May 21, 2019
A few days ago I blogged about the Supreme Court granting certiorari in Mid Atlantic Medical Services, LLC v. Sereboff, 407 F.3d 212 (4th Cir. 2005). The resolution of that case will clarify the rights of ERISA fiduciaries, the insurers and employers who administer most of the health coverage provided in this country, to pursue reimbursement of an ERISA plan’s money where participants in those plans later obtain recovery of all or a portion of their medical expenses in personal injury cases.
Congress is one step ahead of the Supreme Court. The Pension Protection Act of 2005 [warning: large PDF document] is a bill to amend ERISA that purports to address some of the funding problems for pension plans we’ve seen across the country in recent months. However, that's not all Congress has chosen to put in the bill. Slipped into the middle of it is a provision that passed the House specifically stating that a fiduciary is entitled to bring an action for reimbursement or subrogation as part of the equitable relief authorized under 29 U.S.C. §1132(a)(3). You’ll find it at section 307 of the bill, p. 331 of the 449 page PDF document. This provision is the essence of special interest legislation. Its practical effect will be that the 130 million citizens who are covered by ERISA governed health plans will have to pay back their health insurer any money they receive from personal injury settlements from the first dollar until that health insurer has been completely reimbursed.
A quick hypothetical illustrates the effect. Say you are injured in a car crash due to another driver's fault and you have medical bills of $20,000 which health insurance through your work pays. The negligent driver has $25,000 in insurance. A number of months later your case settles and you recover the $25,000. What are your obligations to repay your insurer? Things differ somewhat depending on the insurance law in your state. But generally speaking, you would pay your personal injury attorney his or her fee out of the recovery, usually around a third of the $25,000, and the insurer would not be entitled to any reimbursement until you were "made whole," that is, until you received adequate compensation to pay not only your medical bills but your attorney fees, your lost wages, and, at the very least, any other out of pocket expenses you may have. The idea that the health insurer is not entitled to reimbursement until you are made whole is referred to as the doctrine of equitable subrogation.
If the bill passes with this provision, it will gut the doctrine of equitable subrogation in the context of ERISA plans. Every health insurance policy and self funded plan I have reviewed in the last several years claims the right to be reimbursed for any funds they have paid to an insured from the first dollar out of a personal injury settlement. Often the insurer also disclaims any responsibility to contribute anything toward the attorney fees incurred by the injured person in obtaining the recovery. Consequently, this bill will have a significant impact on the willingness of plaintiffs to pursue claims that, for a variety of reasons, are not likely to end up recovering significantly more than the medical expenses incurred by the plaintiffs. Why would a plaintiff go after a tortfeasor if at the end of the process most or all of the money will end up being paid back to his health insurer? The injured party should be compensated and the wrongdoer should be held accountable. Neither of these things will happen in this situation.
This provision is a big deal. It will turn ERISA's equitable remedies provision into a sword to be used primarily by business and insurance interests and provides little meaningful relief for people covered by ERISA plans.
Even more obnoxious is the fact that the bill makes no attempt to explicitly state that equitable relief under 29 U.S.C. §1132(a)(3) provides any right to plan participants to recover monetary damages for a fiduciary’s breach of his duties under the terms of an ERISA plan or the statute itself. Congress wants to turn the "equitable relief" provision of ERISA into a one way street. Fiduciaries can come after plan participants to be reimbursed for medical expenses that the ERISA plan has paid. But participants are limited by prior Supreme Court rulings to non-monetary relief. Make no mistake: section 307 in the bill is a huge bone tossed to insurance and business interests.
Contact your Senators and House members now.
Here’s a follow up to my post from earlier this week regarding the attempt to amend ERISA to eviscerate the doctrine of equitable subrogation. The provision in the House bill that passed in mid-December that gives so much heartburn was added in the very last amendment to the bill before the floor debate. There was no reference to it in the House bill as introduced or in the version of the bill that reported out of the two committees in which the bill was heard before the final vote. It was, quite literally, a last minute surprise. The Senate version of the bill does not contain any provision attempting to alter the "equitable relief" provision of ERISA found at 29 U.S.C. Sec. 1132(a)(3).
When Congress reconvenes in a few weeks, a conference committee of selected members of both the Senate and House will be appointed to hammer out the differences between the two versions of the legislation. That will be the last opportunity to get this bit of terrible special interest legislation removed or modified.
I’ve spoken to a number of attorneys who practice in the ERISA and personal injury arenas about this proposed legislation in the last few days. Almost all agree that if the House version of the bill passes it will have the effect of eliminating or significantly reducing the financial incentive of many people to bring meritorious personal injury cases. This amendment to ERISA will have the effect of undermining the concept that responsibility to compensate for a loss should rest with the person who acted wrongfully in causing that loss.
I posted comments here and here earlier this week about the proposed amendment to ERISA to give insurers and self-funded plans full rein to pursue their subrogation interests. Let me give a little more explanation for why this is a very important change to ERISA. The amendment involves the intersection of tort law and legal principles involving when a person is obligated to reimburse insurers for losses the insurer has covered.
In legalese, tort law deals with the right to compensation a person has when they are injured as a result of someone else's wrongful act. If you are injured because someone else has violated a legal duty (usually, but not necessarily, a negligent act), you are generally entitled to bring a claim against the wrongdoer and recover for your losses.
For what losses can you recover? Both "special" and "general" damages. Special damages are past or future financial losses. General damages are more intangible, difficult to measure, but nevertheless real, losses. Examples of special damages in a car accident scenario include such things as medical expenses, costs to repair your car, rental car expense, taxi fare, lost wages, expenses in hiring someone to do things you used to do at your home but now can't such as mowing the lawn, vacuuming, etc. Anything that represents an out of pocket loss to you, either in money you pay out or in money that would come in to you but doesn't, as a consequence of someone's wrongful act is a special damage.
General damages include such things as pain and suffering, loss of enjoyment of life, emotional distress, anxiety, etc. General damages are easiest to identify and understand in the context of severe injuries. An accident that leaves someone a quadriplegic is going to result in general damages that could dwarf the special damages. And those general damages are very real.
Putting a dollar amount on general damages is, by its very nature, imprecise and difficult. Based on experience in dealing with judges and juries, personal injury lawyers agree that general damages are usually a multiple of the amount of special damages. The amount of past and future out of pocket loss is the foundation on which judges and juries add an award of general damages. The amount of those generals depends on the nature of the injuries, the jurisdiction, and many, many other factors as you can imagine.
In my car accident hypothetical, a person who has $20,000 in medical expenses (not to mention other components of special damages and the whole realm of general damages) and who recovers $25,000 in insurance money will almost certainly not be in a position to have recovered his entire loss associated with the accident. He will not be "made whole" by the $25,000. And due to the fact that most states have relatively low minimum legal requirements for auto liability insurance, an injured person’s ability to recover only $25,000, or a similarly modest number, is not uncommon regardless of how badly they have been injured.
So in this scenario, does the health insurer who paid $20,000 of the injured person’s medical expenses have any right to be reimbursed out of the $25,000 the injured person received? The insurer argues that if it has paid the injured person's medical expenses and the injured person recovers all or a portion of those medical expenses from a negligent third party, the insurer is entitled to be reimbursed. Insurers claim that not requiring the injured party to reimburse the insurer for all or a portion of the money paid to the injured person to compensate him for his loss is to give the injured person a windfall. I don't believe that is necessarily true. The injured person paid money to the insurer in the form of premium to cover the risk that the injured person could get in an accident and need insurance to cover medical expenses. So you could reasonably say that the injured person, in having the foresight and paying the money to obtain insurance that they may or may not need, is entitled to any extra compensation he receives for losses that may also be covered by insurance. But insurers have persuaded people that an injured person may, at least in some situations, be getting a windfall and we can’t have that.
So we arrive at the intersection of tort law and reimbursement claims that I referred to in the first paragraph: at what point can an insurer enforce the right it claims to be reimbursed out of money paid by a negligent third party to our hurt car driver? The doctrine of equitable subrogation (a/k/a, the "made whole" rule) is in place to help resolve that tension between the competing claims of a health insurer and our injured party. I’ll cover that in the next post.
The doctrine of equitable subrogation basically says that our injured party is entitled to receive complete compensation, to be "made whole," before the insurer can get its money back. It reflects the idea that, as between the injured driver and the insurer, the injured driver has the primary loss and holds the claim with the greatest entitlement or priority to be paid. So the insurer has to wait until the injured driver is fully compensated before the insurer can start getting any reimbursement money from the negligent third party. Inherent in the doctrine of equitable subrogation is the idea that every situation has to be judged on its own merits. There aren't really any bright lines as to when you know for sure that an injured person has been made whole. It all depends on the nature and seriousness of the injuries. What if the injured person is a concert pianist and loses the pinky and ring finger of his non-dominant hand? His special and general damages will be much much greater than if I lose the pinky and ring finger on my non-dominant hand in the same accident. Arguably I could be made whole by payment of $50,000 from the negligent third party. But will the concert pianist? Not by a long shot.
There will be situations where even if the made whole rule is in place, an insurer will become entitled to be reimbursed after a certain amount of money is paid to the injured person. But, of course, personal injury attorneys being clever and working hard to protect their client's interests, they can usually come up with lots of plausible arguments and information to show that their client is not "made whole." Especially if there is a relatively low recovery from the negligent third party. And getting a "policy limits" recovery from a negligent third party–the maximum amount of money under the liability insurance policy of the careless driver who ran into you–that is far less than the amount of the loss the other car driver suffers, is very common in personal injury cases.
You can see why insurers dislike the doctrine of equitable subrogation. Health insurers routinely draft their policies to include specific language that says something like "we are entitled to be reimbursed for benefits we have paid from the first dollar of any money you receive from a third party for injuries caused by that third party. Furthermore, we have no obligation to pay attorney fees or share in the cost of any attorney fees you may incur in recovering that money from a third party." But many states have insurance laws and cases that resist enforcing this type of language. These states recognize that allowing insurers to strictly enforce this type of boilerplate language will cause a lot of injured folks to not pursue compensation from the negligent party in the first place if the numbers work out the way they do in my hypothetical.
In many jurisdictions the law is a bit unsettled. In my state the Supreme Court has ruled that equitable subrogation is the default rule but it has suggested that insurers may, if they are precise enough with the language they put in their insurance policy, be able to pursue reimbursement for money without the injured party being made whole. However, an informal opinion from the commissioner of the state insurance department some years ago disagrees and tells insurers that they cannot use one sided insurance policy language to skirt the doctrine of equitable subrogation. The effect of uncertainty in the law is to provide incentive to everyone involved in the situation to settle claims short of full blown litigation. The uncertainty ensures that neither side has a decisive upper hand. Generally the folks on all sides of the situation find it in their interests to negotiate some resolution that splits the difference.
So the likely scenario today for my hypothetical? The health insurer sends a letter to the injured person's attorney saying, "we want our $20K back." The attorney says, "well, not so fast" and lays out the facts as to why the injured person is not made whole. The insurer says "but we have language in our policy that says we get our money back from the first dollar." Attorney responds: "yea, but the Jones case in our jurisdiction says you don't get your money back until my guy is made whole and he's not close to being made whole. Go away." Insurer goes away. Alternatively, if the law is muddled, perhaps the attorney, the insurer and the injured party split the $25K recovery three ways. Neither insurer nor injured party is thrilled; everyone gets something; the injured party retains an incentive to go after the negligent third party in the first place. That last effect is critical. More in the next, final post on equitable subrogation.
In amending ERISA to eliminate equitable subrogation, insurers want to dramatically shift the balance of power in the relationship between the health insurer and the injured party. If the amendment goes through, its effect will be to significantly decrease the leverage the injured party holds in negotiating the insurer's reimbursement claim. The language insurers have or will put into their policies giving themselves the right to be reimbursed from the first dollar the injured party receives from the negligent third party will be enforced to the letter. ERISA has a very powerful preemption clause: generally speaking, it wipes out all state laws that conflict with the language of an ERISA plan or the insurance policies under which an ERISA plan is funded. Courts interpreting ERISA are also very clear in saying that the unambiguous language of ERISA plans and their insurance policies will be rigorously enforced. So there is limited room to argue that the "we get reimbursement from the first dollar" language of insurance policies shouldn't be honored. Consequently, the law of equitable subrogation will likely go by the boards, at least for ERISA plans. And don’t forget, ERISA plans provide medical coverage to over 130 million Americans.
The most draconian result would be that our injured party would be left actually owing money above and beyond what he recovers from the insurer for the negligent person causing the accident. He will be responsible for reimbursing the insurer $20,000 and for paying his attorney a third of $25,000! Less drastic, but more likely is that our injured party simply walks away from the claim for the $25,000. Why should he pursue that money when he won't see anything from the recovery? Another possibility is that under the changed language the insurer would exert more leverage to get money back for themselves than they do now but not so much as to completely discourage the injured party and his attorney from chasing the negligent third party. The ideal insurer situation: they obtain greater leverage at the expense of folks they insure. They are in a better position to drive a harder bargain against you and me. We will all be assured by insurance and business interests that they can be trusted to do the right thing.
Interestingly enough, Medicare and Medicaid also assert their rights to be reimbursed when there is a third party recovery. However, in my experience, unlike the situation that often occurs with insurers and companies sponsoring their own health plans, Medicare and Medicaid recognize that they have an obligation to pay their share of the injured party’s attorney fees and costs (there would often be no reimbursement at all if not for the efforts of the attorney) and they are generally pretty reasonable about negotiating a resolution of difficult claims to ensure there will be enough money to go around and that the injured individual is not left high and dry. And their relatively "hands off" approach to pursuing their interests does not discourage injured parties or their attorneys from deciding to pursue personal injury claims in the first place.
However, when more bottom line oriented parties, such as insurers and businesses sponsoring self funded medical plans, are involved, sharper economic incentives are in play. The more aggressive approach of these entities, and the additional leverage this proposed amendment to ERISA provides them, will almost surely upset the carefully balanced dynamic that is equitable subrogation.
The Eighth Circuit Court of Appeals issued a ruling this week, Seitz v. Metropolitan Life, that decisively shoots down a disability insurer’s argument that I’ve seen surface occasionally. It’s one of those arguments that may have some appeal the first time you hear it. But when you digest it and really think it through, you realize its not just wrong but nasty. It’s the type of argument that gives insurers a bad name.
The language of the disability policy in Seitz stated that in order to get benefits you must be "unable to perform all material aspects of your occupation." What does this mean? MetLife argued that Seitz was not disabled under this definition because he could do some of the material aspects of his job. Alternatively, it argued that Seitz was not disabled because he could do all of the material aspects of his job, albeit it to a limited degree. For example, his job required that he sit for five to six hours in a workday. Seitz’s doctors stated that during an eight hour period he could sit for no more than two hours.
The Eighth Circuit rejected both these arguments with little hesitation. The three judges who decided the case recognized that to adopt MetLife’s argument would make disability benefits pretty much impossible to get. Here’s why.
Let’s say you have a job as an office manager. The list of the material aspects of your job is long, 20 different components, including such things as supervising and training the office clerical staff, meeting with peers and superiors on a regular basis to discuss and solve problems as they occur in the office, and acting as the decision-maker on personnel issues such as hiring and firing. Also among the 20 material aspects of your office manager job are these three:
--Be able to lift and carry for short distances files and office equipment of up to 25 lbs. on an occasional basis
--Be able to sit for five to six hours a day
--Show up by 8:00 a.m. and don’t leave before 5:00 p.m. Monday through Friday
Walking to work one day a tree branch falls on your head and leaves you with a serious, permanent brain injury. You lose a good deal of mental capacity and end up with a functional IQ of 75. Physically you are in pretty good shape. But can you do your job? Under MetLife’s definition, you bet. You can perform some of the material aspects of your occupation. The most fundamental ones in many ways. You can show up. You can stay at the job 40 hours a week. You can carry out the physical demands of the job. But would you or your family really think you are not disabled from your occupation as an office manager?
Fortunately, the judges who decided Seitz saw through MetLife’s charade.
When Congress enacted ERISA it included specific direction about where a case could be filed and how and where a defendant could be served with process, i.e., given effective notice of suit that compels that defendant to either respond or have a default entered against them. Since ERISA is a statute designed to ensure uniform administration of pension and welfare benefit plans across the country, Congress provided quite a bit of flexibility for both venue, where the case could be filed, and service of process. 29 U.S.C. §1132(e)(2) states that a case can be filed in the district where the plan is administered, where the alleged breach of the plan or ERISA took place, or where a defendant resides or may be found. It goes on to say that service of process can take place where a defendant resides or may be found.
Many of the terms in §1132(e)(2) have legally specific and fairly technical meanings. Their practical effect shows up in a case we handled a few years ago, Peay v. BellSouth Medical Assistance Plan, 205 F.3d 1206 (10th Cir. 2000), that you can read here in the library section of this website.
In Peay we represented two healthcare providers located in Utah and a patient residing in Tennessee. The two corporate defendants resided in Georgia and Alabama, respectively. We sued for unpaid medical expenses in Utah. The defendants argued that they did not have sufficient contacts to Utah to allow suit to go forward here and asked for dismissal of the case or that it be transferred to Georgia. The trial court agreed with BellSouth. We appealed. The Tenth Circuit reversed the trial court and allowed the case to go forward in Utah. To see the ins and outs of how the court interpreted ERISA’s venue, service of process and personal jurisdiction concepts, you’ll have to read the decision. I’d say it's pretty fascinating stuff but that would direct laughter, scorn and ridicule my way.
The short version is that you can sue ERISA defendants, especially corporate defendants, just about anywhere in the U.S. of A. Only if the location a plaintiff chooses to sue would "make litigation so gravely difficult and inconvenient that . . . [the defendant] unfairly is at a severe disadvantage in comparison to his opponent" will the case be dismissed. That’s a tough burden for defendants to carry off.
For a different take on ERISA’s venue, service of process and personal jurisdiction principles, see Judge Easterbrook’s opinion in Board of Trustees v. Elite Erectors, Inc., 212 F.3d 1031 (7th Cir. 2000). It’s an even more expansive view of ERISA’s venue provision than Peay. Regardless of the topic, Easterbrook is an entertaining read.
Thanks to Glenn Kantor and his excellent ERISA plaintiffs’ firm, we have a very interesting case that combines information about health insurance denials with a good spanking of a disability insurer. Lundquist v. Continental Casualty Co., 394 F.Supp.2d 1230 (C.D. Cal. 2005) involves a disability claim by a clinical research manager in the grievance and appeals department at Blue Cross of California. The disability insurer denied the claim but the trial court reversed that denial. The trial judge found a number of problems with the disability insurer’s handling of Ms. Lundquist’s claim. First, the insurer failed to fairly and completely consider the nature of her job responsibilities in evaluating whether she could perform her work. You can't very well determine whether a person is disabled from their own occupation unless you are willing to find out about and fairly take into account what the job responsibilities of that person are.
Second, the insurer selectively picked portions of a report it procured from a reviewing physician to support its denial of benefits. This violated ERISA’s fiduciary duty and claims procedure requirements. The court determined that the insurer acted unreasonably in denying the disability claim.
Another interesting aspect of the case is that it sheds light on the workload of a reviewer of denied health insurance claims. As part of her disability claim, Ms. Lundquist provided her disability insurer with a detailed description of her job responsibilities at Blue Cross of California as a clinical research manager reviewing appeals from healthcare providers and patients of denied medical claims. In a letter to the disability insurer in 2002 this is how she described these duties:
Since I am one of the managers in [the Grievance and Appeals] department, I have a twofold job. Over the last 18 months the department has decreased in size and all the employees, especially the managers, have assumed an increase in the work load. I added to my work load of trainer of all new hires with a small case load, to a large case load of 135 cases, plus continued as a resource manager to all the employees. These cases have to be reviewed, records requested, re-reviewed and presented to a Medical Director, and closed with a decision within 30 days. There are also expedited appeals that have to be handled and closed within 3 days. This was added on to the 135 cases already being reviewed. Since I am in management I also attend 3-5 meetings per week, that last anywhere from 1-4 hours. . . . The case load was three times what it was when I hired on with the company [in 1997].
There’s a lot of information here to mull over. Even assuming that there are some clerical folks helping a reviewer manage this type of case load, it is pretty clear that any given appeal to this particular health insurer (Blue Cross of California is one of, if not the largest, health insurers in California) isn’t going to receive a lot of attention. Some appeals may not need a lot of energy or time to either reverse or maintain a denial. But a lot of healthcare appeals are complex and/or require careful review of a lot of technical information. It’s hard to believe that those appeals were being considered thoroughly and competently given this type of caseload. And think about the last sentence of Ms. Lundquist’s description. Amazing how this insurer can triple the efficiency of its reviewers in just five years!
Rescission claims are usually fun and interesting claims to litigate. Almost always a rescission is based on the insurer’s argument that the applicant/insured misrepresented their health history on the application for coverage. Knowing that the insurer’s temptation to claim misrepresentation and attempt to rescind may be strong, state legislatures and courts place the burden of showing that the facts exist to justify rescission in any particular case on the insurer. The burden of proof being on the insurer and the number of factual and legal prerequisites to carrying that burden are big reasons these cases are interesting and worthwhile.
Let me be clear: there’s no question that many situations exist in which insurers should be allowed to rescind. If someone knowingly lies about their health history on an insurance application to get coverage when they know they are uninsurable, rescission should be allowed. And I’m sure that happens. That is not the "good rescission case" I refer to in the title of this post.
A "good" rescission case from my perspective is one where the insurer is out on a limb in proving the elements of rescission to sustain their burden of proof. That’s often the case in my experience. For example, before it will be allowed to rescind coverage an insurer must prove that a misstatement on an insurance application was "material." The failure to disclose the existence of a visit to a podiatrist to treat athlete’s foot in the three years before applying for coverage will not justify rescission of the policy when a month after it goes into effect the applicant has a stroke and spends six weeks in intensive care. Likewise, in many jurisdictions, if an applicant makes a purely innocent misstatement of her health history, this does not provide the insurer with a basis to rescind. Derbidge v. Mutual Protective Ins. Co, 963 P.2d 788 (Utah App. 1998). In addition, there are often short time frames within which, after it obtains information to provide the basis for rescinding, an insurer must give notice of its intent to rescind. If it blows the time frames, it can’t rescind.
In addition, usually you will want to get the insurer’s underwriting guidelines. How can you know if the misstatement was "material" if the insurer won’t produce its underwriting guidelines to verify that contention? Insurers fight against disclosing them; they argue the underwriting guidelines are confidential and proprietary. But unless there is an obviously material misstatement, there is little question that when you are appealing a rescission you are entitled to review the underwriting guidelines to independently determine whether they support the insurer’s argument that the misstatement was material. And the usual stonewalling that precedes getting those guidelines (insurers, get a clue: resistence is futile) often provides ammunition in asking the court to award attorneys fees.
A good rescission case is kind of like getting that pair of pants you haven't worn in a few months out of the closet, putting them on and finding a $20 in the pocket.
A recent case from the federal district court of Minnesota, Payzant v. UNUM Life Ins. Co. of America, 402 F.Supp.2d 1053 (D. Minn. 2005), features an issue that comes up occasionally in ERISA disability cases. In Payzant the plaintiff suffered from fibromyalgia, a debilitating disease that is notoriously difficult to diagnose and treat. UNUM denied her claim, in large part because it claimed Payzant had not submitted objective medical evidence of the disease. In court Payzant argued that the language of the disability policy didn’t require this type of proof and that, even if it did, she had presented objective medical evidence. The court agreed with Payzant on both counts.
In light of the absence of policy language requiring objective evidence and the fact that the diagnosis of fibromyalgia is primarily based on subjective reporting of symptoms, the judge held that UNUM's requirement of objective evidence was a "procedural irregularity." The court also ruled that UNUM's actions constituted a "serious breach of fiduciary duty" that justified reversing its denial of Payzant's claim. For good measure, the court also determined that even if objective evidence were required by the policy language, Payzant’s physicians had supplied that type of evidence in their medical records.
Insurers who try to rely on extra-contractual requirements or limitations to coverage are on thin ice.
The Seventh Circuit Court of Appeals issued a decision yesterday, Semien v. LINA, 436 F.3d 805 (7th Cir. 2006), that is an awful joke. It affirms the denial of a long term disability claim, a not infrequent occurrence in our federal courts. The troubling thing about the decision is the court’s contention that Congress intended to restrict the ability of federal judges to review insurers’ and self funded plans’ denials of ERISA claims: "Congress has not provided [the federal judiciary] with the statutory authority, nor the judicial resources, to engage in a full review of the motivations behind every plan administrator’s discretionary decisions" Slip opinion, P.17. Going further, the court states that it will have no part in a "costly system" in which federal judges "conduct wholesale reevaluations of ERISA claims." Pp. 17-18. The court wrings its hands about the possibility that giving claims denials anything more than a cursory review will "tax the judicial resource of the district courts and magistrate judges beyond the breaking point." P. 13.
What authority does the court provide to warrant this abdication of judicial responsibility? None. There are no meaningful citations to language in the statute or legislative authority. ERISA does specifically address the rights of insureds to obtain review of a claim denial in federal court at 29 U.S.C. §1001(b). But the court doesn’t cite to this. It’s difficult to know whether the omission is due to ignorance or conscious disregard. Regardless, the language from the statute undermines the court’s argument. It states that one of ERISA’s primary purposes is to provide plan participants and beneficiaries "appropriate remedies, sanctions, and ready access to federal courts" in the event a claim is denied.
That is not all. The decision effectively bars any opportunity for discovery in all but the most clear cut cases of conflict of interest or procedural irregularity. P. 17. Basically, the court will perform a quick review of the prelitigation record to simply assure itself that an insurer’s or self-funded plan’s decision is not patently unreasonable. Unless there has been self-evident and significant overreaching by the insurer or employer, the court will not overturn the denial. And the court assures us that we need not worry that its unwillingness to meaningfully review insurer or employer decisions will end up hurting employees. After all, there is no reason to think that the benefits staff of an insurer or employer "is any more ‘partial’ against applicants than are federal judges when deciding income tax cases." P. 16. I want to emit a loud guffaw when I see these words. Reading pap like this makes me wonder what planet the author comes from. Let me put it this way. If our federal judges hold themselves to standards of fairness and impartiality that are no higher than insurers or employers whose decisions to approve benefits directly affect their bottom lines, we’re all in trouble.
The Seventh Circuit covers Illinois, Indiana and Wisconsin. This case is binding precedent for the folks who live in those states. Semien is fortunate to have Mark DeBofsky, as fine a plaintiffs’ ERISA lawyer as there is in the country, for her counsel. Whether Mark petitions for rehearing, rehearing en banc or petitions for a writ of certiorari from the Supreme Court, I’m confident he will not accept such a misguided decision lying down.
ERISA is not as clear as it could be about who can and must be included as a defendant when suit is brought under the statute. The statute states that an ERISA plan is an entity that can sue or be sued in its own name. 29 U.S.C. §1132(d). However, an ERISA plan is often not something an employer thinks of as being separate from itself. When a small business buys a group health, disability or life plan for its employees, it does not generally consider that it has established a distinct legal entity that can sue or be sued. But it has. Larger employers or trust funds established under collective bargaining agreements between unions and employers are more likely to understand the significance of the legal reality that an ERISA plan is separate from the entities that fund those benefits.
Building on this principle, some courts have ruled that when a claim is brought under ERISA for payment of denied benefits, claimants must sue the "plan" rather than just the employer or the insurer paying the benefits. Indeed, the U.S. Court of Appeals for the Ninth Circuit has gone so far as to say that the plan is the only proper party when a claim for unpaid benefits is brought. Everhart v. Allmerica Fin. Life Ins. Co., 275 F.3d 751 (9th Cir. 2001); Ford v. MCI Comm. Corp. Health & Welfare Plan, 399 F.3d 1076 (9th Cir. 2005).
These holdings are pretty clearly wrong IMHO. It may be true that because the ERISA plan is a separate entity that can sue or be sued, it must be named as a defendant in a suit for unpaid benefits. But there is no language in the statute to support the idea that an insurer cannot be named as a defendant in a claim for unpaid benefits. On the contrary, numerous provisions of ERISA go to the heart of insurers’ inter-plan activities. The Ninth Circuit rulings in Everhart and Ford suggest that there is no way to effectively obtain any remedy for an insurer’s systematic breaches of ERISA’s disclosure, fiduciary duty or claims procedure requirements that cross plan boundaries.
This is a significant defect in the case law of the Ninth Circuit. It is all the more pernicious because the Ninth Circuit is, by far, the largest in the country both in geography and population. It covers Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington.
Every Circuit in the country has its poorly reasoned and deficient case law regarding ERISA and just about every other area of law. But this Ninth Circuit precedent is a glaring deformity.
Last week I fulminated about the Seventh Circuit's Semien decision. Among other things, I was troubled by the language in that case suggesting that the federal judiciary did not have the ability to meaningfully review denials of ERISA claims by insurers or self funded plans. As the Semien court states: "Congress has not provided [the federal judiciary] with the statutory authority, nor the judicial resources, to engage in a full review of the motivations behind every plan administrator’s discretionary decisions." Slip opinion, p. 17.
I said, with some indignation, that this was nonsense and was contrary to the language of the statute. Since then I've come across a statement from the Supreme Court that puts the matter to rest. In Rush Prudential HMO v. Moran, the Supreme Court states:
"Whatever the standards for reviewing benefit denials may be, they cannot conflict with anything in the text of the statute, which we have read to require a uniform judicial regime of categories of relief and standards of primary conduct, not a uniformly lenient regime of reviewing benefit determinations.
. . . Not only is there no ERISA provision directly providing a lenient standard for judicial review of benefit denials, but there is no requirement necessarily entailing such an effect even indirectly. "
You can't reconcile the language of the Seventh Circuit in Semien with the language of the Supreme Court in Rush Prudential. And we all know which Court is preeminent.
Last week the Seventh Circuit U.S. Court of Appeals issued a decision, Rud v. Liberty Life Ass. Co. Of Boston, written by Judge Richard Posner. Judge Posner is a prolific author and commentator on various topics, a real renaissance man. He writes well and because he avoids legalese and is very much a "cut to the chase" kind of thinker, his decisions usually make for interesting reading. Rud is no exception. Among other things, the case deals with how the language of an ERISA plan should be interpreted and enforced.
Most insurance companies place a boilerplate clause in their policies along the lines of this: "the insurer has the discretion to interpret the terms of this policy and determine eligibility for benefits. The insurer’s decisions shall be binding on the parties." Over 15 years ago, in Firestone Tire & Rubber v. Bruch, the U.S. Supreme Court held that this type of discretion granting language limits the ability of judges to reverse an ERISA plan’s denial to situations where the decision-maker was arbitrary and capricious. Thus, so long as the decision-maker is not completely unreasonable, federal judges will generally not reverse its denial of a claim. However, in Bruch the Supreme Court also stated that if the decision-maker has a conflict of interest, that conflict requires a judge to scrutinize the insurer’s decision more carefully and skeptically than they otherwise would under an arbitrary and capricious standard of review.
In Rud, Judge Posner rationalizes away the conflict of interest language of Bruch by stating that every contract involves a conflict of interest because "each party wants to get as much out of the contract as possible." However, in the case of a health or disability insurance company, there is tremendous opportunity to make sure the insurer gets more than its fair share of benefit out of a policy. Insurance companies draft their policies with little or no input from the insured person, unilaterally determine the premium they will charge and make the ultimate decision about whether a particular claim will be paid or denied. In addition, insurance is very complex and confusing. As a practical matter, there is little opportunity or ability for an insured person to challenge anything but the most obvious error an insurer makes in denying a claim.
Despite the degree to which the insurer and Joe Lunchbucket are unequal in their ability to protect their respective financial interests, Judge Posner goes on to state: "it is hard to see why, if the plan unequivocally authorizes the insurance company to make the conclusive determination of eligibility, the courts should rewrite the provision." Relying on the importance of preserving the right parties have to contract freely about whatever they want, Rud holds that even when there is a conflict of interest, courts should be reluctant to second guess the terms parties place in their contract. It’s a very laissez-faire approach to the issue, consistent with Judge Posner’s reputation as a scholar heavily influenced by free market thinking and economic analysis. This approach to interpretation and enforcement of contracts has been around for quite awhile--as long, in fact, as judges have been around to settle disputes between contracting parties.
However, there is another school of thought on how contracts should be interpreted and enforced. Rather than simply require parties to a contract to live with the literal contract terms down to the last jot and tittle, no matter how one sided they may be, some judges faced with deciding how a contract should be enforced consider the circumstances surrounding how the contract came to be, the relative knowledge and sophistication of the parties, and the economic balance, or lack of it, between them. It’s not hard to think of examples where a judge should do exactly that. If a father of a 16 year old girl decides to supplement the family income by selling his daughter into prostitution, no court will rule in favor of the pimp who sues to enforce the contract when dad later reneges on the deal. Whether to enforce that contract isn’t a close call because the contract between dad and pimp was illegal in the first place. But there will be closer calls about enforcing contracts involving situations that do not involve illegality and about which reasonable minds may disagree.
So what does ERISA have to say about the relationship between insurers and employers on the one hand and employees and their dependents on the other? ERISA was passed to protect employees and their dependents from losing pension and other fringe benefits. To put these protections in place, Congress relied heavily on principles of trust law to supplement and modify the law of contracts. Trust law applies to protect the interests of a party who is vulnerable to being abused, deceived or is otherwise incapable of protecting their interests. The prototypical trust law scenario is where assets are being held for minors or otherwise incompetent individuals.
In the years leading up to 1974 when ERISA was passed, several things occurred that caused Congress to act. The Studebaker corporation went bankrupt and left thousands of employees with pennies on the dollar for pension benefits the employees had negotiated and helped fund over their working careers. In addition, several unions were involved in stealing the pension funds of their members. So Congress imported a number of trust law principles into ERISA. For example, insurers and ERISA plan administrators have a fiduciary relationship with employees and their dependents. These fiduciaries hold ERISA plan assets in trust for the employees and their dependents. 29 U.S.C. §1103. If there is a denial of benefits that an employee believes is wrong, the statute is designed to provide "ready access to Federal courts." 29 U.S.C. §1001(b). In its role as an ERISA fiduciary, an insurer must act solely in the interest of the employees and their dependents and for the exclusive purposes of providing them benefits. 29 U.S.C. §1104(a)(1)(A). An ERISA fiduciary must be completely loyal to the economic interests of the employees and their dependents. That is why the Supreme Court referred in Bruch to the need for judges to take into account any conflict of interest an ERISA fiduciary has.
ERISA's fiduciary duty standards sound inconsistent with an insurer’s profit making purpose don’t they? In fact, the tension between ERISA’s trust law principles and the reality of relying on profit making entities to carry out ERISA’s fiduciary duties is very significant. It generates a lot of litigation.
The problem I have with Judge Posner’s analysis in Rud is that it almost completely ignores ERISA’s trust law component. This is no small error. ERISA’s trust law principles undermine the heart of Judge Posner’s rationale for why federal courts should not second guess the way in which an insurance company sometimes deals with the people it insures. Unfortunately, my experience is that Judge Posner’s pro-insurer, pro-employer result is much more common than it should be among the federal judiciary deciding ERISA cases. When the economic interests of an insurer or employer conflict with its fiduciary duties under ERISA, many judges are too quick to simply ignore the latter and gut ERISA’s fiduciary protections in the process.
I posted here, here, here, here and here last month about an attempt in Congress to amend ERISA to eviscerate the doctrine of equitable subrogation. Since then several things have happened. The Association of Trial Lawyers of America has come out in opposition to the change. Kevin Drum, a high profile political blogger, had a comment about it. There is a letter writing campaign by a number of prominent attorneys and law professors to oppose the amendment.
I don’t believe the members of the conference committee have yet been appointed to integrate the differences between the House and the Senate versions of the bill. It is in the conference committee that we’ll find out whether the change the House inserted at the last minute will make it through the reconciliation process. I’ll update more on the status of that process as I get it.
Senator Michael Enzi from Wyoming has long worked to pass legislation that provides a more affordable health plan alternative to small businesses. In previous years he sponsored legislation to allow small employers to band together and form self funded Association Health Plans (AHP). But he ran into opposition from consumer groups and the insurance industry that felt his proposal was not giving consumers adequate protection. Self funded plans are beyond the scope of state insurance regulation under ERISA’s preemption provisions found at 29 USC §1144(b)(2)(B). Some folks rightly felt that encouraging small employers to set up self funded plans was unwise.
I agree that fostering self funded plans for small employers, even when they group together as AHPs, is a very bad concept. I’ve dealt with a disproportionate share of inadequately funded and incompetently administered small self funded plans. AHPs were sheep waiting to be sheared by unscrupulous third party administrators, fiduciaries and stop loss insurers. Of course, the real losers in that situation would have been the employees and their family members who would have counted on receiving health benefits only to be left holding the bag. ERISA, standing alone, without the additional help of state insurance regulations and case law, gives consumers who are cheated out of their benefits by unscrupulous plan fiduciaries about as much protection as an umbrella in a hurricane.
So Senator Enzi retooled. A couple of days ago he unveiled the Health Insurance Marketplace Modernization Act of 2006 that contains the Small Business Health Plan (SBHP) initiative. This proposed bill addresses some of the concerns of consumer and insurance groups about the old AHPs. It requires that small businesses who form health benefit plans under the bill do so only by purchasing group coverage through licensed insurers, thus subjecting the SBHP to state insurance regulation. To provide cost savings, it allows SBHPs to slide around some of the mandated benefits that various states require of insurers and that, to some degree, increase the expense of health insurance. It requires insurers of SBHPs to accept all applicants regardless of health history and caps the amount the insurers can write up the premiums to levels set by the National Association of Insurance Commissioners, 25% above the base rate for the initial year and 15% per year after that. Finally, it establishes a "harmonization" board that will work to create greater uniformity among the various state’s rate structures and form filing procedures.
It’s an interesting concept and what little information I have about it is that Senator Enzi has worked to accommodate the primary interests of the parties that have been at odds in past years. Will it get through Congress? Time will tell. I’ll post updates as they become available.
A case from the U.S. District Court for the Eastern District of Michigan from earlier this week, The Regents of the University of Michigan v. Otis Spunkmeyer, Inc., case # 03-72985, illustrates the effect of ERISA’s reliance on the letter of the law. A hospital, as assignee, sued an ERISA plan to recover the medical expenses related to a premature baby’s medical treatment. The plan required that in order to obtain coverage for newborns, the infant had to be enrolled as a beneficiary of the plan within 31 days after birth. However, neither the hospital nor the baby’s parents got around to filling out and submitting the necessary paperwork during that time frame. The medical expenses were nearly $650,000.
The court made short work of the situation. The plan required enrollment within 31 days and that didn’t occur. Result: the plan is off the hook and the hospital has to either write off the bill or collect from the parents. There’s not much question about which route the hospital will end up taking.
Relying on the technical details of the language of ERISA plan documents to dispose of claims, even when the result seems to cause tremendous hardship, is very common. And it doesn’t always work to the detriment of the plan participants and beneficiaries or to the benefit of the insurer or plan sponsor. But it is an odd thing to see how ERISA, a statute filled with language about the need to utilize equitable principles involving fairness, flexibility, trust law and fashioning appropriate remedies to address the specific needs of the situation at hand, has been interpreted over time to be so unforgiving of deviation from the language of the plan documents. Those plan documents are invariably complex and filled with detailed requirements, stipulations, exceptions, conditions, limitations, exclusions, contingencies and provisos. They are almost always drafted by insurers and the businesses sponsoring the ERISA plan. As a result, the loss associated with failing to dot the i’s and cross the t’s seems to always fall hardest on the unsophisticated, unrepresented and unmonied.
The U. S. Court of Appeals for the Sixth Circuit has issued a number of encouraging decisions recently, at least from the perspective of plaintiffs’ lawyers. And really, what other perspective matters? Evans v. UNUMProvident Corp., 434 F.3d 866 (6th Circuit 2006) deals with a denied disability claim being reviewed under an arbitrary and capricious standard of review. This is the most deferential review courts provide when asked to take a look at the decisions ERISA plans and their insurers and fiduciaries make. Despite such significant deference, the decision reverses the denial and orders payment of benefits.
There are many good bits of language and analysis in the court's ruling. For example, the court states that even though an insurer's denial will be sustained unless it is arbitrary and capricious, "it is not, however, without some teeth. . . merely because our review must be deferential does not mean our review must be inconsequential. . . the federal courts do not sit in review of the administrator's decision only for the purpose of rubber stamping those decisions."
The decision then refers to the inherent conflict of interest UNUMProvident has in acting both as the ERISA fiduciary obligated to make decisions solely in the interest of ERISA participants and for the exclusive purpose of providing them benefits while at the same time acting as a profit making company that incurs a direct expense as a result of any decision it makes to pay benefits. After reviewing various legal principles from prior Sixth Circuit decisions, the court applies them to the facts of the case to conclude, 1) the insurer unreasonably discounted the opinions of the applicant's treating physicians that the applicant was disabled, 2) the insurer improperly focused on the relatively non-taxing physical demands of the applicant's job while ignoring the more significant mental and emotional demands of the job, and 3) the internal communications of the insurer made it clear that, as the court puts it, "the defendant's conflict of interest unduly influenced its evaluation of plaintiff's claim."
Yesterday's New York Times has a story about the Department of Labor investigating Northwest Airline for coordinating the timing of its bankruptcy to get maximum benefit of transfering its unfunded pension plan obligations to the federal Pension Benefit Guaranty Corporation. As the article puts it, the investigation suggests "the Labor Department is looking for a way to breach an entrenched pattern, in which distressed companies quietly deplete their pension funds over a number of years, then declare bankruptcy and transfer huge obligations to the federal government."
The DOL working to put more teeth into ERISA's fiduciary duty language? Great idea!
Because it establishes standards that must be followed by employee pension and welfare benefit plans across the country, ERISA is well suited to serve as a vehicle for class actions. However, one fly in the class action ointment is the requirement imposed by the federal judiciary that an individual bringing a claim for benefits must exhaust prelitigation appeals to the plan and its fiduciaries. Defendants in ERISA class actions routinely argue that all members of an ERISA plan must exhaust their prelitigation appeals before they can be part of the class. Adopting that argument would, as a practical matter, eliminate the possibility of bringing class actions in ERISA cases. Fortunately, most courts that have considered this argument have rejected it and allowed the case to go forward as a class action as long as the class representatives, as opposed to all class members, have exhausted their prelitigation appeals.
That position was strengthened considerably by an opinion from the U.S. Seventh Circuit Court of Appeals yesterday, In Re Household International Tax Reduction Plan, 2006 U.S. App. LEXIS 6821. Judge Richard Posner wrote the decision. I’ve blogged about Judge Posner before. He wrote the short decision for the panel specifically holding that so long as the class representative's claims fairly present the issue to be adjudicated to the ERISA fiduciary and that fiduciary has an opportunity to consider the class representative's claims, further exhaustion by other class members "would merely produce an avalanche of duplicative proceedings and accidental forfeitures, and so is not required."
Judge Posner is a very influential jurist. This opinion will carry some weight among his federal courtmates
I ran across another illustration of a provider getting kicked around in litigation because of poor legal representation this week. A federal district court dismissed a case for unpaid medical expenses brought by a large urban hospital. Reading the case it became painfully obvious to me that the attorney for the hospital simply didn’t have a clue about how to even begin to pursue the claim with any likelihood of success. No reason to disclose the name of the case or the hospital’s counsel. But here are some problems with the hospital’s handling of the case that jumped out.
First sign that the hospital’s attorney is out of his element: he files a case against a very large self funded medical plan sponsored by the mother of all retailers in state court. This is a case that is clearly governed by ERISA. It is permissible under ERISA for benefit recovery cases to be filed in state rather than federal court. But there was no mention of ERISA in the complaint. The case was brought for recovery under an open account theory. Sorry, but that will never fly in an ERISA case. That claim is simply not available. The judge dismisses it immediately.
Next, the hospital’s counsel has no clear idea about how to handle the fact that the hospital has claims both under a preferred provider contract AND under the patient’s ERISA plan. Those two separate rights require different and very careful analyses. It’s a good thing to have both rights. But sometimes a hospital will want to ignore one right and focus on the other. Sometimes it will want to ignore both and see if facts exist to assert state law tort claims that are, yet again, distinct from either the PPO or the ERISA claim. It all depends on the circumstances of the case. And unless an ERISA plaintiff's lawyer recognizes what facts to look for and why they matter, he really has little hope for a good outcome.
Finally, the court decision notes the failure of the hospital’s counsel to include documents to support the hospital’s claims and failure to file timely responses to motions before the court.
Pursuing claims for health care providers and their patients in court against commercial payors absolutely requires high levels of skill and expertise. This area of litigation is not for the inexperienced attorney. And having incompetent counsel working cases for ERISA plaintiffs makes bad law that then haunts future litigants.
Via Bridget O'Ryan, ERISA plaintiff's attorney in Indiana, we receive word of a large verdict against Lumbermens Mutual Casualty Co., which is a part of Kemper Insurance. You can read about the verdict here in the Indianapolis Star.
The plaintiff, Donna Combs, suffered from myelodysplastic syndrome (a form of cancer) and rheumatoid arthritis. She was paid disability benefits for two years and then was terminated wrongfully by the insurer. With the claims file there was a note from the claims administrator stating that termination of the claim had resulted in a savings to the insurer of $356,000.
Combs' counsel asked the jury to award three times the $356,000 to reflect compensation for Combs' financial and emotional distress. But Bridget, who was co-counsel on the case, tells me that members of the jury added some onto that to make sure Ms. Combs expenses were covered.
Early in the evolution of the case law that defines ERISA, the Supreme Court ruled that insured ERISA plans must comply with state law requirements for mandated benefits. Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724 (1985) prevented Met Life from using ERISA’s preemption clause to ignore a mandated mental health benefit Massachusetts required all insurers doing business in that state to provide to its citizens.
Knowing about mandated benefits ensures that patients are in a better position to get their full measure of benefits from insured ERISA plans. For example, many states have mental health parity statutes. The statutes differ a great deal from state to state but many require insurers to provide mental health benefits at the same coverage levels as they provide for physical illnesses or injuries. If an insurer in such a state limits payment of inpatient mental health care to 10 days per year and provides a more generous coverage level for treatment of physical conditions, the mental health limitation is invalid and the patient can get the insurer’s denial based on the 10 day per year limitation overturned.
States have passed many different types of mandated benefits in the past two or three decades. For example, you can review a summary of Wisconsin’s mandated benefits here. The legislative decision to require insurers to provide certain benefits to their insureds is controversial because it raises the costs of insurance. But most people feel there should be a basic level of coverage that health insurers marketing comprehensive health insurance coverage simply must provide.
It's not that common to see federal judges really speak their mind in frank language. A March 29, 2006, Memorandum and Order in Wilson v. Life Ins. Co. of North America, case no. 4:05cv3133 out of the federal district court of Nebraska, has some unusually pointed language about an insurer's actions. Judge Richard G. Kopf was evaluating whether a disability insurer was correct in denying a claimant's disability application.
Mr. Wilson worked as a telephone cable repairer. He had suffered a heart attack that required two stents, a stroke resulting from coronary artery disease, loss of vision in the right side of each eye as a result of the stroke, poorly controlled diabetes and peripheral vascular disease that caused severe leg pain. He qualified for Social Security disability benefits. The insurer, LINA, said that while he couldn't work as a telephone cable repairer anymore, he could be a maintenance scheduler or a service dispatcher.
Judge Kopf started his analysis of Wilson's claim in this way. "Frankly, it is hard to know where to begin. How LINA could conclude that a heart attack and stroke victim in his early fifties could work full-time even at seated work, when he was literally half blind, had serious vascular problems, and suffered severe pain that deprived him of normal sleep, is beyond me. That said, here are four points that highlight why I think Wilson made his case (and then some) . . . "
Mr. Wilson got his benefits.