FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
JEANENE HARLICK, No. 10-15595
Plaintiff-Appellant,
v. D.C. No.
3:08-cv-03651-SC
BLUE SHIELD OF CALIFORNIA,
OPINION
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of California
Samuel Conti, Senior District Judge, Presiding
Argued and Submitted
May 11, 2011—San Francisco, California
Filed August 26, 2011
Before: William A. Fletcher and N. Randy Smith,
Circuit Judges, and Richard Mills, Senior District Judge.*
Opinion by Judge William A. Fletcher
*The Honorable Richard Mills, Senior District Judge for the U.S. Dis-
trict Court for Central Illinois, Springfield, sitting by designation.
16405
HARLICK v. BLUE SHIELD OF CALIFORNIA 16409
COUNSEL
Lisa S. Kantor, Elizabeth K. Green, KANTOR & KANTOR,
Northridge, California, for the plaintiff-appellant.
Adam Pines, Joanna Sobol McCallum, MANATT, PHELPS
& PHILLIPS, LLP, Los Angeles, California, for the
defendant-appellee.
OPINION
W. FLETCHER, Circuit Judge:
Plaintiff Jeanene Harlick suffers from anorexia nervosa.
The question before us is whether Blue Shield was required
to pay for her care at a residential treatment facility, either
under the terms of her insurance plan or under California’s
Mental Health Parity Act. We conclude that her insurance
plan does not so require, but that the Mental Health Parity Act
does.
I. Background
A. Harlick’s Treatment at Castlewood
Jeanene Harlick, who is now 37 years old, has suffered
from anorexia for more than twenty years. In early 2006,
16410 HARLICK v. BLUE SHIELD OF CALIFORNIA
when she was a clerk at the Pacific Construction & Manufac-
turing Company, she relapsed and began undergoing intensive
outpatient treatment. She was then enrolled in the company’s
health insurance plan through Blue Shield (“the Plan”), which
paid for the treatment.
In March 2006, Harlick’s doctors told her that she needed
a higher level of care than the intensive outpatient treatment
then being provided. Blue Shield employees told Harlick on
the telephone that residential treatment was not covered under
her Plan, but that partial or inpatient (full-time) hospitaliza-
tion would be covered if Blue Shield determined that it was
medically necessary. Blue Shield employees gave Harlick the
names of several facilities where such treatment might be
covered. Harlick and her doctors ultimately determined that
none of the in-network facilities suggested by Blue Shield
could provide effective treatment, so she registered at Castle-
wood Treatment Center, a residential treatment facility in
Missouri that specializes in eating disorders. When Harlick
entered Castlewood, she was at 65% of her ideal body weight.
When she had been there less than a month, a feeding tube
was inserted because her “caloric level needed to gain weight
was so high.” Harlick stayed at Castlewood from April 17,
2006 to January 31, 2007.
According to Castlewood’s website, it is a “Residential
Treatment Facility and Day Hospital program for individuals
needing comprehensive treatment for anorexia nervosa,
bulimia nervosa, and binge eating disorders.” Six levels of
care are available at Castlewood. In increasing order of inten-
sity, they are a community support group, an outpatient pro-
gram, an intensive outpatient program, day treatment, “Step
Down” or partial hospitalization, and residential care. Every
week, patients in residential care have four sessions with an
individual therapist, one session with a psychiatrist, one ses-
sion with a nutritionist, and many hours of group therapy.
Castlewood staff members are on-site 24 hours a day, and
they plan patients’ meals, monitor patients’ food intake and
HARLICK v. BLUE SHIELD OF CALIFORNIA 16411
kitchen use, provide dietary supplements, and maintain feed-
ing tubes. Castlewood specializes in the treatment of those
who, like Harlick, have multiple mental illnesses and have
failed in other treatment programs. Several staff members at
Castlewood have graduate degrees in psychology, but none of
the staff members is a medical doctor or a nurse.
Castlewood is consistently described as a “residential”
community on its website. In an FAQ section of the website
discussing insurance, potential patients are told to ask their
insurance companies about available benefits for
“[r]esidential, mental health, non-substance abuse” treatment.
The website says that “Castlewood . . . is licensed as a ‘Resi-
dential’ facility, so it is important to obtain the residential
benefit and not simply the ‘inpatient’ benefit, as they might
be different.” The website also says that many states “have
‘parity’ laws, which means that the eating disorder could
potentially be covered on par with medical benefits.”
B. The Plan
For mental illnesses, Harlick’s insurance plan covers inpa-
tient services, limited outpatient services, office visits, psy-
chological testing, and in-person or telephone counseling
sessions. Inpatient services are covered “in connection with
hospitalization or psychiatric Partial Hospitalization (day
treatment).” Inpatient services for treatment of mental ill-
nesses are discussed three times in the Plan. Each time, the
Plan says that “[r]esidential care is not covered.” “Residential
care” is not defined anywhere in the Plan.
For physical illnesses, the Plan covers extensive hospital
treatment, outpatient treatments, and office visits. It also cov-
ers certain forms of “subacute care.” Subacute care is defined
as “skilled nursing or skilled rehabilitation provided in a Hos-
pital or Skilled Nursing Facility to patients who require
skilled care such as nursing services, physical, occupational or
speech therapy, a coordinated program of multiple therapies
16412 HARLICK v. BLUE SHIELD OF CALIFORNIA
or who have medical needs that require daily Registered
Nurse monitoring.” A Skilled Nursing Facility (“SNF”) is
defined as “a facility with a valid license issued by the Cali-
fornia Department of Health Services as a Skilled Nursing
Facility or any similar institution licensed under the laws of
any other state, territory, or foreign country.” The Plan pro-
vides coverage for up to 100 days at an SNF.
C. Blue Shield’s Coverage Decision
Blue Shield paid for the first eleven days of Harlick’s treat-
ment at Castlewood, but then refused to pay for the rest of her
treatment. Blue Shield conducted several internal reviews of
Harlick’s claim, and Blue Shield employees engaged in exten-
sive correspondence with Harlick and her mother, Robin Wat-
son, about her claim.
On September 20, 2006, Blue Shield employee Bruce Berg
reviewed Harlick’s record and recommended denying the
claim in an internal document that was not sent to Harlick or
Watson. Berg wrote, “[T]his appears to be residential care as
stated in the consent to treatment/treatment plan. . . . Residen-
tial treatment is not a benefit.”
On December 8, 2006, Blue Shield employee David Battin
reviewed the claim in another internal document. Battin con-
cluded that “[t]he principal reason” for the denial was that
Harlick’s plan did not cover residential care. A few days later,
on December 12, 2006, Blue Shield employee Risell Tachin-
Salazar wrote to Harlick and denied the claim based on Bat-
tin’s review, explaining that Harlick did not have a benefit for
residential care.
On January 19, 2007, Blue Shield employee Carroll Ceder-
berg reviewed the claim in another internal document. Ceder-
berg again concluded that residential care was not a covered
benefit under Harlick’s Plan.
HARLICK v. BLUE SHIELD OF CALIFORNIA 16413
On March 27, 2007, David Battin reviewed the claim again
in another internal document. He concluded:
The principal reason [for the denial] is that these ser-
vices are not a covered benefit. As per your health
plan’s Evidence of Coverage (EOC); all inpatient
psychiatric hospital care must be prior authorized by
the Mental Health Services Administrator (MHSA),
except for emergency care. Since you specifically
traveled to Missouri to be admitted to this particular
facility, this would not be considered as an emer-
gency admission. You also had amble [sic] time to
contact MHSA for authorization prior to your admis-
sion. In addition; [sic] residential care (room and
board) is not a covered benefit. During the dates of
service 4/28/06 to 8/25/06 the medical necessity of
being treated as an inpatient was not established, you
could have been treated as an outpatient. Since your
EOC does not cover room and board, the facility fees
for your residential treatment . . . are not a covered
benefit.
Battin also wrote that professional fees incurred at Castle-
wood, such as psychologists’ fees, would be covered if Blue
Shield found that the professional treatment was medically
necessary. A few days later, on April 6, 2007, Blue Shield
employee Mary Anne Gomez sent a letter to Harlick that
repeated Battin’s statements nearly verbatim.
On April 30, 2007, Blue Shield employee Carolyn Garner
wrote to Harlick, reiterating that coverage for treatment at
Castlewood had been denied because Harlick’s plan did not
cover residential treatment. Garner corrected two errors in
Gomez’s April 6 letter. First, she explained that the preauthor-
ization requirement did not apply to facilities outside Califor-
nia. Second, she explained that professional fees incurred at
Castlewood would not be covered unless the professionals
billed Blue Shield independently. Since Castlewood charged
16414 HARLICK v. BLUE SHIELD OF CALIFORNIA
a global fee that included professional fees, Blue Shield
would not cover those fees. Finally, in response to an inquiry
from Harlick’s mother, Robin Watson, Garner wrote that Cal-
ifornia’s mental heath parity law did not require Blue Shield
to cover treatment at Castlewood. Garner wrote that the Plan
did not cover any residential treatment, “whether the diagno-
sis is for a mental health condition or a medical condition,”
so there was no violation of the parity law.
On May 2, 2007, according to Watson, Blue Shield
employee Mary Anne Gomez suggested to Watson on the
telephone that Blue Shield might, in fact, cover professional
fees from Castlewood, and told her to separate claims for pro-
fessional fees from claims for room and board.
On August 3, 2007, Blue Shield employee Joan Russo
wrote a detailed letter to Watson clarifying inconsistencies in
previous letters and reiterating the reasons for the denial. She
repeated that the claim had been denied because residential
facilities were not covered. She explained, for the first time,
that Blue Shield had paid for the first eleven days at Castle-
wood because of a “coding error.” According to Russo, the
coder used “a procedure code that did not identify the claim
as a mental health diagnosis,” so it was paid automatically.
Finally, Russo said that professional fees would not be cov-
ered. The letter stated that it was the final decision in Harl-
ick’s administrative appeal.
Blue Shield eventually did pay for professional fees
incurred at Castlewood. It has never paid for the rest of her
treatment at Castlewood.
D. DMHC review
Frustrated by Blue Shield’s refusal to pay, Watson filed a
complaint with California’s Insurance Commissioner. Her let-
ter was forwarded to the California Department of Managed
Health Care, where Senior Counsel Andrew George investi-
HARLICK v. BLUE SHIELD OF CALIFORNIA 16415
gated the complaint. George wrote to Blue Shield and asked,
among other things: (1) why Harlick had been told that resi-
dential care was not medically necessary; (2) why Harlick
was told that benefits would be denied because care was not
pre-authorized, even though the Plan clearly stated that lack
of preauthorization resulted only in a $250 penalty; and (3)
whether Castlewood could be covered as an SNF. After talk-
ing to Russo, George concluded that “although [Harlick]
ha[d] been provided with conflicting information from the
Plan regarding its basis for denial,” Blue Shield had denied
coverage because Harlick’s Plan did not cover residential
care.
E. Proceedings in the District Court
On October 31, 2008, Harlick filed a complaint in federal
district court. On March 4, 2010, the district court granted
Blue Shield’s motion for summary judgment and denied Harl-
ick’s motion for summary judgment. The court found that
Harlick’s Plan unambiguously excluded coverage for residen-
tial care and that, while the Plan did cover care at Skilled
Nursing Facilities, Castlewood was not an SNF. The court did
not reach the question whether California’s Mental Health
Parity Act required coverage of Harlick’s residential treat-
ment at Castlewood.
II. Standard of Review
We review de novo the district court’s decision on coverage
provided by an ERISA plan. Nolan v. Heald Coll., 551 F.3d
1148, 1153 (9th Cir. 2009) Like the district court, we review
the plan administrator’s decision whether to grant benefits for
abuse of discretion. Abatie v. Alta Health & Life Ins. Co., 458
F.3d 955, 959 (9th Cir. 2006) (en banc). In the ERISA con-
text, “a motion for summary judgment is merely the conduit
to bring the legal question before the district court and the
usual tests of summary judgment, such as whether a genuine
16416 HARLICK v. BLUE SHIELD OF CALIFORNIA
dispute of material fact exists, do not apply.” Nolan, 551 F.3d
at 1154 (internal quotation marks and citation omitted).
III. Discussion
A. Plan Coverage of Residential Care
For the reasons that follow, we conclude that Harlick’s Plan
does not itself provide coverage for her residential care at
Castlewood.
1. Review for Abuse of Discretion
[1] When we review an ERISA plan administrator’s denial
of benefits, the standard of review depends on whether the
plan explicitly grants the administrator discretion to interpret
the plan’s terms. Abatie, 458 F.3d at 967. The parties agree
that Harlick’s plan did grant Blue Shield such discretion. We
therefore review Blue Shield’s decision for abuse of discre-
tion. Id. However, our review is “tempered by skepticism”
when the plan administrator has a conflict of interest in decid-
ing whether to grant or deny benefits. Id. at 959, 968-69. In
such cases, the conflict is a “factor” in the abuse of discretion
review. Abatie, 458 F.3d at 966-68; accord Metro. Life Ins.
Co. v. Glenn, 554 U.S. 105, 108 (2008). The weight of that
factor depends on the severity of the conflict. Abatie, 458
F.3d at 968; Glenn, 554 U.S. at 108, 115-117.
[2] A conflict arises most frequently where, as here, the
same entity makes the coverage decisions and pays for the
benefits. This dual role always creates a conflict of interest,
Glenn, 554 U.S. at 108, but it is “more important . . . where
circumstances suggest a higher likelihood that it affected the
benefits decision.” Id. at 117. The conflict is less important
when the administrator took “active steps to reduce potential
bias and to promote accuracy,” id., such as employing a “neu-
tral, independent review process,” or segregating employees
who make coverage decisions from those who deal with the
HARLICK v. BLUE SHIELD OF CALIFORNIA 16417
company’s finances. Abatie, 458 F.3d at 969 n.7. The conflict
is given more weight if there is a “history of biased claims
administration.” Glenn, 554 U.S. at 117. Our review of the
administrator’s decision is also tempered by skepticism if the
administrator gave inconsistent reasons for a denial, failed to
provide full review of a claim, or failed to follow proper pro-
cedures in denying the claim. See Lang v. Long-Term Disabil-
ity Plan, 125 F.3d 794, 798-99 (9th Cir. 1997); Friedrich v.
Intel Corp., 181 F.3d 1105, 1110 (9th Cir. 1999).
Harlick points to four factors that she argues should result
in our review of Blue Shield’s decision being tempered by
skepticism: (1) Blue Shield both makes coverage decisions
and pays benefits; (2) Blue Shield gave inconsistent reasons
for its denial of Harlick’s claim; (3) Blue Shield “never
explained why the California Mental Health Parity Act did
not require payment of [the] claim”; and (4) Blue Shield
excluded “residential treatment” from the Plan’s coverage
without defining the term. We take these factors in turn.
First, Blue Shield concedes that as plan administrator it
both makes coverage decisions and pays benefits. However,
the record does not indicate whether Blue Shield has a history
of bias in claims administration or whether it has taken any
steps to promote accurate decisionmaking. See Glenn, 554
U.S. at 117; Abatie, 458 F.3d at 969 n.7.
Second, Blue Shield also concedes that it gave Harlick
inconsistent information about why it would not pay for her
treatment at Castlewood. But Blue Shield argues that its mis-
takes were minor and quickly corrected. We disagree. Watson
spoke several times to Blue Shield’s call center employees.
According to Watson, they gave her no useful information
about whether treatment at Castlewood would be covered.
When Harlick entered Castlewood, Blue Shield paid without
complaint for eleven days, and then abruptly stopped paying.
It took more than a year for Blue Shield to explain that it had
paid for the first eleven days because of a “coding error.” Har-
16418 HARLICK v. BLUE SHIELD OF CALIFORNIA
lick and Watson received four letters from four different Blue
Shield representatives explaining why treatment at Castle-
wood was not covered. The first letter said that residential
treatment was not covered. The second letter said that residen-
tial treatment was not covered, that treatment was not pre-
authorized, and that treatment was not medically necessary,
but that professional fees might be covered. The third letter
said that residential treatment and professional fees were not
covered. An employee then told Watson on the telephone that
professional fees might be covered. The fourth letter said that
residential treatment was not covered and professional fees
were not covered. Blue Shield eventually paid the profes-
sional fees. While there is no evidence indicating that Blue
Shield changed its explanations in bad faith, or suggesting
that Blue Shield was determined to deny Harlick’s claim
regardless of its validity, the combined effect of its communi-
cations to Harlick and Watson was confusing and frustrating.
Third, Harlick argues that Blue Shield failed to explain why
the Mental Health Parity Act did not require coverage. This
assertion is contradicted by the record. Caroyln Garner
explained in her April 30 letter why Blue Shield believed that
the Act did not require coverage.
Fourth, it is true that Blue Shield denied coverage for “resi-
dential care” without ever defining the term. As discussed
below, however, we discern no real ambiguity in the meaning
of “residential care” in Harlick’s Plan, and there is no indica-
tion that Blue Shield exploited any uncertainty about the
meaning of “residential care.” Compare Grosz-Salomon v.
Paul Revere Life Ins. Co., 237 F.3d 1154, 1162 & n.33 (9th
Cir. 2001) (an employer may not exploit uncertainty that it
has created).
[3] The net effect is that our review of Blue Shield’s denial
of coverage is for abuse of discretion, but tempered by some
skepticism because of Blue Shield’s structural conflict and its
changing explanations for denying coverage.
HARLICK v. BLUE SHIELD OF CALIFORNIA 16419
2. Coverage Under the Plan
Harlick makes two arguments in support of her contention
that the Plan covers her treatment at Castlewood. First, she
argues that the Plan covers residential care. Second, she
argues, in the alternative, that her care at Castlewood qualifies
for coverage as care at a Skilled Nursing Facility. We find
both arguments unpersuasive.
a. Residential Care
An ERISA plan is a contract that we interpret “in an ordi-
nary and popular sense as would a [person] of average intelli-
gence and experience.” Gillam v. Nev. Power Co., 488 F.3d
1189, 1194 (9th Cir. 2007) (internal quotation marks and cita-
tion omitted). We look first to the “explicit language of the
agreement to determine, if possible, the clear intent of the par-
ties,” and then to extrinsic evidence. Id. (internal quotation
marks and citation omitted). Harlick argues that the term “res-
idential care” is ambiguous for two reasons. First, she argues
that “residential care” has no defined meaning in the Plan
document. Second, she argues that the exclusion of residential
care is unclear because of its placement in the Plan. Specifi-
cally, she points out that the exclusion of “residential care”
occurs in the sections of the Plan that deal with inpatient hos-
pital care, suggesting that Blue Shield intended to exclude
coverage for residential care only in the context of hospitals.
[4] Harlick’s own evidence shows, however, that “residen-
tial care” has a well-established meaning in the context of the
treatment of mental illness, particularly eating disorders.
Castlewood’s website calls Castlewood a “residential treat-
ment facility.” An FAQ on Castlewood’s website explains
that Castlewood “is licensed as a ‘Residential’ facility, so it
is important to obtain the residential benefit.” Harlick argues
in her opening brief that “residential treatment center” is one
of “five critical levels of care which should be considered for
patients with an eating disorder,” and she quotes several pro-
16420 HARLICK v. BLUE SHIELD OF CALIFORNIA
fessional associations opining on the importance of residential
care for eating disorders. A survey done by the California
Department of Managed Health Care, discussed below, spe-
cifically addresses coverage for residential care for eating dis-
orders. There may be disputes at the margin about what
qualifies as residential care, and it is certainly preferable for
a Plan to define key terms. But there is no evidence of actual
confusion in this case about whether treatment at Castlewood
was “residential care.”
We also disagree that the placement of the exclusion was
confusing. Every time the Plan says anything about inpatient
care for mental illness, it specifies that residential care is not
a covered benefit. The Plan states three times that residential
care is not covered. First, it states that “inpatient services” are
covered when they are connected with hospitalization, but
that “[r]esidential care is not covered.” Second, it states that
“[r]esidential care is not covered” in the section describing
payment responsibilities for inpatient professional and physi-
cian services. Third, it states that “[r]esidential care is not
covered” in the section describing payment responsibilities
for inpatient hospital treatment.
[5] Blue Shield could have organized the Plan document
more clearly — for example, it could have put an exclusion
for residential care in the “Principal Limitations” section —
but the current organization is neither illogical nor mislead-
ing. Residential care is a type of inpatient care. A Plan sub-
scriber wanting to know whether residential care is covered
would go to the sections of the Plan describing coverage for
inpatient care, and would discover, each time inpatient care is
mentioned, a statement that residential care is not covered.
Since the entire section of the Plan dealing with treatment of
mental illness is only six pages long, these statements are not
difficult to find. We believe that a person “of average intelli-
gence and experience” would have no trouble concluding that
the Plan does not cover residential care. Compare Saltarelli
v. Bob Baker Group Med. Trust, 35 F.3d 382, 385-87 (9th Cir.
HARLICK v. BLUE SHIELD OF CALIFORNIA 16421
1994) (holding that placement of exclusion was so inexplica-
ble that exclusion was unenforceable).
b. Skilled Nursing Facility
[6] Harlick argues, in the alternative, that Castlewood is a
Skilled Nursing Facility under the Plan. Harlick’s Plan covers
a maximum of 100 days of treatment each year at an SNF. A
“Skilled Nursing Facility” is defined in the Plan as “a facility
with a valid license issued by the California Department of
Health Services as a Skilled Nursing Facility or any similar
institution licensed under the laws of any other state, territory,
or foreign country.” The California licensing statute defines
an SNF as “a health facility that provides skilled nursing care
and supportive care to patients whose primary need is for
availability of skilled nursing care on an extended basis.” Cal.
Health & Safety Code § 1250(c). Among other things, an SNF
in California must have “at least one registered nurse or a
licensed vocational nurse, awake and on duty, in the facility
at all times, day and night.” 22 Cal. Admin. Code § 72329(b)-
(d).
Missouri, where Castlewood is located, also licenses SNFs.
Under Missouri law, an SNF is
any premises, other than a residential care facility,
assisted living facility, or an intermediate care facil-
ity, which is utilized by its owner, operator, or man-
ager, to provide for twenty-four (24) hour
accommodation, board and skilled nursing care and
treatment services to at least three (3) residents . . .
Skilled nursing care and treatment services are those
services commonly performed by or under the super-
vision of a registered professional nurse for individu-
als requiring twenty-four (24) hours a day care by
licensed nursing personnel including acts of observa-
tion, care, and counsel of the aged, ill, injured, or
infirm, the administration of medications and treat-
16422 HARLICK v. BLUE SHIELD OF CALIFORNIA
ments as prescribed by a licensed physician or den-
tist, and other nursing functions requiring substantial
specialized judgment and skill.
19 Mo. Code of State Regulations § 30-83.010(49).
[7] Castlewood has no registered nurses, licensed voca-
tional nurses, or any other nurses on its staff. It therefore does
not qualify as an SNF under either California or Missouri law.
[8] Harlick points out that the Plan covers SNFs licensed
in California and “any similar institution licensed under the
laws of any other state, territory, or foreign country.” She
argues that Castlewood is a “similar institution” to an SNF,
providing care for mental rather than physical illness. Castle-
wood may provide mental illness care that is analogous to the
physical illness care that is provided in an SNF, but this does
not mean that it is a “similar institution” to an SNF within the
meaning of the Plan. The most natural reading of the Plan’s
language is that the Plan covers SNFs in California, as well
as institutions in other states that provide around-the-clock
nursing care for physical illnesses, even if they are given a
different name in those states. It was not an abuse of discre-
tion for the Plan administrator to conclude that Castlewood
was not an SNF or a “similar institution licensed under the
laws of any other state” within the meaning of the Plan.
B. Mental Health Parity Act
For the reasons that follow, we conclude that the Mental
Health Parity Act requires that a plan within the scope of the
Act provide all “medically necessary treatment” for “severe
mental illnesses,” and that Harlick’s residential care at Castle-
wood was medically necessary.
1. Overview of the Act
[9] The California Mental Health Parity Act (“Parity Act”
or “Act”) was enacted in 1999. In enacting the statute, the
HARLICK v. BLUE SHIELD OF CALIFORNIA 16423
California legislature found that “[m]ost private health insur-
ance policies provide coverage for mental illness at levels far
below coverage for other physical illnesses.” 1999 Cal. Legis.
Serv. ch. 534 (A.B.88), § 1 (West). The legislature further
found that coverage limitations had resulted in inadequate
treatment of mental illnesses, causing “relapse and untold suf-
fering” for people with treatable mental illnesses, as well as
increases in homelessness, increases in crime, and significant
demands on the state budget. Id.
To combat this disparity, the Parity Act provides, in perti-
nent part:
(a) Every health care service plan contract issued,
amended, or renewed on or after July 1, 2000, that
provides hospital, medical, or surgical coverage shall
provide coverage for the diagnosis and medically
necessary treatment of severe mental illnesses of a
person of any age . . . under the same terms and con-
ditions applied to other medical conditions as speci-
fied in subdivision (c).
(b) These benefits shall include the following:
(1) Outpatient services.
(2) Inpatient hospital services.
(3) Partial hospital services.
(4) Prescription drugs, if the plan contract
includes coverage for prescription drugs.
(c) The terms and conditions applied to the benefits
required by this section, that shall be applied equally
to all benefits under the plan contract, shall include,
but not be limited to, the following:
16424 HARLICK v. BLUE SHIELD OF CALIFORNIA
(1) Maximum lifetime benefits.
(2) Copayments.
(3) Individual and family deductibles.
(d) For the purposes of this section, “severe mental
illnesses” shall include:
....
(8) Anorexia nervosa.
Cal. Health & Safety Code § 1374.72 (emphasis added). It is
undisputed that Harlick’s Plan “provides hospital, medical, or
surgical coverage” and so comes within the scope of the Act.
[10] Subsection (a) contains the Act’s basic mandate.
Briefly summarized, subsection (a) states that all plans that
come within the scope of the Act “shall provide coverage for
. . . medically necessary treatment of severe mental illnesses,”
including anorexia nervosa. That is, if treatment for a covered
mental illness is “medically necessary,” a plan that comes
within the scope of the Act must pay for that treatment.
Subsection (a) contains only one limitation on this basic
mandate: coverage for mental illnesses must be provided
“under the same terms and conditions applied to other medi-
cal conditions as specified in subdivision (c).” The parties
agree that the phrase “terms and conditions” refers to mone-
tary conditions, such as copayments and deductibles. Thus,
the requirement that plans cover treatment for mental and
physical illnesses “under the same terms and conditions”
means that plans must apply the same copayments, deduct-
ibles, and other financial terms to both types of treatment. For
instance, if a plan caps lifetime benefits at $1 million for
physical illnesses, it can cap total lifetime benefits — whether
for treatment of mental or physical illnesses — at $1 million.
HARLICK v. BLUE SHIELD OF CALIFORNIA 16425
Subsection (b) states that “[t]hese benefits” must be offered
by a plan that comes within the scope of the Act, and lists four
specific required benefits. The wording of subsection (b) is
confusing. The phrase “these benefits” suggests that subsec-
tion (b) refers back to subsection (a), but subsection (a) never
uses the word “benefits.” Harlick contends, and we agree, that
the phrase “these benefits” refers to the phrase “coverage for
the diagnosis and medically necessary treatment.” Thus, the
required coverage “shall include” all the benefits listed in sub-
section (b) — outpatient, inpatient, and partial hospital ser-
vices, and, in some circumstances, prescription drug services.
As we discuss below, the list of benefits in subsection (b) is
not exhaustive.
Subsection (c) gives three illustrative examples of “terms
and conditions” that must apply equally to coverage for men-
tal and physical illnesses: maximum lifetime benefits, copay-
ments, and deductibles. As explained above, the parties agree
that “terms and conditions” refers only to financial terms and
conditions.
Finally, subsection (d) lists nine specific “severe mental ill-
nesses” for which coverage for “medically necessary treat-
ment” is required, including anorexia nervosa.
[11] In summary, plans that come within the scope of the
Act must cover all “medically necessary” treatment for the
nine listed mental illnesses, but can apply the same financial
limits — such as yearly deductibles and lifetime benefits —
that are applied to coverage for physical illnesses.
2. Benefits Required under the Parity Act
[12] Blue Shield contends that residential care is not a ben-
efit that it must provide under the Parity Act, even if such care
is medically necessary. A more detailed examination of the
statute and accompanying regulation is necessary to under-
stand Blue Shield’s argument and why it is incorrect.
16426 HARLICK v. BLUE SHIELD OF CALIFORNIA
The district court did not reach this question. Because the
parties presented the issue both to the district court and to us,
and because the record is developed, it is appropriate for us
to reach it. See Dole Food Co., Inc. v. Watts, 303 F.3d 1104,
1117-18 (9th Cir. 2002).
a. Statutory and Regulatory Text
[13] We begin with the text of the Parity Act and its imple-
menting regulation. See United States v. Nader, 542 F.3d 713,
717 (9th Cir. 2008). Subsection (b) of the Act provides that
“benefits shall include” outpatient services, inpatient hospital
services, partial hospitalization services, and prescription
drugs if the plan includes coverage for prescription drugs.
Thus, the coverage required under subsection (a) must
include, at a minimum, those four treatments. Subsection (b)
does not mention “residential care” as a covered benefit, so a
threshold question is whether the list of benefits in subsection
(b) is an exhaustive list of treatments that can qualify as
“medically necessary.”
Subsection (b) says that benefits “shall include” the four
listed treatments, but it does not explicitly say whether the list
is exhaustive. By contrast, the list of “terms and conditions”
in subsection (c) of the Act is explicitly characterized as a
non-exhaustive list. Cal. Health & Safety Code § 1374.72(c)
(“The terms and conditions . . . shall include, but not be lim-
ited to, the following.”). At least two district courts have con-
cluded that the difference in wording means that the list of
benefits in subsection (b) is exhaustive. Wayne W. v. Blue
Cross of Cal., No. 1:07-CV-00035, 2007 WL 3243610, at *4
(D. Utah Nov. 1, 2007); Daniel F. v. Blue Shield of Cal., No.
C09-2037, 2011 WL 830623, at *8-9 (N.D. Cal. Mar. 3,
2011).
[14] However, the California Department of Managed
Health Care (“DMHC”), which is responsible for implement-
ing the Parity Act, has promulgated a regulation that makes
HARLICK v. BLUE SHIELD OF CALIFORNIA 16427
clear that the list of benefits in subsection (b) is not exhaus-
tive. The regulation provides:
The mental health services required for the diagno-
sis, and treatment of conditions set forth in Health
and Safety Code section 1374.72 [the Parity Act]
shall include, when medically necessary, all health
care services required under the Act including, but
not limited to, basic health care services within the
meaning of Health and Safety Code sections 1345(b)
and 1367(I), and section 1300.67 of Title 28.
28 Cal. Admin. Code § 1300.74.72(a) (emphasis added). The
words “including, but not limited to” in the regulation make
clear that the list of benefits in subsection (b), as well as the
“basic health care services” specified in the regulation, are
illustrative rather than exhaustive.
Apparently recognizing that the lists in the Act and the reg-
ulation are not exhaustive, Blue Shield argues in its brief that
“a particular ‘medically necessary’ treatment must be pro-
vided for the treatment of severe mental illness if: (1) it is a
level of care specified in subsection (b) of the Parity Act; (2)
it is a ‘basic health care service’ required under Cal. Health
& Safety Code § 1345(b) . . . ; or (3) it is an additional (non-
mandated) benefit that the plan has chosen to provide for the
treatment of physical conditions.” Blue Shield’s argument has
two steps: first, that plans need not cover all medically neces-
sary treatment under the Parity Act, and, second, that Blue
Shield’s three-prong test determines whether a given medi-
cally necessary treatment must be covered. We disagree with
both steps.
In support of the first step of its argument that it need not
cover all “medically necessary treatment” for the listed severe
mental illnesses, Blue Shield points out that the Knox-Keene
Act — the portion of the Health and Safety Code that regu-
lates health insurance plans generally — does not require that
16428 HARLICK v. BLUE SHIELD OF CALIFORNIA
health care plans cover all medically necessary treatments for
physical illnesses. Cal. Health & Safety Code §§ 1345(b),
1367(I); 28 Cal. Admin. Code § 1300.67. It contends that the
DMHC’s implementing regulation shows that the Parity Act
is intended to parallel the Knox-Keene Act. It writes in its
brief to us:
[The regulation] states that the mental health ser-
vices required under the Parity Act “shall include,
when medically necessary, all health care services
required under the [Knox-Keene] Act, including, but
not limited to, basic health care services within the
meaning of [the statutory provisions].”
(Quoting 28 Cal. Admin. Code § 1300.74.72(a); italics,
[Knox-Keene], and [the statutory provisions] added by Blue
Shield in its brief.)
Blue Shield inserted the bracketed phrase “[Knox-Keene]”
in its quotation of the regulation. Based on its assumption that
the regulation refers to the Knox-Keene Act, Blue Shield
argues that coverage under the Parity Act is intended to paral-
lel coverage under the Knox-Keene Act. We believe that Blue
Shield misreads the regulation. In our view, the “Act” to
which the regulation refers is the Parity Act. The regulation
states that “mental health services” for “treatment of condi-
tions set forth in Health & Safety Code section 1374.72 [the
Parity Act] shall include, when medically necessary, all health
care services required under the Act . . . .” The word “Act,”
coming immediately after an explicit reference to the Parity
Act, is most reasonably read as referring to the Parity Act.
Without Blue Shield’s alteration, nothing in the text of the
statute or the regulation suggests that the scope of the Parity
Act is equivalent to the scope of the Knox-Keene Act.
The second step of Blue Shield’s argument is based on its
assumption that the Parity Act does not require plans to cover
all medically necessary treatment for severe mental illnesses.
HARLICK v. BLUE SHIELD OF CALIFORNIA 16429
Blue Shield contends that if a benefit is not listed in subsec-
tion (b) of the statute, and is not a “basic healthcare service”
specified in the regulation, it is not required by the Act unless
it is “an additional (non-mandated) benefit that the plan has
chosen to provide for the treatment of physical conditions.”
Because Blue Shield’s Plan “has [not] chosen to provide for”
residential treatment for physical illness, Blue Shield contends
that it need not cover Harlick’s residential treatment for
anorexia.
Blue Shield’s three-prong test has no support in the Act. It
can point to nothing in the text of the statute, the statutory
scheme, or the implementing regulation to suggest that bene-
fits under subsection (b) (as opposed to terms and conditions
under subsection (c)) must be the same for physical and men-
tal illnesses. Blue Shield’s argument also lacks any support in
common sense. Some medically necessary treatments for
severe mental illness have no analogue in treatments for phys-
ical illnesses. For example, it makes no sense in a case such
as Harlick’s to pay for 100 days in a Skilled Nursing Facility
— which cannot effectively treat her anorexia nervosa — but
not to pay for time in a residential treatment facility that spe-
cializes in treating eating disorders.
Moreover, subsection (b)(4) of the Parity Act suggests that
Blue Shield’s interpretation is wrong. Subsection (b)(4) pro-
vides that plans within the scope of the Act must cover
“[p]rescription drugs, if the plan contract includes coverage
for prescription drugs.” The legislature thus specified that a
plan need not cover prescription drugs for mental illnesses,
even if they are medically necessary, unless the plan covers
such drugs for physical illnesses. The fact that the legislature
carved out a specific exemption for prescription drugs indi-
cates that all other types of benefits must be provided when-
ever they are medically necessary, whether or not that type of
benefit is covered for physical illnesses.
Although there is no caselaw directly on point, a recent
opinion from the California Court of Appeal supports our
16430 HARLICK v. BLUE SHIELD OF CALIFORNIA
conclusion. In Arce v. Kaiser Foundation Health Plan, Inc.,
181 Cal. App. 4th 471 (2010), the issue was the certification
of a plaintiff class in a suit under the Parity Act. The court had
no occasion to explicitly hold that the phrase “medically nec-
essary treatment” in the Act means all medically necessary
treatment, but the court’s analysis appears to assume that this
is the meaning of the Act. The court wrote:
In sustaining [Kaiser’s] demurrer, it appears that the
trial court assumed that Arce could only prove a vio-
lation of the Mental Health Parity Act if he could
demonstrate that the therapies at issue were medi-
cally necessary for the putative class members and
that Kaiser denied coverage based on a determina-
tion that they were not. While that is one means of
establishing a violation [of] the statute, it is not the
exclusive means. It is possible that Arce also could
prove a statutory violation by showing that Kaiser
categorically denies coverage for mental health care
services that may, in some circumstances, be medi-
cally necessary . . . for its individual plan members.
Id. at 493.
b. Positions Taken by the Department of
Managed Health Care
[15] Seeking to avoid the import of the statutory and regu-
latory texts, Blue Shield contends that the California Depart-
ment of Managed Health Care (“DMHC”) has taken the
position that the Parity Act does not require that all “medi-
cally necessary treatments” for enumerated “severe mental ill-
nesses” be covered. It is more accurate to say that the DMHC
has taken more than one position on this issue.
Under California law, the deference a court should accord
to an agency’s interpretation of a statute is “fundamentally sit-
uational.” Yamaha Corp. of Am. v. State Bd. of Equalization,
HARLICK v. BLUE SHIELD OF CALIFORNIA 16431
19 Cal. 4th 1, 12 (1998) (emphasis omitted). Judicial defer-
ence to an agency’s interpretation “turns on a legally
informed, commonsense assessment of [its] contextual merit.”
Id. at 14. A court should consider factors “indicating that the
agency has a comparative interpretive advantage over the
courts” and factors “indicating that the interpretation in ques-
tion is probably correct.” Id. at 12 (internal quotation marks
and citation omitted). An agency will have a comparative
advantage over courts, for example, if the subject matter of
the statute is especially technical or complex, or if the agency
is interpreting its own regulation. Id. An agency’s interpreta-
tion is more likely to be correct when the interpretation has
gone through formal notice-and-comment rulemaking, when
there are “indications of careful consideration by senior
agency officials,” or when the agency has maintained a con-
sistent interpretation over time. Id. at 13.
During the notice-and-comment process leading up to the
promulgation of the regulation implementing the Parity Act,
28 Cal. Admin. Code § 1300.74.72, the DMHC unambigu-
ously stated that the Act requires that plans within the scope
of the Act cover all “medically necessary treatments” for “se-
vere mental illnesses.” Blue Shield wrote to the DMHC dur-
ing the comment period, stating that it was concerned that the
Act might be interpreted to require that a plan cover all “med-
ically necessary treatments.” Blue Shield wrote:
[W]e are concerned that the language in proposed
subsection (a) [of the proposed regulation] could be
construed to require the plan to provide coverage for
any and all medically necessary services for [cov-
ered mental health conditions] notwithstanding that
the services are not basic health services and are not
otherwise covered by the enrollees benefit plan for
other conditions (e.g., residential treatment, prescrip-
tion drugs if not otherwise covered, etc). Therefore,
we would recommend that a more direct approach be
taken with respect to this provision and would offer
16432 HARLICK v. BLUE SHIELD OF CALIFORNIA
the following as replacement language for subsection
(a):
“The health services required to be pro-
vided by a plan for an enrollee with a
severe mental illness . . . shall include all
benefits and services provided to enrollees
under the same subscriber contract as for
other health conditions. Such coverage shall
not otherwise be limited only to basic
health care services within the meaning of
Section 1345(b) of the Act and Section
1300.67 of Title 28.”
Letter from Lyle S. Swallow, Associate General Counsel,
Blue Shield of California, to Curtis Leavitt, Assistant Chief
Counsel, DMHC (Sept. 25, 2002). The language suggested by
Blue Shield is the functional equivalent of the language in the
third prong of its proposed three-prong test, discussed above.
The DMHC responded, rejecting Blue Shield’s suggested
language. It wrote:
REJECT. Health & Safety Code section 1374.72
requires health plans to provide mental health cover-
age for specified mental conditions, to the same
extent as the health plan covers other medical condi-
tions. The regulation must be read and applied so as
to interpret, make specific, or clarify a statute. Given
that the statute requires parity in coverage, the com-
mentator’s concern is without merit; the regulation
requires only that health plans provide mental health
coverage in parity with what the plan provides for
other medical conditions. The draft regulation lan-
guage makes clear that plans cannot limit mental
health coverage to anything less than what is medi-
cally necessary and on parity with other health cov-
erage provided by the plan.
HARLICK v. BLUE SHIELD OF CALIFORNIA 16433
DMHC Mental Health Parity, Responses to Comments, 1st
Comment Period, 8/16 – 9/30/2002, at 1.
The DMHC’s response clearly rejected Blue Shield’s inter-
pretation of the Act, but did not explicitly say that plans had
to cover all medically necessary treatment for the listed men-
tal illnesses. But the DMHC’s response to other comments
was very explicit. One commentator had suggested that the
proposed regulation should list specific rehabilitative services
that are medically necessary, and that therefore must be cov-
ered by plans within the scope of the Act. Id. at 18. The
DMHC wrote in response:
REJECT. It is not appropriate to list all services,
including “rehabilitative services,” that a plan must
provide in order to meet the obligations of section
1374.72 [the Parity Act]. It is sufficient that plans
provide all medically necessary services. To the
extent that certain rehabilitative services are medi-
cally necessary, then those services will be provided.
Id. at 18 (emphasis added). Another commentator had made
a similar suggestion, and the DMHC gave the same response.
See id. at 2 (“[I]t is sufficient to state the plans must provide
all medically necessary services. To the extent that certain
services are medically necessary, then those services will be
provided.”).
However, Blue Shield contends that the DMHC has taken
a contrary position on three occasions. First, Blue Shield
points to Consumer Watchdog v. California DMHC, No.
BS121397 (Super. Ct. Cal. filed June 30, 2009), in which the
DMHC demurred to a complaint seeking coverage of medi-
cally necessary treatment for autism by providers not licensed
in California. The DMHC described the question presented as
follows:
Petitioners allege the Department must order plans to
cover all medically necessary ABA therapy where it
16434 HARLICK v. BLUE SHIELD OF CALIFORNIA
is provided by a professional who is unlicensed in
California. Does the law command the Department
to order coverage in every such extreme case?
Memorandum of Points and Authorities in Support of Demur-
rer at 1, Consumer Watchdog, No. BS121397 (Super. Ct. Cal.
Aug. 7, 2009). The DMHC argued that the Parity Act did not
require coverage of treatment for autism when the provider
was unlicensed, even if the treatment was medically neces-
sary.
Positions taken by an agency for purposes of litigation ordi-
narily receive little deference under California law. See
Yahama, 19 Cal. 4th at 23-24 (citing Culligan Water Condi-
tioning v. State Bd. of Equalization, 17 Cal. 3d 86 (1976)).
This is particularly so where, as here, the agency adopts a liti-
gating position that is inconsistent with an interpretation it has
previously expressed. See Yamaha, 19 Cal. 4th at 13. More-
over, the DMHC put forth no persuasive arguments in support
of its position in the demurrer. Our skepticism about the
DMHC’s litigating position was shared by the Superior Court
in Consumer Watchdog, which overruled the demurrer and
held that the Act requires that plans cover medically neces-
sary treatment by unlicensed providers “unless they have
licensed providers who will provide the same services.” Deci-
sion on Demurrer at 7, Consumer Watchdog, No. BS121397
(Super. Ct. Cal. Oct. 20, 2009).
Second, Blue Shield points to a survey conducted in 2005
by the DMHC as part of a “preliminary analysis on mental
health parity.” Problems identified in the survey included a
lack of high-quality residential treatment centers for eating
disorders, as well as “significant variation” in plan coverage
of residential care for such disorders. Seven plans were stud-
ied, though the coverages of only six were described. One
plan had “made a policy decision that, under parity, [residen-
tial treatment center] services are covered for all age groups
and are comparable to skilled nursing home facility services.”
HARLICK v. BLUE SHIELD OF CALIFORNIA 16435
Four plans covered residential treatment as an optional bene-
fit. One plan did not “routinely” offer residential treatment
coverage; under this plan, residential treatment coverage was
not a benefit “for most enrollees.”
Blue Shield argues that if the DMHC had interpreted the
Parity Act to require residential care, it would have ordered
all seven plans to cover such care. We are not convinced that
this is so. The DMHC was conducting a survey of residential
treatment coverage as part of a larger preliminary study of
mental health parity. The study was not — and was not
designed to be — an across-the-board enforcement proceed-
ing.
Third, Blue Shield points to the May 25, 2007, letter from
DMHC Senior Counsel Andrew George to Harlick. After
reviewing a complaint from Harlick’s mother Robin Watson
about Blue Shield’s refusal to cover Harlick’s care at Castle-
wood, George wrote:
After reviewing all of the information submitted, we
are unable to direct Blue Shield to cover these ser-
vices. According to the terms of your health plan
contract, . . . residential care is excluded from cover-
age. As Castlewood is licensed as a residential treat-
ment center, rather than an acute in-patient facility,
Blue Shield is not obligated to provide coverage for
this treatment.
Blue Shield argues that George’s letter shows that the Parity
Act does not require coverage for medically necessary treat-
ment for anorexia nervosa in a residential care facility.
Blue Shield misunderstands the scope of the DMHC’s
review and the purpose of George’s letter. Upon request, the
DMHC will review a plan’s refusal to cover care based on a
determination that the care was not medically necessary. See
Cal. Health & Safety Code § 1374.30(b), (d). This review is
16436 HARLICK v. BLUE SHIELD OF CALIFORNIA
called an “independent medical review.” Id. Such a review
deals solely with the question whether treatment was medi-
cally necessary for a particular patient. Id. The DMHC does
not decide whether a plan should generally cover a particular
treatment. Id.
It is clear that George’s review of Harlick’s complaint was
an “independent medical review” under § 1374.30. Watson
sent the complaint on April 9, 2007, and it was forwarded to
the DMHC on April 19, 2007. On April 24, 2007, the DMHC
sent Blue Shield an “Independent Medical Review Request
for Health Plan Information” questionnaire. The cover sheet
said, “The Department of Managed Health Care has received
the attached request for an Independent Medical Review.” On
April 30, Blue Shield employee Carolyn Garner sent a letter
to Harlick noting her “understanding that you have submitted
an Application for Independent Medical Review to the Cali-
fornia Department of Managed [H]ealth Care.” On May 15,
George sent a letter of inquiry to Blue Shield. The letter
focused on medical necessity. It never mentioned the Parity
Act. On May 23, Blue Shield employee Joan Russo wrote a
letter to George explaining that the refusal to cover the treat-
ment was based on the terms of the Plan. Her letter never
mentioned the Parity Act. Once he learned that Blue Shield’s
refusal was a coverage decision, George sent his letter termi-
nating the review two days later, on May 25. This letter, too,
never mentioned the Parity Act. George’s May 25 letter estab-
lishes only that the DMHC terminated its “independent medi-
cal review” under § 1374.30 once it determined that Blue
Shield’s denial was not based on a lack of medical necessity.
It does not establish that the DMHC approved of Blue
Shield’s decision not to cover residential care at all.
c. Summary
[16] We therefore conclude that the most reasonable inter-
pretation of the Parity Act and its implementing regulation is
that plans within the scope of the Act must provide coverage
HARLICK v. BLUE SHIELD OF CALIFORNIA 16437
of all “medically necessary treatment” for the nine enumer-
ated “severe mental illnesses” under the same financial terms
as those applied to physical illnesses.
C. Medical Necessity in Harlick’s Case
[17] The remaining question is whether Harlick’s residen-
tial care at Castlewood was medically necessary. Blue Shield,
as the plan administrator, normally makes the medical neces-
sity determination in the first instance. Sarchett v. Blue Shield
of Cal., 43 Cal. 3d 1, 9-10 (1987). Blue Shield did not dispute
that treatment at Castlewood was medically necessary until
supplemental briefing filed after oral argument in this Court.
Blue Shield now argues that it should be allowed to reopen its
administrative process in order to determine whether Harl-
ick’s residential care was medically necessary.
An ERISA administrator who denies a claim must explain
the “specific reasons for such denial” and provide a “full and
fair review” of the denial. 29 U.S.C. § 1133. The administra-
tor must also give the claimant information about the denial,
including the “specific plan provisions” on which it is based
and “any additional material or information necessary for the
claimant to perfect the claim.” 29 C.F.R. § 2560.503-1(g).
[18] ERISA and its implementing regulations are under-
mined “ ‘where plan administrators have available sufficient
information to assert a basis for denial of benefits, but choose
to hold that basis in reserve rather than communicate it to the
beneficiary.’ ” Mitchell v. CB Richard Ellis Long Term Dis-
ability Plan, 611 F.3d 1192, 1199 n.2 (9th Cir. 2010) (quoting
Glista v. Unum Life Ins. Co. of Am., 378 F.3d 113, 129 (1st
Cir. 2004)). Claimants should not be “ ‘sandbagged by a ratio-
nale the plan administrator adduces only after the suit has
commenced.’ ” Mitchell, 611 F.3d at 1199 n.2 (quoting
Jebian v. Hewlett-Packard Co. Employee Benefits Org.
Income Prot. Plan, 349 F.3d 1098, 1104 (9th Cir. 2003))
(some internal quotation marks omitted). Just as claimants
16438 HARLICK v. BLUE SHIELD OF CALIFORNIA
should present all of their arguments for granting the claim to
the insurer during the administrative process, an insurer
should tell the claimant all of its reasons for denying the
claim. Cf. Diaz v. United Agric. Employee Welfare Benefit
Plan & Trust, 50 F.3d 1478, 1483 (9th Cir. 1995).
[19] During the administrative process, Blue Shield never
said that it was denying the claim because treatment at Castle-
wood was not medically necessary. Only once during its
extensive communication with Harlick and Watson did Blue
Shield even suggest that medical necessity might be an issue.
In a letter full of other errors, one Blue Shield employee said
that coverage for treatment at Castlewood was denied in part
because medical necessity had not been established for a four-
month period. But in a letter a few weeks later, a different
Blue Shield employee reiterated that Castlewood was not cov-
ered because it was a residential facility. From that time on,
Harlick was told only that Blue Shield would not pay for her
care at Castlewood because her coverage did not extend to
residential care. Blue Shield Senior Manager in the Law
Department, Joan Russo, explained in a letter to Watson:
The Plan is not arguing that Jeanene was not in need
of care and treatment for her condition. However, it
is the Plan’s position that Jeanene was in a residen-
tial treatment program at Castlewood and according
to the terms of her Shield Spectrum PPO Plan, resi-
dential care is not covered.
Blue Shield also told the DMHC that the denial was not
based on medical necessity. During the independent medical
review, George sent Blue Shield a form about the claim
denial. The form began, “The health plan’s reason for the
denial was based on which of the following determinations:
(Check the appropriate boxes) — Benefit/Coverage, Experi-
mental/Investigational Treatment, Medical Necessity,
ER/Urgent Care Reimbursement.” Blue Shield checked “Ben-
efit/Coverage,” but did not check “Medical Necessity.”
HARLICK v. BLUE SHIELD OF CALIFORNIA 16439
George terminated the “independent medical review” because
that review deals only with medical necessity, and Blue
Shield had not raised any issue of medical necessity.
Blue Shield has discretion to determine whether treatment
is medically necessary during the administrative review pro-
cess. But Blue Shield had to tell Harlick the “specific reasons
for the denial” — not just one reason, if there was more than
one — and provide a “full and fair review” of the denial. 29
U.S.C. § 1133 (emphases added). Blue Shield told both Harl-
ick and her mother, as well as the DMHC, that medical neces-
sity was not the reason for its denial of Harlick’s claim. It
cannot now bring out a reason that it has “held in reserve” and
commence a new round of review. See Mitchell, 611 F.3d at
1199 n.2.
[20] Given that Harlick’s doctors believed that outpatient
treatment was insufficient, that Harlick entered Castlewood at
65% of her ideal body weight, and that Harlick needed a feed-
ing tube while at Castlewood, it seems likely that more than
outpatient treatment was indeed necessary. But we need not
decide that question. By failing to assert during the adminis-
trative process that medical necessity was a reason for deny-
ing Harlick’s claim, Blue Shield forfeited the ability to assert
that defense in the litigation now before us.
Conclusion
[21] Harlick’s Plan does not itself require that Blue Shield
pay for residential care at Castlewood for her anorexia ner-
vosa. However, California’s Mental Health Parity Act pro-
vides that Blue Shield “shall provide coverage for the
diagnosis and medically necessary treatment” of “severe men-
tal illnesses,” including anorexia nervosa. Blue Shield is fore-
closed from asserting that Harlick’s residential care at
Castlewood was not medically necessary. We therefore con-
clude that Blue Shield is obligated under the Parity Act to pay
for Harlick’s residential care at Castlewood, subject to the
16440 HARLICK v. BLUE SHIELD OF CALIFORNIA
same financial terms and conditions it imposes on coverage
for physical illnesses.
REVERSED.