Today’s case demonstrates that the actions of benefits administrators are worth some thought on the part of a plaintiff lawyer looking to heighten the level of scrutiny that is applied by a reviewing court. Kosiba v. Merck & Co., 2004 U.S.App.LEXIS 19164 (3d Cir. 9/14/2004).

Anyone who litigates cases brought under the ERISA statute (Employee Retirement Income Security Act of 1974, 29 U.S.C. §1001 et seq.) knows that what often determines the outcome of the case is the standard of review applied by the court.

Although the Supreme Court in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), characterized a de novo standard of review as the default standard in ERISA benefit cases, the court recognized the availability of a highly deferential standard of review if the benefit plan/insurance policy contains appropriate language reserving discretion to determine eligibility for benefits.

The Supreme Court cautioned, though, that even when the language necessary to trigger a deferential standard of review is contained in the benefit plan, if the fiduciary is operating under a ”conflict of interest, that conflict must be weighed” in determining abuse of discretion. 489 U.S. at 115.

Justice David Souter also pointed out in footnote 15 in Rush Prudential HMO Inc. v. Moran, 122 S.Ct. 2151 (2002), ”It is a fair question just how deferential the review can be when the judicial eye is peeled for conflict of interest.”

Although the 7th U.S. Circuit Court of Appeals does not consider large insurers and corporate plan sponsors to be affected by claims of minimal financial value (see Leipzig v. AIG Life Insurance Co., 326 F.3d 406 (7th Cir. 2004)), other circuits take a different view; and the Kosiba case is an example of how the 3d Circuit weighs the conflict of interest.

The party in interest as plaintiff in this case, Epps-Malloy, alleged disability due to sarcoidosis and fibromyalgia; and Unum Life Insurance Company of America, as administrator for Merck, administered the benefit claim and paid Epps-Malloy benefits from 1993 until 1996 when benefits were terminated.

After the plaintiff appealed the decision, she was requested to undergo a medical exam; and when the results of that examination contradicted the treating doctors’ support of ongoing disability, the plan upheld the benefit termination.

After denying both parties’ summary judgment motions, the court held a bench trial on a stipulated documentary record and entered judgment for the defendants pursuant to Federal Rule of Civil Procedure 52, based on an undiminished arbitrary and capricious standard of review.

On appeal, the court found ”a procedural bias in Merck’s intervention in the appeals process to request an independent medical examination.” The court found this ”especially problematic because the record before the defendants prior to [the] examination provided reasonably sound as well as unequivocal support for Epps-Malloy’s claim for benefits; the choice to request a third medical opinion therefore strongly suggests a desire to generate evidence to counter Epps-Malloy’s physicians’ diagnoses.”

The court also found that the district court never addressed the fibromyalgia diagnosis, which alone would require a new trial.

The opinion focused on what factors justify a heightened review of a benefit decision. In addition to a financial conflict, the court added the ground of ”demonstrated procedural irregularity, bias, or unfairness in the review of the claimant’s application for benefits.”

Since there was no proof as to whether Merck had an actual financial conflict of interest, no financial conflict was shown, although the court suggested that if Merck paid for benefits out of its general operating funds, it would constitute a financial conflict.

But the procedural conflict was evident to the court. Based on the circumstances of the claim, the court found an inference of bias was raised:

”At the time of the request, every piece of evidence in Epps-Malloy’s record – the opinions of two doctors (Drs. Williams and McQueen), a consistent medical history, and an SSA determination that she was totally disabled – supported her contention that she was disabled.”

The court added:

”It is in this light that we must view Merck’s request for an independent medical examination. We have a claimant seeking continued LTD benefits whose treating physicians offer unequivocal support for her claims, and a plan administrator that has delegated claims administration to a large insurance company intervening – not at the initial determination stage, but at the appeal stage – with a request for an additional medical examination to be performed by a physician of its own choosing.

”This situation arguably has a quality to it that undermines the administrator’s claim to the deference normally owed to plan fiduciaries. Given how favorable the record was to Epps-Malloy prior to Dr. Dev’s examination, the most natural inference is that by intervening and ordering the retention of Dr. Dev, thus seeking evidence to counter Epps-Malloy’s physicians’ evaluation, Merck was not being a disinterested fiduciary.” The court was careful to qualify its conclusion, however,

”That said, we acknowledge the possibility that Merck acted with a good faith belief that Epps-Malloy’s application was a close call, and that it could resolve perceived ambiguities with a third physician’s opinion. Independent medical examinations are not uncommon in the claims administration world, and this is responsible plan administration that we would not wish to deter.

”At this stage, however, we are considering only how searching a review of the defendants’ benefits determination to undertake. Epps-Malloy’s suit will rise or fall with the merits of her underlying claim (including Dr. Dev’s opinion), modulated by the deference owed to the defendants’ decision. For a responsible fiduciary, we trust that the incentive to collect enough information to make a responsible claims determination will outweigh the incentive to avoid requesting more information in the hopes of maintaining the most deferential standard of review. And we trust that courts will not penalize plan administrators for seeking independent medical examinations at appropriate stages of the claims determination process.”

The court then turned to the fibromyalgia issue and reiterated that the district court failed to consider that condition even though Social Security appears to have granted benefits based on that condition and because Dr. Dev, Merck’s examining doctor, was a pulmonologist, not a rheumatologist, the medical specialty having the greatest expertise on the subject of fibromyalgia. Thus, a remand was warranted on that basis.

This ruling was written by Judge Edward Becker, who has written several decisions critical of the ERISA law, and it is no surprise that he expressed suspicion about Merck’s procedural conduct in this case. One always has to question the validity of the opinion of a physician who is first retained to perform an examination (or even a file review) after a benefit decision has already been made; and this ruling really lays out the issue in situations where all of the other evidence is consistent and unequivocal.

It obviously struck the court that the plan was simply fishing for evidence it might be able to use to terminate benefit payments. Certainly, Merck and/or Unum would have been smarter to have obtained the examination before the benefit termination; however, of much greater import than the specific issue that led to this ruling, this opinion illustrates a much larger problem: allowing discretionary reviews in benefit cases.

If there was no issue about whether Merck was entitled to a deferential standard of review, the court would not have had to create a rule relating to ”procedural bias.” This is yet another argument for applying a plenary standard of review to all benefit claims.

As we pointed out in an earlier article, ”Discretionary clauses starting to lose favor,” Chicago Daily Law Bulletin, April 2, 2004, the viability of giving deference to benefit determinations made by for-profit insurers is under attack from several quarters.

The ruling in Kosiba is yet another example of finding a means to mitigate the potentially unfair deferential standard of review in an effort to fulfill the congressional intent behind the ERISA statute, as quoted in Black & Decker Disability Plan v. Nord, 538 U.S. 822, 123 S.Ct. 1965, 1970 (2003):

”ERISA was enacted to promote the interests of employees and their beneficiaries in employee benefit plans, and to protect contractually defined benefits.”

This article was initially published in the Chicago Daily Law Bulletin.

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