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Don't weasel on claims

To: SPBA Members, Their Clients & Friends

Re: Beware of weaseling out of big claims via questionable means.

From: Fred Hunt, SPBA President

Today: November 2nd, 1992

Dear Friends,

There has been a growing trend for employers, plans, or TPAs to try to side-step big claims or risks via questionable interpretations or eligibility decisions. Researching such situations is quite proper...but there's been an unfortunate trend towards arranging circumstances or interpretations with an eye to escaping the claim rather than seeing where common sense or government would say it should fall. (This trend also applies to insurers.)

There are several legal, consumer, and political implications for you to consider. The private employee benefits system could win the battle of frugality, but lose the war to maintain an independent benefits system if we leave too many "casualties" among covered employees whose bills we refuse to pay for questionable reasons. Please consider these for your own long term protection:

1. ERISA fiduciary duty has a double responsibility. First, that everyone with fiduciary duty* have the goal of protecting the security & size (minimizing expenses) of the plan assets. Avoiding incorrect claims certainly fulfills that. However, the second fiduciary responsibility is to be sure that legitimate claims of legitimate plan participants are paid. Thus, if you side-step paying a claim for a legitimate plan participant and a court decides that you concocted to escape a legitimate claim, the people with fiduciary responsibility* would be subject to civil and/or criminal (jail time) prosecution.

*Who has ERISA fiduciary responsibility? First and foremost, the plan trustees/official Administrator (usually the employer or joint union-management trustees plan sponsors). They are the official "fiduciaries". However, anyone who is perceived by DOL to have known or should have known about about the operations of the plan is considered a "knowing participant" or "co-fiduciary", and have the same fiduciary duty. (Sec. 502(1)(1)(B) of Title I of ERISA). A TPA, stop-loss GMU or carrier who is familiar with the plan, attorneys, CPAs, consultants etc. can all expect to be considered "knowing participant co-fiduciaries" and be subject to fiduciary responsibility and penalties.

2. Public opinion can be a killer to the employer and to the whole private benefits system. Every time someone is left high and dry with an unpaid big bill, it is ammunition for those who want to show that the private employee benefit system doesn't work...or that government requirements should be even more punitive towards plans. Closer to home, it may cause financial ruin for a member of the community. If the person feels he was cheated because the plan used questionable interpretations to escape paying a claim otherwise expected to be covered, he will tell all his friends and their friends and the local press how terrible that employer is. So, there is a PR cost. Note: This does not mean you should stretch common sense to pay claims that probably wouldn't be covered (unless government interpretations have already stretched common sense on the issue). The first ERISA fiduciary responsibility (described above) to protect plan assets can send you to jail for being overly kind & generous as well as for being overly stingy.

3. Government attitude is shaped a great deal by public opinion and anecdotes. The bills in the last Congress like HR1602, which would let state courts try cases of claims denial and set punitive damages are scary and would cost millions in legal fees. However, the Congressman who sponsored the bill spoke with me the afternoon he conceived the idea. He had just watched a series of heart-wrenching anecdotes on a TV investigative reporting show. (Fortunately, self-funded plans, employers, and especially TPAs have traditionally had a better record and reputation for fair play and service with covered workers, so TPAs & self-funding were exempted from the first bill. However, as more and more sad anecdotes about self-funded plans were brought forward, the subsequent versions of HR1602 and other bills include self-funding to be open to punishment. Government's perception (from anecdotes) of employers and plans weaseling out of paying legitimate claims by conveniently interpreting government regulations is why so many of the government interpretations have gone to the other extreme. For instance, COBRA disqualification for "gross misconduct", according to IRS, "applies only about 1% of the times most people would think". (Actual murder on the job was the only example they could think of. Stealing on the job would not be "gross misconduct".)

I realize this sounds like "inside the Beltway" idealistic talk. You have plans that are scrambling to stay afloat, and there's always someone else offering a deal too good to be true to cut costs. However, this letter is to remind you that there are some serious legal (even jail time), public opinion, and political implications if everyone involved doesn't carefully differentiate between being frugal versus weaseling out of what are probably legitimate claims.

You can evaluate what to do in any given instance with a simple self-administered test: Imagine that the facts of the situation and what you did are being presented on the "60 Minutes" TV show (or in court or in the local scandal sheet) from the most unfavorable perspective for you. What is it about the description that embarrasses you and which you wish you had done differently? This is also a useful role-playing tool when the TPA and employer (or trustees) are discussing what to do. After all, the final decision and ultimate legal liability is for the official plan sponsor (employer or trustees).

I hope this helps. To survive, the private employe benefits system has to be trusted to be fair and trusted to not ditch covered employees via questionable means at the time of their greatest need. After all, the greatest public hesitation against national health insurance is that government-run plans would be uncaring and impersonal. Thus, one of the private benefit system's most important attributes is to be kinder & gentler.


Frederick D, Hunt, Jr. - President

SPBA is the national association of independent Third Party Administration firms (better known as TPAs) which manage client employee benefit plans. It is estimated that one-third (1/3) of all U.S. workers are covered by employee benefit plans managed by SPBA member TPA firms. Over 95% of the TPA firms known to be eligible for SPBA have joined. TPA firms must be independent at the Board level and derive at least 50% of their income from TPA services in order to be members of SPBA.

SPBA is unique, not only for the large percent and breadth of benefit plans represented, including small business, big corporations, union, non-union, association-sponsored plans and every industry & profession...but also because SPBA and its member TPAs have earned a respected reputation for total candor. SPBA has no "axe to grind" for or against any particular type of plan or industry.