Employee Benefits Alert
In light of the Supreme Court's decision in Metropolitan Life Insurance Co. v. Glenn, 554 U.S., 128 S.Ct. 2343 (2008) ("MetLife"), claims administrators who are part of the entities that also provide funding for plan benefits are well-advised to establish internal safeguards to reduce the impact of a perceived conflict of interest. If structured properly, such safeguards could help preserve the right to deferential review of claim decisions.
MetLife v. Glenn
In MetLife, the Supreme Court held that when an administrator or fiduciary having discretionary authority is operating under a conflict of interest, such conflict must be weighed as a factor in determining the propriety of a claims determination. However, the Court rejected the proposition that a conflict of interest should change the standard of review from deferential to de novo.
MetLife was the administrator and insurer of a Sears, Roebuck & Company long-term disability plan governed by ERISA. The plan gave MetLife discretionary authority to decide when to award benefits and provided that MetLife, as insurer, would pay the claims. MetLife denied Glenn's disability claim based in large part on a statement from her physician that she was able to do sedentary work. Finding that MetLife had not appropriately considered additional information that had been available, the Sixth Circuit set aside MetLife's benefits denial. The court used a deferential standard of review, even though it concluded that there existed a conflict of interest because MetLife both determined an employee's eligibility and paid for benefits.
The Supreme Court had earlier addressed the appropriate standard of judicial review under ERISA in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), holding that a deferential standard of review is appropriate where the plan grants the administrator or fiduciary discretionary authority to determine eligibility. The opinion also observed that, if the administrator or fiduciary is operating under a conflict of interest, the conflict must be weighed as a factor in determining whether there is an abuse of discretion. In MetLife, the Supreme Court stated that a plan administrator's dual role of both evaluating and paying benefits claims creates the kind of conflict of interest referred to in Firestone. The Court explained that such a conclusion is clear where it is the employer itself that both funds the plan and evaluates the claim, but a conflict also exists where the plan administrator is an insurance company that also insures the plan. In fact, the Court was unanimous with respect to the conflict of interest issue, despite the various opinions rendered in the case (including a dissent by Justice Scalia, joined by Justice Thomas).
The Court declined to overturn Firestone, but also rejected the claimant's argument that the existence of a conflict of interest necessitated de novo review. The Court stated that it is not necessary or desirable for courts to create special burden-of-proof rules, or other special procedural or evidentiary rules, just because of an evaluator/payor conflict. Rather, the Court held that a conflict of interest is a factor to be weighed with the other case-specific factors. The Court determined that the Sixth Circuit followed such a standard by giving the conflict of interest some weight but also focusing on other factors and, therefore, upheld the decision in favor of Glenn.
Despite its ruling in favor of the claimant, the MetLife case offers some good news for plan administrators. Although it did not provide lower courts with a detailed set of instructions regarding the impact of a conflict of interest, the decision provided helpful guidance. Notably, the Court stated that a conflict of interest should "prove less important (perhaps to the vanishing point)" when there is evidence that the administrator took active steps to diminish potential bias and increase the accuracy of its claims administration. For example, "walling off" claims administrators from persons involved in company finances, and imposing management checks that reward accurate decision-making and/or punish inaccuracies, should be sufficient.
Recommended Internal Safeguards to Secure Deferential Review
In some respects, MetLife was a net victory for administrators and insurers of ERISA plans. It essentially provided a skeletal blueprint to ensure that the impact of a conflict of interest would be significantly diminished (or even eliminated), in determining the level of discretion to be afforded to a claims decision. The Court did not, itself, spell out the terms of a safe harbor in this regard. However, it cited to an article that proposes several steps to forming a "Chinese Wall" to prevent (or diminish) conflicts of interest in banks (Herzel & Collins, The Chinese Wall and Conflict of Interest in Banks, 34 Bus. Law 73 (1978).
The following is a list of measures that, if implemented in whole or part, may help prevent a conflict of interest from influencing a court's decision regarding whether to afford substantial deference. The more safeguards that are in place, the better an administrator's chances are of achieving deferential review (and, thus, the plan administrator's decision being upheld).
Create and maintain a separate committee or department. Perhaps the most important measure to be undertaken in this context is to completely separate the individuals who handle claims decisions from those who have financial responsibility for the plan or the company. For insurers, it is advisable to establish a separate claims department. For employers, this may include outsourcing the claims processing function, including review of appeals. If the plan sponsor creates an internal committee to review claims, the committee (or department in the case of an insurer) should be maintained as separately and independently as possible. For example, individuals who review appeals should be completely restricted from access to information regarding the cost of the claims that have been paid by the plan and perhaps from the individuals who have responsibility for the company's payment of claims and benefit plan design. Similarly, the individuals who process claims should not have direct responsibility for, or receive a direct financial incentive (such as an end of year bonus) that is tied to, the profitability of the company. In this regard, it would also be valuable for the claims administrators to be physically separated within the same building or, if possible, located in a different building altogether. In addition, transfers of personnel between claims administration and positions that are directly responsible for or impacted by the financial success of the company should be limited or, preferably, avoided. Finally, procedures should be established to deal with the accidental communication of financial information to the claims administrators.
The creation of a separate committee or department, as described above, leads to a rational argument that there is no real conflict of interest at play. The claims determination group can legitimately state that (i) it is not the plan sponsor, and (ii) its fiduciary duty is only to the plan. Thus, in connection with claims determinations, it acts in good faith in the best interest of the plan beneficiaries (not the company that funds the benefits). See also, Jo-el J. Meyer, Practitioners Detail Steps Administrators Should Take to Ensure Deferential Review, BNA Daily Report for Executives, No. 130, A-20 (July 8, 2008). Furthermore, administrators may be well-suited to disclose the existence of these wall-off restrictions, in writing, to claimants. However, with respect to previous claims denials, beware of the argument that, in implementing the restrictions, the administrator has essentially admitted their necessity in order to alter implied fiduciary duties to the plan sponsor.
Establish proper written procedures. As with most legal matters, a clear paper trail is always desirable. Administrators should have written guidelines and policies, which are as detailed as possible, that govern the claims determination process. For example, the guidelines should explicitly state that administrators will consider neither the amount of benefits that will be paid to a claimant, nor the financial impact on the company, if a claim is approved. An additional written policy requiring administrators to comply with the guidelines is also recommended. However, note that procedures should only be adopted that the administrators actually intend to perform; it could weaken the credibility of the entire process if the procedures include steps that the committee or department cannot demonstrate it follows.
Eliminate any incentives for claims denials. It is also very important to ensure a completely objective structure for determinations, which in no way rewards denials of claims. For example, the claims examiners' pay structures should provide for equal compensation regardless of the outcomes of their decisions. In addition, it is advisable to institute regular training programs and perhaps the circulation of written company policies that explain the requirement of complete objectivity in claims determinations. For instance, part of company's mission statement to "Act with integrity in all matters" could be translated specifically for the claims committee or department as "[f]airly and objectively evaluate all the information submitted with a claim and the plan materials to ensure consistent and accurate decision-making." While such steps will not prevent willful acts by administrators, they can at least "create an atmosphere" in which there is no incentive to deny claims.
Incentivize accuracy. Going a step further, administrators could be provided with specific incentives for rendering accurate determinations. For example, a bonus system linked to the percentage of challenged claims decisions that are upheld or overturned would sufficiently accomplish this objective. The company may also want to hire an outside entity, such as a law, accounting, or consulting firm, to perform an independent audit of past claims decisions for accuracy.
Require well-drafted decisions. Denial letters should always be carefully crafted in a manner that makes them as impervious to attack as possible. As such, it is advisable to require citations to, and at least some brief reasoned analyses of, as much of the information presented in connection with the claim as possible. Conversely, it could be damaging to present a record that reflects a lengthy discussion by the administrators of the high cost of the benefit or medical procedure at issue. Every written determination should include boilerplate language, quoting the administrators' written policy forbidding financial considerations with respect to the plan sponsor or insurance company.
ERISA regulations already require written denials to be provided to claimants that explain the reasons for the determination. However, many administrators choose to err on the side of brevity in this respect, which often prompts the decision to be overturned by a court due to a lack of proper consideration of all of the evidence. Thus, it is important to remember in this context that less is not always more.
If some or all of the steps outlined above are implemented as suggested, and effectively publicized via employee communications and carefully drafted claim denials, a court may find it more difficult to conclude that the particular plan administrators had not "taken active steps to reduce potential bias and promote accuracy," under MetLife. Further, as other plan administrators begin to implement steps such as these, companies that do not may have a harder time arguing that they have taken appropriate measures to mitigate what courts are viewing as an inherent conflict of interest. Accordingly, adopting these measures may provide security, and may become necessary to demonstrate, that a dual-role administrator's decision should receive the preferred deferential review.
Miller & Chevalier Can Help
Miller & Chevalier has significant experience assisting employers and health plans/ insurers with all aspects of ERISA plan administration and compliance, including the review claims procedures and implementation of best practices in light of MetLife v. Glenn.
For more information, please contact any of the following lawyers:
Anthony Shelley, firstname.lastname@example.org, 202-626-5924