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.


  1. The jist of your argument is rooted in the insurance industry lobbying for and receiving an "exclusion from compensatory damages" in the passing of ERISA in 1974. The reversal of this single rule corrects the bulk of what you argue.

    PPACA, Public Law 111-148, places all review on a "De Novo" basis and thus, cures the second part of your argument.

    Finally, you are encouraging an old deception by the simple phrase "insurance". ERISA flushes out the legal fiduciary of the promise to pay for bills promised as part of the compensation package in employment. In fact, over three quarters of all so called "health insurance", right now, is actually "self insurance" where the employer is covering ALL of the cost and the "insurer" (Blue, Aetna, etc) is just the TPA clearing the paperwork and giving the employee a recognizable card to carry around. This shift has occurred as encouraged by the insurance industry where they continued to receive roughly 25% of every health dollar spent in "administrative" fees while shifting all of the real risk back to the employer. 25% margin, like before, now with no risk.

    I am afraid that your ‘blog’ will be an inadequate space for this multifaceted, complex set of issues.

  2. Well, I tried to respond and the thing disappeared into the ether. I'll try again.

    Thanks for your comment. You are quite correct, I think, that many of the complex issues at play are beyond the scope of this little blog and certainly my limited intellect.

    OTOH promises made in return for someone's labor ought to be enforced by the courts. That's really the point of all this.

    First, HCR does nothing to impact disability, AD&D, or life insurance, or any other employee benefit besides health coverage.

    Second, it is far from clear that HCR will require de novo judicial analysis. Last time I looked at it I came away thinking state law remedies would be availble for Exchange-purchased coverage, even if there's an employer subsidy, but for employment-based coverage as defined in the act (which is pretty much the typical ERISa insurance plan most people have now) preemption of state law remedies continues. there's a discussion here about all that:

    In any case that question will not be resolved without some fun litigation.

    Finally, I quibble with the notion that Congress intended ERISA to gut state law remedies against insurance companies; that came from the judiciary. Pilot Life and its evil spawn. Congress, when it enacted ERISA, included the saving clause to exempt state law regulating insurance from preemption, and it also carved insurance policies out from the requirements that plan assets be held in trust. I think Congress figured the status quo ante re insurance regulation was fine the way it was. That is also supported by much of the commentary in the legislative history.

    Thank you again for your comment.

  3. You know I think I just conflated remedies with de novo analysis. Never mind; I will have to get back to you on that.

    But we still need compensatory damages to be available, at the very least, before any insurer will have any real incentive to act properly. You're correct the reversal of that single rule would take care of that problem. So how do we reverse that single rule?