Tuesday, December 15, 2009

Seventh Circuit: “Discretion” means the insurance company can shuck and jive

Ghandi Gutta is an accomplished physician. Unfortunately for him, he suffered from a variety of ailments, which kept him from being able to work as a physician. As the United States Seventh Circuit Court of Appeals described it, Dr. Gutta’s ailments included:

type I diabetes, macular degeneration, retina artery aneurism in his left eye with a residual blind spot, dislocation of the left thumb, degenerative arthritis in both wrists, ulnar palsy of the left arm and hand, rotator cuff injury in the left shoulder, and degenerative arthritis in the right AC joint.

Other than that he was fine.

Dr. Gutta filed a disability claim under his ERISA-governed insurance policy, and after paying for a brief time Standard Insurance Company terminated his benefits; Dr. Gutta was thereby forced to roll the dice with his ERISA lawsuit. The evidence in the claim file (which is of course all he got to introduce at trial) included “the testimony of no less than twelve doctors, as well as a few other people.” Standard, meanwhile, had decided that Dr. Gutta was able to work as a medical director or assistant medical director, so no benefits for him.

In court, of course, Standard argued that it had conferred “discretion” upon itself in its insurance policy, and that therefore its termination of Dr. Gutta’s disability benefits could be overturned only if it was an abuse of discretion, never mind whether it was correct. The Seventh Circuit agreed, and described the “abuse of discretion” standard as allowing Standard to “shape the application, interpretation, and content of the rules in each case.”

Guess who won?

This is remarkable, or would be anywhere but ERISAworld. The rules by which an insurance company decides which claims to pay are not shaped by the terms of the insurance policy, and God knows the law doesn’t intrude on its unfettered ability to lie cheat and steal. No, an insurance company can decide for itself, in each case, what the “application, interpretation and content of the rules” are.

And our Congressional representatives just allow this to fester.

Wednesday, December 9, 2009

With the Public Option gutted, fix ERISA to keep insurers honest

[Updated December 10, 2009]

It appears the public option aspect of health insurance reform has been eliminated or, at the least, has morphed into a feeble remnant of its original incarnation.

Remember the rationale for having a public option was to keep insurers honest. President Obama said explicitly that he didn’t support the public option in order to eliminate the insurance industry – he just wants to hold them accountable.

We could go a long way in the direction of accomplishing exactly that – with utterly no impact on the public coffers – by fixing the ERISA problem.

The current proposal in the senate, so far as we know at any rate, would allow state law claims and remedies with respect to coverage purchased through the contemplated Health Insurance Exchange. Individual private policies already involve state law and not ERISA. That leaves employment-based insurance, which is by far the most common type, and which is governed by ERISA -- imposing on the insurer no meaningful accountability at all.

So the natural alternative to the now-apparently-moribund public option is to address the malignant effects ERISA has on the behavior of insurance companies.

President Obama, Congress, now is the time to expose the health insurance industry to some real accountability, to require them to make whole the innocent insureds whom they defraud and kill. Do something about ERISA, and we’ll achieve some actual reform.

Update: The public option indeed appears to be dead. House Speaker Nancy Pelosi says the House would still likely vote for an alternative proposal which accomplishes certain broad goals, and specifically relating to the late lamented public option says "We believe, we in the House believe, that the public option is the best way to hold insurance companies honest -- to keep them honest and also to increase competition. If there is a better way, put it on the table."

There is a better way: fix ERISA.

Tuesday, December 1, 2009

The Problem, redux

Around the first day of each month I'll be posting a reprise of the first post on this blog, which contains an overview of the Problem. It'll be updated and edited as we go along. But I'd like to have a summary of the Problem available frequently, hence the monthly repeat and update. So off we go...

ERISA is the Employee Retirement Income Security Act, and it is codified in Title 29 of the United States Code, starting with section 1001. It's federal law, enacted in 1974, and it was supposed to protect employees' rights in connection with their pension plans and benefit plans (health, disability, life insurance, that sort of thing). But it doesn't. Quite the contrary.

This blog is dedicated to the ERISA problem.

What is that problem? It mainly concerns those benefit plans (ERISA is actually not a bad law with respect to pension plans). Pension plans is what they had in mind when they enacted it -- benefit plans were an afterthought.

And it shows. If your insurance company wrongfully denies your claim, you might figure you can always take them to court. You can do that (usually), but when you get there you'll find things don't make any sense. We'll go into the particulars soon, but for now:

If you get your insurance coverage through your employment, then in virtually every case ERISA preempts state law (meaning it cancels it out, eradicates it, takes its place). But, having gutted state law relating to insurance disputes, it fails to provide any reasonable substitute. The remedies it provides (i.e. what you get if you win a lawsuit) are very, very stingy. And ERISA severely compromises your ability to secure even the scant remedies it does provide.

1. Remedies. ERISA limits the recovery you might get to the benefits which should have been provided in the first place, and an award on account of attorney fees in the court’s discretion. Example: you have your disability benefits wrongfully denied. As a result, you have no income, your credit rating is trashed, you lose your home and you are driven into bankruptcy. You file your ERISA suit and against the odds, you win. What do you get? The benefits they should have been paying you back when it might have done you some good. That's all (you might -- might -- get something on account of your attorney fees too).

The trashed credit, the lost home, the bankruptcy, the ruined life? Bupkis. ERISA does not allow for any recovery on account of these sorts of consequential damages -- none. And this applies even if the insurance company committed outright fraud when it denied your claim. Incidentally, I find it quite difficult to understand why the insurance industry, uniquely among all industries in America, needs to have immunity from liability for fraud if it is to offer its services at a reasonable price. Anyway, this concern goes beyond making people whole; it also directly impacts the behavior of insurance companies.

As of now we have a situation where the law tells insurers they face no meaningful consequences if they deny care improperly or even commit outright fraud. As one federal judge has commented, "if an HMO wrongly denies a participant's claim even in bad faith, the greatest cost it could face is being compelled to cover the procedure, the very cost it would have faced had it acted in good faith. Any rational HMO will recognize that if it acts in good faith, it will pay for far more procedures than if it acts otherwise, and punitive damages, which might otherwise guard against such profiteering, are no obstacle at all." Insurance companies, of course, are not charities, but corporations; their boards are subject to a fiduciary duty to maximize shareholder value. If it is possible to accomplish this by mistreating insureds, then it follows insurers will do precisely that (and believe me, they do).

2. Procedure. In ERISA litigation, courts have determined among other things that there is no right to a jury; that discovery (the pre-trial process where you obtain the other side's documents, take depositions and such) is to be significantly abridged; that the evidence which may be introduced at trial is limited to that which the insurer deigned to assemble during its claims evaluation process; and that, when the policy contains language vesting "discretion" in the insurer, if you prove the insurance company was wrong -- you lose. In order to win, you must prove the denial was "arbitrary and capricious" -- that is to say, ridiculous, absurd, unintelligible, crazy. And lo and behold, the insurance companies grant themselves "discretion" when they write their policies. In this way we treat insurance companies as if they were federal judges. But Learned Hand they are not.

These days we're all debating health care reform and what to do about the uninsured. ERISA matters a lot here, because if you get your insurance through your employment, then consider yourself to be in that group. If by "insurance" you mean something like an enforceable promise by an insurance company that it will pay for what it says it will, what you have doesn't qualify. What you have is a piece of paper saying some company will pay your claim if it feels like it. You don't have insurance at all -- you only think you do.