Report Of The Working Group On Health And Welfare Benefit Plans' Communications
This report was produced by the Advisory Council on Employee Welfare and Pension Plans, which was created by ERISA to provide advice to the Secretary of Labor with respect to the carrying out of its functions under ERISA and to submit recommendations with respect to those functions. The contents of this report do not represent the position of the Department of Labor (DOL). The 2005 ERISA Advisory Council formed a Working Group (hereinafter referred to as the Working Group) on Health and Welfare Benefit Plans’ Communications to assess just how well the material distributed by employer sponsors to participants and beneficiaries of health and welfare plans achieved the following goals of:
Testimony to the Working Group was provided on July 7, 2005 and September 21, 2005 by four plan administrator advocates, three insurer and/or service providers (third party administrators (TPAs)), and five employee or employee organization advocates (including an actual participant covered under a disability plan). One witness’ testimony on September 22, 2005, before the Working Group on Retirement Plan Distributions was relevant to this Working Group’s report and thus was utilized. (The witnesses and their testimony are provided in the appendix and transcripts.)
After careful debate and analysis of the issues and transcripts, the Working Group submits the following recommendations to the Secretary of Labor for consideration on two different topics:
With respect to Summary Plan Descriptions (SPD)
With respect to the Notice of Benefit Determinations
The Working Group believes that these recommendations will further enable the DOL to meet its goals of providing plan participants and beneficiaries of health and welfare plans with useful information to support the voluntary employee benefit structure for Americans and their families.
Advisory Council Working Group Members
This Working Group Report is divided into five sections
The 2005 Working Group on Health and Welfare Benefit Plans’ Communications was formed to assess just how well the material distributed by employer sponsors to participants and beneficiaries of health and welfare plans achieved the following goals of:
The scope of the study will be to ascertain whether such plan participants understand benefits under health and welfare plans and whether the existing required communication tools (e.g., SPD, SAR, claims procedure rules) are accomplishing their original goal of full disclosure, as set forth in ERISA §2(b) (Findings and declaration of policy).
Congress enunciated that the interests of plan participants and beneficiaries are protected by requiring disclosure and reporting of financial and other plan information and by providing ready access to federal courts. The DOL has regulatory authority over ERISA’s reporting and disclosure requirements and thus may rule as to the type of reporting and disclosure that would be meaningful to plan participants and beneficiaries.
In the health and welfare context, the following information is required to be disclosed to participants and beneficiaries (more fully explained at www.dol.gov/ebsa/pdf/rdguide.pdf):
For health plans only, additional information to be disclosed includes:
Among the hoped for results are a determination of whether:
Following is the list of questions (represented as not exhaustive) distributed to Potential Witnesses prior to the Testimony in July and September 2005
II. Applicable Definitions and Current Requirements under the Law and Regulations Commonly Used Definitions
Summary Plan Descriptions (SPDs) Requirements - ERISA §101(a)(1) requires that the plan administrator of a covered employee benefit plan furnish to each participant and beneficiary who is receiving benefits, a SPD (as described in ERISA §102(a)(1)). With respect to the Working Group’s particular focus, an SPD under ERISA §102(a) is required to include the following information:
The DOL regulations require that the SPD be “written in a manner calculated to be understood by the average plan participant and shall be sufficiently comprehensive to apprise the plan’s participants and beneficiaries of their rights and obligations under the plan (emphasis added).”(2) In fulfilling this duty, the plan administrator is cautioned to consider the level of comprehension and education of the typical plan participants and the complexity of the terms of the plan. Thus, technical jargon and long complex sentences should be avoided or limited. The SPD should not be misleading or misinforming and any exceptions, limitations, reductions or other restrictions of plan benefits must not be minimized nor deemphasized.
Summary Annual Reports Requirements - Under ERISA §103, SARs are required to be published with respect to every covered employee benefit plan disclosing financial statements, and if applicable, an accountant’s opinion as to the examination of the plan’s financial statement. Given that health and welfare benefits are generally paid by the employer sponsor on a pay-as-you-go basis, the financial statement regarding the plan’s financial health is of less importance than in the context of a covered pension plan. The testimonies of our witnesses did not focus on the adequacy of the SARs.
Notice of Benefit Determinations Requirements - The provisions of ERISA §502 provide for private causes of actions for participants and beneficiaries, including denial of benefits. As such, ERISA §503 requires every employee benefits plans to provide adequate written notice when a claim has been denied, “setting forth the specific reasons for the denial and written in a manner calculated to be understood by the participant (emphasis added).”(3) The plan is also required to provide reasonable opportunity for the participant or beneficiary for a full and fair review by an “appropriate named fiduciary” of the decision denying the claim.(4)
When a participant or beneficiary requests payment for benefits, the plan administrator is required to provide the following information either through the SPD or a separate document that accompanies the SPD:
If the claim for benefits is denied, the DOL regulations require the plan administrator to provide the following information:
In the case of an adverse benefit determination, the claimant has a right to a timely full and fair review.(11) According to the DOL regulations, this right will be deemed to be satisfied given that the claims procedure:
If the claimant’s adverse benefit determination is affirmed by the named fiduciary, he/she has recourse to pursue a cause of action under ERISA §502(a)(1)(B). While ERISA is silent on the applicable judicial standard of review, the Supreme Court in the Firestone v. Bruch decision rendered a de novo standard as the presumed judicial standard in ERISA benefit denial cases.(20) The de novo standard permits the courts to decide the issue without deference to either party’s interpretation, by looking at the terms of the plan and other manifestations of the parties’ intent.(21)
The de novo standard can be avoided if the terms of the plan give discretionary power to the plan administrator or TPA to determine eligibility for benefits and/or to construe the terms of the plan.(22) In this situation, the Supreme Court in Firestone held that the deferential arbitrary and capricious standard of review controls. The majority of circuits have held that this standard of review is highly deferential.(23) Under this standard, courts will affirm the decision of the plan administrator or TPA unless it was arbitrary, capricious, made in bad faith, or not supported by substantial evidence.(24) That decision does not have to be the only reasonable interpretation; in fact, it need not even be the best interpretation.(25)
The circuit courts have struggled as to what plan language is necessary to confer discretionary power.(26) The Seventh Circuit has provided model language that it deems sufficient to provide a grant of discretionary power.(27) The courts are not clear as to whether the grant of discretionary power must be given by the employer sponsor, or whether the plan administrator or TPA may grant itself discretionary power.
If the plan administrator is operating under a conflict of interest and the arbitrary and capricious standard is applicable, the Supreme Court in Firestone directed the courts to weigh that factor in determining whether the administrator abused its discretion.(28) All of the circuits have attempted to adjust the deferential standard of review in conflict of interest cases, but the results vary dramatically depending on the circuit.(29) Since the utilization of the arbitrary and capricious standard of review by the courts is so outcome determinative in benefit denial cases, claimants do not realize the importance of the initial benefits determination and the full and fair review hearing (when the plan document confers discretionary power). The current DOL regulations do not require disclosure as to whether the plan administrator or TPA making the benefits determination has been granted discretionary authority under the plan nor whether the plan administrator or TPA is operating under a conflict of interest.
Courts have generally required the participant to exhaust the plan’s internal claims procedures as a prerequisite to filing suit.(30) However, exhaustion is not required if those claims procedures do not comply with the DOL regulations or the claimant was improperly denied the ability to present a claim at the plan level.(31)
III. Various Concerns Expressed by the Different Constituency Groups
The description and questions were given to all of the witnesses in advance of their testimony. The witnesses were all told that the questions were merely a starting point to generate thought and discussion of the issues to be studied. The questions were not intended to limit the parameters of their testimony.
As a result of the testimonies and discussions with the Working Group, two problems surfaced with respect to plan communications with participants and beneficiaries of H&W plans:
Thus, the Working Group decided to focus only on those two items, even though some of the witnesses made remarks regarding other plan communication requirements.
Plan Administrators’ Issues
The Working Group heard from four plan administrator advocates.(32)
Regarding SPDs - The consensus of the plan administrator advocates was that the DOL’s requirement that SPDs be written in a manner calculated to be understood by the average participant has become almost impossible to attain. The reasons were multiple:
The plan administrator advocates did not advocate less disclosure to participants and beneficiaries. In fact, Michael Tomasek, a partner at the law firm of Schiff Hardin, advocated that plan administrators be required to conduct initial and periodic training sessions for participants, as it was apparent that participants do not read, nor do they understand the SPDs provided to them.
Plan administrator advocates affirmed the goal that the SPD be written in a manner easily understood by the participant. It was recommended that the DOL provide model language that sponsors could rely upon and that the DOL permit other media forms beside hardcopy for the dissemination of required materials. The general consensus was not to impose more burdens on plan sponsors than already required.
Regarding Notification of Benefit Determination - Only two plan administrator advocates spoke to this issue. Mr. Tomasek testified that there was a lack of compliance with the DOL claim procedure regulations and a lack of enforcement by the DOL with such regulations.(33) Nonenforcement of the claims regulations makes it difficult for plan administrators to justify the additional costs and burdens of compliance. As a result, he advocated that the notice of benefit determination be organized into four sections:
Helen Darling, President of the National Business Group on Health, testified that there is compliance between plan administrators and employees regarding communication requirements, but that the information required to be disclosed in connection with claim denials (e.g., specific protocol) was voluminous and increased the responsibility of the plan administrator.
Service Providers’ Issues
The Working Group heard from three service provider advocates – two representing health and welfare insurers and/or TPAs and one representing a disability TPA.(34)
Regarding SPDs - Paul Boulis, Senior Vice President of the National Division for Blue Cross and Blue Shield of Illinois, testified that it was almost impossible to provide the answers to all possible benefit questions due to the overwhelming complexity of health plan designs. Therefore, health providers are relying on a variety of information vehicles – customer telephone representatives; interactive Internet-based tools; and required ERISA materials.
Regarding Notification of Benefit Determination - Jacqueline Paul testified on behalf of Humana, Inc., a health care provider with 7 million plan participants, as well America’s Health Insurance Plans (AHIP), a trade association of 1,300 health insurance plans providing coverage to more than 200 million participants. The difficulties facing these insurance providers, in her opinion, are a result of the complex and overlapping dual regulatory structure of both federal and state regulation. To maximize efficiencies and reduce costs, most insurance plans were designed to comply with all applicable state and federal requirements. Thus, Ms. Paul recommended uniformity of federal and state regulation and educational outreach efforts to inform state regulators of the requirements of ERISA. She also testified that the plan administrators were in compliance with the DOL claims regulations and that the “deemed exhaustion” penalty was sufficient incentive for compliance.
Andrew Bernstein, Vice President and General Counsel of Disability RMS, Inc., stated that participants did not understand the difference between the plan administrator and the TPA, nor the various roles of the insurer, plan sponsor and plan administrator in determining a claims denial. He recommended that the DOL consider clarifying the difference between the plan administrator and the TPA. He advocated that the denial letter contain an exact quote of the plan provisions that were applicable in denying the claim and an explanation as to what the participant needed to do to perfect the claim. Because some state insurance commissioners have taken the position that discretionary clauses in an insurance policy are illusory, he also recommended that the DOL issue guidance that discretionary authority is acceptable language in an ERISA governed insured plan.
Regarding fiduciary roles - Paul Boulis orally testified that the TPA was not a fiduciary if the plan sponsor had the ultimate decision to pay or deny the claim. Based on case law, he believes this contradicted ERISA’s definition that conferred fiduciary status on any person that had discretionary authority to determine benefits, even if a subsequent fiduciary upon review, could pay or deny the claim. Mr. Bernstein, representing a disability TPA, affirmed his view that a third party administrator is a claims fiduciary, even if it was not making the final appeals decision.
The Working Group heard from five employee advocates, including an actual plan participant who initially been denied disability benefits from a TPA/insurer, but then later paid withheld benefits.(35) From the participants’ perspective, the issues vary depending on whether the claim was a health claim or a disability claim. The Working Group on Retirement Plan Distributions & Options heard from a public advocate regarding the plan fiduciary’s duty of loyalty in the context of selecting an annuity provider. Testimony from that advocate is relevant to this Working Group’s discussion as well.
Regarding SPDs - Steven Sleigh, Director of Strategic Resources for the International Association of Machinists and Aerospace Workers (IAM), criticized SPDs for being written for health care professionals, but not every day people. Mary Ellen Signorille, Senior Attorney in the AARP Foundation Litigation, viewed the SPD as two parts – one of benefits and one for participant’s rights. With respect to the first part – benefits – participants typically do not understand limits imposed under the plan; the relationship between employer-provided health care, COBRA and Medicare; and how a merger or acquisition would impact their benefits.
Regarding Notification of Benefit Determination - The DOL regulations presently do not require that the participant be notified as to whether the claims adjudicator has discretion to determine eligibility and/or construe the terms of the plan. Ms. Signorille and Mark DeBofsky, a partner at the law firm of Daley, DeBofsky & Bryant, strongly agreed that participants did not understand the meaning of a discretionary clause, its relevance to the adjudicator’s denial, and its impact on the judicial review of such a denial.
With respect to the discretionary clause, Mr. DeBofsky highlighted several problems:
Mr. DeBofsky and Ms. Signorille recommended the DOL provide model language explaining the relevance of a discretionary clause on the judicial standard of review of a participant’s cause of action. One participant advocate recommended the DOL provide model plan language as to what constitutes a grant of discretionary authority (e.g., relying perhaps on the language in the Seventh Circuit case of Herzberger).
Professor Dana Muir testified before the Working Group on Retirement Plan Distributions on the issue of requiring defined contribution plans to provide annuity options. She discussed the DOL’s Interpretative Bulletin 95-1, as it set forth the plan fiduciary’s duty of loyalty in the selection of an annuity provider. It requires the fiduciary to “take steps calculated to obtain the safest annuity available, unless under the circumstances it would be in the interests of the participants and beneficiaries to do otherwise.” The Fifth Circuit in Bussian v. RJR Nabisco Inc., did not adopt the DOL’s interpretation, but instead held that the fiduciary duty of loyalty would be judged “with an eye single to the interests of the participants and beneficiaries.”(36) Professor Muir explained that the fiduciary’s duty of loyalty derives from trust law – an obligation to put the interests of the participants and beneficiaries first, before that of the fiduciary. Its focus is not on the outcome, but the process. If the fiduciary is operating under a conflict of interest, it should minimize its effect.
While the conflict of interest can be minimized in the annuity selection context, Professor Muir contrasted the conflict of interest in the claims adjudication context. Where the insurance company both pays the benefits and makes the decision on benefit eligibility, she believes the insurer has a very strong incentive to inappropriately deny claims. Such a conflict of interest could then insulate the insurer from any real financial risk, especially in light of ERISA’s apparent lack of remedies for injured participants and beneficiaries. According to Professor Muir, this is not the case in the annuity selection decision by a defined contribution sponsor.
There was testimony from Debra Potter who had served as a broker selling disability insurance products to employers and then became disabled and filed for disability benefits under her employer’s plan. Due to her expertise as a broker and her familiarity with the disability insurance product, she knew what materials to submit to perfect her claim. However, in her case, the disability insurer moved her case file through twenty different representatives who frequently lost some of the documentation. The benefit denials were vague and did not provide any guidance as to what she could have done to perfect her claim. Only after she hired an attorney did the insurer settle with her. However, since the case wasn’t litigated, her attorney fees were not covered, nor did the insurer pay back interest on the withheld amounts. She recommended some third party to serve as an advocate in the disability context; this could be the DOL or the insurance broker.
IV. Working Groups Observations, Discussions and Recommendations
A. Utility of the SPD
As a result of the testimony heard, the Working Group concluded that the SPD is no longer accomplishing its original goals (i.e., to be a summary of the plan and to be easily understood by the participant). There are a variety of reasons for this result:
To the extent that the SPD is simply a reiteration of the plan document, it is not accomplishing ERISA’s goals. In questioning the witnesses for solutions, they recommended various solutions:
Recommendations Regarding the SPD - There is no “quick fix” solution to this dilemma. Thus, the Working Group recommends three solutions – two short term solutions and one long term solution – for the DOL to implement:
Short-Term Recommendation 1: Provide regulatory or advisory guidance to help plan administrators prepare understandable and user-friendly SPDs. Affirmation that the use of Executive Summaries or Life Event Summaries is considered a best practice would be extremely helpful.
Short-Term Recommendation 2: Enhance or create mechanisms to enforce the regulatory requirement that SPDs be understandable by the average plan participant.
Long-Term Recommendation: Review court decisions granting legal superiority to SPDs and, if necessary, propose legislation to amend ERISA to restore the original purpose and status of SPDs that satisfy regulatory requirements.
B. Content of the Notification of Benefit Determinations
The SPD (or accompanied document) is required to set forth the plan’s claim procedures. The DOL regulations specify that the claim procedures not only set forth the rules governing the filing of claims, but also set forth the time frames afforded to the outcome of these claims and the process with which an adverse benefit determination may be reviewed.(39) In the event a participant or beneficiary is denied payment of benefits under a plan, ERISA §503 affords a reasonable opportunity for a full and fair review by the appropriate named fiduciary of the decision denying the claim and requires adequate notice be given to the participant and beneficiary in writing setting forth the specific reasons for such denial, written in a manner calculated to be understood by the participant.
Sponsors provide explanations of benefits (referred to as EOBs) which either pay or deny the claimant’s benefits and set forth the reasons for the denial. According to the testimonies, it was not clear that plan sponsors were specifically setting forth the additional information necessary to perfect a denied claim, although such requirement was set forth in the DOL regulations.
The testimonies from the witnesses highlighted a variety of problems with the current claims procedure regulations:
To assure that participants and beneficiaries are able to process their claims in a timely and fair process, the Working Group recommends that the DOL, through regulatory or advisory guidance, implement the following solutions:
Recommendation 1: Require disclosure of the specific functions of the plan sponsor, the plan administrator, and, if applicable, the TPA/insurer relating to the claims adjudication process, along with the fiduciary responsibility associated with each of the various functions and the conferment of any grants of discretionary authority to the claims adjudicator with respect to determining eligibility and/or the terms of the plan.
Recommendation 2: Require disclosure of any conflicts of interest on the part of the claims adjudicator; however, DOL guidance is needed to identify conflicts of interest in this context.
Recommendation 3: Affirm fiduciary status for TPAs, who have been and are continuing to deny fiduciary status with respect to their initial determination of benefits, on the premise that the plan administrator is the final arbitrator of benefits under the plan.
Recommendation 4: Require that TPAs retain copies of the SPDs, SMMs and the plan document, including all amendments, for the time period required under ERISA.
V. Summary of Witness Testimonies
Summary of Testimony of Michael Tomasek, a partner at the law firm of Schiff Hardin in Chicago, IL, July 7, 2005
Mr. Tomasek assists clients with developing all types of employee benefit plans and counsels clients in the resolution of complex legal issues relating to employee benefit plans. He has special expertise in the compliance with HIPAA, the Mental Health Parity Act, the Newborns and Mothers Health Protection Act of 1996, and the Women's Health and Cancer Rights Protection Act of 1998.
Contents of SPD - With respect to the SPD, Mr. Tomasek proposed that the SPD for H&W plans consist of a one page summary, which cross-references the various provisions of the SPD.
Mr. Tomasek proposed that the DOL should encourage or require plan sponsors to conduct initial and periodic training sessions (e.g., when the plan is materially modified) for employees, covering the items in the one page summary. Such training sessions would be beneficial because participants simply don't read the documents that are provided to them. When asked to address the participant’s self-responsibility for reading the documents, Mr. Tomasek agreed that there is an individual responsibility on the part of an employee to understand the terms of their benefits, but that it would be easier for the participant to carry out this responsibility with some assistance from the employer or other appropriate party. Even if the documents are written in language that is simple and understandable to the average participant, there is something to be gained from sitting the individual participant down and explaining the information.
Information on Form 5500 - From the participant's perspective, Mr. Tomasek commented that it may be appropriate to include information regarding the rating of any plan insurer and the extent to which a state agency would guarantee payments if the insurer became insolvent. In the case of a self-insured H&W plan, it may be appropriate to include information that could indicate financial distress of a plan sponsor (e.g., if the plan sponsor is currently in bankruptcy). Other potential items could include events similar to those enumerated under the PBGC reportable events regulations, including the inability to pay benefits when due, liquidation, loan default, and similar events.
SAR Format - For an insured H&W plan, Mr. Tomasek proposed that the SAR be required to provide relevant information when the plan sponsor is in financial distress as well as adding whether there is stop loss coverage in place with respect to the plan and the terms of that coverage.
Because stop-loss coverage only protects the employer and claims against stop-loss coverage cannot be brought directly by participants, Working Group members questioned if including stop-loss coverage information could be misleading to a participant in a self insured plan. Mr. Tomasek responded that it could be helpful if the employee believes the employer may be in a situation where it cannot fund benefits, because the employee would know that there is insurance in place to assist with certain large claims. It could also be helpful to the participant to understand the overall financial picture of the plan and the employer sponsoring the plan.
For an insured H&W plan, Mr. Tomasek commented that it would be appropriate to add information regarding the insurance company's rating as well as information on any state agency guaranteeing payment of benefits if the insurer becomes insolvent. In response to questions, Mr. Tomasek stated that ratings information would be helpful because it helps the average person determine the financial condition of the insurance company. The Working Group members voiced concerns with the subjective nature of insurance company ratings. Mr. Tomasek also noted that it would be necessary for the SAR to explain the nature of the ratings.
Notices in Addition to SPD and SAR - Mr. Tomasek did not suggest any additions to the various notices required by ERISA in addition to the SPD and the SAR. He did note, however, that, to the extent feasible, the DOL should provide sample language for each required notice that a plan could tailor to its specific requirements, with the sample language reviewed and updated as necessary for statutory or regulatory changes.
Format of Notification of Benefit of Determination - Mr. Tomasek testified that it would be helpful for the notification of benefit determination to be organized into four sections:
Mr. Tomasek stated that information about the standard of review may be helpful to the participant, or to someone assisting the participant with the claim denial and review. However, he also added that this information would only be helpful to the participant if it included an explanation of the applicable standard. The Notification would also have to disclose that the standard of review would ultimately be determined by the court. Finally, Mr. Tomasek commented that it would be in the employees’ interest for the employer to consider this issue and to establish the intended standard of review in the Notification.
Effectiveness of Disclosure Requirements for Benefit Denials - Mr. Tomasek’s experience is that the claims procedure regulations are not accomplishing the goals of encouraging an effective disclosure of the rationale for denial of benefits, the process and access to information for appealing the denial, and the perfecting of an ERISA cause of action for denial of benefit claims. For example, he is aware of instances where the denial notice provides little information other than a statement that "Your claim is denied based on the terms of your employer's plan." Mr. Tomasek testified that the DOL needs to investigate noncompliance and needs to increase enforcement.
Explanation of Insurance Relationship - In identifying the roles played by entities with respect to a fully insured plan, Mr. Tomasek noted that the entity responsible for deciding claims is the insurer, to which authority is delegated by the plan sponsor under the terms of the insurance contract.
Mr. Tomasek also responded to a question regarding fiduciary status by noting that, in an insured context, if the insurer is responsible for deciding claims, the insurer is the fiduciary in that context, whereas the plan administrator is the fiduciary in the self-insured context. If the employer delegates the authority to decide claims to a TPA (e.g., an insurer providing only administrative services), the third party is the fiduciary with respect to claim determinations. Finally, whenever any fiduciary is making claims decisions, the fiduciary is required to act with undivided loyalty to the plan and all of its participants. Any conflict of interest between the plan sponsor and the plan (including all plan participants) must be resolved in favor of the plan.
Summary of Testimony of Mark DeBofsky, a partner at the law firm of Daley, DeBofsky & Bryant of Chicago, IL, July 7, 2005
Mark DeBofsky specializes in civil & appellate litigation, concentrating in employee benefit litigation and representing claimants rather than plans. He is a graduate of the University of Illinois College of Law; member of the ABA Tort & Insurance Practice Section and Employee Benefits Committee; and co-chair of the Employment Discrimination Subcommittee.
Mr. DeBofsky began his testimony with a review of the 1989 Supreme Court decision of Firestone v. Bruch which permits courts to apply a deferential judicial standard of review – the arbitrary and capricious standard. Mr. DeBofsky stated that statistics show that the insurer/plan wins over 75% of the time. On a de novo standard of review, claimant will win approximately 60% of the time. Employees have the right to know if the plan is reserving discretion because it will affect their confidence that their plan will pay a claim that is incurred.
Mr. DeBofsky indicated that if there is no plan and no delegation, that the insurance company has no independent authority to give them discretion under the terms of ERISA. Thus, they should be held liable under a de novo standard of review, rather than an arbitrary and capricious standard of review which substantially enhances the likelihood that the claim denial would be upheld by a court. Quoting Mr. DeBofsky from the record, “[o]n a de novo standard of review, the claimant stands in an equal position with the insurance company. If the judge is persuaded that the evidence the claimant presents is more persuasive, the claimant wins. But in a deferential arbitrary and capricious standard of review, the claimant could come in with ten medical reports supporting their disability. And the plan could have one report written by a doctor who has never seen the claimant and still win the case.”
The courts have faced over 200 federal appellate decisions on the issue of what plan language triggers the arbitrary and capricious standard of review. Mr. DeBofsky referred to Judge Posner remarks from Herzberger v. Standard Life Insurance Co., 205 F.3d 327 (7th Cir. 2000) that solid entitlement to benefits depends on the language in the plan. In Herzberger, the 7th Circuit prescribed model language that could be used to create a deferential standard of proof, yet hardly any plans have incorporated that language, which means litigation over what language is sufficient, continues to the present day. When asked to paraphrase Herzberger’s model language, Mr. DeBofsky indicated that the term “discretion” or equivalent synonym is required; otherwise the language is ambiguous. He thought there should be additional language beyond the language the Seventh Circuit prescribed in Herzberger so that an insured would know what was their level of protection. Mr. DeBofsky recommended that the DOL issue a regulation setting forth model discretionary language if a plan has the intent of reserving it (for example: the plan has conferred discretionary authority upon the plan administrator or TPA in determining eligibility for benefits and/or construing the terms of the plan and thus, the courts will use a highly deferential standard of review in judging a claims denial).
In response to a question as to what steps a claimant could take in advance to protect his/her rights, Mr. DeBofsky indicated that backup or supplemental coverage could be purchased. When questioned about the feasibility of such back-up coverage because many insurers won’t go over 60 or 70%, Mr. DeBofsky answered that there still was a benefit to disclose. Member Gladstein indicated in the Union sector, if this was in the SPD, they could file a grievance saying that the plan the company bought isn’t in compliance with what was negotiated or request a better plan in the next round of negotiations. Panel Members debated what the employee could do with this information.
Mr. DeBofsky was posed the question: if a plan sponsor is entering into an insurance contract in which the insurer has granted itself full discretion to determine claims, is that a sufficient delegation from the sponsor to the insurer? Mr. DeBofsky indicated that in the 7th Circuit there is an implied belief that there is an overriding plan document that establishes a disability or health benefit plan and then within the scope of that overriding plan, there is the purchase of insurance. He stated that unless the fiduciary act is actually performed by somebody who has been told that they have that discretion and a plan instrument, then the court should not be granting discretion as a matter of course just because it says so on the insurance policy. There is a step missing. The policy lacks a bridge from the reservation of discretion in the first instance to the discretionary act, which is going to be accorded an arbitrary and capricious standard of review in the courts.
Mr. DeBofsky testified that disability insurers are giving themselves discretion to decide who receives benefits or equivalent language. This is not what ERISA contemplates in the statute - 29 U.S.C. §§1102 and 1105(c) which speak of a written instrument delegating that discretion. If an insurance company merely takes that discretion upon themselves, the point of ERISA as set forth in the statute is missed. Most federal courts have not picked up on this point.
If the insurer is making a discretionary decision, a member of the Working Group stated that it is taking on a fiduciary role. Why then isn’t the insurer a proper party in any litigation over a claims denial? Mr. DeBofsky responded that the courts are saying that the only proper party is the plan itself, but the plan itself is nothing but a piece of paper. However, it’s the insurer who is making the decision, but courts are dismissing them from these cases. He indicated that the insurance companies are writing these policies with a few pages at the end labeled “Summary Plan Description” or an ERISA statement that says “Plan Sponsor, ABC Company” “Plan Administrator, ABC Company”, it doesn’t list the insurance company as having the authority.
When asked how this issue is relevant to the topics at hand, Mr. DeBofsky answered that the party responsible for making the claim decision should be named in the documents that the plan participants are provided. If the plan sponsor just uses the insurer as the TPA, the plan sponsor would be responsible. If the insurance company was the party making the decision and its funds are at stake, there should be a means of keeping that company in the case.
In many companies, group insurance benefits are mandatory and everyone has to be enrolled in the plan, but employers are not given the option of a discretionary policy or non-discretionary policy. What they are buying is concealed from the employers as well because they have no explanation as to what the benefit plan provides. What is going to happen if a claim is denied and the claim ends up in court?
Members discussed with Mr. DeBofsky as to why it would be better for the employee to know that they are not as well protected as they may think. His response was that most people would be willing to pay more money for an insurance plan that is actually going to protect them than pay less for a plan that offers little or no protection unless they suffer catastrophic disability confining them to a wheelchair or hospital bed. He was not saying that insurance companies are habitually providing illusory benefits and defrauding the people that contribute to the plan, but points out that the largest disability insurer in the country UNUM Provident Corp. was just cited by the DOL for systematically engaging in unfair claims practices which resulted in the unfair denial of benefits, paid a $15 million dollar fine and will be reviewing over 215,000 claims. He stated that everything that exists in the ERISA law creates the perverse incentive to deny claims because there’s no practical consequence for that.
On the state insurance law level, the National Association of Insurance Commissioners promulgated a model law prohibiting discretionary clauses in health and disability policies. Mr. DeBofsky explained how various states can enact a model law promulgated by the NAIC. So far, only California, Montana and Illinois have taken action, but in forty seven states, it is perfectly permissible to include discretionary clauses.
There has also been litigation as to whether the discretionary language that is in the certificate of coverage (but not in the plan or in the summary plan description) is sufficient to trigger a discretionary standard of review. Mr. DeBofsky stated that the Seventh Circuit recently ruled that the certificate, the SPD, and the plan are all plan documents and thus, if the discretionary language is found in any one of them, that is sufficient. Other courts hold to the contrary, requiring the discretion to be in the plan.
There was a discussion between the members and Mr. DeBofsky as to the liability of brokers who sell these policies to employers. Mr. DeBofsky asserted that the brokers don’t understand what they are selling and don’t understand the legal significance of the particular clauses in the contract (e.g., discretionary clauses). However, he cited a Montana Supreme Court decision Dionier vs. Paul Revere Life Insurance Company, where a broker sued the insurer because she felt she was misinformed about the significance of certain policy language and how it would be used in litigation.
The members questioned whether discretionary clauses could be adequately explained to participants. Mr. DeBofsky said yes. Step one is communicating the appropriate discretionary language if the plan is going to confer discretion and step two is to communicate the legal significance as to how language relates to the claims adjudication. What is important is for employees to understand the benefits they’re being given. Mr. DeBofsky indicated that the point of employee benefits is to recruit and retain the best employees they can find. If the benefit plan is illusory, the employees won’t be happy with that coverage and they could use bargaining power to get a better benefit program. If necessary, employees may have to get the attention of employer’s executives.
A member of the Working Group noted that employee benefits are voluntary and it’s important to balance this against any demands imposed on the employers in providing benefits. Mr. DeBofsky agreed that employers should be encouraged to offer the benefits, but the benefits should have real meaning and offer the protection that they purport to have. He has been trying to get statistics about whether you could buy a discretionary policy versus a non-discretionary policy and what the price difference would be.
Summary of Testimony of Helen Darling, the President of the National Business Group on Health, a national non-profit organization devoted to providing practical solutions to employers on health care issues and representing employers’ perspective on national health policy issues, July 7, 2005
Ms. Darling testified that the National Business Group on Health, is a membership organization of large employers and they work only with H&W plans. This organization wants increased transparency for health care consumers across the board in everything that anybody could possibly know and things they are not able to know but should.
The witness went on to say that the plan documents and the programs that are available to employees should absolutely spell out in simple lay language the options they have. Informed decision-making and tools that help people to understand what, in fact, makes sense to them on an evidence basis ought to always be a key part of anybody's health plan.
She also stated that employers want employees to be well informed so they can make good choices. They know that a well-informed employee who makes good health care decisions will value their benefits more, that they will have fewer administrative problems and can often contribute to reducing the cost of both health benefits administration and health care costs.
Ms. Darling said that those of us who are either large employers or work with large employers know that people have to understand the value of their benefits. And everybody agrees that communication is key. She believes that most employers do, in fact, spend a lot of time and money on communication to employees. The witness referenced a recent study by Watson Wyatt in February 2005. The study found, among other things, that employers can significantly improve retention rates by communicating details about health benefits to employees.
Ms. Darling stated that the best companies and best practices use multiple lines of communication. They use a variety of tools -- posters and pop ups on the employees’ computer during open enrollment time. Also dedicated call centers, face-to-face meetings, post cards, inserts into payroll mailings, CDs, videos and newsletters are used by companies trying to communicate to their employees. Ms. Darling said that SPD requirements are extremely complex, but for the most part, they work. What they would not want to see is anything more burdensome than the current requirements.
Summary of Testimony of Nicole Melton, Senior Vice President and Practice Leader of Organizational Communication in AON Consulting’s New York City office, who works with mid- to large-size clients designing and implementing communication strategies to support human resource and organization change of varying degrees, July 7, 2005
Ms. Melton’s comments focused on two primary areas related to SPDs for H&W plans: (1) SPD content; and (2) SPD logistics. Ms. Melton stated that the content in SPDs is a barrier to consumerism. Employees are asked to take control and be accountable for their benefit decisions but the SPD does not provide them the accessible, plain language information they need and want. Since recent rulings have decided in favor of the SPD when there is a conflict between the SPD and the plan document, employers are faced with the burden of balancing the employees’ need for understandable information and the employer’s need to mitigate risk while meeting ERISA standards. Unfortunately, these two objectives are mutually exclusive.
With respect to logistics, employers struggle with budget allocations for SPDs - development of the format and content, production and distribution. Ms. Melton discussed the complexity involved in drafting an SPD for H&W plans. She referenced the forty-seven page checklist that AON Consulting developed for its communication consultants to use when drafting an SPD. The checklist is used to identify information that should be included in an SPD prepared for an ERISA Plan. There is a sixteen-page checklist that addresses administrative issues, eligibility, participation, contributions, benefits, loss of benefits, disclaimers and rights under COBRA and HIPAA. This is information that is either required to be in the SPD by DOL regulations or recommended for clarification purposes. Then there are twenty pages of model language and notices and finally three pages of additional information. Not only is there complexity in the language required but the cost to develop, produce and distribute can be significant, especially for large employers. In addition, some employers are not in compliance because they are not fully aware of all of their compliance obligations. Therefore, they do not produce and distribute within the compulsory time frames. Even electronic distribution has problems because some employee populations have no PC access at work.
Ms. Melton’s suggestions for improvement focused around keeping the communication “real” and returning to basics. She said we should not lose sight of the primary purpose of an SPD which should be easy to understand H&W plan provisions, coverages and exclusions. She suggested that with respect to the content of an SPD, the language should be consistent with the tone used in open enrollment materials. It should have an introductory section that is brief and includes information of interest to the employee and a listing of other resources for the employee to access like web sites, hotlines or insurance carrier information sites. Ms. Melton suggested that we consider a recommendation to the DOL to provide representative wording that employers, carriers, consultants and others could use in drafting SPDs. With respect to logistics, she cited the need to make production and distribution easier, especially by allowing for other media forms besides hardcopy (e.g., web sites, CD-ROM’s, etc.).
Summary of Testimony of Dr. Steven Sleigh and Dr. David Lansky; Dr. Sleigh is Director of Strategic Resources for the International Association of Machinists and Aerospace Workers (IAM), and Dr. Lansky is the Director of the Health Program at the Markle Foundation which is a proponent of a more responsive and accountable health care system, July 7, 2005
Dr. Sleigh testified that health care is a difficult issue in collective bargaining. Management is struggling to maintain health benefits and their competitiveness, while the IAM is trying to get the best coverage at the best price for its members. He said that over half of their strikes are related to health care cost shifting.
Dr. Sleigh stated that the SPD and other plan communications need to explain what employees get for their money under a plan. He criticized SPDs for being written for health care professionals; not for everyday people. He feels that SPDs are very difficult to understand. Dr. Sleigh argued that SPDs and other health plan communications should be written to the level of the people who are using the benefits even though they are legal documents. In his written Testimony, Dr. Sleigh recommended that SPDs be provided to participants at least once every three years.
Dr. Lansky testified that his research shows that people want information about quality to assist them in making medical decisions, and they want information that allows them to be better managers of their families’ health care. He pointed out that Medicare, the largest plan sponsor in the country, is creating an online portal to allow beneficiaries to look at their own claims data. He stated that there are also discussions to create a system under the new prescription drug program that will enable Medicare participants to review on-line their medication list and their medication history. Under this scenario, Medicare would aggregate information from its contracting providers and then make it available to participants electronically. Dr. Lansky noted that although this has not yet been finalized, it shows that a very large complex organization with public responsibility is looking into this idea.
Dr. Lansky stated that there are four categories of information that people want to have but they are not getting from their SPD. They want to know how to choose a doctor. They want to understand what their doctors are telling them. They want to know if their doctors are paying attention to best practices and standards of care. They want transparency since they believe plans have hidden incentives to health care providers that affect medical decisions, impact the quality of care, and shift costs to participants. Dr. Lansky, Dr. Sleigh and the Working Group members discussed issues related to the gaps in the information that is collected, problems with ways the data is collected, and difficulty in getting access to the data.
Dr. Lansky talked about personal health care records. He and Dr. Sleigh discussed how ERISA applies to this type of information and what the Working Group could advocate if it agreed that this type of information should be recommended or required. For example, there was a discussion about claims data, including who owns the claims data and who has access to the data.
Dr. Sleigh argued that the SPD is not currently an effective tool and is not adequate given today’s technology. He said that since ERISA governs communications to plan participants, there should be a way to say that it is in the participants’ interest to have access to this type of information. He gave an example of how using electronic technology workers should be able to look at a simple-to-read SPD for information about benefits under the health plan, with links to a listing of doctors in the network, information on quality, and their personal health records.
Dr. Sleigh talked about the burden and difficulties if this type of information was mandated, but said that access to this information would save lives and reduce costs. He feels that the Secretary of Labor should come out in favor of an open, transparent health care system, and that available information should be provided through the SPD. He stated that he does not want ERISA to force the entire country to change overnight, but that the SPD needs to reflect the best information that is available.
Summary of Testimony of Marty Webb, Assistant Vice President of Benefits Operations for SBC Communications, who has responsibility for all H&W and retirement benefit operations for SBC Communications, September 21, 2005
Marty R. Webb addressed the effectiveness of ERISA guidelines on H&W communications. He provided the Council with background information on the state of the healthcare industry in the U.S., with escalating health care costs exceeding inflation. He focused on the employer’s role in a healthcare system consisting of employers, consumers, providers, administrators/insurers and the government. With cash expenditures for H&W plans rising, employers are focusing on plan design. Employee communications about that design is a fundamental requirement because for a plan to be effective, participants must understand the provisions.
Mr. Webb addressed the evolution of SPD language and the use of SPDs. He stated that a vast array of communication tools are now used and do a better job than SPDs of explaining the benefits, by using more manageable bites of information delivered at teachable moments.
The DOL regulations require that the SPD be written in a manner calculated to be understood by the average participant -- a difficult order to fill. When an SPD, which must explain complex plan provisions, is written following ERISA and DOL guidelines and drafted to mitigate litigation risk, the resulting communication is often ineffective in explaining the plan to participants. Town hall sessions, online information, plain speak benefit updates, web-based tools, Webinars and annual open enrollment materials are forms of benefit communications that provide more understandable information for participants.
Since SPDs continue to play an important role in documenting plan information, Mr. Webb did not recommend restricting their distribution. He suggested that the SPD, coupled with enhanced technology and improved communication practices and procedures, be considered in determining guidelines. SBC is not recommending changes in the format or disclosure requirements for SPDs, SMMs, SARs, COBRA notices, etc. SBC is recommending that plan administrators be allowed to satisfy the requirement for legally required communications through notices of availability in electronic or paper form at the time a document is required to be distributed (i.e., apprise the participant of the significance of the document and its availability upon the participant’s request). The current required communication documents, like SPDs, SMMs, SARs, are needed but there should be alternate means of satisfying the distribution requirements.
Summary of Testimony of Paul Boulis, Senior Vice President of the National, Government and Labor Divisions of Blue Cross Blue Shield of Illinois, who is responsible for over 300 major and national clients, most of whom are administrative service (not insured) clients, September 21, 2005
Mr. Paul Boulis testified that Blue Cross and Blue Shield of Illinois (“BCBSIL”), a division of Health Care Service Corporation (“HCSC”), a Mutual Legal Reserve Company, is the largest health insurance company in Illinois. It provides 6.5 million people with coverage through a variety of health plans for individuals, labor organizations and employers. Much of BCBSIL’s business is focused on employers who provide group health plans for their employees and who are regulated by the DOL under the provisions of the ERISA.
BCBSIL does not serve as the plan administrator or the plan sponsor of the employers’ separate H&W plans, and therefore does not undertake direct ERISA compliance responsibility assigned to the plan administrators. BCBSIL does not prepare ERISA required documents such as the SPD and does not review any materials produced by covered employers. Because of the limited scope of its responsibilities, BCBSIL’s knowledge of how effectively ERISA required information is communicated to group plan participants is both limited and indirect.
Based on BCBSIL’ experience with approximately 24 million phone calls received annually from participants with questions about their plan benefits, BCBSIL believes that some plan participants understand some of their benefits some of the time. Communication tools that overwhelm participants with information might not provide answers to their most important and urgent questions. Much of the confusion exhibited by plan participants is due to the overwhelming complexity of health plan designs. The disclosure document needed to fully explain the health plan design is lengthy and many plan participants do not have the time to read and study it. In addition, BCBSIL believes that a certain population responds better to personal explanations. Finally, when individuals are under stress due to a personal or family health issue, they want answers quickly.
The current variety of health plan designs introduces a new vocabulary of terms, such as HSA, HRA and FSA, and also requires plan participants to be more informed about their health plan benefits than ever before. BCBSIL’s customers must now provide even more detailed information to participants, well beyond what is required by ERISA. For example, a health plan membership card is no longer simple. Many large group customers contract separately for the administration of different benefits and features contained in their plans, resulting in four or five different customer service phone numbers on the back of the cards.
ERISA became law in a much simpler time. The materials that are distributed to plan participants under the requirements of ERISA do not, and in fact cannot, easily provide all the answers to all the possible benefits questions. And, it might be impossible to make all of the details of health plans simple enough to be readily understood by most plan participants.
Changes to ERISA requirements alone will not meet all the challenges or answer all of the questions as individuals use their increasingly complex benefits. There will always be a need for a variety of information vehicles to help health plan participants fully understand their benefits and other aspects of their plan, including well-trained customer service representatives, intuitive, interactive Internet-based tools and clear, effective ERISA required communication materials. It would be very, very hard for ERISA requirements to identify every one of the possible permutations in a typical plan design and make sure they're covered.
Summary of Testimony of Mary Ellen Signorille, Senior Attorney in the AARP Foundation Litigation, September 21, 2005
Mary Ellen Signorille discussed that the people AARP assists often have trouble understanding the explanation of benefits (EOB) which is supposed to inform them as to why their claims were denied. When they question the TPA, it typically does not have a copy of the plan or the SPD. TPAs should be able to answer questions about why benefits are being denied and what the participants need to do to support their claims.
Concerning the DOL claims regulations, Ms. Signorille thinks it is working better at health plans than at disability plans. In response to a question, she said that there should be separate claims regulations for health versus disability plans. She finds for disability claims that insurers are not providing the claims manuals, documents, and claims file. Ms. Signorille mentioned a recent case out of the First Circuit which basically said that until a participant can prove prejudice, they don't have a right to the file. She argued that this puts the cart before the horse since an individual does not know if there is something of prejudice if they have not yet seen the file. Ms. Signorille feels that this ruling is not in line with what the Department intended in its claims regulation, and that this could lead to a patchwork of interpretations of the claims regulation.
Ms. Signorille also stated that participants do not understand the meaning of the discretionary clause and how it can impact their claims. She suggested that the DOL issue model language based on the court cases as to the meaning of a discretionary clause and its impact on the court’s review of a participant’s claims denial. In addition, model language on exhaustion of the claims procedure would be useful since people often do not submit everything that they could to support their claim and do not realize that they may not be able to submit more information later. Ms. Signorille mentioned that most participants do not understand that they need to give a point-by-point explanation and refutation of what the plan's doctors have found. She feels that this has become even more important as some courts have determined that when a plan has a discretionary clause, all they need is substantial evidence, which is not a lot of evidence. Ms. Signorille said that insurers often close the record and do not allow relevant information in the review.
Another area of confusion that Ms. Signorille mentioned is that health and disability plans have limitations, such as number of treatments or months of benefits. She feels that participants do not always understand these limits nor do they understand why the sponsor changed the limits (e.g., increase in premiums due to rising health care costs). Reservation of rights clauses was another part of the SPD that Ms. Signorille thinks participants do not understand. Participants do not understand the relationship between employer-provided health care, COBRA and Medicare, which is sometime the SPD could clearly explain. Lastly, mergers and acquisitions was an area that creates confusion for participants. She thinks that plans should provide a notice explaining how a merger or acquisition will impact their benefit plans.
Members of the Working Group and Ms. Signorille discussed SPDs, including people not reading them and how do you highlight key issues without having the document overwhelmed by bold print. Ms. Signorille said that a SPD really has two parts. One is benefits. The other is participant rights. She recommended the SPD have a table of contents and indexes.
Concerning fiduciary duty, Ms. Signorille thinks there is a big problem in knowing who has responsibility under disability plans when there is a plan administrator, an employer and an insurer. She said employers get frustrated since they think the insurance companies are handling things, but the insurer say the employer is the fiduciary and the circuits are not in agreement as to who is a fiduciary in this context.
Ms. Signorille also provided a written submission providing more details on AARP’s concerns. Proposals related to Form 5500s included having the Department of Labor consider different Form 5500s for health and pension plans; having the entities or individuals responsible for compliance with ERISA attest to the information provided on the Form 5500; adding questions about recent changes in attorneys, actuaries, or other service providers; and having all current fiduciaries identified.
Concerning the use of SPDs in court, AARP recommended that the legal standard of reliance on the SPD be interpreted in favor of a participant-friendly approach to encourage greater clarity instead of having an extremely high threshold which requires the participant to show detrimental reliance on the SPD.
Other proposals included allowing participants, upon written request, to get a list of employers contributing to a multi-employer plan; shortening the time limit for plan administrators to provide SMMs; plan amendments should not become final until at least thirty days after participants have been given notice; and SARs need to include additional information, such as were salary deductions paid to the insurer or if the plan is self-insured.
The written submission also included more details, such as court cases and legal issues, on topics Ms. Signorille testified about, such as EOBs, claims procedures and manuals, and participant access to their case files. It also touched on concerns such as plans seeking financial records on participants that have no relationship to a participant’s claims; participants having trouble getting historical plan documents that are related to their claims; issues related to electronic notices; the need for penalties for failures to provide information; and problems non-English speakers have in getting assistance from their plans.
Summary of Testimony of Andrew Bernstein, Vice President and General Counsel of Disability RMS, Inc., Worksite Specialty Partners and CORE, Inc., which are wholly-owned subsidiaries of Assurant, Inc., providing disability insurance and administration for ERISA covered plans, September 21, 2005
Mr. Bernstein testified it’s important to understand, when you’re talking about ERISA claims and ERISA plans in the insurance context, that you have a little bit of context. His employer is a TPA, and as a TPA, it prices, underwrites, and handles claims for a number of companies. In its capacity, it is a claims fiduciary. The TPA makes claims decisions, and it makes appeal decisions. Even if it was not making the final appeals decision, it considers itself the claim fiduciary, which means it is a fiduciary to the extent of its claims responsibility. Mr. Bernstein noted that one area of confusion has been for plan participants in understanding the difference between a TPA and a plan administrator.
Mr. Bernstein referenced the requirement that the denial letter or adverse benefit determination is required to refer to the relevant plan provisions. He indicated that this should be more than a just a reference, but instead the exact plan provisions should be quoted. Insurance policies are sometimes difficult to read, even though state laws require that they pass this “Flesch” test (e.g., plain language).
He also stated for disability claims there’s a reason for the DOL regulations to be clarified – to be more specific in setting forth what the content of the adverse benefit determination letter should be, so that there is a better understanding on the part of the insured as to what is needed to perfect the claim.
Mr. Bernstein made several suggestions including: the issuance by the DOL, clarifying the regulation or through interpretative guidance, that discretionary authority is acceptable language in ERISA governed insured plans; clarification as to the difference between the plan administrator and the TPA; and clarification for participants in terms of how insurers relate to plans, plan sponsors and plan administrators.
Mr. Bernstein testified that small employers have a difficult time with the rules and requirements of the SPDs. They often look to the insurance policy as the plan documents and the certificates of coverage issued by the insurer as the SPD, adding on the appeal claim language (which most insurers certificates do).
Summary of Testimony of Jacqueline Paul, Corporate Director of legislative policy and research at Humana, who is responsible for compliance with federal and state claim determinations and internal/external dispute resolution mechanisms. She testified on behalf of Humana and America’s Health Insurance Plans (AHIP), September 21, 2005
Ms. Paul said that Humana Inc. has about seven million health plan members in individual arrangements, employer sponsored plans and government sponsored plans. In 2004, Humana Inc. processed about 31 million claims in these plans and arrangements. She testified that administration and communication of the claims and appeals rules for insured group health plans is complex because of dual regulation. Insured plans are subject to both federal and state regulation. ERISA preempts state laws that relate to claims and appeals processes for insured plans only to the extent such state laws prevent the application of the federal rules. This leads to complexity and confusion.
Many insurers also voluntarily pursue accreditation for its practices and procedures through organizations like the National Committee for Quality Assurance and the Utilization Review Accreditation Commission. Satisfaction of such accreditation can add to the existing complexity of the dual state and federal regulation of the claims and appeals processes. All of these sources address various and overlapping aspects of the claims and appeals processes. This can make the communication and administration of these processes complex. Ms. Paul testified that there is no significant rationale for why these overlapping regulatory regimes serve the best interests of consumers. Her testimony implies that the present set of overlapping regulations is instead detracting from the best interests of consumers.
Ms. Paul also testified that AHIP membership reported that implementation of the ERISA claims and appeals regulations for its insured book of business alongside the multitude of individual state requirements was “among the most complicated and resource-intensive process implementations they have undertaken.” She also described the complex process undertaken by her employer, Humana, to comply with all of these requirements.
Ms. Paul offered the following recommendations to improve the claims and appeals process:
Summary of Testimony of Debra Potter, a 12-year insurance broker, selling group health, life, disability and pensions through local and state offices for Health Underwriters’ Association, prior to contracting Multiple Sclerosis (MS) in 2002. Mrs. Potter was a participant under an employer-provided disability plan that was administered by a TPA, September 21, 2005
Mrs. Potter testified that she has been on all sides of the issue, as she was an insurance broker selling insurance for H&W plans and an employee covered under a H&W plan. As a broker, she educated employees about their rights and assisted them in processing claims. Therefore, when she became ill, she knew what documents to file. Mrs. Potter was diagnosed with multiple sclerosis (MS) which is difficult to prove. As her employer was covered under an older disability policy that didn’t specifically state certain exclusions, most disabilities were usually covered. Within three months of submitting the documents, she began to receive benefits. When her condition worsened, her doctor suggested a second opinion. Shortly after that, she received notice from the insurance company that the prior payments were a mistake and benefits would cease.
Off the record, the insurer’s representative told her that the carrier wouldn’t cover her disability because she made too much money. Two weeks later, the insurance representative was gone and her case was switched through twenty different representatives who frequently claimed to have “lost” documentation. Mrs. Potter had kept copies of everything but was sick and couldn’t keep up with the carrier’s requirements. The denials documents were vague and legalistic. As her condition worsened, she contacted her employer’s senior management. These senior officials called the insurance carrier demanding the claims be paid and they couldn’t get through.
Mrs. Potter then hired an attorney and the insurance company settled. However, it did not pay lost interest on the withheld payments, nor attorney fees. In the context of disability claims, it would have been helpful to have a third party advocate, perhaps the broker. She encouraged the Working Group members to remember that disabled employees are sick people who are under a lot of stress. Mrs. Potter believes that insurance companies are overwhelmingly disinclined to pay valid claims. She believes insurance companies will pay smaller claims, but fight harder when the claimant is paid a higher salary. The insurer’s goal was to see whether the claimant could survive the continuous levels of denials.
Mrs. Potter stated that her claims denial did not specify what information she should submit in order to perfect her claim. She also didn’t know at what point in the process to hire an attorney.
Professor Dana M. Muir, a professor of the Ross School of Business at the University of Michigan, testified before the Working Group on Retirement Plan Distributions & Options on September 22, 2005, on the topic of selection of annuity providers in defined contribution plans. One of the issues that she testified on was the DOL’s formulation of a fiduciary’s duty of loyalty in the context of selecting annuity providers for its participants and beneficiaries. ERISA does not prohibit a plan fiduciary from having a conflict of interest; instead, ERISA’s duty of loyalty requires the plan fiduciary operating under a conflict of interest to mitigate against such conflict. In this regard, Professor Muir recommended that the DOL reconsider its interpretation of the fiduciary’s duty of loyalty, set forth in Interpretative Bulletin 95-1 (IB 95-1).
In that bulletin, the DOL stated that, in the context of selecting an annuity provider, the fiduciary’s duty of loyalty required it to “take steps calculated to obtain the safest annuity available, unless under the circumstances it would be in the interests of the participants and beneficiaries to do otherwise.” Fifth Circuit opinion, in Bussian v. RJR Nabisco Inc., 223 F.3d 286, 300 (5th Cir. 2000), rejected the DOL’s interpretation and instead judged the fiduciary’s decision “with an eye single to the interests of the participants and beneficiaries.” If the fiduciary kept its focus on the interests of participants and beneficiaries foremost in its minds, taking all steps necessary to prevent conflict interests from entering into the decision-making process, it would satisfy the duty of loyalty.
While the conflict of interest can be minimized in the annuity selection context, Professor Muir contrasted the conflict of interest in the claims adjudication context. Where the insurance company both pays the benefits and makes the decision on benefit eligibility, she believed that the insurer has a very strong incentive to inappropriately deny claims. Such a conflict of interest could then insulate the insurer from any real financial risk, especially in light of ERISA’s apparent lack of remedies for injured participants and beneficiaries. According to Professor Muir, this is simply not the case in the annuity selection decision by a defined contribution sponsor.
Additional Information Sources
Meeting of July 7, 2005
Meeting of September 21, 2005