High court: Do health insurance plans have conflict of interest?

Health insurance is a major issue under debate in the race for the presidency, but this week a controversial aspect of that business arrives at the US Supreme Court.

On Wednesday, the justices are set to examine how judges should approach policyholder disputes involving companies that both evaluate and pay medical disability claims administered under a federal retirement income law.

Do such companies operate in a conflict of interest between caring for their policyholders and enriching their shareholders? If such a conflict exists, how rigorously should federal judges examine decisions to deny benefits?

Federal appeals courts are sharply divided on how to answer those questions. The high court will confront the issue in the case of an Ohio woman diagnosed with a severe heart condition who was granted long-term disability benefits that were later withdrawn by the Metropolitan Life Insurance Company (MetLife).

Because of her condition, the woman, Wanda Glenn, was found to be "totally disabled." She began receiving disability benefits. She also followed her physician's advice and a treatment program, and her health began to improve. When these improvements were reflected in her doctor's reports, MetLife cited the reports and withdrew the benefits. The company said Ms. Glenn was not totally disabled and could find sedentary work.

Glenn filed a lawsuit. A federal judge upheld MetLife's decision, but a federal appeals court panel reversed it. The appeals court said that MetLife was operating under a conflict of interest by both evaluating and paying claims, and that the company's decision to cut off Glenn's benefits was arbitrary and capricious.

In its appeal to the Supreme Court, MetLife says that a company that both evaluates and pays claims does not necessarily operate under a conflict of interest. Lawyers for the company say that Congress in passing the Employee Retirement Income Security Act (ERISA) authorized companies like MetLife to both evaluate and pay claims.

"It is far more efficient to have a single company that issued the funding mechanism based on the plan design evaluate a benefit claim ... than to divide those functions between two separate companies," writes Washington lawyer Miguel Estrada, in his brief on behalf of MetLife.

Mr. Estrada warns that a finding of conflict of interest and a higher standard of judicial review would lead to increased premiums for policyholders or "diminish the generosity of plan designs." He adds that it could deter employers from forming new benefit plans.

Estrada urges the justices to adopt a standard of review that is deferential to the company's decisions.

Lawyers for Glenn say MetLife's business operations are a classic example of conflict of interest. "When an umpire bets on the outcome of a game he is refereeing, he has a conflict of interest," writes E. Joshua Rosenkranz, a lawyer for Glenn, in his brief.

"MetLife is equally conflicted when it decides whether a beneficiary is entitled to benefits. If MetLife answers 'yes,' then it is the one who has to pay; the beneficiary's gain is MetLife's loss," Mr. Rosenkranz writes.

Judges should take this conflict into account when reviewing benefits denials and should apply "especially careful scrutiny" to ensure that financial incentives have not tainted a company's fiduciary duty to its policyholders, he says.

In a friend-of-the-court brief, the American Council of Life Insurers says appeals courts finding a conflict of interest have embraced "an overly simplistic view of the economic realities of the business of insurance."

"An insurer's economic success will depend on its ability to accurately underwrite the policies it issues – not on its denial of valid claims," writes Bart Karwath in the ACLI brief.

The American Dental Association expressed its concern about conflicts of interest. "The ineluctable fact is, such conflicts are real, pervasive and affect benefits decisions in multiple ways, whether consciously or non-consciously, whether overtly or subtly," writes Jerrold Ganzfried in a friend-of-the-court brief on behalf of the ADA.