The Missing Piece of Healthcare Reform

PERSPECTIVE COLUMN
Originally published in the Oct. 23 edition of the LA Daily Journal as part of Loyola's weekly Civil Discourse series

 

By Brietta Clark

 

Last week, the Daily Journal published an article highlighting a pervasive problem of bad faith denials by disability insurers. This problem is largely absent from discussions of health care reform, despite being integrally linked to health care. If improving health care access and outcomes is our priority, then we can't ignore the need for disability insurance reform.

 

Understanding the relationship between disability insurance and health care access is important for two reasons. First, disability insurance is an important tool for accessing health care and improving health outcomes - key concerns underlying state and federal health reform efforts.

 

Bad faith denials can cause employees to lose access to employee benefits before they are able to qualify for health care through other public benefit programs, like the federal Social Security program. This can mean a dramatic reduction in income, which often results in people having no money to pay for health care - medical treatment and supplies necessary to prevent deterioration, achieve maximum independence, and maintain a good quality of life.

 

In many cases, the financial effects are also devastating - causing bankruptcy or homelessness. A Harvard study found that about half of families filing for bankruptcy cited medical causes, and of those 75.7 percent had insurance at the onset of illness. Access to stable housing and support is important for everyone - but for persons with disabilities, it is essential to the ability to function independently and maintain physical and mental health.

 

Second, there are strong parallels between the disability and health insurance markets concerning how and why bad faith denials occur. This means that reforms enacted to address this problem in health care provide useful lessons for reforming disability insurance.

Disability insurance, like health insurance, has grown into a lucrative industry, and insurers always have a financial incentive to deny claims. They have an inherent conflict of interest because of their dual role in determining benefit eligibility and paying these benefits. Consequently, disability insurers employ many tactics to encourage or justify claim denials - many of which have been criticized or even prohibited in health care.

 

Some of these are overtly unscrupulous: imposing denial quotas on insurance administrators; tying bonuses to company earnings; pressuring medical consultants to deny claims; and making claims determinations before requesting medical documentation. Others are harder to identify, and thus more insidious: failing to give medical consultants necessary medical evidence; using the wrong standard for determining disability; and giving unreasonably greater weight to opinions of physician consultants who have not physically examined the patient than to more detailed, consistent reports by treating physicians.

 

The Daily Journal highlighted another tactic: using medical reviews that are not really independent because the medical consultants are chosen by the insurer, rely on the insurer for repeat business, and have a disturbingly high rate of siding with insurers.

While profit motivates these practices, ineffective legal oversight is the reason they are so pervasive. Indeed, another unfortunate parallel between disability and health insurance denials is the lack of meaningful judicial recourse as a check on insurers' bad faith.

State tort law requires insurers to act in good faith in making benefit determinations, and allows them to be sued for large punitive damages to deter future bad faith denials. Punitive damages are important because of the power imbalance favoring insurers, the huge financial incentive to deny claims, and the devastating consequences that can result from wrongful denials.

 

Unfortunately, many insurance plans are employment-based and thus regulated under a federal law called ERISA, which preempts state tort law and prohibits punitive damages. ERISA limits the amount of damages an insured can seek to the amount of benefits due. This means plans have nothing to lose in denying claims wrongfully and making people sue.

 

ERISA provides some protection - it requires insurers to provide a full and fair review of claim requests. And federal courts have overturned benefit denials in many cases because certain plan practices violated this requirement. The problem is that these individual successes are too little, too late. The slow judicial process means the employee has probably suffered serious consequences as a result of the denial - harms that courts have decided cannot be remedied under ERISA.

 

Consider the story Curtis Walker, profiled in the Daily Journal: A senior IT project manager for Kaiser Permanente, he became disabled in 2004 after suffering a stroke. His Kaiser doctors found him disabled, and the federal Social Security Administration agreed. But MetLife, his employment-based disability insurer, denied his claim for benefits. MetLife is one of the disability insurers that has been sued and had denials overturned by courts numerous times because of unfair practices. Mr. Walker filed a lawsuit against MetLife, but is still waiting for trial. In the meantime, he has lost his job, house, family's medical coverage, and savings.

 

The inability of courts to prevent bad faith denials and to fully compensate those harmed makes the role of government regulators critical.

 

Regulators have many more tools at their disposal: they can investigate and fine insurance companies for violations, require reporting that uncovers bias in the review processes, and proscribe (or require) practices that create (or prevent) bias. Regulators may also be authorized to administer a binding independent review process that provides a speedier resolution, minimizing the financial and health consequences from a wrongful denial.

 

In fact, we rely heavily on government regulators to utilize these tools in regulating health insurance companies. Managed care horror stories led many states, including California, to improve regulatory oversight by broadening regulators' powers, enhancing staff expertise and capacity, and creating an independent medical review process that is binding on plans.

 

And ERISA allows this. Although it preempts state tort law, the Supreme Court has made it clear that ERISA does not preempt state regulation specifically directed at insurance companies, even if purchased through employers. The only exception is for employers who self-insure.

 

Unfortunately, regulatory oversight for disability insurance is not nearly as robust or proactive. The California Dept. of Insurance has been surprisingly passive in light of the magnitude of the problem revealed through numerous lawsuits, media stories, and a prior multi-state investigation in 2004.

 

Although the Department has authority to investigate disability insurers, sustained oversight is lacking and the occasional fines are not severe enough to deter a practice that saves plans so much money. One problem is that the Department does not appear to have enough staff with the requisite expertise. For example, the Daily Journal reported disturbingly inconsistent statements between current and former Department officials about the scope of their regulatory authority.

 

Another problem is the lack of a formal independent medical review process for benefit denials. Although consumers can file complaints with the Department, they seem to get very little, if any, information about how or when investigations will be conducted. In Mr. Walker's case, he said he contacted the Dept. of Insurance in April 2005, and has yet to receive help.

 

Robust regulatory oversight and a binding independent medical review process are as necessary to protect consumers against wrongful denials of disability benefits as they are for health care benefits. Without meaningful reform, people already struggling to cope with disabling medical conditions will continue to suffer preventable and potentially irreparable financial and health consequences.

 

Brietta R. Clark is a professor of law at Loyola Law School and a member of the LACMA-LACBA Joint Committee on Biomedical Ethics. She can be reached at brietta.clark@lls.edu.