U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

50–024 cc 1999

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

(

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(II)

COMMITTEE ON APPROPRIATIONS

TED STEVENS, Alaska, Chairman

THAD COCHRAN, Mississippi

ARLEN SPECTER, Pennsylvania

PETE V. DOMENICI, New Mexico

CHRISTOPHER S. BOND, Missouri

SLADE GORTON, Washington

MITCH MCCONNELL, Kentucky

CONRAD BURNS, Montana

RICHARD C. SHELBY, Alabama

JUDD GREGG, New Hampshire

ROBERT F. BENNETT, Utah

BEN NIGHTHORSE CAMPBELL, Colorado

LARRY CRAIG, Idaho

LAUCH FAIRCLOTH, North Carolina

KAY BAILEY HUTCHISON, Texas

ROBERT C. BYRD, West Virginia

DANIEL K. INOUYE, Hawaii

ERNEST F. HOLLINGS, South Carolina

PATRICK J. LEAHY, Vermont

DALE BUMPERS, Arkansas

FRANK R. LAUTENBERG, New Jersey

TOM HARKIN, Iowa

BARBARA A. MIKULSKI, Maryland

HARRY REID, Nevada

HERB KOHL, Wisconsin

PATTY MURRAY, Washington

BYRON DORGAN, North Dakota

BARBARA BOXER, California

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

SLADE GORTON, Washington

CHRISTOPHER S. BOND, Missouri

JUDD GREGG, New Hampshire

LAUCH FAIRCLOTH, North Carolina

LARRY E. CRAIG, Idaho

KAY BAILEY HUTCHISON, Texas

TED STEVENS, Alaska

(Ex officio)

TOM HARKIN, Iowa

ERNEST F. HOLLINGS, South Carolina

DANIEL K. INOUYE, Hawaii

DALE BUMPERS, Arkansas

HARRY REID, Nevada

HERB KOHL, Wisconsin

PATTY MURRAY, Washington

ROBERT C. BYRD, West Virginia

(Ex officio)

Majority Professional Staff

BETTILOU TAYLOR

Minority Professional Staff

MARSHA SIMON

Administrative Support

JIM SOURWINE and JENNIFER STIEFEL
(III)

C O N T E N TS

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
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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
2

the hospital for at least 48 hours. There are provisions up for driveby 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:]
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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-fi- nanced 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.
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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-forservice 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.
5

As increasing numbers of employers are turning to managed care as a cost-effi- cient 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 Ken- nedy’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 re- sponsible 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 em- ployer 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 pro-
6

tections 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.
7

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
8

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, al- though 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 ‘‘TaftHartley’’ plans negotiated by unions with groups of employers. The employment-based health care system regulated by ERISA is a voluntary sys- tem. 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 de- tailed 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 stand- ards 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 ‘‘sav-
9

ings 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 cov-
10

erage 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.
11

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.
12

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
13

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
14

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.

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.
15

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
16

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.
17

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 selfinsure 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 in-
18

sured 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).
19

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 § 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 § 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 § 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 § 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).
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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
21

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
22

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
23

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.
24

The remedy issues raised by existing ERISA legislation are important in promot- ing 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 highquality 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
25

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
26

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 em- ployer-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 meaning-
27

ful 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 pre- emption 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
28

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 em- ployers 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
29

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
30

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.

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-forservice 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.

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-ofnetwork 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 pro-
31

gram 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 flexi- bility

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
32

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 over- rule 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.
33

Under current ERISA law, the plan participant or beneficiary has a right to inter- nal 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 welfarebenefit 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 com- pletely 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 spon- sors 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 spon- sors 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
34

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 lowwages, 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 experiencerated 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
35

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.
36

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 nonmedical 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.
37

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 purchasinghealth 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
38

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
39

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.
40

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
41

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-theboard 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?
42

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 en-
43

rollee, 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.
44

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.
45

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.
46

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
47

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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