                     United States Court of Appeals
                           FOR THE EIGHTH CIRCUIT
                                   ___________

                                   No. 06-2818
                                   ___________

Kenny J. Werdehausen; Anita             *
Werdehausen,                            *
                                        *
      Plaintiffs - Appellants,          * Appeal from the United States
                                        * District Court for the
      v.                                * Eastern District of Missouri.
                                        *
Benicorp Insurance Company,             *
                                        *
      Defendant - Appellee.             *
                                   ___________

                              Submitted: December 13, 2006
                                  Filed: May 29, 2007 (Corrected 6/6/07)
                                  ___________

Before LOKEN, Chief Judge, JOHN R. GIBSON and MURPHY, Circuit Judges.
                              ___________

LOKEN, Chief Judge.

       Kenny Werdehausen had neck surgery and submitted a benefits claim under his
employer’s group health plan reflected in an insurance policy issued by Benicorp
Insurance Company. In reviewing the claim, Benicorp discovered that Werdehausen
had failed to disclose the need for neck surgery in his policy enrollment application.
Benicorp determined that this was a material misrepresentation because disclosure
would have increased the employer’s group health policy premium by $2,000 per
month (the estimated cost of the surgery spread over two years). Benicorp
retroactively rescinded Werdehausen’s enrollment and denied all pending claims for
plan benefits submitted by Werdehausen and his wife. The Werdehausens sued.
      After Benicorp removed their state court action, the Werdehausens filed an
amended complaint seeking to recover plan benefits under the Employee Retirement
Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001 et seq.; and alleging that
Benicorp violated the Health Insurance Portability and Accountability Act of 1996
(HIPAA), Pub. L. No. 104-191, 110 Stat. 1936, by engaging in health status
discrimination, and violated the Missouri Health Care Utilization Review Act
(MHCURA), Mo. Rev. Stat. § 376.1361(13), by denying insurance coverage for
preauthorized medical treatment. The district court granted Benicorp summary
judgment on the ERISA claims, dismissed the HIPAA claim, and held the MHCURA
claim preempted by ERISA. The Werdehausens appeal. We reverse.

                                  I. Background

      Werdehausen became a participant in the group health plan in 1994. His
employer changed insurers to Benicorp at the end of 2002. To remain participants,
Werdehausen and other employees had to complete Benicorp’s enrollment application
form. The form required disclosure of Werdehausen’s medical history, including any
condition that he knew might require surgery -- information Benicorp’s underwriters
then used in setting the group health policy premium, 75% of which was paid by the
employer. The form stated that Werdehausen’s answers must be “true and complete”
and warned that “misstatements or omissions of information may be basis for denying
payment of a claim or voiding coverage entirely.” Werdehausen’s November 13,
2002, application disclosed that he had undergone lower back surgery in April 2002
but did not disclose that a doctor told him on October 29, 2002, that he would
eventually need surgery for a herniated disc in his neck. Werdehausen claims the non-
disclosure was innocent; he expected Benicorp to obtain his full medical records from
the doctor listed in the application.

     When Werdehausen submitted a claim to recover the costs of his neck surgery,
Benicorp obtained and thoroughly reviewed his prior medical records from various

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medical providers. These records revealed that Werdehausen was first treated for
neck pain in September 2000, was advised in March 2002 that he needed neck surgery
but elected to have back surgery first, and was again advised in October 2002 that he
would eventually need neck surgery.

      Benicorp’s lengthy group policy included the following General Provisions:

      STATEMENTS - MISSTATEMENTS. . . . . If an Insured Employee’s
      or Insured Person’s misstatement of facts affects his/her amount or type
      of insurance, the truth shall be used in deciding the coverage in force, if
      any. Premiums and/or benefits may be adjusted to reflect premium
      and/or coverage for the age or medical condition of the Insured Person.

                                   *   *    *    *    *

      TERMINATION FOR . . . MATERIAL MISSTATEMENTS

      . . . . We reserve the right to terminate the coverage of an Insured Person
      who has made a material misstatement in their Group Enrollment Form.

The Certificate Book provided to Werdehausen also contained these provisions. On
August 5, 2003, Benicorp sent Werdehausen a letter reviewing his medical history in
detail and concluding:

      Had your actual medical history been revealed in the application for
      insurance . . . the coverage for your employer group would have been
      issued at a higher premium rate. Therefore . . . your coverage . . . has
      been rescinded . . . pursuant to our rights as set forth in the application
      for insurance, the Policy and the certificate booklet. . . . The result of this
      action is to void your coverage back to the effective date, as though it
      was never in effect. Consequently, no benefits are payable for any
      expenses incurred by your family.




                                           -3-
Werdehausen timely appealed this decision. Benicorp’s Claim Review Committee
affirmed and advised Werdehausen of its adverse decision in a lengthy letter dated
September 12, 2003.

                  II. The ERISA Standard of Review Dispute

       The group health policy granted Benicorp discretionary authority to interpret
the policy and determine eligibility for benefits. Such a plan provision normally
triggers judicial review of a benefits denial under a deferential abuse-of-discretion
standard. However, “if a benefit plan gives discretion to an administrator or fiduciary
who is operating under a conflict of interest, that conflict must be weighed as a factor
in determining whether there is an abuse of discretion.” Firestone Tire & Rubber Co.
v. Bruch, 489 U.S. 101, 115 (1989) (quotation omitted). To obtain the advantage of
less deferential review, the claimant must show a “palpable” financial conflict of
interest that “has a connection to the substantive decision reached” and raises “serious
doubts as to whether the result reached was the product of an arbitrary decision or the
plan administrator’s whim.” Sahulka v. Lucent Techs., Inc., 206 F.3d 763, 768 (8th
Cir. 2000) (quotations omitted).

       In the district court, the Werdehausens argued that Benicorp operated under
such a conflict of interest. The district court properly allowed discovery on this issue.
The Werdehausens deposed Brad Meyers, Benicorp’s claim review manager who
signed the two letters advising of the adverse claim decision. Meyers testified:

      Q So the insurance policy says that you can, in the case of a
      misstatement, amend or revise the premium retroactively; is that correct?

      A The Werdehausen policy says that premiums . . . may be adjusted to
      reflect . . . the age or medical condition of the insured person. So we do
      have the option to adjust the premium . . . .



                                          -4-
      Q However, the company practice and policy is that you never adjust the
      premium; is that correct?

      A The current company policy is that we do not, yes.

      Q And was that the policy that was in effect at the time the
      Werdehausen case was handled?

      A Yes.

      Q So in the process of handling the Werdehausen case, neither you nor
      anybody else with Benicorp ever considered adjustment of premium?

      A No. We followed company policy and performed the rescission.

The district court concluded that Benicorp had a financial conflict of interest but was
nonetheless entitled to deferential review because the Werdehausens failed to prove
that the conflict of interest caused a breach of fiduciary duty. Consistent with abuse-
of-discretion review, the court then limited its review of the merits of Benicorp’s
decision to the administrative record before the claims administrators.

                              III. The ERISA Claims

       The parties raise many complex issues on appeal. But in our view the problem
boils down to a relatively focused issue of ERISA law that in turn reveals a genuine
issue of disputed fact precluding the grant of summary judgment on this record.

        In Shipley v. Arkansas Blue Cross & Blue Shield, 333 F.3d 898 (8th Cir. 2003),
an employee enrolled in his employer’s benefit plan and failed to disclose repeated
prior treatments for symptoms of emphysema. Some months later, when the employee
was diagnosed with cancer and emphysema, the insurer rescinded the policy and the
employee sued. We joined other circuits in concluding that “federal common law
allows for the equitable rescission of an ERISA-governed insurance policy that is

                                         -5-
procured through the material misstatements or omissions of the insured.” 333 F.3d
at 902. Applying the abuse-of-discretion standard of review, we upheld the insurer’s
decision to rescind the policy because the application form “clearly limited coverage
for preexisting conditions” and therefore the non-disclosures were material in
determining the extent of coverage and premium amounts. 333 F.3d at 905.

      In this case, the Benicorp policy expressly authorized rescission for material
misstatements in the enrollment application. In granting summary judgment
dismissing the Werdehausens’ ERISA claims, the district court noted that Shipley
permits rescission for knowing material misstatements, even if not made with
fraudulent intent. Applying the abuse-of-discretion standard of review, the court
concluded that Werdehausen’s non-disclosures were material because, had Benicorp
known of his cervical problems, “it would have issued coverage at a significantly
higher premium rate.” We agree with the court’s analysis of these issues, which the
Werdehausens virtually concede on appeal.

       However, Shipley permits but does not require retroactive rescission for
innocent material non-disclosures. When the benefit plan makes alternative remedies
available, the benefits decision-maker must act in accordance with its duties as an
ERISA fiduciary in choosing among those remedies.1 Here, Benicorp’s claims
manager testified that the policy gave Benicorp the option of retroactively increasing
the premium. Yet Benicorp retroactively rescinded Werdehausen’s enrollment and
denied all his pending claims because, Meyers testified, it is the company’s policy to
rescind in every case, regardless of the circumstances.

      That policy was likely adopted for business reasons. When the prior group
health policy insuring the employer’s plan expired, Benicorp competed for the

      1
       Under ERISA, an insurer’s benefit determinations are “part and parcel of the
ordinary fiduciary responsibilities connected to the administration of a plan.” Aetna
Health Inc. v. Davila, 542 U.S. 200, 219 (2004).

                                         -6-
renewal business. Benicorp could require employees to disclose their medical
histories to remain enrolled in the plan. But unlike the facts in Shipley, see 333 F.3d
at 905, HIPAA precluded Benicorp from enforcing its exclusion of preexisting
medical conditions. See 29 U.S.C. § 1181(a)(3), (c)(1). Disclosure of adverse
medical conditions was still important to Benicorp for underwriting purposes, because
HIPAA does not “restrict the amount that an employer may be charged for coverage
under a group health plan.” 29 U.S.C. § 1182(b)(2)(A). The effect of HIPAA in this
situation is to increase the relative cost of the plan by compelling continued health
care coverage for employees who are likely to incur greater-than-average health care
expenses.

       As coverage for preexisting conditions was assured, enrolling employees such
as Werdehausen had little reason to submit intentionally false applications to
Benicorp. It is predictable in these circumstances that a certain number of employees
will carelessly fail to disclose their relevant medical histories on the Benicorp
enrollment form, particularly because the form provided a small blank space in which
the applicant was asked to describe, for each prior treatment: “Details of medical
conditions; treatment (past, current and planned), medication (past, current and
planned); degree of recovery and other helpful information.” After receiving the
enrollment forms, Benicorp could wait to conduct a thorough review of a claimant’s
medical history until that employee submitted a substantial claim. Then, if a material
non-disclosure was uncovered, Benicorp would automatically rescind the employee’s
coverage retroactive to its inception. Rescission increased Benicorp’s profit by the
amount of the claims thereby denied, offset by a smaller refund of the premium
attributable to that employee. Premium refunds reduced the cost of the group health
plan to the employer, Benicorp’s customer.

      The fortuitous business impact of this automatic rescission policy comes at the
expense of the federal policy enacted in HIPAA -- it results in retroactive non-
coverage of employees who are most in need of group health care coverage because

                                         -7-
of preexisting medical conditions, when under HIPAA those employees could not
have been excluded from the plan because of preexisting conditions at the time the
policy issued. If an ERISA fiduciary decides to retroactively rescind an employee’s
coverage solely on the basis of an automatic rescission policy, when it could have
recouped any loss to the plan by retroactively increasing the employer’s premium, we
find it hard to conceive of a more “palpable” financial conflict of interest, directly
connected to the substantive benefit decision made and demonstrating that the result
reached was an arbitrary exercise of the fiduciary’s discretion that conflicts with its
obligation to “discharge [its] duties with respect to a plan solely in the interest of the
participants and beneficiaries.” 29 U.S.C. § 1104(a)(1). Judicial review of such a
decision is therefore de novo. If the employee’s non-disclosure was intentional, fraud
would perhaps justify rescission, despite the availability of another remedy. But if the
non-disclosure was inadvertent, the decision to rescind must be reversed.

      However, the summary judgment record does not conclusively establish that we
have accurately described the factual setting in this case. In Paragraph 8 of its
Statement of Uncontroverted Material Facts in support of its motion for summary
judgment to the district court, Benicorp asserted:

             8. Notwithstanding the [premium adjustment] provision [in the
      policy], the Employer Application specifically limited Benicorp’s right
      to adjust premiums under the Policy by guaranteeing the initial premium
      rates for the first twelve months of coverage.

This is highly relevant. Werdehausen’s neck surgery occurred during the first twelve
months of coverage. This provision, if applicable, would deny Benicorp the ability
to provide coverage for this claim and retroactively adjust the premium. If a plan
cannot adjust the premium to recoup the unforeseen costs of an employee’s material
misstatement, then retroactive rescission under circumstances permitted by Shipley
may be the claims administrator’s proper decision. However, Benicorp’s assertion is
not an uncontroverted fact. In response, the Werdehausens stated:

                                           -8-
      Plaintiffs Werdehausen admit that the quoted portion of the [employer]
      application is quoted correctly [in Benicorp’s paragraph 8]. However .
      . . . [t]he specific application of premium adjustment authorized in the
      [policy] sections dealing with misstatements is an obvious exception to
      the general guarantee of rates in the application.

        We conclude this is a material dispute that precludes the grant of summary
judgment to either party on this record. Therefore, we must remand the ERISA claims
to the district court to resolve the issue, applying well-established principles of ERISA
plan interpretation. See Hughes v. 3M Retiree Medical Plan, 281 F.3d 786, 790 (8th
Cir. 2002); Barker v. Ceridian Corp, 122 F.3d 628, 638-39 (8th Cir. 1997); Jensen v.
SIPCO, Inc., 38 F.3d 945, 950 (8th Cir.), cert. denied, 514 U.S. 1050 (1994). If the
premium adjustment provision applied to the Werdehausens’ claims during the first
twelve months of coverage, then Benicorp’s reliance on its policy of automatic
rescission was wrongful and the Werdehausens are entitled to an order granting relief
under 29 U.S.C. § 1132(a)(1)(B), including, at a minimum, retroactive reinstatement
as a covered employee and spouse and an award of monetary relief for their
wrongfully denied claims. On the other hand, if the guaranteed rate provision applied,
the court must determine, de novo, whether to uphold Benicorp’s decision to
retroactively rescind.

                            III. Other Claims and Issues

       HIPAA. The Werdehausens’ initial state court complaint alleged that
Benicorp’s retroactive rescission violated the federal law mandating “portability and
eligibility” of employer health plans. After removing, Benicorp moved to dismiss this
claim on the ground that there is no implied private right of action under HIPAA. The
district court agreed, concluding “that Plaintiffs may not maintain a private cause of
action for Benicorp’s alleged failure to comply with HIPAA.” The Werdehausens
then filed an amended complaint alleging as part of their ERISA claims that Benicorp
discriminated “on the basis of health status, medical condition, claims experience,

                                          -9-
receipt of healthcare, and medical history,” the operative language in 29 U.S.C.
§ 1182(a)(1), one of the HIPAA provisions codified in the ERISA subchapter of Title
29. The district court granted summary judgment dismissing the ERISA claims
without referring to HIPAA.

       On appeal, the Werdehausens argue that 29 U.S.C. § 1182 is in the subchapter
that includes ERISA’s statutory remedies and therefore may be enforced by an ERISA
participant’s claim “to enjoin any act or practice which violates any provision of this
subchapter.” 29 U.S.C. § 1132(a)(3). We agree. On the other hand, Benicorp did not
directly violate § 1182(a)(1). It afforded Werdehausen coverage consistent with
HIPAA and then retroactively rescinded coverage because of material non-disclosures
on the application. Thus, the Werdehausens have no ERISA claim based directly on
a HIPAA violation. However, though the Werdehausens have no direct ERISA claim
for a violation of HIPAA, as we have explained the congressional intent underlying
HIPAA is relevant in determining whether Benicorp’s policy of automatic rescission
breached its fiduciary duty as an ERISA benefits decision-maker. In other words, like
the unpreempted state insurance law in UNUM Life Ins. Co. of America v. Ward, 526
U.S. 358, 377 (1999), HIPAA supplies a “relevant rule of decision” for the
Werdehausens’ claim to recover benefits and enforce the terms of the plan under 29
U.S.C. § 1132(a)(1)(B).

      MHCURA. The Werdehausens’ amended complaint included a state law claim
that Benicorp violated MHCURA when it preauthorized Kenny Werdehausen’s neck
surgery and then refused to cover the surgery after it was performed. Mo. Rev. Stat.
§ 376.1361(13). The violation was pleaded both as an element of their ERISA claims
and as a separate claim, but they did not invoke the judicial review remedy expressly
authorized by state law. See Mo. Rev. Stat. § 376.1387(1). The district court
dismissed this claim on the ground that Mo. Rev. Stat. § 376.1361(13) is preempted
by ERISA. We disagree.



                                         -10-
       ERISA broadly preempts “State laws to the extent that those laws relate to any
employee benefit plan” but expressly saves from preemption “any law of any State
which regulates insurance.” UNUM, 526 U.S. at 363, quoting from 29 U.S.C.
§§ 1144(a), (b)(2)(A). In Kentucky Ass’n of Health Plans, Inc. v. Miller, 538 U.S.
329 (2003), the Supreme Court modified its prior standard for determining whether
a state law “regulates insurance” within the meaning of the ERISA saving clause.
Under the new standard, to avoid ERISA preemption a state law must (1) “be
specifically directed toward entities engaged in insurance” and (2) “substantially
affect the risk pooling arrangement between the insurer and the insured.” 538 U.S.
at 342. Benicorp concedes that § 376.1361(13) is specifically directed toward health
insurers2 but argues that it does not substantially affect the risk pooling arrangement.

      In Miller, the Court ruled that a Kentucky statute substantially affected the risk
pooling arrangement because it “alter[ed] the scope of permissible bargains between
insurers and insureds in a manner similar to . . . the notice-prejudice rule we sustained
in UNUM.” 538 U.S. at 338-39. The California notice-prejudice rule in UNUM
required insurers to pay untimely claims unless the insurer was prejudiced by the
delay. 526 U.S. at 364. Like the California rule, Mo. Rev. Stat. § 376.1361(13) limits
an insurer’s contractual ability to deny claims. The California rule limited
enforcement of a policy provision creating a time bar. The Missouri statute bars
enforcement of a provision excluding coverage if the insurer preauthorized the
medical procedure. Each increases the insurer’s liability for health care services
already provided. Each “dictates to the insurance company the conditions under
which it must pay for the risk that it has assumed.” Miller, 538 U.S. at 339 n.3.


      2
        The statute applies to a “health carrier,” a term defined elsewhere to include
entities such as hospitals that are not insurers. See Mo. Rev. Stat. § 276.1350.22.
However, this type of overbreadth does not prevent § 376.1387.13 from being a state
law regulating insurance within the meaning of the ERISA saving clause. See Rush
Prudential HMO, Inc. v. Moran, 536 U.S. 355, 372 (2002); Prudential Ins. Co. of
America v. Nat’l Park Med. Ctr., Inc., 413 F.3d 897, 910-12 (8th Cir. 2005).

                                          -11-
       We conclude that the substance of § 376.1361(13) satisfies both components
of the Miller standard and is therefore saved from ERISA preemption. Of course, any
state law remedy is preempted by ERISA’s comprehensive remedial scheme. See
Davila, 542 U.S. at 209; Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 54 (1987). But
again like the unpreempted notice-prejudice rule in UNUM, § 376.1361(13) supplies
a relevant rule of decision in resolving the Wederhausens’ ERISA claims under 29
U.S.C. § 1132(a)(1)(B). 526 U.S. at 376-77; see also Rush Prudential, 536 U.S. at
380. Not surprisingly, whether Benicorp or its agent preauthorized Werdehausen’s
neck surgery is a disputed issue of fact. It must be resolved in the district court on
remand.

       Other Issues. As we have reversed the grant of summary judgment dismissing
the Werdehausens’ ERISA claims under 29 U.S.C. § 1132(a)(1)(B), we need not
address their arguments that the district court committed evidentiary and discovery
errors in the summary judgment proceedings.

       The judgment of the district court is reversed in part and the case is remanded
for further proceedings not inconsistent with this opinion.
                       ______________________________




                                        -12-
