A Medical Procedure Refused Payment by State Insurer Requires Exhaustion of Administrative Remedies

Suing too Soon Defeats Claim for Health Insurance Proceeds

A State Health Benefits Plan (SHBP) created for employees of the state is a creature of statute. When the statute requires that the person seeking benefits must submit every dispute over coverage to arbitration and other administrative remedies before it can sue the insurer acting for the State seeking payment from the state’s treasury.

In Advanced Orthopedics & Sports Medicine Institute, P.C. v. Aetna Life Insurance Company, Civ. No. 20-7693, United States District Court District Of New Jersey (October 27, 2020) the USDC dealt with a state and federal requirement that a SHBP whose funds come from the state’s Treasury will be strictly construed differently than if the benefits were sought from a commercial insurer.


Aetna Life Insurance Company to dismiss the plaintiff’s suit.  On November 26, 2014, Plaintiff’s contractor, Dr. Grigory Goldberg, performed back surgery on a patient (“Patient”) at Centrastate Medical Center. Patient was admitted with a burst fracture and appeared to be in a significant amount of pain. Dr. Goldberg, the on-call attending orthopedic surgeon, performed the surgery within hours of Patient’s arrival at the hospital.

Patient’s health insurance coverage was through the State of New Jersey State Health Benefits Plan (“SHBP”). Defendant Aetna administered Patient’s insurance plan (the “Plan”) through the SHBP. The Plan is a Health Maintenance Organization (“HMO”) that requires a referral from a primary care physician before obtaining certain kinds of care or out-of-network treatment. The Plan does not require a referral from a primary care physician to obtain emergency care. Plaintiff is an out-of-network provider.

After Patient’s surgery, Plaintiff submitted an invoice for the total amount of $167,542.02 to Defendant. Defendant denied all claims related to the surgery because there was no precertification or authorization for the claims. On January 29, 2015, Defendant sent Plaintiff an Explanation of Benefits that included the denial codes “Service not authorized,” and “Precertification/authorization/notification absent.” The Complaint does not state that Plaintiff took any additional steps to appeal Defendant’s decision after the receipt of the February 25, 2015 letter. With unpaid interest, the total outstanding amount of the claim as of the date of the Complaint was $268,067.00.

Plaintiff filed the Complaint on June 23, 2020 seeking (1) repayment of the original cost of surgery on the basis of unjust enrichment, and (2) prompt payment of interest. On July 30, 2020, Defendant filed a Motion to Dismiss, arguing that (i) Defendant is not a proper party for the claim, (ii) this Court lacks jurisdiction over the claims raised in the Complaint, and (iii) Plaintiff did not exhaust the SHBP’s mandatory appeals procedure.


The SHBP is a state-run and state-funded plan that provides health insurance to state employees. It is, in effect, the State of New Jersey acting as a self-insurer. The State contracts directly with insurance carriers, such as Aetna, to provide medical coverage to SHBP members. The State Health Benefits Commission (“Commission”) administers the SHBP and has the authority to develop rules and regulations related to its operation. The funds to pay SHBP claims are appropriated by the legislature and come from the Treasury of the State of New Jersey. Because the SHBP is state-run, it is exempt from the requirements of the Employee Retirement Income Security Act (“ERISA”).

State law and the New Jersey Administrative Code govern the SHBP. The Code specifically addresses the process of appealing an adverse benefit decision made by a carrier. The Code provides that “[a]ny member of the SHBP who disagrees with the decision of the carrier and has exhausted all appeals within the plan, as well as any external review required by the [Patient Protection and Affordable Care Act (‘PPACA’)], if applicable, may request that the matter be considered by the Commission.” The final administrative determination of the Commission may be appealed to the New Jersey Superior Court, Appellate Division.

Exhaustion of Administrative Remedies

All available and appropriate administrative remedies generally should be fully explored before judicial action is sanctioned. Exhaustion ensures that claims will be heard as a preliminary matter by a body with expertise, a factual record may be created for appellate review, and there is a chance that the agency decision may satisfy the parties and keep them out of court.

The Plan Requires Exhaustion

The Plan Handbook outlines two types of appeals: health claim appeals and administrative appeals. The parties disagree as to how Plaintiff’s claim should be classified under the Plan. Both types of appeals, however, require the member to exhaust administrative remedies before seeking external review.

Regardless of how Plaintiff’s claim is classified, the Court concluded that Plaintiff was required to exhaust administrative remedies before filing suit. Both the New Jersey regulatory scheme and the plain language of the Plan indicate that exhaustion of remedies is mandatory for claims arising under the SHBP.

Federal and state courts have consistently arrived at the same conclusion and have dismissed claims for unpaid SHBP benefits because the plaintiff did not first appeal pursuant to New Jersey Administrative Code. To reach any other conclusion would result in a circumvention of all appeals processes prescribed by the Plan and by state law.

Plaintiff Has Not Exhausted Administrative Remedies

Plaintiff does not allege that it exhausted, or attempted to exhaust, any internal appeal or any form of appeal to the Commission. Plaintiff was required to exhaust administrative remedies before proceeding to litigation. Because Plaintiff did not exhaust administrative remedies, Plaintiff’s claims were dismissed.


Considering the fact that the amount in controversy was $268,067.00 it makes no sense why the plaintiff and its counsel did nothing to seek redress from the available administrative remedies. Since the injury and surgery was performed as a result of an emergency the coverage should have applied and an appeal under the language of the policy could have resolved the issue easily. The Plaintiff lost out by unwisely insisting on litigation without availing itself of the available administrative remedies.

© 2020 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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