McKennon Law Group, Author at McKennon Law Group

The debate over national health care reform has moved to the California Legislature, which will begin taking the initial steps to implement the complex series of health insurance overhauls prescribed by the federal government.

The Legislature seeks to enact reforms signed into law by President Obama this year. Among other things, certain Bills would prohibit health insurers from denying coverage because of preexisting conditions and create an exchange through which individuals could buy insurance. In addition, they would require prior approval of health insurance rates and create a new independent review panel.

AB 2578 (Jones and Feuer), which was recently introduced, has passed the California Assembly. This Bill would require HMOs and health insurers to seek “prior approval” from the state Department of Insurance or the Department of Managed Health Care for rate increases and to justify overhead costs as is required in connection with many lines of insurance under California’s Proposition 103, including auto, home, earthquake, medical malpractice, and others. Proposition 103 does not apply to health insurers.

AB 2470 (De La Torre), has also passed the Assembly. The Bill, sponsored by California Medical Association, would require an independent review and approval of decisions made by health insurers and health plans to rescind coverage for patients after they get sick. Patients would retain their insurance until the review determined whether the proposed rescission is legal and justified. The Bill would require the independent review organization, in reviewing a proposed rescission, to determine whether a health plan enrollee “intentionally misrepresented” material information on his or her application in order to obtain health care. The federal health care Bill requires guaranteed issuance of health care policies despite pre-existing conditions and only permits rescissions for fraud. The federal legislation does not include an outside review of insurers’ rescission decisions, as mandated by AB 2470.

According to the CMA website, “California’s physicians have fought rescissions for years, and we’re determined to put a stop to this awful practice,” said Brennan Cassidy, M.D., president of the CMA.’ AB 2470 would force insurers to honor their commitment to provide coverage for their policyholders, instead of pulling the rug out from patients when they are weak and sick.”

AB 2470 follows two other similar bills – AB 1945 and AB 2, both by De La Torre and sponsored by CMA – that the governor vetoed.

The California Insurance and Life, Health, Disability Blog at californiainsurancelitigation.com and at mslawllp.com All rights reserved

As predicted in my April blog post, the U.S. Supreme Court today handed ERISA plan participants a big victory when they decided the important ERISA disability case of Hardt v. Reliance Standard Life Insurance, __ U.S. __ (Decided May 24, 2010) holding that an ERISA plan participant may be able to collect attorneys’ fees from a plan or claim administrator without obtaining a judgment in the action.

In that case, Bridget Hardt filed suit against the plan’s disability insurer, arguing that Reliance Standard Life Insurance Co. wrongly denied her claim for long-term disability benefits. The district court found that Reliance’s original decision denying benefits disregarded pertinent medical evidence in violation of ERISA and found that the decision was otherwise unsupported by substantial evidence. Based on those findings, the district court remanded the matter to Reliance for reconsideration, ordering it to make a new benefits determination, after which it finally granted the benefits due. The district court then awarded Hardt $39,149 in attorney fees.

The Fourth Circuit Court of Appeals reversed, holding that 29 U.S.C. Section 1132(g)(1)of ERISA provides a district court discretion to award attorney fees only to a prevailing party, and Hardt was not a prevailing party because her only request for relief was the award of benefits, which the district court did not award.

The questions presented were: (1) Whether ERISA section 502(g)(1) provides a district court with discretion to award reasonable attorney’s fees only to a prevailing party; and (2) whether a party is entitled to attorney’s fees pursuant to section 502(g)(1) when she persuades a district court that a violation of ERISA has occurred, successfully secures a judicially ordered remand requiring a redetermination of entitlement to benefits, and subsequently receives the benefits sought on remand.

In a 9-0 decision authored by Justice Thomas, the United States Supreme Court reversed, holding that because Section 1132(g)(1) does not use the term “prevailing party,” district court judges have discretion to award attorneys’ fees to either party, even in a situation where there is no judgment in favor of the plan participant. “We hold instead that a court ‘in its discretion’ may award fees and costs ‘to either party,’ ibid., as long as the fee claimant has achieved ‘some degree of success on the merits,’ Ruckelshaus v. Sierra Club, 463 U. S. 680, 694 (1983).”

The Court further explained its holding:

Ruckelshaus lays down the proper markers to guide a court in exercising the discretion that §1132(g)(1) grants. As in the statute at issue in Ruckelshaus, Congress failed to indicate clearly in §1132(g)(1) that it “meant to abandon historic fee-shifting principles and intuitive notions of fairness.” 463 U. S., at 686. Accordingly, a fees claimant must show “some degree of success on the merits” before a court may award attorney’s fees under §1132(g)(1), id., at 694. A claimant does not satisfy that requirement by achieving “trivial success on the merits” or a “purely procedural victor[y],” but does satisfy it if the court can fairly call the outcome of the litigation some success on the merits without conducting a “lengthy inquir[y] into the question whether a particular party’s success was ‘substantial’ or occurred on a ‘central issue.’” Id., at 688, n. 9.

This decision will encourage the proper adjudication of ERISA rights so that when plan participants achieve some measure of success in their actions against plan/claim administrators, they will be in a position to collect their attorney’s fees.

The California Insurance and Life, Health, Disability Blog at californiainsurancelitigation.com and at mslawllp.com All rights reserved

The Tuesday May 4, 2010 edition of the Los Angeles Daily Journal featured my article, entitled “Deferential Standard of Review in ERISA case Clarified,” in the Perspective column. It explains the latest case from the United States Supreme Court, Conkright v. Frommert and discusses what it means and how it should be read in conjunction with other Supreme Court and Ninth Circuit cases. The article is posted below with permission of Daily Journal Corp. (2010).

Insurance Commissioner Steve Poizner announced last week that his office will conduct an examination of Anthem Blue Cross’s claims-related data used by Anthem to justify its future rate filings. This comes after Anthem’s decision to withdraw its recent application to increase rates to thousands of insureds in California. Here is the press release:

NEWS RELEASE

Insurance Commissioner Steve Poizner Announces Examination of Anthem’s Claims-Related Data

Full Independent Actuarial Review of Recently-Withdrawn Anthem Filing Also Released Insurance Commissioner Steve Poizner announced that the California Department of Insurance (CDI) had begun an effort to assess the validity of the claims data used by Anthem Blue Cross to justify future rate filings.

“As Anthem readies its new rate filing, I have directed auditors at the Department of Insurance to determine whether the underlying information used by Anthem to prepare these documents is fair and accurate. This review will investigate whether there are problems with their claims payments systems and data controls,” said Commissioner Poizner. “I will not allow insurers to inflate their rates based on faulty systems or inaccurate data.”

The examination, started in early April, is scrutinizing Anthem’s accounting and claims systems in regards to the recording and documenting of premiums and claims data, and a review of the information systems and controls in place. The examination includes a review of the Company’s paid claims database, premium database and information systems processes and controls.

The data analyzed in the exam is ultimately the input that goes into the calculation of the company’s medical loss ratio.

Commissioner Poizner also released the full independent, outside actuarial analysis performed by Axene Health Partners, LLC. The 145 page report was conducted over a 10-week period and required 500 hours of work by four licensed actuaries. A summary of the review is below and the entire review is available at our Web site at http://www.insurance.ca.gov.

Based upon a thorough review of Anthem’s calculations, Axene found numerous errors in the methodology used by Anthem to project total lifetime loss ratios. Correcting these errors resulted in lower lifetime loss ratios than initially calculated by Anthem.

The errors identified included:

Error #1: Double counting of aging in the calculation of underlying medical trend for the projection of total lifetime loss ratio.

Error #2: Anthem overstated the initial medical trend used to project claims for September 2009 for known risk factors.

Both of these errors are errors of math and not differences in actuarial opinion.

For several years, health insurers have been strongly criticized for engaging in post claim underwriting and improper policy cancellations, known in the law as “rescissions.” The Insurance Commissioner has even recently regulated the practice.

Now, after this significant criticism and facing tougher federal regulation, two of California’s largest health insurers say they will stop rescinding policies. WellPoint Inc., the parent of Anthem Blue Cross of California, and Blue Shield of California, made the announcement yesterday. WellPoint Chief Executive Angela Braly said in a statement that the company’s “goal is to make reform work for our members and for the country.”

Even before this announcement, several health insurers in California had stopped (or largely stopped) policy rescissions. Under the new federal Healthcare Act, insurers will be limited in their ability to rescind health insurance policies. In 2014, this legislation will require insurers to sell policies to consumers regardless of preexisting conditions. This will effectively preclude the practice of rescissions.

The Los Angeles Times reports that last year, only four such cancellations were reported to the managed healthcare department, down from 1,552 in 2005. Since 2004, at least 5,000 Californians had their insurance policies rescinded by the state’s five largest health insurers — Anthem Blue Cross, Blue Shield, Health Net, Kaiser and PacifiCare. That includes about 3,500 policies regulated by the Department of Managed Health Care and another 1,600 policies regulated by the Department of Insurance.

This is a wise and very practical move by Wellpoint. Let’s see if other insurers who have not stopped the practice follow suit.

The federal courts have for a long time struggled with how to apply the deferential standard of review to actions taken by ERISA plan administrators in light of the United States Supreme Court holding in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). Firestone held that an ERISA plan administrator with discretionary authority to interpret a plan is entitled to deference in exercising that discretion. Courts have reached different results on an important issue: is a plan administrator that incorrectly interprets a plan document still entitled to an abuse of discretion standard of review when courts review the administrator’s actions? The Supreme Court answered that question in the affirmative in Conkright v. Frommert, __ U.S. __ (April 21, 2010). The Court telegraphed how it would rule when it framed the issue as: “The question here is whether a single honest mistake in plan interpretation justifies stripping the administrator of that deference for subsequent related interpretations of the plan.”

This is the Court’s first foray into the post-Glenn era of ERISA. In Metropolitan Life Insurance Co. v. Glenn, 554 U.S. __, 128 S. Ct. 2343 (2008), the Court reaffirmed Firestone’s adoption of a deferential standard of review under section 1132(a)(1)(B). Glenn elucidated the Court’s statement in Firestone and directed courts to proceed by “taking account of several different, often case-specific, factors, reaching a result by weighing all together.” Id. at 2350. The Court observed that a conflict of interest “should prove more important (perhaps of great importance) where circumstances suggest a higher likelihood that it affected the benefits decision,” and “should prove less important (perhaps to the vanishing point) where the administrator has taken active steps to reduce potential bias and to promote accuracy.” Id.

Conkright involved Xerox Corporation’s pension plan (“Plan”) in which Xerox acted as the plan administrator (“Plan Administrator”). The Plan granted the Plan Administrator broad discretion to “[c]onstrue the Plan” and “to take such action as may be necessary to correct [any] defect, rectify [any] omission or reconcile [any] inconsistency”.

Respondents were employees who left Xerox in the 1980’s, received lump-sum distributions of retirement benefits earned up to that point, and were later rehired. To account for the past distributions when calculating respondents’ benefits, the Plan Administrator initially interpreted the Plan to call for an approach that has come to be known as the “phantom account” method. Respondents challenged that method in an action under the Employee Retirement Income Security Act of 1974 (“ERISA”).

The District Court granted summary judgment for the Plan, but the Second Circuit vacated and remanded, holding that the Plan Administrator’s interpretation was unreasonable and that Respondents had not received adequate notice that the phantom account method would be used to calculate their benefits. On remand, the Plan Administrator proposed a new interpretation of the Plan that accounted for the time value of the money Respondents had previously received. The District Court declined to apply a deferential standard to this interpretation, and adopted instead an approach proposed by Respondents that did not account for the time value of money. The District Court ordered the Plan Administrators to pay a lump sum in the amount of the difference between their total accrued benefits and the prior lump sum distribution, without any reference to phantom accounts or hypothetical investment gains.

Affirming in relevant part, the Second Circuit held that the District Court was correct not to apply a deferential standard on remand, and that the District Court’s decision on the merits was not an abuse of discretion. The Second Circuit stated that it was unclear whether a de novo or arbitrary and capricious standard of review applied. It found, however, that “under either an arbitrary and capricious standard or as a matter of law,” that the Plan Administrator’s use of the phantom account method was a violation of ERISA.

The Supreme Court reversed, holding that the District Court should have applied a deferential standard of review to the Plan Administrator’s interpretation of the Plan on remand. The Court addressed the standard for reviewing the decisions of ERISA plan administrators in light of Firestone. Firestone looked to “principles of trust law” for guidance. Id. at 111. Under trust law, the appropriate standard depends on the language of the instrument creating the trust. In Firestone the court held that when a trust instrument gives the trustee “power to construe disputed or doubtful terms, . . . the trustee’s interpretation will not be disturbed if reasonable.” Id. The Court explained that under Firestone and the Plan’s terms, the Plan Administrator would normally be entitled to deference when interpreting the Plan. The Court of Appeals, however, crafted an exception to Firestone deference, holding that a court need not apply a deferential standard when a plan administrator’s previous construction of the same plan terms was found to violate ERISA.

The Court found that the Second Circuit’s “one-strike-and-you’re-out” approach had no basis in Firestone. The Court explained that the Plan granted the Plan Administrator general interpretive authority without suggesting that the authority was limited to a first effort to construe the Plan and noted that although trust law does not resolve the specific question of whether courts may strip a plan administrator of Firestone deference after one good faith mistake, guiding principles underlying ERISA do. The Court placed significant importance on the conclusion that Firestone deference serves the “interest of uniformity, helping to avoid a patchwork of different interpretations of a plan, like the one here, that covers employees in different jurisdictions—a result that ‘would introduce considerable inefficiencies in benefit program operation, which might lead those employers with existing plans to reduce benefits, and those without such plans to refrain from adopting them.’” The Court, seemingly annoyed at the District Court’s interpretation of the Plan that did not include the time value of money, recognized that according to actuaries this interpretation was “highly unforeseeable.”

Respondents asserted that deference is less important once a plan administrator’s interpretation has been found unreasonable, but the court rejected this, stating that the interests in efficiency, predictability, and uniformity do not suddenly disappear simply because of a single honest mistake.

The Court dismissed Respondents’ claim that plan administrators will adopt unreasonable interpretations of their plans, receiving deference each time, thereby undermining the prompt resolution of benefit disputes, driving up litigation costs, and discouraging employees from challenging plan administrators’ decisions. The Court explained that these concerns were “overblown.” But, the Court acknowledged that multiple erroneous interpretations of the same plan provision, even if issued in good faith, could support a finding that a plan administrator is too incompetent to exercise his discretion fairly. The Court determined that applying a deferential standard of review also does not mean that the plan administrator will always prevail on the merits. It means only that the plan administrator’s interpretation “will not be disturbed if reasonable.”