Amicus Curiae Brief — Metropolitan Life Ins. Co. v. Glenn

33

=ILED

MAR 3 - 2008

OFFICE OF THE CLERK

Supreme Court of the Anited States

METROPOLITAN LIFE INSURANCE COMPANY AND

LONG TERM DISABILITY PLAN FOR

ASSOCIATES OF SEARS, ROEBUCK AND COMPANY,

Vv

Petitioners,

WANDA GLENN,

Respondent.,

On Writ of Certiorari to the United States

Court of Appeals for the Sixth Circuit

BRIEF OF AMERICA’S HEALTH INSURANCE .

PLANS, THE AMERICAN BENEFITS COUNCIL,

AND THE CHAMBER OF COMMERCE OF THE

UNITED STATES OF AMERICA AS AMICI CURIAE

IN SUPPORT O¢ PETITIONERS

JULIE SIMON MILLER

AMERICA’S HEALTH

INSURANCE PLANS

601 Pennsylvania Ave., N.W.

Washington, D.C. 20004

ROBIN S. CONRAD

SHANE BRENNAN

NATIONAL CHAMBER

LITIGATION CENTER, INC.

1615 H Street, N.W.

Washington, D.C. 20062

ROBERT N. ECCLES

(Counsel of Record)

JONATHAN D. HACKER

RYAN W. SCOTT*

O’MELVENY & MYERS LLP

1625 Eye Street, N.W.

Washington, D.C. 20006

(202) 383-5300

KATHRYN WILBUR

AMERICAN BENEFITS COUNCIL

1212 New York Ave., N.W.

Washington, D.C. 20005

*Admitted only in Illinois

Attorneys for Amici Curiae

SUPREME COURT, U.S.

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ................sssssssssssssssees iii

INTERESTS OF AMICI CURIAE ..........-:000seeesseeesees 2

INTRODUCTION AND SUMMARY ...........::c::cc00000 3

eitietintcinniiniilicnabighimnndininmeeseevesesscosseces 6

I. ERISA’S FRAMEWORK PERMITTING A

SINGLE ENTITY TO PERFORM FIDU-

CIARY AND NON-FIDUCIARY FUNC-

TIONS HAS OPERATED EFFECTIVELY

A. As ERISA Expressly Allows, Many

Plans Rely On A Single Entity For Both

Fiduciary And Funding Purposes .................. 6

B. Market Incentives And ERISA Regula-

tions Ensure That Funding Entities

Provide Proper Fiduciary Service ................+- 8

Il. ABENEFIT DETERMINATION BY AN

ENTITY THAT ALSO FUNDS THE PLAN

SHOULD NOT BE PRESUWN PTIVELY

SUBJECT TO HEIGH1 ENED JUDICIAL

A. Heightened Judicial Scrutiny Of Bene-

fit Decisions By Entities Who Fund

Plans Would Undermine ERISA’s Pur-

poses And Have Adverse Consequences

Fe ccinticeninesensecnannectesnnnnnenvcescceee 15

ii

TABLE OF CONTENTS

(continued)

B. Courts Should Give No Weight To A

“Potential Conflict” In The Absence Of

A Showing That The Benefits Decision

Was Infected By An Improper Consid-

IEE Witiseentnnicnsnnicntntnincinesnsincsniabenmensmeeess 20

TABLE OF AUTHORITIES

Page(s)

CASES

Abatie v. Alta Health & Life Ins. Co.,

458 F.3d 965 (9th Cir. 2006) .............ccsccccrsssccsees 17

Aetna Health Inc. v. Davila,

ns cnccenncnsccoccncenccosccsoonconse 15

Berry v. Ciba-Geigy Corp.,

761 F.2d 1003 (4th Cir. 1985).........................2. 16

Black & Decker Disability Plan v. Nord,

i scars ssenccconnnensees 6

Buffonge v. Prudential Ins. Co. of Am.,

426 F.3d 20 (1st Cir. 2006)..........cccssererseseeeeees 23

Buttram v. Central States, Se. & Sw.

Areas Health & Welfare Fund,

76 F.3d 896 (8th Cir. 1996) ....................ccccceeeeeee 22

Chalmers v. Quaker Oats Co.,

61 F.3d 1340 (7th Cir. 1995) .............cccccrsessocseees 11

Curtiss-Wright Corp. v. Schoonejongen,

a aaa cpsnmennnananenns 6

Doe v. Group Hospitalization & Med.

Servs.,

ee BID ocnccccccscccccsnecescseesccononenes 17

Donovan v. Cunningham,

716 F.2d 1466 (Sth Cir. 1963) .............cccssceccsseseeee 7

Doyle v. Paul Revere Life Ins. Co.,

144 F.3d 181 (1st Cir. 1998)...............ccccceeeeeeees 10

Egelhoff v. Egelhoff,

I a serrations 15

Firestone Tire & Rubber Co. v. Bruch,

ee I I a csinciscsitesiieeteccosessorevens passim

Fletcher-Merrit v. NorAm Energy Corp..,

250 F.3d 1174 (8th Cir. 2001) ................ceceeeeeee ee 25

iv

TABLE OF AUTHORITIES

(continued)

Fought v. UNUM Life Ins. Co. of Am.,

379 F.3d 997 (10th Cir. 2004)..............44

Guthrie v. Nat'l Rural Elec. Coop. Ass’n

aa -Term Disability Plan,

3d 644 (4th Cir. 2007) ...........:000000

waa v. UNUM Life Ins. Co.,

300 F.3d 1197 (10th Cir. 2002)...............

Jewell v. Life Ins. Co. of N. Am.,

508 F.3d 1303 (10th Cir. 2007)...............

Lockheed Corp. v. Spink,

517 US. 882 EI insicieeveeinennastocoreveccssvcce

Mers v. Marriott Int’l Group Accidental

Death & Dismemberment Plan,

144 F.3d 1014 (7th Cir. 1998)................

' Miller v. United Welfare Fund,

72 F.3d 1066 (2d Cir. 1995)..........00:0cee8

Nichols v. Eaton,

OL UB. TIG (1GB7S) ....0rccccrcccrrrccccosessevsoeeeee

Pegram v. Herdrich,

#530 Cs cinscessesoanies

Perry v. Simplicity Engg,

900 F.2d 963 (6th Cir. 1990)...................

Pinto v. Reliance Standard Life Ins. Co.,

214 F.3d 377 (3d Cir. 2000)................000+-

Pulvers v. First UNUM Life Ins. Co.,

210 F.3d 89 (2d Cir. 2000)..............:c0eeee

Quinn v. Blue Cross & Blue Shield

Ass'n,

161 F.3d 472 (7th Cir. 1998)................04

Riegel v. Medtronic, Inc.,

0. 06-179 (Feb. 20, 2008) ..............2-2000+

Vv

TABLE OF AUTHORITIES

(continued)

Page(s)

Rush Prudential HMO, Inc. v. Moran,

GOS U7. BEG CHGS) nnccccoccccccccscccccccceees 6, 13, 22, 24

Sandoval v. Aetna Life & Cas. Ins. Co.,

967 F.2d 377 (1 TT 25

Semien v. Life Ins. Co. of N. Am.,

436 F.3d 805 (7th Cir. 2006), cert.

denied, 127 S. Ct. 53 (2006) .............cceceeeeeees 18, 24

Shaw v. Delta Air Lines, Inc.,

a sas eeennepuntio’ 15

Smith v. Cont’l Cas. Co.,

45D FB BOO Sees Cir. BOOB) ....0cccccccccecccccccsccssese 23

Van Boxel v. Journal Co. Employees’

Pension Trust,

GSS F.BS 1046 (Ttha Cir. 1967) .....cccccccsccescccsscceses 11

Varity Corp. v. Howe,

OE EN 18

Wright v. R.R. Donnelley & Sons Co.

"ia Benefits Plan,

ns son coepesisniniptannennenegennil 9

STATUTES

a Annee RN EES SETI Eo 2

I TIE... «cancensonnstanssstnonipnnteneseinnds 4,6

«ELE TET EDT HEE NTC Orne 12

I ain ares ear aeinnbetallld 12

I al laaniecidien 15

OTHER GOVERNMENT AUTHORITIES

ee ee OF Ricinscectcccencessecascscsciccctsesecces 12,13

66 Fed. Reg. 35887 (July 9, 2001) ...........ccceceseeeeeeees 13

vi

TABLE OF AUTHORITIES

(continued)

H.R. Rep. No. 93-533 (1973), reprinted

in 1974 U.S.C.C.A.N, 4639...........ccccsceeeees

OTHER AUTHORITIES

AAHP, Independent Medical Review of

Health Coverage Decisions

GIFTED cosecvescessensseuscssecensescenscscescescccccccccooeses

AHIP Center for Policy and Research,

Update on State External Review

Programs (Jan. 2006) ..............cccccseeeeeeeeees

& Bogert, Law of Trusts and

stees § 559 (2d rev. ed. 1980).............

Council for Disability Awareness,

The 2006 CDA Long-Term Disability

Claims Review 1 (Apr. 2007)..............0006+

Health Ins. Ass’n of America, Results

from an HIAA Su on Claims

Payrent Processes (March 2003).............

David M. Studdert & Carol Roan

Gresenz, Enrollee Ap of

Preservice Coverage Denials at 2

Health Maintenance anizations,

289 J. Am. Med. Ass’n TS

Restatement (Second) of Trusts § 187

LIED ccsccccscsssceccscecssseesscnsscossocccecococcceccoccece

Restatement (Third) of Trusts § 50(1)

PEPIN crcasccccsesccccccscecccccssecsecccoconszeeecscssecooces

3 Scott & Fratcher,

The Law of Trusts § 187 (4th ed.

PRT dint tcensdnsenscnccssnocsensccesnezsenscsczsccececoecece

Barry D. Smith & Eric A. Wiening,

ow Insurance Works (2d ed. 1994)........

IN THE

Supreme Court of the Anited States

METROPOLITAN LIFE INSURANCE COMPANY AND

LONG TERM DISABILITY PLAN FOR

ASSOCIATES OF SEARS, ROEBUCK AND COMPANY,

Petitioners,

Vv.

WANDA GLENN,

Respondent.

On Writ of Certiorari to the United States

Court of Appeals for the Sixth Circuit

BRIEF OF AMERICA’S HEALTH INSURANCE

PLANS, THE AMERICAN BENEFITS COUNCIL,

AND THE CHAMBER OF COMMERCE OF THE

UNITED STATES OF AMERICA AS AMICI CURIAE

IN SUPPORT OF PETITIONERS

America’s Health Insurance Plans, the American

Benefits Council, and the Chamber of Commerce of

the United States of America respectfully submit

this brief as amici curiae in support of petitioners,

with the written consent of the parties. !

' Letters of consent have beer filed with the Clerk. No

party or counsel for a party to this case authored this brief in

whole or in part, and no counsel or party made a monetary con-

tribution intended to fund the preparation or submission of this

brief. No person or entity other than amici curiae, their mem-

2

INTERESTS OF AMICI CURIAE

America’s Health Insurance Plans (“AHIP”) is the

national association representing nearly 1,300 mem-

ber companies that collectively provide health insur-

ance coverage to more than 200 million Americans.

The vast majority of individuals insured by AHIP

members are participants in, or beneficiaries of, em-

ployee benefit plans under the Employee Retirement

Income Security Act of 1974 (“ERISA”), 29 U.S.C.

§ 1001 et seg. The association’s goal is to provide a

unified voice for the health care financing industry,

to expand access to high quality, cost-effective health

care to all Americans, and to ensure Americans’ fi-

nancial security through robust insurance markets,

product flexibility and innovation, and an abundance

of consumer choice.

The American Benefits Council (“ABC”) is a

broad-based nonprofit trade association founded to

protect and foster the growth of this Nation’s effec-

tive and important privately sponsored employee

benefit plans under ERISA. The members of ABC

include both smal! and large employer sponsors of

employee benefit plans, as well as plan support or-

ganizations, such as consulting and actuarial firms,

investment firms, banks, insurers and other profes-

sional benefit organizations. Collectively, its more

than 250 members sponsor, administer or advise

plans covering more than 100 million plan partici-

pants.

bers, or their counsel has made a monetary contribution to the

preparation or submission of this brief.

3

The Chamber of Commerce of the United States

of America (“the Chamber”) is the world’s largest

business federation, representing an underlying

membership of over three million businesses and or-

ganizations of every size, in every industry sector,

and from every geographic region of the country. A

principal function of the Chamber is to represent the

interests of its members by filing amicus briefs in

cases involving issues of vital concern to the nation’s

business community. Many Chamber members pro-

vide health benefits to employees and arrange for

the provision of health care services through em-

ployee welfare benefit plans regulated under ERISA.

The ability of its members to purchase affordable

health care coverage for the benefit of their employ-

ees is of vital importance to them, their employees,

and the employees’ dependents, and to the Chamber.

INTRODUCTION AND SUMMARY

For more than 30 years, ERISA’s system of uni-

form regulation for employee benefit plans has fos-

tered the development of widespread employment-

based coverage for disability, health, and other bene-

fits. ERISA does not require that employers adopt

benefit plans, nor does it mandate any particular

terms. Plan design is a “settlor” function, subject to

the discretion of the employer who sponsors the

plan. One critical component of plan design is the

authority of the plan fiduciary responsible for ad-

ministering the plan and determining eligibility for

benefits. As this Court recognized in Firestone Tire

& Rubber Co. v. Bruch, 489 U.S. 101 (1989), employ-

ers may — and in amici’s experience, generally do —

confer on plan fiduciaries full discretion to adminis-

ter the plan and make plan benefit determinations.

4

And ERISA expressly contemplates that employers

may confer that discretion on an entity that is also

the source of funding for the plan. See 29 U.S.C.

§ 1108(cX3). For insured plans, a single entity can

reduce administrative expenses by serving as both

insurer and plan fiduciary. For self-funded plans,

the employer itself or an internal benefits committee

can serve as fiduciary without the need to contract

with a third party. Because of these efficiencies, it is

common for employer-sponsored benefit plans to util-

ize a single entity to perform fiduciary (claims ad-

ministration) and non-fiduciary (insurance) func-

tions.

The regulatory framework established by ERISA

— including its provision allowing a single entity to

perform both fiduciary and non-fiduciary functions —

has functioned effectively. The competitive market

for group insurance prevents insurers who perform

claims administration functions from systematically

denying claims for benefits. Not surprisingly, the

overwhelming majority of benefits claims are ap-

proved. And for claims that are initially denied, De-

partment of Labor regulations guarantee each

claimant a right to a full and fair internal review,

providing further protection for beneficiaries. For

insured health-benefit plans, most states accord

beneficiaries a right of appeal to an independent

medical reviewer. These market pressures and regu-

latory constraints all operate to ensure that fiduci-

ary claim determinations are not driven by improper

considerations, but are made, as they must be, with

an eye toward the best interests of the plan as a

whole.

5

For those reasons, the fact that one entity — ei-

ther an insurer or the employer itself — separately

performs both fiduciary and non-fiduciary functions

should not trigger heightened judicial review of

claim determinations. Where the plan specifies that

a fiduciary’s claim determination is discretionary, de

novo or “sliding-scale” review by courts would frus-

trate ERISA’s purpose to achieve uniformity of in-

terpretation, as illustrated by the splintered ap-

proaches of courts of appeals on the questions pre-

sented in this case. A plan sponsor can reasonably

decide that an experienced and qualified fiduciary

will be better positioned than a court to evaluate

benefits claims consistently and uniformly in the

best interests of the plan as a whole and the rest of

its participants. Departing from the abuse-of-

discretion standard would have adverse conse-

quences for benefit plans by increasing litigation

costs and leaving less money available to pay out

claims.

Consistent with principles of trust law relied

upon by this Court in Firestone, a determination by

any fiduciary should be reviewed deferentially

unless the evidence establishes that the decision was

actually infected by an improper consideration, i.e.,

the fiduciary’s own interest rather than the plan’s.

A claimant could make such a showing by pointing

to evidence of bias or corruption on the face of the

administrative record. If the claimant demonstrates

that an improper motive actually factored into the

fiduciary’s determination, then the court should con-

duct an ordinary trust law analysis by weighing that

conflict alongside other factors in assessing whether

the fiduciary abused its discretion.

6

ARGUMENT

I. ERISA’S FRAMEWORK PERMITTING A

SINGLE ENTITY TO PERFORM FIDUCI-

ARY AND NON-FIDUCIARY FUNCTIONS

HAS OPERATED EFFECTIVELY AND

FAIRLY

A. As ERISA Expressly Allows, Many Plans

Rely On A Single Entity For Both Fiduci-

ary And Funding Purposes

ERISA neither compels employers to establish

benefit plans nor restricts the freedom of employers

to define the benefits they choose to provide. Lock.

heed Corp. v. Spink, 517 U.S. 882, 887 (1996); Cur-

tiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 78

(1995). Instead, under ERISA “employers have large

leeway to design disability and other welfare plans

as they see fit.” Black & Decker Disability Plan v.

Nord, 538 U.S. 822, 833 (2003). ERISA protects em-

ployee benefit plans by providing contractual and

procedural safeguards: if an employer elects to es-

tablish a benefit plan, ERISA “simply requires [the]

plan{] to afford a beneficiary some mechanism for

internal review of a benefit denial, 29 U.S.C.

§ 1133(2), and provides a right to a subsequent judi-

cial forum for a claim to recover benefits, § 1132(a).”

Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355,

385 (2002).

ERISA expressly permits a plan fiduciary respon-

sible for evaluating benefit claims to serve as the

plan’s funding source. 29 U.S.C. § 1108(cX3) (an in-

dividual or entity may “serv[e] as a fiduciary in addi-

tion to being an officer, employee, agent, or other

representative of a party in interest”). Under

7

§ 1108(c)(3), an insurer may assume the dual re-

sponsibility of making benefit determinations and

paying claims, and an employer sponsoring a self-

funded plan likewise may make its own benefit de-

terminations. The provision marks a conscious de-

parture from “from the absolute common law rule

against fiduciaries’ dual loyalties,” and reflects a

congressional judgment that “stringent prophylactic

rules” should not be erected to prohibit tne plan’s

funding source from making benefit determinations.

Donovan v. Cunningham, 716 F.2d 1455, 1466-67

(5th Cir. 1983).

Decades of experience show that under tens of

thousands of benefit plans administered by entities

that fund the plans, such arrangements can provide

substantial efficiency benefits for plans. For insured

plans, relying on a single company to evaluate and

pay benefit claims can reduce administrative costs

and allows the insurer to leverage its expertise and

familiarity with the terms of a plan. For self-funded

plans, an employer can reduce costs by making bene-

fit determinations in-house, rather than contracting

with a third party to administer the plan. Although

plan sponsors must consider a host of business and

legal factors in selecting a fiduciary and funding |

source, and many choose to divide those responsibili-

ties among different entities, many employers value

the cost savings achieved by delegating the functions

to a single entity. By achieving efficiencies in plan

administration, employers can offer richer benefits

to their employees, and avoid the negative impacts

on morale and employee retention they inevitably

experience when forced to reduce benefits or require

8

employee contributions simply because administra-

tive costs cannot be adequately controlled.

Because of the efficiency advantages, it is now

common for employer-sponsored benefit plans to

lodge fiduciary responsibilities in the same entity

that funds the plan. See Guthrie v. Natl Rural Elec.

Coop. Ass’n Long-Term Disability Plan, 509 F.3d

644, 650 (4th Cir. 2007) (describing arrangement in

which “a plan’s administrator is also its funder” as

“simple and commonplace” in the industry); Hall v.

UNUM Life Ins. Co., 300 F.3d 1197, 1205 (10th Cir.

2002) (noting that “(t]he administrator and the payor

are often the same party for many ERISA benefit

plans,” and declining to depart from ordinary eviden-

tiary rules “whenever the same party is the adminis-

trator and payor” because such arrangements are

“commonplace”).

B. Market Incentives And ERISA Regula-

tions Ensure That Funding Entities Pro-

vide Proper Fiduciary Service

1. ERISA’s regulatory framework, operating in

conjunction with market incentives, both encourages

plan formation and ensures that claims are fairly

treated. Employer-sponsored long-term disability

plans, like the one at issue in this case, cover well in

excess of 28 million American workers, who received

long-term disability coverage through 191,000 differ-

ent benefit plans. Those insurers paid more than

$7.2 billion in long-term disability insurance claims

to more than 500,000 individuals in 2006, a 7.5% in-

crease over benefits paid in the previous year. One-

third of those individuals were ineligible for Social

Security Disability Insurance. Council for Disability

9

Awareness, The 2006 CDA Long-Term Disability

Claims Review 1, 3 (Apr. 2007), available at

http://www.disabilitycanhappen.org/news/CDA_LTD

_Claims_Survey_2006.asp (survey of companies rep-

resenting over 75% of the commercial disability in-

surance marketplace in 2006).

2. Although many of those plans confer fiduciary

responsibilities on the entity that funds the plan, the

market for group insurance and the demands of plan

participants effectively ensure that such entities

make benefit decisions entirely in the interests of the

plans they serve.

a. For insured plans, insurers with fiduciary

claims duties have strong disincentives to systemati-

cally deny meritorious claims. As the First Circuit

has explained, “employers have benefit plans to

please employees and, consequently, will not want to

keep an overly tight-fisted insurer.” Wright v. R.R.

Donnelley & Sons Co. Group Benefits Plan, 402 F.3d

67, 75 (2005). If insurers do not administer em-

ployee benefit plans to the actual benefit of employ-

ees, employers will simply retain other insurers to

insure and administer the benefits. The market for

group insurance is highly competitive, particularly

for large employers like Sears, Roebuck and Com-

pany. Many employers renegotiate the terms of

their insured benefit plans annually or biannually.

They frequently issue requests for proposals, enter-

tain bids from multiple insurers, and engage in ex-

tensive negotiation over the terms of the plan. Be-

cause employers who sponsor benefit plans “have the

sophistication and bargaining power necessary to

take their business elsewhere if an insurer . . . con-

sistently denies valid claims,” a practice of denying

10

claims improperly ultimately “would harm an in-

surer by inducing current customers to leave and by

damaging its chances of acquiring new customers.”

Mers v. Marriott Intl Group Accidental Death &

Dismemberment Plan, 144 F.3d 1014, 1021 (7th Cir.

1998).

Market forces, in short, provide “an important

competing motive” that minimizes the risk that an

insurer will wrongfully deny claims to save money in

the short term. Doyle v. Paul Revere Life Ins. Co.,

144 F.3d 181, 184 (1st Cir. 1998). Ignoring the effect

of those forces, the Government incorrectly assumes

that an insurer who provides fiduciary claims ad-

ministration services will consider each transaction

in isolation, seeking to “fill . . . its coffers” immedi-

ately. U.S. Cert. Br. 13. Any such insurer will not

be in the business of insuring employee benefit plans

for long. The Government’s assumption also misap-

prehends the business of insurance. Insurers make

money not by routinely denying claims, but by mak-

ing careful actuarial predictions about potential li-

abilities, assuming that claims will be paid, and

managing costs and risks on that basis. See Barry

D. Smith & Eric A. Wiening, How Insurance Works

3-4, 8-9 (2d ed. 1994). The obligation to pay out

claims, in other words, is an assumed and necessary

function in the provision of insurance services.

b. Market incentives operate even more directly

for self-funded plans. Whereas employ’rs may insist

that insurers administer benefits fairly to satisfy

employees, when the employer itself is the fiduciary,

the employer must respond directly to the expecta-

tions of the employees it wants to satisfy and the

workforce it wants to attract and retain. It would be

11

“a poor business decision to make it a practice of re-

sisting claims for benefits” because “[iJn the long

run, such a practice would dampen loyalties of cur-

rent employees while hindering attempts to attract

new talent.” Chalmers v. Quaker Oats Co., 61 F.3d

1340, 1344 (7th Cir. 1995); see Van Boxel v. Journal

Co. Employees’ Pension Trust, 836 F.2d 1048, 1051

(7th Cir. 1987). By expressly permitting corporate

officers to serve as plan fiduciaries, ERISA embodies

a reasonable congressional judgment that “[t]he im-

pact on a company’s welfare of granting or denying

benefits under a plan will not be sufficiently signifi-

cant as to threaten the administrators’ partiality.”

Chalmers, 61 F.3d at 1344.

c. Unsurprisingly, the foregoing market incen-

tives have significant effects on plan benefit deci-

sionmaking. Contrary to some popular lore, the

overwhelming majority of employee benefit coverage

claims are granted. A study of claims submitted in

2002 to health plans representing 26 million persons

showed that 86 percent of all claims submitted were

granted. Health Ins. Ass’n of America, Results from

an HIAA Survey on Claims Payment Processes 10

(March 2003), available at www.ahipresearch.org/

PDFs/21_ClaimsPaymentProcessesSurveyChartbook

.pdf. And of the 14 percent that were denied, 48 per-

cent were denied because they were duplicate sub-

missions, and 20 percent were denied because the

individual was no longer covered or the policy had

lapsed. Id. at 10. Only about 3 percent of all claims

were denied on the ground that the asserted benefit

was not covered by the plan, 0.4 percent were denied

for eligibility reasons, and one percent of claims were

denied for other reasons. Jd. There is simply no evi-

12

dence that employers and insurers are driven by

self-interest to deny claims routinely — — just the oppo-

site is true.

3. Not all claims are granted, of course. But even

when claims are initially denied, ERISA regulations

requiring internal plan review ensure that claimants

have an effective means of challenging the denial.

ERISA requires that employee benefit plans provide

effective notice of coverage denials and a reasonable

opportunity for “full and fair review” of such deci-

sions.2, The Department of Labor has promulgated

comprehensive regulations governing the appeal

process. See 29 C.F.R. § 2650.503-1(h). The regula-

tions compel benefit plans to establish and maintain

a procedure under which there is an opportunity for

full and fair internal review. Id. § 2650.503-1(h\1).

To satisfy the regulations, the review must take into

account “all comments, documents, records, and

other information submitted by the claimant relating

to the claim,” id. § 2560.503-1(hX2)iv), and must be

conducted by someone other than the initial re-

viewer, with no deference to the initial decision, id.

§ 2560.503-1(h\(3)(ii). In cases involving the exercise

of medical judgment, the plan administrator must

consult with a health care professional in the rele-

2 See 29 U.S.C. § 1133(1) (requiring that plans “provide

adequate notice in writing to any participant or beneficiary

whose claim for benefits under the plan has been denied, set-

ting forth the specific reason for such denial, written in a man-

ner calculated to be understood by the participant”); id.

§ 1133(2) (requiring that plans “afford a reasonable opportunity

to any participant whose claim for benefits has been denied for

a full and fair review by the appropriate named fiduciary of the

decision denying the claim”).

13

vant field when conducting its review. Id.

§ 2560.503-1(h)(4). And in every case, the reviewer

must provide a written explanation of the final deci-

sion with specific reference to pertinent plan provi-

sions. Id. § 2560.503-1(j\(1).

Notably, when the DOL amended its regulations

in 2001 to provide for this comprehensive internal

review structure, it did not require sponsors to name

a plan fiduciary distinct from the plan’s funding

source. See 66 Fed. Reg. 35887 (July 9, 2001) (codi-

fied at 29 C.F.R. pt. 2560).

The internal plan review guaranteed by DOL

regulations provides significant protection for plan

beneficiaries. Employer-sponsored health plans re-

view more than 250,000 internal appeals annually.

See David M. Studdert & Carol Roan Gresenz, En-

rollee Appeals of Preservice Coverage Denials at 2

Health Maintenance Organizations, 289 J. Am. Med.

Ass’n 864, 864 (2003). One leading study of health

plans showed that plan fiduciaries granted benefits

in approximately 42 percent of appeals. Jd. at 866;

see also AAHP, Independent Medical Review of

Health Plan Coverage Decisions 1 (2001), available

at http://www.ahip.org/content/default.aspx?bc=

38 | 82/2246 (estimating that 49% of appeals in

health plans result in grant of benefits).

Moreover, in Rush Prudential, this Court held

that states could provide external review for health-

benefit plan determinations (so long as such review

did not act more like arbitration than a medical “sec-

ond opinion”). 536 U.S. at 359. Consistent with that

holding, forty-three states and the District of Co-

lumbia have external review programs that allow

14

beneficiaries to appeal denials of coverage. AHIP

Center for Policy and Research, Update on State Ex-

ternal Review Programs 2 (Jan. 2006), available at

http://www.ahipresearch.org/pdfs/External_Reviews-

Jan06.pdf. Those programs provide substantial ad-

ditional protection for plan beneficiaries. Jd. at 1, 6-

7.

* * *

In sum, market incentives and regulatory protec-

tions together operate to ensure that plan benefit de-

cisions are neither arbitrary nor self-interested. Ab-

sent evidence that bias or corruption influenced the

process, there is no basis for judicial intervention

into the plan administration process. To the con-

trary, such intervention would affirmatively under-

mine ERISA’s objectives and the interests of plan

beneficiaries, as the next section demonstrates.

ii. A BENEFIT DETERMINATION BY AN EN-

TITY THAT ALSO FUNDS THE PLAN

SHOULD NOT BE PRESUMPTIVELY SUB-

JECT TO HEIGHTENED JUDICIAL RE-

VIEW

Where a plan specifies that a fiduciary’s claim de-

termination is discretionary, courts should not pre-

sume that de novo or “sliding-scale” or reasonable-

ness review is appropriate merely because the fidu-

ciary is also employed by or associated with the

plan’s funding source. Heightened judicial review of

discretionary determinations by a plan fiduciary

would frustrate ERISA’s purpose of achieving uni-

formity and predictability in the oversight of benefit

plans, and it would increase litigation costs by en-

couraging every individual whose claim is denied to

15

seek a second opinién in court. Instead, consistent

with this Court’s decision in Firestone, and with

principles of trust law on which ERISA is predicated,

reviewing courts should give no weight to a fiduci-

ary’s potential conflict in the absence of a showing

that an improper consideration actually affected the

decision.

A. Heightened Judicial Scrutiny Of Benefit

Decisions By Entities Who Fund Plans

Would Undermine ERISA’s Purposes And

Have Adverse Consequences For Benefit

Plans

1. ERISA was designed “to provide a uniform

regulatory regime over employee benefit plans.”

Aetna Health Inc. v. Davila, 542 U.S. 200, 208

(2004). To that end, ERISA “sets various uniform

standards, including rules concerning reporting, dis-

closure, and fiduciary responsibility,” and it pre-

empts most contrary state-law provisions. Shaw v.

Delta Air Lines, Inc., 463 U.S. 85, 91 (1983); see 29

U.S.C. § 1144(a). A single federal standard was “de-

sirable,” Congress concluded, “because it will bring a

measure of uniformity in an area where decisions

under the same set of facts may differ from state to

state.” H.R. Rep. No. 93-533, at 12 (1973), reprinted

in 1974 U.S.C.C.A.N. 4639, 4650.

Congress also recognized the interest of employ-

ers in the uniform interpretation and application of

their benefit plans. Many large employers provide

plans that extend to beneficiaries in multiple juris-

dictions, and such plans would be threatened if they

were “subject to different legal obligations in differ-

ent States.” Egelhoff v. Egelhoff, 532 U.S. 141, 148

16

(2001). Consistent with its purpose to ensure “na-

tionally uniform plan administration,” ERISA there-

fore “requirei[s} that plans be administered, and

benefits be paid, in accordance with plan docu-

ments.” Id. at 148, 150.

A rule that subjects the decisions of fiduciaries

with potentially conflicting interests to de novo or

otherwise heightened judicial review would under-

mine ERISA’s purpose of ensuring uniformity in the

interpretation and administration of benefit plans.

Instead of a single fiduciary, chosen by the plan

settlor and vested with discretion in making benefit

determinations, every federal district court would

have authority to second-guess benefit determina-

tions by reweighing the evidence and construing the

plan documents. Because courts entertain only one

case at a time, they would have no obligation to re-

spect the fiduciary’s decisions concerning similarly

situated claimants or to consider the consequences of

a decision for other beneficiaries. See Berry v. Ciba-

Geigy Corp., 761 F.2d 1003, 1006 (4th Cir. 1985)

(deferential review “exists to ensure that adminis-

trative responsibility rests with those whose experi-

ence is daily and continual, not with judges whose

exposure is episodic and occasional”). This Court re-

cently made a similar point (albeit in a different con-

text) about the limited capacity of decisionmakers in

case-by-case adjudication, compared with those

charged with taking a broader view. See Riegel v.

Medtronic, Inc., No. 06-179 (Feb. 20, 2008), slip op.

11-12 (“A jury, on the other hand, sees only the cost

of a more dangerous design, and is not concerned

with its benefits; the patients who reaped those

benefits are not represented in court.”). And because

17

district courts would seldom be bound by precedent

in interpreting the terms of a plan, they would be

free to adopt constructions that conflict with those of

other courts or the plan administrator. Indeed, the

risk of inconsistent interpretations is among the rea-

sons that plan settlors choose to give the fiduciary

discretionary authority to interpret the plan. See

Firestone, 489 U.S. at 111 (noting that “[a] trustee

may be given power to construe disputed or doubtful

terms, and in such circumstances the trustee’s inter-

pretation will not be disturbed if reasonable”) (citing

Bogert & Bogert, Law of Trusts and Trustees § 559,

at 169-71 (2d rev. ed. 1980)).

The splintered decisions of courts of appeals on

the questions presented in this case illustrate the

potential for inconsistency when federal courts — con-

trary to the wishes of the plan sponsor — conduct de

novo or “sliding scale” or reasonableness review of

benefit determinations because of a potential conflict

of interest. Even courts that have agreed on the ex-

istence of a relevant conflict of interest have differed

sharply as to how that conflict affects the standard

for reviewing the claim. Compare Pet. App. 10a (po-

tential conflict must be weighed alongside other fac-

tors when reviewing for abuse of discretion); with

Pinto v. Reliance Standard Life Ins. Co., 214 F.3d

377, 392 (3d Cir. 2000) (“sliding scale” review de-

pending on nature of conflict and other circum-

stances); Doe v. Group Hospitalization & Med.

Servs., 3 F.3d 80, 87 (5th Cir. 1999) (same); and Pul-

vers v. First UNUM Life Ins. Co., 210 F.3d 89, 92 (2d

Cir. 2000) (de novo review). Appellate courts also

have fractured over the claimant’s ability to intro-

duce new evidence before the reviewing court, see

18

Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955,

967 (9th Cir. 2006) (en banc), the burden of proof and

persuasion in cases involving a potential conflict, see

Fought v. UNUM Life Ins. Co. of Am., 379 F.3d 997,

1006 (10th Cir. 2004), and the circumstances, if any,

in which a claimant may obtain discovery, see

Semien v. Life Ins. Co. of N. Am., 436 F.3d 805, 814-

15 (7th Cir. 2006), cert. denied, 127 S. Ct. 53 (2006).

Such procedural differences abound at the district

court level, and an employer seeking predictability

in the administration of its benefits plan should have

the ability, consistent with the purposes of ERISA, to

obtain uniformity in the review of its benefits deter-

minations by vesting discretion in a fiduciary of its

choice.

2. Another central purpose of ERISA is to avoid

“creatling] a system that is so complex that adminis-

trative costs, or litigation expenses, unduly discour-

age employers from offering welfare benefit plans in

the first place.” Varity Corp. v. Howe, 516 U.S. 489,

497 (1996). ERISA and its accompanying regula-

tions were designed to promote the internal resolu-

tion of claims and to encourage non-adversarial pro-

ceedings, minimizing “both the likelihood of subse-

quent federal litigation and the costs that would be

attendant thereto.” Jewell v. Life Ins. Co. of N. Am.,

508 F.3d 1303, 1308 (10th Cir. 2007).

Heightened judicial review of benefit determina-

tions in cases involving an entity with both fiduciary

claims responsibilities and non-fiduciary funding ob-

ligations would be inconsistent with that purpose be-

cause it would increase litigation and administrative

costs in three ways. First, non-deferential review

would encourage every individual with a borderline

19

claim denied by such an entity to seek a second opin-

ion in federal court, directly contrary to ERISA’s ob-

jective to promote internal resolution of claims. Sec-

ond, even individuals with weak claims would have a

stronger incentive to file a lawsuit in the hope of ob-

taining a favorable settlement. Third, non-

deferential review would increase the likelihood of

reversal, even in cases where the fiduciary acted

reasonably. As a result, plans would be forced to

spend more money, both to defend against the

greater volume of litigation and to pay out claims

properly denied by the fiduciary in the reasonable

exercise of its discretion, as contemplated by the

plan. Employers might respond to those costs in

various ways — by reducing the available coverage,

paying increased premiums, or discontinuing the

plan entirely — but none of them would redound to

the benefit of plan participants in the long run.

This Court in Firestone acknowledged the possi-

bility “that a de novo standard would encourage

more litigation” and drive up costs, and emphasized

that parties are free to choose a standard of review

based on those considerations. 489 U.S. at 114-15.

In this case, and under tens of thousands of similar

employer-sponsored plans, the employer has volun-

tarily chosen to vest a single entity with the duty to

make benefit determinations and the responsibility

to pay claims. That arrangement is expressly per-

mitted by ERISA, and many employers prefer it,

notwithstanding the potential conflict of interest, be-

cause it improves plan efficiency and thereby con-

serves plan funds. See supra at 7-8. Imposing non-

deferential review on the benefit determinations of

all entities with funding obligations not only would

20

contravene one of the central purposes of ERISA, but

would frustrate the objectives of employers who

made the considered judgment that vesting both re-

sponsibilities in a single entity would maximize the

resources available to provide plan benefits. Id.

B. Courts Should Give No Weight To A “Po-

tential Conflict” In The Absence Of A

Showing That The Benefits Decision Was

Infected By An Improper Consideration

In rare circumstances, a fiduciary’s potential con-

flict of interest may develop into an actual conflict of

interest that “must be weighed as a ‘facto([r] in de-

termining whether there is an abuse of discretion.”

Firestone, 489 U.S. at 115 (quoting Restatement

(Second) of Trusts § 187, cmt. d (1959)). Before the

conflict is entitled to any weight, however, a claim-

ant must make‘a substantial showing that the po-

tential conflict actually infected the challenged bene-

fit determination.

1. When a benefit plan confers discretion on the

plan administrator to determine benefit eligibility, a

court’s power to review coverage decisions is highly

circumscribed. As the Court explained in Firestone,

principles of trust law guide the application of ER-

ISA in this context, and under those principles when

“discretion is conferred upon the trustee with respect

to the exercise of a power, its exercise is not subject

to control by the court except to prevent an abuse by

the trustee of his discretion.” 489 U.S. at 111 (quot-

ing Restatement (Second) of Trusts § 187). A court

“will not interfere to control [trustees] in the exercise

of a discretion vested in them by the instrument un-

der which they act.” Jd. (quoting Nichols v. Eaton,

21

91 U.S. 716, 724-25 (1875) (emphasis altered)). In

the law of trusts, “(t]he cases are numerous in which

it has been held that where discretion is conferred

upon the trustee with respect to the exercise of a

power the court will not interfere with him in his ex-

ercise or failure to exercise the power so long as he is

not guilty of an abuse of discretion.” 3 Scott &

Fratcher, The Law of Trusts § 187 (4th ed. 1988).

The same trust principles relied upon by the

Court in Firestone provide clear guidance as to when

and how a conflict of interest affects the abuse-of-

discretion analysis. As the Restatement (Second) of

Trusts explains:

The court will control the trustee in the exer-

cise of a power . . . where he acts from a motive

other than to further the purposes of the trust.

Thus, if the trustee in exercising or failing to

exercise a power does so... to further some

interest of his own or of a person other than

the beneficiary, the court will interpose. Al-

though ordinarily the court will not inquire

into the motives of the trustee, yet if it is shown

that his motives were improper or that he could

not have acted from a proper motive, the court

will interpose.

Restatement (Second) of Trusts § 187 cmt. g (empha-

sis added). A potential conflict of interest is only a

fact “to be considered” in determining whether the

trustee was actually motivated by the conflict — the

relevant question when evaluating whether the trus-

tee abused its discretion. Jd.; accord Restatement

(Third) of Trusts § 50(1) cmt. b (2003) (in reviewing

discretionary decisions by a trustee, “[c]ourt inter-

22

vention may be obtained to rectify abuses resulting

from bad faith or improper motive”) (emphasis

added).

This principle of trust law supports the approach

of those appellate courts holding that the review of a

plan administrator’s discretionary eligibility deter-

mination remains fully deferential, even when the

administrator is also the plan’s funding source,

unless and until the claimant produces specific evi-

dence (beyond the conflict itself) establishing that

the non-fiduciary funding obligation role actually af-

fected the fiduciary’s judgment. See Pulvers, 210

F.3d at 92 (an insurer’s role as plan administrator

“is alone insufficient as a matter of law to trigger

stricter review,” and the claimant must produce

“evidence that [its] decision was actually affected by

a conflict of interest”); Buttram v. Central States, Se.

& Sw. Areas Health & Welfare Fund, 76 F.3d 896,

900 (8th Cir. 1996) (“[AJbsent material, probative

evidence, beyond the mere fact of the apparent [con-

flict of interest], tending to show that the adminis-

trator breached his fiduciary obligation, we will ap-

ply the traditional abuse of discretion analysis to

discretionary trustee decisions.” (citations omitted)).

The bare fact that the same entity serves as the

funding mechanism and evaluates benefit claims —

an arrangement explicitly allowed by statute and in-

tended by the plan sponsor — is entitled to no weight

in determining whether the fiduciary abused its dis-

cretion.

2. To establish an actual conflict of interest rele-

vant to judicial review of a benefit determination, a

claimant should be required to make a threshold

showing of bias or corruption based on the adminis-

23

trative record. See Rush Prudential, 536 U.S. at 384

n.15 (under Firestone, a conflict of interest affects

the abuse-of-discretion standard only if “plausibly

raised”). The terms of the plan itself, for example,

may create a prima facie inference of bias. See Pe-

gram v. Herdrich, 530 U.S. 211, 227 n.7 (2000) (offer-

ing the example of a plan that provides “a bonus for

administrators who denied benefits to every 10th

beneficiary”); Buffonge v. Prudential Ins. Co. of Am.,

426 F.3d 20, 31 n.15 (1st Cir. 2006) (addressing

question whether insurer “intentionally set up a bi-

ased process”). The claim file may also reveal a

complete abdication on the part of the plan adminis-

trator, as in a case where the decisionmaker failed to

consult any relevant evidence, which can give rise to

an inference that the administrator acted pursuant

to am improper consideration. See Restatement

(Second) of Trusts § 187 cmt. h (the court will inter-

pose where the exercise of a power “is left to the

judgment of the trustee and he fails to use his judg-

ment,” as in a case where the trustee acts “without

knowledge of or inquiry into the relevant circum-

stances and merely as a result of his arbitrary deci-

sion or whim”). In that situation, however, the

proper course for a court should be to remand the

decision to the plan for reconsideration by the plan

fiduciary in accordance with proper procedures, in-

cluding the full and fair internal review required

under DOL regulations, as discussed above, supra at

12-13. See, e.g., Buffonge, 426 F.3d at 31-32; Smith

v. Cont’l Cas. Co., 450 F.3d 253, 265 (6th Cir. 2006);

Quinn v. Blue Cross & Blue Shield Ass’n, 161 F.3d

472, 477-78 (7th Cir. 1998). The question whether a

decision was infected by an improper consideration

should be asked only after the decision has been

24

properly made in accordance with appropriate inter-

nal review procedures.

A contrary rule that presumes bias or corruption

on the part of every fiduciary employed by a plan

funding source, or that allows plaintiffs to conduct

discovery into the fiduciary’s motives without any

concrete basis in the administrative record, would

significantly increase litigation costs for benefit

plans, contrary to the purposes of ERISA. See

Jewell, 508 F.3d at 1308 (“[clonfining review in gen-

eral to the administrative record . . . is important for

a variety of reasons related to the goals of ERISA,”

including the minimization of litigation costs). As

the Seventh Circuit has explained, “onerous discov-

ery before an ERISA claim can be resolved would

undermine one of the primary goals of the ERISA

program: providing ‘a method for workers and bene-

ficiaries to resolve disputes over benefits inexpen-

sively and expeditiously.” Semien, 436 F.3d at 815

(quoting Perry v. Simplicity Eng’g, 900 F.2d 963, 967

(6th Cir. 1990)). For that reason, discovery must be

“limitled] ... to those cases in which it appears

likely that the plan administrator committed mis-

conduct or acted with bias.” Jd. at 816. The bald as-

sertion of a potential conflict of interest arising from

a fiduciary’s association with the plan’s funding

mechanism cannot suffice to justify such discovery —

“specific factual allegations of misconduct or bias in

a plan administrators review procedures” must be

required. Id. at 815-16.

Even in the rare case in which a claimant estab-

lishes that the plan administrator acted pursuant to

an actual conflict of interest, Firestone makes clear

that a court should not adopt a different standard of

25

review. Instead, the conflict “must be weighed as a

‘facto[r] in determining whether there is an abuse of

discretion.” Firestone, 489 U.S. at 115 (quoting Re-

statement (Second) of Trusts § 187 cmt. d (alteration

in original, emphasis added); Rush Prudential, 536

U.S. at 384 n.15 (explaining that under “Firestone

Tire itself,” “any conflict of interest on the plan fidu-

ciary’s part,” if “plausibly raised,” would affect “re-

view for abuse of discretion”). The ultimate inquiry

is whether the fiduciary “act[ed] beyond the bounds

of a reasonable judgment,” not whether “the court

would have exercised the [discretionary] power dif-

ferently.” Restatement (Second) of Trusts § 187

cmts. e, i. Accordingly, a fiduciary’s determination

should be affirmed, notwithstanding an actual con-

flict of interest, if it is supported by substantial evi-

dence such that a reasonable person could have

reached the same conclusion. See, e.g., Fletcher-

Merrit v. NorAm Energy Corp., 250 F.3d 1174, 1179

(8th Cir. 2001); Miller v. United Welfare Fund, 72

F.3d 1066, 1071 (2d Cir. 1995); Sandoval v. Aetna

Life & Cas. Ins. Co., 967 F.2d 377, 382 (10th Cir.

1992).

CONCLUSION

For the foregoing reasons, the judgment of the

court of appeals should be reversed.

26

Respectfully submitted,

JULIE SIMON MILLER ROBERT N. ECCLES

AMERICA’S HEALTH (Counsel of Record)

INSURANCE PLANS JONATHAN D. HACKER

601 Pennsylvania Ave., N.W. RYAN W. SCoTT*

Washington, D.C. 20004 O’MELVENY & MYERS LLP

ROBIN S. CONRAD

SHANE BRENNAN

NATIONAL CHAMBER

LITIGATION CENTER, INC.

1615 H Street, N.W.

Washington, D.C. 20062

1625 Eye Street, N.W.

Washington, D.C. 20006

(202) 383-5300

KATHRYN WILBUR

AMERICAN BENEFITS COUNCIL

1212 New York Ave., N.W.

Washington, D.C. 20005

*Admitted only in Illinois

Attorneys for Amici Curiae

March 3, 2008