Atrium Health lawsuit exposes gray legal area, attorneys say
The Supreme Court last year ruled that faith-based hospitals don't have to abide by federal rules that govern the pension plans of private companies. Now, a new lawsuit raises a related question: What about certain not-for-profit health systems?
In the latest case, a group of former Atrium Health employees argue the health system improperly classifies itself as a governmental entity so that its health plan, MedCost, doesn't have to abide by the federal Employee Retirement Income Security Act of 1974, which does not apply to government entities.
As in other prominent cases, in which health systems argued their religious origins qualified them as churches that are exempt from ERISA, attorneys say there's some gray area when it comes to whether certain not-for-profit health systems qualify as government entities.
"It's not always 100% clear whether you are or are not part of that government entity that would be subject—or in this case not subject—to ERISA," said Blake MacKay, a partner with Alston & Bird in Atlanta.
Charlotte, N.C.-based Atrium's former employees, who are seeking class-action status, argue they could be cheated out of pension benefits because Atrium isn't following ERISA requirements for funding their pensions. That shortfall was $379 million at the end of 2017, according to the complaint.
In this case, it's possible the distinction isn't clear. After all, Atrium was established pursuant to state law as the Charlotte-Mecklenburg Hospital Authority.
Atrium, which changed its name from Carolinas HealthCare System in February amid a rebranding, was established by local government more than 75 years ago as the area's hospital authority, Atrium said in a statement.
"A lawsuit was recently filed claiming that Atrium Health is not a governmental entity for purposes of the federal law known as the Employee Retirement Income Security Act (ERISA). They are wrong," the statement said. "Various regulatory agencies have reviewed Atrium Health's governmental status, which stems from our origins as a Hospital Authority."
To argue that Atrium's origins as a hospital authority it as a governmental entity is "probably a stretch," said Paul Keckley, a healthcare industry consultant and managing editor of the Keckley Report. Even as many of those authority health systems were established, they still operated as private, not-for-profit companies, he said. In other words, they didn't receive public funding and instead billed Medicare and commercial health plans.
"To qualify MedCost as a government entity I would think would be kind of a stretch," Keckley said, "but stranger things have happened."
Keckley expects more lawsuits like this one will crop up in the future, given there's roughly 100 provider-sponsored health plans currently operating under joint ownership between one or a few health systems, and they often juggle the question of solvency requirements.
Karen Handorf, partner at Cohen Milstein Sellers & Toll, the firm representing the employees, said the U.S. Department of Labor investigated Atrium's health plan and determined it was not a government plan. She said the department did not take action at the time because the Internal Revenue Service was crafting new regulations that sought to clarify the definition of governmental plans. The IRS has not finalized those regulations, Handorf said.
Atrium representatives did not respond to a request for comment.
In some cases, health systems started out as being operated by the government, but then privatized later on, which Handorf said adds murkiness to the situation, and led to the IRS proposing regulations several years ago.
"The fact is: There must have been some need to clarify and some belief that organizations were improperly claiming the exemption," she said.
Handorf also represented a former Dignity Health employee who sued Dignity because its health plan failed to comply with ERISA.
The U.S. Supreme Court unanimously ruled in June 2017 that faith-based hospitals' pension plans qualify for the so-called "church plan" exemption from ERISA. The sweeping ruling applied to Dignity, Advocate Health Care and St. Peter's Healthcare System in New Brunswick, N.J., all of whom had faced lawsuits from current and former employees on the subject. Three federal appeals courts ruled against Dignity, Advocate and St. Peter's.
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