                                                                          F I L E D
                                                                  United States Court of Appeals
                                                                          Tenth Circuit
                                     PUBLISH
                                                                          MAR 6 1998
                     UNITED STATES COURT OF APPEALS
                                                                        PATRICK FISHER
                                                                              Clerk
                                 TENTH CIRCUIT



 LINDA MCGRAW,

       Plaintiff-Appellant,
 v.

 THE PRUDENTIAL INSURANCE                                 No. 97-6064
 COMPANY OF AMERICA, a
 corporation,

       Defendant-Appellee.


           APPEAL FROM THE UNITED STATES DISTRICT COURT
              FOR THE WESTERN DISTRICT OF OKLAHOMA
                       (D.C. No. CIV-95-1076-T)



Glen Mullins, Oklahoma City, Oklahoma, for Plaintiff-Appellant.

Arlen E. Fielden, Crowe & Dunlevy, Oklahoma City, Oklahoma, for Defendant-Appellee.


Before PORFILIO, ANDERSON, and BALDOCK, Circuit Judges.


PORFILIO, Circuit Judge.
       Linda McGraw appeals three adverse orders resulting in the denial of her claims

for medical insurance benefits for physical therapy and home nursing care prescribed to

treat her multiple sclerosis. We affirm in part, reverse in part, and remand.

                                   I. BACKGROUND

                                      A. The Disease

       Multiple sclerosis (MS) is a demyelinating disease of the central nervous system.

That is, it is believed, deficiencies or abnormalities in the immune system trigger immune

cells to attack myelin, the insulating sheath surrounding nerve cell processes located in

the central nervous system. The damaged myelin cannot transmit electrical impulses

along the nerve fiber pathways in the brain and spinal cord causing the individual to lose

strength, coordination, and balance; to have problems with balance and bladder control;

and to experience numbness, tingling, and blurred or double vision.1 Most commonly,

MS occurs in a relapsing/remitting form in which exacerbations or relapses, periods of

symptom flare-ups, are interrupted by remissions, times when no new symptoms occur or

symptoms improve. Much less common is a chronic progressive form in which spinal

cord and cerebellar dysfunction predominate. Despite these two broad categorizations,




       1
        Numerous articles found in the Appellant’s Appendix, Volume V, provide the
basis for this summary. See, e.g., Galen Mitchell, M.D., Update on Multiple Sclerosis
Therapy, 77 Contemporary Clinical Neurology 231 (January 1993); Multiple Sclerosis
Handbook, UCSF - Mount Zion Medical Center (1995) [hereinafter Multiple Sclerosis
Handbook].

                                            -2-
the course of MS is unpredictable.2 Because the cause of MS remains unknown, there is

no prevention or cure. Instead, an armamentarium of treatments for MS-related

symptoms, drugs that may modify the course of the disease, and rehabilitative and

maintenance therapies to promote and improve functionality and independence are

accepted approaches in the present symptomatic management of MS.3

                               B. Plaintiff’s Medical History

       In 1983, Dr. Sherman Lawton, a board certified neurologist in Oklahoma City,

diagnosed Linda McGraw, then age twenty-eight, with MS. By the spring of 1990, Ms.

McGraw used a walker to stabilize her gait and relied on a wheelchair for longer

distances. In 1991, Dr. John H. Noseworthy, a neurologist at the Mayo Clinic in

Rochester, Minnesota, performed a comprehensive evaluation of Ms. McGraw and the

progression of her MS and recommended an inpatient evaluation at St. Mary’s Hospital of

Physical Medicine and Rehabilitation Unit to more comprehensively address her

problems with mobility.4 Physically too weak to travel back to Mayo, Ms. McGraw was


       Susan B. O’Sullivan, EdD, PT, and Thomas J. Schmitz, PhD, PT, Physical
       2

Rehabilitation: Assessment and Treatment, Chapter 22, Multiple Sclerosis 451 (3d ed.
1994).
       3
           Multiple Sclerosis Handbook, at 1674.
       4
           Dr. Noseworthy later summarized his evaluation in a December 17, 1992 letter,
stating,

       She has relapsing-progressive multiple sclerosis and is markedly disabled.
       At that time, she was unable to walk more than a few steps with assistance
                                                                               (continued...)

                                             -3-
referred to Dr. Donald L. Landstrom, another board certified neurologist in Oklahoma

City, who examined her and confirmed Dr. Noseworthy’s recommendation for inpatient

rehabilitation. Dr. Landstrom then admitted Ms. McGraw to the HealthSouth

Rehabilitation Center on January 13, 1992, for twice daily physical and occupational

therapy5 which was completed on February 1, 1992.

       On another front, Dr. David R. Rittenhouse, a urologist, was treating Ms.

McGraw’s recurrent urinary tract infections, another manifestation of the course of MS.

Indeed, as immobility increases so do urinary tract infections unless the patient readily

transfers to a commode or is catheterized. Although Gary McGraw, Linda’s husband,

was able to catheterize his wife in the early morning, Dr. Rittenhouse ordered home

nursing visits to perform the additional catheterizations, the numbness in Ms. McGraw’s

hands and her immobility making self-catheterizations daunting. A nurse then would visit

daily to monitor her bladder function as well as record vital signs and assist with some

physical therapy.6


       (...continued)
       4

       and required two assistants to climb onto the examining table. She was, in
       addition, disabled by emotional incontinence, cerebellar dysarthria, rotatory
       nystagmus, and visual loss .... In addition, she was troubled by sciatica.

       The record indicates physical therapy addresses problems with gait and balance in
       5

the lower extremities, while occupational therapy targets a patient’s dexterity and upper
body coordination.
       6
        Dr. Rittenhouse wrote, “Her inability to evacuate her bladder, when necessary, by
transferring to a commode does put her at a higher risk of further problems with recurrent
                                                                                (continued...)

                                            -4-
       Thus, to combat these two fronts, the interrelationship of functionality and the

prevention of bladder infection, Dr. Lawton ordered additional outpatient physical

therapy through Baptist HomeCare with the goal of improving Ms. McGraw’s endurance,

strength, and mobility. Explaining this treatment, Dr. Lawton wrote her medical insurer,

the Prudential Insurance Company of America,

       Beginning in April of 1992 it was necessary to resume physical therapy for
       Linda in her home. She is unable to obtain this therapy outside of her home
       because of marked limitations. For the patient to be seen outside the home
       it would be necessary for her to be carried to a wheelchair and then be
       carried into a facility.

The following May 1993, noting Ms. McGraw “had lost much of her ability for selfcare,”

Dr. Lawton again sought precertification for inpatient care at Baptist Medical Center,

explaining, “her case is amenable to intensive physical and occupational therapy, which is

clearly indicated in an attempt to improve the quality of this patient’s life.”

       This second in-patient stay was followed by home physical therapy and skilled

nursing services provided by Hillcrest Home Health Care and Hillcrest Health Center to

help Ms. McGraw maintain functionality and assist in her catheterizations. Dr.

Rittenhouse and Dr. Gena Gardiner, a family practitioner, ordered this care.

                                      C. The Conflict

       For each of these episodes of care, HealthSouth Rehabilitation Center, Baptist

Care Advantage, Baptist Medical Center, Hillcrest Home Healthcare, and Hillcrest Health

       6
        (...continued)
urinary tract infections or progressive injury to her bladder.”

                                             -5-
Center, Gary McGraw submitted claims for reimbursement totaling about $47,000 from

his medical insurance plan, Prudential Plus, a policy offered by Prudential (the Plan)

which his employer, Lifefleet, Inc., purchased. Prudential denied each claim under the

Plan’s general exclusion of unnecessary services or supplies for the diagnosis or medical

care of a sickness or injury. Under this provision, to avoid the exclusion and receive

payment, the service must be needed or “medically necessary.” The Plan defines this

term:

        To be considered “needed”, a service or supply must be determined by
        Prudential to meet all of these tests:

        (a) It is ordered by a Doctor.

        (b) It is recognized throughout the Doctor’s profession as safe and effective,
        is required for the diagnosis or treatment of the particular Sickness or
        Injury, and is employed appropriately in a manner and setting consistent
        with generally accepted United States medical standards.

        (c) It is neither Educational nor Experimental or Investigational in nature.

        To decide whether to exclude a particular service, a case manager reviews the

claim and makes a recommendation to the medical director. Prudential then relies upon a

three-tiered review process. At the first level, the local medical director decides whether

the claim is covered by the policy. A challenge of that decision then goes to Prudential’s

regional medical director. At the third level, an appeals committee comprised of several

members who submit individual ballots may confirm or reverse the regional medical

director’s decision.


                                             -6-
       In this case, the medical director, Dr. Boyd Shook, board certified in internal

medicine, made the initial decision to deny payment of the claim based on his belief

“[p]hysical therapy does not affect the course of MS” and was therefore not medically

necessary. The regional medical director, Dr. Sharon Lewis, who had previously

practiced pediatrics, reviewed the decision and agreed. The appeals committee affirmed

these decisions.

                                    D. The Litigation

       Invoking diversity jurisdiction, Ms. McGraw filed this lawsuit claiming Prudential,

by failing to pay for medical expenses covered by the Plan, had breached its duty to deal

fairly and act in good faith under Oklahoma law. To support the application of state law,

Ms. McGraw alleged her husband’s health insurance policy qualified as a governmental

plan exempt from the Employee Retirement Income Security Act of 1974, 29 U.S.C.

§ 1003(b)(1) (ERISA). Prudential sought summary judgment, contending ERISA

preempted the application of state law and barred three of her five claims because Ms.

McGraw failed to exhaust her administrative remedies; and Prudential’s denial of the two

remaining claims was not arbitrary and capricious.

       In three separate orders, the district court granted summary judgment for

Prudential. First, it rejected Ms. McGraw’s effort to characterize her medical insurance

policy as a “governmental plan” to extricate it from ERISA’s federal statutory web.

Having found the Plan governed by ERISA, the court then granted Prudential’s second


                                            -7-
motion for summary judgment concluding Ms. McGraw failed to exhaust her

administrative remedies for the claims submitted for services rendered by HealthSouth

Rehabilitation, Hillcrest Home Healthcare, and Hillcrest Health Center. In a final order

examining the denial of coverage for the two surviving claims, the district court held Dr.

Shook’s determination the treatments were not medically necessary, while perhaps made

without benefit of a review of Ms. McGraw’s medical records, was nevertheless not

arbitrary and capricious because subsequent review assured the initial decision was

reasonable and made in good faith.

       The district court’s orders in response to cross-motions for summary judgment

merit de novo review. Garratt v. Walker, 121 F.3d 565, 567 (10th Cir. 1997). We must

assure the record demonstrates there is no genuine issue of material fact and, even after

construing all inferences in favor of the non-moving party, the movant is entitled to

judgment as a matter of law. Fed. R. Civ. P. 56(c).

                             II. GOVERNMENTAL PLAN

       Despite ERISA’s regulatory and remedial sweep, Congress did not include public

or governmental benefit plans within its reach believing, in part, state and local

governments’ ability to tax, would enable them to operate employee benefit systems that

would “avoid the pitfalls of underfunding.” Hightower v. Texas Hosp. Ass’n, 65 F.3d

443, 449 (5th Cir. 1995); see also Rose v. Long Island R.R. Pension Plan, 828 F.2d 910,

914 (2d Cir. 1987). Hence, under ERISA,


                                            -8-
       [t]he term “governmental plan” means a plan established or maintained for
       its employees by the Government of the United States, by the government
       of any State or political subdivision thereof, or by any agency or
       instrumentality of any of the foregoing....

29 U.S.C. § 1002(32). The plain language of this subsection focuses on the public entity,

“the government of any State or political subdivision thereof,” that “established or

maintained” the plan. ERISA deems these publicly-spawned plans to be exempt.

       While conceding her Plan is an employee benefit plan within the meaning of

ERISA, 29 U.S.C. § 1003(a), Ms. McGraw persists in arguing it is a “governmental plan”

exempt from ERISA. The weight of her position rests on the degree of control the

Emergency Medical Services Authority (EMSA), an Oklahoma public trust, exercises

over her husband’s employment. That is, although her husband’s paycheck comes from

Lifefleet, Inc., a company owned by Secomerica, Inc., a subsidiary of a Japanese

corporation, EMSA, in fact, controls and supervises all of her husband’s work, owns all

of the equipment connected with the delivery of ambulance services, purchases all

supplies under its tax exempt status, and holds the license permitting emergency workers

supplied by Lifefleet to operate. Indeed, EMSA, which provided Mr. McGraw’s

retirement plan, is like a vacuum, she offers, a shell into which Lifefleet employees are

drawn to perform the essential functions for which EMSA was statutorily enacted.

       Coloring an employee’s work with a governmental aura, however, shifts the

statutory focus and cannot substitute for addressing the core of the inquiry: Did EMSA, a

public trust established in Oklahoma to operate and furnish emergency health services for

                                            -9-
the “convenience, welfare, public health and safety” of the inhabitants of Tulsa and

Oklahoma City purchase, establish or maintain the Plan? The record clearly reflects it did

not. While Ms. McGraw may argue her husband’s private employment with Lifefleet,

now American Medical Response of Oklahoma, Inc. (AMR), served only as a conduit for

his actual employment with EMSA, that characterization ignores the fact EMSA did not

establish the Plan or directly employ Mr. McGraw. Instead, Secomerica purchased the

Plan for the employees of Lifefleet/AMR; Lifefleet/AMR pays Mr. McGraw’s salary; and

Lifefleet/AMR contracts with EMSA solely to provide its personnel for EMSA’s

emergency services.7

       Alley v. Resolution Trust Corp., 984 F.2d 1201 (D.C. Cir. 1993), parallels this

case. There, employees of the then defunct Federal Asset Disposition Association

(FADA) sued its receiver, the RTC, for payments due under FADA’s employee benefit

plans. FADA employees operated under federal agency (FSLIC) auspices; its employees

were not subject to federal civil service rules and were paid salaries competitive with

those paid by private financial institutions. Though acknowledging FADA’s “undeniable

public coloration,” the D.C. Circuit instead “home[d] in on the question whether FADA


       7
        Included in the record are two documents governing EMSA’s emergency services
operations. Each contains a definitions section which in the Oklahoma City Interlocal
Cooperation Agreement defines “Operations Contract” to mean “the contract for purchase
of ambulance services between EMSA and its then-contracted firm (the ‘Operations
Contractor’) for provision of ambulance services throughout the Regulated Service Area.”
EMSA paid Lifefleet/AMR based on the number of transports. In contrast, EMSA hires
and pays the salary of its medical director who serves at the pleasure of the EMSA board.

                                           - 10 -
counts as a government instrumentality for purposes of the ERISA ‘governmental plan’

exemption ... [I]n its employment relationships -- the area most relevant for ERISA

purposes -- FADA functioned not like a governmental agency, but like a private

enterprise.” Id. at 1205-06. Examining those employment relations, the court concluded

Congress did not intend the governmental plan exemption “to reach an entity that relates

to its employees as would a private business -- an entity whose employees are not subject

to laws governing public employees generally.” Id. at 1206.

       This analysis and rationale encompass the facts presented here. While Mr.

McGraw performs those tasks assigned to a public agency under Oklahoma law, the terms

and conditions of his employment more closely resemble those of private sector

employees. EMSA’s setting the professional standards and supervising the delivery of

emergency services do not transform its Lifefleet/AMR personnel into governmental

workers. Instead, as noted, too many other indicia of private sector employment

dominate these facts. See also Hightower, 65 F.3d at 443 (employees of county hospital

could not claim ERISA exemption when county hospital was leased to a private

foundation which took over its operation as well as the retirement plan); NLRB v.

Parents & Friends of the Specialized Living Center, 879 F.2d 1442 (7th Cir. 1989)

(employees of not-for-profit Illinois corporation which operated state-built, licenced, and

regulated intermediate care facility could not claim exemption for their benefit plan).




                                           - 11 -
       Thus, we hold Ms. McGraw’s Plan is not a governmental plan. ERISA then

preempts the application of state law and provides “a panoply of remedial devices,”

Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 108 (1989) (quoting

Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 146 (1985)), to assure

participants and beneficiaries of benefit plans a “full and fair review” of their claims. 29

U.S.C. § 1133(2).

              II. REVIEW OF DENIAL OF BENEFITS UNDER ERISA

                                  A. Standard of Review

       Firestone supplies the standard of judicial review of benefit determinations by

fiduciaries or plan administrators. To remain consistent with principles of trust law, the

Court held “a denial of benefits challenged under § 1132(a)(1)(B) is to be reviewed under

a de novo standard unless the benefit plan gives the administrator or fiduciary

discretionary authority to determine eligibility for benefits or to construe the terms of the

plan.” 489 U.S. at 115. If, however, the benefit plan gives discretion to an administrator

or fiduciary who operates under a conflict of interest, “that conflict must be weighed as a

‘facto[r] in determining whether there is an abuse of discretion,’” the Court qualified. Id.

(quoting Restatement (Second) of Torts § 187 cmt.d (1959)). Thus, “a conflict of interest

triggers a less deferential standard of review.” Chambers v. Family Health Plan Corp.

of Okla., 100 F.3d 818, 825 (10th Cir. 1996); Pitman v. Blue Cross & Blue Shield, 24

F.3d 118, 123 (10th Cir. 1994); Bedrick v. Travelers Ins. Co., 93 F.3d 149, 152 (4th Cir.


                                            - 12 -
1996) (“Inasmuch as the law is highly suspect of ‘fiduciaries’ having a personal interest

in the subject of their trust, the ‘abuse of discretion’ standard is not applied in as

deferential a manner to such plans.”). We have held the degree of deference to accord

such a decision will be decreased on a sliding scale in proportion to the extent of conflict

present, recognizing the arbitrary and capricious standard is inherently flexible.

Chambers, 100 F.3d at 826-27; Pitman, 24 F.3d at 123.

       Nonetheless, the parties clash over what standard of review actually governs the

facts of this case, Ms. McGraw urging de novo as the more promising route to overturn

the benefit determination and Prudential insisting although it was not the Plan

administrator but merely performed “claims administrative functions,” the Plan gave it

discretion to interpret its terms. However, in the event we find the fiduciary has

discretion to interpret the Plan, Ms. McGraw asks we heavily weigh Prudential’s conflict

of interest in denying her benefits.

       Here, the Plan expressly gives Prudential discretion to decide what is medically

necessary. It states, “To be considered ‘needed’, a service or supply must be determined

by Prudential to meet all of these tests....” Your Prudential Plus Health Plan, at 31

(emphasis added). Thus, “we review de novo the [district court’s] application of the

arbitrary and capricious standard to [Prudential’s] decision denying [Ms. McGraw’s]

benefits. Chambers, 100 F.3d at 827 (quoting Pitman, 24 F.3d at 121). However,

because every exercise of discretion impacts Prudential financially, filling or depleting its


                                             - 13 -
coffers, we afford its decisions less deference depending on the degree of conflict

manifest.

                              B. Arbitrary and Capricious

       A decision to deny benefits is arbitrary and capricious if it is not a reasonable

interpretation of the plan’s terms. Semtner v. Group Health Serv. of Okla., 129 F.3d

1390, 1393 (10th Cir. 1997); Torix v. Ball Corp., 862 F.2d 1428, 1429 (10th Cir. 1988).

The district court held Prudential’s denial of benefits for physical therapy provided by

Baptist HomeCare at the direction of Dr. Lawton from May 28, 1992, through September

1992 was a reasonable interpretation of the Plan. As noted, Dr. Lawton wrote Prudential

that Ms. McGraw’s “marked limitations” warranted in-home physical therapy, eliminating

the need to carry her chair to and from transportation and to and from the facility. This

judgment, he stated in his deposition, was premised on his view physical therapy is

recognized in the treatment of MS to provide essential physical support which improves

the individual’s strength and endurance as well as her ability to perform the activities of

daily living (ADL).8

       The decision to deny reimbursement for the care, however, was premised on Dr.

Shook’s opinion physical therapy does not affect the course of MS. An internist who had

given up his practice by 1989 to become “the medical director of all of the Prudential



       8
        These ADL refer to basic tasks made daunting by MS; for example, dressing,
eating, bathing, and communicating.

                                            - 14 -
products in Oklahoma City” (emphasis added), Dr. Shook acknowledged before making

the decision, he did not review Ms. McGraw’s medical records,9 did not talk to her

neurologist, did not examine Ms. McGraw, and did not read any medical literature

“[b]ecause it was such a simple straightforward decision.” He stated his decision was

based on the nature of MS, no doubt referring to its progressive degeneration of the

central nervous system.10 To warrant physical therapy, he explained that Prudential’s

internal protocols required a showing the condition would improve; and because there

was no evidence any intervention would even have anything to do with maintenance,

physical therapy, in his opinion, was not medically necessary.

       In contrast, Ms. McGraw’s treating neurologists testified there is a critical

distinction in the delivery of any care between what is treatable and what is curable,

emphasizing that “treatment” in the context of MS at this stage in the understanding of

the disease targets its effects and concentrates on whatever new symptoms arise. Indeed,

not getting worse may amount to “improving.” Thus, maintaining functionality --

stretching out the legs to prevent contractures which commonly afflict MS patients,



       Michele Beasely, Prudential’s appeals coordinator, testified Ms. McGraw’s
       9

medical records were not ordered until January 1995 and were not in the appeal file.
       10
         In its brief, Prudential describes MS as a disease with no cure, citing deposition
testimony in the record. Prudential writes, “Whether there is any effective treatment is
unsettled. However, nothing will stop the progression of the disease and no treatment
will restore a patient’s loss of strength.” (italics added). Of course, this characterization
would also fit patients suffering from many chronic progressive medical conditions such
as rheumatoid arthritis.

                                            - 15 -
coordination exercises, strengthening the upper body -- is addressed in the literature

submitted in the Appendix and uncontroverted by Prudential, as essential in the treatment

of the effects of MS.11 Although the district court credited a “difference of opinion that

can exist between medical doctors as to whether or not physical therapy is medically

necessary to treat multiple sclerosis,” the assertion does not quite capture Dr. Landstrom’s

response. To a question about whether there could be a reasonable good faith

disagreement among doctors about the place of physical therapy in the treatment of MS,

he answered, “Well, I suppose there could be, doctors can disagree about just about

anything, but I think it would be difficult to find a physician who would say that []

physical therapy has no place in the treatment of multiple sclerosis.”

       In fact, sixteen of Ms. McGraw’s approximately forty outpatient visits in the

Baptist HomeCare claim were automatically paid, deemed “medically necessary,” based

on a confidential, internal Group Claim Division Memorandum (GCLM 90-42), which




        Included in the record is a letter from Dr. Robert Daroff, Professor of Neurology
       11

and Chief of Staff at University Hospitals of Cleveland. He wrote, “Physical therapy
and/or physiotherapy is ‘medically necessary’ for the medical care of many patients with
multiple sclerosis. To claim otherwise is both ignorant and heartless.” Dr. Daroff
submitted literature to support the statement. When asked, Dr. Shook said the literature
“is mostly written by self-serving people. There’s nothing to keep people from serving
their own interest, you know, by writing an article. It happens all the time.”

                                           - 16 -
Dr. Lewis, the regional medical director, referenced in making her decision.12 That

guideline13states, in part,

       Physical therapy should be a short-term intensive and goal-oriented
       program ordered for a condition having potential for significant
       improvement. We consider a “significant improvement” to be a measurable
       and substantial increase in the patient’s physical functional abilities
       compared to his/her ability at the time treatment began.

       As we read the record, Prudential has modified its definition of “medically

necessary” with the additional requirement the treatment provide a measurable and

substantial increase in functional ability for “a condition having potential for significant

improvement.” This guideline is not binding but imposes on the “condition” of MS the

requirement it has a “potential for significant improvement.” However, under the terms

of the Plan, the medical director and subsequent Prudential fiduciaries reviewing the

claim were charged with assuring only that the treatment is ordered by a doctor; is

generally accepted under United States medical standards; and is neither educational,

experimental, or investigational in nature. Prudential’s interpretation of the Plan with this


        In her affidavit, Dr. Sharon Lewis stated, “use of these guidelines in considering
       12

medical necessity is a determination for a Prudential physician.” Because the guideline
authorized physical therapy for “short term, intensive and goal oriented treatment of a
condition which has the potential for significant improvement, as compared to when the
therapy began,” and Ms. McGraw’s “disease is a chronic progressive disease with
relapses and remissions ... only short term physical therapy would be beneficial, if goal
oriented.”
       13
         Prudential representatives testified the guideline was not intended to be binding.
For example, Lynne Wheeler, a registered nurse who was a Prudential case management
supervisor, stated the GCLMs are guidelines, not rules, so Dr. Shook would have the
discretion to go beyond them.

                                            - 17 -
criterion alters its scope and is unreasonable. Moreover, had Prudential’s representatives

read the hospital notes, medical records, and neurologists’ letters, they might have

discovered that each treating physician ordered physical therapy to enhance Ms.

McGraw’s strength, endurance, and motor functions. Ultimately, however, improving

Ms. McGraw’s functionality would permit her to live more comfortably. And that’s the

rub. Using GCLM 90-42, Prudential then characterized the means to that end as

“medically beneficial” but not “medically necessary” because the treatment in its view

would not alter the course of the disease.14

       We apply the same analysis and reasoning to Prudential’s handling of Ms.

McGraw’s claim for inpatient physical therapy at Baptist Medical Center which was

denied by Dr. Shook and the denial approved by Dr. Lewis and the appeals committee.

Dr. Lewis explained in her affidavit the denial was based in part on the statement in Dr.

Lawton’s discharge summary “the patient has had a progressive decline over the last three

years, which has been particularly acute for the last eight months and the admission was

an attempt at intensive therapy, in hope that the patient could regain some degree of

ambulation.” While Dr. Lewis believed this explanation qualified the treatment as

“medically necessary,” she stated, “I did not believe inpatient confinement for that

therapy was necessary, because I found nothing listed on the admission orders that would



        Arguably, were this criterion carried to its logical conclusion, no MS patient
       14

could qualify for reimbursement of certain medical services, and the contract of insurance
would be illusory.

                                               - 18 -
have required inpatient care.15 In addition, nurses’ notes ... reflect that Mrs. McGraw left

the hospital on a pass, accompanied by her husband, and had a good time. I believe the

medical necessity of inpatient confinement is suspect where a patient is either able or

allowed to leave the hospital on a pass.” We find this statement shocking. There is

nothing in the record suggesting proper inpatient physical therapy mandates a twenty-four

hour confinement, or that periods away from the hospital when therapy is not being

administered are incompatible with proper treatment. Indeed, one would assume the

opportunity for entertainment would be not only therapeutic, but also desirable in treating

this illness.

        This case is like Bedrick, 93 F.3d at 149. There, a child, Ethan Bedrick, suffered

from severe cerebral palsy and spastic quadriplegia, a condition in which motor function

is impaired in all four limbs by hypertonia, an abnormal resistance to passive stretching of

the muscles. To counteract these contractures or curling up of the limbs, the muscles

must be stretched. “The diabolical thing about hypertonia is that, unless properly treated,

it can get much worse. Unless each hypertonic muscle is regularly stretched (and its

abnormal resistance thereby overcome), the muscle itself changes. Long, flexible tissue is

replaced by shorter, inflexible, fibrotic tissue. The resulting curled-up appendage is




        Any review of the medical records for Ms. McGraw’s past hospitalization for
        15

physical therapy and the home care regime would have documented the treating
neurologist’s decision to hospitalize at this time, however.

                                            - 19 -
called a contracture.”16 Id. at 151. Unless an adult actively exercises the child’s limbs,

the infant will curl into the position of least resistance. Ethan’s pediatrician recognized

Ethan’s “poor prognosis” but ordered physical therapy on the fifty/fifty chance the child

would be able to walk by age five. Id. In the face of this medical record, Travelers

limited Ethan’s physical and occupational therapy to fifteen sessions per year and denied

claims for prescribed durable medical equipment, a bath chair and an upright stander.

Applying a less deferential review,17 the Fourth Circuit encountered a similar scenario

where Traveler’s definition of medical necessity was supplemented by “a finding that the

specified treatments did not reach a level of potential for significant progress which

would allow the therapies to be provided on a medically necessary basis.” Id. at 153.

Thus, the Fourth Circuit, first, recognized the “significant progress” requirement was not

part of the plan. Second, it noted,

       such a requirement makes no sense. If as his doctors and therapists believe,
       intensive therapy is necessary to prevent harm (e.g. contractures), then it is
       medically necessary “treatment” for his cerebral palsy. It is as important
       not to get worse as to get better. Third, there is no medical evidence in the
       record from which Travelers could make such a “finding.” Both [his
       treating physicians] reported “progress,” and [one doctor] did not even call
       [the Travelers’ representative]. Fourth, the implication that walking by age
       five would not be “significant progress” for this unfortunate child is simply
       revolting.

       16
          Ms. McGraw also suffered from contractures requiring the physical therapist to
lift her legs to stretch out the otherwise spasmed muscles.

        The Fourth Circuit noted, Travelers’ “fiduciary” viewed himself as a “‘supporter’
       17

of Travelers’ ‘legal department’ and ‘field office.’” Bedrick v. Travelers Ins. Co., 93
F.3d 149, 154 (4th Cir. 1996).

                                            - 20 -
Id. at 153 (italics in original) (bold and italics added).

       At least in Bedrick, there had been some minimal communication between Ethan’s

treating physicians and physical therapist and the insurer’s representative. Here, Dr.

Shook emphatically “seriously doubted” he had talked to anyone or read anything. It is

uncontroverted each episode of physical therapy or home nursing services was ordered to

help Ms. McGraw not to get worse.18 Asked whether it was not reasonable to conclude

treating someone with physical therapy with no noticeable improvement established the

treatment was not medically necessary, Dr. Landstrom responded, “Except you never

know whether it’s going to work until you try it. And it’s still treatment, the disease may

be incurable but it’s still treatable.” In an effort to dispel Prudential’s insistence on

distinguishing between physical therapy as “medically beneficial,” as it believed was

present here, as opposed to “medically necessary,” Dr. Lawton analogized the use of

physical therapy in the MS setting to treating malignancies with chemotherapy. He

observed that many people suffering from certain incurable cancers are routinely given

chemotherapy, a treatment which in some instances makes the patient worse and often has

no effect on the progress of the disease at all. No one, however, he ventured, would

characterize the chemotherapy as not medically necessary.




       18
         Gary McGraw testified in his deposition that despite his wife’s physical
debilitation, she still had good muscle tone giving him hope that intensive physical
therapy would preserve and enhance her strength.

                                              - 21 -
       So, if we refer say to her admission in ‘93, I’m not trying to tell anybody it
       helped her, because I don’t think there’s any evidence for that. I think it
       was an appropriate thing to try and would be analogous to a patient with a
       malignancy being admitted to the hospital for chemotherapy that in
       retrospect produced no improvement in the cancer. I think that’s done all
       the time.19

       As we read the record, it is apparent Prudential’s fiduciary, who must act “solely in

the interest of the participants and beneficiaries and for the exclusive purpose of

providing benefits ... and defraying reasonable expenses,” 29 U.S.C. § 1104(a)(1)(A),

made the discretionary decision “to give up on” Ms. McGraw. Bedrick, 93 F.3d at 153.

Most egregiously, there is no indication in this record that the decision was ever based on

a review of Ms. McGraw’s medical records. Clifton Abel, Prudential’s regional appeals

coordinator, testified all the ballots voting to deny the Baptist claim were submitted

before Prudential had Plaintiff’s Exhibit 17B. He opined that a claim could reasonably

be denied without a review of the records if the medical director called the treating

physician. Dr. Shook “seriously doubted” he talked to anyone, and Dr. Lawton stated he




        In the second denial of benefits for the inpatient care at Baptist Medical Center,
       19

Dr. Lawton received authorization for the admission from Prudential on May 11, 1993.
Although Dr. Lawton ordered a three-week course of therapy, Ms. McGraw was
discharged on May 21, 1993. One patient note stated the discharge was “due to lack of
progress.” There is conflict in the record over the reasons for the discharge. Gary
McGraw and Ms. McGraw testified hospital staff told them Prudential wouldn’t pay so
she had to be discharged. Dr. Lawton qualified her “lack of progress” with the fact that at
the time of her admission she suffered from a severe bladder infection adding to her
discomfort and ability to respond positively to the exercise regime. There are notes in her
medical chart referring to how disheartened Ms. McGraw appeared because of her
continuous difficulties with Prudential.

                                            - 22 -
was never called by anyone at Prudential to discuss the care he had ordered. Even Dr.

Lewis testified, while she qualified the need for out-patient physical therapy as medically

necessary in the Baptist Center claim, that decision, she stated in her affidavit, “was

probably influenced by the fact that there had been a delay in the decision-making

process.” Indeed, if there were no records in the appeal file, Dr. Lewis, a pediatrician,

would be distinctly disadvantaged in adjudging the medical necessity of this treatment for

this particular patient.20

       As a salaried employee of the Central Oklahoma Medical Group, which had an

exclusive contract with PruCare, Prudential’s HMO “product,” Dr. Shook understood

every “medical” decision would impact Prudential’s profitability. We therefore will

accord less deference to that decision “to the degree necessary to neutralize any untoward

influence resulting from the conflict.” Bailey v. Blue Cross & Blue Shield of Va, 67

F.3d 53, 56 (4th Cir. 1995) (quoting Doe v. Group Hospitalization & Medical Servs., 3

F.3d 80, 87 (4th Cir. 1993)). At each level of review, Prudential’s fiduciaries did not

evaluate the claims for Ms. McGraw’s physical therapy “solely in the interest of the

participants” as required under 29 U.S.C. § 1104(a)(1)(A), but more to reflect “defraying

reasonable expenses.” 29 U.S.C. § 1104(a)(1)(A). “There is no balancing of interests;

ERISA commands undivided loyalty to the plan participants.” Bedrick, 93 F.3d at 154.


       20
         An article on MS included in the Appendix states: “The onset of symptoms
typically occurs between the ages of 15 and 45 years. The disease is rare in children ....”
Multiple Sclerosis, Chapter 22, at 451 (emphasis added).

                                            - 23 -
Because the fiduciary unreasonably interpreted the Plan, we therefore hold the denial of

benefits for the two claims reviewed was arbitrary and capricious and reverse the contrary

conclusion of the district court.

              III. EXHAUSTION OF ADMINISTRATIVE REMEDIES

       ERISA contains no explicit exhaustion requirement although we have observed

“exhaustion of administrative (i.e., company-or plan-provided) remedies is an implicit

prerequisite to seeking judicial relief.” Held v. Manufacturers Hanover Leasing Corp.,

912 F.2d 1197, 1206 (10th Cir. 1990); Gaylor v. John Hancock Mut. Life Ins. Co., 112

F.3d 460, 467 (10th Cir. 1997). This proposition derives from the exhaustion doctrine

permeating all judicial review of administrative agency action, Communications Workers

of Am. v. AT&T, 40 F.3d 426, 432 (D.C. Cir. 1994), and aligns with ERISA’s overall

structure of placing primary responsibility for claim resolution on fund trustees. 29

U.S.C. § 1133. Otherwise, premature judicial interference with the interpretation of a

plan would impede those internal processes which result in a completed record of

decision making for a court to review. Id. Nevertheless, “[b]ecause ERISA itself does

not specifically require the exhaustion of remedies available under pension plans, courts

have applied this requirement as a matter of judicial discretion.” Id. In exercising that

discretion, district courts have eschewed exhaustion under two limited circumstances:

first, when resort to administrative remedies would be futile; or, second, when the remedy

provided is inadequate. Counts v. American General Life & Acc. Ins. Co., 111 F.3d


                                           - 24 -
105, 108 (11th Cir. 1997); Communications Workers, 40 F.3d at 432. In this case, the

district court refused to credit Ms. McGraw’s “bare allegation” of futility with the

sufficiency necessary to meet the former exception and found Prudential did not obstruct

her attempt to obtain review, interpreting the latter exception as requiring proof of a lack

of access to an internal review procedure.21 To support its analysis, the court relied on

Wilczynski v. Lumbermens Mut. Cas. Co., 93 F.3d 397 (7th Cir. 1996), and Makar v.

Health Care Corp. of Mid-Atlantic, 872 F.2d 80 (4th Cir. 1989), and rejected Ms.

McGraw’s contention that resorting to internal review procedures would have been futile.

That is, it declined to exercise its discretion to excuse the failure to exhaust. We may

disturb that conclusion only if it represents a clear abuse of discretion. Wilczynski, 93

F.3d at 401.

       In Wilczynski, the district court dismissed plaintiff’s claim for disability benefits

upon finding her bare allegation it would be futile to pursue any internal review process

was insufficient. The Seventh Circuit, however, disagreed. Citing the allegation of

futility in her complaint, that defendant steadfastly refused to extend COBRA benefits in

the face of plaintiff’s multiple claims, the reviewing court noted, in fact, plaintiff’s

complaint had been filed two months before defendant denied COBRA benefits and after

the parties had been embroiled in an embittered discovery battle related to her claims.




        Ms. McGraw did not attempt to establish Prudential’s three level review process
       21

was inadequate.

                                             - 25 -
The court held on that basis, “[a]t this stage of the litigation, therefore, these allegations

are sufficient to bring her claim within the futility exception to the administrative

exhaustion requirement.” Id. at 405.

       In Makar, the Fourth Circuit concluded there was no factual record at all to

review, plaintiffs having filed no grievance related to their one claim and instead

instituted suit in county court for monies due. Thus, the court observed, “[t]he [] plan

fiduciaries have not had the opportunity to define the relevant issues or to apply the

relevant plan provisions.” 872 F.2d at 83. The reviewing court then vacated the

dismissal order and remanded the case for the district court to dismiss it without prejudice

so that plaintiffs could proceed administratively.

       The record before us is wholly different from these two cases. Although we

recognize the futility exception is limited to those instances where resort to administrative

remedies would be “clearly useless,” Communications Workers, 40 F.3d at 432 (citations

omitted), we believe this record clearly establishes futility in numerous respects.

       First, as acknowledged by Dr. Lewis, claims that Ms. McGraw pursued were

belatedly processed and review delayed. On different occasions, Prudential might send

an EOB, explanation of benefits, directly to Mr. McGraw or communicate only with Ms.

McGraw’s treating physician or attorney. Delays caused one denial process to overlay

another, making it daunting to extricate the route of one review procedure from another.

Indeed, there are several references in the record to Prudential’s failure to review a claim


                                             - 26 -
within the time limits necessary for Ms. McGraw to be able to submit it for Medicare

supplemental payment. Nevertheless, while the requests and denials were being

exchanged, treating doctors, for example at HealthSouth Rehabilitation Center, attempted

to communicate with Prudential the physical therapy regime was not “respite care,” to

“give her family a break,” as Prudential characterized it, but as Dr. Chadwell, her physical

therapist stated, care to make her life “as good as possible.”

       Second, as previously noted, in the face of Ms. McGraw’s treating neurologist and

urologist’s opinions the services prescribed were medically necessary, Prudential

followed its own interpretation of the Plan isolated from any understanding of the

treatment needs of the Plan’s beneficiary, Ms. McGraw. For example, on two

unexhausted claims included in her lawsuit, Prudential’s representatives insisted the

catheterizations for which Dr. Rittenhouse sought home nursing care could be done by a

family member or neighbor.22 The record does not disclose the availability of those

“family members” or the procedure Ms. McGraw should follow to ask a “neighbor” to

insert a sterile catheter into her ureter. A social services assessment written in 1992 at

HealthSouth Rehabilitation stated Ms. McGraw’s parents were retired and traveled often,

while her brother lives in Washington state. Her husband, it noted, also traveled for




        In her deposition, Ms. McGraw described a visit from a Prudential representative,
       22

probably a case manager, who told her “a monkey could do that [insert a catheter], and I
said, well, I’m not a monkey and I can’t do it.”

                                            - 27 -
Lifefleet. Again, Prudential has demonstrated the chasm in its understanding of Ms.

McGraw’s medical needs rendering further effort for review futile.

       Third, we would note Ms. McGraw’s lawsuit began as a state claim for damages

for Prudential’s bad faith breach of an insurance contract. Once the district court

correctly held ERISA applied, it was within its discretion to consider the full record in

light of ERISA’s remedial structure and evaluate Ms. McGraw’s allegations from that

perspective. Our odyssey through this record makes clear Prudential never evaluated Ms.

McGraw’s individual case but rubber stamped the “nature” of her condition and denied

each subsequent claim arising from her MS.

       It is beyond cavil the record before us, then, under Wilczynski and Makar, fleshes

out Mr. McGraw’s statement “at some point it was obvious that it wasn’t going to do any

good to go any further if there were appeal processes, and that’s when we decided to talk

to lawyers....” The district court, therefore, abused its discretion in holding three of Ms.

McGraw’s claims had not been exhausted by internal review. We remand those claims

for the district court to determine whether Prudential’s denial of their payment was

arbitrary and capricious consistent with our guidance.

       In sum, we AFFIRM the district court’s holding ERISA governs this action. We

REVERSE its conclusion the denial of benefits was not arbitrary and capricious and

REMAND for its examination of the claims submitted for HealthSouth Rehabilitation,




                                            - 28 -
Hillcrest Home Healthcare, and Hillcrest Health Center under the arbitrary and capricious

rubric set forth above.




                                          - 29 -
