                  HCA HEALTH SERVICES OF GEORGIA, INC., Plaintiff-Appellant,

                                                       v.
                EMPLOYERS HEALTH INSURANCE COMPANY, Defendant-Appellee.

                                                 No. 99-11241.

                                       United States Court of Appeals,

                                               Eleventh Circuit.
                                                 Feb. 2, 2001.

Appeal from the United States District Court for the Northern District of Georgia. (No. 96-03333-1-CV-
CAM), Charles A. Moye, Jr., Judge.
Before TJOFLAT, MARCUS and KRAVITCH, Circuit Judges.

        TJOFLAT, Circuit Judge:

        This is an ERISA1 case involving the denial of benefits allegedly due a patient under the terms of a

group health insurance policy issued and administered by an insurance company. The patient underwent

covered outpatient surgery at a medical center. At the time of surgery, the patient assigned to the medical
center his right to recover 80% of the costs of the surgery from the insurance company.2 Accordingly, the
medical center billed the insurance company for the costs of the surgery. Although the amount of the bill was

consonant with the usual and customary fee charged for such services, the insurance company reduced the
bill by 25% and paid the medical center 80% of the reduced bill. The insurance company claims it was

entitled to reduce the medical center's bill by virtue of the following series of contracts: the medical center
promised a third party that it would charge a discounted fee upon rendering specified medical services; the
third party, in turn, "leased" the right to the discounted fee to a fourth party; then, unbeknownst to the patient

and the medical center, the fourth party "leased" the right to the discounted fee to the insurance company.

        The medical center demanded full payment of its bill and the insurance company refused. The



    1
    This cases arises under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C.
§ 1001 et. seq.
    2
     While the patient is ultimately responsible for the bill, under his health insurance policy, the
insurance company agreed to pay a percentage of a provider's bill. The terms of the insurance policy
dictated that the insurance company would pay 80% of a provider's fee for covered medical service, such
as the medical center's fee, and the patient would pay 20% of the fee. Aware of this arrangement between
the insurance company and the patient, the medical center in this case billed the insurance company for
the entire amount. As patient's assignee, the medical center is entitled to demand that the insurance
company fulfill its contractual obligation to the patient. Upon receiving a percentage of the bill from the
insurance company, the medical center would then balance bill the patient for the remainder of the bill.
medical center then brought this lawsuit on behalf of its assignee, the patient, seeking recovery of benefits

due the patient under the terms of his health insurance policy.3 On cross motions for summary judgment, the

district court granted the medical center the relief it sought, entering judgment for 80% of the full amount of
the medical center's bill for services.4 The insurance company now appeals that judgment. We affirm.

                                                       I.
                                                      A.

         The complex relationships among the multiple actors in this case necessitates a brief "who's who."

Software Builders, Inc. ("Software Builders")5 is the employer of the patient, Steven J. Denton ("Denton")

and sponsor of the welfare benefit plan6 it purchased for its employees from the insurance company,
Employers Health, Inc. ("EHI"). EHI7 is the insurance company whose interpretation of the welfare benefit

plan purchased by Software Builders is at issue in this case. Denton,8 a plan participant in the welfare benefit
plan sponsored by Software Builders and administered by EHI, is the patient who underwent outpatient

surgery performed by the medical center, HCA Health Services of Atlanta, d/b/a Parkway Medical Center



    3
      The medical center brought the suit in Georgia Superior Court, seeking recovery under four state law
theories: breach of contract, quantum meruit, open account, and stated account. The insurance company
removed the case to the United States District Court for the Northern District of Georgia on the ground
that the medical center's claims "related to" an employee welfare benefit plan governed by ERISA.
Subsequent to the removal, the medical center amended its complaint to seek alternative relief pursuant to
29 U.S.C. § 1132(a)(1)(B).
    4
     The district court granted the insurance company's motion for summary judgment as to the medical
center's state law claims. After granting the medical center's motion for summary judgment as to the
medical center's ERISA claim, the insurance company moved the district court to alter or amend the
judgment. The district court denied this motion.
    5
    Software Builders, a software company located in Duluth, Georgia, is an employer within the
meaning of 29 U.S.C. § 1002(5).
    6
     The group health insurance policy Software Builders purchased from EHI constitutes an employee
benefit plan within the meaning of ERISA. Under ERISA, the term "employee benefit plan" includes an
"employee welfare benefit plan and/or an 'employee pension benefit plan.' " 29 U.S.C. § 1002(3). An
"employee welfare benefit plan" is a plan, fund or program established or maintained by an employer for
the purposes of providing certain benefits, such as medical benefits to participants and beneficiaries. 29
U.S.C. § 1002(1). Because the group health insurance policy issued by EHI and sponsored by Software
Builders relates to medical benefits, it is considered a welfare benefit plan under ERISA.
    7
    EHI, a wholly owned subsidiary of Humana, Inc., is a plan administrator as defined by 29 U.S.C. §
1002(16)(A)(i). In the group insurance policy it issued to Software Builders, EHI is listed as both the
administrator and insurer of the plan.
    8
     Denton is a plan participant within the meaning of 29 U.S.C. § 1002(7).
("Parkway"). Parkway is the medical center that performed the surgery at issue in this case, the assignee of

Denton's claim against EHI, and party to a preferred provider network contract with MedView Services, Inc.
("MedView"). MedView is an entity that contracts with providers such as Parkway to form a preferred

provider network which MedView then markets to third party payors, usually insurance companies. In its

contract with MedView, Parkway agreed to accept seventy-five percent of its usual and customary fee when
providing specified medical services to MedView Subscribers.9 MedView leased10 its preferred provider

network to Health Strategies, Inc. ("HSI").11 HSI is both a manager of provider networks (like MedView)
and a vendor of provider discounts. As a vendor, it leases its networks (both the networks it forms on its own
and the networks it leases from entities such as MedView) to insurance companies so that they may access

the discounts that providers promised to accept as payment in full when they joined the network. HSI leased

to EHI the right to access the discounts in HSI's provider networks, including the network leased from
MedView (which included Parkway as a provider), in return for a percentage of the savings EHI gained from
availing itself of the discounted fees promised by providers who were members of the networks.

                                                     B.
         On March 31, 1995, Software Builders applied to EHI for a group health insurance policy providing
medical, surgical, and hospital care for Software Builders' employees. Coverage under the policy became

effective April 1, 1995, and a welfare benefit plan within the meaning of 29 U.S.C. § 1002(1) was established.
In its contract with EHI, Software Builders elected to provide its employees with the Preferred Provider
Organization ("PPO") form of managed care. Typically, the PPO form of managed care operates as follows:

health care providers, such as doctors and hospitals, form a network of providers either on their own or by

contracting with a third-party entity created for the purpose of forming provider networks. This third-party



    9
     This term of art in the Parkway/MedView contract is discussed supra Part VII.A.2.b. In short, it
means a "a person who, by virtue of a binding contract between MedView and any business entity, may
obtain medical and/or surgical services of Preferred Hospitals."
    10
       In this context, leasing means the lessor will provide the lessee with access to the provider discounts
the lessor has procured. In return for access, the lessor will receive a percentage of the gain or savings the
lessee earns by virtue of using the provider discounts. For example, MedView leased to HSI Parkway's
promise to accept 75% of its usual and customary fee. When HSI avails itself of Parkway's discounted
fee, it saves an amount equal to 25% of the usual and customary fee. HSI then pays MedView 20% of
this savings.
    11
      Health Strategies, Inc. later changed its name to Healthcare Synergies, Inc. The abbreviation "HSI"
will be used throughout to refer to the corporate entity under either name.
entity acts as a middleman between the providers in the network and third party payors such as insurance

companies. In this case, Parkway, a provider, contracted with MedView, a middleman to become part of

MedView's preferred provider network.
         In essence, a PPO is a network of health care providers organized to offer medical services at

discounted rates. The PPO providers furnish their services at discounted rates because they expect to receive
a higher volume of patients, i.e., participants in the welfare benefit plan offered by the insurance company.

The increase in the volume of patients is a result of third party payors, who pay the bills for medical services

plan participants receive, directing plan participants to providers in the PPO network through marketing
materials and financial incentives. Because third party payors, such as insurance companies, are financially

responsible for the costs of a plan participant's covered medical care, it is in the third party payor's best

interest for the plan participant to receive medical care from a provider who has promised to accept a

discounted fee. The use of financial incentives and other measures to direct plan participants to providers in
the PPO is known in the health care industry as "steerage."

         Another component of the PPO form of managed care rests on the difference between "in-network"

and "out-of-network" providers. Under the PPO form of managed care, providers in the network of health
care providers who offer a payor discounted rates are often referred to as "in-network" providers. Conversely,

providers who do not agree to offer the payor discounted rates are referred to as "out-of-network" providers.

         In this case, EHI agreed to treat the providers in Private Health Care Systems ("PHCS") as its
in-network providers (also known as "preferred providers") in return for PHCS members' promises to discount

their fees when providing medical services to EHI's plan participants. Thus, when EHI contracted with

Software Builders to offer a PPO form of managed care to Software Builders' employees, the providers in
PHCS became the in-network providers for Software Builders' employees.

         What makes PPOs attractive relative to some other forms of managed care is that a percentage of the

bill for the plan participant's health care is still covered by the insurance company if the plan participant

chooses to receive covered medical services from an out-of-network provider.12 Given in-network providers'



    12
       Like health maintenance organizations ("HMOs"), PPOs are comprised of networks of physicians
and hospitals that have agreed to discount their rates for plan participants. Unlike HMOs, PPOs typically
do not use a primary care physician to oversee the patient's medical care. As such, plan participants may
consult specialists or out-of-network providers whenever they feel it is necessary. Plan participants are
strongly encouraged to seek the services of in-network providers. If they do not, they will pay more in
that their insurance company pays a lower percentage of the provider's bill.
promise to discount their fees, however, it is in the best interest of the third party payor to steer plan

participants to in-network providers. Because Software Builders opted for the PPO form of managed care,
EHI's financial obligations differ depending on whether Software Builders' employees such as Denton use

the services of PHCS providers. Therefore, EHI steers plan participants to its in-network providers, i.e.,

members of PHCS, through financial incentives.
         For instance, EHI states that if a plan participant receives medical care from an in-network provider

(a member of PHCS), then EHI will pay 90% of the cost of service and the participant will pay 10%. If the

plan participant receives medical care from an out-of-network provider, then EHI will pay 80% of the cost

of medical service and the participant will pay 20%. In addition to the incentives created by the 10/20%
co-payment differential, EHI fulfills its obligation to steer participants to PHCS by marketing the services

of PHCS providers by supplying plan participants with a directory of the providers in the PHCS network.

Similarly, EHI identifies PHCS as the network of preferred providers on the plan participants' insurance cards
and provides a phone number for participants to confirm the identity of PHCS providers.13 Finally, in the

participant's Certificate of Insurance ("COI"), EHI explains the

         Reasons to Use a PPO Provider. 1. We [EHI] negotiate fees for medical services. The negotiated
         fees lower costs to You [Participants] when You use ... providers in the PPO. 2. In addition, You may
         receive a better benefit and Your Out-Of-Pocket expenses will be minimized. 3. You will have a wide
         variety of selected ... providers in the PPO to help YOU with Your medical care needs. In order to
         avoid reduced benefit payments, obtain Your medical care from Preferred Providers whenever
         possible. However, the choice is Yours.

         As explained above, providers may either form their own network and then sell their services to
insurance companies, or they can work through middlemen, such as MedView or HSI. In this case, Parkway
agreed to become part of MedView's network of providers so that MedView could act as middleman between

Parkway and third party payors like insurance companies to establish the insurance company/in-network
provider type of relationship described above. HSI formed its networks of providers either on its own or by

leasing existing provider networks. Instead of marketing its networks to insurance companies to be treated

as in-network providers, HSI acts as a vendor, leasing provider discounts to insurance companies.14 As part
of providing third party payors with access to provider discounts, HSI performs the administrative task of




    13
     EHI's contract with PHCS prohibited EHI from marketing any other PPO network in the Duluth,
Georgia market.
    14
      These contracts are discussed more fully in Part II.B.1-3.
repricing provider invoices to reflect the discounted rate.15 In this case, MedView leased its network of

providers (including Parkway) to HSI. HSI leased to EHI the use of the provider discounts in its networks,
including that network leased from MedView.

                                                     II.

                                                     A.

         Given this brief explanation of the pertinent participants and the PPO form of managed care, we turn
to the events giving rise to this lawsuit. On December 6, 1995, Denton elected to undergo outpatient surgery

at Parkway.16 Since Parkway was not a member of EHI's preferred provider network, PHCS, Parkway was
considered an out-of-network provider under the terms of plan issued by EHI to Software Builders. As such,
EHI covered 80% of the cost of medical service and Denton was responsible for the remaining 20%. Denton

executed an Assignment of Insurance Benefits in favor of Parkway authorizing EHI to pay his insurance

benefits directly to Parkway. Seeking payment for Denton's surgery, Parkway invoiced EHI in the amount
of $3,108.00 for services rendered. On December 22, 1995, EHI's claims department received the Parkway
invoice. EHI referred the invoice to HSI for repricing. HSI recalculated the invoice to reflect the discounted

fee Parkway had promised to MedView. On January 25, 1996, EHI processed the claim and sent Parkway
an Explanation of Remittance along with payment in the amount of $1,864.80.
         The Explanation of Remittance reflected an "amount charged," an "amount allowed," and an "amount

paid." The Explanation of Remittance indicated that EHI applied a 25% discount ($777.00) to the amount
charged ($3,108.00) to arrive at the amount allowed ($2,331.00).17 EHI paid 80% (the out-of-network
percentage) of the amount allowed to arrive at the amount paid ($1,864.80). In a footnote on the back of the

Explanation of Remittance, EHI stated that "[p]ayment is based on a PPO contract with the HSI network,

MedView Services, Inc. or their affiliates." According to EHI, Denton's co-payment obligation was 20% of
the adjusted bill ($466.20).



    15
      When EHI receives an invoice from an out-of-network provider, it refers the invoice to HSI and
other vendors with whom it has a similar relationship. HSI then recalculates the provider's bill to reflect
the discounted fee. HSI returns the revised invoice to EHI who remits to the provider 80% of the
discounted fee.
    16
      Parkway performed a hernia operation on Denton.
    17
      EHI claims it was allowed to reduce Parkway's fee by 25% based on the series of contracts
discussed infra Part II.B.1-3.
                                                       B.

        EHI interprets its plan to mean that due to a series of contracts, it only has to pay Denton's assignee
80% of a discounted fee rather than 80% of the amount charged. EHI's plan interpretation involves two

distinct but related components. First, EHI claims it is entitled to a 25% discount of Parkway's bill of

$3,108.00 based on a series of contracts that indirectly create contractual obligations between EHI and

Parkway. The contracts in this series, the Parkway/MedView contract, the MedView/HSI contract, and the
HSI/EHI contract, are discussed below. The second component of EHI's plan interpretation relates to the

contract between EHI and Denton in which EHI promised to pay 80% of an out-of-network provider's fee for
covered medical services. EHI claims that because it's participants have the right to be charged the discounted

fee by Parkway, it only owes Parkway 80% of the discounted fee rather than 80% of the amount charged.

In short, EHI uses its interpretation of its rights and obligations under the series of contracts to interpret its
rights and obligations under the terms of its contract with Denton. According to EHI, the result of its
interpretation is that EHI and Denton pay 80% and 20% respectively of Parkway's discounted fee. The

following is a brief explanation of each contract in the series of contracts.
                                                       1.

        The Parkway/MedView contract was formed on March 18, 1994, when Parkway entered into a
Preferred Hospital Agreement with MedView. By virtue of this agreement, Parkway became a preferred
provider in the MedView PPO network. In return for this preferred status, Parkway agreed to accept 75%

of its usual and customary fee for specified outpatient services as payment in full.
                                                       2.

        The MedView/HSI contract was formed on April 14, 1994, when MedView entered into a Letter of
Agreement with HSI. The MedView/HSI contract stated that MedView "may enter into contractual

arrangements with health care providers for the purpose of arranging for the delivery of health care services

at a reduced fee, and will provide other services for [HSI]." The contract makes clear that HSI "desires to
obtain the advantage of the reduced fees available through the preferred provider network by 'leasing'

MedView's network of providers." "Leasing" means "the Company [HSI] will perform all repricing functions

to adjust fees from charges to contracted rates." Among other duties, HSI agreed to "expeditiously reprice
fees for provider services to amounts contracted by MedView."18 According to EHI, the MedView/HSI

contract allowed HSI to pass on to HSI's clients the provider discounts that MedView obtained from its own
network of providers.

                                                        3.

         The HSI/EHI contract is the final link in the series of contracts that allegedly entitles EHI to base the

percentage it owes Parkway on the discounted fee referenced in the Parkway/MedView contract rather than
on the fee charged by Parkway in its invoice. The HSI/EHI contract was formed on July 18, 1995, when EHI

and HSI entered into the PPO Network Customary Participation Agreement. According to EHI, HSI is "a
company which develops networks of participating health care providers, such as hospitals which agree to

accept discounted payments from insurance companies and other payors. HSI [then] enters into contracts

with network providers and with payors, including [EHI]." Under the terms of the HSI/EHI contract, HSI
agreed to reprice bills that EHI received from HSI's network of providers (including MedView providers) for
services rendered to participants in EHI's health insurance plan. EHI refers to the discounts it received by

virtue of its contract with HSI as its "shared savings" agreement. Under the shared savings agreement,
providers receive expedited payment for their services in return for the discounted fees.

         EHI explains that when it received Parkway's invoice for the services performed on Denton, it sent
the invoice to HSI. HSI, by virtue of its contract with MedView, repriced the bill to reflect the discount
Parkway promised to MedView. Meanwhile, Parkway hired Network Analysis, Inc. ("Network Analysis")

to detect and eliminate the practice of unauthorized discounts. EHI contends that months after the January
25, 1996 Explanation of Remittance, Network Analysis noticed that Parkway received $777.00 less from EHI

than the amount charged. Parkway sent letters to EHI dated August 6, 22, and 27, 1996 contesting the
discount. In each of the three letters, Parkway stated that it found EHI's use of the discount inappropriate and

requested that EHI remit $777.00. Each letter identified Denton as the insured and referenced the claim

number, the patient number, the date of service, the amount of the allegedly improper discount, and the
treating facility. In its response of August 30, 1996, EHI asserted it was entitled to the discount and explained

that it had "forwarded the cases in question and your letters to HSI for eligibility confirmation." Parkway



    18
      Although at oral argument we learned that Parkway has not sought redress against MedView, we
note that the MedView/HSI agreement does not require HSI to secure payors who will steer patients to
MedView providers. We note also that the Parkway/MedView contract contains an anti-assignment
provision.
received no further correspondence from EHI. On November 8, 1996, Parkway, as assignee of Denton,

brought this suit for recovery of benefits allegedly due under the group health insurance policy between
Software Builders and EHI.

                                                      III.

         The district court's grant of summary judgment is subject to plenary review. Paramore v. Delta Air

Lines, Inc., 129 F.3d 1446, 1449 (11th Cir.1997). Summary judgment shall be granted where the moving

party has shown that "there is no genuine issue as to any material fact and ... the moving party is entitled to

a judgment as a matter of law." Fed.R.Civ.P. 56(c). We construe the facts and draw all reasonable inferences

in the light most favorable to the non-moving party. Wideman v. Wal-Mart Stores, Inc., 141 F.3d 1453, 1454

(11th Cir.1998).
                                                      IV.
         According to EHI, Parkway lacks standing to bring this suit. EHI contends that Denton was not

harmed by its plan interpretation because Parkway never balance billed Denton for the remaining $777.00,
i.e., 25% of the amount charged—$3,108.00. Instead, EHI's plan interpretation benefitted Denton because

it lowered his co-payment. Because he was not harmed, Denton lacks standing to bring this action himself;
thus, his assignee, Parkway, also lacks standing.19
         Under 29 U.S.C. § 1132(a)(1)(B), a participant or beneficiary of an employee benefit plan may
initiate civil proceedings to recover benefits under the terms of the plan. Parkway is Denton's assignee and

in Cagle v. Bruner, 112 F.3d 1510, 1515 (11th Cir.1997), we explained that "neither 1132(a) nor any other

ERISA provision prevents derivative standing based upon an assignment of rights from an entity listed in that

subsection." In Cagle, we rejected the same argument EHI is making in this case in favor of allowing

provider-assignee standing in suits for the recovery of benefits under ERISA. We explained:
         [i]f provider-assignees cannot sue the ERISA plan for payment, they will bill the participant or


    19
      We reject EHI's contention that Jones v. New York Life Ins. Co., No. 95 CIV. 10825(LLS)
(S.D.N.Y. July 11, 1997), applies to this case because Jones does not address provider-assignee standing
under ERISA. Furthermore, the language from our opinion in Cagle v. Bruner, 112 F.3d 1510, 1515
(11th Cir.1997) quoted infra implies that a provider does not have to balance bill a patient in order to
have derivative standing. Consider the use of the future tense in our statement that "[i]f
provider-assignees cannot sue the ERISA plan for payment, they will bill the participant or beneficiary
directly." Cagle, 112 F.3d at 1515 (emphasis added). EHI's argument is inconsistent with our rationale in
Cagle. One of our reasons for allowing provider-assignees derivative standing is so that providers will
not balance bill participants, thereby requiring participants to bring suit against their insurance company
for unpaid benefits. Given our reasoning in Cagle, we reject EHI's argument that Parkway needed to
balance bill Denton in order to have standing.
        beneficiary directly for the insured's medical bills, and the participant or beneficiary will be required
        to bring suit against the benefit plan when claims go unpaid. On the other hand, if provider-assignees
        can sue for payment of benefits, an assignment will transfer the burden of bringing suit from plan
        participants and beneficiaries to "providers [, who] are better situated and financed to pursue an
        action for benefits owed for their services."

Id. at 1515 (alteration in original) (internal citation omitted). Given our reasoning in Cagle, we conclude that

Parkway, as a provider-assignee, has standing to sue for the recovery of benefits under the group insurance

plan at issue in this case.
                                                        V.

         EHI also claims that it was entitled to summary judgment because Parkway failed to exhaust its

administrative remedies prior to bringing this suit. "It is well-established law in this circuit that plaintiffs in
ERISA cases must normally exhaust available administrative remedies under their ERISA-governed plans

before they may bring suit in federal court." Springer v. Wal-Mart Associates' Group Health Plan, 908 F.2d

897, 899 (11th Cir.1990). EHI cites the following provision of the COI to demonstrate that Parkway's claim

is not timely:
        If We partially or fully deny a claim for benefits submitted by YOU, and YOU disagree or do not
        understand the reasons for this denial, You may appeal this decision. Your appeal must be submitted
        in writing within 60 days of receiving written notice of denial. We will review all information and
        send written notification within 60 days of Your request.

According to EHI, Parkway did not appeal the alleged denial of benefits within 60 days of receiving the

Explanation of Remittance from EHI. Parkway contends that the Explanation of Remittance did not constitute
a written notice of denial. We agree. The above quoted language makes clear that the participant must appeal

"within 60 days of receiving written notice of denial " (emphasis added). Although EHI's Explanation of

Remittance indicated that the claim was discounted, it failed to explain the manner by which EHI adjusted

the claim. The footnote on the back of the Explanation of Remittance stating "[p]ayment is based on a PPO
contract with the HSI network, MedView Services, Inc. or their affiliates" does not contain sufficient

information to constitute a "written notice of denial."

        Further, we accept the finding of the district court that Parkway's letters dated August 6, 22, and 27,

1996, initiated the administrative review process. See Springer, 908 F.2d at 899 (stating that "the decision

whether to apply the exhaustion requirement is committed to the district court's sound discretion") (quoting

Curry v. Contract Fabricators Inc. Profit Sharing Plan, 891 F.2d 842, 846 (11th Cir.1990)). Parkway argues

that EHI's August 30, 1996 letter stating that it believed the discount was correct but that it had forwarded

the letters "to HSI for eligibility confirmation" demonstrates that EHI understood it was taking part in the
appeals process. Again, we agree that EHI's failure to respond further within the required sixty-day time

frame was an implicit denial of the appeal. As such, the entry of summary judgment against Parkway on its
ERISA claim would have been inappropriate on the ground that Parkway failed to exhaust its administrative

remedies before filing suit.

                                                      VI.

         In Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989), the

Supreme Court stated that, generally, courts should review claims challenging an ERISA claims

administrator's20 denial of benefits under a de novo standard. The Court adopted the de novo standard because

the arbitrary and capricious, or abuse of discretion, standard,21 is too lenient. The Court explained that the
arbitrary and capricious standard of review is appropriate, however, when the plan documents at issue

explicitly grant the claims administrator discretion to determine eligibility or construe terms of the plan. See

id. at 115, 109 S.Ct. at 954-56; see also Florence Nightingale Nursing Serv., Inc. v. Blue Cross/Blue Shield,

41 F.3d 1476, 1481 (11th Cir.1995). The arbitrary and capricious deference is diminished though, if the

claims administrator was acting under a conflict of interest. Florence Nightingale, 41 F.3d at 1481. If the

claims administrator was acting under a conflict of interest, "the burden shifts to the [administrator] to prove
that its interpretation of the plan provisions committed to its discretion was not tainted by self interest."

Brown v. Blue Cross & Blue Shield, 898 F.2d 1556, 1566 (11th Cir.1990). "Accordingly, this court has

adopted the following standards for reviewing administrators' plan interpretations: (1) de novo where the plan

does not grant the administrator discretion[;] (2) arbitrary and capricious [where] the plan grants the
administrator discretion; and (3) heightened arbitrary and capricious where there is a conflict of interest."

Buckley v. Metropolitan Life, 115 F.3d 936, 939 (11th Cir.1997). We hold that heightened arbitrary and

capricious review is the appropriate standard because EHI suffers from a conflict of interest.22
         In reviewing a claims administrator's benefits determination, the court follows a series of steps. The

applicability of heightened arbitrary and capricious review is a result of the court making a specific


    20
     "The distinction between a plan administrator and a fiduciary is unimportant because the standard of
review, as set forth by the Court in Firestone, 'applies equally to the decision of fiduciaries and the plan
administrator.' " Marecek v. BellSouth Telecommunications, Inc., 49 F.3d 702, 705 n. 1 (11th Cir.1995).
    21
     See Jett v. Blue Cross & Blue Shield, 890 F.2d 1137, 1139 (11th Cir.1989) (stating that the arbitrary
and capricious standard is used interchangeably with an abuse of discretion standard).
    22
      See supra Part VII.A.5.
determination at each step in the analysis. At each step, the court makes a determination that results in either

the progression to the next step or the end of the inquiry. For ease of application, we lay out these steps
below and then apply them in Part VII to the instant case.

         First, a court looks to the plan documents to determine whether the plan documents grant the claims
administrator discretion to interpret disputed terms. If the court finds that the documents grant the claims

administrator discretion, then at a minimum, the court applies arbitrary and capricious review and possibly

heightened arbitrary and capricious review.

         Regardless of whether arbitrary and capricious or heightened arbitrary and capricious review applies,

the court evaluates the claims administrator's interpretation of the plan to determine whether it is "wrong."23

See Godfrey v. BellSouth Telecommunications, Inc., 89 F.3d 755, 758 (11th Cir.1996) ("we first conduct a

de novo review to decide if the [claims administrator's] determination was wrong."); Brown, 898 F.2d at 1566

n. 12 ("[i]t is fundamental that the fiduciary's interpretation first must be 'wrong' from the perspective of de

novo review before a reviewing court is concerned with the self-interest of the fiduciary."); see also Marecek

v. BellSouth Telecommunications, Inc., 49 F.3d 702, 705 (11th Cir.1995) (explaining that when the district

court agrees with the ultimate decision of the administrator, it will not decide whether a conflict exists. Only

when the court disagrees with the decision does it look for a conflict and, when it finds such a conflict, it
reconsiders the decision in light of this conflict).
         If the court determines that the claims administrator's interpretation is "wrong," the court then

proceeds to decide whether "the claimant has proposed a 'reasonable' interpretation of the plan." Lee v. Blue

Cross/Blue Shield, 10 F.3d 1547, 1550 (11th Cir.1994). Even if the court determines that the claimant's




    23
      "Wrong" is the label used by our precedent to describe the conclusion a court reaches when, after
reviewing the plan documents and disputed terms de novo, the court disagrees with the claims
administrator's plan interpretation. See Yochum v. Barnett Banks, Inc., 234 F.3d 541 (11th Cir.2000); see
also Marecek v. BellSouth Telecommunications, Inc. 49 F.3d 702, 705 (explaining a court must decide if
the administrator correctly interpreted the plan). Brown is the seminal Eleventh Circuit case on the
standard by which to review a claims administrator's decision. In Brown, the court states "the fiduciary's
interpretation first must be 'wrong.' " Brown, 898 F.2d at 1566 n. 12. The Brown court supports this
statement with the following citation and explanatory parenthetical: "See, e.g., Denton v. First Nat'l Bank
of Waco, 765 F.2d 1295, 1304 (5th Cir.1985) (first step in application of arbitrary and capricious standard
is determining legally correct interpretation of disputed plan provision), cited with approval in Jett v. Blue
Cross & Blue Shield, 890 F.2d 1137, 1139 (11th Cir.1989)." Thus began the Eleventh Circuit's use of the
word "wrong." See Lee v. Blue Cross/Blue Shield, 10 F.3d 1547, 1551 n. 3 (11th Cir.1994) (stating
"Brown instructs us to review de novo whether the insurer's interpretation of the plan is wrong"); see also
Florence Nightingale Nursing Serv., Inc. v. Blue Cross/Blue Shield, 41 F.3d 1476, 1481 (11th Cir.1995).
interpretation is reasonable,24 the claimant does not necessarily prevail. At first glance it seems odd that a

reasonable interpretation would not automatically defeat a wrong interpretation. The reason the claimant's
reasonable interpretation does not trump the claims administrator's wrong interpretation is because the plan

documents explicitly grant the claims administrator discretion to interpret the plan. See Brown, 898 F.2d at

1563 (stressing the importance of allowing an insurance company the benefit of the bargain it made in the

insurance contract). We cannot over emphasize the importance of the discretion afforded a claims

administrator; the underlying premise of arbitrary and capricious, rather than de novo, review is that a court

defers to the discretion afforded the claims administrator under the terms of the plan. See Firestone, 489 U.S.

at 111, 109 S.Ct. at 954 quoting Restatement (Second) of Trusts § 187 (1959) ("[w]here discretion is
conferred upon the trustee with respect to the exercise of a power, its exercise is not subject to control by the

court except to prevent an abuse by the trustee of his discretion").

         To find a claims administrator's interpretation arbitrary and capricious, the court must overcome the

principle of trust law25 which states that a trustee's interpretation will not be disturbed if it is reasonable. See

Firestone, 489 U.S. at 110-11, 109 S.Ct. at 954 (explaining that when a trustee is granted discretion his

interpretation will not be disturbed if it is reasonable). Thus, the next step requires the court to determine
whether the claims administrator's wrong interpretation is nonetheless reasonable. If the court determines

that the claims administrator's wrong interpretation is reasonable, then this wrong but reasonable
interpretation is entitled to deference even though the claimant's interpretation is also reasonable.
         The claims administrator's interpretation is not necessarily entitled to deference, however, if the

claims administrator suffers from a conflict of interest. Therefore, the next step in the analysis requires the
court to gauge the self interest of the claims administrator. If no conflict of interest exists, then only arbitrary

and capricious review applies and the claims administrator's wrong but reasonable decision will not be found

arbitrary and capricious. Lee, 10 F.3d at 1550. The steps discussed thus far constitute arbitrary and

capricious review and if there is no conflict of interest, the inquiry stops. If a conflict of interest does exist,

however, then heightened arbitrary and capricious review applies. In applying heightened arbitrary and

    24
      When a plan is ambiguous, the principle of contra proferentem requires that ambiguities be
construed against the drafter of a document; as such, the claimant's interpretation is viewed as correct.
Lee, 10 F.3d at 1551. In Lee, 10 F.3d at 1551 and Florence Nightingale, 41 F.3d at 1481 n. 4, this court
held that contra proferentem applies to ERISA plans.
    25
    See Firestone, 489 U.S. at 110, 109 S.Ct. at 954 (explaining that trust principles are applicable to
ERISA fiduciaries).
capricious review, the court follows the same steps that constitute arbitrary and capricious review, but given

the claims administrator's self interest, it continues the inquiry.
         Under the heightened arbitrary and capricious standard of review, the burden shifts to the claims

administrator to prove that its interpretation of the plan is not tainted by self interest. Id. The claims

administrator satisfies this burden by showing that its wrong but reasonable interpretation of the plan benefits

the class of participants and beneficiaries. See Brown, 898 F.2d at 1568. Even when the administrator

satisfies this burden, the claimant may still be successful if he can show by other measures that the

administrator's decision was arbitrary and capricious. See id. at 1568. If the court finds that the claims

administrator fails to show that its plan interpretation benefits the class of participants and beneficiaries, the

claims administrator's plan interpretation is not entitled to deference.
                                                       VII.
        The crux of EHI's appeal is two-fold. First, EHI contends that the district court improperly used the

heightened arbitrary and capricious standard of review. Second, EHI asserts that even if heightened arbitrary
and capricious review was appropriate, the district court erred in holding that EHI failed to purge the taint
of self interest. We address these concerns in turn.

                                                       A.

         To determine the standard by which to review a claims administrator's plan interpretation, a court
follows the steps outlined in Part VI. Our application of these steps reveals that heightened arbitrary and

capricious review is the correct standard.
                                                        1.

        First, the plan documents grant EHI discretion to interpret disputed terms. The COI states:

        With respect to paying claims for benefits under this Policy, WE [EHI] as administrator for claims
        determinations and as ERISA claims review fiduciary ... shall have discretionary authority to 1)
        interpret policy provisions, 2) make decisions regarding eligibility for coverage and benefits, and 3)
        resolve factual questions relating to coverage benefits.

Given this contractual grant of discretion, do novo review is inapplicable and at a minimum, arbitrary and

capricious review applies.

                                                        2.

        Next, we determine whether EHI's plan interpretation is wrong. EHI points out that under the
Schedule of Benefits in the COI, it is required to pay a specified percentage of the expense of covered medical

services and the participant is required to pay the balance of the expense. Crucial to determining whether
EHI's interpretation is wrong is the meaning of the term "expense." EHI emphasizes the common meaning

of the term found in Webster's Dictionary, and argues that "expense" is "the amount necessary to obtain
covered medical services." According to EHI's interpretation of the plan, the term "expense," as it is used

in the COI, includes the discounted fees in the Parkway/MedView contract.

        EHI supports its plan interpretation by relying on 29 U.S.C § 1104(a)(1)(D), which states that a plan

is to be administered by the fiduciary in accordance with the documents and instruments governing the plan.
EHI asserts that the contract between HSI and itself (which is based on the MedView/HSI and the

Parkway/MedView contracts) is a document and instrument governing the plan. EHI calls the provider
discounts this contract allow EHI to access its "shared savings" program. As such, the scope of 29 U.S.C.

§ 1104(a)(1)(D) and this series of contracts entitle EHI to interpret "expense" to include the discounted fee

Parkway promised in the Parkway/MedView contract.
        We find that EHI's interpretation of the plan documents is wrong for two reasons. First, EHI wrongly
interprets its contract with Denton. Second, EHI wrongly interprets its rights under the series of contracts

linking it to Parkway. We discuss each of these reasons in turn.
                                                     a.

        First, EHI's plan interpretation is not consonant with the terms of the COI—specifically, EHI's stance
on the meaning of the term "expense." In the Schedule of Benefits of the COI, EHI specifically states:
        [b]enefits are payable only if services are considered to be covered expenses and are medically
        necessary. All covered services [are][sic] payable on a maximum allowable fee basis and are subject
        to specific conditions, durational limitations and all applicable maximums of this policy.
To understand EHI's duties under the COI, one must ascertain the meaning of "covered expense." The COI

defines Covered Expense as:
        (1) A Medically Necessary expense; (2) For the benefits stated in this Certificate; and (3) An
        Expense Incurred when You are insured for that benefit under this Policy on the date that the Service
        is rendered.

The definition of Covered Expense leads us to inquire into the meaning of the term "Expense Incurred."
        Expense Incurred means the Maximum Allowable Fee charged for Services which are Medically
        Necessary to treat the condition. The date Service is rendered is the Expense Incurred date.

This definition in turn necessitates a definition of "Maximum Allowable Fee."

        Maximum Allowable Fee is the lesser of: (1) The fee most often charged in the geographical area
        where the Service was performed; (2) the fee most often charged by the provider; (3) the fee which
        is recognized by a prudent person; (4) the fee determined by comparing charges for similar Services
        to a national data base adjusted to the geographical area where the Services or procedures were
        performed; or (5) The fee determined by using a national Relative Value Scale (Relative Value Scale
        means the methodology that values medical procedures and Services relative to each other that
         includes, but is not limited to, a scale in terms of difficulty, work, risk, as well as the material and
         outside costs of providing the Service, as adjusted to the geographic area where the Service or
         procedures were performed).
The district court found that, given these definitions in EHI's contract with Denton's employer and plan

sponsor (Software Builders), the phrase "expense incurred" could not validly be interpreted to mean a charge

reduced or discounted through EHI's contract with HSI. HCA Health Services, Inc. v. Employers Health Ins.

Co., 22 F.Supp.2d 1390, 1396 (N.D.Ga.1998). The district court reasoned that,

         such a discounted charge does not meet any of the definitions of "Maximum Allowable Fee" included
         in the contract. Second, the only terms of the contract which speak to negotiated fees are contained
         within the PPO provisions, and the shared savings discount is in conflict with those provisions....
         Additionally, whereas EHI provides the insured with a list of PPO providers so that the insured can
         make a reasoned choice, the insured never knows who the shared savings providers are and is unable
         to make a reasoned choice to use a shared savings provider rather than a provider with whom there
         are no negotiated savings.26

Id. at 1396.

         We agree with this reasoning regarding the plain language of the plan. To support its position that
the district court erred in finding that "expense" cannot include the discounted fee at issue in this case, EHI
points to the third definition of Maximum Allowable Fee, namely "(3) the fee which is recognized by a

prudent person." EHI's Amicus Curiae27 explain that if EHI paid Parkway an amount 25% higher than
Parkway was contractually obligated to accept, then this payment would not be a "fee ... recognized by a

prudent person." Not only does this argument erroneously assume that Parkway is obligated to charge Denton
the discounted fee, but we disagree that the discounted fee is the fee recognized by a prudent person.
Common sense dictates that the fee recognized by a prudent person is the usual and customary fee in the

industry.28 Instead of supporting EHI's interpretation, the language in the COI stating that the Maximum
Allowable Fee is the fee recognized by a prudent person further bolsters Parkway's interpretation of

"expense." A prudent person would assume that the fee for a service is the reasonable, usual and customary

fee. He would not even consider the discounted fee because it only arises out of a specified contractual



    26
     "Shared savings agreements" is the term of art EHI uses to refer to the contracts, such as its contract
with HSI, which allow it to access discounted fees from out-of-network providers.
    27
     Amici Curiae for EHI are the American Association of Preferred Provider Organizations and the
Health Insurance Association of America. Amicus Curiae for Parkway is the American Medical
Association of Georgia.
    28
       Unlike the fee common in the industry, a discounted fee is the product of a unique contractual
relationship between provider and insurance company.
relationship. The usual and customary fee is the reasonable fee and, as such, is the fee recognized by a
prudent person.

                                                       b.
         Second, we find that EHI's plan interpretation is wrong because it erroneously construes the series

of contracts linking it to Parkway. Recall that EHI's plan interpretation is two-fold: first, the series of

contracts entitles EHI's plan participants to be charged Parkway's discounted fee and, second, the discounted

fee explains the meaning of the term "expense" in EHI's contract with Denton. For the reasons explained
above, the term "expense" in the COI cannot be construed to include the discounted fee at issue in this case.

Because EHI cannot retroactively modify the meaning of the term "expense" in its contract with Denton, its

plan interpretation is wrong. Even if, as a general matter, EHI could use undisclosed, outside agreements not
in existence at the time EHI issued its policy to Denton, to explain the meaning of the term "expense," the
outside agreements in this case (i.e., the series of contracts linking EHI to Parkway) do not entitle EHI to the

discounted fee because Parkway does not receive the benefit of its bargain. Because EHI is not entitled to
the discounted fee, it follows that it cannot base the percentage it owes Parkway on the discounted fee. In
short, consideration of either component of EHI's plan interpretation reveals that it is wrong.

         The terms of the Parkway/MedView contract do not support the proposition that EHI is entitled to
base the percentage it owes Parkway on the discounted fee.29 EHI argues that each contract in the series of


    29
       We note that, apart from performing fee collection services and utilization and quality assurance
reviews, the consideration in the Parkway/MedView contract that supports Parkway's promise to discount
its fees is unclear. We could find that, due to the lack of clear adequate consideration, the
Parkway/MedView contract is not valid. This would necessarily mean that EHI is not entitled to
Parkway's discounted fee because the "root" contract that allegedly entitled MedView to lease the
discount to HSI, which HSI in turn leased to EHI, is unenforceable. We decline to find a contract that has
been continually performed since 1994 void for lack of consideration. Instead, we note that while the
Parkway/MedView contract does not specifically refer to steerage, given the typical workings of the PPO
form of managed care, it is clear to us that Parkway entered the Preferred Hospital Agreement to become
a provider in MedView's network. MedView was then to negotiate with third party payors, such as
insurance companies, so that Parkway and the other providers in the network would be the "in-network"
providers in the insurance company's PPO. Consider Exhibit C to the Parkway/MedView contract.
Although there appears to be some discrepancy about when and if Exhibit C was signed, we note that
Exhibit C to the Parkway/MedView contract is entitled "Payors." Parkway represents that the Subscribers
affiliated with these Payors are entitled to the discounted fees Parkway promised when joining
MedView's preferred provider network. Although not referenced in the primary contract, Exhibit C
evidences that the purpose of the Parkway/MedView contract was that MedView would form contracts
with third party payors that called for the payors to treat MedView's network as preferred providers in
return for the providers' discounted fees. It seems that Exhibit C evidences some of the entities with
which MedView had established the payor/in-network provider relationship. We will not let the lack of
clarity in the Parkway/MedView contract obscure our understanding of the manner in which the managed
care industry, specifically PPOs, operates. When read as a whole, it is clear that the Parkway/MedView
contract contemplates that MedView would act as a middleman between Parkway and a third party payor
contracts at issue in this case evidences its entitlement to the discounted fee. EHI interprets the first contract

in this series, the Parkway/MedView contract, as follows: According to EHI, Parkway's "contract with

MedView defined 'third party payor' to include 'any business entity' having a contract with MedView. As

a 'business entity' having a contract with MedView, HSI qualified as a payor." Because Parkway knew that

MedView could contract with "any business entity" at the time of contract formation, Parkway cannot renege
on its promise to discount its fees.
        The terms of the Parkway/MedView contract are not the primary issue in the case before us;

therefore, we decline to decide whether MedView's leasing contract with HSI is valid. Nonetheless, for the

limited purpose of explaining why EHI's plan interpretation is wrong, we note that one of the express

purposes of the March 18, 1994 agreement between Parkway and MedView was to coordinate and arrange
for the delivery of hospital and physician services to MedView Subscribers. Integral to the contract (and to
EHI's argument) are the definitions of the terms Third Party Payor and Subscriber.
        The Parkway/MedView contract defines Third Party Payor as "an insurance company, employer, or

other business entity which has contracted with MedView to pay for medical services and/or surgical services
rendered by participating physicians to MedView Subscribers and Hospital Services rendered by Preferred

Hospitals to MedView Subscribers." Instead of citing this complete definition, EHI's definition of Third Party
Payor, quoted above, refers only to the phrase "business entity which has contracted with MedView." EHI
claims that this excerpt from the definition of Third Party Payor evidences MedView's right to lease its

provider list to HSI, which in turn validates HSI's right to lease the list to EHI, which then entitles EHI to be
charged the discounted fee. The omissions in EHI's definition of Third Party Payor are not insignificant.
Rather, they reveal the true nature of the Parkway/MedView contract, to wit: to pay for medical services

rendered to MedView Subscribers. As such, the definition of Third Party Payor, and whether EHI qualifies

as a Third Party Payor under the Parkway/MedView contract, necessarily depends on the definition of
Subscriber.

        Consider that Subscriber means "a person who, by virtue of a binding contract between MedView
and any business entity, may obtain medical and/or surgical services of Preferred Hospitals." Denton is not

a MedView Subscriber; he did not obtain medical care from Parkway by virtue of a binding contract between



(such as an insurance company) and that the third party payor would steer its participants to Parkway in
return for Parkway's promise to discount its fees. Without the benefit of steerage there is no reason for
Parkway to agree to discount its fees.
MedView and HSI.30 Similarly, neither HSI nor EHI is a business entity contracting with MedView to pay

for medical services rendered by participating physicians to MedView Subscribers. EHI and HSI may be
business entities that contracted with MedView,31 but the purpose of this contract was not "to pay for medical

services rendered by ... physicians to MedView Subscribers."32 Importantly, EHI and MedView never entered
into a relationship that would result in EHI's plan participants becoming MedView Subscribers, and this
relationship does not arise by virtue of a leasing contract like that peddled by HSI.33 Thus, insofar as EHI's

plan interpretation rests on the contract between MedView and Parkway, it is wrong.
         We note in passing that while EHI may interpret the plan in accordance with governing instruments

and documents (29 U.S.C. § 1104(a)(1)(D)), we take issue with the notion that the Parkway/MedView

contract and the MedView/HSI contract (contracts to which EHI is not even a party) govern the contract
between EHI and Software Builders. EHI fails to provide Parkway with the benefit of its bargain. We also
dismiss EHI's contention that it is entitled to the benefits of a promise in a contract to which it is not a party

and from which it is three times removed.34 Basically EHI is saying that Parkway's promise to discount its

    30
      Given the reasons for these contracts in the managed care industry, we note that a subscriber is a
participant in an employee benefit plan administered by an insurance company. When MedView and an
insurance company contract for the insurance company to use MedView's network as its preferred
providers, the participant may obtain medical services from the preferred providers.
    31
      Of course, only HSI and MedView entered into a contractual arrangement. However, because EHI
claims that through its contract with HSI it is entitled to a provision of the Parkway/MedView contract,
we analyze whether either entity, HSI or EHI, is a Third Party Payor under the Parkway/MedView
contract.
    32
      The express purpose of the MedView/HSI contract is that MedView will "enter into contractual
arrangements with health care providers for the purpose of arranging for the delivery of health care
services at a reduced fee, and will provide other services for [HSI].... [HSI] desires to obtain the
advantage of the reduced fees available through preferred provider network by 'leasing' MedView's
network of providers. 'Leasing' means that [HSI] will perform all repricing functions to adjust fees from
charges to contracted rates." Nowhere does the MedView/HSI contract indicate that its purpose is to pay
for medical services rendered by physicians to MedView Subscribers.
    33
      Although poorly drafted, the Parkway/MedView contract clearly contemplates that MedView would
contract with an insurance company and that insurance company's participants would obtain medical
services at Parkway and be charged a discounted fee because Parkway would be a preferred provider in
the insurance company's plan. The contract's title, Preferred Hospital Agreement, evidences that this is
the purpose of the Parkway/MedView contract. Given what is usual and customary in the managed care
industry, we cannot imagine that even a poorly represented entity would promise to discount its fees in
return for nothing.
    34
       In its reply brief, EHI quotes an excerpt from a deposition of Parkway's corporate representative to
support its argument that Parkway agrees that the stream of contracts is not material. We find that the
thrust of these questions and answers does not necessarily relate to the number of intermediaries so much
as to the fact that participants in EHI's plan are not MedView Subscribers. Even if EHI is correct that
fee travels from the Parkway/MedView contract through the MedView/HSI contract through the HSI/EHI

contract to the EHI/Software Builders contract to modify the term "expense." We cannot accept such logic.35

                                                      3.

         Next, we consider whether Parkway's interpretation is reasonable. Parkway argues that no provision
in EHI's ERISA plan allows EHI to base the percentage it owes Parkway on a discounted fee. The PPO

provisions of the COI mention discounted fees in the context of explaining that if a participant uses an

in-network provider,36 then his co-payment percentage will be less than if he uses an out-of-network provider.
Since the COI discusses discounted fees only in the context of in-network providers and Parkway is not an
in-network provider, Parkway's contention that the plan documents do not permit EHI to discount its charges

is sound. Because the only terms in the COI even suggesting discounted fees are in the PPO provisions and

because Parkway is not in EHI's network of preferred providers, EHI may not apply a discount to Parkway's
charges.
         We concur with the district court that Parkway's interpretation of the plan is reasonable. In the COI,

EHI informs participants (1) that it has negotiated discounted fees with in-network providers and (2) that the
participant's co-payment will be less if he uses the services of an in-network provider. Discounted fees are
not mentioned anywhere else in the COI. As such, it can reasonably be inferred from the contractual language




Parkway considers the number of intermediaries insignificant (which we doubt), we consider the series of
contracts an important factor in our determination that EHI's interpretation of the plan is wrong.
                  Furthermore, we are not saying that EHI can never contract with an out-of-network
         provider. Given, among other factors, that Parkway fails to receive the benefit of its bargain and
         that plan participants are unaware of the discounts, we question the validity of the stream of
         contracts at issue in this case. It is important that neither Parkway nor Denton knew of the terms
         of the HSI/EHI contract. By informing Denton that it had negotiated discounted fees with
         in-network providers, thereby raising the inference that it had not negotiated discounted fees with
         out-of-network providers, such as Parkway, we query whether EHI unilaterally modified its
         contract with Denton.
    35
      We also question EHI's interpretation of the plan because it interprets a provision in its plan a
certain way (i.e., "expense" includes the discounted fees of out-of-network providers that we obtain
through leasing agreements) and then unilaterally "forces" this provision into the contract between
Parkway and Denton. Parkway charged Denton $3,108.00 for the hernia operation. According to EHI,
Parkway should have reduced this fee by 25% and charged Denton $2,331.00. EHI essentially uses its
contract with HSI to unilaterally modify the contract between Parkway and Denton. (Note that if
Parkway had promised EHI that it would charge EHI's plan participants a discounted fee, then the ability
of EHI to demand the discounted fee would be an entirely different matter.)
    36
      As explained above, EHI contracted with PHCS as its network of preferred providers.
that at the time of contract formation EHI was not contemplating discounts with out-of-network providers.37

                                                      4.

         Having decided that EHI's plan interpretation is wrong and Parkway's interpretation is reasonable,
we next determine whether EHI's interpretation is reasonable. Given the complex interrelation of the series

of contracts at issue in this case, we assume for the sake of argument that EHI's interpretation is reasonable.

Even if EHI's wrong interpretation is reasonable, we cannot afford it the deference attributable to arbitrary
and capricious review because EHI suffers from a conflict of interest.38

                                                      5.

         We find that EHI acted under a conflict of interest because EHI pays claims out of its own assets.39


    37
      On April 1, 1995, EHI issued insurance to Denton. Approximately two and one half months later,
on July 18, 1995, EHI entered into the contract with HSI. As such, Denton and other similarly situated
participants were not aware that they would be charged discounted fees by some out-of-network
providers.
    38
      In a notice of supplemental authority filed pursuant to Eleventh Cir. R. 28-4.6, EHI argues that
under Pegram v. Herdrich, 530 U.S. 211, 120 S.Ct. 2143, 147 L.Ed.2d 164 (2000), its decision to base
the percentage it owed Parkway on the discounted fee rather than on the usual and customary fee was a
decision implicating plan design and, therefore, not a fiduciary act that may give rise to a conflict of
interest. We disagree. Pegram is a breach of fiduciary duty case and not a case involving a denial of
benefits due under a plan. The plaintiff in Pegram argued that the HMO breached its fiduciary duty to the
patient by providing incentives for its physicians to limit medical care and procedures. Specifically at
issue in Pegram was whether an HMO should be treated as a fiduciary under ERISA section 1109 when it
makes mixed eligibility and treatment decisions. The Court described eligibility decisions as those
involving "the plan's coverage of a particular condition or medical procedure for its treatment. 'Treatment
decisions,' by contrast, are choices about how to go about diagnosing and treating a patient's condition: ...
what is the appropriate medical response?" Id. at 120 S.Ct. at 2154. Mixed decisions are those in which
determination of whether a benefit plan covers a particular condition or procedure is inextricably mixed
with determination of the appropriate treatment. The Court reasoned that mixed eligibility and treatment
decisions made by an HMO acting through its physicians are not fiduciary acts; therefore, the plaintiff
failed to state a claim for breach of fiduciary duty under ERISA. See id. EHI misreads Pegram when it
states:
                 when EHI was presented the bill for services rendered by [Parkway] to an insured, the
                 decisions EHI made involved both plan eligibility, i.e., whether to cover the treatment,
                 and plan content, i.e., how to pay for the treatment in light of its cost containment
                 measures. In light of Pegram, EHI's decision to pay for the treatment in accordance with
                 the contractual discount was not a "fiduciary" act that might give rise to a conflict of
                 interest.

         Because EHI's alleged denial of benefits does not constitute the type of mixed eligibility and
         treatment decision at issue in Pegram, we decline to find, based on Pegram, that EHI's
         interpretation of its plan was not a fiduciary act.
    39
     EHI contends "no true conflict [exists] between [itself] and Denton. Denton and EHI both
benefitted from the discount. Consequently, the rationale regarding 'conflicts' of Brown and its progeny is
inapplicable" (emphasis added). The thrust of EHI's argument is that because there is no conflict between
EHI and Denton, no conflict of interest exists and therefore there is no need to apply the heightened
In Brown v. Blue Cross & Blue Shield, 898 F.2d at 1556, 1561-62, we explained that "because an insurance

company pays out to beneficiaries from its own assets rather than the assets of a trust, its fiduciary role lies
in perpetual conflict with its profit-making role as a business ... [a] strong conflict of interest [exists] when

the fiduciary making a discretionary decision is also the insurance company responsible for paying the

claims.... The inherent conflict between the fiduciary role and the profit-making objective of an insurance
company make a highly deferential standard of review inappropriate." Therefore, we cannot stop our inquiry

at mere arbitrary and capricious review. Contrary to EHI's assertion, the district court did not err in applying

the heightened arbitrary and capricious standards of review. Because we hold that heightened arbitrary and

capricious review is the appropriate standard, we turn to EHI's other contention, namely: when applying
heightened arbitrary and capricious review, the district court erred in finding that EHI failed to purge the taint

of self interest. In addressing EHI's argument, we continue our application of the steps that constitute
heightened arbitrary and capricious review.

                                                        B.
         Under the heightened arbitrary and capricious standard, the burden shifts to EHI to demonstrate that
its interpretation of the plan was not tainted by self interest. A conflicted fiduciary can purge the taint of self

interest by proving that its wrong but reasonable interpretation of the plan was "calculated to maximize

benefits to participants in a cost-efficient manner." Lee v. Blue Cross/Blue Shield, 10 F.3d 1547, 1552 (11th

Cir.1994). Although EHI's plan interpretation is wrong for either of the reasons discussed Part VII.A.2.a-b,

we could still hold EHI's interpretation is not arbitrary and capricious if it results in a benefit to Denton and

other beneficiaries. According to EHI, its interpretation benefits Denton because his co-payment was limited
to 20% of the discounted fee rather than 20% of the usual and customary fee.40 In order to determine whether
this benefit to Denton and other participants purges the taint of self interest, we consider the consequences

that follow from Parkway's and EHI's plan interpretations when applied to the following hypothetical


arbitrary and capricious standard of review to EHI's plan interpretation. Brown involves a claims
administrator's internal, i.e., inherent, conflict of interest. Because Brown involves a claims
administrator's internal conflict and EHI refers to the absence of an external conflict, we agree with EHI
that Brown is inapposite regarding such absence of an external conflict. The focus of the conflict of
interest inquiry, however, is whether the claims administrator is internally conflicted; Brown, therefore,
controls.
    40
      According to EHI, not all participants and beneficiaries need to receive a benefit in every case, so
long as the plan interpretation was calculated to confer a benefit upon them. Because we find that EHI's
interpretation failed to benefit even Denton (see Part VII.B.3.a-b and 4 supra ), we need not decide the
scope of the benefit a conflicted fiduciary must show in order to purge the taint of self interest.
scenario. The facts in this hypothetical scenario are based on a simplified version of the facts of this case.

                                                      1.

         Assume there are only three health insurance carriers in a metropolitan area: Insurance Company A,
Insurance Company B, and Insurance Company C. Each of these insurance companies has contracted with

a different PPO to serve as the in-network providers under each company's respective health plan.41 For

instance, Insurance Company A entered a contract with PPO A by which Insurance Company A promises to
steer its plan participants to PPO A providers and PPO A providers agree to discount the fees they will charge

Insurance Company A's participants. Insurance Companies B and C have identical agreements with PPOs

B and C, respectively, exchanging steerage of plan participants for discounted medical services.42

         The insurance companies steer plan participants to in-network providers in their respective PPOs
through economic incentives.43 A typical arrangement might operate as follows. If a participant (Participant
A) in Insurance Company A's plan utilizes the services of a provider in PPO A, i.e., an in-network provider,

then Insurance Company A will pay 90% of the provider's fee for medical service and Participant A will pay
10% of the fee. If Participant A utilizes the services of a provider not in PPO A, i.e., an out-of-network

provider, then Insurance Company A will pay 80% of the provider's fee for medical services and Participant
A will pay 20% of the fee. By requiring Participant A to pay a larger percentage (20%) of the fee for medical
services obtained from an out-of-network provider than Participant A would have to pay if he utilized the

services of an in-network provider (10%), Insurance Company A "steers" participants to providers in PPO




    41
     We note that, like the facts of this case, the relationship between each Insurance Company and each
PPO network could have been facilitated through a middleman, like MedView.
    42
      Apparently, it is accepted in the industry that "the requirement of steerage should be inferred in
provider contracts." Michael L. Ile, Position of the American Medical Association on Silent PPOs,
Health Care Innovations 40 (Sept./Oct.1995). While noting that steerage seems to be at the heart of all
PPO arrangements, we need not decide whether the requirement of steerage is per se implied in contracts
between insurance companies and providers in the PPO industry. As discussed supra Part VII.A.2.b,
steerage is implicit in the contract between MedView and Parkway.
    43
       Steerage means actively encouraging plan participants to seek the services of the providers in the
PPO by such means as financial incentives. Financial incentives include reduced co-payment and
deductible amounts when the participant uses a preferred provider. Steerage also occurs through
communication efforts such as providing participants with a list of preferred providers, a hotline to inform
and refer participants to preferred providers, and issuing identification cards designed to inform providers
that a patient is a participant eligible for the PPO discount.
A by making those providers more financially attractive.44 In return for this steerage, the providers in PPO

A discount their usual and customary fees for medical services. Providers in PPO A are willing to charge
Insurance Company A a discounted rate because the money they "lose" in discounting their fees is offset by

the increased volume of patients they will serve as a result of Insurance Company A's steering efforts. For

purposes of this hypothetical, assume that the Insurance Company B/Participant B contract and the Insurance

Company C/Participant C contract use similar economic incentives to steer participants to providers in PPOs
B and C, respectively. Thus, in return for this steerage, the providers in PPO B promise Insurance Company

B they will discount their usual and customary fee for medical services. PPO C and Insurance Company C
have the same arrangement. There are no other insurance companies or PPOs in this hypothetical

metropolitan area.

         Given this background, suppose Participant A breaks his arm. It is undisputed that in this
metropolitan area, the usual and customary fee for setting a broken arm is $1000.00. Providers in PPO A
agree that because Insurance Company A steers participants to them, they will only charge $800.00 for setting

a broken arm rather than the customary $1000.00. As such, if Participant A's arm is set by a provider in PPO
A, then Insurance Company A will pay 90% of the $800.00 fee ($720.00) and Participant A will pay 10%

of the $800.00 fee ($80.00).
         However, if Participant A chooses to have his broken arm set by an out-of-network provider, i.e., a
provider in PPO B or PPO C,45 Participant A expects that he will pay 20% of the fee for medical service and
that Insurance Company A will pay 80% of the fee. Although the percentages are not disputed, at issue in

this hypothetical and in this case is: what is the correct fee for medical service?

                                                       2.
         Under Parkway's interpretation of the plan as applied to this hypothetical scenario, the fee for setting

the broken arm is $1000.00. As previously noted, it is undisputed that $1000.00 is the usual and customary



    44
       We note that EHI's COI contains a subsection labeled Reasons to Use a PPO Provider. The COI
lists the following reasons: "1. We [EHI] negotiate fees for medical services. The negotiated fees lower
costs to You [Participants] when You use ... providers in the PPO. 2. In addition, You may receive a
better benefit and Your Out-Of-Pocket expenses will be minimized. 3. You will have a wide variety of
selected ... providers in the PPO to help YOU with Your medical care needs. In order to avoid reduced
benefit payments, obtain Your medical care from Preferred Providers whenever possible. However, the
choice is Yours."
    45
    Recall that for purposes of this hypothetical there are only three insurance companies, only three
PPOs, and all providers in the metropolitan area are members of one and only one of the PPOs.
fee for setting a broken arm. While the provider in PPO B promised Insurance Company B that it would

charge Insurance Company B $800.00 for setting a broken arm, it did so only because (1) its loss from
receiving this discounted amount would be offset by the increased volume of patients PPO B providers would

service given Insurance Company B's steerage efforts and (2) it can subsidize these discounted fees by

continuing to charge its usual and customary fee ($1000.00) when treating patients who are not participants

in Insurance Company B's plan.
         Parkway points out that the PPO B provider never contracted with Insurance Company A. Further,

the PPO B provider made the promise to discount its fees in reliance on Insurance Company B's promise to

steer plan participants to PPO B providers. According to Parkway, by claiming that it is entitled to the
discounted fee of $800.00, Insurance Company A is availing itself of the PPO B provider's promise to

Insurance Company B without giving the PPO B provider the benefit it expected in return for its

promise—steerage.46 By claiming it is entitled to PPO B's discounted fee, Insurance Company A ignores the

basic tenet of contract law that contracts are premised on a bargained for exchange. This basic tenet of

contract law is violated when, by virtue of a brokering agreement, Insurance Company A uses the PPO B
provider's discounted fee but does not give the PPO B provider the benefit it expected in return, namely,

steerage.
         Assuming Parkway's interpretation of the plan is correct, the fee remains $1000.00, the usual and
customary fee for setting a broken arm. Participant A pays 20% of the fee, or $200.00 and Insurance

Company A pays 80% of the fee, or $800.00. Furthermore, Participant A receives the level of service he
expects from a provider to whom he is paying full price. In essence, this interpretation maintains both of
Participant A's contractual expectations: (1) he expected to pay 20% of an out-of-network provider's usual

and customary fee and (2) he expected to receive the level of service consonant with this fee.47


    46
      EHI contends that the PPO B provider receives a benefit in exchange for the discounted fee,
namely, expedited payment of its fee. We do not dispute that expedited payment benefits the provider.
Nor do we suggest that this was not a benefit considered in the contracts between PPO B, its providers,
and Insurance Company B or, for that matter, between MedView and Parkway. Nonetheless, even if a
provider receives expedited payment, he is still deprived of the benefit of his bargain when his
expectation of steerage is not satisfied.
    47
      Our analysis is based on the assumption that all parties to this hypothetical are motivated primarily
by economic self interest. Simply put, economic principles dictate that the more money a person pays for
something, the more he values it and the more he expects from it. As discussed more fully infra Part
VII.B.3.b, the sheer act of paying a premium to have an option to receive medical care out-of-network
and have a percentage of costs covered means (1) that the participant values this choice enough to pay for
it and (2) that the participant expects more from out-of-network care than from less expensive, in-network
                                                       3.
         Under EHI's plan interpretation, Participant A's fee for medical service obtained from the provider

in PPO B should not be $1000.00 but $800.00 (the discounted fee PPO B providers agreed to charge

Insurance Company B in exchange for Insurance Company B steering its participants to PPO B providers).
If the fee is $800.00, and Insurance Company A only has to pay 80% of an out-of-network provider's fee for

medical service, then Insurance Company A pays $640.00. By choosing to obtain medical service from an

out-of-network provider, Participant A is responsible for 20% of the fee for medical service, $160.00. If,

despite that EHI's interpretation is wrong, it nonetheless benefits Denton and other participants, then EHI has
purged the taint of self interest. We previously determined that EHI's plan interpretation is wrong for two

reasons, see supra Part VII.A.2.a-b. We thus reevaluate each of the proffered reasons for its wrong

interpretation and gauge whether, despite either reason, the plan interpretation results in a benefit to Denton
and other like plan participants.

         We first analyze EHI's interpretation from the view that it's interpretation is wrong because the series
of contracts does not entitle EHI to the discounted fee. We then analyze the interpretation from the view that
it is wrong because EHI cannot modify the meaning of the term "expense" in its contract with Denton. If we

find a benefit to Denton and other participants, then EHI's wrong but reasonable plan interpretation is entitled
to deference. If we find EHI's interpretation does not inure a benefit to Denton and other plan participants,
we may conclude that the interpretation is arbitrary and capricious.

                                                       a.
         Assuming EHI's interpretation is wrong because Insurance Company A is not entitled to the
discounted fee PPO B providers promised to Insurance Company B, we consider whether EHI's wrong but

reasonable interpretation is entitled to deference because it benefits Denton and other participants. If

Insurance Company A is not entitled to the discounted fee PPO B providers promised to Insurance Company

B, then the cost of medical services is just the usual and customary fee for setting a broken arm, i.e.,

$1000.00. By only paying $640.00 of the PPO B provider's bill, Insurance Company A leaves Participant
A on the hook for the remainder of the bill, $360.00.48 While Participant A expects to pay more for


care.
    48
     In its reply brief, EHI assures the court that it "has never taken the position that it would abandon
Denton and leave him to pay the entire amount of the discount." Despite EHI's assertion that it would
never "abandon Denton," the fact of the matter is that Denton is liable for Parkway's bill. He is obligated
out-of-network medical service, he only expected to pay 20% of an out-of-network provider's fee. Given that
the usual and customary fee is $1000.00, Participant A expects he will pay $200.00 and that Insurance

Company A will pay $800.00. However, if Insurance Company A only pays 80% of the $800.00 discounted

fee, i.e., $640.00, Participant A is responsible for a co-payment of 20% of the discounted fee ($160.00) plus
the remainder of the bill ($200.00) when he is balance billed by the PPO B provider. Thus, Insurance

Company A's interpretation of the plan results in Participant A paying $360.00 rather than $200.00 for
out-of-network medical care.

         This unexpected increase in cost will deter Participant A from seeking out-of-network medical care.

The primary reason managed care plan participants choose PPOs over less expensive forms of managed care
is that PPOs allow a participant the flexibility to seek out-of-network treatment for a small increase in the

percentage of his co-payment.49 HMOs, in contrast, typically provide no coverage for out-of-network care.

Because Insurance Company A's interpretation of the plan deters Participant A from utilizing the

out-of-network care option, Participant A loses some of the benefit he expected to receive when he paid his
premium. If out-of-network care was not going to be a financially viable option, Participant A might have

chosen health care coverage from an HMO rather than a PPO.

         Indeed, the ability to receive out-of-network care is the sine qua non of a PPO. Although the option

of having out-of-network medical care covered by insurance will cost the participant more money,

participants who choose PPOs over HMOs deem this burden outweighed by the benefit of the flexibility to

choose one's health care provider. By making this option more financially onerous than the participant
originally (and rightfully) expected when he entered the PPO arrangement, EHI deters the participant—in
fact, all plan participants—from seeking out-of-network care. In so doing, EHI effectively limits participants

to in-network providers. Therefore, at best, EHI is depriving participants of their bona fide contractual

expectations. At worst, EHI is siphoning money from participants and splitting the proceeds of this ill-gotten




to pay Parkway whatever amount EHI does not pay until Parkway is made financially whole. In short,
insofar as Denton is analogous to Participant A, he is financially disadvantaged because he is responsible
for the remainder of the bill.
    49
      A PPO covers the cost of medical care obtained from an out-of-network provider while an HMO
does not. This flexibility is not without a price; the increased cost to the insurance company of a
participant obtaining out-of-network care is reflected in the participant's premium payment, which is
generally higher than an HMO premium payment.
gain between itself and HSI.50

         It is plain that EHI's wrong interpretation (i.e., wrong because EHI is not entitled to Parkway's

discounted fee) is not entitled to deference because it deprives participants of their contractual expectation.
As such, EHI has not purged the taint of self interest. We find, therefore, that its plan interpretation is

arbitrary and capricious. EHI's success on appeal, however, depends on whether, in light of the other reason

its plan interpretation is wrong, we find that the interpretation benefits Denton and other participants.
Consequently, we now consider whether EHI's interpretation continues to be arbitrary and capricious even

if EHI is correct that Insurance Company A is entitled to the discounted fee, but incorrect about how this

discount impacts Insurance Company A's contract with Participant A.

                                                      b.
         According to EHI, when Participant A received medical service from Provider B, Provider B should

have charged Participant A $800.00 based on a contract that Insurance Company A made through a series of
middlemen. EHI deems it irrelevant (1) that Provider B never knew its promise to discount its usual and
customary fee was leased to Insurance Company A and (2) that Provider B does not get steerage in return for

this promise. Because both Participant A51 and Provider B are unaware that Provider B is obligated to charge
a discounted fee, they agree that Participant A will pay $1000.00 and Provider B will set Participant A's

broken arm with a level of service consonant with this fee. Provider B bills Insurance Company A on
Participant A's behalf demanding 80% of $1000.00 ($800.00) from Insurance Company A and 20% ($200.00)

from Participant A. Assuming EHI's plan interpretation as correct—that the series of contracts entitles
Insurance Company A to the discounted fee—the correct total fee for setting Participant A's broken arm is
$800.00 and not $1000.00. Therefore, Insurance Company A owes Provider B 80% of $800.00 ($640.00)

and Participant A owes Provider B 20% of $800.00 ($160.00). At first glance it seems that Participant A



    50
      It concerns us that while participants are deterred from exercising their contractual right to obtain
out-of-network medical care, brokers such as HSI are profiting. EHI pays HSI a fee equal to twenty
percent (20%) of the discount obtained on each provider bill. For instance, if Parkway's bill for setting a
broken arm is $1000.00, yet EHI and HSI recalculate the bill at $800.00, then EHI pays HSI 20% of
$200.00 ($40.00). In essence, participants pay more (in the form of premium payments) and providers
receive less than the usual and customary fee for services. Meanwhile, EHI collects premium payments
which reflect its obligation to pay for out-of-network care while simultaneously refusing to pay the full
fee for such care when its obligation arises. Then, EHI pays HSI a percentage of its savings and pockets
the remainder.
    51
     It bears repeating that by informing Denton that it had negotiated discounted fees with in-network
providers, EHI implied that it had not negotiated discounted fees with out-of-network providers.
benefits from this arrangement because he received the level of service he expected from an out-of-network
provider yet only had to pay 20% of a reduced fee rather than 20% of the usual and customary fee.

         However, our analysis reveals that Participant A does not benefit in the long run. Consider that after

struggling with the hassle of determining and collecting its fee, Provider B is now aware that he is only going
to receive $800.00 when setting the broken arms of participants in Insurance Company A's plan.52

Financially, Provider B is in no different a position than Provider A, Insurance Company A's in-network

provider. Like Provider A, Provider B is now obligated to charge Insurance Company A's plan participants
a discounted fee. Unlike Provider A, however, Provider B does not get the benefit of steerage from Insurance

Company A. Also unlike Provider A, Provider B collects $640 (80% of $800) from Insurance Company A

while Provider A collects $720.00 (90% of $800.00). In comparison to Provider A, then, Provider B is
burdened with collecting a higher percentage of his fee from an individual participant, who is invariably a
payor less financially secure and able than an insurance company.

         Consideration of these effects of EHI's interpretation on Provider B reveals that the interpretation
deleteriously impacts Participant A and others like him. When Participant A breaks his other arm and returns
to Provider B because he was pleased with the level of service he previously received, Provider B is unable

to provide Participant A with the same level of service because he receives less compensation. The entire
purpose of a PPO rather than an HMO is to afford participants the choice to receive out-of-network medical
care. PPO Participants know their medical care will be less expensive if they receive such care from an

in-network provider. They choose, nonetheless, to pay a higher premium for the freedom to have their
medical expenses covered when they receive medical care elsewhere. A participant presumably believes the
level of service he receives outside the network will be different from the level of service he receives inside

the network; this is why he pays for the option of going outside the network.53 Implicit in the belief that the
level of medical service differs outside the network is the participant's understanding that this level of service

will cost more than in-network medical care. The participant's act of paying for this choice is evidence that
participants value the ability to receive medical care outside the network. Presumably, this value is a


    52
      From this point in our analysis, we assume that all parties—insurance companies, providers, and
participants—are apprised of all relevant facts.
    53
      Because it is impossible to account for all possible altruistic or subjective motivations, this analysis
necessarily presumes that the actors in this hypothetical scenario (insurance companies, providers, and
participants) are motivated and act in a way consonant with their own economic self interest. As such, we
analyze this problem through the objective means available to us, namely—economic analysis.
different, if not better, level of medical service. We have no doubt this is a participant's contractual

expectation when he opts for a PPO health insurance policy.

         The results of EHI's plan interpretation crash head on into a participant's rightful and understandable
expectation. When Provider B knows that he will be paid less for setting Participant A's arm, he will be

unable to provide the same level of service.54 Participant A chose to receive medical care from Provider B

because he thought he would receive a level of service consonant with the higher fee he expects the
out-of-network provider to be paid. If Participant A wanted a level of service consonant with a discounted

fee, he would get his broken arm set by an in-network provider. The ultimate result of EHI's plan

interpretation is that participants receive a level of service consonant with a discounted fee regardless of

whether they receive their medical care from an in-network or out-of-network provider. But for the
co-payment differential, there is little difference between in and out-of-network providers. Because such an

interpretation works to deprive participants of their contractual expectation upon entering a PPO, EHI has
not purged the taint of self interest. Accordingly, we hold that EHI's plan interpretation is arbitrary and
capricious.55

                                                       4.
         Not only does EHI's plan interpretation deleteriously impact current Participant A's contractual

expectations, if followed through to its natural conclusion, EHI's plan interpretation could alter the rights and
obligations of future participants and providers. Whether the Parkway/MedView, MedView/HSI, HSI/EHI



    54
       We reiterate that our analysis presumes that all parties act out of economic self interest. Given that
economic principles, not subjective motivations, underlie our analysis, we note that when a provider's fees
are reduced yet overhead and other costs of doing business remain constant, something has to give. Of
course we are not intimating that, regarding quality of outcomes, a provider will purposely provide less or
worse medical care. We are saying that the economic realities of this scenario mean that something has to
give, i.e., the level of service. The provider will be forced to take on more patients to offset the reduction
in its fee; more patients may result in increased waiting time. Another way the provider can compensate
for accepting lower fees is to cut the salaries of his staff or hire fewer staff. Lower salaries may mean a
less educated or experienced staff, both of which would impact the level of service a patient receives.
Likewise, fewer staff necessarily means there will be less personnel available to attend to the patient; this
too impacts the level of service a patient receives. As such, our assertion that the level of service Provider
B is able to deliver may differ when he is paid a discounted fee is based simply on economic principles,
not on a judgment about the provider's skill or integrity.
    55
      Our holding should not be read to mean that payors, such as insurance companies, can never
contract with out-of-network providers for reduced fees. Instead, we note that at the time of contract
formation between EHI and Software Builders, EHI had yet to contract with HSI. Further, EHI
represented to Denton that it only had reduced fee arrangements with its in-network providers, i.e.,
PHCS's providers. Finally, EHI never informed Denton that it had negotiated reduced fees with
out-of-network providers.
series of contracts entitles EHI to the discount or not, Participant A has, in effect, lost the benefit of seeking
and receiving out-of-network care. Under either of the reasons we determined that EHI's plan interpretation

is wrong, Participant A is likely to demand lower premiums to compensate for the loss of this justified and

bargained for contractual expectation. If Participant A and other similarly situated participants succeed in
securing lower premiums, then Insurance Company A will have less income. Because Insurance Company

A has less income, it will demand larger discounts from providers in PPO A, thereby driving down the fees
of in-network providers. Because the level of service participants receive remains consonant with the amount

of money providers receive, this reduction in fees will impact the level of service enjoyed by Participant A

and others like him. If Insurance Companies B and C interpret their plans to allow undisclosed discounts with
out-of-network providers, they too may suffer a participant backlash which in turn may provoke Insurance

Companies B and C to demand lower fees from providers in PPOs B and C, respectively. The downward

spiraling of the level of service would repeat itself as the providers in PPOs B and C adjust the level of service

they provide to reflect their reduced compensation.
         Ironically, when a participant in a traditional PPO arrangement is not satisfied with his in-network

care, he may seek medical care from an out-of-network provider. For instance, in our hypothetical scenario,

Insurance Company A continues to cover the costs of Participant A's medical care when he obtains services
from an out-of-network provider. Given the closed universe of our hypothetical scenario, the out-of-network

providers available to Participant A would be those providers in PPO B or PPO C. By virtue of undisclosed

contracts with a series of middlemen, Insurance Company A can base the percentage it owes the PPO B or
C provider on the discounted fee the PPO B or C provider promised Insurance Company B or C rather than

on the usual and customary fee. The fee the PPO B or C provider promised to Insurance Company B or C

reflects the downward spiraling of provider fees spurred by participants' demand for lower premiums. Not
only are the PPO B and C providers having to further discount their fees to remain in-network providers for

Insurance Companies B and C, respectively, but due to the effect of agreements like the EHI/HSI contract

and the HSI/MedView contract, PPO B and C providers no longer offset this loss by the usual and customary

fees they receive when they treat patients who are not participants in Insurance Companies B and C's plans.56



    56
      Recall that the provider has two primary means for offsetting the loss it incurs by charging
Insurance Company B a discounted fee: (1) the high volume of patients it treats due to Insurance
Company B's steerage efforts and (2) receiving its usual and customary fee when treating patients who are
not participants in Insurance Company B's plan.
        Importantly, it follows that this effect on providers will negatively impact participants. Consider that

the level of service Participant A receives from an in-network provider reflects the further discounting of fees
demanded by Insurance Company A to offset its lower premiums. Worse still, the level of service Participant

A receives out-of-network is also diminished as providers in PPOs B and C adjust for the failure to receive

their usual and customary fee when treating Insurance Company A's participants. When followed to its

natural conclusion, EHI's plan interpretation in effect turns a discounted fee negotiated between a specific
provider and specific insurance company into the usual and customary fee for the entire medical services

industry. Because the level of service participants receive is directly related to this reduction in fees,
participants' expectations continue to be unfulfilled.

        As the above hypothetical scenario demonstrates, participants' contractual expectations are not

satisfied as a result of EHI's plan interpretation. Because EHI's interpretation deprives plan participants of
their contractual expectations, we find that EHI's plan interpretation is arbitrary and capricious. The judgment
of the district court is, therefore, AFFIRMED.
