Given that an administrator of an ERISA plan has a conflict of interest because it both pays claims and determines whether claims are eligible for payment, how much weight should a court give that conflict of interest in deciding whether the administrator abused its discretion regarding a claim?
The Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq., provides a private cause of action for employees challenging wrongful denials of benefits under an employee benefits plan. Under ERISA, Wanda Glenn challenged MetLife's discontinuation of her disability benefits on the ground that the company faced a conflict of interest by both determining eligibilities for benefits payments and making these same payments. The U.S. District Court for the Southern District of Ohio affirmed MetLife's discontinuation of benefits. The U.S. Court of Appeals for the Sixth Circuit, siding with five other Circuits, ruled that a court reviewing a claims-denial must consider whether and to what extent a plan administrator's conflict of interest may have affected its determination of benefits. In this case, the U.S. Supreme Court will determine whether and to what extent a plan administrator that both authorizes the payment of benefits and is responsible for the payment of those benefits has a conflict of interest that must be considered on judicial review.
Questions as Framed for the Court by the Parties
If an administrator that both determines and pays claims under an ERISA plan is deemed to be operating under a conflict of interest, how should that conflict be taken into account on judicial review of a discretionary benefit determination?
In 1989, Wanda Glenn's heart suddenly stopped. Medical doctors resuscitated her and surgically implanted a defibrillator. In 1994, Glenn began working as a sales manager for Sears, Roebuck and Company ("Sears"). However, in 2000, Dr. Rajendra Patel diagnosed her with an enlarged and weakened heart. Dr. Patel advised her to stop working and referred her to a specialist to determine whether her condition necessitated a heart transplant.
Glenn filed a disability claim with the Sears Long Term Disability Plan ("Plan"), administered by Metropolitan Life Insurance Company ("MetLife"). Metlife decided that Glenn was eligible to receive benefit and began payments. Two months later, MetLife directed Glenn to file for Social Security benefits. An administrative judge found Glenn totally disabled and began payments. Because the Plan reduced MetLife's payments by whatever Social Security benefits a plan beneficiary was eligible, Glenn reimbursed MetLife the amount due.
Under the Plan, Sears employees receive sixty percent of their salary if they become totally disabled. During the initial two years of payment, a person is considered "totally disabled" if she cannot "perform the material duties of [her] own job." After two years, a stricter definition applies: she must be "totally incapable of performing the material duties of any gainful occupation for which [she is] reasonably qualified."
In 2002, MetLife requested that Dr. Patel to evaluate her ability to work. Dr. Patel determined that Glenn could perform sedentary work but restricted her from work-induced stress. MetLife informed Glenn that since her condition did not meet the stricter definition of "total disability," the company would terminate benefits payments at the end of the initial two-year period.
Glenn appealed MetLife's decision, submitting a letter from Dr. Patel stating that she should not return to even a sedentary job because the stress would worsen her condition. At MetLife's request, an independent physician examined Glenn's records and suggested that do sedentary work on a trial basis. Citing that report, MetLife made a final denial of Glenn's claim.
Glenn sued in the U.S. District Court for the Southern District of Ohio under section 502(a)(1)(B) of the Employee Retirement Income Security Act of 1974 (codified at 29 U.S.C. § 1132(a)(1)(B)). Applying an "arbitrary and capricious" test, the Court determined that MetLife had not abused its discretion by denying Glenn's claim. Glenn appealed, and the U.S. Court of Appeals for the Sixth Circuit ordered that Glenn's disability benefits be reinstated. It reasoned that MetLife had a conflict of interest because it both paid disability claims and determined whether those claims were eligible for payment. MetLife and the Plan appealed to the U.S. Supreme Court, which granted certiorari on January 18, 2008.
Statutory and Case Law Background
U.S. Congress enacted the Employee Retirement Income Security Act ("ERISA" or the "Act"), 29 U.S.C. §1001 et seq., to protect the interests of employees covered by employee benefit plans and to encourage the cost-effective growth of such programs. § ERISA provides participants appropriate remedies, sanctions, and ready access to federal courts to challenge a denial of benefits. §
In Firestone Tire & Rubber Co. v. Bruch, the U.S. Supreme Court held that federal courts must apply a de novo standard of review when reviewing a denial of benefits under ERISA, unless the benefit plan gives plan administrators discretionary authority to determine eligibility. The Court noted, however, that a more searching review is necessary in the case of a conflicted decision-maker. The Court stated that the conflict itself "must be weighed as a facto[r] in determining" whether the program administrator violated ERISA.
ERISA acknowledges that a benefits plan may require a plan administrator to serve in more than one fiduciary capacity. § In other words, a benefits plan may charge an individual to authorize the lawful payment of benefits and, simultaneously, to protect the financial health of the insurance company funding those benefits. If an administrator denies a legitimate claim for benefits to protect its own financial interest, however, it has violated ERISA. In this case, the Supreme Court must determine whether a federal court, in reviewing a claim-denial under ERISA, must consider a "dual-role" program administrator to be a "conflicted decision-maker" under Firestone.
Should Reviewing Courts Consider Conflicts of Interest?
The Sixth Circuit has answered that question affirmatively, ruling that courts must consider "conflicted decision-makers" when reviewing claim-denials and weigh that factor when determining whether the administrator's decisions were arbitrary and capricious. In Killian, the Sixth Circuit explained that a plan administrator who serves a dual function has a financial incentive to deny benefits-if she authorizes the payment of benefits, the plan incurs the expense of payment, but if she denies their payment, the plan profits. In this regard, the Sixth Circuit aligns with the Fourth, Fifth, Eighth, Ninth, and Eleventh Circuits: each hold that such a possible conflict must be considered and weighed by the court. By comparison, the First and Seventh Circuits hold that, absent a showing that the conflict actually influenced claim-denials, courts need not consider dual roles to create conflicts that courts such must weigh on review.
MetLife argues that the Supreme Court's decision in Pegram v. Herdrich, 530 U.S. 211 (2000), renders the Sixth Circuit rule inapplicable. In Pegram, the Supreme Court acknowledged that ERISA authorizes a fiduciary to "have financial interests adverse to beneficiaries." The Court explained that ERISA does not bar a fiduciary from having a financial duty to someone other than the plan beneficiary. It noted, however, that the fiduciary must consider only its duty to the plan beneficiary when deciding whether to authorize the payment of benefits. Because ERISA contemplates that a plan administrator may have dual roles, Metlife reasons, ERISA does not require a court to consider this potential conflict of interest in judicial review. By contrast, Glenn urges the Supreme Court to uphold the Sixth Circuit's decision. Glenn argues that regardless of whether ERISA recognizes such a role, there is always a risk that a conflicted fiduciary may "occasionally indulge its own financial interests at the expense of claimants."
While the parties agree that trust law principles apply to ERISA claims, they dispute what trust law dictates in this context. MetLife contends that trust law permits a trustee to serve in settings where his decision could potentially further his own interest, as long as that arrangement is contemplated in the trust documents. MetLife thus urges the Court to consider that conflict only when the plaintiff can show that the fiduciary acted upon his or her self-interest when making the challenged decision. While Glenn does not challenge this principle, she argues that MetLife's proposal fails to adequately protect plan beneficiaries. She points out that trust law grants a "general recognition that a trustee-beneficiary's conduct is to be closely scrutinized for abuse including abuse by less than appropriate regard for the duty of impartiality."
In making its decision, the Court will likely consider Congress' goals in enacting ERISA. Because Congress intended ERISA to encourage the development of employee benefit plans, MetLife argues that judicial review of that conflict of interest would increase the administrative and financial burdens already faced by plan administrators. MetLife also claims that the rule would encourage participants with dubious claims to file suit "in the hope of convincing a court to second-guess the plan's claim determination." Glenn asserts, however, that the Court has previously acknowledged that ERISA's overarching purpose is "to promote the interests of employees and their beneficiaries in employee benefit plans." .
If Reviewing Courts Consider Conflicts, How Should Courts Weigh this Factor?
If the Court agrees with Glenn that a fiduciary's potential conflict of interest must be considered on review, it must then explain what kind of review the court should perform. MetLife urges the Court to assume a deferential "abuse of discretion" standard. Per Metlife, courts should give "de minimus" weight to any potential conflict of interest.
Glenn, however, asks the Court to adopt a much more searching review. Glenn asserts that, when a conflict of interest exists, the conduct of the trustee should be subject to "especially careful scrutiny." After explaining that "especially careful scrutiny" requires more than a mere inquiry into the reasonableness of the plan administrator's decision, Glenn lists three components of the test: "...(1) demand complete and careful explanations; (2) cast a skeptical eye on the explanations they do receive; and (3) exhibit little tolerance for analytical flaws or evidentiary gaps."
In the United States, the vast majority of privately-administered health benefits plans are regulated by the ERISA. Judicial review under ERISA potentially influences the availability and content of such plans for thousands of American employees. The resolution of this case will clarify the scope of judicial review under ERISA, determine courts' role in preventing wrongful denials, and shape a course for future ERISA litigation.
Expanding the scope of judicial review of benefits denials
A ruling in favor of Glenn would require courts to undertake a more searching review of future benefits denials if plan administrators play a similar dual-role to MetLife. As Glenn sees it, permitting such extensive judicial review may increase the chance that improperly denied claims will be paid.
MetLife, however, asserts that it is unnecessary for a court to consider a conflict of interest because the "arbitrary and capricious" standard of review alone is enough to root out improper decisions. MetLife argues out that ERISA sufficiently safeguards against wrongful denials of benefits by requiring administrators to consult with physicians and to document the reasons behind their authorization or denial of benefits. Likewise, America's Health Insurance Plans, a national association of insurance companies, argues that deferential judicial review increases the likelihood that decisions over the same plan will be consistent. MetLife also proposes that state regulators have greater expertise and resources than federal courts, and are thus better positioned to consider a conflict of interest.
Preventing wrongful denials
MetLife argues that market forces provide insurance companies with sufficient incentives to honestly and fairly make authorization decisions. It notes that employers offer benefit plans to attract new employees and to boost morale. MetLife asserts that unfairly denying claims would defeat those purposes by angering employees, thus prompting employers to change insurance companies. MetLife further points out that because individual claims are small relative to an insurance company's profits, insurance companies are unlikely to risk losing business by improperly denying claims. However, denying Glenn's claim alone saved MetLife $180,000, and systematically denying such claims could significantly affect profit.
Glenn argues that employees and employers are unlikely to notice any corruption unless they investigate many of claim-denials. Even if claim-denials were often reviewed, insurance companies could minimize their risk of disclosure by honoring obvious claims and denying less obvious claims. Glenn notes that courts have found that UnumProvident, the U.S.'s dominant disability insurer, as well as other insurers, have in fact engaged in unscrupulous practices to reduce claim payments. Nevertheless, as Blue Cross & Blue Shield ("BCBS") notes, many insurance policies remove the incentive to deny claims improperly by having the insurance company pay the employer back or reduce future premiums if claims were less than expected.
Discouraging excessive ERISA litigation
MetLife argues that courts should not discourage insurance companies from having this type of conflict of interest by subjecting their decisions to a higher standard of review. It is efficient (and therefore desirable) to have a single entity both evaluate and pay claims. MetLife asserts that if courts consider this conflict of interest, it would encourage suits over reasonably denied claims, in the hope that courts will come to a more favorable decision. It argues that the specter of costly litigation would increase premiums or cause some employers to decrease or eliminate benefits for their employees. BCBS argues that even if no additional lawsuits result, litigation would still be lengthened and complicated because the court would have to hear additional evidence on whether and what type of conflict of interest existed.
In this case, the U.S. Supreme Court will determine whether, and to what extent, a court must consider an employee-benefit plan administrator's potential conflict of interest when a plan beneficiary challenges a denial or discontinuation of benefits in federal court. As a claimant would face significant difficulty in proving that a plan administrator acted in its own financial interest, a ruling for MetLife may limit judicial review in future challenges of claim-denials . On the other hand, a ruling in favor of Glenn may burden plan administrators by requiring greater documentation and enlarging the time and cost of litigation. In making this determination, the Court must balance the dual purposes of the Employee Retirement Income Security Act and determine what deference, if any, a federal court owes a private insurance company in this context.