WILLIAM G. SCHIFFBAUER
1155 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
FAX (202) 467-4924
September 10, 1999
Charles N. Kahn, III
Re: Liability of Employers and Plan Sponsors Under Dingell-Norwood (H.R. 2723) and Shadegg-Coburn (H.R. 2824)
You have requested an analysis of the effects of certain provisions in proposed legislation, H.R. 2723, the "Bipartisan Consensus Managed Care Improvement Act of 1999" ("Dingell-Norwood proposal"), on employers and plan sponsors who now voluntarily provide health benefits to employees. Like the Democrat proposal (H.R. 358), this legislation would, in part, amend Section 514 of the "Employee Retirement Income Security Act of 1974" ("ERlSA") (relating to preemption of state laws), to provide for non-preemption of certain state-based lawsuits for personal injury or death that may arise out of the provision of health benefits. In particular, this analysis reviews the Dingell-Norwood proposal's "special rule" which the legislation's sponsors assert would shield employers and plan sponsors from any such lawsuit. This analysis also reviews similar provisions of H.R. 2824, the "Health Care Quality and Choice Act of 1999" (sponsored by Representatives Coburn (R-OK) and Shadegg (R-AZ)) ("Shadegg-Coburn").
This analysis concludes that the so-called "shield" is illusory and actually has the effect of increasing the risk that an employer or plan sponsor will face a lawsuit for personal injury or wrongful death. This is because these proposals explicitly impose tort liability whenever the employer or plan sponsor exercises "discretionary authority" - which simply means the power to make a decision or choice on a claim.
I. Description of Current Law
Key to the application of the Dingell-Norwood proposal's "special rule" that the legislation's sponsors claim would shield employers and plan sponsors from state-based tort liability actions is the concept of "discretionary authority". The sponsors mistakenly believe that the exercise of such discretion is rare or limited. However, this is a concept that has been intrinsic to ERISA since its enactment in 1974. ERISA specifically employs the phrase "discretionary authority" when defining a "fiduciary". See ERISA Sec. 3(21). The law currently provides that a person is a "fiduciary" to the extent that such a person exercises any discretionary authority or discretionary control with respect to: (1) management of the employee benefit plan or its assets;
(2) rendering of investment advice for compensation (or having authority or responsibility to do so); or (3) administration of the benefit plan. This definition is a "functional" one in that a person need not be formally titled as a "fiduciary". Rather, the law's only concern is whether the person has any authority, control, or responsibility over the benefit plan.
Importantly, any person who is a "fiduciary" under ERISA then exercises discretionary authority. The law does not define the term "discretionary"; however, numerous courts have identified its characteristics in specific instances. Federal regulations provide that, in determining whether a person exercises discretion, there is implied the power to make decisions as to plan policy, interpretations, practices, and procedures. See 29 C.F.R. Sec. 2509.75-8 (D-2)(1998). Furthermore, ERISA expressly identifies plan operation and administration as "fiduciary" functions that involve the exercise of discretionary authority. See ERISA Sec. 402(a)(1). A plan sponsor of an employee benefit plan is held to be a fiduciary - thus a person exercising discretionary authority - in the mere appointment of a named plan "fiduciary". However, certain business or so-called "settlor" functions such as establishing or terminating an employee benefit plan are not functions that rise to the level of a "fiduciary" activity. See Johnson v. Georgia-Pacific Corp., 19 F.3d 1184 (7th Cir. 1994).
Finally of note, a fiduciary is required by law to discharge his or her duties pursuant to a specified standard of care and solely in the interest of the plan's participants and beneficiaries (hereinafter referred to together as "employees"), for the exclusive purpose of providing benefits. See ERISA Sec. 404(a)(1). A breach of those duties is actionable against the fiduciary under the exclusive, federal remedies set forth in ERISA. These include personal liability of the fiduciary for losses to the plan, other equitable or remedial relief that a court may deem appropriate, and removal of the fiduciary. See ERISA Sec. 409(a). A fiduciary can also be held liable for actionable breach of a co-fiduciary. See Leigh v. Engle, 669 F. Supp. 1390, 1395 (N. D. Ill. 1987).
II. Description of the Proposed Legislation
Section 302 of the Dingell-Norwood proposal amends Section 514 of ERISA, establishing a new subparagraph (e) which provides for explicit non-preemption of certain causes of action brought by a participant or beneficiary (or the estate) under state law. The basis of the cause of action would be any type of tort allowed under state law and brought against any person to recover damages for personal injury or wrongful death: (1) in connection with the provision of insurance, administrative services, or medical services to or for a group health plan; or (2) that arises out of the arrangement for the provision of insurance, administrative services, or medical services to or for a group health plan. See H.R. 2723, 106th Cong., 1st Sess., Sec. 302(a)(1999)(Prop. ERISA Sec. 514(e)(2)(A)). The phrases "in connection with" and "that arises out of the arrangement" are undefined in the Dingell-Norwood proposal and thus left to their plain meaning.
The Dingell-Norwood proposal also provides for an exception that expressly "does not authorize" any cause of action against an employer or other plan sponsor, or any right of recovery or indemnity for damages assessed against a person subject to the non-preempted tort action. This exception does not include the group health plan itself, but only the employer or plan sponsor. This exception, however, is retracted with a "special rule" that, for the first time, expressly allows any cause of action directly against an employer or plan sponsor (or an employee of such an employer or plan sponsor) to recover damages for personal injury or wrongful cause of death where: (1) the action is based on the exercise of discretionary authority with respect to "making a decision" on a claim for benefits; and (2) the exercise of such discretionary authority allegedly results in personal injury or wrongful death. See H.R. 2723, 106th Cong., 1st Sess., Sec. 302(a)(1999)(Prop. ERISA Sec. 514(e)(2)(B)).
The Shadegg-Coburn proposal subjects any person who is a "fiduciary" to a federal cause of action for failure to exercise "ordinary care" in "incorrectly determining" that an item or service is: (1) not medically necessary or appropriate; (2) experimental; or (3) not a covered benefit. In addition, a "fiduciary" is subject to this cause of action where a denial of a claim or any decision by the plan fails to be made within the specified timeframes. Where any such failure is the proximate cause of personal injury or death, the "fiduciary" is liable for specified economic and non-economic damages. See H.R. 2824, 106th Cong., 1st Sess., Sec. 302(a)(1999)(Prop. ERISA Sec. 502(n)(1)). Like the Dingell-Norwood proposal, Shadegg-Coburn provides exception for any cause of action against an employer or plan sponsor, but then retracts this exception with a "special rule" that expressly allows any such cause of action directly against an employer or plan sponsor that "directly participates" in the final decision of the employee's claim. See H.R. 2824, 106th Cong., 1st Sess., Sec. 302(a)(1999)(Prop. ERISA Sec. 502(n)(4)).
Importantly, the phrase "direct participation" is broadly defined to mean any conduct by an employer or plan sponsor that is not specifically listed among six exceptions. These listed exceptions are: (1) selection of the plan or third-party administrator; (2) any cost-benefit analysis relating to the plan or coverage involved; (3) changes in benefits for all plan participants and beneficiaries; (4) action by an agent on behalf of the employer; (5) any decision to authorize coverage or to intercede (or not intercede) for the employee; and (6) any other conduct not involved in making a "final decision". Not among the listed exceptions is the employer or plan sponsor approval of policies and procedures that have a direct bearing on the outcome of the "final decision". For example, the employer's approval of the plan's definition of "medical necessity" that is applied to the benefit decision could be "direct participation" conduct that falls within the "special rule" imposing liability.
III. Analysis of the Proposed Special Rule
A. Employers and Plan Sponsors Cannot Avoid Exercising Discretion.
Neither proposal provides a real liability escape for employers or plan sponsors. This is because ERISA contemplates that an employer will always exercise discretion, acting as both employer and plan fiduciary. See Ward v. Mgt. Analysis Company Employee Disability Benefit Plan, 135 F.3d 1276 (9th Cir. 1998). To avail oneself of this "shield" under either proposal, a court will be required to consider the extent to which an employer or plan sponsor possessed or exercised decision-making control or authority with respect to any wrongs alleged by a plaintiff. As a general rule the employer is deemed to be the plan sponsor in those cases where an employee benefit plan is established by a single employer, and the plan sponsor is the plan administrator if another is not designated in the benefit plan. See Arber v. Equitable Beneficial Life Ins. Co., 848 F. Supp. 1204 (E.D. Pa. 1994). The plan administrator, in turn is a "fiduciary" - a person deemed to exercise discretion. See ERISA Sec. 3(16)(A) and (B).
In order to retain control over the benefit plan, employers and plan sponsors often reserve, in the contractual agreement with a third-party administrator, the sole authority to determine eligibility and the final authority to determine the amount of benefits. The agreement may restrict the third-party administrator to processing claims, while reserving authority to the employer or plan sponsor to review claims and supercede a third-party administrator's decision if necessary. Persons with final decision-making responsibility on claims are deemed to have discretionary authority or responsibility for the plan's administration. See 29 C.F.R. Sec. 560.503-1(g)(2) (requiring claims review procedures for an appropriate, named fiduciary to make such review). See also U.S. Department of Labor's preamble comments regarding adoption of regulations relating to persons making final decisions on appeals from claims denials. See 40 Fed. Reg. 27,426 (1977).
These same concerns are even more pronounced in a self-administered employee benefit plan. There the employer takes on directly all the duties of plan administration. Because a "fiduciary" is defined as someone who exercises discretionary authority, this "special rule" would hold each and every plan fiduciary liable for decisions relating to benefit claims and any alleged personal injury or wrongful death in connection with, or that arises out of, the arranging of insurance, administrative services, or medical services. Often, officers of a company sponsoring a benefit plan are deemed "fiduciaries" because, in retaining authority for selection and retention of plan fiduciaries, they also retain authority or control over management of the benefit plan. See Welsh v. Quabbin Timber, Inc., 943 F. Supp. 98 (D. Mass. 1996).
In either case, whether self-administered or third party administered, the Dingell-Norwood proposal would require an employer or plan sponsor to totally relinquish all authority and control over the benefit plan in order to be entirely free of the threat of state-law based law suits for personal injury or death.
As an alternative to the Dingell-Norwood proposal's use of "discretionary authority" as the state-law based liability trigger, some proposals such as the Shadegg-Coburn proposal would, for example, continue to impose tort liability, but under new federal tort law provisions, and only where an employer or plan sponsor "directly participates" in the final decision on a benefit claim. Although the Shadegg-Coburn proposal lists several limited exceptions to conduct that is considered to be "direct participation", the result is the same as under the Dingell-Norwood proposal. There is, in effect, a prohibition imposed on the involvement of the employer or plan sponsor in the final benefit decision in order to avoid a lawsuit and tort liability. However, employers or plan sponsors want to reserve such final authority because they have legitimate interests in and ERISA responsibilities for: (1) ensuring that the benefit plan is properly managed and administered; (2) ensuring that excessive benefits are not paid out; (3) controlling administrative costs; and (4) ensuring the benefit plan's purposes are fulfilled for the well-being of all of the employees.
Accordingly, both the Dingell-Norwood proposal and the Shadegg-Coburn proposal present employers or plan sponsors with a Hobson's choice between voluntarily providing an expensive benefit that they ultimately cannot control or maintaining the benefit but risking state or federal tort liability of the worst kind. Given such outcomes, most employers or plan sponsors would likely choose not to offer the benefit.
B. Litigation is Not Averted Under the Proposal
Under the "special rule" of either the Dingell-Norwood proposal or the Shadegg-Coburn proposal, an employer or plan sponsor is not protected from the risk of litigation. Neither proposal would preclude a plaintiff from bringing suit. The employer or plan sponsor must prove that there was no exercise of discretionary authority on a claim for benefits in order to avoid liability. If an exercise of discretion is implicated, the employer or plan sponsor must then prove that the exercise of such authority did not cause the resulting personal injury or wrongful death. Rather than offer employers or plan sponsors a "shield", the provision is merely the basis for a federally preemptive defense (in the case of the Dingell-Norwood proposal); and simply a defense in a federal jury trial, perhaps, in the case of Shadegg-Coburn, against an action brought in a court by a participant or beneficiary. The employer or plan sponsor is not spared the expense and public spectacle attendant to even the initiation of such an action, regardless of the merits of the case. In order to be "shielded" from a tort liability judgment, the employer or plan sponsor must successfully assert this defense.
The sponsors of these proposals misrepresent the strength of this provision, which is, at best, only an "illusory" protection that requires a court to determine its application and effectiveness. The Shadegg-Coburn proposal attempts to mitigate this aspect by authorizing external review entities to "screen" frivolous cases to decide personal injury occurrence and proximate cause. However, this device is of questionable constitutionality and, if enacted, may well be struck down by the courts.
C. Scope of Possible Actions is Unlimited Under the Proposal
As discussed, the Dingell-Norwood proposal does not define the key phrases that establish the scope of activities potentially subject to tort liability. An action may be brought against any person for personal injury or wrongful death "in connection with'' the provision of insurance, administrative services, or medical services. In addition, an action may be brought against any person for personal injury or wrongful death "that arises out of the arrangement" for the provision of insurance, administrative, or medical services. It is possible that the mere existence of the group health plan offers sufficient "connection" to serve as the basis of a cause of action in tort. The plain meaning of "connection" is simply that of a causal or logical relation or sequence. Similarly, the phrase "arises out of the arrangement" of insurance, administrative services, or medical care is equally ambiguous. The plain meaning of "arises" is simply that of originating from or coming into being.
ERISA requires that the employer or plan sponsor must appoint a "fiduciary" to administer the benefit plan and provide a full and fair review in the claims procedure of the plan. This exercise of discretion alone may provide the requisite "connection" or "arrangement" out of which tort claims may be brought under the Dingell-Norwood proposal against an employer or plan sponsor. A plaintiff might allege that, but for such an exercise of discretionary authority with respect to choosing the administrator who is "making a decision" on a claim the injury or death would not have occurred. In other contexts, the employer or plan sponsor might be held liable in tort under a state law for: (1) failing to exercise discretionary authority to reverse an administrator's decision; or (2) imprudent selection of a provider; or (3) the improper design of a managed care system; or (4) negligence in the selection of a precertification reviewer; or (5) for the design of a utilization review process without appropriate expertise; or (6) for the setting and manner of care (such as a requirement for use of outpatient services). These would all be activities that could be the basis of an action in tort where a personal injury or wrongful death has a "connection" or "arises" out of the arrangement of providing insurance, administrative services, or medical care.
These same concerns apply to the Shadegg-Coburn proposal with respect to the conduct of any "fiduciary" in the making of determinations with respect to medical necessity, or whether an item or service is experimental, or whether an item or service is a covered benefit. Furthermore, liability is imposed for failing to meet the ambiguous time deadlines which must be determined on a case-by-case basis, depending upon the "medical exigencies" of the individual's circumstances. As discussed above, the "special rule" exceptions are not as clear as the sponsors assert with respect to conduct that is not "direct participation" (and thus protected from a lawsuit for personal injury or death). For example, whether an employer's approval of plan policies and procedures that have a direct bearing on the outcome of a specific benefit claim are instances of "direct participation" is unclear. The limited exceptions do not explicitly preclude such conduct from being considered "direct participation". Furthermore, the Shadegg-Coburn proposal does not provide that an employer or plan sponsor is "shielded" even in its capacity as a "fiduciary". The "shield" only applies to an employer or plan sponsor. However, as previously discussed, an employer or plan sponsor is most always separately deemed to be a "fiduciary" of the plan.
In conclusion, it is critical to observe that an employer or plan sponsor of an employee benefit plan is most always a plan "fiduciary". As such, ERISA deems such employer or plan sponsor to be a person who "exercises discretion" and subjects such persons to exclusive federal remedies for violations of fiduciary duties. Because the Dingell-Norwood proposal uses ERlSA's already established concept of "exercising discretion" - the power to make decisions and choices - as the basis of non-preemption, any "fiduciary" is subject to liability every time a benefit claim is decided. Accordingly, the "special rule" included in H.R. 2723 and H.R. 2824, which the legislation's sponsors assert would shield employers and plan sponsors from any tort liability action, is misleading and its effect is illusory at best. In fact, like the Democrat proposal, the Dingell-Norwood proposal expressly authorizes state-based tort liability actions against any employer or plan sponsor that performs required fiduciary activities, thus exercising discretionary authority to make a decision relating to benefit claims. As a result, the Dingell-Norwood proposal (as well as the Shadegg-Coburn proposal) robs employers of ultimate control and authority over this costly benefit as the price exacted for a liability "shield". Such a public policy is certain to end the voluntary provision of health benefits as employers and plan sponsors seek to avert what is likely to be a "death by a thousand cuts" at the hands of the trial bar.
Please let me know if you have any questions or comments regarding this analysis of the "special rule" for employers and plan sponsors included in H.R. 2723 and H.R. 2824.
William G. Schiffbauer
c: Dean A. Rosen, General Counsel
Fiduciary - Any person who possesses or exercises any authority or control over plan administration or plan assets; or who provides investment advice relating to the plan’s assets; includes broad range of conduct and activities that impact provision of benefits; includes both functional and named fiduciaries. The fiduciary is required by law to act solely in the interests of each plan participant and beneficiary while considering the overall interests of all plan participants and beneficiaries.
Named Fiduciary – The person (a fiduciary) who is formally designated by the plan sponsor to perform specific duties required by law.
Plan Administrator – The person (a fiduciary) who administers the employee benefit plan; this function may be contracted to a third-party.
Plan Sponsor - The employer or organization (a fiduciary) who establishes and maintains the plan.
Employer - The business entity (a fiduciary) that establishes and maintains the plan; may include a group or association of employers.
Health Plan - The employee benefit plan established by an employer or plan sponsor to provide for covered benefits; specifies terms and conditions for receiving coverage and payment of covered items and services of medical care.
Plan Participant - The employee and the principal covered person under the health plan who is entitled to benefits.
Beneficiary - A person designated by the employee/plan participant who is also entitled to benefits under the health plan – generally a spouse and dependent children.
Discretion - The power to make decisions and choices with respect to plan administration or plan assets; plan administration includes such activities as determining eligibility, coverage determinations, payments for covered items and services.
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