The other day the Hastings Center site featured a post by Jacqueline R. Fox, a professor at the University of South Carolina School of Law, entitled Will Health Care Reform Increase Litigation Over Denied Claims? Professor Fox conveyed a legitimate concern, if you ask me, about the effect of proposed reforms on health care costs, but when she turns to whether insurance companies should be accountable for wrongfully denying claims she demonstrates the depth of the ERISA problem.
Professor Fox posits that litigation over denied benefits claims could ramp up for two reasons:
First of all, removing pre-existing conditions and other limitations to coverage in the private market will make it easier for people currently without coverage to get it. In addition, controlling the cost of policies will make it easier for people to keep coverage. Coupled with proposed mandates that would require people to purchase insurance, it is logical to envision millions of people entering the state-regulated private insurance market, getting consistent insurance coverage for the first time.
Note her concern here is with the “state-regulated private insurance market”; that is to say she is not talking about employment-based policies currently covering the vast majority of us.
It’s where Professor Fox contrasts the situation regarding the “private market” with ERISAworld that she illuminates the Problem:
No damages are allowed to be awarded for an ERISA claim beyond the cost of the medical care that was denied, even if real, measurable damages occur and even if state laws would allow for these damages to be recovered.
By protecting employer-sponsored health insurance plans from liability for their benefit decisions, ERISA allows plans to adopt far more aggressive cost-saving approaches in their decisions than they could possibly risk were they subject to liability. In state court cases for wrongful denials that are not subject to ERISA, jury awards can reach tens of millions of dollars.
The legal analysis in benefits decisions is based on the language of the benefits contracts. If excessive cost was explicitly allowed as a basis for coverage decisions, liability would not be a large-scale problem. However, these contracts do not allow explicit cost-based rationing decisions to be made by the plan administrator and instead rely on a more amorphous “medical necessity” standard for their decisions.
Well, I do have a few quibbles with what I view as Professor Fox’s euphemisms. Allowing insurance companies “to adopt far more aggressive cost-saving approaches in their decisions than they could possibly risk were they subject to liability” is another way of saying “allowing insurance companies to fraudulently deny claims they don’t want to pay because of concerns over their bottom line.” And saying that insurers, in the absence of “explicit cost-based rationing” language in their insurance policies, resort to “a more amorphous 'medical necessity' standard for their decisions” amounts to an observation that insurers commit fraud to save themselves money: they can’t deny the claim for the reason they really want to, so they just make something up and call it a “medical necessity” decision.
Professor Fox certainly has a legitimate concern. We do no one any favors by pricing health care out of reach. But “cost savings” ought not be allowed to divert us from our attention to the Problem. After all, we could certainly help out Detroit if we allowed them to sell a car and then get away with not actually delivering, you know, the car. Same thing applies to ERISA: it’s a false economy to pay less for something when that something isn’t really delivered. ERISA insurers sell insurance but deliver empty and illusory promises. And Professor Fox’s argument makes that very point.
Professor Fox herself observes:
It is not at all clear that the ERISA pre-emption is a good way of controlling health care costs, either from an ethical standpoint or in terms of guaranteeing the most rational use of scarce resources. However, it is one of the few ways of controlling costs that we currently have.
No it is not at all clear. If the insurance industry needs immunity from legal liability for fraud in order to keep costs under control, then it is time for them to go. And then it'll be time for us to figure out a way to have health care services delivered by an entity that does not need to be able to commit fraud with impunity if it is to stay in business.