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Ruling Invites More Scrutiny of Denial of Health Claims

October 3, 2008
Employers are reckoning with the implications of a recent U.S. Supreme Court decision that could affect their ability to provide health care benefits.

The high court’s June decision in MetLife v. Glenn made it clear that employers and insurers face conflicts of interest in administering health benefit plans because they stand to gain financially by denying a claim.

The decision means employers and health insurance companies would be more vulnerable to lawsuits if they did not adequately address these conflicts.

Attorneys said the court’s ruling could open the door to expensive lawsuits from employees whose claims have been denied. Tim Jost, a professor of law at Washington and Lee University, said it could also lead employers to avoid the issue altogether by simply approving more health claims, thereby increasing health care costs.

“Employers and insurers better make sure they have their house in order,” Jost said. Insurers and employers must prove they have a conflict-free system in place—creating a “firewall,” for example, between those who adjudicate claims and employees who make financial decisions. If so, the court is likely to support a company’s choice to deny a claim, Jost said.

In cases with the appearance of a conflict of interest, however, employers and insurers could find themselves facing protracted litigation. Before the decision, federal courts widely accepted that conflicts of interest existed.

In affirming their existence, the Supreme Court made it clear that it would permit plaintiffs’ requests to pretrial discovery, a development considered significant, said attorneys specializing in the administration of the Employee Retirement Income Security Act.

“More discovery means more cost and expense for employers,” said H. Douglas Hinson, a partner in the ERISA litigation group of Alston & Bird in Atlanta. “The time that it takes to discover the facts and circumstances around the conflict could be more expensive than paying the benefit in the first place.”

Hinson says the problem with the ruling is that it does not say exactly how a conflict of interest would weaken a defendant’s case. Instead the court said a conflict of interest would be one factor for courts to consider.

To avoid litigation, employers should ensure that those denying claims operate independently, hiring outside doctors to review cases. Employers who hire outside administrators to adjudicate claims should state in their contract that the employer doesn’t become liable for poor claims administration, said Paul M. Yenerall, a partner with Eckert Seamans Cherin & Mellott in Pittsburgh.

The case, which has great implications for health plans, involved Sears, Roebuck and Co. employee Wanda Glenn, who with a heart condition had her disability benefits denied by Metropolitan Life Insurance Co.

Conflicts of interest among insurance companies became a national scandal in 2002 when it became known that Unum-Provident, the largest U.S. disability insurer, had offered medical advisors bonuses based in part on company earnings.

The court’s ruling portends increased scrutiny of health plans’ decisions. Their best course, Jost said, would be to develop a transparent and independent review system.

Otherwise, Jost wrote in a September online article in the journal Health Affairs, lawsuits “may raise the cost of some ERISA plans, which may mean that additional employers will drop health coverage or increase employee cost sharing or premiums, causing additional employees to forgo coverage.”

—Jeremy Smerd

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