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Monday, September 14, 2009

Guest Blogger Tony Sebok On Health Insurance Reform and ERISA

This is a good week to be guest-blogging at TortsProf.  President Obama’s speech last week in defense of healthcare reform won the longest and most sustained applause from the Republican side of the aisle when he mentioned tort reform.  Some commentators, such as Timothy Noah at Slatehave suggested that a cap of $250,000 on pain and suffering damages would be a small price to pay for meaningful reform.


Noah is an example of a certain kind of liberal—one who views tort litigation as an instrument for the achievement of certain social ends, but not as a unique instrument, or one that is worth defending for its own sake.  In this way, Noah’s cavalier attitude is not very different from Obama’s own prescription to liberals about how to treat the idea of “single payer” insurance schemes:  “only a means to [an] end”—namely universal coverage.  I will call this the “instrumentalist position,” a term I have borrowed from my co-authors John Goldberg and Ben Zipursky.


I will be writing this week about the pros and cons of this position.  We can analyze the instrumentalist position from two different perspectives.  First, we might ask whether we will ever have enough information to draw the conclusion that medical malpractice law currently instantiated by the tort system—which is some mixture of strict liability and negligence—is a net drag on the other social goals we have (such as cost and safety).  Some defenders of the medical malpractice system take the position that litigation over adverse events happens so rarely that the effect of the medical malpractice system on the healthcare system is negligible.  That is not much of a defense, much less an endorsement, of one of the most criticized parts of the tort system. 


Second, we might want to ask whether, if we were convinced that we would never be able to gather concrete and reliable aggregate data on the effect of the medical malpractice, we would be able to make decisions about its optimal shape nevertheless.  That is, do we have to wait until we have “enough” data to decide whether to accept or reject reforms?  The tort reformer might complain that their critics’ constant refrain that we lack data misses the point—that the demand that we wait for data is just another way of saying, as in Waiting For Godot, that we should do nothing forever.  The defender of the tort system might argue, with equal vigor, that the demand that medical malpractice law prove that it does not create costs in terms of health care delivery misses the point, since there are other values at stake which justify the continued use of tort litigation, which is admittedly expensive and error-prone, other than its capacity to contribute to welfare maximization.


These are some of the questions which I will raise over the next week.  Before I start with these questions, however, I would like to invite the readers of this blog to answer the following question:  what, if anything, will Obama’s healthcare reform do with the problem of ERISA preemption?


As any teacher of insurance law knows, ERISA—the Employee Retirement Income Security Act of 1974 (29 U.S.C. § 1001 et seq.)—has been interpreted by the Supreme Court to provide complete preemption of all state contract and tort remedies relating to the interpretation of employer-provided health insurance plans.  These plans, of course, sit exactly at the center of the current debate over healthcare reform.  In his speech last week, President Obama promised “[a]s soon as I sign this bill, it will be against the law for insurance companies to drop your coverage when you get sick or water it down when you need it the most.” 


This is a wonderful claim, except that the federal government, through ERISA, preempted the state law remedies that would have allowed disappointed policyholders who got their coverage through their employers to sue when companies “drop[ped their] coverage” when they got sick or “water[ed] it down” when they needed it the most.  To get a sense of how much damage the federal government has already done, one only has to read the angry pleas to Congress to remove this preemption from judges like Federal District Court Judge William Young in Andrews-Clarke v. Travelers Ins. Co., 984 F. Supp. 49, 50 (D. Mass. 1997) who wrote, “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.”


One simple reform to the healthcare system which would be simple, budget-neutral and actually conservative would be to repeal the part of ERISA that immunizes health insurance providers from state common law actions in tort and contract.    I honestly do not know whether the plans being considered by the Congress would provide this repeal, or whether they simply maintain the federal preemption but provide for federal remedies with more teeth than the current system.  The current federal remedies—reimbursement of out-of-pocket expenses by a victorious beneficiary or injunctive relief—are useless for most people, and certainly lack the deterrent effect of state tort and even contract remedies.


If anyone knows whether Obamacare will finally get rid of ERISA preemption, please let me know.


Tony Sebok

Professor of Law

Benjamin N. Cardozo School of Law

Guest Blogger, Scholarship | Permalink

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Professor Sebok:

First thank you for raising this issue, which has been ignored in the health reform discussion but as you suggest is a very very major problem, and if we don't address it it will render any reform which is enacted largely illusory.

I have quoted you at my own ERISA-reform blog; hope you don't mind (of course let me know if you prefer I not do so -- my blog does not aspire to scholarly elegance but is more of a polemic).

The most-discussed proposal to date, HR 3200, not only fails to fix this but expressly continues ERISA preemption in place. See section 151 of HR 3200, and here for Representative Shadegg discussing this issue. Perhaps new proposals yet to be made will fix this. Here's hoping!

Posted by: Richard Johnston | Sep 14, 2009 8:17:28 AM

Nice set-up for what promises to be a thought-provoking week.

Never did I imagine that I would see Republicans getting to the left of Democrats on health care rights. The ERISA problem has festered for decades, and although the industry perspective is that this is a feature, not a bug, most scholarly commentary finds the contours of ERISA preemption difficult to fathom or defend. For years I have wondered why Congress - regardless of "season" - has left the issue unaddressed.

The obvious explanation, which goes pretty far, is that Congress - regardless of season - is in the tank for industry. Expanding lawsuits by "trial lawyers" is rarely an appealing basis for enriching campaign coffers. What is funny is that this has remained constant despite the obvious appeal for Democrats of anti-insurer rhetoric. The high point for me came when Senator Dick Durbin interrogated Chief Justice nominee John Roberts about Roberts's successful pro-preemption arguments in a Supreme Court case while representing an insurer. Shouldn't the victim have had his day in court, Durbin asked? Why, yes, Senator: why haven't you changed the law to comprehend a species of litigation that barely existed in 1974? However, Roberts did not say this...

Another, more cynical explanation is that removing ERISA preemption would deprive Democrats at a stroke of their most powerful argument for health insurance reform - fair treatment of policyholders. Most people feel somewhat badly that 45 million don't have health insurance. But most people - unlike most law professors, I suspect - don't feel this is actually their problem. They ARE, however concerned about losing coverage, or being denied coverage for valid claims. Moreover, the machinery for providing justice for ERISA participants is not new, but simply the application of insurance principles that existed for 150 years before ERISA's enactment.

But, to correct that problem would remove the greatest urgency of heath insurance reform (for Democrats). Could that be the explanation?

A more charitable explanation is that fixing ERISA as suggested here might not fundamentally change insurer practices. Although I personally believe insurers would respond to the threat of liability by avoiding some insurance fights, many cases involve relatively small amounts per policyholder - small enough that the claims might not be worth bringing without some kind of enhancement (obviously a death claim as described in the clip above would be). It is possible that insurance law - currently tilted towards insurers under ERISA - might not affect the basic calculus that makes it cheaper for insurers to pay claims slowly and unevenly than promptly. After all, we have a significant body of bad faith law already, yet State Farm believed -in some sense, ultimately correctly - that it could get away with its egregious misconduct in the Campbell case.

Posted by: Adam Scales | Sep 14, 2009 12:51:32 PM

President Obama’s speech last week really moved me. Despite what my colleagues think of me. If what he says is what will EXACTLY happen, how can I not hope and work towards that cause”? Mike Oliphant runs a small Utah health insurance website and whom deals with hundreds of people on a day to day struggle to be approved for health insurance. “I get hopeful that I can finally tell people they can qualify for coverage REGARDLESS of their pre-existing medical condition”. Mike’s concern is that Obama’s people won’t deliver what he urges on areas within his speech. “I really have been moved by this guy and wish we could just talk so he could understand the frustration of a health insurance agent. I have been involved on a political level within the state of Utah and their struggle for health care reform. I have seen and regrettably been part of politics at work. I have learned lessons through baptism of fire with politics. For instance, I struggled against House Speaker Clark and H.B. 188 because that was what I was urged to do from our industry (that was all I knew). But after awhile and countless meetings with state and private carriers in Utah, I began asking myself if I was doing the right thing. I realized over time that House Speaker Clark really means what he says and is hard nose about getting reform done in Utah. I got that there wasn’t any behind the scene conspiracy scheme or personal objective of Mr. Clark. His bill makes allot of positive changes in the “health insurance reform” world of Utah. He claims that reform just doesn’t stop there, it must continue through “health care reform”. You see, there is a major difference between the two reforms. Clark “gets it” but I really worry that Obama’s administration doesn’t because if you have noticed the subtle language change of dropping “health care reform” and going to “health insurance reform”. See more about what Utah has accomplished here which utilizes private carrier involvement with true reform. If you can believe it, they reached it with an objective of $500,000. Perhaps the feds should take a look at Utah and House Speakers Clark’s bill 188. Now I find myself on the “other side” of the fence furthering Utah’s cause. Let’s hope we don’t all have a mental breakdown nationally and just take a honest look at the proposals.

Posted by: Mike | Sep 14, 2009 1:59:19 PM

Professor Sebok:
I found your post extremely interesting. It lifts the veil on an unknown (to me) piece of legislation, which blurs most of what can be read about medical malpractice law in the US. Once said that from a European point of view the whole of the health reform debate, and esp. the defenders of the statu quo arguments look simply grotesque, I agree with you also a on a more technical point. Repealing preemption of all state contract and tort remedies related to the employer-provided health insurance plans is not only a way of bringing fairness to the balance b/w insurer's and insured's interests, but it is likely to be one of the most powerful, albeit indirect tool to push the insurers to disclose the data about medical malpracice cases. What is better to foster a honest and in-depth assessment of the proposals ?

Posted by: mauro bussani | Sep 16, 2009 4:45:20 AM

Either Obama is right and he can truly cut $500 billion of waste, fraud and abuse out the Medicare budget or Medicare dependent seniors must suffer when $500 billion is cut from muscle and bone because there really wasn’t that much fat.

Posted by: H1N1 Swine Flu | Sep 30, 2009 4:12:46 PM

I agree with your "only a means to an end." This seems rather obvious. I am unaware of ERISA and will research this topic more; I was unaware of the legislation and its effect on health care. I look forward to reading more on this from you.

If Washington was serious about health care reform they would get themselves out of the industry. They help to complicate things and make the billing process for doctors more difficult. I will also add that insurance is a market based product and therefore the market dictates premiums. If premiums are too high than find the waste and inefficiency at the provider level. Providers have many "overhead" costs that could be minimized or even eliminated, But the problem is Washington...I really doubt they do anything to help the situation.

Why don't they fix their already failing governement health care programs (Medicare, Medicaid, VA etc). Then maybe we would have more confidence in their ability to "reform" health care.

Posted by: AIM Insurance | Mar 4, 2010 12:10:35 PM

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