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.

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.

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.

Claim denied: the $43,364.27 battery

Paige Riley has a serious medical condition: gastroparesis. The stomach cannot empty itself, causing nausea, vomiting and pain. Fortunately for Paige, her husband’s employer provided a very attractive insurance plan, so the installation of an Enterra – a device implanted under her skin which ameliorated her condition by prompting the stomach to do its job – was covered back in 2005. And when its batteries needed to be replaced in 2007 – which of course also required surgery since the device was under her skin – that was covered too.

Earlier this year, another operation became necessary to replace the fading batteries. As Forbes.com reports, Blue Cross & Blue Shield of Mississippi, the plan administrator for the insurance plan, decided Enterra was experimental and refused to cover the $43,364.27 bill to install new batteries. So Ms. Riley had to proceed to court.

Now guess which law governs her case. That’s right - ERISA. So her chances of prevailing in court and getting the procedure covered are drastically reduced because ERISA makes it exceedingly difficult to overturn an insurance company’s denial of your health insurance claim. And of course if you do manage to get it overturned the remedies you recover are very, very stingy. Indeed these factors do a lot to explain why an insurer will deny coverage to replace batteries in a device which had already been approved.

So Ms. Riley was left with the choice of going ahead with a dead Enterra device implanted under her skin, and living with the symptoms of gastroparesis, or scrambling to come up with $43,364.27 out of her own pocket.

I don’t know what to call that sort of arrangement, but it certainly isn’t “insurance.”

“Independent” medical exams and “reasonable” grounds for denying your claim

As we’ve seen when an insurance company has managed to grant itself “discretion” it gets the benefit of the most absurd judicial deference known to the law. The courts make no bones about it: a decision to deny benefits, even if the court agrees it is wrong, will nonetheless be upheld so long as the court concludes it was “reasonable” (not reasonable, “reasonable”).

So what does it take for a wrong decision to be “reasonable”? One way is for the insurance company to say hey, it wasn’t our decision, we hired an independent doctor to review all the files and we just abided by this fine fellow’s impartial and fair opinion. And the judge says, well, they did have someone with “M.D.” after his name say the claim was bogus, and who am I, a mere federal district court judge, to disagree with such a learned and considered opinion? (and the champagne and caviar doesn't affect my decision at all!).

Of course, as in all things ERISA, the books are cooked here. These so-called “independent” medical examiners are very, very frequently beholden to the insurance companies who hire them and pay the freight. These doctors are very handsomely contemplated for their time, and that gravy train stops abruptly if the insurance company sees they are issuing too many opinions which don't allow the insurer to deny a claim. So to all too many of these “independent” doctors, no one is ever disabled, and no medical treatment ever qualifies as “medically necessary.”

My colleague Michael Quiat, on his excellent disability law blawg, addressed this issue recently. You should read the whole thing, but here’s a taste:

To construct the façade of “impartiality”, insurance companies hire doctor “agencies” which hire physicians to do what are facetiously called Independent Medical Examinations, purportedly because the insurance company wants to catch malingerers. These doctor agencies scout out MDs, many of whom do not practice medicine as a vocation, but stick strictly to IME exams. These exams provide most, if not all of their income.

These physicians are paid to be highly skeptical of disability claim and claimants. Most of their exams are based on the written reports of claimants’ doctors, but yet they are supposedly able to determine that a claimant is not in pain or restricted in movement or otherwise afflicted, even though they never see the claimant!

Mike’s post includes a link to a recent article in the Los Angeles Daily Journal about this; it is worth your time to take a look at that too.

The U.S. Supreme Court, in a case called Black & Decker Disability Plan v. Nord, echoed the same concerns:

As compared to consultants retained by a plan, it may be true that treating physicians, as a rule, have a greater opportunity to know and observe the patient as an individual. Nor do we question the Court of Appeals' concern that physicians repeatedly retained by benefits plans may have an "incentive to make a finding of `not disabled' in order to save their employers money and to preserve their own consulting arrangements."

Not that that ended up meaning anything; the court in Nord decided that the opinions of treating physicians deserved no particular consideration, and it was perfectly OK for an insurance company to credit the views of its paid whores doctors over the views of the claimant’s treating physicians.

So that’s one way judges uphold decisions they know to be wrong, because the decisions are reasonable “reasonable.”

More ERISA talk on the Nicole Sandler show

My colleague Jeff Metzger appeared on Air America’s Nicole Sandler show last week. Jeff knows his stuff and well explained the problems ERISA causes and how it ruins lives. The audio is here.

HR 3962 preserves ERISA’s malignant scheme

Mark Hall of the O’Neill Institute posted the other day to comment that the “health reform process is ignoring the hash that Congress and the courts have made of ERISA’s pre-emption of state tort suits against health insurers.” Mr. Hall, of course, is precisely correct about that, as he is when he adds “personal injuries caused by insurance claims denials cannot be adequately redressed either under state tort law or federal law, due to ERISA’s complete pre-emption of the former, and its stingy remedies for personal injury to the latter.” No fooling.

Mr. Hall’s larger point is that the health “reform” bill passed by the House of Representatives over the weekend, HR 3962, does nothing to address ERISA’s malignant effects. Section 251 of the bill expressly provides:

Nothing in paragraphs (1) or (2) shall be construed as affecting the application of section 514 of the Employee Retirement Income Security Act of 1974.

(You can find the full text of the bill here).

Section 514 of ERISA, in turn, is the provision which preempts state law and leaves insurance company victims to the tender mercies of the federal courts and the ridiculously stingy remedies ERISA itself has been interpreted to provide.

Now Section 251 in general is the part of HR 3962 which discusses how the bill would affect the applicability of other laws. It says:

In the case of health insurance coverage not offered through the Health Insurance Exchange (whether or not offered in connection with an employment-based health plan), and in the case of employment-based health plans, the requirements of this title do not supercede any requirements applicable under titles XXII and XXVII of the Public Health Service Act, parts 6 and 7 of subtitle B of title I of the Employee Retirement Income Security Act of 1974, or State law, except insofar as such requirements prevent the application of a requirement of this division, as determined by the Commissioner.

OK that’s a bunch of legal mumbo jumbo, but it essentially talks about other laws which survive the enactment of HR 3962 (it designates other laws which are not to be “superceded”). And then comes the part about ERISA, which says essentially that, in the case of "employment-based health plans,“ don’t you dare think for one minute that the insurance industry will lose their licence to lie, cheat, steal and kill.

Mr. Hall discusses another part of HR 3962, which says that insurance purchased through the contemplated “Health Insurance Exchange” will not be subject to ERISA, or at least says “individual rights and remedies under State law shall apply.” Insurance purchased through the Exchange, however, won’t include the “employment-based health plans” which will continue to be subject to ERISA and its various malignancies. At section 100 HR 3962 defines “employment-based health plans” by referring the reader to (what else?) ERISA’s definition of “group health plans,” specifically ERISA section 733(a)(1), where we finally find the actual definition: it’s an “employee welfare benefit plan to the extent that the plan provides medical care.” Elswhere ERISA defines “employee welfare benefit plan” as any “plan, fund or program ... established or maintained by an employer...”

Ah the hell with it. I’m a lawyer and I'm paid to wade through this stuff, and I won’t inflict any more of on the reader here. Suffice it to say that Mr. Hall’s concerns are well founded, and that ERISA’s crappy effects will easily survive the enactment of HR 3962 in its present form.

There may yet be time to impact this. The Senate still needs to pass something, and then there has to be reconciliation in a conference committee. So please don’t stop making noise.

Kudos to Congressman Shadegg and his ERISA-reform efforts

Yesterday Congressman John Shadegg introduced to the press Florence Corcoran, whose baby was killed by an ERISA insurance company. Congressman Shadegg has been on the right side of this issue for a while now and deserves kudos for championing the cause in the halls of Congress. While it is clear his immediate motivation is to raise the issue to oppose current health care reform efforts on the Democratic side, the fact is he’s correct that those efforts will be an exercise in futility if ERISA is left untouched. Here’s some of yesterday’s press conference:



Now of course, the insurance industry will tell you that if you are going to hold them accountable for things like fraud and wrongful death, they just can’t do business on those terms. We’ve heard it before, and now we’ve heard it again. Here’s the response to Congressman Shadegg from ERIC, the ERISA Industry Committee:

The ERISA Industry Committee (ERIC), the Washington, D.C.-based trade association representing America's major employers, strongly opposes a proposal by Representative John Shadegg (R-AZ) to subject employers' Employee Retirement Income Security Act (ERISA) plans to a patchwork quilt of state remedies and laws. Representative Shadegg earlier today held a press conference where he called on Congress to eliminate ERISA's preemption clause and allow state-based remedies.

In response to Shadegg's comments, ERIC President Mark Ugoretz warned that, "if Congress were to allow state litigation of ERISA plans, employers potentially could face thousands of lawsuits, under dozens of legal frameworks, resulting in a litigation nightmare.

Healthcare is a national not a state-by-state issue and must be dealt with in a nationally uniform system -- anything less results in healthcare chaos. Employer-provided healthcare coverage cannot survive if it is subjected to a patchwork of enforcement, remedies, and compliance rules by 50 states and a kind of product liability litigation. For the vast majority of employers, health care coverage is not a product, it is a benefit offered to employees. Employers, many of whom are struggling to offer health coverage to their employees, cannot provide health care coverage if they are subject to a patchwork of rules and multiple lawsuits in state courts."

***

Ugoretz further warned that, "any change in the law relating to ERISA-governed plans would result in a retreat from offering healthcare coverage for millions of Americans who rely on ERISA-governed plans for their health care needs. Such a proposal would drive up already escalating health care costs that ultimately will be passed on to employees. That new burden would amount to a 'litigation tax' on all of an employer's employees to pay for lawsuits initiated by a few."

So there you have it. As long as we can commit fraud with utterly no consequences, as long as we can kill people with utterly no consequences, as long as we can offer insurance but deliver fake, illusory, empty promises, we’re happy to do business with you. Otherwise, no sale.

Congressman Shadegg, as well as these other members of Congress who appeared at his press conference in support, deserve kudos: Senator Tom Coburn; Representative Jack Kingston; Representative Phil Roe; Representative Lee Terry; Representative Louie Gohmert; Representative Phil Gingrey; Representative Sue Myrick; Representative Steve King; Representative Mark Souder; Representative Todd Akin; Representative Jean Schmidt; Representative Paul Broun; Representative Lynn Westmoreland; and Representative Jim Jordan.

These folks are all Republicans.

I’m a Democrat and on this issue I profoundly disagree with my party leaders and their silence.

I think I’ll sit down and write a few letters.

The Problem, redux

On the first day of each month (OK, 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.

Fraud and corruption as cost control

The folks at the Hastings Center Health Care Cost Monitor provide commentary and opinion on cost control as part of health care reform. Nothing wrong with that, of course; it’s a critically important part of the current debate over health insurance reform.

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.

The states fight back – a little

As we’ve discussed previously one of the biggest problems with ERISA is that it prevents the states from providing suitable protections for people who have “insurance” through their employers.

The ERISA prohibition of state regulation is not across-the-board, however. ERISA does preserve some state regulatory authority (in fact a lot of us think it was intended to preserve all state authority when it came to insurance companies, but that got mucked up in the judicial interpretation process over the years). One of the recurring battles in ERISAworld is whether some particular state regulation can survive ERISA and actually, you know, regulate insurers.

Now, in the most important area – the consequences an insurance company faces if it defrauds you or kills you – the states remain powerless to improve on ERISA’s ridiculously stingy approach. But the states do retain some ability to regulate the content of insurance policies sold within their borders, and that’s where a lot of these arguments arise.

Yesterday the Ninth Circuit issued Standard Insurance Company v. Morrison, a case about whether Montana could prohibit so-called “discretionary clauses” in insurance policies. These clauses are what insurance companies use to shield themselves from any but the most cursory and deferential judicial scrutiny of their benefits denials, and to pretend they are something they are not, like courts or administrative agencies. Yesterday the Ninth Circuit said Montana could indeed prohibit these provisions.

As we’ve discussed previously "discretionary authority," which leads to the weak judicial scrutiny the insurers are so fond of, is supposed to come from someone who sets up a trust, and wants the trustee to have such powers. It is not something the trustee just unilaterally confers on itself – except of course in ERISAworld where insurance companies stick this language into the insurance policies for their own benefit, and without so much as checking with the putative “trustor,” i.e. the employer purchasing the policy for its employees.

If you want some corroboration about how pernicious these provisions are, just consider what Montana and some other states have done to try and prohibit them. Montana’s Insurance Commissioner banned them (and the Ninth Circuit said yesterday he had the authority to do so) by invoking his authority to disapprove “any inconsistent, ambiguous or misleading clauses or exceptions and conditions which deceptively affect the risk purported to be assumed in the general coverage of the contract” (you can find that in the trial court decision in the Morrison case, which is at 537 F.Supp.2d 1142 (D.Montana 2008)), a long way of saying he can disapprove language which renders the coverage supposedly provided by the policy a big fat lie.

Montana is not alone. California, for example, has disapproved “grants of administrative discretion in insurance policies and ERISA plan documents” because they “render insurance contracts ‘illusory’ and ‘unsound insurance,’” (Mitchell v. Aetna Life Ins. Co., 359 F.Supp.2d 880 (C.D.Cal. 2005)) and so has Michigan, concluding discretionary clauses “unreasonably reduce the risk purported to be assumed in the general coverage of the policy.” (American Council of Life Insurers v. Watters, 536 F.Supp.2d 811 (W.D.Mich. 2008)). All in all, as of now sixteen states have taken similar actions.

The National Association of Insurance Commissioners, a, um, national association of insurance commissioners of the various states, has also weighed in, issuing the Discretionary Clauses Model Act, which it urges the states to adopt, in 2002. The “NAIC membership believed that discretionary clauses were inconsistent with basic consumer rights," (page 9 of the linked brief) and issued the Model Act “to assure that health insurance benefits and disability income protection coverage are contractually guaranteed, and to avoid the conflict of interest that occurs when the carrier responsible for providing benefits has discretionary authority to decide what benefits are due” (page 11).

The insurance industry, of course, is not willing to give up their little cash cow without a fight. Let’s see what MetLife, a big ERISA insurer, has come up with – if the states can ban discretionary clauses in insurance policies, we’ll just stick them somewhere else:

To date no court has held that state insurance laws can regulate the employer’s plan documents, like the federally mandated summary plan description (SPD) or master plan document, if it has one. ... As a result of the battle over discretionary clauses, an ERISA plan sponsor who wants plan determinations to receive deferential judicial review may be unable to purchase an insurance policy containing a discretionary clause. ... Plan sponsors who want deferential judicial review should include a discretionary clause in their SPDs or other formal plan documents.

Wanna bet MetLife won’t volunteer to draft an employer’s SPD? I’ll take that bet.

The upshot of all this is that the states, as of now, do retain some ability to ameliorate the absurd effects of these pernicious “discretionary” provisions. That may not last forever; as we’ve seen the insurance industry will fight tooth and nail not to lose this unfair advantage. If your state has not yet addressed this problem then it’s time to call your legislators and get them on the stick.

ERISA: not always bad

In the wake of today's good news that Ian Pearl's coverage has been reinstated, it seems a good time to admit that not all things ERISA are all that terrible.

So lest I be misunderstood I want to make it clear that Erisa Nakayama is not a crook and does not belong behind bars (assuming of course she does not work for an ERISA insurance company).

I do think she should have a word with her parents about that name, though.

Labor Department official: "tragedy" to enact health reform and leave ERISA alone

Paul Secunda blogs at Workplace Prof Blog about a talk given by Phyllis Borzi, who heads the Employee Benefit Security Administration. She knows whereof she speaks: she's in the ERISA enforcement business, and her agency's mission is to "deter and correct violations of the relevant statutes through strong administrative, civil and criminal enforcement efforts to ensure workers receive promised benefits."

Phyllis Borzi got it right:

Borzi said it would it a tragedy if Congress passed health care reform legislation without addressing remedies available to plan participants under ERISA.

So did Professor Secunda:

I certainly agree with Sec. Borzi that the current state of ERISA remedies is a tragedy and that health care reform efforts need to consider addressing this remedial issue. I also agree that many employers and management-side attorneys have a knee-jerk reaction to defend that system because of favorable treatment under ERISA's remedial and preemption provisions.

It is time for Congress to finally provide a meaningful remedy for ERISA violations.

True that.

Another “insured” person cheated out of “insurance” by ERISA; UPDATE: Guardian caves in response to public pressure

Ian Pearl, since birth, has suffered from muscular dystrophy. He is now 37 years old, and is confined to a wheelchair and hooked to a breathing tube.

Fortunately for Ian, he had “insurance” through the ERISA plan offered by his father’s company. So while his health was terrible, he at least would have access to adequate care and his family could avoid going bankrupt from medical bills.

Not so fast. His insurance carrier, Guardian Life Insurance Company, decided it was just too expensive to live up to its contractual obligations to cover the care required by Ian and others like him.

So Guardian just pulled the plug. According to the Washington Times:

Legally barred from discriminating against individuals who submit large claims, the New York-based insurer simply canceled lines of coverage altogether in entire states to avoid paying high-cost claims like Mr. Pearl's.

At least Guardian was compassionate about condemning Ian to a life of inadequate medical care for his debilitating condition. You can just hear them choking back their tears:

In an e-mail to four other Guardian executives entered into evidence in the Pearls' suit, company Vice President Tim Birely discussed how the company could "eliminate this entire block to get rid of the few dogs."

Now how on earth is this legal? Simple:

The judge found that the company had not violated the Employee Retirement Income Security Act (ERISA), because it canceled entire policy lines.

Sorry, Ian. To Guardian, you’re just one of the “few dogs” they need to dispense with.

UPDATE:

Daylight,as they say, is the best disinfectant. In response to public pressure and lots of media coverage and widespread outrage, Guardian has caved and reinstated Mr. Pearl's coverage.

Now about all those people who didn't make the headlines...

No surrender! -- redux

This blog is all doom and gloom, and for good reason: ERISA stinks! But that ought not stop us from doing what the little the law allows to try to right these wrongs. Therefore, a periodic call to arms seems appropriate. Herewith, consequently, a reprise:

If you’ve spent any time on this blawg, and you’ve experienced a denied insurance claim subject to ERISA, you may have developed a sense of hopelessness, not to mention frustration and outrage. All, in my opinion, very appropriate reactions. There’s no use soft-peddling the malignant effects of ERISA – it is very arguably the most unjust law on the books.

But the understandable reactions described above ought not lead to paralysis or inaction. To become passive and to simply yield to insurance company abuse only makes a bad situation worse, for yourself and for others in your unfortunate position.

The calculus ERISA presents to an insurance company goes something like this: we deny 100 claims which probably ought to be approved. Perhaps 20 of those people will even realize we have done something wrong, because we can write bogus denial letters that make it sound like the denial is proper even though we know it probably isn’t. Out of the 20 people who realize they’ve been screwed, perhaps 10 will contact a lawyer, and perhaps five will end up actually taking us to court. And once in court, since we get the benefit of the most absurd stacking of the legal deck known to the law, we can probably count on winning three of those cases, even assuming the claimant is right and we are wrong. So by denying 100 claims wrongfully, thanks to ERISA, we can probably reap the financial benefit of not having to pay 98 of them, and the two we might lose in court, even if we are ordered to pay attorney fees for the other side, won’t come close to canceling out that benefit (remember in no case can consequential or punitive damages be awarded, so we never have to worry about one big loss wiping out the benefit we derive from ripping off those original 100 people).

The only way to upset that calculus even a little bit is for people to stand up for their rights, take the insurers to court in appropriate cases, and make them explain themselves to a judge. The law provides meager rights indeed, but there are lawyers (I am one of them) who can and do go to court and enforce those rights at least. Given the state of the law, it is very, very unlikely we can make you whole, but we can often recover something, and in the process make the insurance companies explain their bad behavior. Gradually, gradually, their fraud and abuse is thereby exposed to the light of day.

So: if you think you’ve been ripped off by your ERISA insurance company, there is every likelihood that you have. Find a lawyer specializing in ERISA claims (this is pretty important because ERISA is arcane and a law unto itself; a generalist is swimming upstream in trying to deal with all the absurd and counterintuitive rules), and see if the lawyer can find a way to enforce what rights the law provides. Take a stand and make them explain themselves!

ERISA to Insurance Companies: It’s OK to kill someone’s daughter, just don’t flip them off

Cigna Corporation, an ERISA health insurer, killed Nataline Sarkisyan in December 2007, denying a liver transplant on the pretext it was “experimental” (which is insurance company code for “expensive”; after all paying for the transplant would reduce its profits).

Nataline’s parents sued Cigna for killing their daughter. Nataline’s mom, Hilda, also appeared at Cigna’s Phildelphia headquarters in 2008, and said “You guys killed my daughter. I want an apology.”

What she got instead is described in an article in today’s Los Angeles Times:

Cigna employees, looking down into the atrium lobby from a balcony above, began heckling her, she said, with one of them giving her “the finger.” Sarkisyan walked out, stunned and hurt.

“They showed me their true colors,” she said. “Shame on them.”

Meanwhile, thanks to ERISA, a Los Angeles judge had to dismiss their wrongful death case against Cigna, because ERISA provides the Cignas of the world immunity from liability for killing people.

Cigna, of course, took this as some sort of endorsement of its decision to let Nataline die:

Cigna said the dismissal of the wrongful-death case in April showed that the court “agreed with our position that the Sarkisyans’ claims regarding Cigna’s decision making were without merit.”

But as the Times correctly observed

In fact, the court did not consider the merits of the family’s wrongful-death claims. Instead, it decided those claims could not be heard.

The insurance companies’ flack, one Robert Zirkelbach, a spokesman for America’s Health Insurance Plans, defended the outcome, saying that to hold insurance companies accountable for killing people will “bankrupt these plans, and employers would no longer be able to offer coverage.”

That makes perfect sense. How can you be expected to offer your services at a reasonable price if the courts are going to nitpick about you killing people?

The Sarkisyans did get one bit of good news, though. They get to sue Cigna over its employees flipping off Ms. Sarkisyan: the court “said the Sarkisyans could pursue damages for any emotional distress caused by the Philadelphia incident.”

So they have that going for them.

Memo to insurance companies in ERISAworld: go ahead and kill people. Just keep your middle finger to yourself.

UPDATE: Film at 11:

Insurance Companies and Federal Judges Getting Together to Party and Scheme: What Could Go Wrong?

As we have seen there are judges who are becoming fed up with ERISA and its malignant effects on the behavior of insurance companies and the ability of insureds to enforce the promises made in insurance policies.

These judges, of course, do not make up the entirety of the federal judiciary. There are other judges who actually sit down and party and break bread with insurance companies.

Take, for example, the upcoming ERISA Litigation Conference to be presented by the American Conference Institute. This shindig will be raging at the ritzy Helmsley Park Lane Hotel in NYC on October 19 and 20.

What could possibly be wrong with that? Well, consider for one thing that when you have a claim denied and you ask for reconsideration from an insurance company, they are (supposedly) required by law to undertake a “full and fair” review of the claim, and conduct it impartially in accordance with their so-called fiduciary duties. Among these fiduciary duties are that they are required to discharge their duties “solely in the interest of the participants and beneficiaries.”

So what are these insurance companies (and plan sponsors and service providers) and federal judges going to be talking about over their caviar and bubbly? How about this: “Using the claims review process to set up, control and strengthen the defense”? (page 1 of the ACI brochure linked above) Or “Anticipating claims when making the decision and preparing to defend it before the decision is made”? (Page 3 of the linked brochure).

See, guys, when you are undertaking a review of a denied claim, and you are supposed to do that "solely in the interests of the participants and beneficiaries,” you are not supposed to be thinking about scrubbing the claim file so as to “set up, control and strengthen the defense.” You are not supposed to be “anticipating claims” or “preparing to defend it before the decision is made” since, of course, you approach your job with an open and fair mind and you don’t even know you’re going to deny the claim until you have assembled all the facts and applied your impartial, professional expertise to the decision.

Right?

Right?

And of course while the insurers are discussing how to use the claims review process to prepare for the defense of a future lawsuit instead of applying it to the "sole interest of participants and beneficiaries,” they’ll be doing so while rubbing elbows with “21 federal judges from district courts located in 8 circuits.” (Page 1 of the linked brochure). This, of course, is like Al Capone and Baby Face Nelson setting up a party at the Waldorf Astoria to discuss “Tommy Gun serial number removal techniques” and “get-away cars: the fastest and most inconspicuous models,” while inviting federal judges to come and enjoy the fete.

It smells, sure. Just remember, next time you ask your insurance company to reconsider its denial of your health insurance claim, all you will really get is a reconsideration by the insurance company as to whether it should continue to pay benefits, and thus reduce its profits. And all the while they’ll be thinking about “using the claims review process to set up, control and strengthen the defense.”

Funny, by the way, that ACI’s own web site has sequestered information about this conference. Guess we’re not supposed to know about it. My bad; looks like I was mistaken about that. I can't get the page to come up on my computer but I am told others can.

Confessions of a money-grubbing, lazy, greedy capitalist tool – you know, the type of person who dislikes insurance companies

I was shown a post on another blog the other day ranting about how horrible ERISA attorneys are because they charge for their services when their clients really really need their insurance benefits to survive. This other blog post was inaccurate, ignorant, unduly vituperative, and I did not like it.

So I am not gonna link to it.

So there.

But if one person (erroneously) thinks this way then maybe others do too, so it seems appropriate to mention a few things about the world of ERISA claimant’s attorneys, to which I very proudly belong.

First, it is all too often true that, when an ERISA attorney is able to get a denial or termination of benefits reversed, the attorney fee eats into what should have been your benefits. If you think about how the law drastically limits the possible recovery when you do win, that’s pretty much unavoidable if the attorney is working on a contingency. If the law only allows you to recover what the benefits should have been in the first place, and the attorney is getting a percentage of the recovery as his fee, then yes it has to come out of those benefits.

Do we like that? Of course not. The alternatives, however, are for attorneys to work for free (which happens more often than you may suspect but of course does not make for much of a business plan) or for clients to pay by the hour (an arrangement most clients have no interest in nor ability to sustain).

I think of attorneys like me as being much in the mold of John D. MacDonald’s great beach-bum private dick Travis McGee:

McGee's business card reads Salvage Consultant, and most business comes by word of mouth. His clients are usually people who've been deprived of something important and/or valuable (typically by unscrupulous [and sometimes also legal] means) and have no way to regain it lawfully. McGee's usual fee is half the value of the item (if recovered) plus expenses, and those who object to such a seemingly high fee are reminded that getting back half of something is better than nothing at all.

My fellow McGees of ERISAworld and I regain the ill-gotten loot lawfully, if you can use that word to describe a process which brings discredit to the law. And we typically don’t charge as high a rate as Travis did – in fact I’ve never even heard of a contingency fee as high as 50%.

Travis McGee charges what he does because he has to incur some significant risk in working on his clients’ behalf: those people who took the loot in the first place don’t give it up without a fight. My colleagues and I also take on risk, and quite a lot of it, because ERISA doesn’t allow us to recover anything without a fight, never mind making our clients whole. I know for a fact we work very hard, and against some pretty significant odds, all because, to be a bit touchy-feely for a moment, we believe in what we do.

It would be a lot easier to make a hell of a lot better living by just taking cases not subject to ERISA, where we can get a percentage of emotional distress damages, punitive damages, and get in on that lottery that folks like overlawyered.com think is so outrageous. But we choose to specialize in a field which drastically and artificially limits the recoveries our clients can get, and therefore necessarily limits our fees too. We do that because we see injustice and we want to do our small part to square accounts.

Like any other contingency fee practice, the cases we are able to win have to pay not only for themselves but for the ones we lose too. When we get an award of attorney fees (which is not guaranteed in any case) our clients share in that along with us, at least in any arrangement I’ve ever heard of. ERISA claimant's law is genuinely a calling, if you ask me, and no lawyer in his right mind goes into this field in order to get rich.

Look, I’d love it if the law were such that my clients could always be made whole for the way their insurance company treated them and there was enough left over to keep the doors open at my little law practice. But the law is stingy, and if we can’t make them pay all they should, on behalf of our clients and ourselves, we go forth and try to make them pay as much as the law allows. As Travis McGee’s boon companion Meyer said of him in Darker Than Amber,

I’ve seen how you take on problems. You get deeply involved. You bleed a little. Indignation makes you take nutty risks. All that splendid ironic detachment goes all to hell when you detect a dragon off in the bushes somewhere.

And by the way Travis saw ERISA coming. As he said, in 1964 mind you, in The Deep Blue Good-By,

And I am very wary of a lot of other things, such as plastic credit cards, payroll deductions, insurance programs, retirement benefits, savings accounts, Green Stamps, time clocks, newspapers, mortgages, sermons, miracle fabrics, deodorants, check lists, time payments, political parties, lending libraries, television, actresses, junior chambers of commerce, pageants, progress, and manifest destiny.... But these things can never form lecture material for blithe Travis McGee. I am also wary of earnestness.

Anyway, that’s me and my colleagues. Salvage Consultants.

The Problem, redux

On 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.

The Rising Judicial Chorus: Judge Karlton

The Honorable Lawrence K. Karlton is Senior District Judge for the Eastern District of California, which is based in Sacramento. Judge Karlton is a 1979 Carter appointee to the federal bench, and before that he was a Superior Court judge in Sacramento County. Earlier this year, on August 13, Judge Karlton issued a decision in a case called Duvall v. Reliance Standard Life Insurance Company. As is often the case in ERISAworld, the insurance company won after cheating the insured out of insurance benefits. That’s dog bites man stuff anymore. Along the way, though, Judge Karlton let it be known he was unhappy with the way ERISA cases are adjudicated.

Take for example the claim file on which Judge Karlton was obligated to base his decision. Because they like to pretend they are federal courts or administrative agencies, insurance companies never call a claim file a claim file. Instead, they like to call it the “administrative record,” because calling it a claim file makes it sound so insurance-y. Judge Karlton would have none of that:

The facts described herein derive from the lodged insurance company’s record (“ICR”). The court uses the phrase Insurance Companies’ Record, rather than Administrative Record, although Administrative Record has become customary in the field, because it suggests an independent record, which is false characterization of both the documents and their review.

So, Judge Kartlon saw through the “administrative record” scam. Later, in describing the procedural facts of the case, he mentioned how Reliance Standard had sent Ms. Duvall a letter describing the requirements for her to undertake an “administrative appeal,” another bogus phrase the insurance companies use to make themselves sound like something they’re not. Again Judge Karlton called them on it:

Once again, the use of appeal suggests an independent body reviewing the file, while in truth, of course, all that plaintiff would get was a reconsideration by the insurance company as to whether it should continue to pay benefits, and thus reduce its profits.

Next Judge Karlton turned to the question of whether Reliance Standard’s denial of benefits should be evaluated under a de novo standard, or “arbitrary and capricious” standard. Remember the de novo standard is the one which is supposed to be the usual one, and the "arbitrary and capricious" standard is to be used only in those exceptional cases where the plan sponsor really wanted the plan administrator to have discretion to use its own judgment in approving or denying claims. Lo and behold Reliance Standard had granted itself “discretion” in its insurance policy, so Judge Karlton had to go with the “arbitrary and capricious” non-standard, commenting courts “have not been stingy in our determinations that discretion is conferred upon plan administrators,” and adding:

Whether stingy or not, because it is in the plan’s interest to limit the scope of review, it is the court’s experience that the plan inevitably confers discretion on the administrator.

Finally, Judge Karlton turned to an examination of Reliance Standard’s approach to Ms. Duvall’s claim. He remarked:

The court does so with some distaste. Applying legal standards to what is clearly a stacked deck brings discredit to the legal process.

"Applying legal standards to what is clearly a stacked deck" -- with these words Judge Karlton has summed up ERISAworld about as well as can be done in ten words. But what's a little discredit to the legal process as long as it's efficient?

The case again is Duvall v. Reliance Standard Life Insurance Company, and the citation is – F.Supp.2d –, 2009 WL 2488179 (E.D.Cal.).

Pre-existing condition? We don’t need no stinkin’ pre-existing condition...

One of the major points advanced in favor of health insurance reform is that insurance companies abuse the privilege of refusing to cover you if they decide you have a pre-existing condition, or pulling the plug on coverage you already have if they decide you had one you didn’t tell them about when you applied for coverage. That’s a sad state of affairs, without question. As in other areas, of course, ERISA manages to make a bad situation worse. Much worse.

If you get your insurance through your employment, ERISA wipes out any state law protection you might have in this area, and health plans can simply change your “coverage” to exclude a condition you might develop, never mind whether it was pre-existing or not. Consider the sad case of John McGann, who discovered in December 1987 that he was afflicted with AIDS. At least, he thought, he was fortunate to have good insurance from his employer, H&H Music Company, which provided coverage for AIDS treatment up to a $1,000,000 lifetime limit.

John McGann, unfortunately for him, failed to consider what ERISA was about to do to him.

Now, Mr. McGann had an insurance policy through his employment with H&H, already issued, already underwritten, premiums fully paid. There was absolutely no indication his AIDS was a pre-existing condition, and no one ever claimed it was.

But in 1988, when the insurance company, General American Life Insurance Company, got wind of his illness, all of a sudden things changed at H&H:

In July 1988, H&H Music informed its employees that, effective August 1, 1988, changes would be made in their insurance coverage. These changes included, but were not limited to, limitation of benefits payable for AIDS-related claims to a lifetime maximum of $5,000. No limitation was placed on any other catastrophic illness.

Now hold on a minute. John McGann had an insurance policy which said treatment for AIDS was covered up to $1,000,000. An insurance policy, which most people think of as a binding contract that the insurer will cover what it says it will. But H&H just canceled the policy and pulled it out from under Mr. McGann, replacing it with a self-insured plan with the aforementioned stingy AIDS benefit.

By the way, in court, H&H and General American proudly admitted:

the reduction was prompted by the knowledge of McGann’s illness, and that McGann was the only beneficiary then known to have AIDS.

The United States Fifth Circuit Court of Appeals reviewed ERISA, and concluded:

[ERISA] does not prohibit an employer from electing not to cover or continue to cover AIDS, while covering or continuing to cover other catastrophic illnesses, even though the employer’s decision in this respect may stem from some “prejudice” against AIDS or its victims generally.

It wasn’t even that hard, either. ERISA is pretty clear that your employer, if, say, the insurance company threatens to raise premiums in response to an employee coming down with a covered illness, can just cancel that part of the coverage and leave the sick employee, who didn't think they were in the ranks of the uninsured, high and dry. Indeed, never mind higher premiums, ERISA allows coverage to be precipitously canceled because of, say “some ‘prejudice’ against AIDS or its victims.”

That’s ERISA for you. If we don’t fix ERISA, now, then any “reform” we might achieve will be empty indeed.

The case is McGann v. H&H Music Co., and the citation is 946 F.2d 401 (5th Cir. 1991).

By the way, John McGann died in June 1991.

A basic primer on "de novo" versus "abuse of discretion" judicial analysis

We are exploring the “discretion” scam which infects ERISA law, and how it unduly stacks the deck in favor of insurance companies when you take them to court. I thought an illustration of how big a difference it makes might be useful here, so join me in a review of two recent cases from United States Circuit Courts of Appeal: the Seventh Circuit’s Krolnik v. Prudential Insurance Company of America, which is reported at 570 F.3d 841 (7th Cir. 2009), and the Eleventh Circuit’s Doyle v. Liberty Life Insurance Company of Boston, which is reported at 542 F.3d 1352 (11th Cir. 2008).

One of the big problems with ERISA exemplified by these cases is that the whole concept of a “standard of review,” which is what courts apply to decide whether to overturn the decision of some other body, is a complete mismatch when you’re talking about an insurance company denying your claim. Traditionally the “other body” is one of two things. They are either a lower court or administrative agency, which, say what you want about them, are at least conceptually impartial and have no direct, personal stake in the decision they are rendering. Or they are a trustee vested by a trustor with discretion to bring to bear their own judgment in making decisions about how trust assets are to be distributed. A classic trustee is also impartial, but sometimes trustees have conflicts of interest, which is legal as long as the trustor was OK with it, and which is taken into account by courts. More about that in a later post.

An insurance company, on the other hand, is a party to the insurance contract in question, which is accused of breaching that contract. In a breach of contract case, the court is supposed to decide for itself whether one of the parties is in breach, not have a thumb on the scale in favor of the breaching party as if it were itself a lower court which has already endorsed the decision it made.

Krolnik discusses “de novo” review, where the court does not grant “deference” to the insurance company, and describes the problem with “standards of review” as applied to an insurance company:

Then there is a dispute about whether Krolnik can work even with all of his physical and mental problems. Some physicians say yes, others no. If judicial review were deferential, then Prudential’s decision would be sustained easily. But the court must make an independent decision. To do this, the finder of fact must weigh all of the medical evidence. ... If a paper record contains a material dispute, a trial is essential. And at trial Krolnik would be free to offer medical evidence of his own and cross-examine the physicians who produced the reports that underlie Prudential’s decision. ....

All in all, it would be best for judges and lawyers to stop thinking about “de novo review” – with the implication that the judge is “reviewing” someone else’s action – and start thinking about independent decision....

So that’s how at least one court thinks a so-called “de novo review” should proceed: it’s not a “review” at all, in the sense that some other impartial body has made a decision; it’s a wholly independent decision by a judge in the first instance.

But of course that’s not how ERISA generally works. For a flavor of that, let’s take a look at Doyle, in which the Eleventh Circuit described how so-called “abuse of discretion review” works. In pertinent part:

(1) Apply the de novo standard to determine whether the claim administrator’s benefits-denial decision is “wrong" (i.e. the court disagrees with the administrator’s decision); if it is not, then end the inquiry and affirm the decision.

OK, so the Eleventh Circuit asks whether the insurance company was wrong to deny benefits. If the insurance company was right, it wins. Fair enough. But does it lose if it was wrong? You would think so, but not necessarily:

(2) If the administrator’s decision is in fact “de novo wrong,” then determine whether he was vested with discretion in reviewing claims, if not, end judicial inquiry and reverse the decision.

Well, at least as long as the insurance company was not “vested with discretion,” then if it is wrong it loses. So far so good. But as we have seen insurance companies almost always vest themselves with discretion when they write their ERISA policies, so we go to the next stage, which is where things get screwy:

(3) If the administrator’s decision is “de novo wrong” and he was vested with discretion in reviewing claims, then determine whether “reasonable” grounds supported it (hence, review his decision under the more deferential arbitrary and capricious standard).

Wait ... what was that? If the decision was wrong then do what? After paying some lip service to the effect of a conflict on interest on the insurance company’s part (more on that later), the Eleventh Circuit goes on to say a decision which was, you know, wrong is nonetheless to be upheld if it was “reasonable.”

And when we get to a discussion a bit later on of what it takes to be considered reasonable “reasonable,” your head might really explode.

And you may very well have a very difficult time getting your insurance company to pay for the repair work.

How We Got Here – the “Abuse of Discretion” Scam, Part II

Earlier we started a discussion about the “abuse of discretion” scam. In a nutshell, the so-called “standard of review” a court employs in evaluating an insurance company’s decision to deny your claim is very often, in and of itself, outcome-determinative. Given that a great many insurance company denials are, shall we say, questionable, if the court uses a de novo analysis you’ve got a good chance of winning, and thereby securing the very stingy remedies ERISA allows to aggrieved claimants. But if the court uses a deferential analysis, then it becomes much more difficult – it is no exaggeration to say often impossible – to get that denial turned around by a judge.

Who in their right minds would design a judicial system this way?

To answer that we need to consider a Supreme Court case called Firestone Tire & Rubber Co. v. Bruch. If you’d like to look up the case the citation is 489 U.S. 101 (1989). In Firestone the Court considered what the “standard of review” ought to be for claims under ERISA. Right from the get-go the insurance industry won a big victory there, as talking about a “standard of review” instead of, say, a “burden of proof” implies we are looking at the decision of some sort of impartial administrative agency instead of an insurance company alleged to have breached its contract. We’ll address that problem in a future post.

Anyway, the Firestone Court observed that ERISA is based to a large extent on trust law, which it undeniably is. That’s because when ERISA was enacted its primary focus was on pension plans, not things like health insurance policies, and pension plans do actually, sorta kinda, resemble trusts: the employer sets aside a pile of money to fund retired employees’ pension benefits.

And trust law, as we have seen, does indeed treat the decisions of a trustee with deference if the trust instrument confers discretion on the trustee. So the Firestone Court just went ahead and applied the general rule of trust law: if a trustee is not granted discretion in a trust instrument, then a court considers the decision de novo. If the trust instrument does confer discretion on the trustee, then a court has to find an abuse of discretion before it can rule against the trustee.

Now, the Supreme Court apparently thought it was issuing a decision generally favorable to claimants. Firestone argued that, never mind what the terms of the benefit plan in question might say, denials of benefits under ERISA should always be analyzed under an “abuse of discretion” standard (ERISA defendants are nothing if not brazen in making incredibly self-serving arguments). This the Supreme Court rejected, because “adopting Firestone's reading of ERISA would require us to impose a standard of review that would afford less protection to employees and their beneficiaries than they enjoyed before ERISA was enacted,” and God knows we don’t want to be doing that. So the Supreme Court said the general rule is de novo analysis, and only in those rare circumstances where the plan sponsor decides it wants the insurance company to have discretionary authority will deferential analysis be used.

Well, once Firestone came out it took about five minutes before insurance companies started putting language in their insurance policies by which they granted discretion to themselves – the employer purchasing the policy had no role in creating this language, and in the vast majority of cases didn’t even know it was there.

And the courts, regrettably, gave effect to this self-conferred “discretion.”

That’s the start of how we got to this state of affairs. More soon about the implications.

They aren’t pretty.

"As any teacher of insurance law knows," ERISA stinks

We’ve heard so far from me, a frustrated lawyer who’s seen too many clients cheated by insurers and ERISA, and from several frustrated federal judges who’ve grown weary of having to apply this most unjust law. Today academia enters the fray. Professor Tony Sebok of the Benjamin N. Cardozo School of Law blogs today at TortsProf Blog about ERISA and its malignant effects:

As any teacher of insurance law knows, ERISA—the Employee Retirement Income Security Act of 1974 (29 U.S.C. § 1001 et seq.)—has been interpreted by the Supreme Court to provide complete preemption of all state contract and tort remedies relating to the interpretation of employer-provided health insurance plans. These plans, of course, sit exactly at the center of the current debate over healthcare reform. In his speech last week, President Obama promised “[a]s soon as I sign this bill, it will be against the law for insurance companies to drop your coverage when you get sick or water it down when you need it the most.”

This is a wonderful claim, except that the federal government, through ERISA, preempted the state law remedies that would have allowed disappointed policyholders who got their coverage through their employers to sue when companies “drop[ped their] coverage” when they got sick or “water[ed] it down” when they needed it the most. To get a sense of how much damage the federal government has already done, one only has to read the angry pleas to Congress to remove this preemption from judges like Federal District Court Judge William Young in Andrews-Clarke v. Travelers Ins. Co., 984 F. Supp. 49, 50 (D. Mass. 1997) who wrote, “ERISA has evolved into a shield of immunity that protects health insurers, utilization review providers, and other managed care entities from potential liability for the consequences of their wrongful denial of health benefits.”

One simple reform to the healthcare system which would be simple, budget-neutral and actually conservative would be to repeal the part of ERISA that immunizes health insurance providers from state common law actions in tort and contract. I honestly do not know whether the plans being considered by the Congress would provide this repeal, or whether they simply maintain the federal preemption but provide for federal remedies with more teeth than the current system. The current federal remedies—reimbursement of out-of-pocket expenses by a victorious beneficiary or injunctive relief—are useless for most people, and certainly lack the deterrent effect of state tort and even contract remedies.

If anyone knows whether Obamacare will finally get rid of ERISA preemption, please let me know.

We know that the most-discussed proposal to date, HR 3200, would not only not eliminate ERISA preemption but would expressly continue it, so Professor Sebok would be disappointed about that, as would we all. But HR 3200 is only one bill; there are others and there more to come, so now is the time to write your Congressional representative.

A Modest Proposal: Make Some Noise!

From the president’s speech last night:

“More and more Americans pay their premiums, only to discover that their insurance company has dropped their coverage when they get sick, or won't pay the full cost of care. It happens every day.”

“As soon as I sign this bill, it will be against the law for insurance companies to drop your coverage when you get sick or water it down when you need it most.”

“Insurance executives don't do this because they are bad people. They do it because it's profitable. As one former insurance executive testified before Congress, insurance companies are not only encouraged to find reasons to drop the seriously ill; they are rewarded for it.”

“Now, I have no interest in putting insurance companies out of business. They provide a legitimate service, and employ a lot of our friends and neighbors. I just want to hold them accountable.”

Gee, I have an idea about what law needs to be amended to accomplish that.

This is the time to get the word out and to be heard. The president also said: “If you come to me with a serious set of proposals, I will be there to listen. My door is always open.” Hold him to his promise! Call, write, agitate, contact your Congressional representatives and the White House.

Here are some tips for doing so effectively, shamelessly plagarized from “How to Lobby Your Member of Congress,” Amnesty International, www.amnesty.usa.org; and “How to Lobby Your Member of Congress,” American Civil Liberties Union, www.aclu.org:

Members of Congress rarely hear from their constituents on most issues. Sometimes hearing from a handful of concerned citizens will cause a Senator or Representative to pay attention to a particular issue and encourage him or her to vote the right way.

In general the more personal your lobbying contact is, the more effective it will be. While a personal discussion with a Member of Congress is most effective, a meeting or telephone conversation with one of his or her assistants is almost as good.

You do not need to be an expert on the issue to call or write your Member of Congress’ office. All you need to communicate is that you want the member to support or oppose a particular measure. When you call a Member’s office give your name and address and ask whomever takes your call to let the Member of Congress know that you favor or oppose something.

It is very important that you lobby both Members of Congress who may support your views and those who may not. Lobbying can change votes so it is critically important that you lobby those who disagree with you. Lobbying supporters provides them with evidence of support for their position and allows them to be more active in support of that position.


Remember that all contact is good! Start small, and then increase your activism as you gain experience.

• Write a letter. Letters are an important and effective way to introduce yourself and your purpose. A personal letter is much more effective than a form letter or postcard. Short handwritten letters are best, and always remember to be specific about the action you want your Member of Congress to take. Make sure to include your full address so they know you live in the district. Avoid petitions, as they are not as effective.

• Make a phone call. You can call your U.S. senator or representative by contacting the Capitol Hill switchboard at 1-202-224-3121. Once you are connected to the right office, ask to speak with the staff member who handles labor issues, and/or employee pension and benefits regulation. Clearly have in mind a specific request of your representative. If you are planning a visit, this is also the time to set up a meeting to discuss your request.