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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

Holiday break

As you can see from a quick look at this blog, I have taken the month of December off from blogging. A confluence of circumstances, and holiday madness, have taken all of my time and then some. After the new year we'll pick up again exploring the many, many ways in which ERISA ruins lives.

Fourth and long: ERISA beats the spread against NFL players too

Brent Boyd is a former professional football player. Big tough guy.

In a 1980 pre-season game Mr. Boyd took a serious hit and suffered a concussion. It ended his career and continues to have a very big and bad impact on his life.

Fortunately for Mr. Boyd, the NFL Players Association, when they struck their Collective Bargaining Agreement with the NFL, included a disability plan so that players who became disabled would have some protection against the resulting loss of income.

That hasn’t worked out so well:

Former NFL player Ben Lynch, who once played for the Cal Golden Bears, said he has also been disabled by recurrent head trauma and added that the NFL also did not cover his care.

"When you're playing football, the union tells you there is a safety net waiting to catch you if you fall," Lynch said. "It's not until you smack the ground that you realize that the safety net they told you about doesn't exist."

Mr. Boyd, however, figured he had legal rights, and he went to court to recover his wrongfully-denied disability benefits.

Whereupon he ran into the legal equivalent of the Fearsome Foursome, the Purple People Eaters, and the Steel Curtain all rolled into one: ERISA.

First, the Ninth Circuit observed that, since under ERISA we pretend insurance companies and plan administrators are Oliver Wendell Holmes, and that their motives are pure and pristine, we treat their decisions as if they were edicts from an Oracle on high:

The NFL Plan was established pursuant to collective bargaining and grants to the Retirement Board the full discretion to adjudicate claims and interpret the Plan. We review the Board's decision to deny Boyd's football degenerative disability benefits for an abuse of discretion.

In fact, as the Ninth Circuit added later in the same opinion, denial decisions under ERISA are so bulletproof that “even decisions directly contrary to evidence in the record do not necessarily amount to an abuse of discretion."

The outcome of Mr. Boyd’s suit for disability benefits was as preordained as if the Green Bay Packers were going to play my woefully bad high school football team: “The Retirement Board did not abuse its discretion in concluding that Boyd's disability did not arise from his League football activities.”

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.

Buy a vowel: ER_SA _nsurers l_e, cheat and steal

Pat Sajek, long-time host of Wheel of Fortune and occasional conservative political commentator, thinks we ought to consider limits on public employees’ ability to vote on ballot initiatives which would directly affect their personal self-interest. He backs up his thoughts with this rationale:

In nearly all private and public endeavors, there are occasions in which it's only fair and correct that a person or group be barred from participating because that party could directly and unevenly benefit from decisions made and policies adopted.

In the small world department, here we have Wheel of Fortune game show host (I once read an interview in an airplane magazine in which Vanna White said her primary occupational requirement was that “You have to know the entire alphabet”; I think she was kidding):





anyway where was I? Oh yes, game show host channels American icon James Madison in Federalist Paper 10: “No man is allowed to be a judge in his own cause, because his interest would certainly bias his judgment, and, not improbably, corrupt his integrity.”

Well , we all know that ERISA insurers regularly make decisions, often ruining -- or ending -- the lives of real people, in matters where they “could directly or unevenly benefit from decisions made.” And yet we treat these biased decisions as if they came from an impartial judge who has no skin in the game. As we’ve discussed previously that doesn’t make any sense.

So to exasperated judges, academic experts, and James Madison, we can now add “game show host” to the ranks of anti-ERISA advocates.