Final Results for the Pension Protection Act

Both chambers of Congress recently passed the final, agreed upon version of the Pension Protection Act that amends ERISA. When it came out of the House of Representatives last year the sponsor inserted in the dead of night an overreaching provision that gave a significant leg up to insurers and employers seeking to recover their subrogation interests and be reimbursed money they had previously paid out in health benefits to ERISA plan participants and beneficiaries. I blogged about the issue a lot at the time. When Sereboff v. MAMSI, 126 S.Ct. 1869 (2006), came down in May it reduced the desire of the business and insurance lobbyists to have this special interest legislation included in the final bill because the Supreme Court gave employers and insurers much of what they were seeking in the proposed legislation. The good news is that the obnoxious stealth clause allowing insurers and employers to be reimbursed all their payments from a plan participants personal injury recovery, regardless of the degree to which the person is made whole, was deleted during the last stages of negotiating the final version of the Pension Protection Act. Unfortunately, we still have to live with Sereboff.

Medical Benefits and the Pension Protection Act

The Pension Protection Act of 2006 that recently passed both the House and the Senate deals primarily with pension benefits. But there are some aspects of it that deal with medical benefit plans. CCA Strategies provides a very helpful guide to these lesser known aspects of the Pension Protection Act.

What Deference Do Courts Owe A Conflicted ERISA Fiduciary?

The U.S. Court of Appeals for the Ninth Circuit today issued an important decision in Abatie v. Alta Health & Life Ins. Co. You can read the decision here. It is noteworthy because it takes up a recurring problem for courts in ERISA cases: how to adjust an arbitrary and capricious standard of review when the decision-maker has a conflict of interest. It is also an important decision because it was decided by an en banc panel of the court. In this case fifteen judges decided the case rather than the usual panel of three judges. That gives it more precedential heft. In Firestone Tire & Rubber v. Bruch, the Supreme Court established that where the documents governing an ERISA plan give discretion to a person or entity to interpret the terms of the plan and determine eligibility for benefits, that decision will not be disturbed unless the decision-maker is shown to have abused their discretion. In other words, even if the trial court reviewing the decision feels it would have decided differently, it may not reverse the decision unless it is not just wrong but unreasonable or arbitrary and capricious. That is a tough thing for the person who loses before the ERISA decision-maker to prove. But what about when the decision-maker has a conflict of interest? In Bruch, the Supreme Court emphasized that ERISA decision-makers are fiduciaries to the participants and beneficiaries of ERISA plans. This means, under the language of ERISA, that they must act solely in the interest of participants and beneficiaries and for the exclusive purpose of providing them benefits. This “duty of loyalty” has been described by many judges as imposing the highest obligation known to the law on the decision-maker. Fiduciaries must act without any divided interests or loyalties. Where does that leave us when, as with most life, disability and medical benefits, a for profit insurance company is the decision-maker? Bruch tells us that courts must take any conflict into account in deciding how much deference an ERISA fiduciary is owed by a court but gave no guidance on how to do so. Since Bruch, all the Circuits across the county have wrestled with this issue. This isn’t the place to provide a survey of the dozens of cases that have considered the issue but it suffices to say that most courts acknowledge the inherent conflict of interest an insurer faces when it acts both as a for profit entity and as an ERISA fiduciary. These courts take a harder look at the insurer’s decision and the process by which it was made than when a truly impartial decision-maker is evaluating whether life, disability or health benefits are owed. Today’s decision more clearly recognizes the structural conflict insurers face than earlier Ninth Circuit cases. And it instructs trial courts within the Ninth Circuit to take a harder look at an insurer's decision because of that conflict than it would if the fiduciary were not torn. But it really doesn’t, in my opinion, produce a template for evaluating that conflict and adjusting deference that is any more clear or workable than its sister Circuits. Perhaps the thing that sets Abatie apart from other decisions discussing how to deal with a conflicted ERISA fiduciary is its explicit recognition that plaintiffs are entitled to gather information through the discovery process about the specifics on whether, and the degree to which, the ERISA fiduciary is conflicted. This opens up the components of the process by which the insurers make their decisions as much as anywhere in the country. And sunlight is always a good disinfectant.

A Circuit Cash Balance Decision

I don't handle pension cases very often in my ERISA practice. Consequently, I don't blog about them much. But the Seventh Circuit decision in Cooper v. IBM Personal Pension Plan, 2006 U.S. App. LEXIS 20128, from last week is important as the first Circuit court to weigh in on whether cash balance pension plans violate ERISA's age discrimination standards. The court sustained the manner in which IBM structured its pension plan, ruling against the plaintiffs' assertions that the cash balance design illegally favors younger workers. The cash balance pension idea is relatively new, complex and almost certain to face review by the Supreme Court sooner or later. There's a lot of money at stake.

Let's Facilitate Full Disclosure

President Bush signed an executive order today that requires the Department of Health and Human Services, the Department of Defense, the Department of Veteran Affairs and the Office of Personnel Management to gather information about the quality and price of health care and share that information with each other and the public. The idea is that in this age of increasing consumer directed health care, information must be made available to allow for intelligent choices in spending dollars for health care by you and me. I don't have a problem with that. But as I've said before, insurers need to feel more pressure to write their policies in ways that clearly and unequivocally disclose in plain language what benefits and limitations consumers are getting. Right now, with discretionary language clauses being enforced by courts, insurers have an incentive to fill their policies with ambiguous language and then, when claims arise, interpret those policies to exclude coverage and favor their own financial interests, all the while being immune from judicial oversight.

ERISA Does Not Preempt Louisiana State Statute Requiring Insurers to Honor Healthcare Assignments

Last week the U.S. Court of Appeals for the Fifth Circuit issued a significant case involving a Louisiana statute requiring health insurers to honor assignments of health benefits from patients to their health care providers. First a little background on the dynamics at work with healthcare assignments. Healthcare providers require patients to transfer to them, assign, the patient’s right to insurance benefits so the provider can receive payment from the insurer directly rather than have the insurer send the payment to the patient and hope the patient then pays the provider. These assignment clauses are invariably part of the paperwork patients sign before they ever get medical care. However, payers like to have the ability to prohibit these assignments. Doing so puts pressure on the provider to negotiate a preferred provider contract directly with the payer. If it can ignore the assignment, a payer has more leverage over the provider to obtain discounts off the billed charges for medical services. The State of Louisiana, like many states, has in place a statute requiring payers to honor assignments from patients and prohibiting payer’s attempts to put language disallowing them in their insurance policies. The Blue Cross affiliate for Louisiana brought suit alleging that ERISA preempted the Louisiana statute. The federal district court rejected this challenge and ruled that the state statute was not preempted by ERISA. The Fifth Circuit affirmed the trial court’s ruling in Louisiana Health Service & Indemnity v. Rapides Healthcare System, 2006 U.S. App. LEXIS 21032. The court’s preemption analysis is thorough. Blue Cross argued that the state statute conflicted with the remedies Congress intended be in place for ERISA participants and beneficiaries, thus, requiring that the court strike it down. However, the Fifth Circuit rejected this argument because the patient’s assignment of rights under the ERISA plan to his or her healthcare provider doesn’t create any new rights or remedies. In addition, Blue Cross argued that ERISA expressly preempts the state statute because it “relates to” an ERISA plan. However, the lead opinion by Judge Higginbotham, in which Judge DeMoss joined, held that the state statute regulates an area traditionally subject to state interests and concerns, did not single out ERISA plans for disparate treatment and did not have a connection with those plans that was close enough to even get into the ERISA preemption arena. In a concurring opinion, Judge Owen wrote that even if the statute did “relate to” an ERISA plans, it was left standing under ERISA’s insurance savings clause which directs that state laws regulating insurance are not preempted. Bottom line: fully insured ERISA plans in the state of Louisiana may not prevent healthcare providers from asserting claims assigned to them by their patients.

ERISA's Lousy Remedies

Steven Chabre, a plaintiff’s ERISA lawyer out of the San Francisco Bay area, raised the following scenario in an e-mail the other day. Patient has a serious vascular disorder of the cervical spine. He has health insurance through an HMO. Benefits are provided exclusively through in-network doctors unless care is available only from out of network providers. The patient’s in-network doc recommends treatment from renowned out of network specialist. The HMO denies the request. Patient appeals the denial and eventually it is overturned. In the meantime, patient’s conditions has worsened and he’s now paralyzed. What compensation is available under this situation? If the patient’s health insurance is provided through an ERISA plan, the patient has no ability to get any compensation beyond medical expenses actually incurred in this situation. It is similar to the case I had several years ago involving Don and Cindy DeCastro and blogged about here. This injustice results from the broad application of ERISA’s preemption doctrine from federal courts over the last two decades. One of the best discussions of how this doctrine has developed and the problems it causes is in DiFelice v. Aetna U.S. Healthcare, 346 F.3d 442 (3rd Cir. 2003) which you can also find in the library of this website here. Judge Edward Becker, a legendary jurist who passed away recently, spends several pages, beginning on page 19, outlining the history of how ERISA acts to preempt many state law remedies when an insurer’s or other payer’s wrongful acts cause injury to their insureds. As Judge Becker points out, the result of ERISA’s “unjust and increasingly tangled” remedial scheme is to insulate insurers, HMOs and other ERISA fiduciaries from any meaningful consequences for behavior that favors their own economic interests at the expense of the consumer. Judge Ambro adds his voice to Judge Becker, both judges pleading that Congress or the Supreme Court do more to protect ERISA plan participants and beneficiaries.

Battered Provider Syndrome

Many have heard of “battered spouse syndrome” or "battered person syndrome." That’s when a person in a relationship is abused by their partner but never quite develops the backbone to do what is necessary to put a stop to the abuse. Sometimes the battered person blames herself for the abuse. Other times the person excuses the partner’s abuse by blaming circumstances supposedly beyond the abuser’s control. But the primary characteristic of the disorder is that, despite the fact that any rational person would walk away from the relationship or demand change in the abuser’s behavior, the abusee ends up submitting to continued abuse. It’s a cycle that repeats itself over and over. Sometimes the battered spouse ends up dead. But even if that extreme is never reached, this cycle of behavior is never a characteristic of a healthy relationship. It degrades both individuals involved. The counterpart to these concepts that I regularly see in the healthcare industry involving healthcare providers and commercial payers, usually insurers, is what I call “battered provider syndrome.” In the relationship between healthcare provider and payer for those services, the payer calls the shots. Often payers deal fairly and honestly with providers and their relationships are healthy. But payers commonly take advantage of the leverage they perceive they have over a provider to delay payment, provide bogus denial reasons, fail to communicate, ignore appeals of denied claims, cut procedural corners in handling appeals, demand that discounts be given by providers for no good reason, etc. The list of ways in which payers abuse providers goes on and on. It happens in the context of managed care contracts as well as in indemnity insurance policies. More amazing to me than the regular abuse I see payers giving out to providers is how often I see providers simply take the abuse without responding in a way that clearly indicates the payer's behavior is unacceptable. Time after time providers simply take what reimbursement they are offered by payers and walk away. Their willingness to accept just about any justification payers present for why something less than the amount due under an insurance policy or managed care contract should be paid constantly surprises me. So long as providers are unwilling to hold payers accountable for their abusive reimbursement practices, the provider guarantees those practices will continue. Every time a provider agrees to accept less than the amount both parties know full well should be paid, that provider teaches the payer an important lesson: you can cheat me out of money I’m owed and there will be no negative consequences. That is the essence of battered provider syndrome.

How I Spent My Labor Day Weekend

Had a great time with three of my four brothers, a daughter, nieces, a nephew and friends hiking down from the top of the Subway in Zion National Park. Fun people, amazing things to see, wonderful food. One of the great things about living in Salt Lake is the natural beauty of the area. Living here my whole life, I've spent a lot of time in Arches, Zion, Bryce Canyon, Canyonlands, Capitol Reef, the Grand Canyon, Yellowstone, Grand Teton and many other national parks and monuments as well as a lot of camping in the mountains and deserts of the area. Going down the Subway again this weekend reminded me what an embarrassment of riches this area has for natural beauty and recreational opportunities. Got out of the whole thing with only a large blister on my foot and a blackened big toenail which I'll undoubtedly lose in a few weeks. And I'm still pretty sore today. But it's a small price to pay for that experience.

The Economic Costs of Backdating Stock Options

I’ve mentioned before the excessive piggishness of UnitedHealth Group’s CEO, William McGuire, here and here. McGuire’s gluttonous sins include not only taking exorbitant amounts of stock options in addition to his already generous executive compensation, but the backdating of those options to give the greatest assurance possible that the options would have the maximum value. Aside from the unbridled greed of the thing, did McGuire’s actions damage the value of UnitedHealth Group? Yes, according to a study reported on in yesterday’s New York Times. Researchers at the University of Michigan reviewed the performance of 48 companies that acknowledged they were under investigation for backdating stock options. The loss in stock value tied to the announcement of the investigation averaged 8%, translating to an average of $500 million per company. And that doesn’t take into account losses the companies may have to pay out to settle class action lawsuits. Those tempted to engage in similar rapaciousness, take note!

ERISA Preemption And Bad Insurance Verifications

I’ve blogged before about a healthcare provider's rights when payers give faulty information during the insurance verification process. Judge J. Thomas Greene issued an opinion earlier this week in one of my cases confirming that ERISA doesn’t prevent healthcare providers from bringing state law claims against insurers who misquote the scope of coverage when providers ask about it. You can find Judge Greene’s opinion in the library of this website by clicking here. The case arises out of this common fact situation. Patient needs medical services and tells the provider he has insurance through a group plan from his employer. Healthcare provider gets the insurance information from the patient and calls the insurer to verify coverage exists. If the provider confirms that benefits are available, the treatment proceeds and all is well. If the payer states that no coverage is available, the patient must either go somewhere else to get the medical services or make satisfactory arrangements to pay using his own or other resources. In short, the provider is relying on the payer to give accurate information during this insurance verification process. However, sometimes the insurer misquotes the benefits or neglects to disclose a material limitation or exclusion to coverage. That is what happened in the Northern Utah Healthcare case. We brought suit arguing that the party misquoting the benefits should be prevented from going back on its word and that it is obligated to pay for the services. BC Life & Health, the company that misquoted the benefits, removed the case to federal court and argued that ERISA preempted our state court claims. If it was correct, the hospital had no remedy. Just another way in which ERISA provides terrible remedies as I’ve blogged about before. We argued that ERISA did not preempt the claims and the case needed to be sent back to state court to allow the provider to present its theory to a jury. Judge Greene ruled in our favor in an opinion that has an interesting discussion of some details of ERISA preemption. The takeaway is that when healthcare providers have erroneous information given to them during the insurance verification process, they will probably have the ability to to pursue a meaningful remedy in state court unfettered by ERISA’s remedial straitjacket.

How Federal Courts Treat Insurers As Conflicted Fiduciaries

Cases across the federal judiciary dealing with conflicted ERISA fiduciaries and how to treat them are, well, conflicted. Specifically, as I’ve blogged before, an insurer of an ERISA plan is a fiduciary with the obligation under 29 U.S.C. §1104(a)(1) to act solely in the interest of ERISA participants and beneficiaries and for the exclusive purpose of providing them benefits. At the same time, insurers operate for profit in a competitive market. Their officers and directors owe a fiduciary duty to the companies’ shareholders to maximize the bottom line. It doesn’t take a genius to recognize that these are competing considerations to some degree. Most Circuit courts across the country agree that insurers have a significant conflict. See, for a recent example, the Ninth Circuit treatment of the issue in Abatie v. Alta Health & Life Ins. Co. But not all. As an example, two cases within the same circuit show the range of thinking on this matter. They are Fought v. UNUM Life Ins. Co., 379 F.3d 997 (10th Cir. 2004), cert. den. 544 U.S. 1026 (2005) and Adamson v. UNUM Life Ins. Co., 455 F.3d 1209 (10th Cir. 2006). I’ve placed a copy of each case in the "hits" and "misses" sections of the website library here and here. Fought contains an extensive discussion of the inherent conflict of interest insurers have when they choose to act as ERISA fiduciaries. As a result, the Tenth Circuit holds that when an insurer attempts to grant itself discretionary authority and bootstrap itself into obtaining an arbitrary and capricious standard of review from a court, the court will largely refuse to defer to the insurer but will instead take a hard look at its decision and the process by which the insurer made that decision. Fought is built on a number of cases acknowledging an insurer’s conflict of interest where it acts both as payer of claims and ERISA fiduciary from both within the Circuit and from other District and Circuit courts across the country. The Fought panel modified its original opinion somewhat after UNUM’s petition for rehearing and the Supreme Court thereafter refused UNUM’s petition for writ of certiorari. In short, Fought was decided, reconsidered and modified and then the Supreme Court refused to reconsider it. You would think the matter of insurers’ inherent conflicts of interest would be settled, at least in the Tenth Circuit. However, the schizophrenic nature of the federal judiciary on this insurer conflict of interest issue can be seen in how the same Circuit treated it in Adamson, decided last month. As with Fought, Adamson dealt with an insurer’s decision to deny benefits to an ERISA claimant. However, Adamson attempts to cast doubt on the fundamental concept of insurer conflict of interest. For example, in Adamson the court states that the “observations” in Fought regarding conflict of interest “were never meant to be an ipso facto conclusive presumption to be applied without regard to the facts of the case. . ..” Slip opinion at p. 7. Actually, the extended discussion of an insurer’s inherent conflict of interest was at the heart of the holding in Fought and left no question that establishing a presumption of a conflict of interest was precisely what the Tenth Circuit was after where an insurer acts as both a profit making entity and an ERISA fiduciary deciding claims under ERISA’s fiduciary duty of loyalty. Fought, slip opinion, pp. 16-24. Nevertheless, at least some of the Judges in the Tenth Circuit have heartburn with this concept. Adamson goes on to question the entire concept of a for-profit insurer ever having economic interests that are at odds with its insureds. The court states: “it might be just as easily observed that an insurer has an incentive to pay claims and to get it right so as to avoid dissatisfaction (from plans as customers) and lawsuits.” Adamson slip opinion, p. 7. This is worthy of a loud guffaw. It lends support to the idea that some federal judges simply live in ivory towers, safely insulated from the economic realities of the world. Look, I love insurance companies. They put my children through college. I have purchased for my own protection every type of insurance, health, life, disability, that I commonly litigate for others and a lot of other types as well. I don’t view insurers as having horns on their figurative heads. In my experience insurers do not routinely deny claims that clearly should be paid. But they also do not routinely pay claims where they have a plausible basis to deny them. Many insurance claims are not black and white. They deal with ambiguities in facts, policy language and the intersection of the two. And when it comes to those claims, you can bet that insurers are more likely than not to deny them. Paying such a claim in a competitive insurance market is simply foolish. The federal judiciary needs to be an effective cop on the beat to police insurance companies. I don’t expect that insurers will act other than in an economically self interested manner to one degree or another. The idea presented in Adamson that insurers are just as likely to treat a “gray area” claim with an eye toward looking out for the economic interests of the insured, and go ahead and pay that claim, as they are likely to look out for their own economic interests and deny that claim, is simply absurd. It is a panglossian, rose-tinted attitude about the realities of the world that does much more harm than good. Believing that all is for the best in this, the best of possible worlds, does not make it so. Effective legal remedies that make insureds whole for the loss insurers cause their insureds when they wrongfully deny claims is a critical necessity in this world of ours. Unfortunately, as I’ve written about before, such remedies do not exist under ERISA. That is one reason it is so self-evidently not true, regardless of what Adamson suggests, that insurers tremble at the thought of being sued for denying an ERISA claim. When the only thing an insurer is exposed to pay is the benefits themselves, without any consequential damages, there isn’t a lot for the insurer to worry about in terms of lost revenue from unhappy insureds who sue you. Fortunately, Fought’s definitive analysis of the conflict issue is binding on later panels in the Tenth Circuit. Indeed, the court in Adamson acknowledges the same thing when it refers to Fought as being precedential in the Tenth Circuit. But the decisions in Fought and Adamson point out that federal courts across the country continue to have some diversity in thinking about the degree to which insurers are inherently and significantly conflicted when they act as payers of claims at the same time they are ERISA fiduciaries.

More Cases On Conflicted Fiduciaries

Following up on the last post, I expressed doubt about the wisdom of the Tenth Circuit’s comment in Adamson v. UNUM Life Ins. Co. that it is just as likely insurers will pay gray area claims because they don’t want to have angry or disappointed policyholders as they are to deny those claims to enhance their bottom line. However, this unrealistic view of how insurers operate is not the most detached from reality analysis I’ve seen from a federal court in an ERISA case. That honor goes to the Seventh Circuit. You find the problem in a series of case beginning with Perlman v. Swiss Bank Corp, 195 F.3d 975 (7th Cir. 1999) continuing to, most recently, Semien v. Life Ins. Co. Of North America, 436 F.3d 805 (7th Cir. 2006). The analytical deficiency in these cases is the court's view that the conflict of interest an insurer experiences in deciding whether to pay or deny claims is no different than the conflict of interest a federal judge experiences in deciding tax cases. Semien slip opinion, p. 16. There is some financial effect on the decision maker in each case. But it is equally remote and unlikely to have any real impact on the attitude or bias of the decision-maker. So the Seventh Circuit believes that a federal judge has the same objectivity in deciding cases as a claims adjuster at an insurance company. I assume this is simply a lack of understanding of how the real world works as opposed to self-loathing. Either way, this line of thinking from the Seventh Circuit is way out there. Semien has other significant problems in analysis. I blogged about it when it was issued earlier this year. It easily qualifies to be included in the “misses” section of this website library.

New Blog Links

I've added some good blogs and website resources over on the sidebar. If you look under "resources" you'll find a number of new links. I've been impressed with the content of all of them but if I could single out a couple that are simply first rate on content, take a look at Robin Fisk's comments about managed care contracting as well as Roy Harmon's comments about health plan law. Not to mention the two law professors' blogs and CCA Strategies. Check them out yourself; you could spend a lot of productive time keeping up with these folks.

Our Own Pin-Up Boy

Congrats are in order to John Wood of ERISAontheweb for his inclusion in the list of top twelve male ERISA hotties in the U.S. of A! Sadly, he did not take home the title. But John, a fellow plaintiff's ERISA lawyer, as well as first rate blawger, is nevertheless an object of envy from his male peers and veneration from those of the opposite sex. A personal aside. A couple of weeks ago when word of the contest first broke among the legions of fevered ERISA practitioners across the country, I dropped subtle hints to my paralegal that I would be flattered to be nominated. She feigned lack of knowledge of the contest and/or understanding of my drift. When I finally asked her straight up to submit my name and picture she claimed not to have a digital camera and that her employer's paltry wage left her at the brink of impecuniosity. Riiiiight. The record should reflect that my paralegal's self-serving allegation of insufficient financial resources was accompanied by a distinct lack of enthusiasm and commitment to assisting my selfless efforts to market the law firm (thus providing additional assurance of her continued employment). Bartleby's "I would prefer not to" comes to mind. Note to self: condition payment of Linda's Christmas bonus on her purchase of digital camera by Thanksgiving.

ERISA Does Not Preempt Invasion of Privacy Claims

Here’s another in our continuing series of ERISA hits: Dishman v. UNUM Life Ins. Co., 269 F.3d 974 (9th Cir. 2001). Dishman involves the difficult, complex area of ERISA’s preemption of state law claims. ERISA preemption of state law is like a nuclear weapon on the legal landscape: if a state law runs afoul of ERISA preemption, it's like it never existed at all. The reason I file Dishman in the “hit” category is because it uses common sense to provide a bit of remedial protection to consumers dealing with overreaching insurers. John Dishman was the executive director of a law firm when debilitating migraines caused him to have to stop working. He filed a disability claim with the firm’s insurer. However, Dishman had a large monthly benefit and UNUM was concerned about the cost of Dishman’s claim over his lifetime. Let’s just say UNUM dedicated significant resources to making sure Dishman had a meritorious claim. Frankie Puthoff, a member of UNUM’s Complex Claim Unit, retained several private investigators to monitor his activities and investigate his background. Hiring surveillance on disability claims is not at all uncommon for insurers. But in this case Dishman asserted that the investigators went a little beyond the usual tactics. Dishman alleged the gumshoes gained confidential information about him by falsely claiming to be bank loan officers, impersonated him on the telephone to gather information, falsely claimed that he had volunteered to coach a basketball team, and repeatedly called his home phone and hung up when he answered, among other transgressions. Thereafter, without having any physician examine Dishman or even review his records, UNUM suspended Dishman’s monthly benefit. Dishman sued UNUM in federal court to have the monthly benefit reinstated. In addition, he included a non-ERISA, state law claim for invasion of privacy based on the bad acts of the detectives. UNUM immediately moved to dismiss the invasion of privacy claim and the district court granted the motion. Dishman appealed to the U.S. Court of Appeals for the Ninth Circuit. The decision, included in the library, is an excellent primer on ERISA preemption. The line between state law claims that ERISA does and does not preempt is often difficult to define. But the approach the Ninth Circuit takes is sound and recognizes how the real world works. Not all state law claims that may, strictly speaking, “relate to” an ERISA plan can be preempted. Congress certainly did not intend to prevent states from passing and enforcing all laws that even tangentially affect ERISA plans. Dishman was not attempting to get plan benefits when he brought his invasion of privacy claim. That cause of action did not depend on the benefit claim in any meaningful way. The court analogized: “[w]hat if one of UNUM’s investigators had accidently rear-ended Dishman’s car while surveiling him? Would the fact that the surveillance was intended to shed light on his claim shield UNUM and the investigator from liability? . . . To ask the question is to answer it.” The Ninth Circuit reversed the trial court’s dismissal of the invasion of privacy claim. In so doing it made sure that a least some state law remedies are kept in place to police insurer’s from completely abusing their insureds.

Recent Developments In California Regarding Health Insurance Rescissions

This week Lisa Girion at the Los Angeles Times wrote a series of articles on the practices of health insurers in California generally, and Blue Cross of California specifically, in rescinding health insurance policies on individuals who submit large claims shortly after the policies go into effect. The most in depth article was Sunday the 17th which you can find here. It tells several separate stories of insureds whose coverage was revoked after they submitted large claims. It doesn’t take a lot of imagination to recognize what kind of economic distress insurers cause when they pull the insurance rug out from under folks who have five or six figure medical bills. One of the conflict points is the insurers’ contention that any misstatement by an individual applying for coverage provides the basis for retroactive cancellation. They cite a 1973 California Supreme Court case to support them. Consumers counter that a specific California statute passed in 1993 prohibits rescission unless the insurer can show “willful misrepresentation” and that this trumps the older case. Hurting the public relations aspect of the issue for health insurers are the tremendous profits they have seen in the last few years. On Wednesday the 20th Ms. Girion follows up with an article about Blue Cross’ announcement that it plans to change its process for evaluating cancellations of policies. It will create a consumer ombudsman and revise its appeal procedures, all the while claiming it has done nothing wrong. Bryan Liang, executive director of the Health Law Institute at California Western School of Law calls the change underwhelming. Bill Shernoff, who worked to bring this practice to light through a series of suits he filed against Blue Cross earlier this year, is only slightly more impressed. I agree with Jerry Flanagan, a patient advocate at the Foundation for Taxpayer and Consumer Rights who says it is hard to believe an internal Blue Cross patient advocate will be very zealous in representing consumer interests. Finally, today’s story reports that California’s Department of Managed Health Care has fined Blue Cross $200,000 for wrongful rescission of an individual policy. Cindy Ehnes, director of the DMHC, states that it will continue to investigate other insurers for the same practice. She identifies two particular problems with Blue Cross’ practices. First, the insurer did not competently examine the insured’s application when it was initially presented. Second, the insurer made no effort to show that any misstatements in the application were made with knowledge of their falsity. Interestingly, the article notes that Ahnold applauds the fine. WellPoint, Inc., parent of Blue Cross of California, critcizes the fine as excessive; consumer advocates complain it is nothing but a slap on the wrist and ask for more thorough audits from the DMHC and California’s Department of Insurance. I’ve noted on several occasions my positive feeling for challenging insurers when they rescind insurance policies. Insurers’ rescissions are not always unjustified. But they often are out on a limb when they retroactively cancel coverage. And every rescission I’ve seen is done only after a big claim is submitted. In short, large claims are the things that trigger retrospective underwriting that should have been thoroughly performed by the insurer when the application was initially submitted. But from the insurer’s perspective, it is easier to write a lot of policies, collect premiums and then look for a way out if and when a large claim comes in. Finally, in my experience it is entirely true that insurers make no effort to determine whether misstatements are innocently or knowingly made, regardless of whether the law requires such an inquiry.

BNA's New Blog

The BNA Pension & Benefits Reporter is a great little publication maintained by a large number of very knowledgeable folks who do a pretty amazing job of staying on top of legislative and case law developments in the field. I have been a subscriber for many years. I was happy to see the advisory board started up blog a couple of weeks ago. You can take a look here. Nice to see my friend Jeff Clayton, one of the area's best ERISA lawyers and a genuinely decent human being, chiming in. Keep it up Jeff!

Wal-Mart's Latest Initiative

It’s not exactly at the heart of my usual blogging subjects on this site, but I was intrigued by Wal-Mart’s recent announcement that it would cut costs by capping wages and increasing the number of its part-time employees. The New York Times has an article about it from two days ago and an editorial about it yesterday. Ezra Klein comments on both here and here. In a way you have to admire the company. They got to where they are by directly, efficiently, coldly, cutting costs at every opportunity so as to ensure that they delivered the lowest possible prices to the consumer. And those low prices do make a difference for a lot of people on tight budgets. Wal-Mart is a great example of a pure capitalist venture, with all the good and bad that comes with it. But Wal-Mart also strikes me as an excellent model of problems that arise when you consistently choose to have the ends justify the means in making every business decision. This latest news strikes me as a maneuver akin to a parent eating its young: the company becomes more aggressive about cannibalizing its own labor force. Well, I guess the rest of us can look forward to continued low prices, right?

Two Faced Disability Insurers

The U.S. Court of Appeals for the Sixth Circuit, covering Michigan, Ohio, Kentucky and Tennessee, has been on a roll in the last couple of years. We’ve seen several really well-reasoned ERISA decisions from that Circuit in that time. Last month’s decision, Glenn v. MetLife, 2006 U.S. App. LEXIS 22432, is the latest in the hit parade. There are several noteworthy comments in the decision but the one I wanted to talk about is how the case deals with the relationship between social security disability benefits and insurer disability benefits. First a little background. Under the Social Security Act a person may apply for and receive disability benefits from the federal government if he “. . . cannot, considering his age, education, and work experience, engage in any other kind of substantial gainful work which exists in the national economy, regardless of whether such work exists in the immediate area in which he lives.” If that sounds like a difficult standard to satisfy, you’re right. How does it compare with the language in private insurance policies to qualify for benefits from UNUM, MetLife, Hartford or Prudential, to name a few of the largest disability insurers? There is no uniform standard for how these private insurers define “disability” for purposes of providing benefits under their policies. They can and do design their policies any way they want. However, they have to compete with one another and there is a fairly common standard in the disability insurance industry for defining how you get benefits. Most insurers initially provide benefits if you are disabled from your own occupation. Then, after a year or two or longer, they will usually switch to a stricter standard and provide benefits only if you are disabled from any occupation. The language of the MetLife policy in Glenn is fairly typical for this “any occupation” standard. After two years of paying benefits if a person is disabled from his own occupation, MetLife switches to paying benefits only if the claimant is “completely and continuously unable to perform the duties of any gainful work or service for which he is reasonably qualified, taking into consideration his training, education, experience and past earning.” So why do we care about how the definition of disability under the federal statute compares with the language of your average private disability insurance policy? Well, almost every disability insurer places language in its policy giving it the right to take a dollar for dollar offset of social security benefits against what it would otherwise have to pay its insured under the policy. If you’re entitled to $2,000 a month in disability insurance from UNUM and you also qualify for social security in the amount of $1,500 a month, UNUM gets to offset the entire social security award. They owe you only $500 a month. I’ve had a lot of clients complain mightily about it but the insurers can and do clearly put this right to offset in their policies. Nothing prevents them from doing it. As I talk about here, it’s one of the reasons long term disability policies for relatively low wage earners are often not a very good deal. You can see how insurers have a tremendous financial motive to encourage their insureds who are making a claim on their disability insurance policy to also apply for and get social security disability benefits. And insurers make sure the claimants do just that. They will often hire, or direct claimants to, social security disability lawyers or advocates to do all they can to get their insureds federal disability money. If you take a close look at the language I’ve quoted above from the Social Security Act and compare it to the language of the MetLife policy, you’ll see that the Social Security Act language is more difficult to qualify under than the language in the insurance policy. The insurance policy definition must take into account where you live and whether there are jobs there as well as the claimant’s past earnings. Not so for social security disability income. In other words, under the plain language of the two definitions, it would appear that if you qualify for social security disability benefits, you would surely qualify for private disability insurance benefits. But nooooooo. In fact, I cannot count the number of clients I’ve had and cases I’ve read where, despite qualifying for social security disability benefits, the private insurer cuts off the claimant’s benefits arguing that the person is not disabled under the insurance policy. Not being satisfied with an offset that often consumes most (sometimes all) of the insurance policy benefits, the insurer reaches out to snatch the remaining portion of policy money from the disabled person. Notice any inconsistency in the insurer’s actions? It first sends the claimant off to get social security disability benefits. Why? Solely because having its insured qualify for those benefits puts that money right back in the insurer's pocket. However, if the claimant gets that social security disability award, the insurer does not hesitate to ignore the fact that its insured has qualified for benefits under a definition that is almost always more rigorous than the definition for disability in the insurance company’s own policy. It often rushes to cut off the flow of its own money to its insured. The golden thread that ties the insurer’s actions together is that it follows its own financial interests. Now you would think that the judges and courts hearing cases involving denied disability claims would see through and put an end to this little charade pretty quickly. But again, by and large, you would be wrong. Most courts simply say that a determination of disability by the social security administration is not binding on a private disability insurer and often go on to join the insurer in pretty much ignoring it. Some courts go so far as to say a social security disability award isn’t even relevant to the insurer’s decision about whether the claimant is disabled! Which brings us back to Glenn. The Sixth Circuit deals with this insurer shell game simply and directly, recognizing the inherent conflict and inconsistency of the insurer’s actions. It reverses the insurer’s denial of the claim, reinstates Glenn's disability benefits and directs trial courts in the Sixth Circuit to take into account the “significant factor” that the social security disability determination plays in an insurance company’s evaluation of disability. In support of its decision, the court quotes at some length Judge Richard Posner in Ladd v. ITT 148 F.3d 753 (7th Cir. 1998). Judge Posner is usually insightful and always a good read. There is other good stuff in Glenn. It earns its spot in the “hits” section of the website library.

Defining "Mental Illness"

Many disability and health insurance policies contain limitations or exclusions of coverage for mental illness. We have a tendency to think we know the difference between a mental and a physical disorder when we see it. But without more definition as to what insurers mean when they use the phrase “mental illness” in a policy, it can be very difficult to know what a consumer relying on coverage can reasonably expect the insurer will cover and what it will exclude. Recently the U.S. Court of Appeals for the Eleventh Circuit issued a decision that discusses this problem at some length. In Billings v. UNUM Life, 459 F.3d 1088 (11th Cir. 2006) a pediatrician with obsessive compulsive disorder reached a point where he could no longer practice medicine in his specialty. He filed a disability claim. UNUM’s disability policy limited benefits for disability due to mental illness to 24 months and UNUM cut Billings off after 2 years of coverage. Dr. Billings presented information to UNUM, which the insurer did not dispute, showing that his OCD had a physical cause. Consequently, Billings argued that the 24 month mental illness limitation did not apply. The trial court ruled in favor of the claimant, UNUM appealed and the Eleventh Circuit upheld the trial court. The court ruled that the policy language was ambiguous because it did not make clear whether an illness would be classified as “mental” based on its symptoms or its cause. For Dr. Billings, the illness may have manifested itself in a way that could be classified as “mental” but it had a physical cause. Consequently, the court ruled that the ambiguous language would be construed against the insurer. This rule of giving the insured the benefit of the doubt when dealing with an insurance policy’s unclear language is a rule of contract interpretation, contra proferentem, that has been adopted in every state as to how to interpret ambiguous insurance policies. The idea that illnesses can be easily split between “mental” and “physical” is a questionable distinction to begin with. The Diagnostic and Statistical Manual of Mental Disorders, the bible across the medical field for diagnosis of psychological and mental conditions, points out in its preface that the mental/physical distinction is largely artificial. But the lesson Billings teaches is that if health or disability insurers want to rely on those categories to define and limit coverage, they should do so using precise language with specific examples. Otherwise, the risk of loss after a claim arises should fall on the insurer.

Pseudonyms

My friend Bonny Rafel obtained a decision recently from the U.S. District Court for New Jersey dealing with the interesting issue of when you may proceed in litigation using a pseudonym in place of the real name of a party. This issue arises on occasion, quite often when you are litigating medical or disability claims or cases involving minors. Usually judges frown on the use of pseudonyms. The general rule is that the business of the people in public courts should be open and accessible to anyone interested in looking at the file. Use of a pseudonym to hide the identity of a party is less of a shield to public inquiry about litigation than sealing a file (which commonly occurs when privacy or national security interests are at issue. Think, for example, of proceedings involving terrorism suspects), but it is still disfavored. In Bonny’s case, Doe v. Hartford Life & Acc. Ins. Co., 2006 U.S. Dist. LEXIS 73119 (D.N.J. 2006), her client had a disability claim based on bipolar disorder. The client was an attorney and he feared the stigma, potential loss of professional and business reputation, and aggravation to his illness associated with having his illness publicly known. Consequently, he asked the court for permission to proceed in the case under the “John Doe” pseudonym. The magistrate judge who initially heard the matter denied the motion. The plaintiff then appealed that ruling to the U.S. District Court judge. After a thorough review of the case law and other authorities who have considered the matter, Judge Jose L. Linares utilized a balancing test: the plaintiff’s interest in privacy was compared to the public’s interest in knowing who was pursuing the litigation. Factors to be weighed in considering pseudonymity include the extent to which the identity of the party has been kept confidential, the reasons for the request for a pseudonym, the public interest in maintaining privacy, whether the issue presented is purely a legal issue or one that involves a public interest in knowing the party’s identity, the degree to which the refusal to allow a pseudonym will deter the party from litigating a legitimate claim, whether the party has “illegitimate ulterior motives” in seeking to keep his identity secret and whether those opposing pseudonymity have an improper motive for their opposition. In the end the judge felt the matter was not a close call and allowed the disability claimant to proceed under the “John Doe” pseudonym. I'll try to get a copy of this decision and post it to the website library. UPDATE: you can get see a copy of the court's order, courtesy of Bonny, here at the website library. Bonny also tells me that the case will be published as opposed to its original "not for publication" designation.

Should You Arbitrate Your Claim?

The ability of insurers, employers and business interests to enforce arbitration provisions contained in “take it or leave it” contracts has been hotly contested in recent years. Generally speaking, I’m not a fan of arbitration. Arbitration is often much more expensive than litigation. The parties are paying out of their own pockets for the structure to resolve a dispute (cost of a judge, court reporter, etc.) that in litigation is already provided through our tax dollars. I’ve paid tens of thousands of dollars to an arbitrator's time for which I wouldn’t have had to pay a nickel in litigation. The Supreme Court has taken notice. It ruled in Green Tree Financial Corp – Alabama v. Randolph, 531 U.S. 79 (2000), that if a party demonstrates the financial burden of arbitration will impair his ability to resolve the dispute, an arbitration clause may not be enforceable. In addition, while arbitration advocates such as the American Arbitration Association claim that it is faster than litigation, that is not necessarily the case. The only structural aspect of arbitration that makes it likely the case will be resolved more quickly than litigation is the absence of a meaningful opportunity to appeal an adverse ruling. That is hardly a point in arbitration’s favor in my book. I have no interest in seeing litigation prolonged. Over 95% of my cases are handled on a contingent fee basis. The longer the case goes without a final resolution, the longer I go without getting paid. But even so, the absence of any real appeal mechanism in arbitration is distinctly unattractive to me. If the court in which your case is pending is clogged and your case will not be resolved for months if not years, arbitration may be faster. But in my experienced most courts are not significantly backlogged. In short, there is nothing inherent about arbitration to make it faster than litigation except the absence of a genuine appeal mechanism and that aspect of arbitration is not a good thing in my mind. In the context of ERISA it is pretty much settled that boilerplate arbitration clauses in form insurance policies or other ERISA plan documents are not enforceable, at least not at the sole election of insurers or ERISA plans. Sosa v. PARCO Oilfield Services, Ltd., 2006 U.S. Dist. LEXIS 70312 (E.D. Tex. 2006), discusses the issue in a recent case written by Judge T. John Ward. The primary authority on the issue is the federal regulation underlying ERISA’s claims procedure section, 29 C.F.R. §2560.503-1(c)(4). The section states that mandatory arbitration provisions in ERISA plans are unreasonable. Only if both parties voluntarily choose to arbitrate, after the dispute has arisen, will arbitration be enforced. Since most contested insurance claims involving health, disability and life claims arise under ERISA, mandatory arbitration isn’t usually an issue in the cases I handle Sometimes there are good reasons to arbitrate claim disputes. But I generally avoid arbitration if I can.

Some Vindication

Along with a lot of other folks, I've been critical of the porcine behavior of UnitedHealth Group CEO, William W. McGuire, in the past. You can read posts here, here and here predicting the eventual demise of this hog. Yesterday was that day. The New York Times has a story this morning about McGuire being forced to resign from the company yesterday and also give up a portion of the $1.1 billion in stock options he holds. In addition, the general counsel and another member of the UHG board were dismissed. A report commissioned by the board to look into the timing of UHG's stock options to McGuire was critical of the company's internal controls and found that UHG had backdated the stock options, rigged the system, to ensure that McGuire and others realized the greatest amount possible on them. You can read the report performed by the outside law firm retained by UHG here as linked to from UHG website. Other changes are in the works at UHG and the company remains under investigation from the U.S. Justice Department, the SEC, the IRS and the Minnesota Attorney General's office. An analyst at Goldman Sachs predicts that UHG's stock price will fall now that McGuire, one of the darlings of Wall Street, is leaving. Sad.

Blue Cross of California Throws in the Towel

Blue Cross of California has had a rough go of it lately. I've posted about their vicissitudes recently. Now the L.A. Times has more news. First, last Friday a class action suit was filed on behalf of all hospitals in California who have lost money as a result of Blue Cross' alleged improper rescissions of health insurance policies. You can read the article here. Then today comes the story that Blue Cross has agreed to settle over 70 suits filed by patients for improperly retroactively terminating their health insurance. The settlement terms are confidential so the specifics aren't available. But they involve not only providing payment to the families for their denied medical expenses but putting in place procedures that assure Blue Cross will change its approach to rescinding coverage. Other insurers in California are also being sued for their practices of looking for "discrepancies" between information in the patient's insurance application and their medical history after large claims come in and and using that alleged inconsistency as the basis to withdraw insurance coverage. Bill Shernoff, counsel for many of the individual plaintiffs put it succinctly when he gave credit to Blue Cross relative to other insurers: "Blue Cross at least is not in denial anymore. They are in rehab now." Of note, the first story states that "Blue Cross often denies payments with little explanation . . .". This is one of many frustrating things about dealing with health insurers. Their explanations of benefits are often very conclusory or cryptic. You have no idea what the real cause of denial is when your EOB says only "not a covered expense." But that is the topic of another blog post.