[Senate Hearing 105-859]
[From the U.S. Government Publishing Office]
S. Hrg. 105-859
ERISA PREEMPTION: REMEDIES FOR DENIED
OR DELAYED HEALTH CLAIMS
=======================================================================
HEARING
before a
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE
ONE HUNDRED FIFTH CONGRESS
SECOND SESSION
__________
SPECIAL HEARING
__________
Printed for the use of the Committee on Appropriations
Available via the World Wide Web: http://www.access.gpo.gov/congress/
senate
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U.S. GOVERNMENT PRINTING OFFICE
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_______________________________________________________________________
For sale by the U.S. Government Printing Office
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ISBN 0-16-058120-6
COMMITTEE ON APPROPRIATIONS
TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri PATRICK J. LEAHY, Vermont
SLADE GORTON, Washington DALE BUMPERS, Arkansas
MITCH McCONNELL, Kentucky FRANK R. LAUTENBERG, New Jersey
CONRAD BURNS, Montana TOM HARKIN, Iowa
RICHARD C. SHELBY, Alabama BARBARA A. MIKULSKI, Maryland
JUDD GREGG, New Hampshire HARRY REID, Nevada
ROBERT F. BENNETT, Utah HERB KOHL, Wisconsin
BEN NIGHTHORSE CAMPBELL, Colorado PATTY MURRAY, Washington
LARRY CRAIG, Idaho BYRON DORGAN, North Dakota
LAUCH FAIRCLOTH, North Carolina BARBARA BOXER, California
KAY BAILEY HUTCHISON, Texas
Steven J. Cortese, Staff Director
Lisa Sutherland, Deputy Staff Director
James H. English, Minority Staff Director
------
Subcommittee on Departments of Labor, Health and Human Services, and
Education, and Related Agencies
ARLEN SPECTER, Pennsylvania, Chairman
THAD COCHRAN, Mississippi TOM HARKIN, Iowa
SLADE GORTON, Washington ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri DANIEL K. INOUYE, Hawaii
JUDD GREGG, New Hampshire DALE BUMPERS, Arkansas
LAUCH FAIRCLOTH, North Carolina HARRY REID, Nevada
LARRY E. CRAIG, Idaho HERB KOHL, Wisconsin
KAY BAILEY HUTCHISON, Texas PATTY MURRAY, Washington
TED STEVENS, Alaska ROBERT C. BYRD, West Virginia
(Ex officio) (Ex officio)
Majority Professional Staff
Bettilou Taylor
Minority Professional Staff
Marsha Simon
Administrative Support
Jim Sourwine and Jennifer Stiefel
C O N T E N T S
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Page
Opening remarks of Senator Specter............................... 1
Opening remarks of Senator Edward M. Kennedy..................... 2
Prepared statement........................................... 3
Source of coverage............................................... 3
Opening remarks of Senator Lauch Faircloth....................... 3
Prepared statement of Hon. Tom Harkin, U.S. Senator from Iowa.... 4
Statement of Olena Berg, Assistant Secretary, Pension and Welfare
Benefits Administration, Department of Labor................... 5
Prepared statement........................................... 7
Statement of Robert Gallagher, Principal, Groom & Nordberg,
Chartered, on behalf of the Association of Private Pension and
Welfare Plans [APPWP] the Benefits Association................. 14
Prepared statement........................................... 16
Statement of Ronald F. Pollack, executive director, Families USA. 21
Prepared statement........................................... 23
Statement of Mark A. Smith, Employees Benefits Compliance
Manager, AMP Inc., on behalf of the National Association of
Manufactures................................................... 27
Prepared statement........................................... 29
Common law rights of action...................................... 37
ERISA PREEMPTION: REMEDIES FOR DENIED OR DELAYED HEALTH CLAIMS
----------
THURSDAY, MAY 14, 1998
U.S. Senate,
Subcommittee on Labor, Health and Human
Services, and Education, and Related Agencies,
Committee on Appropriations,
Washington, DC.
The subcommittee met at 12:35 p.m., in room SD-138, Dirksen
Senate Office Building, Hon. Arlen Specter (chairman)
presiding.
Present: Senators Specter and Faircloth.
Also present: Senators Kennedy and Durbin.
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
STATEMENT OF OLENA BERG, ASSISTANT SECRETARY
OPENING STATEMENT OF SENATOR SPECTER
Senator Specter. The subcommittee on Labor, Health and
Human Services, and Education, will now proceed with this
hearing concerning the ERISA preemption of remedies on health
care claims. We hear a lot about ERISA. It is the Employee
Retirement Income Security Act of 1974, which has created a
comprehensive Federal approach, dealing with the rights of
employees in welfare benefit plans offered by employers.
The Congress has preempted all State laws that, quote,
``relate to any employee benefit plan.'' And as a consequence
of that provision, patients are prevented from suing employer-
sponsored health insurance plans if injury occurs as a result
of any improperly denied or delayed health coverage. The issue
has created quite a lot of controversy. It is a matter which is
frequently raised in the open-house town meetings that I
conduct in my State. There is a real concern that if there is a
modification of this provision, the costs will rise very
substantially for health care premiums--some estimates being as
high as 8 or 9 percent.
The use of the managed care plans has risen tremendously.
In 1984, only 5 percent of the employees were covered by
managed care. More recently, that figure has increased to as
much as 80 percent of the employees in the United States.
The Congress has moved ahead with a number of measures on
the so-called micromanagement. When the issue of drive-by
deliveries came up, the Congress acted, to require that
patients stay in the hospital for at least 48 hours. There are
provisions up for drive-by mastectomies. Once one of these
provisions reaches the floor of the U.S. Senate or the U.S.
House, it is very hard to see those measures voted against. But
it is obviously undesirable to have micromanagement by the
Congress.
We have seen areas of major concern on the so-called gag
rule. We have seen major concern on capitation on the issue of
referral by the general practitioner to specialists. There are
issues of more disclosure being necessary, appellate rights and
these are issues which are very much in the forefront in the
Congress today, with several health care plans being pending.
We have a very distinguished panel today. And let me yield
for a brief opening statement by Senator Kennedy, who has asked
for leave to sit with the subcommittee today. He has been a
leader in health care over the years.
Senator Kennedy, welcome.
OPENING REMARKS OF SENATOR EDWARD M. KENNEDY
Senator Kennedy. Thank you, Mr. Chairman. And I just want
to thank Senator Specter for having the hearings. I hope we are
able to hear the hearings as we go on through the course of
this hearing. But I do want to express appreciation, because
this is an issue of enormous importance.
And no matter where different parties come out on the
questions of a Patients' Bill of Rights or other kinds of
related issues, this one is something that is of enormous
importance and consequence in and of itself. And we have
panelists here to help us. And we have not had really the kinds
of hearings that we are having there that can really benefit us
in the Senate.
So, I thank the Senator for extending the courtesy. I
basically had indicated that I just welcome the chance to
listen to our witnesses here this morning, and I am grateful to
him. He has outlined the basic challenges that we are faced
with. We have really, as he pointed out, a changed situation in
our Nation. And we have 123 million Americans that are covered
by some employer kind of related coverage and health insurance
programs, and they are treated one way. We have State and local
employees--millions of those--almost 20 million--that are
treated a different way. We have individuals who have
individual plans, and they are treated differently.
And the real kind of question is, how are we going to best
protect the consumer? And how are we going to, with these
changed conditions, in terms of the managed care, how are we
best going to protect the consumer?
prepared statement
And we are looking forward to hearing from our panelists
here today on their observations and their recommendations.
I am very grateful to the chair. I would like to put my
full statement in the record.
Senator Specter. Without objection, it will be placed in
the record.
[The statement follows:]
Statement of Senator Edward M. Kennedy
I commend Senator Specter for holding this hearing and for his
leadership on this important issue, and I'm grateful for the
opportunity to participate in this hearing.
Too often today, because of ERISA preemption, unscrupulous health
insurance plans have a license to maim and kill.
Under the Employee Retirement and Income Security Act, patients
whose lives have been devastated or destroyed by the reckless behavior
of their health plan are denied the right to go to court to obtain
reasonable remedies under state law. ERISA ``preempts'' all state
actions.
Patients are limited to the narrow Federal remedy, which covers
only the cost of the procedure that the plan refused to pay for. Some
remedy! You can be crippled for life because your health plan refused
to authorize a test costing a few hundred dollars--and all you can
recover is the cost of the test.
The denial of fair remedies is indefensible. It's an incentive for
unscrupulous plans to deny payment for costly services, knowing they
can't be held liable for the serious injuries that result.
Persons who are injured by such willful or negligent acts deserve a
remedy. If they are seriously injured, they may have no other way to
obtain the financial help they need to care for themselves or provide
for their families for the rest of their lives.
ERISA preemption applies to millions of Americans who obtain their
health insurance coverage through a private employer. But it does not
apply to 23 million State and local employees and their families. It
does not apply to people who buy insurance on their own, rather than
through an employer. It does not apply to Medicaid patients. It does
not apply to Medicare patients enrolled in private health plans. These
patients already have appropriate remedies under current law, and so
should every other patient.
If state and local government employees have the right to hold
their taxpayer-financed health plans accountable, equally hard-working
Americans employed by private companies should have the same basic
right.
Every other industry in America can be held responsible for its
actions. Health plan decisions can truly mean life or death, and they
do not deserve immunity.
The Patients' Bill of Rights legislation that many of us support
will guarantee this right as well as provide a number of other
critically important protections for patients against abusive behavior
by health plans. It has been endorsed by more than 100 organizations
representing doctors, nurses, and patients, and it deserves to be
endorsed by the Senate. This hearing is an important step toward doing
so, and I look forward to the comments of our witnesses.
source of coverage
Senator Specter. Before turning to Senator Faircloth for an
opening statement, I would call attention to the two charts
which our very able staff has prepared, showing the source of
coverage. On average, there is about 125 million people who
receive their health insurance coverage through employers' base
plans. As I stated earlier, 5 percent of those who received
health insurance in 1984 were on these plans. But by 1997, more
than 80 percent of employees had shifted to the HMO, away from
fee-for-service medicine, into managed care.
There is always some competitive force around here, and we
are going to try to get the drilling stopped. But, in the
interim, we want to proceed with the very distinguished panel
which we have today. The lights will be for 5 minutes, with the
yellow signifying 1 minute.
Before doing that, I turn to my very distinguished
colleague from North Carolina, Senator Faircloth.
OPENING REMARKS OF SENATOR LAUCH FAIRCLOTH
Senator Faircloth. Thank you, Mr. Chairman.
I'm pleased to be here to address the very serious problem
people are facing today regarding the denial or delay of health
benefits. Health insurance plans are supposed to provide
security to workers and their families in the event of illness
or injury. But as more companies become self-insured or adopt
managed care, I've been hearing from more people, constituents
in North Carolina, who are unhappy with their care.
This seems to be caused by the different ways traditional
fee-for-service and managed care plans provide care. Under fee-
for-service, treatment is provided up front and payment issues
are dealt with later. Most managed care plans require coverage
decisions to be made before care is given. The focus becomes
cost, not care.
I can understand the concern when people feel they or a
loved one needs care and faces a delay as the HMO decides to
respond--well, I'd be upset too. I feel deeply for people who
are denied basic rights, like access to specialists and
emergency room care. I support the consumer protection and
quality provision in the patients' bill of rights. I also agree
with doctors who say they should not be held accountable for
medical decisions they have not made which have been imposed by
a plan. But I cannot in good conscience, support any approach
that results in more litigation which drives up health costs.
I see that one of our witnesses today is a trial lawyer,
and well versed in this dynamic. In his testimony, he will talk
about the chilling effect of litigation. He lays it all out--
expanded lawsuits cause increased costs to the insurance and
managed care company and employers. They pass this cost along,
and my constituents pay more for health insurance. They pay
enough already, I don't want to see them have to pay more.
After careful consideration, I decided to cosponsor a bill
known as QUEST, which meets 7 of the 11 elements the AMA say
they need. QUEST enhances protection for patients by improving
internal claims and appeals review, and requiring external
reviews. But QUEST does not reach self-insured companies, which
cover many of these lives. So, I am pleased to hear that the
administration will now use a similar approach to better
provide patient protection for ERISA plans. And I am delighted
that they have decided to make these improvements in the name
of decreased litigation.
Thank you, Mr. Chairman.
Senator Specter. Thank you very much, Senator Faircloth.
prepared statement of senator tom harkin
We have received a prepared statement from Senator Harkin,
it will be inserted into the record at this point.
[The statement follows:]
Prepared Statement of Senator Tom Harkin
Thank you, Mr. Chairman, for holding this important hearing
on federal law regarding ERISA self-insured health plans and
its effect on consumers' ability to seek redress for denied or
delayed health claims. And I am happy to welcome Senator
Kennedy here with us this afternoon. He has shown tremendous
leadership on this subject.
This is an issue of increasing concern to millions of
Americans throughout our country; 146 million Americans get
their insurance through their employer. Of that number, 123
million people--roughly half the nation--are in self insured
plans regulated by ERISA, and have very limited legal remedy if
their treatment is denied by their HMO.
As increasing numbers of employers are turning to managed
care as a cost-efficient way to provide health benefits to
their employees, it is vital that Congress examine the possible
problems presented by ERISA.
I am pleased to say that I have cosponsored Senator Daschle
and Senator Kennedy's bill, ``The Patients' Bill of Rights.''
This consumer protection bill would provide Americans with a
fundamental set of health care rights. It is a good, fair bill
and I believe the Senate should take it up for consideration
without delay.
Included in this bill is a provision that amends ERISA so
that the States are allowed to determine whether or not a
beneficiary can bring a state cause of action against health
plan administrators who cause harm through their decisions.
Our legal system is based on the principle that individuals
and companies are responsible for the decisions they make or
the actions they take. If a health maintenance organization
makes a decision to improperly delay or deny care that results
in harm to a patient, that organization ought be held
accountable for their decision. Today, too often that is not
happening.
In my own State of Iowa, Randy and Nancy Davis brought suit
against their employer and their group health plan on behalf of
their daughter Wendy, a child with Down's Syndrome. Randy Davis
was employed by the Ottumwa YMCA. One of the benefits of the
job was group health insurance, which was critical to the Davis
family because of Wendy's condition. When Wendy needed medical
treatment, their health plan denied their coverage on the
grounds that the YMCA had allowed their policy to lapse. This
left the Davis family without any coverage. The Davises sued,
but the court would not hear their case--their claim was
preempted because of ERISA.
But if the Davises had been State or local employees
covered by their employer, or if they had purchased individual
insurance directly from the insurer, they could have sued under
State law and the court would have considered the case. But the
Davises are among a fast growing majority--approximately 80
percent of Americans--that do not have such an option.
This case and numerous others demonstrate the need for us
to re-examine certain aspects of ERISA. Twenty-four years ago,
ERISA was enacted to protect the pension and welfare benefits
of employees, while at the same time helping employers avoid
costly regulatory requirements and legal impediments. But 24
years ago, the vast majority of Americans were covered through
traditional fee-for-service plans. When a patient sought care,
he or she usually received it, and then was reimbursed by the
insurer. Today, however, managed care has fundamentally changed
the delivery of health care in this country. Patients are too
often not assured they will get the care they need because of
cost cutting efforts.
When a company is in the business of deciding what medical
treatment is necessary, I believe they are making medical
decisions. And they should be held accountable for those
decisions. ERISA should reflect that.
A judge from Massachusetts, after dismissing a case because
ERISA preempted the claim, states, ``This case, thus, becomes
yet another illustration of the glaring need for Congress to
amend ERISA to account for the changing realities of the modern
health care system. Enacted to safeguard the interests of
employees and their beneficiaries, ERISA has evolved into a
shield of immunity that protects health insurers, utilization
review providers, and other managed care entities from
potential liability for the consequences of their wrongful
denial of health benefits.''
I think we all would do well to heed this judge's advice.
Thank you.
summary statement of hon. olena berg
Senator Specter. Our first witness is Ms. Olena Berg, now
serving in her fifth year as Assistant Secretary for the United
States Department of Labor's Pension and Welfare Benefits
Administration. She had been chief deputy treasurer in
California, and had been executive vice president of Lowe
Associates in Los Angeles.
We are still trying to stop the noise, Ms. Berg, but if you
would proceed at this time as best you can.
Ms. Berg. Well, thank you, Chairman Specter and members. I
appreciate your inviting me here today to speak to you about
ERISA preemption. The administration is absolutely committed to
improving consumer protections by making real the Presidential
Commission's Consumer Bill of Rights, and ensuring that its
protections are enforced. Bipartisan legislation has been
introduced in this Congress to implement the bill of rights.
These bills have momentum, and Congress should act now to put
these protections in place.
As you know, many of these bills do address the issue of
remedies. It is crucial that consumers be able to obtain
adequate redress when they are injured by the wrongful delay or
denial of a health benefit claim. But ERISA currently only
provides for the benefit the individual should have received to
begin with. No additional medical costs, no other compensation
is available. Consumers in ERISA plans do not have adequate
protections.
And this is a problem. Because as you have already pointed
out, ERISA covers approximately 125 million Americans.
This law was enacted in 1974, primarily to address abuses
in the private sector pension plans. And as a result, it
included only limited protections for participants in health
plans. In addition, two key changes have occurred since ERISA
was enacted that have resulted in the statute not providing for
adequate remedies.
The first, again, has already been pointed out, the immense
growth in managed care arrangements. In traditional fee-for-
service medicine, you got the treatment up front and people
argued afterward how the payment would be divided. Now, in
managed care arrangements, coverage decisions are made before
the medical treatment is provided. And so today, the improper
denial of a claim to which someone is entitled means they will
not get the treatment to which they are entitled.
Second, ERISA preemption has blocked the application of
State protections in health care claims involving ERISA plans.
In 1987, the Supreme Court held that ERISA occupied the entire
field of remedies for its participants, precluding the States
from providing any different or additional protections. The
limited remedies in ERISA applied both to self-insured plans
and to the fully-insured plans that would otherwise be subject
to State regulation.
This is why legislation is now needed to ensure that ERISA
serves the purpose for which it was enacted in the first place.
And that is to protect promised benefits.
It is also important to note that participants in many
health care plans not governed by ERISA have stronger
protections. Consumers who purchase individual insurance
policies directly from an insurer or an HMO, State and local
government employees, participants in Medicare and Medicaid all
can sue under State law for wrongful denial of a benefit.
Unlike ERISA participants, not only can they receive the
benefit and attorney's fees, but also the cost of additional
care, lost wages, and other damages, as well.
The protections we have should not depend on the type of
plan we have.
Let me briefly illustrate the problem with ERISA with an
example. Let us assume an ERISA plan participant goes to her
HMO doctor complaining of severe and persistent headaches, and
the doctor determines that she needs a CAT scan. But that test
has to be approved by a utilization review panel. And let us
assume that they wrongfully deny her that test. And as a
result, a treatable condition that she has goes undiagnosed and
untreated. That condition causes her to become permanently
disabled.
If she goes to court under ERISA and if she is successful,
her remedy will be the cost of the test that she should have
had in the first place.
Now, as I point out in my written testimony, we believe
that a solution to the problem of wrongful claims denial has
three components. First, strengthening internal claims reviews.
Second, requiring independent external review. And, finally,
remedies.
Some would argue that only the first two are necessary. We
disagree. First, a strengthened grievance procedure will not be
effective 100 percent of the time, no matter how good it is,
and wrong decisions will still cause damage. In those cases,
individuals should be able to be compensated.
Second, plans can comply with procedural requirements, they
can meet all of those, and still arbitrarily deny claims. Now,
external review might take care of a large part of that, but
many participants, we know, never question that initial
determination. They never go into the appeals process. They
just assume that that determination was properly made.
And if at the end of the day the only consequence for plans
that engage in this kind of practice, just arbitrarily denying
things, is paying the benefit that they would have had to pay
in the first place, they have no reason to do the right thing
and strong economic reasons for denying valid claims. Only in
combination will internal reviews, external reviews and
improved remedies secure consumers' rights to their benefits.
These reforms provide plans with both the mechanisms and
the incentives to treat consumers fairly from the start. There
are a number of ways to provide remedies and accountability. In
the interest of time, I will not outline them for you, but I
refer you to my written testimony.
prepared statement
We look forward to working with you, to sign into law
bipartisan legislation that will improve consumer protections
and provide remedies under ERISA. I applaud your willingness to
look at this issue, and thank you for the opportunity to be
here today. I am happy to answer any questions you may have.
Thank you.
Senator Specter. Thank you very much, Ms. Berg, for your
testimony. All written statements will, as customary, be made
part of the record.
[The statement follows:]
Prepared Statement of Olena Berg
introduction
Chairman Specter and Members of the Subcommittee, thank you for
inviting me to speak with you this morning about ERISA preemption and
its impact on consumer remedies for improper delay and denial of health
benefit claims. We appreciate the leadership of the Chairman, Ranking
Member, and other Committee members in holding this hearing to address
ways to restore the public's confidence in America's health care system
by implementing enforceable consumer protections.
As Assistant Secretary of the Pension and Welfare Benefits
Administration (PWBA), I direct the agency that administers the
Employee Retirement Income Security Act (ERISA), the primary federal
statute governing employment-based health plans. As you know, the
President's Advisory Commission on Consumer Protection and Quality in
the Health Care Industry, co-chaired by the Secretaries of Labor and
Health and Human Services, last fall issued a Consumer Bill of Rights
and Responsibilities. This approach recognizes that consumer
protections and health care quality are each essential to the other.
The President embraced the Bill of Rights and called on Congress to
pass bipartisan legislation this session.
The Administration is strongly committed to improving consumer
protections and the quality of health care in the employment-based
system, including improved internal claims review procedures and
external review. We are also committed to ensuring that these
protections are enforceable. We recognize the fundamental problem
regarding ERISA remedies best characterized by Judge Young in his
opinion in Andrews-Clarke v. Travelers Insurance Company. Judge Young
stated that, although ERISA was ``[e]nacted to safeguard the interests
of employees and their beneficiaries, [it] has evolved into a shield of
immunity that protects health insurers, utilization review providers
and other managed care entities from potential liability for the
consequences of their wrongful denial of health benefits.'' Judge Young
noted the, ``glaring need for Congress to amend ERISA to account for
the changing realities of the modern health care system.''
At the heart of the opinion in the Andrews-Clarke case is the
matter before us today. When an individual suffers harm due to the
wrongful delay or denial of a claim for promised health benefits, ERISA
only provides for the benefit that the individual should have received
to begin with; no additional medical costs or other compensation is
available.
overview of erisa
This issue is so important because of the simple fact that most
workers and their families receive their health care through ERISA-
covered plans. ERISA covers over 2.5 million private sector health
plans which provide health benefits to 125 million people. These plans
are either provided by employers, or are jointly trusteed ``Taft-
Hartley'' plans negotiated by unions with groups of employers.
The employment-based health care system regulated by ERISA is a
voluntary system. While we in PWBA enforce ERISA's provisions, we do
not certify, accredit, or approve plans. ERISA represents an effort to
adequately protect the health benefits promised to individuals while
avoiding overly burdensome or costly requirements that might discourage
employers from offering, or employees from enrolling in, plans.
In providing health benefits, employers and employees can either
contribute to the purchase of third party insurance or provide health
benefits directly themselves. Thus, ``fully-insured plans'' are plans
that pay a premium or per capita payment to a third party to insure the
health benefits offered to employees. ``Self-insured plans,'' also
called ``self-funded'' plans, are ones in which the plan sponsor agrees
to be primarily liable for the provision of promised health benefits to
employees.
the erisa framework
In order to understand the purpose and operation of ERISA, it may
be helpful to briefly review the history of this legislation. ERISA was
enacted in 1974 primarily to address abuses in private sector pension
plans. Hearings in the 1960's and 1970's revealed that large numbers of
working people were losing their pension benefits because of:
underfunding, long vesting periods, and plain ``garden variety''
pension fraud and mismanagement. These problems were compounded by a
lack of adequate reporting and disclosure either to the government or
to participants of the status of their pension benefits. These problems
were serious enough that many States had either passed, or were
considering passing, statutes regulating pension plans. This posed an
additional problem: plan sponsors that wished to offer their
participants uniform benefits but that operated in more than one State
would have to cope with myriad and possibly conflicting State
regulations.
ERISA dealt with these problems with respect to pension plans by
providing detailed minimum standards for participation, vesting and
funding of the plans, and uniform reporting, disclosure and fiduciary
requirements. ERISA also provided uniformity by preempting all State
laws relating to any ERISA-covered employee benefit plan.
However, while ERISA provides uniform reporting, disclosure and
fiduciary standards for health plans, there is no substantive
regulation of health plans under ERISA that is comparable to the
participation, vesting, and funding requirements for pension plans.
When ERISA was enacted in 1974, most people received health
insurance coverage through insurance contracts which were regulated by
States. Since there was a general consensus that States could and
should regulate insurance contracts, they were carved out of ERISA's
general preemption of State law by the so-called ``savings clause.''
Because of this structure, insurance contracts purchased by employment-
based health plans are generally regulated by States, while self-
insured plans are not. That may not have been much of an issue in 1976,
when only 4 percent of health benefits were paid under self-insured
plans. Today, however, for a variety of reasons, about 40 percent of
workers with private employment-based health benefits are covered under
self-insured plans.
It may appear that I have drawn a simple line to help you
understand the ERISA framework: self-insured plans are generally
regulated federally by ERISA while plans that purchase insured products
accept the State regulations that apply to the product they purchase.
Unfortunately, because of the scope of ERISA's preemption clause and a
series of court decisions, things are not quite that simple.
scope of erisa preemption
I have to qualify my comments by noting that the extent and the
limits of ERISA preemption are far from clear. To date, the U.S.
Supreme Court has issued 16 decisions on how preemption should be
applied. Other issues are confused by conflicting decisions by the
lower courts. Nevertheless, I will venture toward some tentative
conclusions that I hope will help.
One, States laws governing the solvency of insurers or mandating
that health insurance policies cover certain types of care are not
preempted, because of the savings clause, as laws regulating insurance
are not preempted. However, these same laws may not be applied to self-
funded plans.
Two, State laws that allow participants to sue plans for failing to
follow certain procedures in denying and reviewing benefit claims, and
providing that a participant may obtain compensatory damages for
abusive processing of such claims are preempted, even if the claimed
defect is a violation of a State law regulating insurance. The Supreme
Court, in the Pilot Life decision, held that ERISA preempts an
employee's State common law breach of contract and tort action against
an insurance company for improper claims processing. Although the court
ruled that the employee's action was not saved from preemption by
ERISA's ``insurance savings clause,'' it also noted that ERISA's
remedies for plan participants to enforce claims for benefits displaced
State laws conferring similar causes of action. The Supreme Court said,
in effect, that ERISA occupied the entire field of remedies for ERISA
plans, precluding the States from providing any different or additional
remedies. State laws that provide for external review of claims denials
may also be preempted by ERISA. This issue has never been decided by
the courts. To the extent that State insurance laws prohibiting
insurance companies from engaging in unfair claims practices are
enforced by State agencies, such claims may survive ERISA preemption as
applied to fully-insured plans. However, the courts have never
addressed this issue.
Three, there have been cases where a Health Maintenance
Organization (HMO) will attempt to use ERISA preemption to protect
itself from such liability. The Department has successfully argued in a
number of amicus briefs that State laws holding physicians and those
that contract for their services liable for medical malpractice in
connection with treatment decisions are not preempted, even if the
physician provides services to ERISA plan participants. We have opined
that State medical malpractice laws do not relate to ERISA plans.
Instead, State malpractice laws, regulate medical treatment without
regard to how it is paid for. On the other hand, if treatment is denied
or delayed through wrong or slow decisions, based solely on what is or
is not covered by the plan, State laws cannot address this problem. If
a State attempts to regulate the payment of claims, including refusals
to preauthorize medically necessary care, such a law will likely be
preempted with respect to ERISA plans, whether insured or self-insured.
As a result of ERISA's remedial framework and the interpretation of
its preemption provisions, the States are limited in their ability to
protect the rights of participants in all ERISA-covered plans.
In addition, the absence of more stringent accountability for ERISA
plans has become especially problematic for ERISA plan participants in
the past decade due to the dramatic increase of managed care
arrangements. According to various data sources, enrollment in managed
care grew from approximately 1 percent to 81 percent of total health
plan enrollment among medium to large size employers between 1980 and
1997. Most smaller businesses have embraced managed care as well.
Managed care plans raise questions of regulation and legal remedies
that were not anticipated when ERISA was enacted in 1974. Unlike the
traditional fee-for-service environment where treatment is provided up
front and payment issues are dealt with later, most managed care
arrangements require coverage decisions to be made before most medical
services are provided. Today, denying a request for medical coverage
can do more than force the patient to pay for the care herself. In all
too many cases, delay or denial of plan benefits can even lead to a
failure to obtain necessary treatment. This makes the timeliness and
accuracy of these decisions more significant, and the availability of
adequate procedural protections and remedies even more important.
The consequence of all of these developments is that ERISA does not
adequately provide for the essential consumer protections listed in the
Commission's Consumer Bill of Rights. As a result, legislation is
needed to implement these protections in ERISA-covered plans and
provide a mechanism for the enforcement of these protections.
broader remedies are available elsewhere
In its final report, the President's Commission noted that,
``consumers can be injured as a result of an inappropriate decision to
deny insurance coverage for services that are medically necessary and
covered by the plan. In some cases such decisions can lead to a delay
in care or to a decision to forgo care entirely.'' Plainly, ERISA's
current enforcement mechanism has proved insufficient to safeguard
consumers' health care benefits. Participants in many health care plans
not governed by ERISA enjoy stronger protections. To illustrate this
point more clearly, consider the experiences of two hypothetical
individuals: ``Bob'' and ``Mary.''
If Bob bought an individual policy directly from an insurer or HMO,
or if he is a State or local government employee covered by his
employer's plan, chances are he can sue the insurer, HMO, or plan under
State law for wrongful denial of a promised benefit. The State court
will examine the dispute anew, considering all available facts. If Bob
wins, remedies are available which, depending on Bob's losses and the
laws in his State, can include the benefit that should have been paid,
the cost of otherwise uncovered additional care, attorney's fees and
other legal costs, lost wages and other financial losses, compensation
for injury or wrongful death, compensation for pain and suffering, and,
possibly, punitive damages.
If Mary, Bob's neighbor, is insured as a private sector employee,
her remedy for wrongful delay or denial of a promised benefit is
determined not by State law, but by ERISA, which preempts State
remedies. Mary generally can sue only in federal court. The court will
likely consider only facts considered already by the person who denied
coverage, and will defer to that person's judgment unless it is shown
to be unreasonable. What's more, if she wins, she can recover only the
benefit that should have been paid and, at the court's discretion,
possibly attorney's fees.
The inability of consumers to recover additional remedies is best
illustrated by the real life story of Madison Scott as reported by NBC
Nightly News. When Madison Scott was born prematurely with correctable
retinopathy, her parents allege that the HMO delayed a key test 8
weeks. Today the two-year-old is blind. Unfortunately, under ERISA, her
HMO is not liable for the harm that occurred if the coverage was
delayed. Moreover, Mr. and Mrs. Scott cannot recover the additional
costs they will need to provide special care for Madison. We believe
that the Madison Scott's of this world deserve their day in court, with
a court determining the facts of the case, and with remedies adequate
to address the injury, if any, that was suffered as a result of the
alleged delay.
Today in America, there are 125 million people who are enrolled in
ERISA-covered health plans and, like Madison and our hypothetical Mary,
are, therefore, unprotected by adequate remedies. There are roughly 60
million individuals, like our hypothetical Bob who are protected by
stronger State law remedies. This varied treatment depending upon which
law governs your particular health benefit plan is unjustifiable.
There is growing evidence of the consequences of ERISA's limited
remedies. In fact, delay or denial of coverage is the most commonly
stated health insurance problem, reported by 11 percent of managed care
enrollees in a survey for the Kaiser Family Foundation and others.
Delays and denials suffered by Kaiser survey respondents resulted in
claims of serious harm:
--24 percent said they were physically injured;
--3 percent were permanently disabled;
--26 percent lost school or work time, while 9 percent lost more than
10 days; and
--41 percent suffered financial losses.
Furthermore, our legal system is premised on the basic principle
that individuals and organizations must be responsible and accountable
for actions that cause injury to others. Where an entity fails to
deliver what it promises, or negligently provides a service or product,
and this failure results in injury to a consumer, that consumer must be
compensated for the injury.
Ironically, I have more consumer protections and remedies available
when I buy a car, a toy for my child, or use my credit card. If I walk
into my neighborhood grocery store, and due to a dangerous condition
inadvertently created by store employees, I slip, fall, and injure
myself, our legal system allows me to have legal recourse against the
store to seek compensation for my injuries. If my pharmacist mistakenly
gives me the wrong medication, and I am injured as a result, I also can
seek to obtain relief from the pharmacist or the company that employs
her. If I buy a car or any other product, I rely on the expertise of
the manufacturer to make sure that the product is safe and free of
defects. If I am injured due to a defect in the product, the product
manufacturer can be held accountable for damages under our legal system
to reasonably compensate me for my injury. By the same token, when I
receive health care benefits, I rely on the expertise of plan
administrators to make the correct coverage decision in a timely
manner. Under ERISA, however, if I am injured because such decisions
are not made correctly or are unreasonably delayed, our legal system
does not hold the plan accountable. I cannot receive any damages beyond
the benefit itself. There is no reason why we should treat health care
differently than we treat other consumer products or services.
remedies as procedural protection
Several health care consumer protection bills pending in this
Congress would enact strong procedural protections to protect
participant health benefits. Some of the bills include improved
internal plan claims review, impartial external review, and enhanced
remedies. The theory behind this arrangement is that these three
elements working together can assure accountability, better health care
delivery, and may result in less, not more, litigation of these issues.
ERISA's current provisions regarding internal claims review have
become inadequate to protect the rights of ERISA plan participants in
today's managed care environment. For this reason, the Department will
be proposing amendments to the current claims review regulation in the
near future to require fairer and more expeditious handling of benefit
claims and appeals through plans' internal claims procedures. The
Department will propose faster processing of routine and urgent benefit
claims and appeals, require consultation with medical professionals in
deciding appeals involving medical judgments, and require that appeal
decisions consider all relevant information and be rendered by a party
other than the party who made the original claims determination, among
other provisions. Clearly, effective and appropriate regulation in this
area should not lock in yesterday's standards, but should be part of a
framework in which plans can adapt to future needs. Consumer
protections tailored to accommodate group plans' variety can advance
patients' rights while nurturing innovations that improve quality,
choice, and affordability for group plan enrollees.
Independent external review is also an important component to
provide accountability. ERISA currently provides no authority for
requiring an independent system of external review. As a result,
legislation is needed to amend ERISA and provide for this requirement.
An impartial, speedy, expert review by an entity external to the health
plan is essential to securing participants' right to covered benefits.
The more claims that can be resolved at an earlier stage of the process
through internal or external review the less likely it will be that
participants will be injured by the wrongful delay or denial of health
claims. An improved internal claims review coupled with an independent
system of external review will go a long way toward resolving improper
delay or denial of claims before an injury occurs, reducing the need
for litigation.
However, adding these enhanced procedural protections on the front
end do not eliminate the need for improved remedies. Procedural rights,
even when honored, cannot eliminate negligent or self-interested
decision making by those determining whether claimed coverage has been
promised by the plan. Some cases will involve only disputes about the
availability of a benefit, and, if promptly resolved, no consequential
harm will result. However, other wrongful decisions, even if ultimately
corrected by some newly created administrative tribunal or by the
courts will, some percentage of the time, cause injury before they are
corrected. In some cases, the relief necessary to repair the injury
will be easily defined and relatively minimal. For these cases, we
should be looking for speedy, economical, and fair means of dispute
resolution. As the seriousness of the health and economic harm
increases, more substantial remedies should be available from
traditional court proceedings.
In other contexts throughout our legal system, foreseeable injuries
caused by a failure to deliver what has been promised must be
compensated. Under ERISA, however, working men and women give their
labor in exchange for the promise of benefits, but are not compensated
for injuries when benefits are wrongly withheld. Under this system, an
insurance company or HMO may stubbornly refuse to provide what is
promised in the hope that the worker will not finance a court battle,
and even if she does, years of litigation will produce no more than an
order to provide the withheld benefits.
How else to explain Bedrick v. Travelers Ins. Co.? There the Fourth
Circuit Court of Appeals determined that Travelers had withheld
desperately needed physical therapy from a severely handicapped child
on the grounds that the therapy was not medically necessary since it
would only prevent further deterioration in the child's condition, but
could not cure him. Would Travelers have engaged in a long and costly
court battle to oppose the therapy, if it knew that it might be
responsible for the consequences of the delayed treatment? Under our
present system, the litigation, premised on a defense that the court
found ``revolting,'' made economic sense for Travelers. If the child's
family could not finance the physical therapy while the litigation
remained pending, every week spent in court was a week during which
Travelers did not have to pay for on-going therapy. While the
discussion about what types of remedies are needed is a legitimate one,
without additional remedies, our system produces perverse results.
The absence of remedies produces another perverse result that
additional procedural protections cannot prevent. As our system is
currently constituted there is no disincentive to applying harsh and
arbitrary guidelines for the initial denial of care. To litigate a
claim's denial requires significant resources, and some percentage of
claimants can be counted on to give up without pursuing their claim.
While we are aware of no studies, advocates for claimants have reported
to us an astonishing rate of success in getting decisions overturned
prior to, or immediately after, filing litigation. Attorney's fees for
pre-suit work are borne by the claimant. The current system lacks
incentives to assure that the initial claims determination is fair,
since the wrongly denied claimant who is injured can never seek
compensation for injury while his case is pending, and the discouraged
participant with a meritorious claim represents pure savings to the
managed care entity. A system which delays justice until an internal
appeal or even a threat of litigation saves the managed care entity
money. Thus, under our current system, there is a strong financial
incentive to delay providing costly medical treatment.
In the end, better internal review, and independent external review
are necessary elements to consumer protection, but we must make sure
that these procedural protections are properly enforced.
cost issues
The cost implications of providing for additional remedies must be
carefully evaluated. We are sensitive to this issue, and we realize
that estimating the cost of additional remedies is difficult.
We are aware that there are studies with conflicting results on the
cost impact of additional remedies. The studies on the issue have
focused on measuring the cost of an approach that would narrow ERISA
preemption to allow consumers to sue a plan that wrongfully delayed or
denied a promised health benefit under State law. Some of these studies
have concluded that this State approach to providing additional
remedies will increase premiums only marginally.
The best evidence regarding cost impact exists in those markets
where expanded remedies already exist. There is nothing in these
markets to show that these remedies result in larger premium costs. For
example, participants in group health plans covering State and local
employees are outside ERISA and often have access to full State law
remedies for injuries that result from improper delay and denial of
benefit claims. Yet insurers and HMO's compete aggressively for State
and local group business, and there is no evidence that insurers charge
higher prices to these groups because of the greater liability exposure
associated with them. Thus, it seems highly unlikely that the
availability of additional remedies would force employers to retreat
from offering health coverage.
It is also important to note that we have yet to see any studies on
the cost impact of simply adding additional remedies to ERISA, or any
approach other than narrowing ERISA preemption to allow actions in
State court. The State approach may be a good, viable option, but it is
not the only one. As I will discuss later, there are several possible
alternatives for providing additional remedies.
We ask that you consider the two following points when faced with
pessimistic assumptions about the cost implications of added remedies:
First, as I stated previously, the cost of expanded remedies will
be mitigated by the existence of better internal review as well as
external review procedures. External review, particularly, should
lessen the number and degree of injuries resulting from wrongful
benefit determinations, by providing a means for benefit disputes to be
resolved before an injury occurs. External review could also decrease
the number of claims brought by individuals by ensuring access to a
more inexpensive and timely means of resolving these disputes than
litigation, and by increasing enrollee confidence generally.
Second, this new incentive to make proper and timely claims
decisions up front may reduce total health care costs by preventing the
wrongful conduct and any resulting injury in the first place. For
example, if a plan wrongfully denies an individual coverage for a
mammogram, and that denial results in breast cancer going undetected,
eventually someone, probably the plan, will have to pay for the
additional costs associated with the resulting cancer treatment. The
plan could have prevented this extra cost in the first place with the
proper claims review decision.
perspectives on a solution
In addition to evaluating the cost and coverage implications of
additional legal remedies, Congress must decide how best to ensure that
these additional remedies are available. There are several ways that
Congress could provide additional remedies to fairly compensate injured
consumers and hold plans accountable for their actions. Various pieces
of bipartisan legislation have been introduced in this Congress
suggesting alternative mechanisms to expand remedies for ERISA plan
participants.
One approach would be to narrow ERISA preemption to permit States
to apply their existing substantive laws and remedies, as well as any
newly enacted laws and remedies, to address the improper denial and
delay of health benefit claims. This approach has been set out in
varying forms in the following bills: the ``Patients' Bill of Rights
Act of 1998'' (S. 1890/H.R. 3605) introduced by Senator Daschle and
Representative Dingell; the ``Responsibility in Managed Care Act''
(H.R. 2960) intended to replace section 4 of the ``Patient Access to
Responsible Care Act'' (S. 644/H.R. 1415) introduced by Senator D'Amato
and Representative Norwood; and the ``Employee Health Insurance
Accountability Act of 1997'' (S. 1136) introduced by Senator Durbin.
The advantage of this approach is that it returns to the States the
traditional role of overseeing health insurance issues. The States
would be able to impose their standards for awarding damages under this
approach. They would be able to award any type of damages, including
compensatory damages, or limit damages. Another benefit of the State
approach is that it would give ERISA plan participants the same
opportunities for relief that are currently held by individual
purchasers of insurance and employers of State and local government
employees.
A second approach, a form of which is applied by Representative
Stark in his bill, the ``Managed Care Accountability Act of 1997,''
(H.R. 1749) would be to amend ERISA to incorporate additional remedies
and other procedural protections for consumers. One possible option
would be to make damages available for economic losses, such as the
cost of care and lost wages, when an improper denial or delay in
deciding health benefit claims. Non-economic damages such as pain and
suffering, as well as punitive damages, could also be made available
under specified circumstances.
This approach could be combined with well-crafted other procedural
protections that could also be added to ERISA such as changing the
standard of review for claims review decisions. Currently, when courts
review ERISA claims denials they are required to apply a standard of
review that gives deference to the denial made at the plan level,
unless it can be shown that the plan's decision was arbitrary and
capricious. Often the review is limited to the information and
documents considered in the initial claims denial. Under what is called
a ``de novo'' standard of review, a court would be able to assess both
the plaintiffs' and defendants' side equally and can evaluate evidence
that was not before the internal claims review. Other procedural
changes to the statute could include restrictions on the ability of
plans to remove cases to federal court, and awarding reasonable
attorney and expert fees to successful claimants.
There are several advantages to this federal approach of adding
enhanced remedies and procedural protections to ERISA. It would
establish a uniform standard applicable to all ERISA plans as well as
result in uniform federal precedent regarding claims denial cases.
Also, it would not alter ERISA's present preemption scheme.
These are just two of the many approaches that can be taken to
address the remedies problem. Yet another approach would be to apply a
standard that would overturn the decision in the Pilot Life case. Under
this approach, a federal standard could be applied to self-insured
plans, permitting State laws to apply to fully-insured plans. This
approach would allow the States to fully enforce their laws, but would
not subject self-funded plans to the diversity of State remedies. We
are certain that there are other approaches to providing additional
remedies. We are open to other ideas, and are eager to work with
Congress to find a bi-partisan solution to this problem.
Each of the approaches that we have discussed has its own set of
advantages. One advantage common to all of these options is that they
may ultimately lessen the need for increased government regulation of
health benefit plans. The Department of Labor will never have the
resources to effectively police the hundreds of millions of claims
determinations made within ERISA plans. With additional remedies,
participants are empowered to seek legal redress when appropriate
without government involvement.
conclusion
The provision of health care benefits is an important tool that
employers use to attract employees. Health insurance plans are designed
to provide security to workers in the event of illness. There is no
security, however, when plans can deny or delay covered benefits with
impunity. This is, in fact, not a benefit at all but a burden on
workers who are under the mistaken belief that their covered health
benefits are assured.
The implementation of the Commission's Consumer Bill of Rights will
provide necessary protections for all Americans. We look forward to
working with you to develop legislation to both pass a Consumer Bill of
Rights, and to ensure that these protections are available under ERISA.
Managed care growth--percent of employer plan enrollment
Fiscal year Percent Fiscal year Percent
1980........................... 2 1989........... 35
1981........................... 3 1990........... 41
1982........................... 4 1991........... 47
1983........................... 5 1992........... 56
1984........................... 5 1993........... 58
1985........................... 10 1994........... 65
1986........................... 14 1995........... 69
1987........................... 22 1996........... 74
1988........................... 29 1997........... 81
Notes: Includes, HMO, PPO, POS plans. Data for 1988-97 from KPMG Peat
Marwick survey of employers with 200 plus employees. Data for 1980,
1982, 1984, and 1986 from U.S. Bureau of Labor Statistics survey of
medium and large private establishments. Data for 1981, 1983, 1985,
and 1987 interpolated.
Source of coverage
Millions
Medicaid.......................................................... 37
Medicare.......................................................... 37
State-regulated (individual market)............................... 16
Federal employee plan............................................. 9
State and local government employee plans......................... 23
ERISA-regulated (private employee plans).......................... 123
Source: President's Advisory Commission on Consumer Protection and
Quality in the Health Care Industry.
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STATEMENT OF ROBERT GALLAGHER, PRINCIPAL, GROOM &
NORDBERG, CHARTERED, ON BEHALF OF THE
ASSOCIATION OF PRIVATE PENSION AND WELFARE
PLANS [APPWP] THE BENEFITS ASSOCIATION
Senator Specter. We turn now to Mr. Robert Gallagher,
Executive at Groom & Nordberg, a Washington, DC, firm which
specializes in employee benefits laws. He had served as Counsel
for ERISA from 1976 through 1982. And while working at the
Department of Labor, tried the first case by the Department
under ERISA.
Welcome, Mr. Gallagher, and we look forward to your
testimony.
Mr. Gallagher. Thank you, Chairman Specter, Senators.
I have been practicing exclusively in the ERISA for 22
years. I have brought cases on behalf of participants and
beneficiaries, employees, on behalf of benefit plans
themselves, employer sponsors of plans, and companies engaged
in providing services to health benefit plans. So, I have seen
these issues from a number of perspectives.
In my view, the proposals to limit ERISA preemption would
be disastrous for health benefit plans. The proposals would be
a major step backward in a national effort to provide the
highest degree of quality health care for the largest number of
people at a reasonable cost. The current system has made steady
progress toward that goal. Under the current system, the labor
market, and sometimes negotiations between employers and
employee representatives, determine how much employees will be
paid and what part of that compensation will go towards health
care.
Under the current system, the plan sponsor, sometimes in
negotiations with employee representatives, determine the plan
design of the health benefit plan, what benefits will be
covered. Every benefit cannot be covered.
The typical restrictions for care, that it is not medically
necessary or care that is experimental, are a result of that
process of trying to put the dollars to the highest use; the
greatest good for the greatest number.
Repeal of preemption would turn the authority to make those
plan design decisions--what benefits will be covered--take it
away from the traditional employer or employee
representatives--and turn it over to the State courts and to
juries.
The results of that would be several. There would be a lack
of uniformity in decisions, where plans would have to apply the
same rule and give it a different meaning in different
jurisdictions. The same plan term could be interpreted
differently in a dozen or more different States. That would
defeat the principal objective of the preemption provisions of
ERISA, enacted back in 1974--to provide uniformity in plan
administration, for efficient plan administration.
It would also introduce a far higher level of uncertainty
among employees, employers, payors, of what benefits would be
covered under plans.
What it would do really is turn what is now a system for
the rational allocation of available resources into basically a
lottery, where a few people--principally plaintiffs' lawyers--
would get large judgments and attorneys' fees, and that much
money would be taken out of the system available to provide
benefits to others.
For example, in a recent case in California, involving a
bone marrow transplant, a common controversy--is this a
medically necessary or an experimental procedure, is it
covered, and there is great professional debate on all sides of
that issue--in this case, the employer lost; $77 million in
punitive damages were awarded, $12.3 million in compensatory
damages. That is almost $90 million. That $90 million could
have provided hundreds, if not thousands, bone marrow
transplants to people who were covered for that procedure.
The repeal of preemption would significantly increase the
cost of coverage for many employers and for employees. It does
that by making plan administration less efficient, with diverse
rules that have to be followed, and defending these cases that
will be brought. Cases are very expensive to defend. Most of
them cost tens of thousands of dollars to defend. Some of them
cost hundreds of thousands of dollars to defend.
And it would also change the design of employee big plans,
so that most employers would probably have to eliminate the
limitations for services that are not necessary or that are
experimental. So that would basically change the mechanism of
who designs employee benefit plans.
Small employers would probably eliminate plans altogether,
many of them would. Larger employers would have to reduce their
coverage or pass on more of the costs to employees. And studies
show that even a small increase in cost to employees results in
electing to drop coverage or to elect less coverage.
And private pension plans covered by ERISA--the 120 million
people that we have talked about--there are hundreds of
millions of claims processed every year. Very few of them
result in the kinds of problems that have raised this
committee's attention. Most employers work hard to fix
procedures, make claims processing more efficient so there are
fewer errors. And I think that is the way to do it. Work on the
so-called front-end problems rather than the so-called back-end
problems.
prepared statement
If you are convinced that something must be done to improve
the system, the Department of Labor has told us that they do
have authority and they are working on regulations to help
improve the front-end system. And all the employers that I know
of and all the members of the Association would be happy to
work with the Department of Labor to do that.
We think that is the right approach.
Thank you, Senator.
Senator Specter. Thank you very much, Mr. Gallagher.
[The statement follows:]
Prepared Statement of Robert Gallagher
Chairman Specter and members of the Subcommittee, my name is Robert
Gallagher, and I am executive principal in the Washington, D.C. based
law firm of Groom and Nordberg. I have specialized exclusively in the
field of employee benefits law for 22 years. Prior to joining Groom and
Nordberg, I served as counsel for ERISA litigation at the U.S.
Department of Labor where I tried the first case brought by the
Department under ERISA as well as many other cases seeking to protect
the interests of employer benefit plans and their participants and
beneficiaries. At Groom and Nordberg, I routinely counsel employers
that sponsor health benefits plans on fiduciary duty issues arising
under the Employee Retirement Income Security Act of 1974, as amended
(``ERISA''). I also routinely advise companies in connection with the
scope of ERISA's preemption clause, including application of ERISA
preemption to state laws affecting the health care industry, and I have
been involved in litigation of ERISA preemption issues on behalf of
both employers and service providers to health plans.
I am appearing before you today on behalf of the Association of
Private Pension and Welfare Plans (APPWP--The Benefits Association), a
national trade association of companies concerned about the employee
benefits system. APPWP's members include many Fortune 1000 companies
offering health benefits to their employees, as well as organizations
that provide benefit services to employees. Collectively, APPWP's
members either sponsor or administer health and retirement plans
covering more than 100 million Americans.
I would like to share my perspectives with you on the current state
of the law of ERISA preemption, the existing remedies for improper
denial of health benefits claims in connection with ERISA-regulated
health plans, and the possible consequences to employers if ERISA were
amended to expand the available remedies when ERISA plans deny claims.
i. the current state of the erisa preemption doctrine
When ERISA was enacted in 1974, Representative John Dent, a leading
sponsor of the legislation, noted that ``to many, the crowning
achievement of this legislation'' was its preemption clause. See 120
Cong. Rec. 29,197 (Aug. 13, 1974) (remarks of Rep. Dent).
ERISA's preemption rules were designed, in the words of the late
Senator Jacob Javits, to ``eliminate the threat of conflicting or
inconsistent state and local regulation, * * * laws hastily contrived
to deal with some particular aspect of private welfare and pension
plans.'' Congress intended, instead, ``that a body of Federal
substantive law will be developed by the courts to deal with issues
involving rights and obligations under welfare and pension plans.'' See
120 Cong. Rec. 29933 (Aug. 22, 1974) (remarks of Senator Javits). For
more than 20 years ERISA's preemption clause has successfully worked to
eliminate potential regulatory disincentives for employers to offer
health benefits to employees, and has helped make employer-paid health
care an expected benefit routinely provided to American workers.
The preemption rules of ERISA are found in section 514 of the
statute. Section 514 requires a three-step analysis to determine
whether a particular state law is preempted. Section 514(a) provides
generally that ERISA ``supersedes any and all state laws insofar as
they may now or hereafter relate to any employee benefit plan,'' and
therefore the first step is to determine whether the law ``relate[s]
to'' an ERISA-regulated employee benefit plan. If so, the second step
is to determine whether one of the enumerated exceptions to preemption
applies, because under section 514(b) of ERISA, even if a state law
``relates to'' an employee benefit plan it will be saved from
preemption if it is a law that regulates insurance, banking, or
securities. The final step is to determine whether the exception to
preemption for insurance laws is inapplicable because of the so-called
``deemer'' clause. Under section 514(c) of ERISA, a state law
regulating insurance will nonetheless be preempted if it has the effect
of deeming an ERISA plan to be an insurance company or engaged in the
business of insurance.
Over the years, a dichotomy has developed in the treatment of
health benefits plans in which the employer provides benefits through
purchase of a health insurance policy, and those health benefit plans
in which an employer chooses to self-insure the risk. Many states
mandate that group health insurance policies sold in such state contain
certain benefits, such as coverage for mental health or drug or alcohol
abuse treatment. In 1985, the Supreme Court analyzed whether states may
use these laws to regulate the content of insured and self-insured
health plans in light of the savings clause. Metropolitan Life Ins. Co.
v. Massachusetts, 471 U.S. 724 (1985).
The Court found that ERISA preemption does not prevent states from
regulating the content of insurance policies purchased by an employer
for a health plan. However, the Court concluded that state laws that
regulate the content of self-insured plans were preempted because they
would not be ``saved'' as laws regulating insurance. Therefore, when
employers purchase group health insurance policies to fund the health
benefits programs offered to their employees, these state mandates
effectively dictate the design of the benefits program, because the
policies funding these plans must meet state benefit mandates. See
Metropolitan Life Ins. Co. v. Massachusetts; FMC Corp. v. Holliday, 498
U.S. 52 (1990).
The Supreme Court has adopted a two-step approach to determine
whether a state law falls within the insurance law exceptions to ERISA
preemption. Metropolitan Life Ins. Co. v. Massachusetts, supra. First,
a court must resolve whether the law satisfies a ``common sense''
definition of insurance regulation. Second, a court must look at three
factors drawn from cases analyzing the McCarran-Ferguson Act's
reference to the ``business of insurance": (1) whether the state law
has the effect of transferring or spreading a policyholder's risk; (2)
whether the statute concerns an integral part of the policy
relationship between the insurer and the insured; and (3) whether the
state law is limited to entities within the insurance industry.
Probably the most fundamental service undertaken in the
administration of an employer-provided health benefits plan is the
processing of benefit claims--the decision, made by either an insurance
company or a claims administrator, as to whether the health benefits
plan will pay for a particular medical service. Liability under ERISA
in connection with benefits claims does not turn on whether a plan is
insured or self-insured. Accordingly, the courts uniformly hold that
state-based contract or tort actions asserting the improper processing
by an insurance company or claims administrator of a claim for benefits
under an ERISA-regulated plan, whether insured or self-insured,
``relate[s] to'' a benefit plan, and is preempted. See Pilot Life Ins.
Co. v. Dedeaux, 481 U.S. 41 (1987).
In my experience, it is customary for health benefits plans to
include specific language clearly communicating to covered employees
that the plan will not cover services or treatments that are
experimental in nature, or are not medically necessary. As you know,
the gate-keeping and other review protocols that are a key element of
the managed-care approach to health care often involve determinations
by claims administrators whether a treatment or service is medically
appropriate. Consequently, persons injured by managed-care decisions
often bring state-based causes of action seeking tort remedies for
allegedly negligent medical professional determinations, and there is a
substantial body of case law addressing the effect of ERISA preemption
on those claims.
The majority of courts agree that ERISA preempts wrongful death,
medical malpractice, loss of consortium, and other state-based claims
based on medical judgment decisions made in the context of a benefits
plan coverage determination. See, e.g. Aetna Life Ins. Co. v. Borges,
869 F.2d 142 (2d Cir.), cert. denied, 493 U.S. 811 (1991) (wrongful
death, loss consortium, misrepresentation all preempted in connection
with delay in authorization of coverage); Corcoran v. United
Healthcare, 965 F.2d 1321 (5th Cir. 1993) (Louisiana wrongful death
statute preempted in action arising from utilization review provider's
refusal to authorize hospitalization); Kuhl v. Lincoln National, 999
F.2d 298 (8th Cir. 1993) (medical malpractice, tortious interference
claims based on HMO's delay in authorizing heart surgery preempted).
Moreover, state tort claims for negligence, fraud, or
misrepresentation in connection with how HMOs or insurance carriers
have structured provider networks, or the quality of the physicians
included in the network, are routinely found to be preempted, as are
claims relating to statements that HMOs and carriers have made about
the quality of care to be provided by the network. See Kearney v. U.S.
Healthcare, 18 Empl. Ben. Cases (BNA) 1886 (E.D. Pa. 1995); Stroker v.
Rubin, 1994 WL 719694 (E.D. Pa. 1994); Elesser v. Philadelphia College
Osteopathic Medicine, 16 Empl. Ben. Cases (BNA) 1063 (E.D. Pa. 1992).
Similarly, to the extent a challenged communication about the structure
of the network or the quality of network care is made in a benefit plan
document, that communication is deemed an ERISA plan benefit
communication, and the challenge must be ERISA-based.
On the other hand, in instances in which medical judgment are not
made in the context of determining whether the benefits plan will cover
a service or treatment, and thus the judgment is disengaged from a plan
coverage decision, courts are unlikely to find state-based challenges
to the propriety of such judgments preempted. See Dukes v. U.S.
Healthcare, 57 F.3d 350, 19 EBC 1473 (3d Cir.), cert. denied, 116 S.
Ct. 564 (1995) (no allegation participants denied benefits they were
due under plan; rather, participants contested the quality of HMOs
medical care provided through plan; no preemption); Fritts v. Khoury,
933 F. Supp. 668 (E.D. Mich. 1996); Howard v. Sasson, 19 Empl. Ben.
Cases (BNA) 2091 (E.D. Pa. 1995). In these cases, there is no
allegation that medical treatment was wrongfully delayed or denied, or
that the challenged acts by the medical organization were undertaken in
its utilization review role, refusing to authorize and/or pay for
treatment. Rather, the issue centers on the quality of the medical care
actually delivered and covered, whether by a primary care physician or
other provider.
Furthermore, courts are increasingly foreclosing the use of ERISA
preemption as a means of shielding HMOs and insurance carriers from
vicarious liability claims under state law in connection with allegedly
negligent treatment provided by a physician or other health care
provider. These claims are based on apparent or ostensible agency
theory, with the claimants asserting that even if the allegedly
negligent provider was not the employee of the HMO or carrier, the
objectively reasonable impression formed by the patient was that such
provider acted as an agent, and thus the HMO or carrier is liable as a
quasi-principal. In cases like Pacificare of Oklahoma, Inc. v. Burrage,
59 F.3d 151 (10 Cir. 1995) and Jass v. Prudential Health Care Plan, 88
F.3d 1482 (7th Cir. 1996) the courts held that ERISA does not preempt a
state law claim against an HMO or claims administrator to hold it
vicariously liable for the alleged malpractice of one of its
contracting physicians or utilization review personnel. Lower courts
are increasingly making it clear that ERISA does not preempt vicarious
liability claims against HMOs, carriers, or administrators, even in
instances in which the medical judgment at issue was made in the
context of a benefits determination. See Kearney v. U.S. Healthcare,
Inc., 18 Empl. Ben. Cases (BOA) 1886 (E.D. Pa. 1994).
I also believe it is most important to recognize that the trend in
ERISA preemption is to narrow its boundaries, not extend them. The
narrowing of ERISA preemption is due to a decision of the Supreme Court
I will now discuss. The effect of the decision on state efforts to
regulate managed care is still very much in flux and it is far from
settled how the ERISA preemption curbs state efforts to regulate
managed care in the future.
Until 1995, the Supreme Court applied a plain meaning test in
construing the ``relate to'' clause in section 514(a) of ERISA, and
construed the language quite expansively to preempt all state action
that bore some connection to ERISA plans. See, e.g., Shaw v. Delta Air
Lines, 463 U.S. 85, 97-98 (1983) (term relate to ``was to be given its
broad common sense meaning); District of Columbia v. Greater Wash. Bd.
of Trade, 506 U.S. 125 (1992).
Yet in New York State Conf. of Blue Cross & Blue Shield Plans v.
Travelers' Inc. Co., 115 S. Ct. 167 (1995) the Court effectively
abandoned the ``plain meaning'' test and narrowed the boundaries of
ERISA preemption. In Travelers, the Court unanimously ruled that laws
which have only an indirect economic effect on benefits plans do not
``relate to'' such plans, and are not preempted. The Supreme Court
noted that despite the broad language in ERISA's preemption clause,
state action in fields of traditional state regulation, such as health
care, are nonetheless assumed not to be preempted, unless preemption
was the ``clear and manifest'' purpose of Congress. Under the Travelers
framework, a state law will be deemed to ``relate to'' ERISA benefit
plans only if it makes specific reference to a plan, or mandates an
employee benefit structure or administration, or precludes
administrative uniformity or uniform interstate benefits.
Lower courts are just beginning to apply this new preemption
framework to the efforts by states to regulate the managed care
process. While Travelers and its progeny are unlikely to be construed,
and should not be construed, as overruling prior cases like Pilot Life,
it is also clear that the ERISA bar to states regulating in the health
care area is lower than it was prior to Travelers.
ii. remedies for erisa fiduciary misconduct and improper claims
determinations
Under ERISA, the persons with the ultimate responsibility to
determine whether a benefits plan will cover a claim are cloaked with
fiduciary status. Such fiduciaries, when deciding claims, are required
to exercise prudent judgment in determining claims, and are to act
solely in the interests of the benefit plan and its participants and
beneficiaries. See ERISA Sec. 404(a)(1). If a person is aggrieved by a
wrongful denial of health benefits, he or she can sue to recover
payment of the benefit. See ERISA Sec. 502(a)(1)(B). Fiduciaries who
act inconsistently with their duties of prudence and loyalty also may
be sued by aggrieved health benefit plan participants, and the Supreme
Court has recognized that ERISA plan participants may recover directly
from fiduciaries for the latter's misconduct. See Howe v. Parity Corp.,
116 S. Ct. 1065 (1996).
Although punitive damages and other forms of extra-contractual
relief may not be imposed upon ERISA fiduciaries, see Massachusetts
Life Ins. Co. v. Russell, 473 U.S. 134 (1985), courts otherwise have
the authority to award a broad array of equitable relief against
fiduciaries. See Mertens v. Hewitt Associates, 113 S. Ct. 2063 (1993).
Fiduciaries may be forced to make restitution against injured
participants, and can be required to specifically perform. Moreover,
fiduciaries can be removed from office. In addition, courts have the
discretion to award attorneys' fees to the victorious party in actions
against fiduciaries. See ERISA Sec. 502(g). In instances in which a
suit is brought by the Department of Labor against a fiduciary for
breach of duty, ERISA does provide for extra-contractual damages in the
nature of civil penalties. See ERISA Sec. 502(1).
Thus, for example, if a health benefits plan denies coverage for a
medical service and as a consequence the treatment is unavailable to
the plan participant, that participant can sue the fiduciary and obtain
an order requiring the fiduciary, on behalf of the benefits plan, to
provide coverage. If a claims administrator is shown to systematically
engage in imprudent and sloppy claims processing techniques, a
participant has standing to sue to remove such party. More
specifically, if a utilization review manager were shown to have
engaged in a pattern of systematic denials of medical coverage
involving care that a court otherwise finds necessary, such court would
have the power under ERISA to remove the fiduciary from its claims
administrative office. In fact, if the charges were sufficiently
serious, a court has the authority to ban the entity from performing
any fiduciary services to ERISA plans for a period of years. See
generally Marshall v. Snyder, 572 F.2d 894 (2d Cir. 1978).
The particular forms of relief and remedies that may be obtained
against ERISA fiduciaries reflect a careful balancing of competing
interests. When enacting ERISA, the 92nd Congress recognized that it
needed both to protect ERISA plan participants in their benefits and
also to avoid creating liability rules that would discourage employers
either from establishing benefits plans, or offering benefits that are
stingy and of little value. By eliminating the threat of extra-
contractual damages against fiduciaries, but allowing courts to award
improperly denied benefits, to issue injunctions requiring coverage,
and to remove fiduciaries who are not sufficiently competent or loyal
to warrant positions of authority, ERISA grants participants a broad
array of rights against managed care benefit decision-makers without
imposing liabilities that will chill the business community's continued
willingness to provide generous health benefit plans.
iii. the consequences of expanding liability
The decision by an employer to provide health care benefits, and
the design of such benefits plans, are by and large left to the
discretion of the employer. In my experience, when employers are faced
with significant increases in the cost of health benefits they react in
one of two ways. They either eliminate coverage for categories of
medical treatment that previously were covered, or they increase the
cost-sharing elements of the health plan by raising contributions,
deductibles or copayments. In the case of benefits employers provide
through HMOs, employers pass through costs typically by asking
employees to pay a higher portion of the monthly HMO premiums via
salary withholding.
I believe that if punitive damages and other extracontractual tort
remedies available under state law were expanded to cover ERISA health
benefit claims administration, a number of adverse consequences will
occur. The most fundamental will be (1) that the cost of benefits will
increase, (2) each constituency (insurers/HMOs, employers) will in fact
pass through such costs, and (3) employees will end up paying
considerably more for health insurance.
If punitive damages and other extracontractual tort remedies were
expanded to include employers that perform claims administration,
employers simply would abandon involvement in that process and contract
the complete authority for claims processing to insurance carriers and
other third parties. Many companies, particularly self-insured
companies, currently reserve to themselves the right to make final
claims determinations. Furthermore, in many jointly sponsored union-
management plans, otherwise known as Taft-Hartley plans, a joint group
of union-management trustees retain final authority to decide claims.
This practice of reserving final authority is often desired because it
allows intervention in tough cases and improves employee relations.
But I have little doubt such companies and Taft-Hartley plan
trustees would abandon such efforts if liability were expanded. Given
that claims processing is not part of the core effort of the business
community (except for insurance carriers and third party
administrators), those not in the primary business of claims
administration are unlikely to be willing to accept the cost of
malpractice insurance and the adverse publicity surrounding claims
litigation, and would cede all authority to outsiders.
Even if liability were not extended to employers, and even if
insurance carriers, HMOs, or third party administrators were prohibited
by law from obtaining indemnification from employers for expanded
liability, the economic result would still be the same. This would be
true whether or not awards of significant punitive damages in benefits
disputes involving medical necessity actually increase. Insurance
companies, HMOs and third party administrators would adjust to the
prospect of increased economic exposure by routinely granting coverage
in close cases, or even worse, routinely granting coverage in instances
in which the medical necessity is doubtful but the prospect of jury
litigation were high. Insurance companies, HMOs and third party
administrators will make the economic trade-off of avoiding the risk of
punitive damages litigation for more expensive claims experience.
Why? Because the increased cost in higher claims experience can
more easily be passed back to the business community, either in higher
premiums or, for self-insured plans, higher plan costs. Why should
claims administrators risk the adverse publicity and expense of jury
litigation when it can easily avoid such risk simply by granting
coverage, even for treatment that the weight of medical authority deems
experimental, or which the medical community by and large believes
serves cosmetic needs. Why should a claims administrator risk that the
determination of whether a treatment is experimental, or medically
appropriate, be significantly influenced by the understandable emotions
of a jury instead of sound scientific evidence or outcomes research?
Expanding claims administration remedies to include extracontractual
and punitive damages will simply shift the pendulum sharply to an
environment in which expensive and controversial treatments are
routinely granted, regardless of whether they are objectively
necessary.
Ironically, if a claims administrator were to be materially
influenced in its fiduciary decision-making by the threat of punitive
damages, such conduct would itself be a fiduciary breach of its duty to
conserve plan assets for the benefit of other plan participants. But
the practical ability of the business community to prove such an
influence when it occurs will be difficult and expensive. In most
instances, the choice that I believe health care administrators will
make--to err on the side of granting coverage--will be made with
impunity. And, in an ever competitive business environment, employers
will not have to look far to identify the constituency to whom they can
pass on these higher costs. The price will be passed through to
employees, in some instances by abandoning the health benefits plan
altogether, in most other instances, through cost-sharing.
Furthermore, the cost of actual plan administration also will
increase. Exposure of ERISA plan claims administrators to state-based
punitive and extra-contractual damages also means exposure to state-
based substantive standards of conduct. Punitive damages are merely a
remedy. Such damages cannot be imposed unless there is a violation of
the concomitant substantive duty whose violation carries with it such
penalty. This means that in every state a body of law will develop
governing the conduct of ERISA-plan claims administrators whenever such
decisions involve a medical judgment. Those laws will undoubtedly vary
by state, with different standards of conduct and different burdens of
proof in the event of litigation. This will further increase the cost
of plan administration by creating exactly the kind of inconsistent
patchwork of benefits law that the designers of ERISA preemption hoped
to avoid.
Indeed, the current proposals for managed care reform would, by
their terms, cede to state law the regulation of only those health
benefits decisions involving the exercise of medical judgments. But the
legal determination as to when a benefits claims decision involves a
medical judgment will be difficult and the results will, in my view,
undoubtedly be inconsistent. In some jurisdictions, the line between
claims administration decisions that are governed exclusively by ERISA
and those governed by state tort law will be different than in others.
In conclusion, it is clear from past experience that any
legislation limiting the scope of ERISA preemption will increase the
cost of providing a given level of benefits. That will, in turn, result
in higher costs and an increase in the complexity of plan
administration. This increase in cost and complexity will cause some
plan sponsors--particularly smaller employers--to simply drop health
benefit plans altogether, resulting in a larger uninsured population.
Larger employers will likely respond by altering their health benefit
plans to provide more limited coverage at higher costs, though the
possibility exists that these employers will forego providing coverage
at all. Ultimately, limiting the scope of ERISA preemption will result
in lower benefits for the great majority of plan participants and more
money spent on attorneys' fees that would otherwise go to provide
needed benefits.
STATEMENT OF RONALD F. POLLACK, EXECUTIVE DIRECTOR,
FAMILIES USA
Senator Specter. We now turn to Mr. Ron Pollack, executive
director of Families USA, an national organization for health
care consumers. In 1997, Mr. Pollack was appointed the sole
consumer organization representative of the Presidential
Advisory Commission on Consumer Protection and Quality in the
health care industry. Mr. Pollack had been dean of the Antioch
University School of Law.
Welcome, Mr. Pollack, and we look forward to your
testimony.
Mr. Pollack. Thank you so much, Mr. Chairman, and
distinguished members of the panel.
I would like to make five quick points in the short time we
have.
First, following up on what Mr. Gallagher said, I think
consumers are interested in the front-end protection, as well,
not just the back-end. And that is why I think a Patients' Bill
of Rights, which established modest procedural protections,
such as the independent right of appeals, is very important.
And it is my hope that if such a patient right of appeals is
established, then we are likely to see less litigation,
although we are still going to see abuses and problems that do
need to be addressed.
Second, the issue with respect to ERISA is not merely a
preemption issue. That is a part of the issue. But what is also
a part of the issue is that the Federal remedy that is
established under ERISA is essentially a nonremedy remedy. The
only thing that is available to a person after that person
succeeds in the litigation process is that person can only
receive the service that was originally denied, which may come
at a point where it is absolutely too late.
And if I may, let me cite a very brief example that I think
illustrates this. Take the case of Frank Wurzbacher, a
plaintiff in Kentucky, who unfortunately had prostate cancer.
He was receiving injections that cost $500 per injection. And
he was getting those until his employer changed carriers to
administer his plan, to Prudential. Prudential said: ``You are
going to have to pay $180 for each injection.'' And Mr.
Wurzbacher simply could not afford to pay for those injections.
So, he sought alternatives. And he asked his physician. And
the only alternative that his physician said was available to
him, given the progression of his cancer, was that he should be
castrated. He went to Prudential and Prudential said: ``We will
pay for your castration.'' And, indeed, Mr. Wurzbacher was
castrated.
The day Mr. Wurzbacher returned from the hospital, he
received a notice from Prudential saying: ``We made a mistake;
you did not have to pay the $180 in copayments.''
Now, if Mr. Wurzbacher goes to court under Federal law, the
only remedy afforded to him is that he can now get his
injections for free. Now, how anyone can say that that is a
reasonable remedy, I find that absolutely extraordinary. This
is the only area where, irrespective of indifference,
callousness, willfulness, or just negligence, there is simply
no accountability.
The third point I want to make is that the judiciary has
been handling numerous such cases--and I brought with me, if
you would like for the court record, but it is certainly
available to the distinguished members of this panel--a series
of cases, all across the country, which represent the kind of
situations that Mr. Wurzbacher himself represents. But what is
interesting about this is what the judges themselves are
saying. The judges are adhering to what the ERISA statute
requires.
But if you take a look at my testimony--and I have cited
some of the quotes from some of those judges--you will see what
the judges are saying--is this is a travesty of justice, this
is absolutely wrong, but we are powerless to change this. The
only way this can be changed is through congressional statute.
And, by the way, Florence Corcoran, who was cited as one of
those cases, which I suggest is well worth reading, is sitting
behind me. And if you would like to talk to her, cited the
facts in her case, I think you would find it illustrative of
what I am saying.
The fourth point I want to make is that ERISA made sense
when Congress adopted it in 1974. We were in a totally
different world in 1974. We were in a fee-for-service world.
And so the controversy in litigation was after the service was
provided and the insurance company was denying payment of that
claim. And so if you then required the insurance company to pay
for that service, that person was made whole. But at that
point, less than 5 percent of the plans in this country were
HMO's or managed care plans.
Today it is totally different. When there is a controversy
between a plaintiff and a plan, that controversy is whether you
are going to receive that service in the first place. And
people change their course of conduct, as unfortunately Mr.
Wurzbacher did, and we need to find a different remedy.
To say that you now need to provide this service that you
originally should have provided merely says to a plan: You can
keep on delaying and delaying and delaying and delaying, and
the only thing that you are going to ultimately be accountable
for is that you are going to have to, at the end of that road,
you are going to have to pay for the service you originally
denied. And by that point, it is likely, in many cases, to be
too late.
prepared statement
The last point I want to make is that there really are two
alternative remedies. And seeing that the red light has gone
on, I would just conclude with a sentence. S. 1890 and S. 644
adopt one approach, which I think makes a great deal of sense:
to allow the States to establish remedies. Another alternative
is not to change the ERISA structure, but to change the ERISA
remedy.
Thank you.
Senator Specter. Thank you very much, Mr. Pollack.
[The statement follows:]
Prepared Statement of Ronald F. Pollack
Mr. Chairman and members of the committee: Thank you for inviting
me to testify today on an issue of growing significance to people in
managed care plans. I am Ron Pollack, Executive Director of Families
USA, the national organization for health care consumers. I had the
privilege of serving on the President's Advisory Commission on Consumer
Protection and Quality in the Health Care Industry. As you know, the
Commission received extensive testimony and analysis about the role of
ERISA in establishing a remedial system for people aggrieved by denials
or delays of care by their health plans.
At the outset of my testimony, I should emphasize that consumers
are most interested in preventing wrongful denials and delays of care,
not simply seeking remedies after the fact. At the point that someone
goes to court to seek a remedy, the harm has already occurred.
Enlightened policy must focus on the front end of health decision-
making, not just the back end after harm has been caused. Public
policy, therefore, should take effective steps to ensure that
appropriate health care is not withheld and that quality of care is
provided to America's health care consumers. It is for this reason that
consumer organizations across the country are very supportive of a
Patients' Bill of Rights--such as the Bill of Rights proposed by the
President's Commission and in bills pending in Congress. These
proposals offer modest steps designed to empower consumers with
information and procedural rights so that they get the health care that
was promised to them when they procured health coverage.
I should hasten to add that one of the key features of a Bill of
Rights is the establishment of an independent and prompt right to
appeal denials or delays of health care services. The President's
Commission unanimously recommended such a right, and that right is
incorporated into each of the major bills now pending in the Congress.
I believe that the establishment of such a right would not only be very
welcomed by health care consumers but would significantly reduce the
likelihood of subsequent litigation. This right to an independent
appeal, according to the analysis prepared for the President's
Commission, would cost merely 0.3 to 7 cents per health plan enrollee
per month.
The remedy issues raised by existing ERISA legislation are
important in promoting high-quality care, not simply because they deal
with specific grievances by enrollees of health plans but because they
help to deter plans from being cavalier about denials of needed care.
Without a meaningful remedy at the end of a grievance process, health
plans will always have an incentive to deny care because they know
there will never be a penalty for improperly doing so. The creation of
an effective remedy, therefore, must be part and parcel of a system
that encourages high-quality care.
Unfortunately, ERISA--which was intended to protect employees in
pensions and health plans--has become a protective shield for managed
care plans even when they wrongfully deny care, either through
negligence or malicious indifference. Central to ERISA's failure is its
preemption of state remedies for wrongful denials of care and its
failure to establish a meaningful federal remedy. Today, approximately
123 million people in working families are denied reasonable relief if
their health plans improperly withhold care.
Under ERISA, consumers whose benefits are wrongfully denied are
entitled only to equitable relief and not monetary damages. In
practical terms, this means that a worker who is improperly denied
health care can only recover the value of the denied service or the
service itself--which, in some tragic cases, comes far too late. The
worker, however, is not allowed to receive any compensation to make him
or her whole from the benefit denial, even in the event of loss of life
because of the health plan's improper denial. Neither compensatory nor
punitive damages are available under ERISA. As a result, workers and
their families are very much at risk of arbitrary benefits denials, and
this risk is most substantial when the treatment sought is costly.
Health plans have no accountability for their decisions to deny
needed care and treatment. This lack of meaningful remedies invites
abuse. Regardless of a managed care company's indifference,
callousness, willfulness or negligence in refusing to authorize
medically necessary treatment, the only punishment made available by
ERISA, if a plaintiff ultimately prevails, is the provision (or payment
for) the initially denied treatment. In other words, a managed care
company has every financial incentive to deny or delay care--knowing
full well that, even after years of litigation, the worst that can
happen is that the plan will only have to pay for the services
originally denied. This clearly invites, and creates financial
incentives for, abuse.
A recent case emanating from Kentucky illustrates the absurdity of
the ERISA remedial system. Frank Wurzbacher had the misfortune of
contracting prostate cancer. To deal with his condition, Mr. Wurzbacher
received periodic injections of leupron. Under his health plan, these
treatments--costing $500 per injection--were supposed to be fully
covered. When Prudential took over as the plan administrator, Mr.
Wurzbacher was told that he would have to pay $180 per injection--an
amount he could not afford. As a result, Mr. Wurzbacher asked his
physician for health care alternatives. In light of the aggressiveness
of his cancer, Wurzbacher's doctor said that his only alternative was
castration.
Prudential approved the castration operation and Mr. Wurzbacher was
castrated. When Wurzbacher returned home from the hospital, he found a
letter from Prudential notifying him that it had made a mistake and
that the plan would pay the full $500 for the leupron injections.
When Mr. Wurzbacher brought suit under state law, his claim was
denied due to ERISA preemption. More significantly, if Mr. Wurzbacher
brought suit under the provisions of ERISA, his only available
``remedy'' would be the provision of leupron injections at no cost.
Obviously, this ``remedy'' constitutes a nonremedy and is entirely
useless for Mr. Wurzbacher. ERISA, in this and many other cases,
constitutes a cruel and unusual joke for someone who experienced tragic
harm due to the health plan administrator's negligence.
The ERISA-caused injustice experienced by Mr. Wurzbacher is
occurring in many other situations and courts across the country. I
have brought with me a notebook full of cases decided in the last full
years that are replete with the types of injustices exemplified by the
Wurzbacher case. Notably, in some of these cases, judges--as they
implement the strictures of ERISA--are commenting about the resulting
injustices being caused and are admonishing Congress to take corrective
action. Permit me to cite two such cases.
The first case, Andrews-Clarke v. Travelers Insurance Co., was
decided last year in the Federal District Court for the District of
Massachusetts. [See 21 EBC 2137, 1997 WL 677932.] The facts of the case
are as follows. Richard Clarke's health plan--that covered him, his
wife, and their four young children--provided, under its terms, for one
30-day inpatient rehabilitation program per year. When Mr. Clarke drank
to excess, his physician admitted him to a hospital for alcohol
detoxification and medical evaluation. Travelers Insurance, through its
utilization review provider (Greenspring of Eastern Pennsylvania),
refused to approve Clarke's enrollment in a 30-day inpatient alcohol
rehabilitation program. Instead it approved two separate brief (five
and eight days, respectively) hospital stays. Within 24 after the
second hospital stay, Clarke attempted suicide in the garage with the
car engine running while he consumed a combination of alcohol, cocaine,
and prescription drugs. His wife discovered him by breaking through the
garage door. Clarke was taken to the hospital where he was treated for
carbon monoxide poisoning.
At his mental commitment proceeding, the court ordered Mr. Clarke
to participate in a 30-day detoxification and rehabilitation program
following his release from the hospital. ``By now,'' according to the
Federal District Court, ``it was tragically apparent to everyone but
Travelers and its agent, Greenspring, that Clarke was a danger to
himself and perhaps others.'' However, Travelers (in the words of the
Court) ``incredibly refused'' to authorize admission under the plan.
Instead, Clarke was sent to a correctional center where he was forcibly
raped and sodomized by another inmate. He received little therapy or
treatment at the correction center. Following his release, he went on a
prolonged drinking binge that resulted in his hospitalization due to
respiratory failure. After his release from the hospital, he began
drinking again and was found the following morning dead in his car,
with a garden hose running from the tailpipe into the passenger
compartment.
The Federal District Court dismissed the suit brought by Clarke's
widow and four children. The Court held that the ERISA statute
preempted the claim. The Court held that, even though the ``insurer and
utilization reviewer repeatedly and arbitrarily refused to authorize
medical and psychiatric treatment that was expressly provided by the
plan and that was prescribed not only by doctors at several hospitals,
but by state courts as well, and where participant's death was [a]
direct and foreseeable result of such refusal,'' ERISA compelled
dismissal of the claim. The Court, however, underscored the resulting
injustice. In relevant part, the Court said:
``Under traditional notions of justice, the harms alleged--if
true--should entitle Diane Andrews-Clarke to some legal remedy on
behalf of herself and her children against Travelers and Greenspring.
Consider just one of her claims--breach of contract. This cause of
action--that contractual promises can be enforced in the courts--pre-
dates Magna Carta. It is the very bedrock of our notion of individual
autonomy and property rights. It was among the first precepts of the
common law to be recognized in the courts of the Commonwealth and has
been zealously guarded by the state judiciary from that day to this.
Our entire capitalist structure depends on it.
``Nevertheless, this Court had no choice but to pluck Diane
Andrews-Clarke's case out of the state court in which she sought
redress (and where relief to other litigants is available) and then, at
the behest of Travelers and Greenspring, to slam the courthouse doors
in her face and leave her without any remedy.
``This case, thus, becomes yet another illustration of the glaring
need for Congress to amend ERISA to account for the changing realities
of the modern health care system. Enacted to safeguard the interests of
employees and their beneficiaries, ERISA has evolved into a shield of
immunity that protects health insurers, utilization review providers,
and other managed care entities from potential liability for the
consequences of their wrongful denial of health benefits.''
The Court concluded that: ``[a]lthough the alleged conduct of
Travelers and Greenspring in this case is extraordinarily troubling,
even more disturbing to this Court is the failure of Congress to amend
a statute that, due to the changing realities of the modern health care
system, has gone conspicuously awry from its original intent.''
Another example also illustrates the frustration experienced by the
courts in reviewing ERISA cases and how members of the judiciary are
calling upon Congress to amend ERISA. In Corcoran v. United HealthCare.
Inc., 965 F.2d 1321 (5th Cir. 1992), the plaintiff, Florence Corcoran,
was in an employer-sponsored health plan using Blue Cross as
administrator and United HealthCare as the utilization reviewing
agency. Mrs. Corcoran was pregnant and had a history of pregnancy-
related problems and was viewed as a high-risk pregnancy. Although her
doctor recommended hospitalization so that the fetus could be monitored
as the due date approached, and another obstetrician (who was contacted
for a second opinion) concurred, United HealthCare denied that
hospitalization was medically necessary and refused to certify a
hospital stay. Instead, ten hours of daily in-home nursing care were
authorized. When the nurse was not on duty, the fetus developed
problems and died.
The Court found that, under ERISA, the Corcorans had no remedy for
damages. The Court found that the Corcorans' claim for damages under
state law were preempted. In so ruling, the Court decried the obvious
injustice perpetrated under ERISA and called for Congressional action
to amend ERISA. In its applicable part, the Court stated:
``The result ERISA compels us to reach means that the Corcorans
have no remedy, state or federal, for what may have been a serious
mistake. First, it eliminates an important check on the thousands of
medical decisions routinely made in the burgeoning utilization review
system. With liability rules generally inapplicable, there is
theoretically less deterrence of substandard medical decisionmaking.
Moreover, if the cost of compliance with a standard of care (reflected
either in the cost of prevention or the cost of paying judgments) need
not be factored into utilization review companies' cost of doing
business, bad medical judgments will end up being cost-free to the
plans that rely on these companies to contain medical costs. ERISA
plans, in turn, will have one less incentive to seek out the companies
that can deliver both high quality services and reasonable prices.
``Second, in any plan benefit determination, there is always some
tension between the interest of the beneficiary in obtaining quality
medical care and the interest of the plan in preserving the pool of
funds available to compensate all beneficiaries. In a prospective
review context, with its greatly increased ability to deter the
beneficiary (correctly or not) from embarking on a course of treatment
recommended by the beneficiary's physician, the tension between
interest of the beneficiary and that of the plan is exacerbated. A
system which would, at least in some circumstances, compensate the
beneficiary who changes course based upon a wrong call for the costs of
that call might ease the tension between the conflicting interests of
the beneficiary and the plan.
``Finally, cost containment features such as the one at issue in
this case did not exist when Congress passed ERISA. While we are
confident that the result we have reached is faithful to Congress's
intent neither to allow state-law causes of action that relate to
employee benefit plans nor to provide beneficiaries in the Corcorans'
position with a remedy under ERISA, the world of employee benefit plans
has hardly remained static since 1974. Fundamental changes such as the
widespread institution of utilization review would seem to warrant a
reevaluation of ERISA so that it can continue to serve its noble
purpose of safeguarding the interests of employees. Our system, of
course, allocates this task to Congress, not the courts, and we
acknowledge our role today by interpreting ERISA in a manner consistent
with the expressed intentions of its creators.''
Across the country there are approximately 146 million people who
have employer-based coverage. Of this number, more than four out of
five--approximately 84 percent, or 123 million people--are in ERISA
plans and are governed by ERISA's non-remedial regimen and are
preempted from receiving protection under state law. (Public employees
are the largest group who may receive employer-based coverage but are
not subject to ERISA provisions.) In Pennsylvania, approximately 89
percent of the people with employer-based coverage, or approximately
6.4 million Pennsylvanians, are in ERISA plans. All of these people are
vulnerable to the same legal frailties of ERISA that were experienced
by Frank Wurzbacher, the Andrews-Clarke family, and Florence Corcoran.
Congress should reconsider the remedial restrictions currently
contemplated by the 1974 ERISA statute. In the old world of fee-for-
service health care, the ERISA statute made rational sense. At that
time, people routinely received the care they sought and the dispute
centered on whether the claim for reimbursement of costs incurred
should be honored. This dispute was a narrow one, albeit important for
the party litigants. The remedy available--namely, payment for the
service received--had the potential of making a plaintiff ``whole.''
This, however, is no longer true in today's world of managed care.
Today, the dispute usually does not relate to reimbursement for
services already rendered. With managed care and utilization review,
the service at issue is normally withheld and consumer-patients are
usually forced either to forego necessary medical treatment or seek
other care. As a result, the stakes are much higher than they were when
ERISA was enacted. If, during the pendency of litigation--a period
which may be quite considerable--the service needed for good health or
survival is being withheld, a remedy limited to the ultimate provision
of the withheld service may be, and often is, illusory. Moreover, this
non-remedy remedy provides a powerful added incentive for managed care
organizations to deny care. At worst, they will face a slap on the
wrist and be required to provide the service that was originally
denied.
Congress can respond to this problem through two alternative
approaches. First, the civil enforcement provisions of ERISA can be
remedied by establishing a system that makes aggrieved consumers and
their families whole. Such a system can include one or a combination of
compensatory, consequential and punitive damages. Such a system would
not alter the ERISA framework but would establish meaningful remedies
within that framework. Rep. Pete Stark has introduced H.R. 1749, the
Managed Care Plan Accountability Act of 1997, which takes this
approach.
Alternatively, Congress can amend ERISA by explicitly removing the
state preemption remedial bar that currently limits states' abilities
to establish causes of action for wrongful denials of care. Both the
Patients' Bill of Rights Act (S.1890/H.R. 3605) and the Patients'
Access to Responsible Care Act (PARCA) (S. 644/H.R. 1415),
comprehensive consumer protection bills now pending in Congress, adopt
this approach.
We believe that either approach is vastly preferable to the current
ERISA scheme. Although there is, as yet, no independent economic
analysis of these approaches, we believe that these alternatives are
inexpensive and cost-effective. As experience in other health care
contexts demonstrate, few people avail themselves of the opportunity to
litigate. Indeed, few people even apply for external administrative
hearings when given the opportunity to do so--as is currently available
for people in the Medicare program. Moreover, the provision of punitive
damages, even when theoretically available, is virtually never invoked.
Thus, while these alternative remedies will undoubtedly induce improved
behavior on the part of managed care plans, the direct costs of making
a meaningful remedy available are likely to be less than 1 percent, and
undoubtedly less than 2 percent, of insurance premiums--as is the case
with malpractice insurance premiums today.
Such a cost-effective deterrent to improper denials of care is
clearly warranted in the new world of managed health care.
STATEMENT OF MARK A. SMITH, EMPLOYEE BENEFITS
COMPLIANCE MANAGER, AMP INC., ON BEHALF OF
THE NATIONAL ASSOCIATION OF MANUFACTURERS
Senator Specter. We now turn to Mr. Mark Smith, employee
benefits compliance manager for AMP Inc., with headquarters in
Harrisburg, PA. Mr. Smith also serves as an adjunct professor
of law at Dickinson School of Law. Among several prior
positions, Mr. Smith served as employee benefits manager for a
Big 6 accounting firm in Central Pennsylvania.
Welcome, Mr. Smith. We look forward to your testimony.
Mr. Smith. Thank you, Chairman Specter and Senators.
As you indicated, I am employed at AMP Inc. Our CEO and
president, William Hudson, is currently the vice chairman of
the National Association of Manufacturers Board. We are
speaking here today on behalf of the NAM, the Nation's oldest
and largest broad-based industrial trade association.
As you have indicated, AMP's headquarters are located in
Harrisburg, PA, where we employ in excess of 9,500 employees,
and are the world's leading manufacturer of electric connectors
and interconnection systems. We have over 46,000 employees
worldwide, in over 300 facilities, in 53 different countries.
Suffice it to say that if something turns off and on, there is
likely an AMP product involved.
We are pleased to have this opportunity to discuss with you
proposed changes to the current system of ERISA remedies. Like
you and the other Members of Congress, we believe that
policymakers, business owners, health care providers,
consumers, and managed care organizations need to work together
to continue to ensure and improve the quality of care Americans
receive.
At AMP, we believe that providing quality health care
benefits to our employees is a civic responsibility, the right
thing to do at a moral level; but besides that, it makes good
business sense. A high-quality health care program can be a key
retention and recruitment tool for employees.
We strongly believe that both ERISA and the advent of
managed care has been essential to our ability to offer
quality, cost-effective benefits to our employees. In fact, at
AMP, we are very careful about who we do business with in the
health care arena. And we work very hard to ensure that the
HMO's that we work with are accredited.
ERISA requires all plans to have claim procedures for
solving benefit disputes. Plans are now liable for medical
malpractice when they are involved in treatment. Suing plans
over coverage of specific procedures or therapies will force
them to pay for high-risk or minimally effective treatments.
Advocates of liability are wrong to think that they can protect
the employers.
If the employee is suing as a result of coverage received
under a benefit program, both sponsored and designed by the
employer and administered by a vendor under a contract with the
employer, it would be very difficult for the employer to escape
liability under that scenario. To escape liability under the
bills currently before Congress, an employer would have to
abandon any responsibility for processing claims or reviewing
claim decisions made by their health plans.
At AMP, we have a dedicated individual who works with our
employees when they have problems getting claims paid through
our various health care providers. And if you could have an
opportunity to sit with that gentleman during the day, I think
you would see that AMP, as an employer, is highly committed to
making sure that our employees get the coverage they are
entitled to.
And for each of these very unfortunate stories that we
hear, I could bring in many, many, many success stories that
would counter the notion that managed care is not being
effective.
The NAM opposes the changes in the law which would lead
employers to face punitive and economic damages for health
benefit decisions. Creating plan liability for benefit
decisions would force plans who wish to avoid liability for
coverage decisions to be more restrictive in defining covered
benefits. We have heard references to the recent polls that
talks about the general support for consumer protection in this
area. However, that support erodes very quickly when the notion
of increased health care premiums is brought into the story.
And I can tell you, at AMP, our employees are highly
sensitive to any change in their health care programs. We have
very, very competitive programs. We do have employee cost
sharing, and they pay attention. And we have many employees who
voluntarily elect to go into managed care because of what they
deem to be a more reasonable premium opportunity and, in many
cases, a more expensive premium option but a richer package of
benefits.
We have over 50 percent of our employees participating in
managed care. And out of 40,000-some claims processed a year,
we see very, very few formal appeals. And many times, these
appeals are resolved in favor of the employee. And at AMP, we
have not had any major appeals that involved excessive claim
denial or managed care vendors acting in an irrational manner.
prepared statement
We also believe that it is unfair to allow private
employers to be sued when the Federal Government programs
remain protected from these lawsuits. Congress should reject
this attempt to redefine ERISA remedies. It will only harm your
constituents and our employees.
Thank you. I will take questions.
Senator Specter. Thank you very much, Mr. Smith.
[The statement follows:]
Prepared Statement of Mark A. Smith
I am Mark Smith, employee benefits compliance manager at AMP
Incorporated. Our CEO and President, William J. Hudson, is currently
the vice chairman of the NAM's Board of Directors. We at AMP share your
commitment and interest in ensuring access to quality health care.
Thank you for this opportunity to speak about the importance we place
on quality health care for our employees and their families.
AMP employs more than 9,500 Pennsylvanians and is the world's
leading manufacturer of electronic connectors and interconnection
systems. Headquartered in Harrisburg, PA, we have more than 46,500
employees in more than 300 facilities in 53 countries. We serve
customers in the automotive, computer, communications, consumer,
industrial and power industries.
The NAM is the nation's oldest and largest broad-based industrial
trade association. The association's nearly 14,000 members companies
and subsidiaries, including approximately 10,000 small manufacturers,
are in every state and produce about 85 percent of U.S. manufactured
goods. Through its member companies and affiliated associations, the
NAM represents every industrial sector and more than 18 million
employees.
We are pleased to have the opportunity to discuss with you our
opposition to proposed changes to the current system of ERISA remedies.
Like you and the other members of Congress, we believe that policy-
makers, business owners, health care providers, consumers and managed
care organizations need to work together to continue to ensure and
improve the quality of care Americans receive.
Our testimony makes two key points: First, we will outline the
contribution of the Employee Retirement Income Security Act of 1974
(ERISA) and managed care in improving the voluntary private employer-
provided health care system in this country. Second, we will show that
changing ERISA remedies to allow patients to sue their HMOs or
employers for benefits decisions would impede employers' ability to
continue to provide high-quality, cost-effective health care benefits
to employees and their families.
the value of the employer-based system
Virtually all NAM members offer health benefits to their employees
Perhaps the biggest challenge facing manufacturers in today's
fiercely competitive environment is recruitment and retention of the
highly skilled workers needed in today's modern, high-tech workplaces.
Health benefits are a key recruitment and retention tool. Nearly all
NAM members offer health benefits to their full-time employees, a
success record found in few other sectors of the economy. According to
a survey of NAM members in April and May of last year, 99.4 percent
offer health benefits to their full-time employees; 97.6 percent offer
dependent coverage to their full-time employees; and equally,
impressive, 98.2 percent of NAM members with fewer than 26 employees
provide health benefits to their employees. (The NAM has more than
2,000 member companies with fewer than 26 employees.)
Value-purchasing
Before the widespread adoption of managed care, liberal insurance
payments encouraged hospital stays and high-cost tests and procedures.
Few incentives existed to reduce costs and most employers were merely
passive bill payers, not active purchasers.
During the late 1980's and early 1990's, the medical-care inflation
rate was approximately twice the general inflation rate. As late as
1992, when national health expenditures increased 9.1 percent, fee-for-
service indemnity plans enrolled the majority of employees (52
percent). Business coped with this cost onslaught by turning
increasingly to managed care, which slowed the growth in health care
costs, and, by 1997, indemnity plans covered only 15 percent of
employees.
In 1997, AMP U.S. spent approximately $45 million on health care
for its employees. After experiencing double-digit increases for a
number of years, the company's net health care costs have increased at
less than 4 percent. Because our costs have been well controlled
recently, we have been able to implement important benefit improvements
to some of the plans. In addition, employee contributions for many of
the health options are either remaining the same during 1998 or
increasing only modestly.
In the 1980's, American manufacturers adopted Total Quality
Management techniques to satisfy their customers and compete in the
world economy. They expected no less from their suppliers. Many
companies now set performance standards for health plans the same way
that they do for vendors of other goods and services. This value-based
purchasing approach involves evaluating the quality delivered for the
dollar paid. Through managed care techniques, employers try to control
the quality of health care and expenses, so that their health plans can
achieve the greatest good for the greatest number of employees.
The managed care delivery system evolved from an effort to
eliminate the excessive, unnecessary and inappropriate care that the
financial incentives of the fee-for-service delivery system created.
Research has documented a huge geographic variation in medical
practice; often it is not clear that those geographic areas with higher
intensity of use of particular services have better health outcomes. In
fact, the Rand Corporation has estimated that one-third of all medical
treatment is unnecessary or inappropriate.
Many employers are collecting HEDIS (Health Plan and Employer Data
Information Set) data \1\ and accreditation status information and
developing ``report cards'' to incorporate quality, patient-
satisfaction measures and cost. These efforts provide the basis for
employer decisions about selecting, retaining and modifying their
relationships with managed care vendors. Many large employers
incorporate the results of this report-card approach in the pricing of
the various plans offered employees and incorporate quality performance
standards into their vendor contracts.
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\1\ HEDIS is a set of standard performance measures to help
employers request comparable data about quality from health plans. An
example of HEDIS data would be the Cesarean section rate by the HMO
population, since we know that C-sections are often performed when they
are not medically necessary, leading to an increase rate of surgical
complications.
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the value of managed care
Managed care has been key to the value-based purchasing strategy
because it creates provider accountability, emphasizes preventive care
and spurs the development of data systems that allow meaningful plan-
to-plan comparisons. It also has helped to control health care costs,
reduce the number of uninsured and increase worker wages. While it may
not be perfect, managed care has served a valuable role in the
improvement of health care delivery in the United States.
Workers have benefited financially from the advent of managed care.
According to the Lewin Group, in 1996, Americans workers with health
insurance reaped wage gains of between 0.7 and 1.0 percent as a result
of managed care. For workers earning less than $6 per hour, these wage
gains were 4.0 percent. For workers earning more than $15 per hour, the
gains were approximately 0.8 percent. Managed care saved private
insurance in 1996 somewhere between $130 million and $205 million,
which translates into a 2.7-4.3 percent premium savings and an annual
savings per family of $107.
Managed care has had a positive effect on health care quality. Most
studies show that health indicators are about the same when HMO and
fee-for-services patients are compared.
Ninety-two percent of American workers who receive health coverage
through their employers are offered at least one plan that covers care
provided by out-of-network physicians and hospitals. Two-thirds of
workers offered health coverage are offered more than one health plan.
The issue of choice has been at the center of the congressional debate
over health care. We suggest that as you continue to debate this issue,
you ensure that managed care remains an option for those employees who
choose it and those employers who decide to offer it.
CHOICES is the employee benefit delivery system at AMP. Our program
strategy includes offering high-quality managed care choices, self-
insuring plan options where appropriate, overall plan design changes,
and effective employee contribution strategies.
Instead of providing everyone with the same benefits package,
CHOICES gives employees the power to design their own benefits program
to meet their own unique needs. CHOICES offers four medical options
with each option covering essentially the same eligible medical
services. Each option promotes effective use of health care and results
in cost savings. In general, plans that provide an overall higher level
of benefits may have a higher price tag, while plans that incorporate a
higher employee co-pay and co-insurance generally have lower price
tags. The CHOICES program offers several different indemnity options
with an opportunity to elect coverage under several HMOs available in
our geographic area.
ERISA ensures delivery of promised health benefits and allows for plan-
sponsor flexibility
The innovation and value-based purchasing described here would not
have been possible without ERISA, the 1974 law that governs all
privately provided benefits and currently covers more than 160 million
Americans. The crafters of ERISA struck a careful balance: The law does
not require that employers offer benefits to their employees or specify
the exact benefits to be offered, but instead ensures that participants
get the benefits they are promised. If an employer does offer benefits,
ERISA requires him or her to meet certain standards. By not dictating
plan design, ERISA avoids overly burdensome or costly requirements that
might discourage employers from offering, or employees from enrolling
in, plans offered under our voluntary health system.
In avoiding such micro-management and over-regulation, ERISA has
provided businesses with the flexibility to tailor the content of
health plans to meet the unique needs of their employees, and the
freedom to operate under uniform federal regulation instead of under a
patchwork of varying state laws. This flexibility is crucial not only
to large multi-state employers such as AMP, but also to small
employers, since they frequently operate in more than one state and
recruit workers from multiple states. ERISA has also enabled many of
the quality innovations that have been made in the marketplace.
ERISA's pre-emption of conflicting state laws promotes consistent
treatment of similarly situated participants and enables employers to
administer their plans uniformly. Further, allowing individual states
to regulate such benefit plans would substantially increase the costs
and complexity of plan administration. It would be difficult or
impossible to offer the same or comparable benefits to employees of the
same company who are located in different states.
Contrary to popular belief, ERISA plans are subject to substantive
requirements. These include: reporting and disclosure requirements,
which were tightened by last year's Health Insurance Portability and
Accountability Act (HIPAA); non-discrimination requirements; the
fiduciary obligation to deliver promised benefits; continuation of
benefits required under the Consolidated Budget Reconciliation Act
(COBRA) of 1985; and the portability and non-discrimination
requirements in HIPAA. The Americans With Disabilities Act also applies
to ERISA plans.
The vast majority of HMOs offered to employees are offered on a
fully insured basis and are monitored on quality issues and the
grievance process by state health and insurance departments, the
Federal HMO Act and the Health Care Financing Administration, as well
as by various private accreditation agencies.
The fiduciary's duty to deliver promised benefits under ERISA provides
superior consumer protection
ERISA requires fiduciaries to act in the sole interest of the
beneficiaries of the plan. If a fiduciary does not, he or she can be
held personally liable. The plan cannot reimburse the fiduciary for any
liability the court may levy against him or her, although the
fiduciary's employer could choose to do so. Additionally, if the
fiduciary is found to have breached those rules, he or she can be
removed from the job. In fact, the Department of Labor (DOL) has
brought numerous cases to assure that the fiduciaries of health plans
comply with this ERISA provision. The statute also authorizes
injunctive relief against conduct by plans and the removal of plan
fiduciaries or service providers who engage in systematic patterns of
abuse.
In a February informational letter, the DOL concluded that ERISA
plan fiduciaries must consider service quality and provider
qualifications when selecting a health care service provider, or risk
possible violations of these ERISA fiduciary rules. We at AMP have long
selected providers based on both quality and cost considerations. We
believe this new guidance from the DOL is appropriate and it will lead
other employers or Taft-Hartley plans to factor quality into their plan
selection.
Dispute resolution under ERISA
Issues of coverage arise as a matter of course in health plans
because no plan can afford to cover everything. Benefits and benefit
limits in employer-sponsored health plans are described in plan
documents and applied, on a case-by-case basis, by plan administrators.
ERISA requires health benefit plans to have procedures to provide a
``full and fair review'' of disputed claims.
Coverage decisions in managed care plans
Under the old indemnity system, the chief issue was whether a
payment would be made by the plan for a service that had already been
provided. The old indemnity plans also had very specific limits on the
amount of treatment they would pay for. Studies showed that patients
sometimes got the procedure that their physicians were trained in
rather than the most appropriate treatment.
In contrast to the old indemnity plans, in managed care plans, the
health care provider and the patient often know the plan's decision
before the service has actually been provided. Care is coordinated and
purchasers are learning to measure a health plan's success in improving
the health of their patients. This means that everyone involved--the
patient, the provider, the plan and the employer--has a stake in making
sure that the right decisions are made in the first place, and that the
decisions are made consistently and fairly.
Plan sponsors shifted from indemnity type coverage (everything
specifically spelled out and limited) to comprehensive benefits in
order to provide greater flexibility in meeting patient needs. Rather
than pay for only what was listed in the plan document, the plan would
pay for whatever was ``medically necessary'' and ``appropriate'' for
the patient. The plan had the responsibility to determine what that
was.
Employers have encouraged plans to base their medical decisions on
available medical evidence, to adopt guidelines from medical societies
or with medical teams and to revise them based on evidence from
treatment and medical literature. Managed care has provided structure
to bringing individual treating physicians' judgments in line with the
state of the art medical practices. The treating physician is not
always the last word on the most suitable treatment for the patient.
Advantages of the current system
In the 1987 Pilot Life versus Dedaeux decision, the Supreme Court
determined that ERISA provides the ``exclusive remedies'' for insured
and self-insured ERISA plans. ERISA permits recovery for the costs of
the benefit due, plus prejudgment interest, plus attorney's fees.
Injunctive relief is available to employees in cases where an immediate
coverage decision or other resolution is required. The advantage of the
current system is that it provides simplified judicial relief to plan
beneficiaries who do not need to get conflicting state laws or
jurisdictional questions resolved. They can go straight to federal
court. ERISA thereby assures that an employee's legal rights, remedies
and obligations do not depend on where he or she happens to reside.
Benefits decisions are not medical decisions
It is important to understand the distinction between malpractice
liability and plan administration liability. When a treatment decision
has harmed a patient's health, the question is one of medical
malpractice and is litigated under state tort law. Medical
practitioners must be specifically licensed to make medical-treatment
decisions. In fact, many states specifically ban the ``corporate
practice of medicine'': Medical decision-making by a plan administrator
or an employer of physicians who is not a licensed physician. As a
result, only physicians can be liable under state law for medical
malpractice. In fact, the DOL has argued successfully in a number of
cases that state laws holding physicians, and those that contract for
their services, liable for medical malpractice in connection with
treatment decisions, are not pre-empted even if the physician provides
services to ERISA plan participants.
Managed care plans are often included in suits brought over the
issue of provider negligence or the quality of care provided as they
can sometimes be found to be ``vicariously liable'' for the actions of
the network providers to the extent that providers are viewed as
employees or agents of the health plan. Such suits are usually most
successful against staff or group model HMOs, which can be assumed to
have more control over the providers in their plan than can a more
loosely integrated managed care plan.
Suits over benefits decisions are different. There is also an
important difference between medical decision-making and coverage
decisions. Physicians choose from a wide range of diagnoses and
treatment options, not all of which may be covered under the terms of
the plan.
Needed care is provided
Some consumer advocates allege that utilization review personnel
routinely overrule a doctor's decision on necessary treatment or that
physicians are forced to spend a tremendous amount of time and energy
justifying treatment decisions to clerks in distant offices. The
reality is quite different. A recent study of more than 2,000
physicians caring for patients in plans that utilize managed care found
that the final coverage denial rate for physician recommendations
within eight categories of care was at most 3 percent and much less for
other categories of care. The majority of physicians reported no
coverage denials whatsoever for any form of care surveyed. Moreover,
physicians are spending more time with patients than they did a few
years ago; they spend just 3 percent of their time on insurance
paperwork.
Under current ERISA law, the plan participant or beneficiary has a
right to internal plan review and can appeal the plan decision in
federal court to receive benefits. Further, while the current rule may
allow up to a year for claims to be resolved, anecdotal evidence from
NAM member companies, including our own, suggests that claims
resolution rarely ever takes that long. We understand that in
September, the DOL issued a request for information on claims
procedures for employee welfare-benefit plans and already has the
statutory authority to shorten these time frames.
As is the case with any employee benefit program, not all employees
are completely satisfied with their health care coverage. Accordingly,
as required under ERISA, AMP employees have the right to appeal claim
denials. AMP is committed to ensuring that its employees receive the
coverage to which they are entitled. Indeed, AMP is diligent in its
efforts to resolve claim disputes in a timely fashion. Over the past
three years less than 1 percent of claims processed have resulted in
formal appeal proceedings. A vast majority of the claim appeals involve
amounts in controversy of less than $200. Of the claims appealed, many
are ultimately resolved in favor of the plan participants. To the
extent that the original claim denial is deemed appropriate, the plan
participant is given a full and complete explanation.
In one case, a plan participant had incurred ambulance costs in
excess of plan limits. Nonetheless, rather than simply deny the claim,
AMP personnel contacted the ambulance provider and negotiated a 20
percent discount on behalf of the plan participant. This commitment to
customer service is but one example of AMP's dedication to providing
high-quality health care to its employees.
how will changes to erisa remedies affect the provision of health care
benefits by private-sector employers?
The fundamental issue before the Congress is: Should health plans
and plan sponsors be liable under state tort law (with jury trials and
punitive damages) for coverage decisions and denials of benefits? Bills
such as the Patient Access to Responsible Care Act (S. 644) and the
Patient Bill of Rights Act (S. 1890) would allow lawsuits to be brought
against employers, insurers, third-party administrators and others
under state law causes of action in personal injury and wrongful death
cases.
Changing the current system could create more adversarial
relationships that are unresponsive to the needs of both employees and
employers. Administrative expenses, such as the costs of claim review
and litigation, consume funds that otherwise would be available for
benefits. In addition, turning plan disputes over to the vagaries of
state courts and juries would take from employers the opportunity to
intervene early before formal procedures were triggered, increasing
time and monetary costs to both employees and employers.
Congress must recognize that we have a voluntary health care
system. Plan sponsors provide the package of benefits they can afford.
The benefit package is an agreement between the employer and employee.
It is understood from the beginning that everything a provider might do
will not necessarily be paid for by the employer plan.
ERISA and malpractice reform
S. 644 includes a provision that would eliminate ERISA pre-emption
of ``any state cause of action to recover damages for personal injury
or wrongful death against any person that provides insurance or
administrative services to or for an employee welfare benefit plan
maintained to provide health care benefits.'' This provision would open
up liability for employers who administer their own plans, and,
depending on the interpretation of the regulatory agencies and courts,
could also directly affect self-insured employers who purchase
administrative services.
The Patient Bill of Rights Act would impose liability against those
that ``arrange'' for medical and administrative services for health
coverage. To some extent, all plan sponsors ``arrange for medical
services,'' therefore this provision could result in potential exposure
of plan sponsors to state causes of action.
The threat of increased litigation would cause many employers to drop
or scale back their health benefits
The NAM strenuously and vigorously objects to this provision.
Exposing plans to damages beyond the scope or value of the benefits
provided through the plan would fundamentally alter the nature of the
benefit contract between employers and employees. Such remedies also
would create perverse incentives for costly and unnecessary litigation
at the expense of the dispute resolution methods currently in ERISA.
The threat of increased litigation would discourage employers from
offering health care plans. This liability burden would pose one more
hurdle--and a very large one at that--for the small employer just on
the cusp of offering health benefits to his or her employees. Further,
employers would significantly reduce or eliminate health care coverage
in order to insulate themselves from liability in an area that is not
their core business activity.
The NAM conducted a survey of more than 2,000 manufacturers in
March at National Manufacturing Week. The survey found that 51 percent
of companies would cut back benefits to offset the costs of potential
lawsuits and 14 percent would stop offering health benefits altogether
if faced with increased liability for health benefits. According to
another survey conducted by the polling firm Public Opinion Strategies
for the Health Benefits Coalition (of which the NAM is a member): 57
percent of very small employers (between 5 and 50 employees) would
likely drop coverage if exposed to malpractice lawsuits. Almost 4 out
of 10 (39 percent) say they would be ``very likely'' to stop providing
coverage.
Removing the ERISA shield for State causes of action would be costly
and would depress wages' job growth and other benefits
A recent study by the Barents Group found that expanding liability
under ERISA for benefits decisions would increase health care premiums
by as much 8.6 percent. This premium increase would be hardest to bear
for small businesses and low-wage workers. This cost increase could
force as many as 1.8 million more Americans to lose their coverage in
1999. (In 1996, 64 percent of Americans received health care coverage
through employers.) Some would lose their coverage as a result of their
employers dropping coverage entirely. Other consumers would decide they
could not afford the increased cost sharing that would be passed on to
them as a result of this proposal. In fact, a study conducted by
researchers in the Department of Health and Human Services and
published in the health-policy journal Health Affairs (Nov.-Dec. 1997)
found that while employers are increasingly offering health benefits to
their employees, employees, particularly those who are young or earn
low-wages, are increasingly turning that offer down. Most likely these
employees decline this coverage because they cannot afford the cost-
sharing requirements. At a time when policy-makers continue to struggle
with the ever-increasing problem of the uninsured, why would Congress
want to do anything to aggravate the problem?
Over the next five years, such a cost increase could result in as
much as $94 billion in additional health care costs for American
business. Such an increase could depress worker wages as well by a loss
of as much as $1,512 in take-home pay per household. As total
compensation (benefits plus wages is fixed), this increase in health
insurance costs would force wages down as well as create job losses.
Indeed, according to Barents, as many as 240,000 jobs could be lost in
2003 as rising health care costs forced employers to cut their
payrolls.
More important than this average cost increase across the board is
what would happen to an employer, particularly a small one, faced with
an expensive malpractice suit. Such a suit could wipe out an employer.
Even if liability insurance were available for employers in these
cases, this insurance is likely to be experience-rated and thus
prohibitively expensive for employers who have experienced any adverse
action.
Expanded remedies benefit only the trial bar and would not improve
health care quality
Increased lawsuits would channel scarce health benefit dollars to
the trial lawyers' bar and away from the care for employees and their
families and efforts to improve the quality of care. If health plans
and employers could be sued for medical malpractice over their benefits
decision, most of the money would go to trial lawyers--not injured
patients. According to the Rand Corporation, only 43 cents of every
dollar awarded in medical liability litigation goes to patients. Access
to a jury trial also does nothing for the patient. Issues affecting the
patient would be resolved years after the patient needed a treatment
decision.
The NAM has long recognized that malpractice liability is a
significant problem for physicians, but increasing malpractice
liability--for plans--is not a panacea. Instead, this attempt
emphasizes a reactive approach to health care quality and interferes
with proactive approaches that emphasize continuing quality improvement
and greater accountability of physicians.
Judgments about the most appropriate treatment are best made in a
medical context, not in a courtroom. Taking these issues before a jury
would put science-based decisions on trial after the fact. The issue
before the jury would be whether the choice of treatment, in
retrospect, could have contributed to a poor outcome for the patient
(which can never be known for sure), not whether the choice of
treatment was the best choice at that time for the patient.
Throwing medical decision-making before juries creates substantial
liability for doing the very things that we want plans to do to improve
quality. Any effort by an employer or health plan to review physician
decisions or provide evidence-based guidelines creates a potential for
liability. State tort liability for benefit denials would also give the
treating physician a weapon against the medical director and the
medical committee in the plan. Treating physicians would be able to
force plans to pay for outdated or unproven treatments.
Applying malpractice liability to coverage decisions would make the
patient's health outcome a sufficient condition for liability,
regardless of whether proper procedures and practices were employed.
Unfortunately, sometimes despite the best possible treatment and the
correct decisions on coverage, patients die or their conditions worsen.
Imposing expanded liability on private plans is fundamentally unfair
Such an increased liability essentially punishes those private
employers who try to do the right thing by their employees by providing
them with benefits. More unjust is the fact that none of the bills
under consideration by Congress would expose public programs such as
Medicare, Medicaid or the CHAMPUS program operated by the Department of
Defense to such liability. This double-standard is completely
inconsistent with the spirit of the Congressional Accountability Act
and Unfunded Mandates Act.
It is also unfair to impose such an increased liability threat on
private-sector employers when neither the Federal Employees Health
Benefits Program (FEHBP) nor the Medicare program permits the award of
punitive or compensatory damages beyond the scope of the covered
benefits.
Expanded liability will decrease provider flexibility
Creating plan liability for treatment may bring the very result
that physicians are trying to avoid: an increased role for
administrators and lawyers in medical decision-making. The best way for
plan sponsors to avoid liability is to pick specific treatments,
perhaps only those benefits that are determined to be medically
necessary by the courts, and provide an explicit statement in the plan
that those are all the treatments the plan will pay for. Enrollees
cannot sue to get benefits the plan clearly does not provide. This
would remove any discretion from the treating physician or the plan's
medical director. It would also substantially reduce the quality of
medical decision-making. Plan participants will have very limited
coverage that would not keep pace with innovations in medical treatment
or account for unique individual needs.
Employers cannot be shielded from liabilities for benefits decisions
under congressional proposals
Many in Congress seek to draft legislation that would somehow allow
only health plans and not employers to be sued for malpractice for
benefit decisions. For example, Representative Charles Norwood, the
chief House sponsor of PARCA, has stated that it was not his intent for
employers to be held liable under H.R. 1415. Therefore, in November, he
introduced H.R. 2960, The Responsibility in Managed Care Act. H.R. 2960
states that the liability provisions shall not apply to any cause of
action against an employer or other health plan sponsor unless, ``The
employer or other plan sponsor exercised discretionary authority to
review and make decisions on claims for plan benefits, and the exercise
by such employer or other plan sponsor of such authority resulted in
personal or financial injury or death.'' S. 1891 also allows state
causes of action against an employer or other plan sponsor if ``such
action is based on the employer's or other plan sponsor's exercise of
discretionary authority to make a decision on a claim for benefits
covered under the plan or health insurance coverage in the case at
issues; and the exercise by such employer or other plan sponsor of such
authority resulted in personal injury or wrongful death.''
We believe that trying to somehow isolate employer liability from
the liability of a managed care organization's liability for a benefits
decision is bad policy. First, it is almost impossible to write
legislation that would make managed care organizations, but not
employers, liable for benefit decisions. In part this difficulty is due
to the fact that employer sponsors of health benefits plans are not
passive buyers of health care services. Instead, they exercise
discretionary authority on a daily basis to determine what benefits are
covered under the terms of the plan. In fact, such authority is part of
an employer plan sponsor's fiduciary duty under ERISA. In other words,
to escape liability under bills currently before the Congress, an
employer would have to abandon any responsibility for processing claims
or reviewing claims decisions made by their health plans. This puts
employers in the untenable position of having to give up control over
their health plans or risk lawsuits. Given that many NAM members
intervene with the health plans they contract on behalf of their
employees to ensure that they get better care, such a policy will only
hurt workers and their families.
Second, even if it were possible to limit such liability to managed
care organizations, the NAM would oppose such liability as it would
hamper medical innovation and efforts to improve health care quality
and decrease health care costs. Employers and their workers would
ultimately pay for expanded liability for HMOs and other health plans.
Medical necessity decisions
Just last week, Representative Norwood unveiled a revised version
of PARCA (PARCA 98) with new ERISA remedies provisions. PARCA 1998
would ``not apply to any cause of action to recover damages for
personal or financial injury or wrongful death against any person that
provides insurance or administrative services to or for a group health
plan,'' unless an employer denied a benefit on the grounds that the
benefit was not medically necessary.'' (PARCA 1998 also prohibits
punitive damages in cases that have gone through an external review
process.)
As explained previously, employers working with their health plans
do not make medical judgments; they make coverage decisions.
Nonetheless, they cannot afford to pay for every treatment a patient
may desire or a provider may wish to prescribe or undertake. They,
therefore, must sometimes decide--while consulting with properly
trained utilization management teams or other experts--that a treatment
does not meet best-practice standards. While there is much hype that
non-medical personnel supposedly make medical decisions, the NAM sits
on the board of the American Accreditation Health Care Commission/URAC,
which accredits utilization review organizations and network-based
managed care plans. I can tell you that non-medical personnel have no
medical discretion to deny a claim in an accredited plan. If they turn
down a treatment based on the scripts, they are required in any
accredited plan to turn the case over almost immediately to a medical
professional.
Expanding malpractice liability to cover benefits decisions would
allow external review parties and the courts to have wide latitude to
override internal procedures defining the terms of what constitutes
plan benefits (i.e., medically necessary services). Every plan would
then have to provide whatever benefits a district or circuit court may
find ``medically necessary'' in a particular case. Certainly, providers
would use this window to introduce every other provider service
imaginable into HMOs and self-insured plans, whether or not given
scarce benefit dollars such services were truly in the best interest of
the majority of the plan's beneficiaries. To have either federal
regulatory agencies or the courts determine what is and is not
``medically necessary'' was the essence of the President's failed
Health Security Act and would result in the destruction of the private
health care market.
Conclusion
Even the President's Advisory Commission on Consumer Protection and
Quality in the Health Care Industry failed to recommend expanded
liability in its final report. Your former colleague, Florida Governor
Lawton Chiles has also rejected such an approach. In his 1996 veto
letter over just such a proposal in Florida, Governor Chiles wrote,
``Throwing these cases into our already overly crowded and overly
litigious tort system is also troubling. The tendency in most cases
would be to require the HMO to pay for the services regardless of cost.
* * * The key to any dispute resolution system for health care claims
is that it be fast, fair and efficient. The tort system is none of
those.''
In fact, while the American Medical Association as a whole has
sought out other deep pockets to pay for medical malpractice and
embraced these ERISA-liability expansions, the president of the New
Hampshire Medical Society in a February letter to the New Hampshire
legislature wrote, ``We believe that ready access to information at the
time the denial was made is critical to taking the appropriate next
step in a patient's care. An explanation, today, on why a service has
been denied, will help me and my patient decide whether or not to
continue on a course of treatment, change direction or pursue an appeal
with the HMO. Health insurer liability in a court case 3 years down the
road does little to help my patient here and now.''
We urge Congress, too, to reject expanded liability for health
plans and employers. Such an expansion would only decrease health care
quality, increase health care costs and the number of uninsured, harm
small businesses, jeopardize the very existence of the employer-based
system and enrich the trial bar. Instead, we support private-sector
efforts to encourage better medical and benefits-decision-making at the
front-end. Thank you for letting us share our views with you on this
important subject.
executive summary
Health benefits are a key recruitment and retention tool for
employers. It is therefore, in an employer's self-interest to provide
quality health care benefits to attract new employees and keep these
employees productive.
The Employee Income Security Act of 1974 (ERISA) has encouraged
employers to provide health benefits to their employees by leaving up
to employers the types and amounts of benefits they can provide. It
simply requires that employers fulfill the benefit promises they have
made. ERISA also contains strict fiduciary standards, which require
employer plan sponsors and other plan administrators to act in the sole
interest of the beneficiaries covered under the plan. Fiduciaries who
fail to do so can be severely penalized. Recently, the Department of
Labor has determined that fiduciaries must take quality as well as cost
into account when purchasing-health benefits.
ERISA requires all plans to have claims procedures for solving
benefit disputes and provides the sole remedy for self-insured and
fully insured ERISA plans in disputes. The case is heard in federal
court and the remedy is limited to the costs of the benefit due plus
pre-judgment interest and attorney's fees. Current law distinguishes
between treatment decisions--where individuals can sue for medical
malpractice--and decisions over plan administration which are coverage
decisions--and are generally pre-empted by ERISA. The NAM believes
strongly that this distinction should be maintained.
Legislation, such as the Patient Access to Responsible Care Act (S.
644) and the Patient Bill of Rights Act (S. 1890), would destroy the
employer-based health care system by allowing lawsuits to be brought in
state courts against employers and health plans in personal injury and
wrongful death cases.
The NAM opposes this change in the law, which may lead employers to
face punitive and economic damages for health benefits decisions for
the following reasons:
(1) The threat of increased litigation would lead many employers to
drop or scale back their health benefits.
(2) Expanding liability under ERISA for benefits decisions would
harm employers and employees by increasing health care premiums by as
much as 8.6 percent, leading to less health care coverage, fewer jobs
and lower overall employee compensation.
(3) Allowing such suits would take money away from efforts toward
increasing health care quality-and towards our malfunctioning tort
system. Only 43 cents in medical liability litigation goes to patients.
(4) Allowing private employers to be sued when federal government
programs would remain protected from these lawsuits is unfair.
(5) Creating plan liability for benefits decisions would force
plans--which wished to avoid liability for coverage decisions--to be
more restrictive in defining covered benefits. The resulting rigidity
in benefit design would hurt patients.
(6) Despite various congressional attempts to do so, employers
cannot be insulated from liability for benefits decisions without
ceding all control over the benefit plans they pay for. Even if
employers could be isolated, they and their employees--if they were
fortunate enough to continue to have health benefits--would still pay
the increasing health care costs that resulted from this new liability.
(7) Expanding malpractice liability to penalize employers or health
plans that denied in good faith a benefit for lack of medical necessity
would allow the courts or regulatory agencies to define medical
necessity. Private-sector health plans would then have to cover almost
all benefits.
Congress should reject--as did Governor Lawton Chiles of Florida,
the President's Advisory Commission on Consumer Protection and Quality
in the Health Care Industry and the New Hampshire Medical Society--this
misbegotten attempt to redefine ERISA remedies. It will only harm
constituents.
common law rights of action
Senator Specter. Before proceeding to the 5-minute rounds
of questioning, I would state the facts of the case involving
Mrs. Corcoran. As reported in the Federal reports, she was
pregnant but had a history of pregnancy-related complications.
Her treating doctor recommended hospitalization. The HMO
determined that hospitalization was not medically necessary,
instead authorizing 10 hours of in-home nursing care per day.
According to the facts presented to me, the fetus became
distressed while the nurse was not on duty, and the fetus died.
The Federal courts denied liability under the ERISA statute.
Coming right to the core, Ms. Berg, of the administration's
proposal, are you contending that ERISA should be changed so
that Mrs. Corcoran would have a common law right to sue the
HMO?
Ms. Berg. Yes, we are. We are saying that these remedies
should be available to participants in health plans. As Mr.
Pollack already noted, there are a couple of ways to do that.
We note that in our testimony, as well.
One approach, again, is to put these issues back into State
court. Another is to change the ERISA remedy. There are
variations of these approaches. And we would be happy to work
with you in developing any of them. But the goal here is to
make sure these remedies are available.
Senator Specter. Ms. Berg, the contention is raised by many
that there would be an enormous increase in health care costs,
estimated by the National Federation of Independent Businesses,
to be $94 billion, contending that there would be a loss of
some 1.8 million Americans on their coverage. Does the
administration have an analysis as to what increased costs
would arise and what coverage would be limited if the common
law rights of action were available, as you have recommended?
Ms. Berg. Well, first, before I talk about the estimates,
let me point out whenever we are talking about a change like
this, you will find different sorts of estimates. In this case,
we have actual experience going on out there: the millions of
participants in health care plans that are not covered by ERISA
and have these remedies available to them. And, indeed--and let
us use State and local government employees as an example--
State and local government employees generally are covered in
higher numbers than private sector employees. We do not see
their employers running away from providing health insurance
because of these liabilities.
Senator Specter. What liabilities do you find in those
plans where there is a common law right of action?
Ms. Berg. They are able to go into State court, under
contract or tort law, and sue for the benefit they should have
gotten, and obtain attorneys' fees. They can get expert
witnesses' fees if necessary. They can get compensation for
other monetary harm that has been done to them. They can get
damages for pain and suffering.
Senator Specter. Economic damages and punitive damages?
Ms. Berg. Economic damages and punitive damages.
Senator Specter. And what are those costs? What do they
aggregate?
Ms. Berg. Again, we do not see a difference in the premiums
for State and local government employees. In fact, many of them
are in the same HMO's that also cover ERISA employees.
Senator Specter. Mr. Gallagher, do you disagree with that?
Mr. Gallagher. I do not have the answer to that, Senator. I
know that in the case of individuals who buy private coverage,
their costs are substantially higher. I have seen studies that
indicate it is 25 percent higher.
Senator Specter. Well, Mr. Gallagher, we really need the
specifics as to what the comparison in costs are. Now, this is
obviously a big factor. If there are greater rights attaching,
there obviously will be increased costs. And there ought to be
an evidentiary base, since there are alternative plans, which
would provide an answer to it.
Mr. Pollack, you had your hand up.
Mr. Pollack. Mr. Chairman, yes. The one State that has
actually adopted a specific provision akin to what we are
talking about is the State of Texas. They adopted legislation
last year. And an analysis was made for the Legislature and the
Governor concerning the cost. And that cost--and I have the
estimate here; I am happy to share it with you--was 34 cents
per enrollee, per month. And the reason it is so low is the
same experience that we have in a whole bunch of other health
situations. And that is very few people make claims.
And so in terms of any State that has tried this so far and
has gone to the trouble to develop estimates, the State of
Texas, I submit to you, has done that. And it comes out to less
than $4 per enrollee, per year.
Senator Specter. How long has Texas had this legislative
plan?
Mr. Pollack. It has been in effect for approximately a
year. And I will say that this was a prospective analysis.
Senator Specter. Is there litigation as to whether Texas
may make that provision, in light of the ERISA preemption?
Mr. Pollack. Yes; there is litigation pending in Federal
district court. And it is our belief that there will be a
judgment rendered in that case within the month.
Senator Specter. To what extent, Mr. Pollack, as an expert
in this field, do you think there would be a reduction in
complaints if you had the independent right of appeal as a
mandatory provision?
Mr. Smith, you say you do have that right of appeal in
AMP's plan?
Mr. Smith. Internally, yes, we do.
Senator Specter. Internally. OK.
Mr. Pollack. And I have to say, Senator, when we were in
the President's Commission, one of the things is when we
suggested an external right of appeal--and we voted on this
unanimously, health plans, insurance companies, employers--one
of the things I think that all of us felt was these different
systems of internal, external and ultimately the right to
judicial remedies, it helps get the problems solved at an
earlier point. Because if you know you have got an external
right of appeal, you are more likely to deal with this
successfully in the internal right of appeal.
Senator Specter. How would you propose the external right
of appeal work?
Mr. Pollack. Well, we have some experience with that in a
few States, and we have experience with that in the Medicare
program. After an internal review has taken place and the plan
has had an opportunity to make a judgment in the internal
review, there would be a panel that would be selected. That
panel would be independent of the plan. And they would conduct
a de novo hearing. And that de novo hearing would then make a
determination as to whether the denial was inappropriate.
I want to be clear, however, that panel would not have the
right to redesign a benefit package. They would have to render
their decision based on the benefit package that was
established by the employer. And this would not be a pretext
for opening that up.
Senator Specter. Senator Faircloth.
Senator Faircloth. Yes; I had a question for Ms. Berg. The
growth of managed care did not happen overnight. While it has
gone from 4 percent to 40 percent of health benefits paid under
self-insurance, you have had many years of complaints I am
sure. Why has it taken the administration so long to decide to
issue regulations to protect health benefits?
Ms. Berg. Well, Senator, I cannot speak to the 15 or more
years before I got here since the passage of the original reg,
but I can speak to the last 5 years.
Senator Faircloth. You have been there 5 years?
Ms. Berg. Yes, I have been here 5 years.
I will say we recognized the problem right from the
beginning. But at the time that I got here, there were some--I
like to think many--who hoped that universal health care reform
was in sight. And it did not seem to be a productive use of
time to work on amending a regulation, with all the work that
that takes, that might immediately be irrelevant.
By the time it became apparent that it was more likely
there were going to be incremental approaches to health care
reform, we picked the issue right back up. In fact, during
deliberations on the Kennedy-Kassebaum bill, we wrote,
requesting that these issues of protections be included in that
legislation, because we knew, to some extent, our regulatory
authority was limited and there could be a more comprehensive
addressing of the issue through legislation.
Unfortunately, that did not happen. And our immediate
responsibility, after the passage of HIPAA, was to get
regulations in place, implementing that legislation in an
extremely short timeframe. We did that. I am very proud of the
way that we did that.
And immediately after that, we turned back to this issue
yet again, and put out a request for information, modeled on
work that was already being done by HCFA and others. Because we
said, why reinvent the wheel; let us pick up on that. The
question we went out with is, why will these kinds of standards
not work in the private sector? We asked any number of
questions.
And I have to tell you, I am a little bit amused, because
the employer group representatives who are now saying if the
Department would change the regulation we would not be here
talking--I mean, I can quote to you from their response to our
request for information on our current regulation, the APPWP:
``We believe the existing minimum claims procedure standard,
supported by ERISA's strict fiduciary rules, have resulted in
timely, fair and cost-effective resolutions for health plan
claims.''
Don't do anything, they are telling us. Similarly, the ERIC
testified, as well.
So it has only been since the bills that we are talking
about, the bills with real protections that we need to add on
to the internal claims process, have the momentum that they
have that suddenly people are saying, well, gee, improvements
to our claims process is all that is needed here.
Senator Faircloth. When do you plan to issue the
regulations?
Ms. Berg. Within 60 days.
Senator Faircloth. Within 60 days you will be issuing
them.
You propose that legislation be passed to amend ERISA, to
require self-insured plans to have independent systems for
external review of claims. You justify this on the basis that
it will reduce the need for litigation. What is the connection?
Ms. Berg. Well, again, as I was explaining, our position is
that all three pieces are needed: a strong internal claims
review process, where we would hope that most of these problems
would be picked up in the first place--but as I pointed out--
and, again, this is the problem with remedies at the end of the
day--if a health plan knows that if they deny a benefit, even
though it ought to be covered under the plan, at the end of the
process, all they will have to do is pay that benefit, if they
are trying to improve their financial situation for whatever
reason, there is no disincentive for them to deny claims.
They can be in perfect procedural compliance. They can deny
every single one of those claims within 72 hours, or whatever.
But the problem is those claims should not have been denied in
the first place. So you need to know there is going to be a
review of that kind of practice so these things will not
happen. And ultimately, remedies as well, so that there is
financial incentives that make people do the things that they
should be doing in the first place.
Senator Faircloth. What would be the administration's
response to laws to put a limit on what claims could be--a
specific limit on what any claim could be?
Ms. Berg. Well, again, as we point this out in our
testimony, there are different approaches that can be taken
with this. Many of the States have limitations on claims
already, as well. We are open to different approaches. We are
not saying there is any one that is absolutely right and
perfect.
Senator Faircloth. Mr. Pollack, what would be yours?
Mr. Pollack. Well, in response to the question you asked
the Assistant Secretary, I would say, first of all, the
external right of appeal is going to be very important.
Senator Faircloth. Well, I asked for a specific monetary
limit on what any claim could amount to. What would your
response to that be?
Mr. Pollack. I am not sure I would establish one across-
the-board monetary limit. I am not sure that that would be
appropriate.
If that approach was adopted, there might be different
classifications of cases, where there would be some range
established, as we have in our penal system.
Senator Faircloth. Is there some way to put a compensation
limit to what it could be?
Mr. Pollack. I understand what you are driving at.
Senator Faircloth. For simplification, I think it would
save attorney's fees. It would save time. The injured person
would get paid quicker. Is it possible to do what I am talking
about?
Mr. Pollack. I think it is possible. It is very difficult
to do it. I think it is possible to do it. I do not think I am
going to be able to respond directly, as you are asking me to,
to give you a precise fee for each and every kind of situation.
I think it is possible to do it. It is very difficult to do
it. But it is achievable.
Senator Faircloth. Well, lawsuits are out of hand is the
thing I believe you mentioned. Somebody gets $90 million.
Mr. Pollack. Yes; that was my colleague on my left, Mr.
Gallagher, said that.
Senator Faircloth. Was that Mr. Gallagher? OK. Well,
litigation is out of hand, and in some way it has got to be
brought under control.
Thank you, Mr. Chairman.
Senator Specter. Thank you, Senator Faircloth.
Senator Kennedy.
Senator Kennedy. Thank you.
And I thank the panel. It has been enormously interesting.
As I understand, there are two different ways of doing the
remedies. There is one, either to have a Federal remedy, or
otherwise leave it to the States. And I think many of us have
felt that we could leave this to the States and let the States
make these decisions about where they are going to come out in
terms of the remedy itself. That certainly would be the
approach that I would take.
I know there are some--Congressman Stark and others--who
want the Federal. Then I think the question is about what you
do along the lines in setting limits that may be an issue. But
that, I suppose, could be another time.
I think, for the most part, I do not know particularly in
the Senate, about the Federal remedies. It is basically to let
the States make these judgments.
Could I ask, just coming back to the point about the
questions about the costs. Because this has been sort of the
way that many of those that are opposed to both having the
appeals--and I thought that was an enormously important issue
to raise, because it really is part of this whole process to
have the appeals procedures, as Mr. Pollack has mentioned, as
well as the remedies. And tying those together are very, very
important, so that we have the preventive aspect to try and get
this done.
And as I understand, Mr. Pollack and others, we do have
that under the Medicare and it works pretty well. Maybe we
ought to be finding ways to make it better, but we do have
those external appeals. We are not trying to take a whole new
concept, as I understand it. We are trying to build on
something that we do know that works.
Mr. Pollack. And is inexpensive. And I want to be clear
about this, because this is a point that should be discussed,
and it is very relevant. Every one of us are talking about it
in some way.
We did get estimates from the--when we made the
recommendation for an external right of appeal, independently,
from the Lewin Group. And what we heard was as follows. We got
a range. And the range provided to us by the Lewin Group was
that the cost of an external right of appeals--and I am giving
you the exact figures--was 0.3 cents per enrollee, per month,
up to 7 cents per enrollee, per month. You take the maximum end
of that, and you are talking about 84 cents per enrollee, per
month, for an external right of appeals.
Senator Kennedy. So this is a small factor.
Now, let me just ask about the differential, in terms of
the cost of the remedies. You mentioned the Texas situation. We
also have the example of CALPERS, California, 1.2 million.
Their State and local employees, their premiums are competitive
and in many instances are less because they have a better
bargaining position. And as I understand, they have the
complete right of remedies that you are recommending under the
Bill of Rights. Am I correct?
Mr. Pollack. That is correct.
Senator Kennedy. So, you know, there is speculation about
what the costs are going to be. And Mr. Gallagher was unable,
as I understand it, and I will give him a chance to respond,
but unable to respond to the point that, in reality, what is
happening in terms of the State and county employees, and local
employees, we have not seen any evidence, or it has not been
submitted, evidence, about any real difference in terms of
premiums, nor for individuals who are outside, who purchase--I
guess there may be some difference there, but I did not see
there was very much of a difference, even in terms of the
premiums, outside of individual--the marketing reasons for
individual purchasers.
Is that your understanding?
Mr. Pollack. Yes.
Senator Kennedy. Now, what we are really talking about
here--and this is just the end, Olena Berg--let us take your
case about your CAT scan. If a person has the CAT scan, if the
doctor, if the groups says, the package says, you can have the
CAT scan, and the doctor says, I am not going to do the CAT
scan because I do not think that it is worthwhile in this case,
the person then gets a health implication of this, at the
present time, they can sue the doctor for malpractice, is that
correct?
Ms. Berg. That is correct.
Senator Kennedy. OK. Now, if they say that the doctor wants
to do the CAT scan but the package does not provide the CAT
scan, and so the plan says, no, you cannot do that CAT scan,
then what is the remedy if the person gets additional medical
complications? What happens now?
Ms. Berg. In that case, it is a benefit determination, and
it would be subject to ERISA. So, arguably, the only benefit
that would be available is the original test, if the person
were damaged. But I have to point out that we actually have
three situations here. One is the plan clearly says we are not
going to cover this, and there is no question about that.
Senator Kennedy. OK.
Ms. Berg. The issues that we are mostly talking about today
is kind of the intermediary. The plan has a set of benefits,
but there is a determination by someone, not the doctor. The
doctor says, my patient needs this test, and someone in the
process--a utilization review committee or something like
that--even though, under the plan, the person is covered for
what is determined to be medically necessary, someone
wrongfully says, this test is not necessary, and the person
does not get it.
And we are saying that situation should be treated exactly
as the malpractice situation is. Someone has done something
that was wrong that harmed the patient.
Senator Specter. Senator Kennedy, we are under tight time
constraints. After this hearing was set, the Appropriations
Committee set a meeting with Prime Minister Netanyahu at 2
o'clock. So we are going to turn to Senator Durbin for a round
of questioning.
Senator Durbin. Thank you, Senator Specter. I apologize for
being late. And I want to applaud you for holding this hearing.
This is a timely issue, and one that I have tried to address by
introducing legislation on the matter.
And I frankly come to this issue with two life experiences
that give me great interest. One is, before I was elected to
Congress, I was a medical malpractice attorney. And I
represented both sides. I defended doctors and I sued them. So
I have been on both sides of this issue. I think I understand
better than some that we are talking about real-life experience
and real-life tragedies.
The second experience relates to a program in my hometown
of Springfield, IL, that invited Members of Congress to spend a
day with the doctor. So I went on rounds in a hospital with a
doctor. I spent 1 hour of that day standing at a nurse's
station while this doctor, on the telephone, argued with a
clerk from an insurance company in Omaha, Nebraska, about
whether a woman would be admitted. And, finally, the doctor, in
desperation, said I cannot in good conscience, send this woman
home. I am going to admit her and fight the insurance company
myself.
I think this issue is about accountability. Who should be
held accountable? If a doctor makes a medical decision in the
best interest of his patient, and then is overridden by the
insurance company, who should be held accountable?
Let me just say, before I offer Mr. Pollack an opportunity
here, those who argue that this is going to shift a burden on
employers who choose these managed care plans, I beg them to
read the legislation that I have introduced. We clearly
indemnify all employers. This is a question about the managed
care company. It is also a question of a doctor's advice. And
it is a question of accountability.
Mr. Pollack.
Mr. Pollack. Mr. Durbin, if I may just build on your
comment, and Mr. Specter's elaboration of Mrs. Corcoran's case,
you have got a perfect example of that situation. Her doctor
said that she needed--she had an at-risk pregnancy. Her doctor
said she needed to be in the hospital as she was approaching
term. And the doctor was clear that she needed that care.
Unbeknownst to Mrs. Corcoran, that HMO had gotten a second
opinion. And that second opinion also said she should be in the
hospital and that she should be under constant doctor's care.
Notwithstanding that, the HMO said no, she should not be in a
hospital; that she should be getting 10 hours a day of nurse's
care. And as a result of that, her child died.
There is no question that plans are practicing medicine.
And what the plans, in effect, are saying to us is: We can
practice medicine except when we make a mistake. Then you
should not treat us as if we are practicing medicine.
But Mrs. Corcoran is a clear example of how the plans have
overridden professional decisions about what was good for
herself and for her fetus. And unfortunately, the plan overrode
it and she has no remedy today.
Senator Durbin. I would like to ask Mr. Smith and Mr.
Gallagher a question--it is not a hypothetical, it is a real
case of a woman in Chicago, who went on vacation in Hawaii, and
had a severe reaction. And the doctor in Hawaii recommended a
bone marrow transplant immediately to save her life. She called
her HMO. They said no, you have to come back to Chicago. We
will not do it in Hawaii. And her doctor in Hawaii warned her:
Do not get on that plane. She said: I have no choice; I cannot
pay for this. She got on the plane, suffered a stroke, and died
9 days later.
Should the HMO and insurance company get off the hook in
this situation? Should they be limited to the cost of the
procedure only if they have overridden a doctor's medical
decision about what is in the best interest of a patient, and
the patient dies as a result of that insurance company
decision?
Mr. Smith.
Mr. Smith. As it stands now, if a plan is involved in
practicing medicine, they are subject to liability. And in
terms of indemnifying employers, you can indemnify all you
want, but the costs will come back to us. And so far, all we
have heard about these costs are examples of State and local
governments. I have heard examples of Medicare being held up as
an example.
To the extent that you want to start comparing State and
local government management to what a private employer can do,
that makes me very uncomfortable. And this notion that we have
no incentive to, other than financial controls, is ludicrous.
We care about our employees and we want them to get top-quality
care.
And I will repeat this again. We can cite example after
example of some very horrific situations, but for every one of
those there are many, many, many success stories. And I am as
sorry as I can be about this woman who died on her way back
from Chicago. It is a terrible thing. And any employer would
feel very compassionate toward their employee for that. But to
the extent that we try to fix those individual situations with
a broad-based piece of legislation, then you are going to
impact the lives of----
Senator Durbin. Mr. Smith----
Senator Specter. Senator Durbin, we are going to have to
give Mr. Gallagher a chance.
Senator Durbin. Well, I would like to respond to this
first. Let me tell you, this is not about compassion. This is
about justice. This is about justice. This is a decision made
by a company, not by a doctor. The company overrode the doctor.
And you are saying, oh, there is liability. But it is a limited
liability. And I think your response was not totally responsive
to the question.
Mr. Smith. If they practiced medicine, then they could be
subject to State malpractice.
Senator Durbin. Mr. Gallagher?
Mr. Smith. So there is more liability than you are
suggesting.
Senator Specter. Mr. Gallagher, would you care to reply?
Mr. Gallagher. Thank you. Briefly.
I know all the members of the committee here are lawyers,
and you know the phrase ``bad facts make bad law,'' and that
applies to legislation, too.
But you should not deprive employees of this country of the
benefits that they have gotten from the managed care system,
which is better care, wellness benefits, all the things that we
did not have in the fee-for-service system, by focusing on
penalizing employers and managed care companies when mistakes
are made. The focus should be on making sure those mistakes do
not happen again.
Senator Specter. Mr. Smith and Mr. Gallagher, would you
care to reply on this issue of internal and external rights of
appeal? You have not been given an opportunity to comment on
that. Do you think that there ought to be internal right of
appeal?
Mr. Smith, you commented within your own company. Do you
think that that would be an appropriate remedy, for a mandatory
internal right of appeal?
Mr. Smith. I cannot speak on behalf of NAM, but at AMP we
have been involved in developing policy statements, where, as
an alternative to changing some of these ERISA remedies, we
would certainly favor some type of an appeal process to help
resolve some of these issues.
Senator Specter. How about external appeal?
Mr. Smith. Under the right circumstances. That is fraught
with certain difficulties, as well. But it is something we
would certainly prefer to some of the ERISA remedy changes.
Senator Specter. Mr. Gallagher, would you care to answer
that question?
Mr. Gallagher. I know, Senator, that many companies and
many managed care companies, are considering doing that on a
voluntary basis merely because of the perception that consumers
and others have that they are not going to get a fair shake
when you go back to the----
Senator Specter. The question goes to whether you would
think it appropriate for Congress to make that a requirement,
internal and external rights of appeal.
Mr. Gallagher. I would prefer that it be voluntary, that
the decision be left to the company.
Senator Specter. Senator, do you have one more comment to
make here? I am sorry to limit--this is a vast subject, but we
do have, as I said, the Prime Minister coming in very shortly.
Senator Durbin. Senator, you have been kind enough to hold
this hearing. I am glad you did. And I will not hold it up.
Thank you very much.
Senator Specter. All right.
Do you want to make another comment, Ms. Berg?
Ms. Berg. Just one final comment on the issue of cost,
because it is important that there be a weighing of that. There
are a couple of studies on the PARCA bill, one by Muse and
Associates, which estimates the additional costs due to these
remedies at two-tenths of a percent of premium. There are two
studies by industry groups who oppose the bill.
Now, one of these two studies I will not discuss with you
in detail because I can best describe it as using assumptions
that have little basis in fact. I could go assumption by
assumption with you and go through that. I would be happy to
provide information on that. The other study--now, this is a
group that is opposed to this provision--estimated the
additional costs of these provisions at just under a billion
dollars in the context of total health care premiums. That is
three-tenths of 1 percent. They came in right where Muse and
Associates did--very little difference.
So that, too, supports our contention that these are
important protections, with very little additional cost.
Senator Specter. Well, we thank you all. The subcommittee
would be interested in any additional data that you could
provide on how many people will fall out of plans and will not
have any coverage at all, so that they do not get some care,
what the factor is there. We have to make a public policy
judgment as to what ought to be required.
The cases of Mrs. Corcoran and others are very heart-
rendering and very compelling. We want to know what the
incidence is of such cases which are like Mrs. Corcoran's. And
we also want to know what the cost would be as to how many
people would drop out of plans and not have any care at all,
the other side of the coin, of lack of care.
This is a very complex question, and we have obviously only
scratched the surface. But I think that it is important to
proceed, to find out what we can about the hard facts, which
will enable the Congress to make an informed judgment.
conclusion of hearing
Thank you all very much for being here, that concludes our
hearing. The subcommittee will stand in recess subject to the
call of the Chair.
[Whereupon, at 1:40 p.m., Thursday, May 14, the hearing was
concluded, and the subcommittee was recessed, to reconvene
subject to the call of the Chair.]
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