Chairman Baucus; Ranking Member Grassley; Members of the Senate Finance Committee. Thank you for giving me the opportunity to testify at today’s hearing.
When ERISA (Employee Retirement Income Security Act) was passed in 1974, one of the law’s major sponsors, Senator Jacob Javits, hailed it as “the greatest development in the life of the American worker since Social Security.” 1 That optimism was secured by a promise contained in the preamble to the statute proclaiming ERISA’s purpose: to provide “appropriate remedies, sanctions, and ready access to the federal courts.” 2 Yet the story told over the past 35 years has been one revealing an utter betrayal of those lofty goals and an egregious absence of remedies, sanctions, and access to normal federal court procedures. Contrary to the clearly expressed legislative intent, the courts have transformed ERISA into a shield that protects insurance companies from having to face the consequences of unprincipled benefit denials and other breaches of fiduciary duty. Claimants are denied the right to trial by jury, a basic Constitutional right routinely available in every other type of insurance case and virtually all other civil litigation. In most cases, there is not even a trial. Instead, courts conduct reviews of claim records assembled and shaped by self-serving insurance companies. Claimants are given no opportunity to cross-examine adverse medical or vocational experts, routine discovery procedures such as written interrogatories and depositions are denied, and no trial is held. No provision of ERISA sanctions such a practice; and Supreme Court precedent establishes the impropriety of courts holding review proceedings rather than trials in cases such as this.
This insidious practice has also led to courts’ willingness to overlook wholesale flouting of ERISA claim standards developed by the Department of Labor. Courts allow insurers to unduly delay claim decisions and deny benefit claimants any opportunity to rebut adverse evidence without any adverse consequences. Conversely, unsophisticated claimants who fail to meet complex and detailed rules governing the submission of claims and appeals are given no leeway whatsoever and are often barred from presenting crucial evidence in court if they are even able to gain access to judicial review.
And even when claimants win, instead of simply ordering the payment of benefits when the benefit denial has been overturned, the routine practice is for courts to send the case back to the insurance company. Since insurance companies understand that they will be given further opportunities to develop new reasons for denying the claim, there is no incentive to make an accurate decision in the first instance. Consequently, the practice of remands clogs the federal court system with multiple rounds of litigation.
The courts have also precluded damage awards even when the harm caused when benefits are wrongfully denied often results in bankruptcy, home foreclosure, or even death if necessary medical treatment has been denied. 3
Following the 1989 Supreme Court ruling in Firestone v. Bruch, a vast transformation of ERISA litigation arose. So long as certain language is written into the insurance policy, courts are compelled to defer to the insurance company’s determination unless the claimant can prove the benefit denial was arbitrary and capricious 4 and not merely wrong, a concept that has been elevated above the goal of assuring an accurate claim decision. Thus, as one court has remarked, “The broader that discretion, the less solid an entitlement the employee has…” 5 Some examples of how this has played out:
- An employee of a major accounting firm who first received disability benefits in 1994 when his HIV infection worsened and developed into full-blown AIDS lost his benefits in 2006 despite no improvement whatsoever in his health status. Even a physician hired by the insurance company found the claimant lacked sufficient stamina to handle a 40-hour workweek. Nonetheless, because other doctors consulted by the insurance company who had never examined the claimant thought otherwise, the benefit termination was sustained based on the insurance company’s discretionary authority. 6
- Despite reports from doctors at the Cleveland Clinic and other prestigious medical institutions certifying the disability of the executive director of a major summer festival, along with disability findings made by the Social Security Administration and a second independent disability insurance company, an insurance company’s
denial of benefits was upheld as not arbitrary and capricious based on contrary medical reports submitted by physicians frequently retained by the insurer who conducted pure paper reviews. 7
And there are many more examples.
The reason most frequently offered for preserving the existing ERISA regime is that the current state of the law holds down costs and thus encourages the formation of employee benefit plans. But that rationale is hardly a justification for a system in which courts give more deference to insurance companies than is given to federal administrative law judges. Since employee benefits are a valuable tool utilized by employers to recruit and retain prized employees, it is extremely unlikely that employers would cease sponsoring benefit plans. Nor is there a legitimate fear of markedly increased costs. The only available actuarial study on this issue reveals that potential cost increases resulting from the elimination of insurer discretion would lead to at most a modest 4% rise in premiums. 8 To analogize, both history and common sense suggests that most consumers would willingly pay a ticket charge of $104 to fly on an airline that has a near-perfect safety record rather than paying $100 to fly on an airline perceived as being less safe. That price is a small one to pay for the assurance of more solid rights to receive benefits when they are needed in times of sickness or injury and to have confidence that those who deserve benefits receive them expeditiously while those who are not deserving are denied for valid, defensible reasons.
The ways in which ERISA can be amended to bring about these changes are not unduly complex. One possibility would be to amend the definition of “welfare benefits” in ERISA to clarify that the purchase of insurance as a means of funding employer-sponsored disability, health, or life insurance benefits excludes the resulting plan from ERISA 9 altogether, leaving claimants with the existing protections of already well-established state laws, rights, and remedies. Another proposal would be to amend § 502 of ERISA 10 to provide that claims brought under insured plans will always be adjudicated in accordance with the same plenary standards and proceedings afforded any other civil action brought in federal court. 11 Simplifying the statutory language to enable recovery of relief at large would also remedy a great unfairness that currently exists.
These proposed changes would restore the intent and purpose of the comprehensive benefits reform enacted by Congress more than thirty-five years ago. More importantly, such changes can help rebuild public confidence in insurance companies that have, for too long, been able to hide behind legislative shields and judicial protections that no other industry receives.
1) 120 Cong. Rec. 29, 933 (1974) (statement of Senator Javits)
2) 29 U.S.C. §1001(b)
3)Sarkisyan v. Cigna Healthcare of Cal., Inc., 613 F. Supp. 2d 1199 (C.D.Cal. 2009)
4)Pokratz v. Jones Dairy Farm, 771 F.2d 206, 209 (7th Cir. 1985)(“The ‘arbitrary or capricious’ standard calls for less searching inquiry than the ‘substantial evidence’ standard that applies to Social Security disability cases. Although it is an overstatement to say that a decision is not arbitrary or capricious whenever a court can review the reasons stated for the decision without a loud guffaw, it is not much of an overstatement. The arbitrary or capricious standard is the least demanding form of judicial review of administrative action. Any questions of judgment are left to the agency, or here to the administrator of the Plan.”)
5) Herzberger v. Standard Ins.Co., 205 F.3d 327, 331 (7th Cir. 2000)
6) Jenkins v. Price Waterhouse Long Term Disability Plan, 564 F.3d 856 (7th Cir. 2009)
7)Black v. Long Term Disability Ins., 582 F.3d 738 (7th Cir. 2009)
8) Milliman Inc. November 14, 2005
9) 29 U.S.C. § 1002(1)
10) 29 U.S.C. § 1132
11) It is important to distinguish insured welfare benefit plans from Taft-Hartley plans or other self-funded plans which have governance, funding, and other procedural mechanisms in place offering greater protection to plan participants than insured plans.