The Conflict Of Interest Inherit In Administrative Review The Conflict of Interest Inherit in Administrative Review and the Ineffectiveness of the Current Standard of Review by U.S. District Courts Law and Medicine By # I. Introduction The Employee Retirement Income Security Act, better known as ERISA, has been a major issue in healthcare litigation since its inception in 1974. ERISA governs any claim centering on health insurance, disability insurance, or any other employer provided benefits. ERISA affects many aspects of the American legal system, from inter-state commerce to bankruptcy, and particularly insurance and healthcare law. ERISA contains clauses for both the procedure and substance of the law and is often preemptive over state law.
There is a great deal of misunderstanding and confusion surrounding the application and coverage of ERISA, which has made litigation even more complex and hazardous. Understanding the basic procedure, coverage and intricacies of ERISA’s implications and formalities is essential for any attorney practicing insurance or healthcare law. This past year I was personally involved in an ERISA litigation suit. This suit involved a woman working for The Mutual of Omaha Companies. She was denied a breast reduction surgery by her employer-run health plan. This surgery had been recommended by her physician and deemed “medically necessary.” However, her health insurance plan exempted all forms of breast surgery, not involving cancer, from coverage regardless of their necessity.
Our client, the insurance participant (“client”) then came to our office to see what assistance we could provide in helping her obtain coverage for this surgery. At this point, our office thought that the chances for recovery of any benefits were very slim due to the fact that the health insurance policy specifically excluded breast reduction surgery from coverage. However, we told the client we would look into the possibility of recovery. With very little investigation we were able to discover that although the health insurance policy had excluded breast reduction surgery, Mutual of Omaha had previously granted coverage to three of the exact same types of surgery to more senior Mutual of Omaha employees within the past year. Thereafter, our case quickly became a question of whether the healthcare administrator was precluded from denying coverage for breast reduction surgery, when it had granted coverage for the same on three previous occasions. The U.S.
District Court held that the plan administrator was precluded from denying the claim, when they had granted coverage in the exact same medical circumstances on three previous occasions. This case is currently on appeal with the Eighth Circuit. The issue that I found most compelling while researching ERISA procedure was the administrative appeal process, and the standard of review to which the U.S. District Court must adhere. The U.S. District Court was required to review a case on appeal, after the exhaustion of administrative remedies, only for an abuse of discretion, so long as discretion had been granted to a plan administrator within the plan.
In our suit, the health insurance policy did contain a clause that gave the administrator discretion to interpret and review, therefore our burden of proof was to convince the U.S. District Court judge that the administrator had abused his discretion and denied coverage beyond what the administer believed were the policy guidelines. This is an extremely high burden of proof and essentially gave 95% of the power of review to the administrator, which happened to be a panel of senior Mutual of Omaha employees. This seems to me as if the proverbial wolves were guarding the hen house, by placing the persons who benefit from the denial of a claim in charge of the appeal from a claim that a participant thought was unfair. Since I do not understand the reasoning behind this rule of procedure, I will analyze the reasoning that the U.S.
Supreme Court provided for allowing such a high burden of proof for claimants in ERISA actions. II. Overview of the Employee Retirement Income Security Act and Procedure ERISA was designed to secure employee pensions and benefits for their future use by employees. Enacted in 1974, ERISA was a response to concerns about fraud and abuse within private employee benefit programs. See 29 U.S.C.
1001. ERISA established federal uniform duties and obligations for benefit plan administrators to ensure the preservation of employee pension funds and benefit plans. ERISA governs all benefit programs, which fall within the ERISA’s statutory definition of employee welfare benefit plans. ERISA defines employee welfare benefit plan, as (1) any plan, fund, or program; (2) established or maintained by an employer; (3) through the purchase of insurance or otherwise; (4) for the purpose of providing medical, surgical, hospital care, sickness, disability, death or unemployment benefits; (5) to its participants and beneficiaries. 29 U.S.C.
1002. As long as a benefit plan falls within ERISA’s coverage, a plan participant may bring civil suit appealing their denied claim. See 29 U.S.C. 1132(a)(1)(B). A participant of a plan governed by ERISA may bring suit in three situations.
First, a participant may bring suit to recover benefits due under the terms of the plan. Second, he or she may bring an action to enforce rights under the terms of the plan. Finally, a participant may bring suit to clarify his or her rights to future benefits under the terms of the plan. Firestone Tire & Rubber Co. v. Brunch, 489 U.S.
101, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989). ERISA additionally includes procedural formalities that must be satisfied before a claimant may bring civil suit. First, the participant must file a written claim with the plan administrator. 29 U.S.C. 1002.
If the claimant has not filed a written claim to the plan administrator, the claimant will not receive an administrative review and therefore is precluded from filing a civil action. Second, the claimant must ensure that all administrative remedies have been exhausted. Id. This means that a plan participant must have first appealed his/her claim for an appropriate administrative review, as enumerated in the benefit plan, before he or she can bring a civil suit. The plan administrator usually conducts these administrative reviews through an internal review process. However, there is one exception to the rule of exhaustion of administrative review. Complete exhaustion of an administrative review is not necessary if the claimant can demonstrate that the participant was not informed as to the administrative claims process or if the claimant can show that the exhaustion will be futile.
An administrative appeal is allowed if a beneficiary is denied a claim, which he or she believes is covered under the benefit plan, and the claimant has received a denial notice. When the plan administrator denies a claim, the administrator must meet certain requirement in his or her denial notice. The denial notice must contain four specific statements: (1) the specific reason for the denial; (2) a specific reference to pertinent plan provisions on which the denial is based; (3) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (4) appropriate information as to the steps to be taken if the participant or beneficiary wishes to submit his or her claim for review. 29 U.S.C. 1002.
If the administrator does not provide a denial notice that includes the above four requirements, the claimant is deemed to have been denied a “full and fair review” and may seek to vacate the benefit denial. Halpin v. W.W. Grainger, 962 F.2d 685 (7th Cir. 1992).
After receiving a denial notice the claimant may then begin the administrative appeals process, as proscribed by the benefit plan. If a claimant has exhausted all of his administrative remedies and still believes that he or she has a valid claim, the claimant may file an appeal with the U.S. District Court. 29 U.S.C. 1132(a)(1)(B). State courts have concurrent jurisdiction over ERISA claims, but any claimant who desires a remedy other than an award of benefits must file their action in federal court.
29 U.S.C. 1132(e)(1). Although an ERISA action may be brought in state court, the state court is still required to apply the federal ERISA statute. Bird v. Shearson Leaman/American Express, 871 F.2d 292 (2nd Cir.
1989). The ERISA statute itself determines venue. An ERISA action can be brought in the district where the plan is being administered, where the alleged breach took place, or where a defendant resides. 29 U.S.C. 1132(e)(2).
Finally, trial courts are given discretion to determine whether attorney’s fees should be awarded, and in what amounts, to a prevailing attorney. 29 U.S.C. 1132(g)(1). Although the payment of attorney’s fees is not required they are “expected absent special circumstance which would make the award unjust.” Stanton v. Larry Fowler Trucking, Inc., 52 F.3d 723 (8th Cir. 1995).
In order to award attorneys fees a court usually applies a five-prong test: (1) the degree of the offending parties’ culpability or bad faith; (2) the degree of the ability of the defending party to satisfy personally an award of attorney’s fees; (3) whether or not an award of attorney’s fees against the opposing parties would deter other persons acting under similar circumstance; (4) the amount of benefit as a whole; and (5) the relative merit of the parties’ positions. Bittner v. Sadoff & Rudoy Industries, 728 F.2d 820 (7th Cir. 1984). Most circuits seem to have a slight presumption in favor of allowing an award for attorney’s fees to a prevailing plaintiff. III.
What is the Appropriate Standard of Review for a U.S. District Court? Prior to Firestone Tire & Rubber Co. v. Brunch, the Supreme Court had held that an arbitrary and capricious standard of review was to be given to all administrative reviews appealed to the U.S. District Court under ERISA. ERISA has always contained an enforcement clause that grants plan participants the explicit right to file suit to recover benefits that have been wrongfully withheld.
29 U.S.C. 1132(a)(1)(B). However, the statute itself does not contain any guidance or standard regarding the proper standard of review for denial of a benefit. Early ERISA decisions applied the “arbitrary and caprious standard,” which strongly favored the plan administers. The arbitrary and caprious standard was imported from the Labor Management Relations Act of 1947 (LMRA). This standard had worked in the LMRA, and was thought to be appropriate for ERISA.
However, no one noticed the fundamental differences between LMRA trusts and ERISA. 51 Alabama L. Rev. 733. One important difference between ERISA governed health plans and LMRA trusts, is that LMRA trusts were to be administered by joint employer-employee trustee.
Id. This safeguard allowed the conflicting interests of administers and beneficiaries to decide together on the appropriate course of action. Then, if the employer and employees could not decide a course of action, the dispute was turned over to a disinterested arbitrator for a ruling. Id. This safeguard, embedded in the procedural administration, prevented a conflict of interest from affecting the decision.
ERISA, on the other hand, contains no safeguards. Once the courts realized that a conflict of interest could affect benefit approvals and that ERISA should not be treated like the LMRA, many differing opinions began to arise. In 1989, the United States Supreme Court attempted to clarify the standard of review by announcing the appropriate standard of review to be used for appeals arising from ERISA administrative reviews. In Firestone Tire & Rubber Co. v.
Brunch, the Court held that the U.S. District Court shall perform a de novo review of benefit determinations made by plan administrators and fiduciaries in cases where the plan has given no discretionary authority to the plan administrators or fiduciaries to interpret the plan terms or to determine eligibility for benefits. Brunch, 489 U.S. 101 (1989). The Court went further held that when administrators and fiduciaries are given the authority to interpret the plan’s terms, the District Court must review the administrative finding for an abuse of discretion. Id.
at 115. If no abuse of discretion is discovered then the administrative ruling must be upheld. Id. at 115. The Court additionally held that if the administrator or fiduciary is given discretionary authority, and is operating under a conflict of interest, that conflict is to be weighed as a factor in determining whether there has been an abuse of discretion.
Id at 115. This holding is a dramatic change from the weight previously given to all administrative rulings. a. Facts of Firestone Tire & Rubber Co. v. Brunch The facts of Firestone Tire & Rubber Co.
v. Brunch are as follows: In 1980, Firestone sold its Plastics Division to Occidental Petroleum. Nearly all-former Firestone employees were re-hired by Occidental to work in the Plastics Division. Unknown to Firestone, their employee termination pay plan was governed by ERISA, and Firestone had failed to comply with the appropriate steps for establishing a claims procedure. Several former Firestone employees now working for Occidental, sought severance pay from Firestone under the termination pay plan. The plaintiffs claimed that when Firestone sold it’s Plastics Division to Occidental, Firestone had made a “reduction in work force,” and therefore the plaintiffs were entitled to severance benefits according to the termination pay plan.
Firestone, the administrator and fiduciary of the benefit plan, denied the plaintiff’s claim because it determined the sale of a division was not a “reduction in work force” as defined by the termination pay plan. The plaintiff then brought a civil suit in the United States District Court for the Eastern District of Pennsylvania. The District Court granted Firestone’s Motion for Summary Judgment because the court believed that Firestone’s denial of the plaintiff’s claim was not arbitrary and caprious. The plaintiffs appealed to the Third Circuit Court of Appeals. The Appellate Court reversed the finding of the District Court holding that Firestone had a conflict of interest, and had failed to act impartially. The Third Circuit held that due to Firestone’s conflict of interest, as employer, administrator, and fiduciary of the plan, the correct standard of review should be a more complete, de novo review.
The United States Supreme Court subsequently granted certiorari “to resolve the conflicts among the Court of Appeals as to the appropriate standard of review in actions under 29 U.S.C. 1132(a)(1)(B) and the interpretation of the term participant in 29 U.S.C. 1002(7).” Id. at 108. The Supreme Court affirmed the de novo review, but not due to the apparent conflict of interest.
The U.S. Supreme Court held that the Firestone plan did not give the administrator discretionary authority to interpret the plan, particularly the term “reduction in work force.” Id. at 111. The Supreme Court also reversed the Third Circuit’s construction of the word “participant.” The Court held that “participant” did not apply to former employees who did not have a reasonable expectation to return to the employment of the employer of the plan.” Id. at 117.
The case was then remanded to the Third Circuit to determine whether the claimants were “participants” within the meaning of 29 U.S.C. 1002(7). Id. at 109. b. A Closer Look at the Brunch Opinion In Brunch, Firestone raised five separate points why the Court should apply the arbitrary and capricious standard of review to an administrator’s decision. First, Firestone argued that prior case law applied the arbitrary and capricious standard of review to ERISA claims.
Second, even though the plan did not specifically give the plan administrator the power to use his discretion to interpret terms of the plan, the administrator’s position was an “inherently discretionary function.” Third, Firestone argued that the arbitrary and capricious standard should be used because the plan administrator is a fiduciary. As such, any exercise of authority by a fiduciary is discretionary and therefore subject to an arbitrary and capricious review. Fourth, Firestone argued that since Congress failed to adopt an amendment that included a mandatory de novo review for all ERISA actions, Congress’ intent was to keep the arbitrary and capricious standard. Finally, Firestone made the argument that applying a de novo review would undermine ERISA’s purpose and encourage appeals and civil suits from benefit denials. Brunch at 109. The Court stated that the above arguments applied to the LMRA reasoning for the use of the arbitrary and caprious review, however, that same standard will not be “imported” into ERISA’s administration.
Id. at 109-10. The Court stated that the arbitrary and capricious standard of review that was previously developed under the Labor Management Relations Act of 1947 (LMRA) was not the appropriate standard of review for ERISA claims. Id. at 102.
The Court determined that the arbitrary and capricious standard was inappropriate for ERISA claims because the LMRA did not expressly make labor/management pension plan decisions reviewable, unlike the ERISA statute. The Court stated that principals of trust law must settle the proper standard of review for ERISA actions. Id. at 102. Under the principals of trust law, when a trustee is given the power of discretion to interpret the trust plans terms, a court will uphold a reasonable interpretation by that trustee.
Id. at 11 …