Monday, January 31, 2011

You know I don’t even think it’s constitutional

Consider ERISA. Now think about the most unfair and one-sided legal process you can imagine. But I repeat myself.

When something is as unfair as ERISA, and violates some of our most basic ideas about how the judicial process should operate (like a man not being a judge in his own case, for example), you have to wonder whether the Constitution might not have something to say about it. If you ask me, it does.

The Fifth Amendment does more than just allowing people to clam up if they’re about to incriminate themselves. It also “forbids the federal government from depriving persons of ‘life, liberty, or property, without due process of law.” Buckingham v. Sec'y of U.S. Dept. of Agr., 603 F.3d 1073, 1081 (9th Cir. 2010). Now your entitlement to, say disability benefits, from an ERISA-governed insurance policy, very very likely qualifies as a property interest. (I’m gonna cheat and just assume it does, because I want to get to the good stuff, but I am pretty sure I’m right).

And what is one of the most, if not the most, important component of due process? It’s “an impartial and disinterested tribunal in both civil and criminal cases.” Marshall v. Jerrico, Inc., 446 U.S. 238 (1980). As recently as 2009, in Caperton v. A.T. Massey Coal Co., Inc., the Supreme Court observed “It is axiomatic that “[a] fair trial in a fair tribunal is a basic requirement of due process.”

So what process do you get under ERISA? First, you get a decision by an insurance company, essentially a “reconsideration by the insurance company as to whether it should continue to pay benefits, and thus reduce its profits.” That’s not an “impartial and disinterested tribunal.”

Then you go to court and the judge, who is impartial, is legally required to have a thumb on the scale in the insurance company’s favor. So a fair decisionmaker is required, by law, to use an unfair process, where the unfair decision made by the insurance company comes with a wholly undue presumption of correctness. The question is, then: does this presumption of correctness, given that the decision under review was made by a party to the very dispute in question, create a derivative constitutional defect?

That phrase “derivative constitutional defect” is not mine; I stole it from a 1993 Supreme Court case – an ERISA case! – called Concrete Pipe & Products of Cal. v. Construction Laborers Pension Trust for Southern California. It was about “withdrawal liability,” which refers to the funds an employer owes when it withdraws from a multi-employer pension plan, to make sure it has paid enough to account for its employees’ share of future pension benefits. The way it works is that the pension fund tells the withdrawing employer how much it owes, and the employer says take a flying leap, that’s way too high a figure. Under ERISA this type of dispute goes first to a neutral arbitrator, and if the employer disagrees with the arbitrator’s decision, it goes to a court – which has to presume the arbitrator was correct, very much like a court treats an insurer’s denial of benefits with “deference.”

The Supreme Court decided this was OK under the Fifth Amendment, but look how they arrived at that conclusion:

Because the statute as we construe it does not foreclose any factual issue from independent consideration by the arbitrator (the presumption is, again, assumed by all to be inapplicable to issues of law), there is no constitutional infirmity in it. For the same reason, that an employer may avail itself of independent review by the concededly neutral arbitrator, we find no derivative constitutional defect infecting the further presumption that a district court must afford to an arbitrator's findings of fact.

See what they did there? In order for it to be constitutional for a court to treat a litigant’s own decision with deference, somewhere along the line there has to be an “independent review by a concededly neutral arbitrator.” Otherwise, there’s a “derivative constitutional defect.”

An ERISA insurer, of course, is not “concededly neutral.” And its obviously un-neutral decision gets treated with deference by a court. But where is the neutral arbitrator in between? It’s not there.

And so, we see that ERISA’s approach to adjudicating insurance disputes is not only absurd and unfair – it’s unconstitutional.

Monday, January 17, 2011

ERISA: Pro-insurance-industry, not pro-free-market

Ilya Somin, over at Volkh Conspiracy, writes today about the insurance industry’s approval of the Health Care Reform bill. As he points out, it’s not surprising they’re in favor of the bill; “Is there any industry that wouldn’t support a law requiring people to buy its products?”

One of Mr. Somin’s premises is that there’s a big difference between a court being “pro-business” and “pro-free-market,” although the latter is mistaken for the former. Indeed, they’re often directly opposed to each other, since big business (having achieved bigness) is not inclined to be in favor of competition.

Because Mr. Somin believes the Supreme Court is more pro-free-market than it is pro-big-business, he doubts the fact the insurance industry likes Health Care Reform will have much of an effect when it comes time for the Court to make it HCR decision.

This makes a lot of sense to me, and that in turn makes me wonder why the insurance industry has so successfully worked its will with ERISA. Particularly in more recent years, the industry has been allowed to get away with murder, and the courts have quite often rationalized that result with the observation that ERISA was designed (in part) to encourage employers to offer benefit plans, and we don’t want to make it too expensive for them. Just last year, in Conkright v. Frommert, Chief Justice Roberts said Congress sought "to create a system that is [not] so complex that administrative costs, or litigation expenses, unduly discourage employers from offering [ERISA] plans in the first place."

OK, fair enough. We don’t want to make it too inconvenient or expensive for employers to set up benefit plans. Insurance companies, of course, are not employers (not in this context at any rate). And the implicit threat they will ratchet up premiums to an unaffordable level if we make them refrain from committing fraud live up to their promises makes the ERISA insurance industry a big extortion racket: “Nice health care plan you have there, I’d hate to see anything happen to it.”

So, in the name of encouraging employers to offer employee benefits, we allow the vendors of those benefits to offer products which are, in a word, illusory. They promise things in their insurance policies and, when it comes time to make good on their promises, they refuse to do so – “in their discretion.

ERISA is a big counterpoint to what I believe to be Mr. Somin’s generally correct observation that the insurance industry’s approval of HCR “probably won’t give much pause to the conservative justices on the Supreme Court, assuming the latter are otherwise inclined to strike down the mandate.” Under ERISA, the Court has refused to enforce some of the most basic principles of the rule of law which is necessary for a free market to function, like, say, breach of contract.

Which leads me to another post to which Mr. Somin links: John Cochrane’s proposal of a way to deal with pre-existing conditions should the individual mandate be struck down. There’s one big weakness with Mr. Cochrane’s otherwise persuasive idea: it depends on the observation “And courts do still enforce contracts.” In ERISA cases, not so much. Mr. Cochrane’s proposal for a free-market way to facilitate coverage for pre-existing conditions would not work without very careful vigilance against ERISA-style immunity, for the insurance industry, from liability for everything up to and including outright fraud.

And don't think the insurance industry would not forcefully push for that sort of immunity (recall they managed to keep it in the HCR bill). After all, if we don’t let them commit fraud with impunity, how can they be expected to offer their product at a reasonable price?

Monday, January 3, 2011

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 welfare benefit plans (health, disability, life insurance, that sort of thing). But it doesn't. Quite the contrary.

Way, way to the contrary.

This blog is dedicated to the ERISA problem.

What is that problem? It mainly concerns those welfare 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 -- welfare 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:

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 in the vast majority of cases a successful claimant is not made whole; not even close. 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. 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, and ERISA says there is no meaningful consequence for that, then it follows that's what insurers will 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 generally limited to that which the insurer unilaterally decided to include within its claim file; 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.

The Republicans are gearing up to take a shot at repealing Obamacare. If that happens, then the least we could do is to ensure that those people who are fortunate enough to have insurance at least have some meaningful ability to enforce insurers' promises in court.

But never mind Obamacare; ERISA matters a lot anyway. If you get your insurance through your employment, then -- thanks to ERISA -- consider yourself to be uninsured. 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.