Tuesday, June 29, 2010

A word from an industry insider makes the case against ERISA

Wendell Potter is a former “insurance” industry bigwig; he worked at Cigna Corporation, most recently as head of corporate communications and as the company's chief corporate spokesman. Before that he was with Humana, a major health “insurer.”

Mr. Potter had the unenviable job of serving as Cigna’s corporate spokesman following its decision to let Nataline Sarkisyan die and its too-little-too-late decision to cover its tracks. That’s no job for someone with a conscience, and Mr. Potter soon thereafter resigned his position. This is worth watching and listening to in full:

Mr. Potter now maintains a blog, and his most recent post is also worth a look. He describes how Health Care Reform did precious little to rein in the “insurance” industry, since they can still lie, cheat and steal with no legal consequence. The whole thing is compelling; here’s a taste:

While the motivation of Congress was to protect employer-sponsored pension plans when it passed the Employee Retirement Income Security Act (ERISA) in 1974, the federal courts over the years have interpreted the law to apply to all employee benefits, including health care benefits. Because it is a federal law, it preempts state laws, meaning that the 130 million Americans enrolled in employer-sponsored ERISA-protected plans cannot sue their insurance companies (or their employers) in state court if they have been denied coverage for a treatment or procedure. The can try to sue in federal court, but even if they succeed, they can only recover the value of the denied treatment or procedure. Federal courts, unlike state courts, cannot require defendants to compensate plaintiffs for pain and suffering or lost wages. The monetary awards to plaintiffs who win their lawsuits are typically so small that few lawyers are willing to represent patients in federal courts.


Insurers and big employers argue that ERISA allows them to offer benefits to their employees more efficiently because it exempts them from what they pejoratively call a patchwork of state regulations. That’s true, but many consumer advocates, health policy experts, jurists and regulators believe that the ERISA preemption of state laws does more harm than good. As the National Association of Insurance Commissioners noted in a comprehensive report on the often harmful consequences of ERISA’s preemption of state laws: “ERISA provides few rights to consumers and, more significantly, it is used as a weapon to block the states’ implementation of health care consumer rights.”

So while Obama’s Patients’ Bill of Rights represents an important step forward, much more reform is needed if the United States is ever to have a health care system that benefits its citizens more than profit-driven health insurance companies.

Kudos to Mr. Potter for his good work.

Monday, June 14, 2010

Let's get scholarly: A good summary of the academic case against ERISA -- "denying benefits is all potential economic gain with no downside risk."

I don't know Andrew Stumpff, but I sure do like his recent piece which is soon to published in the St. Thomas Law Review and which you can download now from SSRN.

The paper, entitled "Darkness at Noon," is a pretty succinct discussion of ERISA and its malignant effects on American workers. Go read the whole thing; here's a taste (with some gratuitous self-serving links inserted by yours truly):

Imagine a participant whose employer has denied the participant's claim for plan benefits. Together with the Firestone decision, the exhaustion of administrative remedies requirement presents the participant with the following prospect, if she wants to reverse the denial: First the participant must appeal the denial to the employer itself or the the employer's agent, according to procedures and under a deadline prescribed by the employer itself. The employer, let us remind ourselves, is a party whose economic interest is directly adverse to that of the participant, and who has already ruled against her. If the appeal results in continued denial of the claim, the participant will finally gain access to the courts; but the courts will reverse the employer's denial only if the denial was "arbitrary and capricious." All this inferred by courts from -- nowhere expressly provided by -- a statute whose motivation was to protect plan participants.

Meanwhile, with no possibility for consequential or punitive damages, the employer will have had very little disincentive to deny benefits in the first place. If the employer decides not to pay, the worst potential consequence (from the employer's perspective) is that a court might later disagree, in which case all the employer will have to do is pay the claimed amount. From the employer's perspective, denying benefits is all potential economic gain with no downside risk. Furthermore the parties' positions are unequal: The employer is likely in a much stronger position to bear the cost of litigation than the employee (and will also likely have more economic incentive to do so, given the possibility of similar claims by other participants).

In sum, the employer's calculus in deciding whether to pay benefits under an ERISA plan is now roughly the following: On the one hand, pay the benefits. On the other hand, don't, with as consequence only the remote chance the participant will decide to incur the time, cost and effort to exhaust his administrative appeals to the employer or its agent, and then take the case to court; and that the denial will be eventually judicially reversed as "arbitrary and capricious" -- in which case the employer will merely have to pay what it would have owed in any event.

What's striking is not just that this can hardly be viewed as a regime "protective of plan participants." What's striking is that this regime is distinctly less protective that would have been the case under ordinary principles of common law, and that it was established by judges in the name of a law expressly intended to expand participant protection beyond those available under common law.

I think the whole thing stinks even more if you substitute the words "insurance company" for "employer" in the foregoing, which is all too often the case. Then even the meager argument supporting ERISA -- that it encourages employers to create employee benefit plans in the first place -- withers on the vine.

Hat tips to Carol Cachey and Brian King.

Tuesday, June 1, 2010

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.