by Congress and thus could not challenge the plan as violative of the Parity Act.

Turning to the defendant's second constitutional defense of preemption, the court held that even if sovereign immunity did not deprive it of jurisdiction, FEHBA preempted the Parity Act. In hoping to avoid preemption, the plaintiff argued that the Parity Act was not preempted because of the Harlick decision (issued by a federal court) and because of the similarity between the preemption provisions in ERISA and FEHBA. The court decided that FEHBA contains an express preemption provision that would defeat the plaintiff's claim, indicating that, at least for FEHBA plans, the Parity Act does not control whether an insurer is required to cover residential treatment for mental illnesses. In distinguishing FEHBA and ERISA, the court observed that ERISA's preemption provision included a “savings clause” that serves as an exception to preemption, which is notably absent in FEHBA, and further, Harlick never considered the issue of preemption.

Not only did FEHBA expressly preempt the Parity Act, it also impliedly preempted it. To allow the Parity Act “to dictate the limits of national health plans directly conflicts with Congress' purpose in enacting FEHBA,” Congress enacted FEHBA and included preemption language to ensure uniform benefits and coverage for federal employees and to prevent an increase in costs. The court found it unreasonable to accept the plaintiff's argument since it would “undermine Congressional intent” and would thwart Congress' goals. In a last-ditch attempt, the plaintiff argued that the express preemption provision might be unconstitutional by allowing “contract terms, rather than actual federal laws, to preempt state laws.” Again, this argument failed on the grounds that both the U.S. Supreme Court and the Ninth Circuit did not find the provision to be “constitutionally problematic.” Thus, the court ruled that the Parity Act “does not apply to Plaintiff's benefits because FEHBA preempts it.”

Beyond Harlick and Rea

The issues raised in Harlick and Rea have been litigated in other states and contexts with varying outcomes.

For example, in Hummel v. Ohio Dept. of Job & Family Services, 164 Ohio App. 3d 776, 778 (2005), an Ohio appellate court expanded the scope of coverage under the state-administered Healthy Start Medicaid Program to a type of treatment not covered in the policy but determined to be medically necessary for an enumerated mental illness. The plaintiff in Hummel was diagnosed with autism and received Applied Behavior Analysis (“ABA”) therapy at the recommendation of his doctor, but his state health plan denied his claim, concluding that such therapy was neither medically necessary nor a medical service. The court ruled that the ABA treatment was medically necessary and constituted a medical service such that the plan was required to cover it.

By contrast, in Z.D. ex rel. J.D. v. Group Health Co-op., 2013 WL 1412388 (W.D. Wash. Apr. 8, 2013), the court ruled against the policyholder and in favor of the health insurance provider in limiting the extent of required treatment. There, the plaintiffs ' insureds under the defendant's health insurance plan ' claimed that the defendant violated Washington's Parity Act in capping the number of medically necessary neurodevelopmental therapy visits per year that it would cover for insureds suffering from mental disorders.

Washington's Parity Act requires insurers to cover “medically necessary outpatient and inpatient services provided to treat mental disorders” for “conditions listed in the diagnostic and statistical manual of mental disorders,” an extensive list of mental illnesses. The court distinguished Washington's and California's Parity Acts, emphasizing that California “limits insurer liability by limiting the illnesses to which it applies, not by limiting medically necessary treatments,” whereas Washington requires coverage for a broader range of illnesses but allows limits on medically necessary treatments. California's Parity Act applies to only nine illnesses, while “[i]n clear contrast, Washington's Act requires coverage of treatment for nearly all mental health conditions” listed in the diagnostic and statistical manual of mental disorders but “allows limits on medically necessary treatments if those limits are also applied to treatment for medical and surgical services.” The court then concluded that the health plan's caps on visits did not violate Washington's Parity Act given that the plan applied the exact same cap on the number of treatments to similar therapies for physical health problems.

Implications for Health Insurance Providers

In light of Harlick and Rea, it would not be surprising to see plaintiffs argue that health insurance companies need to cover more than the enumerated mental illnesses as well as medically necessary residential treatment for all of the listed mental illnesses covered by the Parity Act. Such litigation would likely impact the way in which plans and benefits, especially types of treatments and limits on treatments, are written and conveyed to insureds. It remains to be seen whether insurance companies can craft policies in ways to exclude expansive coverage of treatments while still complying with the Parity Act. As Z.D. emphasizes, key to understanding the precise contours of a policy is the statutory language of the controlling parity act at issue.

Conclusion

There are some positive developments for health insurance providers. First, Harlick acknowledged that plan administrators have broad discretion in making the initial determination of whether a treatment is medically necessary. Administrators must exercise this power wisely, as Harlick exposed the pitfalls for a health insurer that fails to carefully review and analyze the medical necessity of submitted claims in advance of litigation. Second, coverage is still “nonetheless limited by the policy limits,” meaning that coverage is limited by the same financial terms and conditions that would apply to coverage for physical illnesses. Accordingly, insurance companies are not susceptible to unlimited financial responsibilities for medically necessary treatments. Third, court decisions have already limited the scope of the Parity Act to state-administered and ERISA policies only. Finally, based on the exacting review of the statutory language in Harlick , Rea and similar cases, insurers can press for legislative reform to limit the types of treatments and severe mental illnesses covered by the Parity Act. Such reform would likely focus on clarifying the language in the statute so as to limit its broad scope.

Chet A. Kronenberg , a member of this newsletter's Board of Editors, is a litigation partner in the Los Angeles office of Simpson Thacher & Bartlett LLP. Tyler Z. Bernstein is a litigation associate in the same office.

In 1999, the California legislature enacted the California Mental Health Parity Act (“Parity Act”) to remedy what it perceived to be a deficiency in coverage for mental illness on the part of private health insurance policies. Within the broad realm of mental illness, tens of millions of Americans suffer from eating disorders, most notably anorexia nervosa (“anorexia”) and bulimia nervosa (“bulimia”). Recently, insureds prevailed in two decisions regarding health insurance coverage for such eating disorders. In Harlick v. Blue Shield of California , 686 F.3d 699 (9th Cir. 2012), and Rea v. Blue Shield of California, 2014 WL 2584433 (Cal. Ct. App. June 10, 2014), courts found that the Parity Act requires health insurance providers to cover certain services used to treat eating disorders that were excluded from coverage in the insureds' policies. This article summarizes these decisions and discusses the implications for health insurance providers.

The Parity Act

Enacted in 1999, the Parity Act is part of the Knox-Keene Health Care Service Plan Act (“Knox-Keene Act”) found in ” 1340'1399 of the California Health and Safety Code. California first enacted the Knox-Keene Act in 1975 to provide a legal framework for the regulation of California's individual and group health care plans. Located within the Knox-Keene Act, the Parity Act mandates that health care service plans that provide “hospital, medical, or surgical coverage shall provide coverage for the diagnosis and medically necessary treatment of severe mental illnesses.” CAL. HEALTH & SAFETY CODE ' 1374.72(a). The California legislature enacted the Parity Act to address the imbalance between medical coverage for physical and mental illnesses. The legislature found that the majority of “private health insurance policies provide coverage for mental illness at levels far below coverage for other physical illnesses.” 1999 Cal. Legis. Serv. Ch. 534 (A.B. 88), ' 1. As a result of this gap in coverage, the legislature determined that inadequate treatment for mental illness led to “relapse and untold suffering” as well as general increases in crime and homelessness, with an accompanying negative impact on the state budget. Id .

The Parity Act specifically enumerates anorexia and bulimia as severe mental illnesses, and mandates health insurance coverage for these disorders under any plan that also provides hospital, medical or surgical coverage. CAL. HEALTH & SAFETY CODE ' 1374.72(d)(7), (8). Within this list of enumerated mental illness, the “medically necessary treatment” that plans must provide is undefined. The statute does, however, require that plans provide certain benefits, including: 1) outpatient services; 2) inpatient hospital services; 3) partial hospital services; and 4) prescription drugs if the plan includes coverage for such drugs. Id . at (b)(1'4). Notably absent from these enumerated benefits is residential treatment.

As part of the Knox-Keene Act's regulatory scheme, many of its subsections require that insurance plans include basic health care services. The statute specifically defines “basic health care services” as the following: 1) physician services; 2) hospital inpatient and ambulatory care services; 3) laboratory and radiologic services; 4) home health services; 5) preventative health services; 6) emergency health care services to include ambulance services; and 7) hospice care. Id. ' 1345(b). As with the Parity Act, similarly absent from the Knox-Keene's Act enumeration of “basic health care services” is residential treatment.

Harlick v. Blue Shield

In a 2012 decision involving a challenge to an insurer's exclusion of coverage for residential care as part of a treatment plan for anorexia, the Ninth Circuit ruled that even though the specific health care plan did not cover residential treatment, the Parity Act requires health care providers to cover residential treatment for anorexia if medically necessary.

The plaintiff in Harlick suffered from anorexia for over 20 years, and was enrolled in Blue Shield's health insurance plan that was governed by the Employee Retirement Income Security Act (“ERISA”). The plan at issue specifically excluded residential treatment for mental illnesses. However, after the plaintiff spent eight months at a residential treatment center, she filed a claim with Blue Shield to cover those residential treatment costs, which Blue Shield denied.

To establish that Blue Shield ought to have covered her residential treatment, the plaintiff argued that her treatment was medically necessary for two principal reasons. First, her doctors stated that her then-current treatment was insufficient to address her underlying illness. Second, she entered the residential treatment at 65% of her ideal body weight, and consequently needed a feeding tube while there. Blue Shield, in defense, argued that despite the plaintiff's claims, it was not required to cover all medically necessary treatment, especially since the Knox-Keene Act only mandates that health plans cover basic health care services as specifically defined in ' 1345(b). Blue Shield further maintained that the coverage required for mental illnesses under the Parity Act is no greater than that under the Knox-Keene Act for physical illnesses. Importantly, the Knox-Keene Act does not require coverage for all medically necessary treatments, even for physical illnesses.

Ultimately, the court agreed with the plaintiff. It held that insurance plans that fall within the scope of the Parity Act must provide coverage for all medically necessary treatments administered to treat the Parity Act's enumerated severe mental illnesses and that residential treatment for eating disorders was medically necessary. In so holding, it reasoned that subsection (b) of the Parity Act “says that the benefits 'shall include' the four listed treatments, but it does not explicitly say whether that list is exhaustive.” Determining that the list was not limited to the four specific treatments, the court cited favorably to a California Department Managed Health Care regulation implementing the Parity Act stating that the list of benefits was not meant to be exhaustive. Thus, even though the health plan in Harlick excluded residential treatment for eating disorders, the Ninth Circuit read in a requirement to cover such medically necessary treatment.

The court distinguished the Parity Act from the Knox-Keene Act, pointing out that because the Knox-Keene Act requires coverage for all physical illnesses, while the Parity Act only covers severe mental illnesses, “it makes sense that the [Parity] Act requires insurers to cover all medically necessary treatments” even when the Knox-Keene Act does not. Crucial to the court's holding was the distinction that the Parity Act limits insurer liability by only covering enumerated illnesses, while the Knox-Keene Act functions differently and limits insurer liability by limiting the scope of medically necessary treatments. Further, the court rejected Blue Shield's argument that the Knox-Keene Act's coverage for physical illnesses limited the Parity Act's required coverage for mental illnesses because some “medically necessary treatments for severe mental illness have no analogue in treatments for physical illnesses.” Thus, in order to adhere to the Parity Act's purpose, the court held that these plans must provide coverage for all medically necessary treatment for severe mental illnesses, including residential treatment. Even if a plaintiff's plan “does not itself require that [the defendant] pay for residential care,” the court ruled that the Parity Act nonetheless requires that a health insurance plan “'shall provide coverage for the diagnosis and medically necessary treatment' of 'severe mental illnesses.'”

Once making this threshold ruling, the court then turned to the specific question of whether the plaintiff's residential treatment was in fact medically necessary. In resolving this issue, the court endorsed the inherent power of plan administrators to make “the medical necessity determination in the first instance.” It then commented that failing to exercise such power in the first instance, which Blue Shield failed to do given that that the plan expressly did not cover residential treatment, can preclude the insurer from later defending its denial of coverage on the basis of a purported lack of medical necessity. Because Blue Shield never claimed during the administrative process that the treatment was not medically necessary, it waived its ability to subsequently dispute medical necessity in light of the court's holding.

Nevertheless, even if Blue Shield had initially defended its denial of coverage on the grounds that residential treatment was not medically necessary, the court would not have agreed, given the extreme set of facts related to the plaintiff's entry into the treatment center. In sum, the court ruled that anorexia is a severe mental illness and because Blue Shield's plan falls within the scope of the Parity Act, Blue Shield must pay for residential care as a medically necessary treatment.

Rea v. Blue Shield

In 2014, a California appellate court reached a similar result as that in Harlick, explicitly agreeing that health care service providers must provide coverage for residential treatment for eating disorders even where such treatment is not set forth in the plan. The court held that “the language and background of the Parity Act establish that residential treatment for eating disorders must be covered by health care service plans,” even where similar treatment does not exist for physical illnesses. The court concluded that “parity” under the Parity Act requires “treatment of mental illnesses sufficient to reach the same quality of care afforded physical illnesses,” not that the treatments for mental and physical illnesses be identical.

In Rea , the plaintiffs suffered from anorexia and bulimia and were advised by doctors to enter into residential treatment for their eating disorders on the grounds that such treatment was medically necessary. Upon denial of their claims for that treatment ' because their health plans excluded residential care ' the plaintiffs claimed that Blue Shield had violated the Parity Act. In arguing that their treatment should be covered, the plaintiffs relied on Harlick for the proposition that some medically necessary treatments for mental illnesses simply “find no analog” in traditional treatment for physical illnesses.

Blue Shield, meanwhile, emphasized that the statutory language and scheme of both the Parity Act and Knox-Keene Act indicated that the California legislature intended to limit parity in mandated coverage for physical and mental illnesses to basic health services. Any contrary interpretation, it argued, would result in the scope of treatment for mental illnesses far exceeding that of physical illnesses. In Blue Shield's view, the difference in language between subsection (b) of the Parity Act, which states that health plans' benefits “shall include ' ” and that in subsection (c) which, in reference to terms and conditions, contained the phrase “ shall include, but not be limited to” was evidence that the legislature intended for subsection (b) to be an exhaustive list. Noting that the Parity Act is contained within the Knox-Keene Act, Blue Shield further argued that the Knox-Keene Act only requires basic health care service coverage, as defined by ' 1345(b), and if the legislature intended coverage of all medically necessary treatment for mental illnesses, it would have inserted such language into the statute.

The court first explained that while the legislature did not expressly include or exclude residential treatment as a required treatment necessary to achieve parity, it nonetheless recognized the need for flexibility when addressing mental illness care. Rejecting Blue Shield's textual argument about the exhaustive nature of the language used in subsection (b), the court reasoned that the word “'include' is generally used as a word of enlargement and not limitation and that the language of subsections (b) and (c) should not be read as having different meanings.” The implementing regulation also unambiguously stated that mental health services under the Parity Act would not be limited to basic health care services.

From a policy perspective, Blue Shield put forth two arguments: 1) the economic strain an expansive interpretation of “parity” would have on the California health care market; and 2) that from a comparative standpoint, other states with laws analogous to the Parity Act indicate that the legislature could not have intended to require residential treatment coverage for eating disorders. The court disagreed with both policy implications, and ruled that Blue Shield's desired interpretation of the Parity Act “would exclude one of the most effective treatments for anorexia and bulimia [and] one of the primary purposes of the Parity Act [would] be thwarted because victims of eating disorders [would] not receive effective treatment.”

Limits on the Parity Act

Despite these seemingly significant expansions of what health care plans now must cover under the Parity Act, courts have imposed limits on mental health parity acts on sovereign immunity and preemption grounds in certain limited circumstances. In Brazil v. Office of Personnel Management, 2014 WL 1309935 (N.D. Cal. Mar. 28, 2014), the plaintiff, an enrollee in a Federal Employee Health Benefits Act plan (“FEHBA”), sued for relief under the Parity Act after her plan refused to cover her treatment at a residential facility for anorexia. Rather than dispute the medical necessity of the plaintiff's treatment, the defendant raised two constitutional defenses. First, the defendant argued that there was no waiver of sovereign immunity for the plaintiff's suit as Congress had not consented to be sued under the Parity Act. The court agreed, holding that the plaintiff failed to show any explicit waiver by Congress and thus could not challenge the plan as violative of the Parity Act.

Turning to the defendant's second constitutional defense of preemption, the court held that even if sovereign immunity did not deprive it of jurisdiction, FEHBA preempted the Parity Act. In hoping to avoid preemption, the plaintiff argued that the Parity Act was not preempted because of the Harlick decision (issued by a federal court) and because of the similarity between the preemption provisions in ERISA and FEHBA. The court decided that FEHBA contains an express preemption provision that would defeat the plaintiff's claim, indicating that, at least for FEHBA plans, the Parity Act does not control whether an insurer is required to cover residential treatment for mental illnesses. In distinguishing FEHBA and ERISA, the court observed that ERISA's preemption provision included a “savings clause” that serves as an exception to preemption, which is notably absent in FEHBA, and further, Harlick never considered the issue of preemption.

Not only did FEHBA expressly preempt the Parity Act, it also impliedly preempted it. To allow the Parity Act “to dictate the limits of national health plans directly conflicts with Congress' purpose in enacting FEHBA,” Congress enacted FEHBA and included preemption language to ensure uniform benefits and coverage for federal employees and to prevent an increase in costs. The court found it unreasonable to accept the plaintiff's argument since it would “undermine Congressional intent” and would thwart Congress' goals. In a last-ditch attempt, the plaintiff argued that the express preemption provision might be unconstitutional by allowing “contract terms, rather than actual federal laws, to preempt state laws.” Again, this argument failed on the grounds that both the U.S. Supreme Court and the Ninth Circuit did not find the provision to be “constitutionally problematic.” Thus, the court ruled that the Parity Act “does not apply to Plaintiff's benefits because FEHBA preempts it.”

Beyond Harlick and Rea

The issues raised in Harlick and Rea have been litigated in other states and contexts with varying outcomes.

For example, in Hummel v. Ohio Dep t. of Job & Family Services , 164 Ohio App. 3d 776, 778 (2005), an Ohio appellate court expanded the scope of coverage under the state-administered Healthy Start Medicaid Program to a type of treatment not covered in the policy but determined to be medically necessary for an enumerated mental illness. The plaintiff in Hummel was diagnosed with autism and received Applied Behavior Analysis (“ABA”) therapy at the recommendation of his doctor, but his state health plan denied his claim, concluding that such therapy was neither medically necessary nor a medical service. The court ruled that the ABA treatment was medically necessary and constituted a medical service such that the plan was required to cover it.

By contrast, in Z.D. ex rel. J.D. v. Group Health Co-op., 2013 WL 1412388 (W.D. Wash. Apr. 8, 2013), the court ruled against the policyholder and in favor of the health insurance provider in limiting the extent of required treatment. There, the plaintiffs ' insureds under the defendant's health insurance plan ' claimed that the defendant violated Washington's Parity Act in capping the number of medically necessary neurodevelopmental therapy visits per year that it would cover for insureds suffering from mental disorders.

Washington's Parity Act requires insurers to cover “medically necessary outpatient and inpatient services provided to treat mental disorders” for “conditions listed in the diagnostic and statistical manual of mental disorders,” an extensive list of mental illnesses. The court distinguished Washington's and California's Parity Acts, emphasizing that California “limits insurer liability by limiting the illnesses to which it applies, not by limiting medically necessary treatments,” whereas Washington requires coverage for a broader range of illnesses but allows limits on medically necessary treatments. California's Parity Act applies to only nine illnesses, while “[i]n clear contrast, Washington's Act requires coverage of treatment for nearly all mental health conditions” listed in the diagnostic and statistical manual of mental disorders but “allows limits on medically necessary treatments if those limits are also applied to treatment for medical and surgical services.” The court then concluded that the health plan's caps on visits did not violate Washington's Parity Act given that the plan applied the exact same cap on the number of treatments to similar therapies for physical health problems.

Implications for Health Insurance Providers

In light of Harlick and Rea, it would not be surprising to see plaintiffs argue that health insurance companies need to cover more than the enumerated mental illnesses as well as medically necessary residential treatment for all of the listed mental illnesses covered by the Parity Act. Such litigation would likely impact the way in which plans and benefits, especially types of treatments and limits on treatments, are written and conveyed to insureds. It remains to be seen whether insurance companies can craft policies in ways to exclude expansive coverage of treatments while still complying with the Parity Act. As Z.D. emphasizes, key to understanding the precise contours of a policy is the statutory language of the controlling parity act at issue.

Conclusion

There are some positive developments for health insurance providers. First, Harlick acknowledged that plan administrators have broad discretion in making the initial determination of whether a treatment is medically necessary. Administrators must exercise this power wisely, as Harlick exposed the pitfalls for a health insurer that fails to carefully review and analyze the medical necessity of submitted claims in advance of litigation. Second, coverage is still “nonetheless limited by the policy limits,” meaning that coverage is limited by the same financial terms and conditions that would apply to coverage for physical illnesses. Accordingly, insurance companies are not susceptible to unlimited financial responsibilities for medically necessary treatments. Third, court decisions have already limited the scope of the Parity Act to state-administered and ERISA policies only. Finally, based on the exacting review of the statutory language in Harlick , Rea and similar cases, insurers can press for legislative reform to limit the types of treatments and severe mental illnesses covered by the Parity Act. Such reform would likely focus on clarifying the language in the statute so as to limit its broad scope.

Chet A. Kronenberg , a member of this newsletter's Board of Editors, is a litigation partner in the Los Angeles office of Simpson Thacher & Bartlett LLP. Tyler Z. Bernstein is a litigation associate in the same office.