[Senate Hearing 105-859]
[From the U.S. Government Printing Office]

                                                        S. Hrg. 105-859

                        OR DELAYED HEALTH CLAIMS



                                before a

                          SUBCOMMITTEE OF THE


                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION


                            SPECIAL HEARING


         Printed for the use of the Committee on Appropriations

 Available via the World Wide Web: http://www.access.gpo.gov/congress/


                     U.S. GOVERNMENT PRINTING OFFICE
50-024 cc                    WASHINGTON : 1999

            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 
                           ISBN 0-16-058120-6


                     TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
SLADE GORTON, Washington             DALE BUMPERS, Arkansas
MITCH McCONNELL, Kentucky            FRANK R. LAUTENBERG, New Jersey
CONRAD BURNS, Montana                TOM HARKIN, Iowa
RICHARD C. SHELBY, Alabama           BARBARA A. MIKULSKI, Maryland
JUDD GREGG, New Hampshire            HARRY REID, Nevada
ROBERT F. BENNETT, Utah              HERB KOHL, Wisconsin
LARRY CRAIG, Idaho                   BYRON DORGAN, North Dakota
LAUCH FAIRCLOTH, North Carolina      BARBARA BOXER, California
                   Steven J. Cortese, Staff Director
                 Lisa Sutherland, Deputy Staff Director
               James H. English, Minority Staff Director

 Subcommittee on Departments of Labor, Health and Human Services, and 
                    Education, and Related Agencies

                 ARLEN SPECTER, Pennsylvania, Chairman
THAD COCHRAN, Mississippi            TOM HARKIN, Iowa
SLADE GORTON, Washington             ERNEST F. HOLLINGS, South Carolina
JUDD GREGG, New Hampshire            DALE BUMPERS, Arkansas
LAUCH FAIRCLOTH, North Carolina      HARRY REID, Nevada
LARRY E. CRAIG, Idaho                HERB KOHL, Wisconsin
TED STEVENS, Alaska                  ROBERT C. BYRD, West Virginia
  (Ex officio)                         (Ex officio)
                      Majority Professional Staff
                            Bettilou Taylor

                      Minority Professional Staff
                              Marsha Simon

                         Administrative Support
                   Jim Sourwine and Jennifer Stiefel

                            C O N T E N T S

Opening remarks of Senator Specter...............................     1
Opening remarks of Senator Edward M. Kennedy.....................     2
    Prepared statement...........................................     3
Source of coverage...............................................     3
Opening remarks of Senator Lauch Faircloth.......................     3
Prepared statement of Hon. Tom Harkin, U.S. Senator from Iowa....     4
Statement of Olena Berg, Assistant Secretary, Pension and Welfare 
  Benefits Administration, Department of Labor...................     5
    Prepared statement...........................................     7
Statement of Robert Gallagher, Principal, Groom & Nordberg, 
  Chartered, on behalf of the Association of Private Pension and 
  Welfare Plans [APPWP] the Benefits Association.................    14
    Prepared statement...........................................    16
Statement of Ronald F. Pollack, executive director, Families USA.    21
    Prepared statement...........................................    23
Statement of Mark A. Smith, Employees Benefits Compliance 
  Manager, AMP Inc., on behalf of the National Association of 
  Manufactures...................................................    27
    Prepared statement...........................................    29
Common law rights of action......................................    37



                         THURSDAY, MAY 14, 1998

                           U.S. Senate,    
    Subcommittee on Labor, Health and Human
     Services, and Education, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 12:35 p.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Arlen Specter (chairman) 
    Present: Senators Specter and Faircloth.
    Also present: Senators Kennedy and Durbin.

                          DEPARTMENT OF LABOR

              Pension and Welfare Benefits Administration



    Senator Specter. The subcommittee on Labor, Health and 
Human Services, and Education, will now proceed with this 
hearing concerning the ERISA preemption of remedies on health 
care claims. We hear a lot about ERISA. It is the Employee 
Retirement Income Security Act of 1974, which has created a 
comprehensive Federal approach, dealing with the rights of 
employees in welfare benefit plans offered by employers.
    The Congress has preempted all State laws that, quote, 
``relate to any employee benefit plan.'' And as a consequence 
of that provision, patients are prevented from suing employer-
sponsored health insurance plans if injury occurs as a result 
of any improperly denied or delayed health coverage. The issue 
has created quite a lot of controversy. It is a matter which is 
frequently raised in the open-house town meetings that I 
conduct in my State. There is a real concern that if there is a 
modification of this provision, the costs will rise very 
substantially for health care premiums--some estimates being as 
high as 8 or 9 percent.
    The use of the managed care plans has risen tremendously. 
In 1984, only 5 percent of the employees were covered by 
managed care. More recently, that figure has increased to as 
much as 80 percent of the employees in the United States.
    The Congress has moved ahead with a number of measures on 
the so-called micromanagement. When the issue of drive-by 
deliveries came up, the Congress acted, to require that 
patients stay in the hospital for at least 48 hours. There are 
provisions up for drive-by mastectomies. Once one of these 
provisions reaches the floor of the U.S. Senate or the U.S. 
House, it is very hard to see those measures voted against. But 
it is obviously undesirable to have micromanagement by the 
    We have seen areas of major concern on the so-called gag 
rule. We have seen major concern on capitation on the issue of 
referral by the general practitioner to specialists. There are 
issues of more disclosure being necessary, appellate rights and 
these are issues which are very much in the forefront in the 
Congress today, with several health care plans being pending.
    We have a very distinguished panel today. And let me yield 
for a brief opening statement by Senator Kennedy, who has asked 
for leave to sit with the subcommittee today. He has been a 
leader in health care over the years.
    Senator Kennedy, welcome.


    Senator Kennedy. Thank you, Mr. Chairman. And I just want 
to thank Senator Specter for having the hearings. I hope we are 
able to hear the hearings as we go on through the course of 
this hearing. But I do want to express appreciation, because 
this is an issue of enormous importance.
    And no matter where different parties come out on the 
questions of a Patients' Bill of Rights or other kinds of 
related issues, this one is something that is of enormous 
importance and consequence in and of itself. And we have 
panelists here to help us. And we have not had really the kinds 
of hearings that we are having there that can really benefit us 
in the Senate.
    So, I thank the Senator for extending the courtesy. I 
basically had indicated that I just welcome the chance to 
listen to our witnesses here this morning, and I am grateful to 
him. He has outlined the basic challenges that we are faced 
with. We have really, as he pointed out, a changed situation in 
our Nation. And we have 123 million Americans that are covered 
by some employer kind of related coverage and health insurance 
programs, and they are treated one way. We have State and local 
employees--millions of those--almost 20 million--that are 
treated a different way. We have individuals who have 
individual plans, and they are treated differently.
    And the real kind of question is, how are we going to best 
protect the consumer? And how are we going to, with these 
changed conditions, in terms of the managed care, how are we 
best going to protect the consumer?

                           prepared statement

    And we are looking forward to hearing from our panelists 
here today on their observations and their recommendations.
    I am very grateful to the chair. I would like to put my 
full statement in the record.
    Senator Specter. Without objection, it will be placed in 
the record.
    [The statement follows:]
                 Statement of Senator Edward M. Kennedy
    I commend Senator Specter for holding this hearing and for his 
leadership on this important issue, and I'm grateful for the 
opportunity to participate in this hearing.
    Too often today, because of ERISA preemption, unscrupulous health 
insurance plans have a license to maim and kill.
    Under the Employee Retirement and Income Security Act, patients 
whose lives have been devastated or destroyed by the reckless behavior 
of their health plan are denied the right to go to court to obtain 
reasonable remedies under state law. ERISA ``preempts'' all state 
    Patients are limited to the narrow Federal remedy, which covers 
only the cost of the procedure that the plan refused to pay for. Some 
remedy! You can be crippled for life because your health plan refused 
to authorize a test costing a few hundred dollars--and all you can 
recover is the cost of the test.
    The denial of fair remedies is indefensible. It's an incentive for 
unscrupulous plans to deny payment for costly services, knowing they 
can't be held liable for the serious injuries that result.
    Persons who are injured by such willful or negligent acts deserve a 
remedy. If they are seriously injured, they may have no other way to 
obtain the financial help they need to care for themselves or provide 
for their families for the rest of their lives.
    ERISA preemption applies to millions of Americans who obtain their 
health insurance coverage through a private employer. But it does not 
apply to 23 million State and local employees and their families. It 
does not apply to people who buy insurance on their own, rather than 
through an employer. It does not apply to Medicaid patients. It does 
not apply to Medicare patients enrolled in private health plans. These 
patients already have appropriate remedies under current law, and so 
should every other patient.
    If state and local government employees have the right to hold 
their taxpayer-financed health plans accountable, equally hard-working 
Americans employed by private companies should have the same basic 
    Every other industry in America can be held responsible for its 
actions. Health plan decisions can truly mean life or death, and they 
do not deserve immunity.
    The Patients' Bill of Rights legislation that many of us support 
will guarantee this right as well as provide a number of other 
critically important protections for patients against abusive behavior 
by health plans. It has been endorsed by more than 100 organizations 
representing doctors, nurses, and patients, and it deserves to be 
endorsed by the Senate. This hearing is an important step toward doing 
so, and I look forward to the comments of our witnesses.

                           source of coverage

    Senator Specter. Before turning to Senator Faircloth for an 
opening statement, I would call attention to the two charts 
which our very able staff has prepared, showing the source of 
coverage. On average, there is about 125 million people who 
receive their health insurance coverage through employers' base 
plans. As I stated earlier, 5 percent of those who received 
health insurance in 1984 were on these plans. But by 1997, more 
than 80 percent of employees had shifted to the HMO, away from 
fee-for-service medicine, into managed care.
    There is always some competitive force around here, and we 
are going to try to get the drilling stopped. But, in the 
interim, we want to proceed with the very distinguished panel 
which we have today. The lights will be for 5 minutes, with the 
yellow signifying 1 minute.
    Before doing that, I turn to my very distinguished 
colleague from North Carolina, Senator Faircloth.


    Senator  Faircloth. Thank you, Mr. Chairman.
    I'm pleased to be here to address the very serious problem 
people are facing today regarding the denial or delay of health 
benefits. Health insurance plans are supposed to provide 
security to workers and their families in the event of illness 
or injury. But as more companies become self-insured or adopt 
managed care, I've been hearing from more people, constituents 
in North Carolina, who are unhappy with their care.
    This seems to be caused by the different ways traditional 
fee-for-service and managed care plans provide care. Under fee-
for-service, treatment is provided up front and payment issues 
are dealt with later. Most managed care plans require coverage 
decisions to be made before care is given. The focus becomes 
cost, not care.
    I can understand the concern when people feel they or a 
loved one needs care and faces a delay as the HMO decides to 
respond--well, I'd be upset too. I feel deeply for people who 
are denied basic rights, like access to specialists and 
emergency room care. I support the consumer protection and 
quality provision in the patients' bill of rights. I also agree 
with doctors who say they should not be held accountable for 
medical decisions they have not made which have been imposed by 
a plan. But I cannot in good conscience, support any approach 
that results in more litigation which drives up health costs.
    I see that one of our witnesses today is a trial lawyer, 
and well versed in this dynamic. In his testimony, he will talk 
about the chilling effect of litigation. He lays it all out--
expanded lawsuits cause increased costs to the insurance and 
managed care company and employers. They pass this cost along, 
and my constituents pay more for health insurance. They pay 
enough already, I don't want to see them have to pay more.
    After careful consideration, I decided to cosponsor a bill 
known as QUEST, which meets 7 of the 11 elements the AMA say 
they need. QUEST enhances protection for patients by improving 
internal claims and appeals review, and requiring external 
reviews. But QUEST does not reach self-insured companies, which 
cover many of these lives. So, I am pleased to hear that the 
administration will now use a similar approach to better 
provide patient protection for ERISA plans. And I am delighted 
that they have decided to make these improvements in the name 
of decreased litigation.
    Thank you, Mr. Chairman.
    Senator Specter. Thank you very much, Senator Faircloth.

                prepared statement of senator tom harkin

    We have received a prepared statement from Senator Harkin, 
it will be inserted into the record at this point.
    [The statement follows:]

                Prepared Statement of Senator Tom Harkin

    Thank you, Mr. Chairman, for holding this important hearing 
on federal law regarding ERISA self-insured health plans and 
its effect on consumers' ability to seek redress for denied or 
delayed health claims. And I am happy to welcome Senator 
Kennedy here with us this afternoon. He has shown tremendous 
leadership on this subject.
    This is an issue of increasing concern to millions of 
Americans throughout our country; 146 million Americans get 
their insurance through their employer. Of that number, 123 
million people--roughly half the nation--are in self insured 
plans regulated by ERISA, and have very limited legal remedy if 
their treatment is denied by their HMO.
    As increasing numbers of employers are turning to managed 
care as a cost-efficient way to provide health benefits to 
their employees, it is vital that Congress examine the possible 
problems presented by ERISA.
    I am pleased to say that I have cosponsored Senator Daschle 
and Senator Kennedy's bill, ``The Patients' Bill of Rights.'' 
This consumer protection bill would provide Americans with a 
fundamental set of health care rights. It is a good, fair bill 
and I believe the Senate should take it up for consideration 
without delay.
    Included in this bill is a provision that amends ERISA so 
that the States are allowed to determine whether or not a 
beneficiary can bring a state cause of action against health 
plan administrators who cause harm through their decisions.
    Our legal system is based on the principle that individuals 
and companies are responsible for the decisions they make or 
the actions they take. If a health maintenance organization 
makes a decision to improperly delay or deny care that results 
in harm to a patient, that organization ought be held 
accountable for their decision. Today, too often that is not 
    In my own State of Iowa, Randy and Nancy Davis brought suit 
against their employer and their group health plan on behalf of 
their daughter Wendy, a child with Down's Syndrome. Randy Davis 
was employed by the Ottumwa YMCA. One of the benefits of the 
job was group health insurance, which was critical to the Davis 
family because of Wendy's condition. When Wendy needed medical 
treatment, their health plan denied their coverage on the 
grounds that the YMCA had allowed their policy to lapse. This 
left the Davis family without any coverage. The Davises sued, 
but the court would not hear their case--their claim was 
preempted because of ERISA.
    But if the Davises had been State or local employees 
covered by their employer, or if they had purchased individual 
insurance directly from the insurer, they could have sued under 
State law and the court would have considered the case. But the 
Davises are among a fast growing majority--approximately 80 
percent of Americans--that do not have such an option.
    This case and numerous others demonstrate the need for us 
to re-examine certain aspects of ERISA. Twenty-four years ago, 
ERISA was enacted to protect the pension and welfare benefits 
of employees, while at the same time helping employers avoid 
costly regulatory requirements and legal impediments. But 24 
years ago, the vast majority of Americans were covered through 
traditional fee-for-service plans. When a patient sought care, 
he or she usually received it, and then was reimbursed by the 
insurer. Today, however, managed care has fundamentally changed 
the delivery of health care in this country. Patients are too 
often not assured they will get the care they need because of 
cost cutting efforts.
    When a company is in the business of deciding what medical 
treatment is necessary, I believe they are making medical 
decisions. And they should be held accountable for those 
decisions. ERISA should reflect that.
    A judge from Massachusetts, after dismissing a case because 
ERISA preempted the claim, states, ``This case, thus, becomes 
yet another illustration of the glaring need for Congress to 
amend ERISA to account for the changing realities of the modern 
health care system. Enacted to safeguard the interests of 
employees and their beneficiaries, ERISA has evolved into a 
shield of immunity that protects health insurers, utilization 
review providers, and other managed care entities from 
potential liability for the consequences of their wrongful 
denial of health benefits.''
    I think we all would do well to heed this judge's advice.
    Thank you.

                  summary statement of hon. olena berg

    Senator Specter. Our first witness is Ms. Olena Berg, now 
serving in her fifth year as Assistant Secretary for the United 
States Department of Labor's Pension and Welfare Benefits 
Administration. She had been chief deputy treasurer in 
California, and had been executive vice president of Lowe 
Associates in Los Angeles.
    We are still trying to stop the noise, Ms. Berg, but if you 
would proceed at this time as best you can.
    Ms. Berg. Well, thank you, Chairman Specter and members. I 
appreciate your inviting me here today to speak to you about 
ERISA preemption. The administration is absolutely committed to 
improving consumer protections by making real the Presidential 
Commission's Consumer Bill of Rights, and ensuring that its 
protections are enforced. Bipartisan legislation has been 
introduced in this Congress to implement the bill of rights. 
These bills have momentum, and Congress should act now to put 
these protections in place.
    As you know, many of these bills do address the issue of 
remedies. It is crucial that consumers be able to obtain 
adequate redress when they are injured by the wrongful delay or 
denial of a health benefit claim. But ERISA currently only 
provides for the benefit the individual should have received to 
begin with. No additional medical costs, no other compensation 
is available. Consumers in ERISA plans do not have adequate 
    And this is a problem. Because as you have already pointed 
out, ERISA covers approximately 125 million Americans.
    This law was enacted in 1974, primarily to address abuses 
in the private sector pension plans. And as a result, it 
included only limited protections for participants in health 
plans. In addition, two key changes have occurred since ERISA 
was enacted that have resulted in the statute not providing for 
adequate remedies.
    The first, again, has already been pointed out, the immense 
growth in managed care arrangements. In traditional fee-for-
service medicine, you got the treatment up front and people 
argued afterward how the payment would be divided. Now, in 
managed care arrangements, coverage decisions are made before 
the medical treatment is provided. And so today, the improper 
denial of a claim to which someone is entitled means they will 
not get the treatment to which they are entitled.
    Second, ERISA preemption has blocked the application of 
State protections in health care claims involving ERISA plans. 
In 1987, the Supreme Court held that ERISA occupied the entire 
field of remedies for its participants, precluding the States 
from providing any different or additional protections. The 
limited remedies in ERISA applied both to self-insured plans 
and to the fully-insured plans that would otherwise be subject 
to State regulation.
    This is why legislation is now needed to ensure that ERISA 
serves the purpose for which it was enacted in the first place. 
And that is to protect promised benefits.
    It is also important to note that participants in many 
health care plans not governed by ERISA have stronger 
protections. Consumers who purchase individual insurance 
policies directly from an insurer or an HMO, State and local 
government employees, participants in Medicare and Medicaid all 
can sue under State law for wrongful denial of a benefit. 
Unlike ERISA participants, not only can they receive the 
benefit and attorney's fees, but also the cost of additional 
care, lost wages, and other damages, as well.
    The protections we have should not depend on the type of 
plan we have.
    Let me briefly illustrate the problem with ERISA with an 
example. Let us assume an ERISA plan participant goes to her 
HMO doctor complaining of severe and persistent headaches, and 
the doctor determines that she needs a CAT scan. But that test 
has to be approved by a utilization review panel. And let us 
assume that they wrongfully deny her that test. And as a 
result, a treatable condition that she has goes undiagnosed and 
untreated. That condition causes her to become permanently 
    If she goes to court under ERISA and if she is successful, 
her remedy will be the cost of the test that she should have 
had in the first place.
    Now, as I point out in my written testimony, we believe 
that a solution to the problem of wrongful claims denial has 
three components. First, strengthening internal claims reviews. 
Second, requiring independent external review. And, finally, 
    Some would argue that only the first two are necessary. We 
disagree. First, a strengthened grievance procedure will not be 
effective 100 percent of the time, no matter how good it is, 
and wrong decisions will still cause damage. In those cases, 
individuals should be able to be compensated.
    Second, plans can comply with procedural requirements, they 
can meet all of those, and still arbitrarily deny claims. Now, 
external review might take care of a large part of that, but 
many participants, we know, never question that initial 
determination. They never go into the appeals process. They 
just assume that that determination was properly made.
    And if at the end of the day the only consequence for plans 
that engage in this kind of practice, just arbitrarily denying 
things, is paying the benefit that they would have had to pay 
in the first place, they have no reason to do the right thing 
and strong economic reasons for denying valid claims. Only in 
combination will internal reviews, external reviews and 
improved remedies secure consumers' rights to their benefits.
    These reforms provide plans with both the mechanisms and 
the incentives to treat consumers fairly from the start. There 
are a number of ways to provide remedies and accountability. In 
the interest of time, I will not outline them for you, but I 
refer you to my written testimony.

                           prepared statement

    We look forward to working with you, to sign into law 
bipartisan legislation that will improve consumer protections 
and provide remedies under ERISA. I applaud your willingness to 
look at this issue, and thank you for the opportunity to be 
here today. I am happy to answer any questions you may have. 
Thank you.
    Senator Specter. Thank you very much, Ms. Berg, for your 
testimony. All written statements will, as customary, be made 
part of the record.
    [The statement follows:]
                    Prepared Statement of Olena Berg
    Chairman Specter and Members of the Subcommittee, thank you for 
inviting me to speak with you this morning about ERISA preemption and 
its impact on consumer remedies for improper delay and denial of health 
benefit claims. We appreciate the leadership of the Chairman, Ranking 
Member, and other Committee members in holding this hearing to address 
ways to restore the public's confidence in America's health care system 
by implementing enforceable consumer protections.
    As Assistant Secretary of the Pension and Welfare Benefits 
Administration (PWBA), I direct the agency that administers the 
Employee Retirement Income Security Act (ERISA), the primary federal 
statute governing employment-based health plans. As you know, the 
President's Advisory Commission on Consumer Protection and Quality in 
the Health Care Industry, co-chaired by the Secretaries of Labor and 
Health and Human Services, last fall issued a Consumer Bill of Rights 
and Responsibilities. This approach recognizes that consumer 
protections and health care quality are each essential to the other. 
The President embraced the Bill of Rights and called on Congress to 
pass bipartisan legislation this session.
    The Administration is strongly committed to improving consumer 
protections and the quality of health care in the employment-based 
system, including improved internal claims review procedures and 
external review. We are also committed to ensuring that these 
protections are enforceable. We recognize the fundamental problem 
regarding ERISA remedies best characterized by Judge Young in his 
opinion in Andrews-Clarke v. Travelers Insurance Company. Judge Young 
stated that, although ERISA was ``[e]nacted to safeguard the interests 
of employees and their beneficiaries, [it] has evolved into a shield of 
immunity that protects health insurers, utilization review providers 
and other managed care entities from potential liability for the 
consequences of their wrongful denial of health benefits.'' Judge Young 
noted the, ``glaring need for Congress to amend ERISA to account for 
the changing realities of the modern health care system.''
    At the heart of the opinion in the Andrews-Clarke case is the 
matter before us today. When an individual suffers harm due to the 
wrongful delay or denial of a claim for promised health benefits, ERISA 
only provides for the benefit that the individual should have received 
to begin with; no additional medical costs or other compensation is 
                           overview of erisa
    This issue is so important because of the simple fact that most 
workers and their families receive their health care through ERISA-
covered plans. ERISA covers over 2.5 million private sector health 
plans which provide health benefits to 125 million people. These plans 
are either provided by employers, or are jointly trusteed ``Taft-
Hartley'' plans negotiated by unions with groups of employers.
    The employment-based health care system regulated by ERISA is a 
voluntary system. While we in PWBA enforce ERISA's provisions, we do 
not certify, accredit, or approve plans. ERISA represents an effort to 
adequately protect the health benefits promised to individuals while 
avoiding overly burdensome or costly requirements that might discourage 
employers from offering, or employees from enrolling in, plans.
    In providing health benefits, employers and employees can either 
contribute to the purchase of third party insurance or provide health 
benefits directly themselves. Thus, ``fully-insured plans'' are plans 
that pay a premium or per capita payment to a third party to insure the 
health benefits offered to employees. ``Self-insured plans,'' also 
called ``self-funded'' plans, are ones in which the plan sponsor agrees 
to be primarily liable for the provision of promised health benefits to 
                          the erisa framework
    In order to understand the purpose and operation of ERISA, it may 
be helpful to briefly review the history of this legislation. ERISA was 
enacted in 1974 primarily to address abuses in private sector pension 
plans. Hearings in the 1960's and 1970's revealed that large numbers of 
working people were losing their pension benefits because of: 
underfunding, long vesting periods, and plain ``garden variety'' 
pension fraud and mismanagement. These problems were compounded by a 
lack of adequate reporting and disclosure either to the government or 
to participants of the status of their pension benefits. These problems 
were serious enough that many States had either passed, or were 
considering passing, statutes regulating pension plans. This posed an 
additional problem: plan sponsors that wished to offer their 
participants uniform benefits but that operated in more than one State 
would have to cope with myriad and possibly conflicting State 
    ERISA dealt with these problems with respect to pension plans by 
providing detailed minimum standards for participation, vesting and 
funding of the plans, and uniform reporting, disclosure and fiduciary 
requirements. ERISA also provided uniformity by preempting all State 
laws relating to any ERISA-covered employee benefit plan.
    However, while ERISA provides uniform reporting, disclosure and 
fiduciary standards for health plans, there is no substantive 
regulation of health plans under ERISA that is comparable to the 
participation, vesting, and funding requirements for pension plans.
    When ERISA was enacted in 1974, most people received health 
insurance coverage through insurance contracts which were regulated by 
States. Since there was a general consensus that States could and 
should regulate insurance contracts, they were carved out of ERISA's 
general preemption of State law by the so-called ``savings clause.'' 
Because of this structure, insurance contracts purchased by employment-
based health plans are generally regulated by States, while self-
insured plans are not. That may not have been much of an issue in 1976, 
when only 4 percent of health benefits were paid under self-insured 
plans. Today, however, for a variety of reasons, about 40 percent of 
workers with private employment-based health benefits are covered under 
self-insured plans.
    It may appear that I have drawn a simple line to help you 
understand the ERISA framework: self-insured plans are generally 
regulated federally by ERISA while plans that purchase insured products 
accept the State regulations that apply to the product they purchase. 
Unfortunately, because of the scope of ERISA's preemption clause and a 
series of court decisions, things are not quite that simple.
                       scope of erisa preemption
    I have to qualify my comments by noting that the extent and the 
limits of ERISA preemption are far from clear. To date, the U.S. 
Supreme Court has issued 16 decisions on how preemption should be 
applied. Other issues are confused by conflicting decisions by the 
lower courts. Nevertheless, I will venture toward some tentative 
conclusions that I hope will help.
    One, States laws governing the solvency of insurers or mandating 
that health insurance policies cover certain types of care are not 
preempted, because of the savings clause, as laws regulating insurance 
are not preempted. However, these same laws may not be applied to self-
funded plans.
    Two, State laws that allow participants to sue plans for failing to 
follow certain procedures in denying and reviewing benefit claims, and 
providing that a participant may obtain compensatory damages for 
abusive processing of such claims are preempted, even if the claimed 
defect is a violation of a State law regulating insurance. The Supreme 
Court, in the Pilot Life decision, held that ERISA preempts an 
employee's State common law breach of contract and tort action against 
an insurance company for improper claims processing. Although the court 
ruled that the employee's action was not saved from preemption by 
ERISA's ``insurance savings clause,'' it also noted that ERISA's 
remedies for plan participants to enforce claims for benefits displaced 
State laws conferring similar causes of action. The Supreme Court said, 
in effect, that ERISA occupied the entire field of remedies for ERISA 
plans, precluding the States from providing any different or additional 
remedies. State laws that provide for external review of claims denials 
may also be preempted by ERISA. This issue has never been decided by 
the courts. To the extent that State insurance laws prohibiting 
insurance companies from engaging in unfair claims practices are 
enforced by State agencies, such claims may survive ERISA preemption as 
applied to fully-insured plans. However, the courts have never 
addressed this issue.
    Three, there have been cases where a Health Maintenance 
Organization (HMO) will attempt to use ERISA preemption to protect 
itself from such liability. The Department has successfully argued in a 
number of amicus briefs that State laws holding physicians and those 
that contract for their services liable for medical malpractice in 
connection with treatment decisions are not preempted, even if the 
physician provides services to ERISA plan participants. We have opined 
that State medical malpractice laws do not relate to ERISA plans. 
Instead, State malpractice laws, regulate medical treatment without 
regard to how it is paid for. On the other hand, if treatment is denied 
or delayed through wrong or slow decisions, based solely on what is or 
is not covered by the plan, State laws cannot address this problem. If 
a State attempts to regulate the payment of claims, including refusals 
to preauthorize medically necessary care, such a law will likely be 
preempted with respect to ERISA plans, whether insured or self-insured.
    As a result of ERISA's remedial framework and the interpretation of 
its preemption provisions, the States are limited in their ability to 
protect the rights of participants in all ERISA-covered plans.
    In addition, the absence of more stringent accountability for ERISA 
plans has become especially problematic for ERISA plan participants in 
the past decade due to the dramatic increase of managed care 
arrangements. According to various data sources, enrollment in managed 
care grew from approximately 1 percent to 81 percent of total health 
plan enrollment among medium to large size employers between 1980 and 
1997. Most smaller businesses have embraced managed care as well. 
Managed care plans raise questions of regulation and legal remedies 
that were not anticipated when ERISA was enacted in 1974. Unlike the 
traditional fee-for-service environment where treatment is provided up 
front and payment issues are dealt with later, most managed care 
arrangements require coverage decisions to be made before most medical 
services are provided. Today, denying a request for medical coverage 
can do more than force the patient to pay for the care herself. In all 
too many cases, delay or denial of plan benefits can even lead to a 
failure to obtain necessary treatment. This makes the timeliness and 
accuracy of these decisions more significant, and the availability of 
adequate procedural protections and remedies even more important.
    The consequence of all of these developments is that ERISA does not 
adequately provide for the essential consumer protections listed in the 
Commission's Consumer Bill of Rights. As a result, legislation is 
needed to implement these protections in ERISA-covered plans and 
provide a mechanism for the enforcement of these protections.
                broader remedies are available elsewhere
    In its final report, the President's Commission noted that, 
``consumers can be injured as a result of an inappropriate decision to 
deny insurance coverage for services that are medically necessary and 
covered by the plan. In some cases such decisions can lead to a delay 
in care or to a decision to forgo care entirely.'' Plainly, ERISA's 
current enforcement mechanism has proved insufficient to safeguard 
consumers' health care benefits. Participants in many health care plans 
not governed by ERISA enjoy stronger protections. To illustrate this 
point more clearly, consider the experiences of two hypothetical 
individuals: ``Bob'' and ``Mary.''
    If Bob bought an individual policy directly from an insurer or HMO, 
or if he is a State or local government employee covered by his 
employer's plan, chances are he can sue the insurer, HMO, or plan under 
State law for wrongful denial of a promised benefit. The State court 
will examine the dispute anew, considering all available facts. If Bob 
wins, remedies are available which, depending on Bob's losses and the 
laws in his State, can include the benefit that should have been paid, 
the cost of otherwise uncovered additional care, attorney's fees and 
other legal costs, lost wages and other financial losses, compensation 
for injury or wrongful death, compensation for pain and suffering, and, 
possibly, punitive damages.
    If Mary, Bob's neighbor, is insured as a private sector employee, 
her remedy for wrongful delay or denial of a promised benefit is 
determined not by State law, but by ERISA, which preempts State 
remedies. Mary generally can sue only in federal court. The court will 
likely consider only facts considered already by the person who denied 
coverage, and will defer to that person's judgment unless it is shown 
to be unreasonable. What's more, if she wins, she can recover only the 
benefit that should have been paid and, at the court's discretion, 
possibly attorney's fees.
    The inability of consumers to recover additional remedies is best 
illustrated by the real life story of Madison Scott as reported by NBC 
Nightly News. When Madison Scott was born prematurely with correctable 
retinopathy, her parents allege that the HMO delayed a key test 8 
weeks. Today the two-year-old is blind. Unfortunately, under ERISA, her 
HMO is not liable for the harm that occurred if the coverage was 
delayed. Moreover, Mr. and Mrs. Scott cannot recover the additional 
costs they will need to provide special care for Madison. We believe 
that the Madison Scott's of this world deserve their day in court, with 
a court determining the facts of the case, and with remedies adequate 
to address the injury, if any, that was suffered as a result of the 
alleged delay.
    Today in America, there are 125 million people who are enrolled in 
ERISA-covered health plans and, like Madison and our hypothetical Mary, 
are, therefore, unprotected by adequate remedies. There are roughly 60 
million individuals, like our hypothetical Bob who are protected by 
stronger State law remedies. This varied treatment depending upon which 
law governs your particular health benefit plan is unjustifiable.
    There is growing evidence of the consequences of ERISA's limited 
remedies. In fact, delay or denial of coverage is the most commonly 
stated health insurance problem, reported by 11 percent of managed care 
enrollees in a survey for the Kaiser Family Foundation and others. 
Delays and denials suffered by Kaiser survey respondents resulted in 
claims of serious harm:
  --24 percent said they were physically injured;
  --3 percent were permanently disabled;
  --26 percent lost school or work time, while 9 percent lost more than 
        10 days; and
  --41 percent suffered financial losses.
    Furthermore, our legal system is premised on the basic principle 
that individuals and organizations must be responsible and accountable 
for actions that cause injury to others. Where an entity fails to 
deliver what it promises, or negligently provides a service or product, 
and this failure results in injury to a consumer, that consumer must be 
compensated for the injury.
    Ironically, I have more consumer protections and remedies available 
when I buy a car, a toy for my child, or use my credit card. If I walk 
into my neighborhood grocery store, and due to a dangerous condition 
inadvertently created by store employees, I slip, fall, and injure 
myself, our legal system allows me to have legal recourse against the 
store to seek compensation for my injuries. If my pharmacist mistakenly 
gives me the wrong medication, and I am injured as a result, I also can 
seek to obtain relief from the pharmacist or the company that employs 
her. If I buy a car or any other product, I rely on the expertise of 
the manufacturer to make sure that the product is safe and free of 
defects. If I am injured due to a defect in the product, the product 
manufacturer can be held accountable for damages under our legal system 
to reasonably compensate me for my injury. By the same token, when I 
receive health care benefits, I rely on the expertise of plan 
administrators to make the correct coverage decision in a timely 
manner. Under ERISA, however, if I am injured because such decisions 
are not made correctly or are unreasonably delayed, our legal system 
does not hold the plan accountable. I cannot receive any damages beyond 
the benefit itself. There is no reason why we should treat health care 
differently than we treat other consumer products or services.
                   remedies as procedural protection
    Several health care consumer protection bills pending in this 
Congress would enact strong procedural protections to protect 
participant health benefits. Some of the bills include improved 
internal plan claims review, impartial external review, and enhanced 
remedies. The theory behind this arrangement is that these three 
elements working together can assure accountability, better health care 
delivery, and may result in less, not more, litigation of these issues.
    ERISA's current provisions regarding internal claims review have 
become inadequate to protect the rights of ERISA plan participants in 
today's managed care environment. For this reason, the Department will 
be proposing amendments to the current claims review regulation in the 
near future to require fairer and more expeditious handling of benefit 
claims and appeals through plans' internal claims procedures. The 
Department will propose faster processing of routine and urgent benefit 
claims and appeals, require consultation with medical professionals in 
deciding appeals involving medical judgments, and require that appeal 
decisions consider all relevant information and be rendered by a party 
other than the party who made the original claims determination, among 
other provisions. Clearly, effective and appropriate regulation in this 
area should not lock in yesterday's standards, but should be part of a 
framework in which plans can adapt to future needs. Consumer 
protections tailored to accommodate group plans' variety can advance 
patients' rights while nurturing innovations that improve quality, 
choice, and affordability for group plan enrollees.
    Independent external review is also an important component to 
provide accountability. ERISA currently provides no authority for 
requiring an independent system of external review. As a result, 
legislation is needed to amend ERISA and provide for this requirement. 
An impartial, speedy, expert review by an entity external to the health 
plan is essential to securing participants' right to covered benefits. 
The more claims that can be resolved at an earlier stage of the process 
through internal or external review the less likely it will be that 
participants will be injured by the wrongful delay or denial of health 
claims. An improved internal claims review coupled with an independent 
system of external review will go a long way toward resolving improper 
delay or denial of claims before an injury occurs, reducing the need 
for litigation.
    However, adding these enhanced procedural protections on the front 
end do not eliminate the need for improved remedies. Procedural rights, 
even when honored, cannot eliminate negligent or self-interested 
decision making by those determining whether claimed coverage has been 
promised by the plan. Some cases will involve only disputes about the 
availability of a benefit, and, if promptly resolved, no consequential 
harm will result. However, other wrongful decisions, even if ultimately 
corrected by some newly created administrative tribunal or by the 
courts will, some percentage of the time, cause injury before they are 
corrected. In some cases, the relief necessary to repair the injury 
will be easily defined and relatively minimal. For these cases, we 
should be looking for speedy, economical, and fair means of dispute 
resolution. As the seriousness of the health and economic harm 
increases, more substantial remedies should be available from 
traditional court proceedings.
    In other contexts throughout our legal system, foreseeable injuries 
caused by a failure to deliver what has been promised must be 
compensated. Under ERISA, however, working men and women give their 
labor in exchange for the promise of benefits, but are not compensated 
for injuries when benefits are wrongly withheld. Under this system, an 
insurance company or HMO may stubbornly refuse to provide what is 
promised in the hope that the worker will not finance a court battle, 
and even if she does, years of litigation will produce no more than an 
order to provide the withheld benefits.
    How else to explain Bedrick v. Travelers Ins. Co.? There the Fourth 
Circuit Court of Appeals determined that Travelers had withheld 
desperately needed physical therapy from a severely handicapped child 
on the grounds that the therapy was not medically necessary since it 
would only prevent further deterioration in the child's condition, but 
could not cure him. Would Travelers have engaged in a long and costly 
court battle to oppose the therapy, if it knew that it might be 
responsible for the consequences of the delayed treatment? Under our 
present system, the litigation, premised on a defense that the court 
found ``revolting,'' made economic sense for Travelers. If the child's 
family could not finance the physical therapy while the litigation 
remained pending, every week spent in court was a week during which 
Travelers did not have to pay for on-going therapy. While the 
discussion about what types of remedies are needed is a legitimate one, 
without additional remedies, our system produces perverse results.
    The absence of remedies produces another perverse result that 
additional procedural protections cannot prevent. As our system is 
currently constituted there is no disincentive to applying harsh and 
arbitrary guidelines for the initial denial of care. To litigate a 
claim's denial requires significant resources, and some percentage of 
claimants can be counted on to give up without pursuing their claim. 
While we are aware of no studies, advocates for claimants have reported 
to us an astonishing rate of success in getting decisions overturned 
prior to, or immediately after, filing litigation. Attorney's fees for 
pre-suit work are borne by the claimant. The current system lacks 
incentives to assure that the initial claims determination is fair, 
since the wrongly denied claimant who is injured can never seek 
compensation for injury while his case is pending, and the discouraged 
participant with a meritorious claim represents pure savings to the 
managed care entity. A system which delays justice until an internal 
appeal or even a threat of litigation saves the managed care entity 
money. Thus, under our current system, there is a strong financial 
incentive to delay providing costly medical treatment.
    In the end, better internal review, and independent external review 
are necessary elements to consumer protection, but we must make sure 
that these procedural protections are properly enforced.
                              cost issues
    The cost implications of providing for additional remedies must be 
carefully evaluated. We are sensitive to this issue, and we realize 
that estimating the cost of additional remedies is difficult.
    We are aware that there are studies with conflicting results on the 
cost impact of additional remedies. The studies on the issue have 
focused on measuring the cost of an approach that would narrow ERISA 
preemption to allow consumers to sue a plan that wrongfully delayed or 
denied a promised health benefit under State law. Some of these studies 
have concluded that this State approach to providing additional 
remedies will increase premiums only marginally.
    The best evidence regarding cost impact exists in those markets 
where expanded remedies already exist. There is nothing in these 
markets to show that these remedies result in larger premium costs. For 
example, participants in group health plans covering State and local 
employees are outside ERISA and often have access to full State law 
remedies for injuries that result from improper delay and denial of 
benefit claims. Yet insurers and HMO's compete aggressively for State 
and local group business, and there is no evidence that insurers charge 
higher prices to these groups because of the greater liability exposure 
associated with them. Thus, it seems highly unlikely that the 
availability of additional remedies would force employers to retreat 
from offering health coverage.
    It is also important to note that we have yet to see any studies on 
the cost impact of simply adding additional remedies to ERISA, or any 
approach other than narrowing ERISA preemption to allow actions in 
State court. The State approach may be a good, viable option, but it is 
not the only one. As I will discuss later, there are several possible 
alternatives for providing additional remedies.
    We ask that you consider the two following points when faced with 
pessimistic assumptions about the cost implications of added remedies:
    First, as I stated previously, the cost of expanded remedies will 
be mitigated by the existence of better internal review as well as 
external review procedures. External review, particularly, should 
lessen the number and degree of injuries resulting from wrongful 
benefit determinations, by providing a means for benefit disputes to be 
resolved before an injury occurs. External review could also decrease 
the number of claims brought by individuals by ensuring access to a 
more inexpensive and timely means of resolving these disputes than 
litigation, and by increasing enrollee confidence generally.
    Second, this new incentive to make proper and timely claims 
decisions up front may reduce total health care costs by preventing the 
wrongful conduct and any resulting injury in the first place. For 
example, if a plan wrongfully denies an individual coverage for a 
mammogram, and that denial results in breast cancer going undetected, 
eventually someone, probably the plan, will have to pay for the 
additional costs associated with the resulting cancer treatment. The 
plan could have prevented this extra cost in the first place with the 
proper claims review decision.
                       perspectives on a solution
    In addition to evaluating the cost and coverage implications of 
additional legal remedies, Congress must decide how best to ensure that 
these additional remedies are available. There are several ways that 
Congress could provide additional remedies to fairly compensate injured 
consumers and hold plans accountable for their actions. Various pieces 
of bipartisan legislation have been introduced in this Congress 
suggesting alternative mechanisms to expand remedies for ERISA plan 
    One approach would be to narrow ERISA preemption to permit States 
to apply their existing substantive laws and remedies, as well as any 
newly enacted laws and remedies, to address the improper denial and 
delay of health benefit claims. This approach has been set out in 
varying forms in the following bills: the ``Patients' Bill of Rights 
Act of 1998'' (S. 1890/H.R. 3605) introduced by Senator Daschle and 
Representative Dingell; the ``Responsibility in Managed Care Act'' 
(H.R. 2960) intended to replace section 4 of the ``Patient Access to 
Responsible Care Act'' (S. 644/H.R. 1415) introduced by Senator D'Amato 
and Representative Norwood; and the ``Employee Health Insurance 
Accountability Act of 1997'' (S. 1136) introduced by Senator Durbin.
    The advantage of this approach is that it returns to the States the 
traditional role of overseeing health insurance issues. The States 
would be able to impose their standards for awarding damages under this 
approach. They would be able to award any type of damages, including 
compensatory damages, or limit damages. Another benefit of the State 
approach is that it would give ERISA plan participants the same 
opportunities for relief that are currently held by individual 
purchasers of insurance and employers of State and local government 
    A second approach, a form of which is applied by Representative 
Stark in his bill, the ``Managed Care Accountability Act of 1997,'' 
(H.R. 1749) would be to amend ERISA to incorporate additional remedies 
and other procedural protections for consumers. One possible option 
would be to make damages available for economic losses, such as the 
cost of care and lost wages, when an improper denial or delay in 
deciding health benefit claims. Non-economic damages such as pain and 
suffering, as well as punitive damages, could also be made available 
under specified circumstances.
    This approach could be combined with well-crafted other procedural 
protections that could also be added to ERISA such as changing the 
standard of review for claims review decisions. Currently, when courts 
review ERISA claims denials they are required to apply a standard of 
review that gives deference to the denial made at the plan level, 
unless it can be shown that the plan's decision was arbitrary and 
capricious. Often the review is limited to the information and 
documents considered in the initial claims denial. Under what is called 
a ``de novo'' standard of review, a court would be able to assess both 
the plaintiffs' and defendants' side equally and can evaluate evidence 
that was not before the internal claims review. Other procedural 
changes to the statute could include restrictions on the ability of 
plans to remove cases to federal court, and awarding reasonable 
attorney and expert fees to successful claimants.
    There are several advantages to this federal approach of adding 
enhanced remedies and procedural protections to ERISA. It would 
establish a uniform standard applicable to all ERISA plans as well as 
result in uniform federal precedent regarding claims denial cases. 
Also, it would not alter ERISA's present preemption scheme.
    These are just two of the many approaches that can be taken to 
address the remedies problem. Yet another approach would be to apply a 
standard that would overturn the decision in the Pilot Life case. Under 
this approach, a federal standard could be applied to self-insured 
plans, permitting State laws to apply to fully-insured plans. This 
approach would allow the States to fully enforce their laws, but would 
not subject self-funded plans to the diversity of State remedies. We 
are certain that there are other approaches to providing additional 
remedies. We are open to other ideas, and are eager to work with 
Congress to find a bi-partisan solution to this problem.
    Each of the approaches that we have discussed has its own set of 
advantages. One advantage common to all of these options is that they 
may ultimately lessen the need for increased government regulation of 
health benefit plans. The Department of Labor will never have the 
resources to effectively police the hundreds of millions of claims 
determinations made within ERISA plans. With additional remedies, 
participants are empowered to seek legal redress when appropriate 
without government involvement.
    The provision of health care benefits is an important tool that 
employers use to attract employees. Health insurance plans are designed 
to provide security to workers in the event of illness. There is no 
security, however, when plans can deny or delay covered benefits with 
impunity. This is, in fact, not a benefit at all but a burden on 
workers who are under the mistaken belief that their covered health 
benefits are assured.
    The implementation of the Commission's Consumer Bill of Rights will 
provide necessary protections for all Americans. We look forward to 
working with you to develop legislation to both pass a Consumer Bill of 
Rights, and to ensure that these protections are available under ERISA.

        Managed care growth--percent of employer plan enrollment
          Fiscal year             Percent      Fiscal year      Percent
1980...........................          2    1989...........         35
1981...........................          3    1990...........         41
1982...........................          4    1991...........         47
1983...........................          5    1992...........         56
1984...........................          5    1993...........         58
1985...........................         10    1994...........         65
1986...........................         14    1995...........         69
1987...........................         22    1996...........         74
1988...........................         29    1997...........         81
Notes: Includes, HMO, PPO, POS plans. Data for 1988-97 from KPMG Peat
  Marwick survey of employers with 200 plus employees. Data for 1980,
  1982, 1984, and 1986 from U.S. Bureau of Labor Statistics survey of
  medium and large private establishments. Data for 1981, 1983, 1985,
  and 1987 interpolated.

Source of coverage


Medicaid..........................................................    37
Medicare..........................................................    37
State-regulated (individual market)...............................    16
Federal employee plan.............................................     9
State and local government employee plans.........................    23
ERISA-regulated (private employee plans)..........................   123

Source: President's Advisory Commission on Consumer Protection and 
Quality in the Health Care Industry.
    Senator Specter. We turn now to Mr. Robert Gallagher, 
Executive at Groom & Nordberg, a Washington, DC, firm which 
specializes in employee benefits laws. He had served as Counsel 
for ERISA from 1976 through 1982. And while working at the 
Department of Labor, tried the first case by the Department 
under ERISA.
    Welcome, Mr. Gallagher, and we look forward to your 
    Mr. Gallagher. Thank you, Chairman Specter, Senators.
    I have been practicing exclusively in the ERISA for 22 
years. I have brought cases on behalf of participants and 
beneficiaries, employees, on behalf of benefit plans 
themselves, employer sponsors of plans, and companies engaged 
in providing services to health benefit plans. So, I have seen 
these issues from a number of perspectives.
    In my view, the proposals to limit ERISA preemption would 
be disastrous for health benefit plans. The proposals would be 
a major step backward in a national effort to provide the 
highest degree of quality health care for the largest number of 
people at a reasonable cost. The current system has made steady 
progress toward that goal. Under the current system, the labor 
market, and sometimes negotiations between employers and 
employee representatives, determine how much employees will be 
paid and what part of that compensation will go towards health 
    Under the current system, the plan sponsor, sometimes in 
negotiations with employee representatives, determine the plan 
design of the health benefit plan, what benefits will be 
covered. Every benefit cannot be covered.
    The typical restrictions for care, that it is not medically 
necessary or care that is experimental, are a result of that 
process of trying to put the dollars to the highest use; the 
greatest good for the greatest number.
    Repeal of preemption would turn the authority to make those 
plan design decisions--what benefits will be covered--take it 
away from the traditional employer or employee 
representatives--and turn it over to the State courts and to 
    The results of that would be several. There would be a lack 
of uniformity in decisions, where plans would have to apply the 
same rule and give it a different meaning in different 
jurisdictions. The same plan term could be interpreted 
differently in a dozen or more different States. That would 
defeat the principal objective of the preemption provisions of 
ERISA, enacted back in 1974--to provide uniformity in plan 
administration, for efficient plan administration.
    It would also introduce a far higher level of uncertainty 
among employees, employers, payors, of what benefits would be 
covered under plans.
    What it would do really is turn what is now a system for 
the rational allocation of available resources into basically a 
lottery, where a few people--principally plaintiffs' lawyers--
would get large judgments and attorneys' fees, and that much 
money would be taken out of the system available to provide 
benefits to others.
    For example, in a recent case in California, involving a 
bone marrow transplant, a common controversy--is this a 
medically necessary or an experimental procedure, is it 
covered, and there is great professional debate on all sides of 
that issue--in this case, the employer lost; $77 million in 
punitive damages were awarded, $12.3 million in compensatory 
damages. That is almost $90 million. That $90 million could 
have provided hundreds, if not thousands, bone marrow 
transplants to people who were covered for that procedure.
    The repeal of preemption would significantly increase the 
cost of coverage for many employers and for employees. It does 
that by making plan administration less efficient, with diverse 
rules that have to be followed, and defending these cases that 
will be brought. Cases are very expensive to defend. Most of 
them cost tens of thousands of dollars to defend. Some of them 
cost hundreds of thousands of dollars to defend.
    And it would also change the design of employee big plans, 
so that most employers would probably have to eliminate the 
limitations for services that are not necessary or that are 
experimental. So that would basically change the mechanism of 
who designs employee benefit plans.
    Small employers would probably eliminate plans altogether, 
many of them would. Larger employers would have to reduce their 
coverage or pass on more of the costs to employees. And studies 
show that even a small increase in cost to employees results in 
electing to drop coverage or to elect less coverage.
    And private pension plans covered by ERISA--the 120 million 
people that we have talked about--there are hundreds of 
millions of claims processed every year. Very few of them 
result in the kinds of problems that have raised this 
committee's attention. Most employers work hard to fix 
procedures, make claims processing more efficient so there are 
fewer errors. And I think that is the way to do it. Work on the 
so-called front-end problems rather than the so-called back-end 

                           prepared statement

    If you are convinced that something must be done to improve 
the system, the Department of Labor has told us that they do 
have authority and they are working on regulations to help 
improve the front-end system. And all the employers that I know 
of and all the members of the Association would be happy to 
work with the Department of Labor to do that.
    We think that is the right approach.
    Thank you, Senator.
    Senator Specter. Thank you very much, Mr. Gallagher.
    [The statement follows:]
                 Prepared Statement of Robert Gallagher
    Chairman Specter and members of the Subcommittee, my name is Robert 
Gallagher, and I am executive principal in the Washington, D.C. based 
law firm of Groom and Nordberg. I have specialized exclusively in the 
field of employee benefits law for 22 years. Prior to joining Groom and 
Nordberg, I served as counsel for ERISA litigation at the U.S. 
Department of Labor where I tried the first case brought by the 
Department under ERISA as well as many other cases seeking to protect 
the interests of employer benefit plans and their participants and 
beneficiaries. At Groom and Nordberg, I routinely counsel employers 
that sponsor health benefits plans on fiduciary duty issues arising 
under the Employee Retirement Income Security Act of 1974, as amended 
(``ERISA''). I also routinely advise companies in connection with the 
scope of ERISA's preemption clause, including application of ERISA 
preemption to state laws affecting the health care industry, and I have 
been involved in litigation of ERISA preemption issues on behalf of 
both employers and service providers to health plans.
    I am appearing before you today on behalf of the Association of 
Private Pension and Welfare Plans (APPWP--The Benefits Association), a 
national trade association of companies concerned about the employee 
benefits system. APPWP's members include many Fortune 1000 companies 
offering health benefits to their employees, as well as organizations 
that provide benefit services to employees. Collectively, APPWP's 
members either sponsor or administer health and retirement plans 
covering more than 100 million Americans.
    I would like to share my perspectives with you on the current state 
of the law of ERISA preemption, the existing remedies for improper 
denial of health benefits claims in connection with ERISA-regulated 
health plans, and the possible consequences to employers if ERISA were 
amended to expand the available remedies when ERISA plans deny claims.
         i. the current state of the erisa preemption doctrine
    When ERISA was enacted in 1974, Representative John Dent, a leading 
sponsor of the legislation, noted that ``to many, the crowning 
achievement of this legislation'' was its preemption clause. See 120 
Cong. Rec. 29,197 (Aug. 13, 1974) (remarks of Rep. Dent).
    ERISA's preemption rules were designed, in the words of the late 
Senator Jacob Javits, to ``eliminate the threat of conflicting or 
inconsistent state and local regulation, * * * laws hastily contrived 
to deal with some particular aspect of private welfare and pension 
plans.'' Congress intended, instead, ``that a body of Federal 
substantive law will be developed by the courts to deal with issues 
involving rights and obligations under welfare and pension plans.'' See 
120 Cong. Rec. 29933 (Aug. 22, 1974) (remarks of Senator Javits). For 
more than 20 years ERISA's preemption clause has successfully worked to 
eliminate potential regulatory disincentives for employers to offer 
health benefits to employees, and has helped make employer-paid health 
care an expected benefit routinely provided to American workers.
    The preemption rules of ERISA are found in section 514 of the 
statute. Section 514 requires a three-step analysis to determine 
whether a particular state law is preempted. Section 514(a) provides 
generally that ERISA ``supersedes any and all state laws insofar as 
they may now or hereafter relate to any employee benefit plan,'' and 
therefore the first step is to determine whether the law ``relate[s] 
to'' an ERISA-regulated employee benefit plan. If so, the second step 
is to determine whether one of the enumerated exceptions to preemption 
applies, because under section 514(b) of ERISA, even if a state law 
``relates to'' an employee benefit plan it will be saved from 
preemption if it is a law that regulates insurance, banking, or 
securities. The final step is to determine whether the exception to 
preemption for insurance laws is inapplicable because of the so-called 
``deemer'' clause. Under section 514(c) of ERISA, a state law 
regulating insurance will nonetheless be preempted if it has the effect 
of deeming an ERISA plan to be an insurance company or engaged in the 
business of insurance.
    Over the years, a dichotomy has developed in the treatment of 
health benefits plans in which the employer provides benefits through 
purchase of a health insurance policy, and those health benefit plans 
in which an employer chooses to self-insure the risk. Many states 
mandate that group health insurance policies sold in such state contain 
certain benefits, such as coverage for mental health or drug or alcohol 
abuse treatment. In 1985, the Supreme Court analyzed whether states may 
use these laws to regulate the content of insured and self-insured 
health plans in light of the savings clause. Metropolitan Life Ins. Co. 
v. Massachusetts, 471 U.S. 724 (1985).
    The Court found that ERISA preemption does not prevent states from 
regulating the content of insurance policies purchased by an employer 
for a health plan. However, the Court concluded that state laws that 
regulate the content of self-insured plans were preempted because they 
would not be ``saved'' as laws regulating insurance. Therefore, when 
employers purchase group health insurance policies to fund the health 
benefits programs offered to their employees, these state mandates 
effectively dictate the design of the benefits program, because the 
policies funding these plans must meet state benefit mandates. See 
Metropolitan Life Ins. Co. v. Massachusetts; FMC Corp. v. Holliday, 498 
U.S. 52 (1990).
    The Supreme Court has adopted a two-step approach to determine 
whether a state law falls within the insurance law exceptions to ERISA 
preemption. Metropolitan Life Ins. Co. v. Massachusetts, supra. First, 
a court must resolve whether the law satisfies a ``common sense'' 
definition of insurance regulation. Second, a court must look at three 
factors drawn from cases analyzing the McCarran-Ferguson Act's 
reference to the ``business of insurance": (1) whether the state law 
has the effect of transferring or spreading a policyholder's risk; (2) 
whether the statute concerns an integral part of the policy 
relationship between the insurer and the insured; and (3) whether the 
state law is limited to entities within the insurance industry.
    Probably the most fundamental service undertaken in the 
administration of an employer-provided health benefits plan is the 
processing of benefit claims--the decision, made by either an insurance 
company or a claims administrator, as to whether the health benefits 
plan will pay for a particular medical service. Liability under ERISA 
in connection with benefits claims does not turn on whether a plan is 
insured or self-insured. Accordingly, the courts uniformly hold that 
state-based contract or tort actions asserting the improper processing 
by an insurance company or claims administrator of a claim for benefits 
under an ERISA-regulated plan, whether insured or self-insured, 
``relate[s] to'' a benefit plan, and is preempted. See Pilot Life Ins. 
Co. v. Dedeaux, 481 U.S. 41 (1987).
    In my experience, it is customary for health benefits plans to 
include specific language clearly communicating to covered employees 
that the plan will not cover services or treatments that are 
experimental in nature, or are not medically necessary. As you know, 
the gate-keeping and other review protocols that are a key element of 
the managed-care approach to health care often involve determinations 
by claims administrators whether a treatment or service is medically 
appropriate. Consequently, persons injured by managed-care decisions 
often bring state-based causes of action seeking tort remedies for 
allegedly negligent medical professional determinations, and there is a 
substantial body of case law addressing the effect of ERISA preemption 
on those claims.
    The majority of courts agree that ERISA preempts wrongful death, 
medical malpractice, loss of consortium, and other state-based claims 
based on medical judgment decisions made in the context of a benefits 
plan coverage determination. See, e.g. Aetna Life Ins. Co. v. Borges, 
869 F.2d 142 (2d Cir.), cert. denied, 493 U.S. 811 (1991) (wrongful 
death, loss consortium, misrepresentation all preempted in connection 
with delay in authorization of coverage); Corcoran v. United 
Healthcare, 965 F.2d 1321 (5th Cir. 1993) (Louisiana wrongful death 
statute preempted in action arising from utilization review provider's 
refusal to authorize hospitalization); Kuhl v. Lincoln National, 999 
F.2d 298 (8th Cir. 1993) (medical malpractice, tortious interference 
claims based on HMO's delay in authorizing heart surgery preempted).
    Moreover, state tort claims for negligence, fraud, or 
misrepresentation in connection with how HMOs or insurance carriers 
have structured provider networks, or the quality of the physicians 
included in the network, are routinely found to be preempted, as are 
claims relating to statements that HMOs and carriers have made about 
the quality of care to be provided by the network. See Kearney v. U.S. 
Healthcare, 18 Empl. Ben. Cases (BNA) 1886 (E.D. Pa. 1995); Stroker v. 
Rubin, 1994 WL 719694 (E.D. Pa. 1994); Elesser v. Philadelphia College 
Osteopathic Medicine, 16 Empl. Ben. Cases (BNA) 1063 (E.D. Pa. 1992). 
Similarly, to the extent a challenged communication about the structure 
of the network or the quality of network care is made in a benefit plan 
document, that communication is deemed an ERISA plan benefit 
communication, and the challenge must be ERISA-based.
    On the other hand, in instances in which medical judgment are not 
made in the context of determining whether the benefits plan will cover 
a service or treatment, and thus the judgment is disengaged from a plan 
coverage decision, courts are unlikely to find state-based challenges 
to the propriety of such judgments preempted. See Dukes v. U.S. 
Healthcare, 57 F.3d 350, 19 EBC 1473 (3d Cir.), cert. denied, 116 S. 
Ct. 564 (1995) (no allegation participants denied benefits they were 
due under plan; rather, participants contested the quality of HMOs 
medical care provided through plan; no preemption); Fritts v. Khoury, 
933 F. Supp. 668 (E.D. Mich. 1996); Howard v. Sasson, 19 Empl. Ben. 
Cases (BNA) 2091 (E.D. Pa. 1995). In these cases, there is no 
allegation that medical treatment was wrongfully delayed or denied, or 
that the challenged acts by the medical organization were undertaken in 
its utilization review role, refusing to authorize and/or pay for 
treatment. Rather, the issue centers on the quality of the medical care 
actually delivered and covered, whether by a primary care physician or 
other provider.
    Furthermore, courts are increasingly foreclosing the use of ERISA 
preemption as a means of shielding HMOs and insurance carriers from 
vicarious liability claims under state law in connection with allegedly 
negligent treatment provided by a physician or other health care 
provider. These claims are based on apparent or ostensible agency 
theory, with the claimants asserting that even if the allegedly 
negligent provider was not the employee of the HMO or carrier, the 
objectively reasonable impression formed by the patient was that such 
provider acted as an agent, and thus the HMO or carrier is liable as a 
quasi-principal. In cases like Pacificare of Oklahoma, Inc. v. Burrage, 
59 F.3d 151 (10 Cir. 1995) and Jass v. Prudential Health Care Plan, 88 
F.3d 1482 (7th Cir. 1996) the courts held that ERISA does not preempt a 
state law claim against an HMO or claims administrator to hold it 
vicariously liable for the alleged malpractice of one of its 
contracting physicians or utilization review personnel. Lower courts 
are increasingly making it clear that ERISA does not preempt vicarious 
liability claims against HMOs, carriers, or administrators, even in 
instances in which the medical judgment at issue was made in the 
context of a benefits determination. See Kearney v. U.S. Healthcare, 
Inc., 18 Empl. Ben. Cases (BOA) 1886 (E.D. Pa. 1994).
    I also believe it is most important to recognize that the trend in 
ERISA preemption is to narrow its boundaries, not extend them. The 
narrowing of ERISA preemption is due to a decision of the Supreme Court 
I will now discuss. The effect of the decision on state efforts to 
regulate managed care is still very much in flux and it is far from 
settled how the ERISA preemption curbs state efforts to regulate 
managed care in the future.
    Until 1995, the Supreme Court applied a plain meaning test in 
construing the ``relate to'' clause in section 514(a) of ERISA, and 
construed the language quite expansively to preempt all state action 
that bore some connection to ERISA plans. See, e.g., Shaw v. Delta Air 
Lines, 463 U.S. 85, 97-98 (1983) (term relate to ``was to be given its 
broad common sense meaning); District of Columbia v. Greater Wash. Bd. 
of Trade, 506 U.S. 125 (1992).
    Yet in New York State Conf. of Blue Cross & Blue Shield Plans v. 
Travelers' Inc. Co., 115 S. Ct. 167 (1995) the Court effectively 
abandoned the ``plain meaning'' test and narrowed the boundaries of 
ERISA preemption. In Travelers, the Court unanimously ruled that laws 
which have only an indirect economic effect on benefits plans do not 
``relate to'' such plans, and are not preempted. The Supreme Court 
noted that despite the broad language in ERISA's preemption clause, 
state action in fields of traditional state regulation, such as health 
care, are nonetheless assumed not to be preempted, unless preemption 
was the ``clear and manifest'' purpose of Congress. Under the Travelers 
framework, a state law will be deemed to ``relate to'' ERISA benefit 
plans only if it makes specific reference to a plan, or mandates an 
employee benefit structure or administration, or precludes 
administrative uniformity or uniform interstate benefits.
    Lower courts are just beginning to apply this new preemption 
framework to the efforts by states to regulate the managed care 
process. While Travelers and its progeny are unlikely to be construed, 
and should not be construed, as overruling prior cases like Pilot Life, 
it is also clear that the ERISA bar to states regulating in the health 
care area is lower than it was prior to Travelers.
    ii. remedies for erisa fiduciary misconduct and improper claims 
    Under ERISA, the persons with the ultimate responsibility to 
determine whether a benefits plan will cover a claim are cloaked with 
fiduciary status. Such fiduciaries, when deciding claims, are required 
to exercise prudent judgment in determining claims, and are to act 
solely in the interests of the benefit plan and its participants and 
beneficiaries. See ERISA Sec. 404(a)(1). If a person is aggrieved by a 
wrongful denial of health benefits, he or she can sue to recover 
payment of the benefit. See ERISA Sec. 502(a)(1)(B). Fiduciaries who 
act inconsistently with their duties of prudence and loyalty also may 
be sued by aggrieved health benefit plan participants, and the Supreme 
Court has recognized that ERISA plan participants may recover directly 
from fiduciaries for the latter's misconduct. See Howe v. Parity Corp., 
116 S. Ct. 1065 (1996).
    Although punitive damages and other forms of extra-contractual 
relief may not be imposed upon ERISA fiduciaries, see Massachusetts 
Life Ins. Co. v. Russell, 473 U.S. 134 (1985), courts otherwise have 
the authority to award a broad array of equitable relief against 
fiduciaries. See Mertens v. Hewitt Associates, 113 S. Ct. 2063 (1993). 
Fiduciaries may be forced to make restitution against injured 
participants, and can be required to specifically perform. Moreover, 
fiduciaries can be removed from office. In addition, courts have the 
discretion to award attorneys' fees to the victorious party in actions 
against fiduciaries. See ERISA Sec. 502(g). In instances in which a 
suit is brought by the Department of Labor against a fiduciary for 
breach of duty, ERISA does provide for extra-contractual damages in the 
nature of civil penalties. See ERISA Sec. 502(1).
    Thus, for example, if a health benefits plan denies coverage for a 
medical service and as a consequence the treatment is unavailable to 
the plan participant, that participant can sue the fiduciary and obtain 
an order requiring the fiduciary, on behalf of the benefits plan, to 
provide coverage. If a claims administrator is shown to systematically 
engage in imprudent and sloppy claims processing techniques, a 
participant has standing to sue to remove such party. More 
specifically, if a utilization review manager were shown to have 
engaged in a pattern of systematic denials of medical coverage 
involving care that a court otherwise finds necessary, such court would 
have the power under ERISA to remove the fiduciary from its claims 
administrative office. In fact, if the charges were sufficiently 
serious, a court has the authority to ban the entity from performing 
any fiduciary services to ERISA plans for a period of years. See 
generally Marshall v. Snyder, 572 F.2d 894 (2d Cir. 1978).
    The particular forms of relief and remedies that may be obtained 
against ERISA fiduciaries reflect a careful balancing of competing 
interests. When enacting ERISA, the 92nd Congress recognized that it 
needed both to protect ERISA plan participants in their benefits and 
also to avoid creating liability rules that would discourage employers 
either from establishing benefits plans, or offering benefits that are 
stingy and of little value. By eliminating the threat of extra-
contractual damages against fiduciaries, but allowing courts to award 
improperly denied benefits, to issue injunctions requiring coverage, 
and to remove fiduciaries who are not sufficiently competent or loyal 
to warrant positions of authority, ERISA grants participants a broad 
array of rights against managed care benefit decision-makers without 
imposing liabilities that will chill the business community's continued 
willingness to provide generous health benefit plans.
              iii. the consequences of expanding liability
    The decision by an employer to provide health care benefits, and 
the design of such benefits plans, are by and large left to the 
discretion of the employer. In my experience, when employers are faced 
with significant increases in the cost of health benefits they react in 
one of two ways. They either eliminate coverage for categories of 
medical treatment that previously were covered, or they increase the 
cost-sharing elements of the health plan by raising contributions, 
deductibles or copayments. In the case of benefits employers provide 
through HMOs, employers pass through costs typically by asking 
employees to pay a higher portion of the monthly HMO premiums via 
salary withholding.
    I believe that if punitive damages and other extracontractual tort 
remedies available under state law were expanded to cover ERISA health 
benefit claims administration, a number of adverse consequences will 
occur. The most fundamental will be (1) that the cost of benefits will 
increase, (2) each constituency (insurers/HMOs, employers) will in fact 
pass through such costs, and (3) employees will end up paying 
considerably more for health insurance.
    If punitive damages and other extracontractual tort remedies were 
expanded to include employers that perform claims administration, 
employers simply would abandon involvement in that process and contract 
the complete authority for claims processing to insurance carriers and 
other third parties. Many companies, particularly self-insured 
companies, currently reserve to themselves the right to make final 
claims determinations. Furthermore, in many jointly sponsored union-
management plans, otherwise known as Taft-Hartley plans, a joint group 
of union-management trustees retain final authority to decide claims. 
This practice of reserving final authority is often desired because it 
allows intervention in tough cases and improves employee relations.
    But I have little doubt such companies and Taft-Hartley plan 
trustees would abandon such efforts if liability were expanded. Given 
that claims processing is not part of the core effort of the business 
community (except for insurance carriers and third party 
administrators), those not in the primary business of claims 
administration are unlikely to be willing to accept the cost of 
malpractice insurance and the adverse publicity surrounding claims 
litigation, and would cede all authority to outsiders.
    Even if liability were not extended to employers, and even if 
insurance carriers, HMOs, or third party administrators were prohibited 
by law from obtaining indemnification from employers for expanded 
liability, the economic result would still be the same. This would be 
true whether or not awards of significant punitive damages in benefits 
disputes involving medical necessity actually increase. Insurance 
companies, HMOs and third party administrators would adjust to the 
prospect of increased economic exposure by routinely granting coverage 
in close cases, or even worse, routinely granting coverage in instances 
in which the medical necessity is doubtful but the prospect of jury 
litigation were high. Insurance companies, HMOs and third party 
administrators will make the economic trade-off of avoiding the risk of 
punitive damages litigation for more expensive claims experience.
    Why? Because the increased cost in higher claims experience can 
more easily be passed back to the business community, either in higher 
premiums or, for self-insured plans, higher plan costs. Why should 
claims administrators risk the adverse publicity and expense of jury 
litigation when it can easily avoid such risk simply by granting 
coverage, even for treatment that the weight of medical authority deems 
experimental, or which the medical community by and large believes 
serves cosmetic needs. Why should a claims administrator risk that the 
determination of whether a treatment is experimental, or medically 
appropriate, be significantly influenced by the understandable emotions 
of a jury instead of sound scientific evidence or outcomes research? 
Expanding claims administration remedies to include extracontractual 
and punitive damages will simply shift the pendulum sharply to an 
environment in which expensive and controversial treatments are 
routinely granted, regardless of whether they are objectively 
    Ironically, if a claims administrator were to be materially 
influenced in its fiduciary decision-making by the threat of punitive 
damages, such conduct would itself be a fiduciary breach of its duty to 
conserve plan assets for the benefit of other plan participants. But 
the practical ability of the business community to prove such an 
influence when it occurs will be difficult and expensive. In most 
instances, the choice that I believe health care administrators will 
make--to err on the side of granting coverage--will be made with 
impunity. And, in an ever competitive business environment, employers 
will not have to look far to identify the constituency to whom they can 
pass on these higher costs. The price will be passed through to 
employees, in some instances by abandoning the health benefits plan 
altogether, in most other instances, through cost-sharing.
    Furthermore, the cost of actual plan administration also will 
increase. Exposure of ERISA plan claims administrators to state-based 
punitive and extra-contractual damages also means exposure to state-
based substantive standards of conduct. Punitive damages are merely a 
remedy. Such damages cannot be imposed unless there is a violation of 
the concomitant substantive duty whose violation carries with it such 
penalty. This means that in every state a body of law will develop 
governing the conduct of ERISA-plan claims administrators whenever such 
decisions involve a medical judgment. Those laws will undoubtedly vary 
by state, with different standards of conduct and different burdens of 
proof in the event of litigation. This will further increase the cost 
of plan administration by creating exactly the kind of inconsistent 
patchwork of benefits law that the designers of ERISA preemption hoped 
to avoid.
    Indeed, the current proposals for managed care reform would, by 
their terms, cede to state law the regulation of only those health 
benefits decisions involving the exercise of medical judgments. But the 
legal determination as to when a benefits claims decision involves a 
medical judgment will be difficult and the results will, in my view, 
undoubtedly be inconsistent. In some jurisdictions, the line between 
claims administration decisions that are governed exclusively by ERISA 
and those governed by state tort law will be different than in others.
    In conclusion, it is clear from past experience that any 
legislation limiting the scope of ERISA preemption will increase the 
cost of providing a given level of benefits. That will, in turn, result 
in higher costs and an increase in the complexity of plan 
administration. This increase in cost and complexity will cause some 
plan sponsors--particularly smaller employers--to simply drop health 
benefit plans altogether, resulting in a larger uninsured population. 
Larger employers will likely respond by altering their health benefit 
plans to provide more limited coverage at higher costs, though the 
possibility exists that these employers will forego providing coverage 
at all. Ultimately, limiting the scope of ERISA preemption will result 
in lower benefits for the great majority of plan participants and more 
money spent on attorneys' fees that would otherwise go to provide 
needed benefits.
            FAMILIES USA
    Senator Specter. We now turn to Mr. Ron Pollack, executive 
director of Families USA, an national organization for health 
care consumers. In 1997, Mr. Pollack was appointed the sole 
consumer organization representative of the Presidential 
Advisory Commission on Consumer Protection and Quality in the 
health care industry. Mr. Pollack had been dean of the Antioch 
University School of Law.
    Welcome, Mr. Pollack, and we look forward to your 
    Mr. Pollack. Thank you so much, Mr. Chairman, and 
distinguished members of the panel.
    I would like to make five quick points in the short time we 
    First, following up on what Mr. Gallagher said, I think 
consumers are interested in the front-end protection, as well, 
not just the back-end. And that is why I think a Patients' Bill 
of Rights, which established modest procedural protections, 
such as the independent right of appeals, is very important. 
And it is my hope that if such a patient right of appeals is 
established, then we are likely to see less litigation, 
although we are still going to see abuses and problems that do 
need to be addressed.
    Second, the issue with respect to ERISA is not merely a 
preemption issue. That is a part of the issue. But what is also 
a part of the issue is that the Federal remedy that is 
established under ERISA is essentially a nonremedy remedy. The 
only thing that is available to a person after that person 
succeeds in the litigation process is that person can only 
receive the service that was originally denied, which may come 
at a point where it is absolutely too late.
    And if I may, let me cite a very brief example that I think 
illustrates this. Take the case of Frank Wurzbacher, a 
plaintiff in Kentucky, who unfortunately had prostate cancer. 
He was receiving injections that cost $500 per injection. And 
he was getting those until his employer changed carriers to 
administer his plan, to Prudential. Prudential said: ``You are 
going to have to pay $180 for each injection.'' And Mr. 
Wurzbacher simply could not afford to pay for those injections.
    So, he sought alternatives. And he asked his physician. And 
the only alternative that his physician said was available to 
him, given the progression of his cancer, was that he should be 
castrated. He went to Prudential and Prudential said: ``We will 
pay for your castration.'' And, indeed, Mr. Wurzbacher was 
    The day Mr. Wurzbacher returned from the hospital, he 
received a notice from Prudential saying: ``We made a mistake; 
you did not have to pay the $180 in copayments.''
    Now, if Mr. Wurzbacher goes to court under Federal law, the 
only remedy afforded to him is that he can now get his 
injections for free. Now, how anyone can say that that is a 
reasonable remedy, I find that absolutely extraordinary. This 
is the only area where, irrespective of indifference, 
callousness, willfulness, or just negligence, there is simply 
no accountability.
    The third point I want to make is that the judiciary has 
been handling numerous such cases--and I brought with me, if 
you would like for the court record, but it is certainly 
available to the distinguished members of this panel--a series 
of cases, all across the country, which represent the kind of 
situations that Mr. Wurzbacher himself represents. But what is 
interesting about this is what the judges themselves are 
saying. The judges are adhering to what the ERISA statute 
    But if you take a look at my testimony--and I have cited 
some of the quotes from some of those judges--you will see what 
the judges are saying--is this is a travesty of justice, this 
is absolutely wrong, but we are powerless to change this. The 
only way this can be changed is through congressional statute.
    And, by the way, Florence Corcoran, who was cited as one of 
those cases, which I suggest is well worth reading, is sitting 
behind me. And if you would like to talk to her, cited the 
facts in her case, I think you would find it illustrative of 
what I am saying.
    The fourth point I want to make is that ERISA made sense 
when Congress adopted it in 1974. We were in a totally 
different world in 1974. We were in a fee-for-service world. 
And so the controversy in litigation was after the service was 
provided and the insurance company was denying payment of that 
claim. And so if you then required the insurance company to pay 
for that service, that person was made whole. But at that 
point, less than 5 percent of the plans in this country were 
HMO's or managed care plans.
    Today it is totally different. When there is a controversy 
between a plaintiff and a plan, that controversy is whether you 
are going to receive that service in the first place. And 
people change their course of conduct, as unfortunately Mr. 
Wurzbacher did, and we need to find a different remedy.
    To say that you now need to provide this service that you 
originally should have provided merely says to a plan: You can 
keep on delaying and delaying and delaying and delaying, and 
the only thing that you are going to ultimately be accountable 
for is that you are going to have to, at the end of that road, 
you are going to have to pay for the service you originally 
denied. And by that point, it is likely, in many cases, to be 
too late.

                           prepared statement

    The last point I want to make is that there really are two 
alternative remedies. And seeing that the red light has gone 
on, I would just conclude with a sentence. S. 1890 and S. 644 
adopt one approach, which I think makes a great deal of sense: 
to allow the States to establish remedies. Another alternative 
is not to change the ERISA structure, but to change the ERISA 
    Thank you.
    Senator Specter. Thank you very much, Mr. Pollack.
    [The statement follows:]
                Prepared Statement of Ronald F. Pollack
    Mr. Chairman and members of the committee: Thank you for inviting 
me to testify today on an issue of growing significance to people in 
managed care plans. I am Ron Pollack, Executive Director of Families 
USA, the national organization for health care consumers. I had the 
privilege of serving on the President's Advisory Commission on Consumer 
Protection and Quality in the Health Care Industry. As you know, the 
Commission received extensive testimony and analysis about the role of 
ERISA in establishing a remedial system for people aggrieved by denials 
or delays of care by their health plans.
    At the outset of my testimony, I should emphasize that consumers 
are most interested in preventing wrongful denials and delays of care, 
not simply seeking remedies after the fact. At the point that someone 
goes to court to seek a remedy, the harm has already occurred. 
Enlightened policy must focus on the front end of health decision-
making, not just the back end after harm has been caused. Public 
policy, therefore, should take effective steps to ensure that 
appropriate health care is not withheld and that quality of care is 
provided to America's health care consumers. It is for this reason that 
consumer organizations across the country are very supportive of a 
Patients' Bill of Rights--such as the Bill of Rights proposed by the 
President's Commission and in bills pending in Congress. These 
proposals offer modest steps designed to empower consumers with 
information and procedural rights so that they get the health care that 
was promised to them when they procured health coverage.
    I should hasten to add that one of the key features of a Bill of 
Rights is the establishment of an independent and prompt right to 
appeal denials or delays of health care services. The President's 
Commission unanimously recommended such a right, and that right is 
incorporated into each of the major bills now pending in the Congress. 
I believe that the establishment of such a right would not only be very 
welcomed by health care consumers but would significantly reduce the 
likelihood of subsequent litigation. This right to an independent 
appeal, according to the analysis prepared for the President's 
Commission, would cost merely 0.3 to 7 cents per health plan enrollee 
per month.
    The remedy issues raised by existing ERISA legislation are 
important in promoting high-quality care, not simply because they deal 
with specific grievances by enrollees of health plans but because they 
help to deter plans from being cavalier about denials of needed care. 
Without a meaningful remedy at the end of a grievance process, health 
plans will always have an incentive to deny care because they know 
there will never be a penalty for improperly doing so. The creation of 
an effective remedy, therefore, must be part and parcel of a system 
that encourages high-quality care.
    Unfortunately, ERISA--which was intended to protect employees in 
pensions and health plans--has become a protective shield for managed 
care plans even when they wrongfully deny care, either through 
negligence or malicious indifference. Central to ERISA's failure is its 
preemption of state remedies for wrongful denials of care and its 
failure to establish a meaningful federal remedy. Today, approximately 
123 million people in working families are denied reasonable relief if 
their health plans improperly withhold care.
    Under ERISA, consumers whose benefits are wrongfully denied are 
entitled only to equitable relief and not monetary damages. In 
practical terms, this means that a worker who is improperly denied 
health care can only recover the value of the denied service or the 
service itself--which, in some tragic cases, comes far too late. The 
worker, however, is not allowed to receive any compensation to make him 
or her whole from the benefit denial, even in the event of loss of life 
because of the health plan's improper denial. Neither compensatory nor 
punitive damages are available under ERISA. As a result, workers and 
their families are very much at risk of arbitrary benefits denials, and 
this risk is most substantial when the treatment sought is costly.
    Health plans have no accountability for their decisions to deny 
needed care and treatment. This lack of meaningful remedies invites 
abuse. Regardless of a managed care company's indifference, 
callousness, willfulness or negligence in refusing to authorize 
medically necessary treatment, the only punishment made available by 
ERISA, if a plaintiff ultimately prevails, is the provision (or payment 
for) the initially denied treatment. In other words, a managed care 
company has every financial incentive to deny or delay care--knowing 
full well that, even after years of litigation, the worst that can 
happen is that the plan will only have to pay for the services 
originally denied. This clearly invites, and creates financial 
incentives for, abuse.
    A recent case emanating from Kentucky illustrates the absurdity of 
the ERISA remedial system. Frank Wurzbacher had the misfortune of 
contracting prostate cancer. To deal with his condition, Mr. Wurzbacher 
received periodic injections of leupron. Under his health plan, these 
treatments--costing $500 per injection--were supposed to be fully 
covered. When Prudential took over as the plan administrator, Mr. 
Wurzbacher was told that he would have to pay $180 per injection--an 
amount he could not afford. As a result, Mr. Wurzbacher asked his 
physician for health care alternatives. In light of the aggressiveness 
of his cancer, Wurzbacher's doctor said that his only alternative was 
    Prudential approved the castration operation and Mr. Wurzbacher was 
castrated. When Wurzbacher returned home from the hospital, he found a 
letter from Prudential notifying him that it had made a mistake and 
that the plan would pay the full $500 for the leupron injections.
    When Mr. Wurzbacher brought suit under state law, his claim was 
denied due to ERISA preemption. More significantly, if Mr. Wurzbacher 
brought suit under the provisions of ERISA, his only available 
``remedy'' would be the provision of leupron injections at no cost. 
Obviously, this ``remedy'' constitutes a nonremedy and is entirely 
useless for Mr. Wurzbacher. ERISA, in this and many other cases, 
constitutes a cruel and unusual joke for someone who experienced tragic 
harm due to the health plan administrator's negligence.
    The ERISA-caused injustice experienced by Mr. Wurzbacher is 
occurring in many other situations and courts across the country. I 
have brought with me a notebook full of cases decided in the last full 
years that are replete with the types of injustices exemplified by the 
Wurzbacher case. Notably, in some of these cases, judges--as they 
implement the strictures of ERISA--are commenting about the resulting 
injustices being caused and are admonishing Congress to take corrective 
action. Permit me to cite two such cases.
    The first case, Andrews-Clarke v. Travelers Insurance Co., was 
decided last year in the Federal District Court for the District of 
Massachusetts. [See 21 EBC 2137, 1997 WL 677932.] The facts of the case 
are as follows. Richard Clarke's health plan--that covered him, his 
wife, and their four young children--provided, under its terms, for one 
30-day inpatient rehabilitation program per year. When Mr. Clarke drank 
to excess, his physician admitted him to a hospital for alcohol 
detoxification and medical evaluation. Travelers Insurance, through its 
utilization review provider (Greenspring of Eastern Pennsylvania), 
refused to approve Clarke's enrollment in a 30-day inpatient alcohol 
rehabilitation program. Instead it approved two separate brief (five 
and eight days, respectively) hospital stays. Within 24 after the 
second hospital stay, Clarke attempted suicide in the garage with the 
car engine running while he consumed a combination of alcohol, cocaine, 
and prescription drugs. His wife discovered him by breaking through the 
garage door. Clarke was taken to the hospital where he was treated for 
carbon monoxide poisoning.
    At his mental commitment proceeding, the court ordered Mr. Clarke 
to participate in a 30-day detoxification and rehabilitation program 
following his release from the hospital. ``By now,'' according to the 
Federal District Court, ``it was tragically apparent to everyone but 
Travelers and its agent, Greenspring, that Clarke was a danger to 
himself and perhaps others.'' However, Travelers (in the words of the 
Court) ``incredibly refused'' to authorize admission under the plan. 
Instead, Clarke was sent to a correctional center where he was forcibly 
raped and sodomized by another inmate. He received little therapy or 
treatment at the correction center. Following his release, he went on a 
prolonged drinking binge that resulted in his hospitalization due to 
respiratory failure. After his release from the hospital, he began 
drinking again and was found the following morning dead in his car, 
with a garden hose running from the tailpipe into the passenger 
    The Federal District Court dismissed the suit brought by Clarke's 
widow and four children. The Court held that the ERISA statute 
preempted the claim. The Court held that, even though the ``insurer and 
utilization reviewer repeatedly and arbitrarily refused to authorize 
medical and psychiatric treatment that was expressly provided by the 
plan and that was prescribed not only by doctors at several hospitals, 
but by state courts as well, and where participant's death was [a] 
direct and foreseeable result of such refusal,'' ERISA compelled 
dismissal of the claim. The Court, however, underscored the resulting 
injustice. In relevant part, the Court said:
    ``Under traditional notions of justice, the harms alleged--if 
true--should entitle Diane Andrews-Clarke to some legal remedy on 
behalf of herself and her children against Travelers and Greenspring. 
Consider just one of her claims--breach of contract. This cause of 
action--that contractual promises can be enforced in the courts--pre-
dates Magna Carta. It is the very bedrock of our notion of individual 
autonomy and property rights. It was among the first precepts of the 
common law to be recognized in the courts of the Commonwealth and has 
been zealously guarded by the state judiciary from that day to this. 
Our entire capitalist structure depends on it.
    ``Nevertheless, this Court had no choice but to pluck Diane 
Andrews-Clarke's case out of the state court in which she sought 
redress (and where relief to other litigants is available) and then, at 
the behest of Travelers and Greenspring, to slam the courthouse doors 
in her face and leave her without any remedy.
    ``This case, thus, becomes yet another illustration of the glaring 
need for Congress to amend ERISA to account for the changing realities 
of the modern health care system. Enacted to safeguard the interests of 
employees and their beneficiaries, ERISA has evolved into a shield of 
immunity that protects health insurers, utilization review providers, 
and other managed care entities from potential liability for the 
consequences of their wrongful denial of health benefits.''
    The Court concluded that: ``[a]lthough the alleged conduct of 
Travelers and Greenspring in this case is extraordinarily troubling, 
even more disturbing to this Court is the failure of Congress to amend 
a statute that, due to the changing realities of the modern health care 
system, has gone conspicuously awry from its original intent.''
    Another example also illustrates the frustration experienced by the 
courts in reviewing ERISA cases and how members of the judiciary are 
calling upon Congress to amend ERISA. In Corcoran v. United HealthCare. 
Inc., 965 F.2d 1321 (5th Cir. 1992), the plaintiff, Florence Corcoran, 
was in an employer-sponsored health plan using Blue Cross as 
administrator and United HealthCare as the utilization reviewing 
agency. Mrs. Corcoran was pregnant and had a history of pregnancy-
related problems and was viewed as a high-risk pregnancy. Although her 
doctor recommended hospitalization so that the fetus could be monitored 
as the due date approached, and another obstetrician (who was contacted 
for a second opinion) concurred, United HealthCare denied that 
hospitalization was medically necessary and refused to certify a 
hospital stay. Instead, ten hours of daily in-home nursing care were 
authorized. When the nurse was not on duty, the fetus developed 
problems and died.
    The Court found that, under ERISA, the Corcorans had no remedy for 
damages. The Court found that the Corcorans' claim for damages under 
state law were preempted. In so ruling, the Court decried the obvious 
injustice perpetrated under ERISA and called for Congressional action 
to amend ERISA. In its applicable part, the Court stated:
    ``The result ERISA compels us to reach means that the Corcorans 
have no remedy, state or federal, for what may have been a serious 
mistake. First, it eliminates an important check on the thousands of 
medical decisions routinely made in the burgeoning utilization review 
system. With liability rules generally inapplicable, there is 
theoretically less deterrence of substandard medical decisionmaking. 
Moreover, if the cost of compliance with a standard of care (reflected 
either in the cost of prevention or the cost of paying judgments) need 
not be factored into utilization review companies' cost of doing 
business, bad medical judgments will end up being cost-free to the 
plans that rely on these companies to contain medical costs. ERISA 
plans, in turn, will have one less incentive to seek out the companies 
that can deliver both high quality services and reasonable prices.
    ``Second, in any plan benefit determination, there is always some 
tension between the interest of the beneficiary in obtaining quality 
medical care and the interest of the plan in preserving the pool of 
funds available to compensate all beneficiaries. In a prospective 
review context, with its greatly increased ability to deter the 
beneficiary (correctly or not) from embarking on a course of treatment 
recommended by the beneficiary's physician, the tension between 
interest of the beneficiary and that of the plan is exacerbated. A 
system which would, at least in some circumstances, compensate the 
beneficiary who changes course based upon a wrong call for the costs of 
that call might ease the tension between the conflicting interests of 
the beneficiary and the plan.
    ``Finally, cost containment features such as the one at issue in 
this case did not exist when Congress passed ERISA. While we are 
confident that the result we have reached is faithful to Congress's 
intent neither to allow state-law causes of action that relate to 
employee benefit plans nor to provide beneficiaries in the Corcorans' 
position with a remedy under ERISA, the world of employee benefit plans 
has hardly remained static since 1974. Fundamental changes such as the 
widespread institution of utilization review would seem to warrant a 
reevaluation of ERISA so that it can continue to serve its noble 
purpose of safeguarding the interests of employees. Our system, of 
course, allocates this task to Congress, not the courts, and we 
acknowledge our role today by interpreting ERISA in a manner consistent 
with the expressed intentions of its creators.''
    Across the country there are approximately 146 million people who 
have employer-based coverage. Of this number, more than four out of 
five--approximately 84 percent, or 123 million people--are in ERISA 
plans and are governed by ERISA's non-remedial regimen and are 
preempted from receiving protection under state law. (Public employees 
are the largest group who may receive employer-based coverage but are 
not subject to ERISA provisions.) In Pennsylvania, approximately 89 
percent of the people with employer-based coverage, or approximately 
6.4 million Pennsylvanians, are in ERISA plans. All of these people are 
vulnerable to the same legal frailties of ERISA that were experienced 
by Frank Wurzbacher, the Andrews-Clarke family, and Florence Corcoran.
    Congress should reconsider the remedial restrictions currently 
contemplated by the 1974 ERISA statute. In the old world of fee-for-
service health care, the ERISA statute made rational sense. At that 
time, people routinely received the care they sought and the dispute 
centered on whether the claim for reimbursement of costs incurred 
should be honored. This dispute was a narrow one, albeit important for 
the party litigants. The remedy available--namely, payment for the 
service received--had the potential of making a plaintiff ``whole.'' 
This, however, is no longer true in today's world of managed care.
    Today, the dispute usually does not relate to reimbursement for 
services already rendered. With managed care and utilization review, 
the service at issue is normally withheld and consumer-patients are 
usually forced either to forego necessary medical treatment or seek 
other care. As a result, the stakes are much higher than they were when 
ERISA was enacted. If, during the pendency of litigation--a period 
which may be quite considerable--the service needed for good health or 
survival is being withheld, a remedy limited to the ultimate provision 
of the withheld service may be, and often is, illusory. Moreover, this 
non-remedy remedy provides a powerful added incentive for managed care 
organizations to deny care. At worst, they will face a slap on the 
wrist and be required to provide the service that was originally 
    Congress can respond to this problem through two alternative 
approaches. First, the civil enforcement provisions of ERISA can be 
remedied by establishing a system that makes aggrieved consumers and 
their families whole. Such a system can include one or a combination of 
compensatory, consequential and punitive damages. Such a system would 
not alter the ERISA framework but would establish meaningful remedies 
within that framework. Rep. Pete Stark has introduced H.R. 1749, the 
Managed Care Plan Accountability Act of 1997, which takes this 
    Alternatively, Congress can amend ERISA by explicitly removing the 
state preemption remedial bar that currently limits states' abilities 
to establish causes of action for wrongful denials of care. Both the 
Patients' Bill of Rights Act (S.1890/H.R. 3605) and the Patients' 
Access to Responsible Care Act (PARCA) (S. 644/H.R. 1415), 
comprehensive consumer protection bills now pending in Congress, adopt 
this approach.
    We believe that either approach is vastly preferable to the current 
ERISA scheme. Although there is, as yet, no independent economic 
analysis of these approaches, we believe that these alternatives are 
inexpensive and cost-effective. As experience in other health care 
contexts demonstrate, few people avail themselves of the opportunity to 
litigate. Indeed, few people even apply for external administrative 
hearings when given the opportunity to do so--as is currently available 
for people in the Medicare program. Moreover, the provision of punitive 
damages, even when theoretically available, is virtually never invoked. 
Thus, while these alternative remedies will undoubtedly induce improved 
behavior on the part of managed care plans, the direct costs of making 
a meaningful remedy available are likely to be less than 1 percent, and 
undoubtedly less than 2 percent, of insurance premiums--as is the case 
with malpractice insurance premiums today.
    Such a cost-effective deterrent to improper denials of care is 
clearly warranted in the new world of managed health care.
    Senator Specter. We now turn to Mr. Mark Smith, employee 
benefits compliance manager for AMP Inc., with headquarters in 
Harrisburg, PA. Mr. Smith also serves as an adjunct professor 
of law at Dickinson School of Law. Among several prior 
positions, Mr. Smith served as employee benefits manager for a 
Big 6 accounting firm in Central Pennsylvania.
    Welcome, Mr. Smith. We look forward to your testimony.
    Mr. Smith. Thank you, Chairman Specter and Senators.
    As you indicated, I am employed at AMP Inc. Our CEO and 
president, William Hudson, is currently the vice chairman of 
the National Association of Manufacturers Board. We are 
speaking here today on behalf of the NAM, the Nation's oldest 
and largest broad-based industrial trade association.
    As you have indicated, AMP's headquarters are located in 
Harrisburg, PA, where we employ in excess of 9,500 employees, 
and are the world's leading manufacturer of electric connectors 
and interconnection systems. We have over 46,000 employees 
worldwide, in over 300 facilities, in 53 different countries. 
Suffice it to say that if something turns off and on, there is 
likely an AMP product involved.
    We are pleased to have this opportunity to discuss with you 
proposed changes to the current system of ERISA remedies. Like 
you and the other Members of Congress, we believe that 
policymakers, business owners, health care providers, 
consumers, and managed care organizations need to work together 
to continue to ensure and improve the quality of care Americans 
    At AMP, we believe that providing quality health care 
benefits to our employees is a civic responsibility, the right 
thing to do at a moral level; but besides that, it makes good 
business sense. A high-quality health care program can be a key 
retention and recruitment tool for employees.
    We strongly believe that both ERISA and the advent of 
managed care has been essential to our ability to offer 
quality, cost-effective benefits to our employees. In fact, at 
AMP, we are very careful about who we do business with in the 
health care arena. And we work very hard to ensure that the 
HMO's that we work with are accredited.
    ERISA requires all plans to have claim procedures for 
solving benefit disputes. Plans are now liable for medical 
malpractice when they are involved in treatment. Suing plans 
over coverage of specific procedures or therapies will force 
them to pay for high-risk or minimally effective treatments. 
Advocates of liability are wrong to think that they can protect 
the employers.
    If the employee is suing as a result of coverage received 
under a benefit program, both sponsored and designed by the 
employer and administered by a vendor under a contract with the 
employer, it would be very difficult for the employer to escape 
liability under that scenario. To escape liability under the 
bills currently before Congress, an employer would have to 
abandon any responsibility for processing claims or reviewing 
claim decisions made by their health plans.
    At AMP, we have a dedicated individual who works with our 
employees when they have problems getting claims paid through 
our various health care providers. And if you could have an 
opportunity to sit with that gentleman during the day, I think 
you would see that AMP, as an employer, is highly committed to 
making sure that our employees get the coverage they are 
entitled to.
    And for each of these very unfortunate stories that we 
hear, I could bring in many, many, many success stories that 
would counter the notion that managed care is not being 
    The NAM opposes the changes in the law which would lead 
employers to face punitive and economic damages for health 
benefit decisions. Creating plan liability for benefit 
decisions would force plans who wish to avoid liability for 
coverage decisions to be more restrictive in defining covered 
benefits. We have heard references to the recent polls that 
talks about the general support for consumer protection in this 
area. However, that support erodes very quickly when the notion 
of increased health care premiums is brought into the story.
    And I can tell you, at AMP, our employees are highly 
sensitive to any change in their health care programs. We have 
very, very competitive programs. We do have employee cost 
sharing, and they pay attention. And we have many employees who 
voluntarily elect to go into managed care because of what they 
deem to be a more reasonable premium opportunity and, in many 
cases, a more expensive premium option but a richer package of 
    We have over 50 percent of our employees participating in 
managed care. And out of 40,000-some claims processed a year, 
we see very, very few formal appeals. And many times, these 
appeals are resolved in favor of the employee. And at AMP, we 
have not had any major appeals that involved excessive claim 
denial or managed care vendors acting in an irrational manner.

                           prepared statement

    We also believe that it is unfair to allow private 
employers to be sued when the Federal Government programs 
remain protected from these lawsuits. Congress should reject 
this attempt to redefine ERISA remedies. It will only harm your 
constituents and our employees.
    Thank you. I will take questions.
    Senator Specter. Thank you very much, Mr. Smith.
    [The statement follows:]
                  Prepared Statement of Mark A. Smith
    I am Mark Smith, employee benefits compliance manager at AMP 
Incorporated. Our CEO and President, William J. Hudson, is currently 
the vice chairman of the NAM's Board of Directors. We at AMP share your 
commitment and interest in ensuring access to quality health care. 
Thank you for this opportunity to speak about the importance we place 
on quality health care for our employees and their families.
    AMP employs more than 9,500 Pennsylvanians and is the world's 
leading manufacturer of electronic connectors and interconnection 
systems. Headquartered in Harrisburg, PA, we have more than 46,500 
employees in more than 300 facilities in 53 countries. We serve 
customers in the automotive, computer, communications, consumer, 
industrial and power industries.
    The NAM is the nation's oldest and largest broad-based industrial 
trade association. The association's nearly 14,000 members companies 
and subsidiaries, including approximately 10,000 small manufacturers, 
are in every state and produce about 85 percent of U.S. manufactured 
goods. Through its member companies and affiliated associations, the 
NAM represents every industrial sector and more than 18 million 
    We are pleased to have the opportunity to discuss with you our 
opposition to proposed changes to the current system of ERISA remedies. 
Like you and the other members of Congress, we believe that policy-
makers, business owners, health care providers, consumers and managed 
care organizations need to work together to continue to ensure and 
improve the quality of care Americans receive.
    Our testimony makes two key points: First, we will outline the 
contribution of the Employee Retirement Income Security Act of 1974 
(ERISA) and managed care in improving the voluntary private employer-
provided health care system in this country. Second, we will show that 
changing ERISA remedies to allow patients to sue their HMOs or 
employers for benefits decisions would impede employers' ability to 
continue to provide high-quality, cost-effective health care benefits 
to employees and their families.
                 the value of the employer-based system
Virtually all NAM members offer health benefits to their employees
    Perhaps the biggest challenge facing manufacturers in today's 
fiercely competitive environment is recruitment and retention of the 
highly skilled workers needed in today's modern, high-tech workplaces. 
Health benefits are a key recruitment and retention tool. Nearly all 
NAM members offer health benefits to their full-time employees, a 
success record found in few other sectors of the economy. According to 
a survey of NAM members in April and May of last year, 99.4 percent 
offer health benefits to their full-time employees; 97.6 percent offer 
dependent coverage to their full-time employees; and equally, 
impressive, 98.2 percent of NAM members with fewer than 26 employees 
provide health benefits to their employees. (The NAM has more than 
2,000 member companies with fewer than 26 employees.)
    Before the widespread adoption of managed care, liberal insurance 
payments encouraged hospital stays and high-cost tests and procedures. 
Few incentives existed to reduce costs and most employers were merely 
passive bill payers, not active purchasers.
    During the late 1980's and early 1990's, the medical-care inflation 
rate was approximately twice the general inflation rate. As late as 
1992, when national health expenditures increased 9.1 percent, fee-for-
service indemnity plans enrolled the majority of employees (52 
percent). Business coped with this cost onslaught by turning 
increasingly to managed care, which slowed the growth in health care 
costs, and, by 1997, indemnity plans covered only 15 percent of 
    In 1997, AMP U.S. spent approximately $45 million on health care 
for its employees. After experiencing double-digit increases for a 
number of years, the company's net health care costs have increased at 
less than 4 percent. Because our costs have been well controlled 
recently, we have been able to implement important benefit improvements 
to some of the plans. In addition, employee contributions for many of 
the health options are either remaining the same during 1998 or 
increasing only modestly.
    In the 1980's, American manufacturers adopted Total Quality 
Management techniques to satisfy their customers and compete in the 
world economy. They expected no less from their suppliers. Many 
companies now set performance standards for health plans the same way 
that they do for vendors of other goods and services. This value-based 
purchasing approach involves evaluating the quality delivered for the 
dollar paid. Through managed care techniques, employers try to control 
the quality of health care and expenses, so that their health plans can 
achieve the greatest good for the greatest number of employees.
    The managed care delivery system evolved from an effort to 
eliminate the excessive, unnecessary and inappropriate care that the 
financial incentives of the fee-for-service delivery system created. 
Research has documented a huge geographic variation in medical 
practice; often it is not clear that those geographic areas with higher 
intensity of use of particular services have better health outcomes. In 
fact, the Rand Corporation has estimated that one-third of all medical 
treatment is unnecessary or inappropriate.
    Many employers are collecting HEDIS (Health Plan and Employer Data 
Information Set) data \1\ and accreditation status information and 
developing ``report cards'' to incorporate quality, patient-
satisfaction measures and cost. These efforts provide the basis for 
employer decisions about selecting, retaining and modifying their 
relationships with managed care vendors. Many large employers 
incorporate the results of this report-card approach in the pricing of 
the various plans offered employees and incorporate quality performance 
standards into their vendor contracts.
    \1\ HEDIS is a set of standard performance measures to help 
employers request comparable data about quality from health plans. An 
example of HEDIS data would be the Cesarean section rate by the HMO 
population, since we know that C-sections are often performed when they 
are not medically necessary, leading to an increase rate of surgical 
                       the value of managed care
    Managed care has been key to the value-based purchasing strategy 
because it creates provider accountability, emphasizes preventive care 
and spurs the development of data systems that allow meaningful plan-
to-plan comparisons. It also has helped to control health care costs, 
reduce the number of uninsured and increase worker wages. While it may 
not be perfect, managed care has served a valuable role in the 
improvement of health care delivery in the United States.
    Workers have benefited financially from the advent of managed care. 
According to the Lewin Group, in 1996, Americans workers with health 
insurance reaped wage gains of between 0.7 and 1.0 percent as a result 
of managed care. For workers earning less than $6 per hour, these wage 
gains were 4.0 percent. For workers earning more than $15 per hour, the 
gains were approximately 0.8 percent. Managed care saved private 
insurance in 1996 somewhere between $130 million and $205 million, 
which translates into a 2.7-4.3 percent premium savings and an annual 
savings per family of $107.
    Managed care has had a positive effect on health care quality. Most 
studies show that health indicators are about the same when HMO and 
fee-for-services patients are compared.
    Ninety-two percent of American workers who receive health coverage 
through their employers are offered at least one plan that covers care 
provided by out-of-network physicians and hospitals. Two-thirds of 
workers offered health coverage are offered more than one health plan. 
The issue of choice has been at the center of the congressional debate 
over health care. We suggest that as you continue to debate this issue, 
you ensure that managed care remains an option for those employees who 
choose it and those employers who decide to offer it.
    CHOICES is the employee benefit delivery system at AMP. Our program 
strategy includes offering high-quality managed care choices, self-
insuring plan options where appropriate, overall plan design changes, 
and effective employee contribution strategies.
    Instead of providing everyone with the same benefits package, 
CHOICES gives employees the power to design their own benefits program 
to meet their own unique needs. CHOICES offers four medical options 
with each option covering essentially the same eligible medical 
services. Each option promotes effective use of health care and results 
in cost savings. In general, plans that provide an overall higher level 
of benefits may have a higher price tag, while plans that incorporate a 
higher employee co-pay and co-insurance generally have lower price 
tags. The CHOICES program offers several different indemnity options 
with an opportunity to elect coverage under several HMOs available in 
our geographic area.
ERISA ensures delivery of promised health benefits and allows for plan-
        sponsor flexibility
    The innovation and value-based purchasing described here would not 
have been possible without ERISA, the 1974 law that governs all 
privately provided benefits and currently covers more than 160 million 
Americans. The crafters of ERISA struck a careful balance: The law does 
not require that employers offer benefits to their employees or specify 
the exact benefits to be offered, but instead ensures that participants 
get the benefits they are promised. If an employer does offer benefits, 
ERISA requires him or her to meet certain standards. By not dictating 
plan design, ERISA avoids overly burdensome or costly requirements that 
might discourage employers from offering, or employees from enrolling 
in, plans offered under our voluntary health system.
    In avoiding such micro-management and over-regulation, ERISA has 
provided businesses with the flexibility to tailor the content of 
health plans to meet the unique needs of their employees, and the 
freedom to operate under uniform federal regulation instead of under a 
patchwork of varying state laws. This flexibility is crucial not only 
to large multi-state employers such as AMP, but also to small 
employers, since they frequently operate in more than one state and 
recruit workers from multiple states. ERISA has also enabled many of 
the quality innovations that have been made in the marketplace.
    ERISA's pre-emption of conflicting state laws promotes consistent 
treatment of similarly situated participants and enables employers to 
administer their plans uniformly. Further, allowing individual states 
to regulate such benefit plans would substantially increase the costs 
and complexity of plan administration. It would be difficult or 
impossible to offer the same or comparable benefits to employees of the 
same company who are located in different states.
    Contrary to popular belief, ERISA plans are subject to substantive 
requirements. These include: reporting and disclosure requirements, 
which were tightened by last year's Health Insurance Portability and 
Accountability Act (HIPAA); non-discrimination requirements; the 
fiduciary obligation to deliver promised benefits; continuation of 
benefits required under the Consolidated Budget Reconciliation Act 
(COBRA) of 1985; and the portability and non-discrimination 
requirements in HIPAA. The Americans With Disabilities Act also applies 
to ERISA plans.
    The vast majority of HMOs offered to employees are offered on a 
fully insured basis and are monitored on quality issues and the 
grievance process by state health and insurance departments, the 
Federal HMO Act and the Health Care Financing Administration, as well 
as by various private accreditation agencies.
The fiduciary's duty to deliver promised benefits under ERISA provides 
        superior consumer protection
    ERISA requires fiduciaries to act in the sole interest of the 
beneficiaries of the plan. If a fiduciary does not, he or she can be 
held personally liable. The plan cannot reimburse the fiduciary for any 
liability the court may levy against him or her, although the 
fiduciary's employer could choose to do so. Additionally, if the 
fiduciary is found to have breached those rules, he or she can be 
removed from the job. In fact, the Department of Labor (DOL) has 
brought numerous cases to assure that the fiduciaries of health plans 
comply with this ERISA provision. The statute also authorizes 
injunctive relief against conduct by plans and the removal of plan 
fiduciaries or service providers who engage in systematic patterns of 
    In a February informational letter, the DOL concluded that ERISA 
plan fiduciaries must consider service quality and provider 
qualifications when selecting a health care service provider, or risk 
possible violations of these ERISA fiduciary rules. We at AMP have long 
selected providers based on both quality and cost considerations. We 
believe this new guidance from the DOL is appropriate and it will lead 
other employers or Taft-Hartley plans to factor quality into their plan 
Dispute resolution under ERISA
    Issues of coverage arise as a matter of course in health plans 
because no plan can afford to cover everything. Benefits and benefit 
limits in employer-sponsored health plans are described in plan 
documents and applied, on a case-by-case basis, by plan administrators. 
ERISA requires health benefit plans to have procedures to provide a 
``full and fair review'' of disputed claims.
Coverage decisions in managed care plans
    Under the old indemnity system, the chief issue was whether a 
payment would be made by the plan for a service that had already been 
provided. The old indemnity plans also had very specific limits on the 
amount of treatment they would pay for. Studies showed that patients 
sometimes got the procedure that their physicians were trained in 
rather than the most appropriate treatment.
    In contrast to the old indemnity plans, in managed care plans, the 
health care provider and the patient often know the plan's decision 
before the service has actually been provided. Care is coordinated and 
purchasers are learning to measure a health plan's success in improving 
the health of their patients. This means that everyone involved--the 
patient, the provider, the plan and the employer--has a stake in making 
sure that the right decisions are made in the first place, and that the 
decisions are made consistently and fairly.
    Plan sponsors shifted from indemnity type coverage (everything 
specifically spelled out and limited) to comprehensive benefits in 
order to provide greater flexibility in meeting patient needs. Rather 
than pay for only what was listed in the plan document, the plan would 
pay for whatever was ``medically necessary'' and ``appropriate'' for 
the patient. The plan had the responsibility to determine what that 
    Employers have encouraged plans to base their medical decisions on 
available medical evidence, to adopt guidelines from medical societies 
or with medical teams and to revise them based on evidence from 
treatment and medical literature. Managed care has provided structure 
to bringing individual treating physicians' judgments in line with the 
state of the art medical practices. The treating physician is not 
always the last word on the most suitable treatment for the patient.
Advantages of the current system
    In the 1987 Pilot Life versus Dedaeux decision, the Supreme Court 
determined that ERISA provides the ``exclusive remedies'' for insured 
and self-insured ERISA plans. ERISA permits recovery for the costs of 
the benefit due, plus prejudgment interest, plus attorney's fees. 
Injunctive relief is available to employees in cases where an immediate 
coverage decision or other resolution is required. The advantage of the 
current system is that it provides simplified judicial relief to plan 
beneficiaries who do not need to get conflicting state laws or 
jurisdictional questions resolved. They can go straight to federal 
court. ERISA thereby assures that an employee's legal rights, remedies 
and obligations do not depend on where he or she happens to reside.
Benefits decisions are not medical decisions
    It is important to understand the distinction between malpractice 
liability and plan administration liability. When a treatment decision 
has harmed a patient's health, the question is one of medical 
malpractice and is litigated under state tort law. Medical 
practitioners must be specifically licensed to make medical-treatment 
decisions. In fact, many states specifically ban the ``corporate 
practice of medicine'': Medical decision-making by a plan administrator 
or an employer of physicians who is not a licensed physician. As a 
result, only physicians can be liable under state law for medical 
malpractice. In fact, the DOL has argued successfully in a number of 
cases that state laws holding physicians, and those that contract for 
their services, liable for medical malpractice in connection with 
treatment decisions, are not pre-empted even if the physician provides 
services to ERISA plan participants.
    Managed care plans are often included in suits brought over the 
issue of provider negligence or the quality of care provided as they 
can sometimes be found to be ``vicariously liable'' for the actions of 
the network providers to the extent that providers are viewed as 
employees or agents of the health plan. Such suits are usually most 
successful against staff or group model HMOs, which can be assumed to 
have more control over the providers in their plan than can a more 
loosely integrated managed care plan.
    Suits over benefits decisions are different. There is also an 
important difference between medical decision-making and coverage 
decisions. Physicians choose from a wide range of diagnoses and 
treatment options, not all of which may be covered under the terms of 
the plan.
Needed care is provided
    Some consumer advocates allege that utilization review personnel 
routinely overrule a doctor's decision on necessary treatment or that 
physicians are forced to spend a tremendous amount of time and energy 
justifying treatment decisions to clerks in distant offices. The 
reality is quite different. A recent study of more than 2,000 
physicians caring for patients in plans that utilize managed care found 
that the final coverage denial rate for physician recommendations 
within eight categories of care was at most 3 percent and much less for 
other categories of care. The majority of physicians reported no 
coverage denials whatsoever for any form of care surveyed. Moreover, 
physicians are spending more time with patients than they did a few 
years ago; they spend just 3 percent of their time on insurance 
    Under current ERISA law, the plan participant or beneficiary has a 
right to internal plan review and can appeal the plan decision in 
federal court to receive benefits. Further, while the current rule may 
allow up to a year for claims to be resolved, anecdotal evidence from 
NAM member companies, including our own, suggests that claims 
resolution rarely ever takes that long. We understand that in 
September, the DOL issued a request for information on claims 
procedures for employee welfare-benefit plans and already has the 
statutory authority to shorten these time frames.
    As is the case with any employee benefit program, not all employees 
are completely satisfied with their health care coverage. Accordingly, 
as required under ERISA, AMP employees have the right to appeal claim 
denials. AMP is committed to ensuring that its employees receive the 
coverage to which they are entitled. Indeed, AMP is diligent in its 
efforts to resolve claim disputes in a timely fashion. Over the past 
three years less than 1 percent of claims processed have resulted in 
formal appeal proceedings. A vast majority of the claim appeals involve 
amounts in controversy of less than $200. Of the claims appealed, many 
are ultimately resolved in favor of the plan participants. To the 
extent that the original claim denial is deemed appropriate, the plan 
participant is given a full and complete explanation.
    In one case, a plan participant had incurred ambulance costs in 
excess of plan limits. Nonetheless, rather than simply deny the claim, 
AMP personnel contacted the ambulance provider and negotiated a 20 
percent discount on behalf of the plan participant. This commitment to 
customer service is but one example of AMP's dedication to providing 
high-quality health care to its employees.
how will changes to erisa remedies affect the provision of health care 
                 benefits by private-sector employers?
    The fundamental issue before the Congress is: Should health plans 
and plan sponsors be liable under state tort law (with jury trials and 
punitive damages) for coverage decisions and denials of benefits? Bills 
such as the Patient Access to Responsible Care Act (S. 644) and the 
Patient Bill of Rights Act (S. 1890) would allow lawsuits to be brought 
against employers, insurers, third-party administrators and others 
under state law causes of action in personal injury and wrongful death 
    Changing the current system could create more adversarial 
relationships that are unresponsive to the needs of both employees and 
employers. Administrative expenses, such as the costs of claim review 
and litigation, consume funds that otherwise would be available for 
benefits. In addition, turning plan disputes over to the vagaries of 
state courts and juries would take from employers the opportunity to 
intervene early before formal procedures were triggered, increasing 
time and monetary costs to both employees and employers.
    Congress must recognize that we have a voluntary health care 
system. Plan sponsors provide the package of benefits they can afford. 
The benefit package is an agreement between the employer and employee. 
It is understood from the beginning that everything a provider might do 
will not necessarily be paid for by the employer plan.
ERISA and malpractice reform
    S. 644 includes a provision that would eliminate ERISA pre-emption 
of ``any state cause of action to recover damages for personal injury 
or wrongful death against any person that provides insurance or 
administrative services to or for an employee welfare benefit plan 
maintained to provide health care benefits.'' This provision would open 
up liability for employers who administer their own plans, and, 
depending on the interpretation of the regulatory agencies and courts, 
could also directly affect self-insured employers who purchase 
administrative services.
    The Patient Bill of Rights Act would impose liability against those 
that ``arrange'' for medical and administrative services for health 
coverage. To some extent, all plan sponsors ``arrange for medical 
services,'' therefore this provision could result in potential exposure 
of plan sponsors to state causes of action.
The threat of increased litigation would cause many employers to drop 
        or scale back their health benefits
    The NAM strenuously and vigorously objects to this provision. 
Exposing plans to damages beyond the scope or value of the benefits 
provided through the plan would fundamentally alter the nature of the 
benefit contract between employers and employees. Such remedies also 
would create perverse incentives for costly and unnecessary litigation 
at the expense of the dispute resolution methods currently in ERISA. 
The threat of increased litigation would discourage employers from 
offering health care plans. This liability burden would pose one more 
hurdle--and a very large one at that--for the small employer just on 
the cusp of offering health benefits to his or her employees. Further, 
employers would significantly reduce or eliminate health care coverage 
in order to insulate themselves from liability in an area that is not 
their core business activity.
    The NAM conducted a survey of more than 2,000 manufacturers in 
March at National Manufacturing Week. The survey found that 51 percent 
of companies would cut back benefits to offset the costs of potential 
lawsuits and 14 percent would stop offering health benefits altogether 
if faced with increased liability for health benefits. According to 
another survey conducted by the polling firm Public Opinion Strategies 
for the Health Benefits Coalition (of which the NAM is a member): 57 
percent of very small employers (between 5 and 50 employees) would 
likely drop coverage if exposed to malpractice lawsuits. Almost 4 out 
of 10 (39 percent) say they would be ``very likely'' to stop providing 
Removing the ERISA shield for State causes of action would be costly 
        and would depress wages' job growth and other benefits
    A recent study by the Barents Group found that expanding liability 
under ERISA for benefits decisions would increase health care premiums 
by as much 8.6 percent. This premium increase would be hardest to bear 
for small businesses and low-wage workers. This cost increase could 
force as many as 1.8 million more Americans to lose their coverage in 
1999. (In 1996, 64 percent of Americans received health care coverage 
through employers.) Some would lose their coverage as a result of their 
employers dropping coverage entirely. Other consumers would decide they 
could not afford the increased cost sharing that would be passed on to 
them as a result of this proposal. In fact, a study conducted by 
researchers in the Department of Health and Human Services and 
published in the health-policy journal Health Affairs (Nov.-Dec. 1997) 
found that while employers are increasingly offering health benefits to 
their employees, employees, particularly those who are young or earn 
low-wages, are increasingly turning that offer down. Most likely these 
employees decline this coverage because they cannot afford the cost-
sharing requirements. At a time when policy-makers continue to struggle 
with the ever-increasing problem of the uninsured, why would Congress 
want to do anything to aggravate the problem?
    Over the next five years, such a cost increase could result in as 
much as $94 billion in additional health care costs for American 
business. Such an increase could depress worker wages as well by a loss 
of as much as $1,512 in take-home pay per household. As total 
compensation (benefits plus wages is fixed), this increase in health 
insurance costs would force wages down as well as create job losses. 
Indeed, according to Barents, as many as 240,000 jobs could be lost in 
2003 as rising health care costs forced employers to cut their 
    More important than this average cost increase across the board is 
what would happen to an employer, particularly a small one, faced with 
an expensive malpractice suit. Such a suit could wipe out an employer. 
Even if liability insurance were available for employers in these 
cases, this insurance is likely to be experience-rated and thus 
prohibitively expensive for employers who have experienced any adverse 
Expanded remedies benefit only the trial bar and would not improve 
        health care quality
    Increased lawsuits would channel scarce health benefit dollars to 
the trial lawyers' bar and away from the care for employees and their 
families and efforts to improve the quality of care. If health plans 
and employers could be sued for medical malpractice over their benefits 
decision, most of the money would go to trial lawyers--not injured 
patients. According to the Rand Corporation, only 43 cents of every 
dollar awarded in medical liability litigation goes to patients. Access 
to a jury trial also does nothing for the patient. Issues affecting the 
patient would be resolved years after the patient needed a treatment 
    The NAM has long recognized that malpractice liability is a 
significant problem for physicians, but increasing malpractice 
liability--for plans--is not a panacea. Instead, this attempt 
emphasizes a reactive approach to health care quality and interferes 
with proactive approaches that emphasize continuing quality improvement 
and greater accountability of physicians.
    Judgments about the most appropriate treatment are best made in a 
medical context, not in a courtroom. Taking these issues before a jury 
would put science-based decisions on trial after the fact. The issue 
before the jury would be whether the choice of treatment, in 
retrospect, could have contributed to a poor outcome for the patient 
(which can never be known for sure), not whether the choice of 
treatment was the best choice at that time for the patient.
    Throwing medical decision-making before juries creates substantial 
liability for doing the very things that we want plans to do to improve 
quality. Any effort by an employer or health plan to review physician 
decisions or provide evidence-based guidelines creates a potential for 
liability. State tort liability for benefit denials would also give the 
treating physician a weapon against the medical director and the 
medical committee in the plan. Treating physicians would be able to 
force plans to pay for outdated or unproven treatments.
    Applying malpractice liability to coverage decisions would make the 
patient's health outcome a sufficient condition for liability, 
regardless of whether proper procedures and practices were employed. 
Unfortunately, sometimes despite the best possible treatment and the 
correct decisions on coverage, patients die or their conditions worsen.
Imposing expanded liability on private plans is fundamentally unfair
    Such an increased liability essentially punishes those private 
employers who try to do the right thing by their employees by providing 
them with benefits. More unjust is the fact that none of the bills 
under consideration by Congress would expose public programs such as 
Medicare, Medicaid or the CHAMPUS program operated by the Department of 
Defense to such liability. This double-standard is completely 
inconsistent with the spirit of the Congressional Accountability Act 
and Unfunded Mandates Act.
    It is also unfair to impose such an increased liability threat on 
private-sector employers when neither the Federal Employees Health 
Benefits Program (FEHBP) nor the Medicare program permits the award of 
punitive or compensatory damages beyond the scope of the covered 
Expanded liability will decrease provider flexibility
    Creating plan liability for treatment may bring the very result 
that physicians are trying to avoid: an increased role for 
administrators and lawyers in medical decision-making. The best way for 
plan sponsors to avoid liability is to pick specific treatments, 
perhaps only those benefits that are determined to be medically 
necessary by the courts, and provide an explicit statement in the plan 
that those are all the treatments the plan will pay for. Enrollees 
cannot sue to get benefits the plan clearly does not provide. This 
would remove any discretion from the treating physician or the plan's 
medical director. It would also substantially reduce the quality of 
medical decision-making. Plan participants will have very limited 
coverage that would not keep pace with innovations in medical treatment 
or account for unique individual needs.
Employers cannot be shielded from liabilities for benefits decisions 
        under congressional proposals
    Many in Congress seek to draft legislation that would somehow allow 
only health plans and not employers to be sued for malpractice for 
benefit decisions. For example, Representative Charles Norwood, the 
chief House sponsor of PARCA, has stated that it was not his intent for 
employers to be held liable under H.R. 1415. Therefore, in November, he 
introduced H.R. 2960, The Responsibility in Managed Care Act. H.R. 2960 
states that the liability provisions shall not apply to any cause of 
action against an employer or other health plan sponsor unless, ``The 
employer or other plan sponsor exercised discretionary authority to 
review and make decisions on claims for plan benefits, and the exercise 
by such employer or other plan sponsor of such authority resulted in 
personal or financial injury or death.'' S. 1891 also allows state 
causes of action against an employer or other plan sponsor if ``such 
action is based on the employer's or other plan sponsor's exercise of 
discretionary authority to make a decision on a claim for benefits 
covered under the plan or health insurance coverage in the case at 
issues; and the exercise by such employer or other plan sponsor of such 
authority resulted in personal injury or wrongful death.''
    We believe that trying to somehow isolate employer liability from 
the liability of a managed care organization's liability for a benefits 
decision is bad policy. First, it is almost impossible to write 
legislation that would make managed care organizations, but not 
employers, liable for benefit decisions. In part this difficulty is due 
to the fact that employer sponsors of health benefits plans are not 
passive buyers of health care services. Instead, they exercise 
discretionary authority on a daily basis to determine what benefits are 
covered under the terms of the plan. In fact, such authority is part of 
an employer plan sponsor's fiduciary duty under ERISA. In other words, 
to escape liability under bills currently before the Congress, an 
employer would have to abandon any responsibility for processing claims 
or reviewing claims decisions made by their health plans. This puts 
employers in the untenable position of having to give up control over 
their health plans or risk lawsuits. Given that many NAM members 
intervene with the health plans they contract on behalf of their 
employees to ensure that they get better care, such a policy will only 
hurt workers and their families.
    Second, even if it were possible to limit such liability to managed 
care organizations, the NAM would oppose such liability as it would 
hamper medical innovation and efforts to improve health care quality 
and decrease health care costs. Employers and their workers would 
ultimately pay for expanded liability for HMOs and other health plans.
Medical necessity decisions
    Just last week, Representative Norwood unveiled a revised version 
of PARCA (PARCA 98) with new ERISA remedies provisions. PARCA 1998 
would ``not apply to any cause of action to recover damages for 
personal or financial injury or wrongful death against any person that 
provides insurance or administrative services to or for a group health 
plan,'' unless an employer denied a benefit on the grounds that the 
benefit was not medically necessary.'' (PARCA 1998 also prohibits 
punitive damages in cases that have gone through an external review 
    As explained previously, employers working with their health plans 
do not make medical judgments; they make coverage decisions. 
Nonetheless, they cannot afford to pay for every treatment a patient 
may desire or a provider may wish to prescribe or undertake. They, 
therefore, must sometimes decide--while consulting with properly 
trained utilization management teams or other experts--that a treatment 
does not meet best-practice standards. While there is much hype that 
non-medical personnel supposedly make medical decisions, the NAM sits 
on the board of the American Accreditation Health Care Commission/URAC, 
which accredits utilization review organizations and network-based 
managed care plans. I can tell you that non-medical personnel have no 
medical discretion to deny a claim in an accredited plan. If they turn 
down a treatment based on the scripts, they are required in any 
accredited plan to turn the case over almost immediately to a medical 
    Expanding malpractice liability to cover benefits decisions would 
allow external review parties and the courts to have wide latitude to 
override internal procedures defining the terms of what constitutes 
plan benefits (i.e., medically necessary services). Every plan would 
then have to provide whatever benefits a district or circuit court may 
find ``medically necessary'' in a particular case. Certainly, providers 
would use this window to introduce every other provider service 
imaginable into HMOs and self-insured plans, whether or not given 
scarce benefit dollars such services were truly in the best interest of 
the majority of the plan's beneficiaries. To have either federal 
regulatory agencies or the courts determine what is and is not 
``medically necessary'' was the essence of the President's failed 
Health Security Act and would result in the destruction of the private 
health care market.
    Even the President's Advisory Commission on Consumer Protection and 
Quality in the Health Care Industry failed to recommend expanded 
liability in its final report. Your former colleague, Florida Governor 
Lawton Chiles has also rejected such an approach. In his 1996 veto 
letter over just such a proposal in Florida, Governor Chiles wrote, 
``Throwing these cases into our already overly crowded and overly 
litigious tort system is also troubling. The tendency in most cases 
would be to require the HMO to pay for the services regardless of cost. 
* * * The key to any dispute resolution system for health care claims 
is that it be fast, fair and efficient. The tort system is none of 
    In fact, while the American Medical Association as a whole has 
sought out other deep pockets to pay for medical malpractice and 
embraced these ERISA-liability expansions, the president of the New 
Hampshire Medical Society in a February letter to the New Hampshire 
legislature wrote, ``We believe that ready access to information at the 
time the denial was made is critical to taking the appropriate next 
step in a patient's care. An explanation, today, on why a service has 
been denied, will help me and my patient decide whether or not to 
continue on a course of treatment, change direction or pursue an appeal 
with the HMO. Health insurer liability in a court case 3 years down the 
road does little to help my patient here and now.''
    We urge Congress, too, to reject expanded liability for health 
plans and employers. Such an expansion would only decrease health care 
quality, increase health care costs and the number of uninsured, harm 
small businesses, jeopardize the very existence of the employer-based 
system and enrich the trial bar. Instead, we support private-sector 
efforts to encourage better medical and benefits-decision-making at the 
front-end. Thank you for letting us share our views with you on this 
important subject.
                           executive summary
    Health benefits are a key recruitment and retention tool for 
employers. It is therefore, in an employer's self-interest to provide 
quality health care benefits to attract new employees and keep these 
employees productive.
    The Employee Income Security Act of 1974 (ERISA) has encouraged 
employers to provide health benefits to their employees by leaving up 
to employers the types and amounts of benefits they can provide. It 
simply requires that employers fulfill the benefit promises they have 
made. ERISA also contains strict fiduciary standards, which require 
employer plan sponsors and other plan administrators to act in the sole 
interest of the beneficiaries covered under the plan. Fiduciaries who 
fail to do so can be severely penalized. Recently, the Department of 
Labor has determined that fiduciaries must take quality as well as cost 
into account when purchasing-health benefits.
    ERISA requires all plans to have claims procedures for solving 
benefit disputes and provides the sole remedy for self-insured and 
fully insured ERISA plans in disputes. The case is heard in federal 
court and the remedy is limited to the costs of the benefit due plus 
pre-judgment interest and attorney's fees. Current law distinguishes 
between treatment decisions--where individuals can sue for medical 
malpractice--and decisions over plan administration which are coverage 
decisions--and are generally pre-empted by ERISA. The NAM believes 
strongly that this distinction should be maintained.
    Legislation, such as the Patient Access to Responsible Care Act (S. 
644) and the Patient Bill of Rights Act (S. 1890), would destroy the 
employer-based health care system by allowing lawsuits to be brought in 
state courts against employers and health plans in personal injury and 
wrongful death cases.
    The NAM opposes this change in the law, which may lead employers to 
face punitive and economic damages for health benefits decisions for 
the following reasons:
    (1) The threat of increased litigation would lead many employers to 
drop or scale back their health benefits.
    (2) Expanding liability under ERISA for benefits decisions would 
harm employers and employees by increasing health care premiums by as 
much as 8.6 percent, leading to less health care coverage, fewer jobs 
and lower overall employee compensation.
    (3) Allowing such suits would take money away from efforts toward 
increasing health care quality-and towards our malfunctioning tort 
system. Only 43 cents in medical liability litigation goes to patients.
    (4) Allowing private employers to be sued when federal government 
programs would remain protected from these lawsuits is unfair.
    (5) Creating plan liability for benefits decisions would force 
plans--which wished to avoid liability for coverage decisions--to be 
more restrictive in defining covered benefits. The resulting rigidity 
in benefit design would hurt patients.
    (6) Despite various congressional attempts to do so, employers 
cannot be insulated from liability for benefits decisions without 
ceding all control over the benefit plans they pay for. Even if 
employers could be isolated, they and their employees--if they were 
fortunate enough to continue to have health benefits--would still pay 
the increasing health care costs that resulted from this new liability.
    (7) Expanding malpractice liability to penalize employers or health 
plans that denied in good faith a benefit for lack of medical necessity 
would allow the courts or regulatory agencies to define medical 
necessity. Private-sector health plans would then have to cover almost 
all benefits.
    Congress should reject--as did Governor Lawton Chiles of Florida, 
the President's Advisory Commission on Consumer Protection and Quality 
in the Health Care Industry and the New Hampshire Medical Society--this 
misbegotten attempt to redefine ERISA remedies. It will only harm 

                      common law rights of action

    Senator Specter. Before proceeding to the 5-minute rounds 
of questioning, I would state the facts of the case involving 
Mrs. Corcoran. As reported in the Federal reports, she was 
pregnant but had a history of pregnancy-related complications. 
Her treating doctor recommended hospitalization. The HMO 
determined that hospitalization was not medically necessary, 
instead authorizing 10 hours of in-home nursing care per day. 
According to the facts presented to me, the fetus became 
distressed while the nurse was not on duty, and the fetus died. 
The Federal courts denied liability under the ERISA statute.
    Coming right to the core, Ms. Berg, of the administration's 
proposal, are you contending that ERISA should be changed so 
that Mrs. Corcoran would have a common law right to sue the 
    Ms. Berg. Yes, we are. We are saying that these remedies 
should be available to participants in health plans. As Mr. 
Pollack already noted, there are a couple of ways to do that. 
We note that in our testimony, as well.
    One approach, again, is to put these issues back into State 
court. Another is to change the ERISA remedy. There are 
variations of these approaches. And we would be happy to work 
with you in developing any of them. But the goal here is to 
make sure these remedies are available.
    Senator Specter. Ms. Berg, the contention is raised by many 
that there would be an enormous increase in health care costs, 
estimated by the National Federation of Independent Businesses, 
to be $94 billion, contending that there would be a loss of 
some 1.8 million Americans on their coverage. Does the 
administration have an analysis as to what increased costs 
would arise and what coverage would be limited if the common 
law rights of action were available, as you have recommended?
    Ms. Berg. Well, first, before I talk about the estimates, 
let me point out whenever we are talking about a change like 
this, you will find different sorts of estimates. In this case, 
we have actual experience going on out there: the millions of 
participants in health care plans that are not covered by ERISA 
and have these remedies available to them. And, indeed--and let 
us use State and local government employees as an example--
State and local government employees generally are covered in 
higher numbers than private sector employees. We do not see 
their employers running away from providing health insurance 
because of these liabilities.
    Senator Specter. What liabilities do you find in those 
plans where there is a common law right of action?
    Ms. Berg. They are able to go into State court, under 
contract or tort law, and sue for the benefit they should have 
gotten, and obtain attorneys' fees. They can get expert 
witnesses' fees if necessary. They can get compensation for 
other monetary harm that has been done to them. They can get 
damages for pain and suffering.
    Senator Specter. Economic damages and punitive damages?
    Ms. Berg. Economic damages and punitive damages.
    Senator Specter. And what are those costs? What do they 
    Ms. Berg. Again, we do not see a difference in the premiums 
for State and local government employees. In fact, many of them 
are in the same HMO's that also cover ERISA employees.
    Senator Specter. Mr. Gallagher, do you disagree with that?
    Mr. Gallagher. I do not have the answer to that, Senator. I 
know that in the case of individuals who buy private coverage, 
their costs are substantially higher. I have seen studies that 
indicate it is 25 percent higher.
    Senator Specter. Well, Mr. Gallagher, we really need the 
specifics as to what the comparison in costs are. Now, this is 
obviously a big factor. If there are greater rights attaching, 
there obviously will be increased costs. And there ought to be 
an evidentiary base, since there are alternative plans, which 
would provide an answer to it.
    Mr. Pollack, you had your hand up.
    Mr. Pollack. Mr. Chairman, yes. The one State that has 
actually adopted a specific provision akin to what we are 
talking about is the State of Texas. They adopted legislation 
last year. And an analysis was made for the Legislature and the 
Governor concerning the cost. And that cost--and I have the 
estimate here; I am happy to share it with you--was 34 cents 
per enrollee, per month. And the reason it is so low is the 
same experience that we have in a whole bunch of other health 
situations. And that is very few people make claims.
    And so in terms of any State that has tried this so far and 
has gone to the trouble to develop estimates, the State of 
Texas, I submit to you, has done that. And it comes out to less 
than $4 per enrollee, per year.
    Senator Specter. How long has Texas had this legislative 
    Mr. Pollack. It has been in effect for approximately a 
year. And I will say that this was a prospective analysis.
    Senator Specter. Is there litigation as to whether Texas 
may make that provision, in light of the ERISA preemption?
    Mr. Pollack. Yes; there is litigation pending in Federal 
district court. And it is our belief that there will be a 
judgment rendered in that case within the month.
    Senator Specter. To what extent, Mr. Pollack, as an expert 
in this field, do you think there would be a reduction in 
complaints if you had the independent right of appeal as a 
mandatory provision?
    Mr. Smith, you say you do have that right of appeal in 
AMP's plan?
    Mr. Smith. Internally, yes, we do.
    Senator Specter. Internally. OK.
    Mr. Pollack. And I have to say, Senator, when we were in 
the President's Commission, one of the things is when we 
suggested an external right of appeal--and we voted on this 
unanimously, health plans, insurance companies, employers--one 
of the things I think that all of us felt was these different 
systems of internal, external and ultimately the right to 
judicial remedies, it helps get the problems solved at an 
earlier point. Because if you know you have got an external 
right of appeal, you are more likely to deal with this 
successfully in the internal right of appeal.
    Senator Specter. How would you propose the external right 
of appeal work?
    Mr. Pollack. Well, we have some experience with that in a 
few States, and we have experience with that in the Medicare 
program. After an internal review has taken place and the plan 
has had an opportunity to make a judgment in the internal 
review, there would be a panel that would be selected. That 
panel would be independent of the plan. And they would conduct 
a de novo hearing. And that de novo hearing would then make a 
determination as to whether the denial was inappropriate.
    I want to be clear, however, that panel would not have the 
right to redesign a benefit package. They would have to render 
their decision based on the benefit package that was 
established by the employer. And this would not be a pretext 
for opening that up.
    Senator Specter. Senator Faircloth.
    Senator  Faircloth. Yes; I had a question for Ms. Berg. The 
growth of managed care did not happen overnight. While it has 
gone from 4 percent to 40 percent of health benefits paid under 
self-insurance, you have had many years of complaints I am 
sure. Why has it taken the administration so long to decide to 
issue regulations to protect health benefits?
    Ms. Berg. Well, Senator, I cannot speak to the 15 or more 
years before I got here since the passage of the original reg, 
but I can speak to the last 5 years.
    Senator  Faircloth. You have been there 5 years?
    Ms. Berg. Yes, I have been here 5 years.
    I will say we recognized the problem right from the 
beginning. But at the time that I got here, there were some--I 
like to think many--who hoped that universal health care reform 
was in sight. And it did not seem to be a productive use of 
time to work on amending a regulation, with all the work that 
that takes, that might immediately be irrelevant.
    By the time it became apparent that it was more likely 
there were going to be incremental approaches to health care 
reform, we picked the issue right back up. In fact, during 
deliberations on the Kennedy-Kassebaum bill, we wrote, 
requesting that these issues of protections be included in that 
legislation, because we knew, to some extent, our regulatory 
authority was limited and there could be a more comprehensive 
addressing of the issue through legislation.
    Unfortunately, that did not happen. And our immediate 
responsibility, after the passage of HIPAA, was to get 
regulations in place, implementing that legislation in an 
extremely short timeframe. We did that. I am very proud of the 
way that we did that.
    And immediately after that, we turned back to this issue 
yet again, and put out a request for information, modeled on 
work that was already being done by HCFA and others. Because we 
said, why reinvent the wheel; let us pick up on that. The 
question we went out with is, why will these kinds of standards 
not work in the private sector? We asked any number of 
    And I have to tell you, I am a little bit amused, because 
the employer group representatives who are now saying if the 
Department would change the regulation we would not be here 
talking--I mean, I can quote to you from their response to our 
request for information on our current regulation, the APPWP: 
``We believe the existing minimum claims procedure standard, 
supported by ERISA's strict fiduciary rules, have resulted in 
timely, fair and cost-effective resolutions for health plan 
    Don't do anything, they are telling us. Similarly, the ERIC 
testified, as well.
    So it has only been since the bills that we are talking 
about, the bills with real protections that we need to add on 
to the internal claims process, have the momentum that they 
have that suddenly people are saying, well, gee, improvements 
to our claims process is all that is needed here.
    Senator  Faircloth. When do you plan to issue the 
    Ms. Berg. Within 60 days.
    Senator  Faircloth. Within 60 days you will be issuing 
    You propose that legislation be passed to amend ERISA, to 
require self-insured plans to have independent systems for 
external review of claims. You justify this on the basis that 
it will reduce the need for litigation. What is the connection?
    Ms. Berg. Well, again, as I was explaining, our position is 
that all three pieces are needed: a strong internal claims 
review process, where we would hope that most of these problems 
would be picked up in the first place--but as I pointed out--
and, again, this is the problem with remedies at the end of the 
day--if a health plan knows that if they deny a benefit, even 
though it ought to be covered under the plan, at the end of the 
process, all they will have to do is pay that benefit, if they 
are trying to improve their financial situation for whatever 
reason, there is no disincentive for them to deny claims.
    They can be in perfect procedural compliance. They can deny 
every single one of those claims within 72 hours, or whatever. 
But the problem is those claims should not have been denied in 
the first place. So you need to know there is going to be a 
review of that kind of practice so these things will not 
happen. And ultimately, remedies as well, so that there is 
financial incentives that make people do the things that they 
should be doing in the first place.
    Senator  Faircloth. What would be the administration's 
response to laws to put a limit on what claims could be--a 
specific limit on what any claim could be?
    Ms. Berg. Well, again, as we point this out in our 
testimony, there are different approaches that can be taken 
with this. Many of the States have limitations on claims 
already, as well. We are open to different approaches. We are 
not saying there is any one that is absolutely right and 
    Senator  Faircloth. Mr. Pollack, what would be yours?
    Mr. Pollack. Well, in response to the question you asked 
the Assistant Secretary, I would say, first of all, the 
external right of appeal is going to be very important.
    Senator  Faircloth. Well, I asked for a specific monetary 
limit on what any claim could amount to. What would your 
response to that be?
    Mr. Pollack. I am not sure I would establish one across-
the-board monetary limit. I am not sure that that would be 
    If that approach was adopted, there might be different 
classifications of cases, where there would be some range 
established, as we have in our penal system.
    Senator  Faircloth. Is there some way to put a compensation 
limit to what it could be?
    Mr. Pollack. I understand what you are driving at.
    Senator  Faircloth. For simplification, I think it would 
save attorney's fees. It would save time. The injured person 
would get paid quicker. Is it possible to do what I am talking 
    Mr. Pollack. I think it is possible. It is very difficult 
to do it. I think it is possible to do it. I do not think I am 
going to be able to respond directly, as you are asking me to, 
to give you a precise fee for each and every kind of situation.
    I think it is possible to do it. It is very difficult to do 
it. But it is achievable.
    Senator  Faircloth. Well, lawsuits are out of hand is the 
thing I believe you mentioned. Somebody gets $90 million.
    Mr. Pollack. Yes; that was my colleague on my left, Mr. 
Gallagher, said that.
    Senator  Faircloth. Was that Mr. Gallagher? OK. Well, 
litigation is out of hand, and in some way it has got to be 
brought under control.
    Thank you, Mr. Chairman.
    Senator Specter. Thank you, Senator Faircloth.
    Senator Kennedy.
    Senator Kennedy. Thank you.
    And I thank the panel. It has been enormously interesting.
    As I understand, there are two different ways of doing the 
remedies. There is one, either to have a Federal remedy, or 
otherwise leave it to the States. And I think many of us have 
felt that we could leave this to the States and let the States 
make these decisions about where they are going to come out in 
terms of the remedy itself. That certainly would be the 
approach that I would take.
    I know there are some--Congressman Stark and others--who 
want the Federal. Then I think the question is about what you 
do along the lines in setting limits that may be an issue. But 
that, I suppose, could be another time.
    I think, for the most part, I do not know particularly in 
the Senate, about the Federal remedies. It is basically to let 
the States make these judgments.
    Could I ask, just coming back to the point about the 
questions about the costs. Because this has been sort of the 
way that many of those that are opposed to both having the 
appeals--and I thought that was an enormously important issue 
to raise, because it really is part of this whole process to 
have the appeals procedures, as Mr. Pollack has mentioned, as 
well as the remedies. And tying those together are very, very 
important, so that we have the preventive aspect to try and get 
this done.
    And as I understand, Mr. Pollack and others, we do have 
that under the Medicare and it works pretty well. Maybe we 
ought to be finding ways to make it better, but we do have 
those external appeals. We are not trying to take a whole new 
concept, as I understand it. We are trying to build on 
something that we do know that works.
    Mr. Pollack. And is inexpensive. And I want to be clear 
about this, because this is a point that should be discussed, 
and it is very relevant. Every one of us are talking about it 
in some way.
    We did get estimates from the--when we made the 
recommendation for an external right of appeal, independently, 
from the Lewin Group. And what we heard was as follows. We got 
a range. And the range provided to us by the Lewin Group was 
that the cost of an external right of appeals--and I am giving 
you the exact figures--was 0.3 cents per enrollee, per month, 
up to 7 cents per enrollee, per month. You take the maximum end 
of that, and you are talking about 84 cents per enrollee, per 
month, for an external right of appeals.
    Senator Kennedy. So this is a small factor.
    Now, let me just ask about the differential, in terms of 
the cost of the remedies. You mentioned the Texas situation. We 
also have the example of CALPERS, California, 1.2 million. 
Their State and local employees, their premiums are competitive 
and in many instances are less because they have a better 
bargaining position. And as I understand, they have the 
complete right of remedies that you are recommending under the 
Bill of Rights. Am I correct?
    Mr. Pollack. That is correct.
    Senator Kennedy. So, you know, there is speculation about 
what the costs are going to be. And Mr. Gallagher was unable, 
as I understand it, and I will give him a chance to respond, 
but unable to respond to the point that, in reality, what is 
happening in terms of the State and county employees, and local 
employees, we have not seen any evidence, or it has not been 
submitted, evidence, about any real difference in terms of 
premiums, nor for individuals who are outside, who purchase--I 
guess there may be some difference there, but I did not see 
there was very much of a difference, even in terms of the 
premiums, outside of individual--the marketing reasons for 
individual purchasers.
    Is that your understanding?
    Mr. Pollack. Yes.
    Senator Kennedy. Now, what we are really talking about 
here--and this is just the end, Olena Berg--let us take your 
case about your CAT scan. If a person has the CAT scan, if the 
doctor, if the groups says, the package says, you can have the 
CAT scan, and the doctor says, I am not going to do the CAT 
scan because I do not think that it is worthwhile in this case, 
the person then gets a health implication of this, at the 
present time, they can sue the doctor for malpractice, is that 
    Ms. Berg. That is correct.
    Senator Kennedy. OK. Now, if they say that the doctor wants 
to do the CAT scan but the package does not provide the CAT 
scan, and so the plan says, no, you cannot do that CAT scan, 
then what is the remedy if the person gets additional medical 
complications? What happens now?
    Ms. Berg. In that case, it is a benefit determination, and 
it would be subject to ERISA. So, arguably, the only benefit 
that would be available is the original test, if the person 
were damaged. But I have to point out that we actually have 
three situations here. One is the plan clearly says we are not 
going to cover this, and there is no question about that.
    Senator Kennedy. OK.
    Ms. Berg. The issues that we are mostly talking about today 
is kind of the intermediary. The plan has a set of benefits, 
but there is a determination by someone, not the doctor. The 
doctor says, my patient needs this test, and someone in the 
process--a utilization review committee or something like 
that--even though, under the plan, the person is covered for 
what is determined to be medically necessary, someone 
wrongfully says, this test is not necessary, and the person 
does not get it.
    And we are saying that situation should be treated exactly 
as the malpractice situation is. Someone has done something 
that was wrong that harmed the patient.
    Senator Specter. Senator Kennedy, we are under tight time 
constraints. After this hearing was set, the Appropriations 
Committee set a meeting with Prime Minister Netanyahu at 2 
o'clock. So we are going to turn to Senator Durbin for a round 
of questioning.
    Senator Durbin. Thank you, Senator Specter. I apologize for 
being late. And I want to applaud you for holding this hearing. 
This is a timely issue, and one that I have tried to address by 
introducing legislation on the matter.
    And I frankly come to this issue with two life experiences 
that give me great interest. One is, before I was elected to 
Congress, I was a medical malpractice attorney. And I 
represented both sides. I defended doctors and I sued them. So 
I have been on both sides of this issue. I think I understand 
better than some that we are talking about real-life experience 
and real-life tragedies.
    The second experience relates to a program in my hometown 
of Springfield, IL, that invited Members of Congress to spend a 
day with the doctor. So I went on rounds in a hospital with a 
doctor. I spent 1 hour of that day standing at a nurse's 
station while this doctor, on the telephone, argued with a 
clerk from an insurance company in Omaha, Nebraska, about 
whether a woman would be admitted. And, finally, the doctor, in 
desperation, said I cannot in good conscience, send this woman 
home. I am going to admit her and fight the insurance company 
    I think this issue is about accountability. Who should be 
held accountable? If a doctor makes a medical decision in the 
best interest of his patient, and then is overridden by the 
insurance company, who should be held accountable?
    Let me just say, before I offer Mr. Pollack an opportunity 
here, those who argue that this is going to shift a burden on 
employers who choose these managed care plans, I beg them to 
read the legislation that I have introduced. We clearly 
indemnify all employers. This is a question about the managed 
care company. It is also a question of a doctor's advice. And 
it is a question of accountability.
    Mr. Pollack.
    Mr. Pollack. Mr. Durbin, if I may just build on your 
comment, and Mr. Specter's elaboration of Mrs. Corcoran's case, 
you have got a perfect example of that situation. Her doctor 
said that she needed--she had an at-risk pregnancy. Her doctor 
said she needed to be in the hospital as she was approaching 
term. And the doctor was clear that she needed that care.
    Unbeknownst to Mrs. Corcoran, that HMO had gotten a second 
opinion. And that second opinion also said she should be in the 
hospital and that she should be under constant doctor's care. 
Notwithstanding that, the HMO said no, she should not be in a 
hospital; that she should be getting 10 hours a day of nurse's 
care. And as a result of that, her child died.
    There is no question that plans are practicing medicine. 
And what the plans, in effect, are saying to us is: We can 
practice medicine except when we make a mistake. Then you 
should not treat us as if we are practicing medicine.
    But Mrs. Corcoran is a clear example of how the plans have 
overridden professional decisions about what was good for 
herself and for her fetus. And unfortunately, the plan overrode 
it and she has no remedy today.
    Senator Durbin. I would like to ask Mr. Smith and Mr. 
Gallagher a question--it is not a hypothetical, it is a real 
case of a woman in Chicago, who went on vacation in Hawaii, and 
had a severe reaction. And the doctor in Hawaii recommended a 
bone marrow transplant immediately to save her life. She called 
her HMO. They said no, you have to come back to Chicago. We 
will not do it in Hawaii. And her doctor in Hawaii warned her: 
Do not get on that plane. She said: I have no choice; I cannot 
pay for this. She got on the plane, suffered a stroke, and died 
9 days later.
    Should the HMO and insurance company get off the hook in 
this situation? Should they be limited to the cost of the 
procedure only if they have overridden a doctor's medical 
decision about what is in the best interest of a patient, and 
the patient dies as a result of that insurance company 
    Mr. Smith.
    Mr. Smith. As it stands now, if a plan is involved in 
practicing medicine, they are subject to liability. And in 
terms of indemnifying employers, you can indemnify all you 
want, but the costs will come back to us. And so far, all we 
have heard about these costs are examples of State and local 
governments. I have heard examples of Medicare being held up as 
an example.
    To the extent that you want to start comparing State and 
local government management to what a private employer can do, 
that makes me very uncomfortable. And this notion that we have 
no incentive to, other than financial controls, is ludicrous. 
We care about our employees and we want them to get top-quality 
    And I will repeat this again. We can cite example after 
example of some very horrific situations, but for every one of 
those there are many, many, many success stories. And I am as 
sorry as I can be about this woman who died on her way back 
from Chicago. It is a terrible thing. And any employer would 
feel very compassionate toward their employee for that. But to 
the extent that we try to fix those individual situations with 
a broad-based piece of legislation, then you are going to 
impact the lives of----
    Senator Durbin. Mr. Smith----
    Senator Specter. Senator Durbin, we are going to have to 
give Mr. Gallagher a chance.
    Senator Durbin. Well, I would like to respond to this 
first. Let me tell you, this is not about compassion. This is 
about justice. This is about justice. This is a decision made 
by a company, not by a doctor. The company overrode the doctor. 
And you are saying, oh, there is liability. But it is a limited 
liability. And I think your response was not totally responsive 
to the question.
    Mr. Smith. If they practiced medicine, then they could be 
subject to State malpractice.
    Senator Durbin. Mr. Gallagher?
    Mr. Smith. So there is more liability than you are 
    Senator Specter. Mr. Gallagher, would you care to reply?
    Mr. Gallagher. Thank you. Briefly.
    I know all the members of the committee here are lawyers, 
and you know the phrase ``bad facts make bad law,'' and that 
applies to legislation, too.
    But you should not deprive employees of this country of the 
benefits that they have gotten from the managed care system, 
which is better care, wellness benefits, all the things that we 
did not have in the fee-for-service system, by focusing on 
penalizing employers and managed care companies when mistakes 
are made. The focus should be on making sure those mistakes do 
not happen again.
    Senator Specter. Mr. Smith and Mr. Gallagher, would you 
care to reply on this issue of internal and external rights of 
appeal? You have not been given an opportunity to comment on 
that. Do you think that there ought to be internal right of 
    Mr. Smith, you commented within your own company. Do you 
think that that would be an appropriate remedy, for a mandatory 
internal right of appeal?
    Mr. Smith. I cannot speak on behalf of NAM, but at AMP we 
have been involved in developing policy statements, where, as 
an alternative to changing some of these ERISA remedies, we 
would certainly favor some type of an appeal process to help 
resolve some of these issues.
    Senator Specter. How about external appeal?
    Mr. Smith. Under the right circumstances. That is fraught 
with certain difficulties, as well. But it is something we 
would certainly prefer to some of the ERISA remedy changes.
    Senator Specter. Mr. Gallagher, would you care to answer 
that question?
    Mr. Gallagher. I know, Senator, that many companies and 
many managed care companies, are considering doing that on a 
voluntary basis merely because of the perception that consumers 
and others have that they are not going to get a fair shake 
when you go back to the----
    Senator Specter. The question goes to whether you would 
think it appropriate for Congress to make that a requirement, 
internal and external rights of appeal.
    Mr. Gallagher. I would prefer that it be voluntary, that 
the decision be left to the company.
    Senator Specter. Senator, do you have one more comment to 
make here? I am sorry to limit--this is a vast subject, but we 
do have, as I said, the Prime Minister coming in very shortly.
    Senator Durbin. Senator, you have been kind enough to hold 
this hearing. I am glad you did. And I will not hold it up. 
Thank you very much.
    Senator Specter. All right.
    Do you want to make another comment, Ms. Berg?
    Ms. Berg. Just one final comment on the issue of cost, 
because it is important that there be a weighing of that. There 
are a couple of studies on the PARCA bill, one by Muse and 
Associates, which estimates the additional costs due to these 
remedies at two-tenths of a percent of premium. There are two 
studies by industry groups who oppose the bill.
    Now, one of these two studies I will not discuss with you 
in detail because I can best describe it as using assumptions 
that have little basis in fact. I could go assumption by 
assumption with you and go through that. I would be happy to 
provide information on that. The other study--now, this is a 
group that is opposed to this provision--estimated the 
additional costs of these provisions at just under a billion 
dollars in the context of total health care premiums. That is 
three-tenths of 1 percent. They came in right where Muse and 
Associates did--very little difference.
    So that, too, supports our contention that these are 
important protections, with very little additional cost.
    Senator Specter. Well, we thank you all. The subcommittee 
would be interested in any additional data that you could 
provide on how many people will fall out of plans and will not 
have any coverage at all, so that they do not get some care, 
what the factor is there. We have to make a public policy 
judgment as to what ought to be required.
    The cases of Mrs. Corcoran and others are very heart-
rendering and very compelling. We want to know what the 
incidence is of such cases which are like Mrs. Corcoran's. And 
we also want to know what the cost would be as to how many 
people would drop out of plans and not have any care at all, 
the other side of the coin, of lack of care.
    This is a very complex question, and we have obviously only 
scratched the surface. But I think that it is important to 
proceed, to find out what we can about the hard facts, which 
will enable the Congress to make an informed judgment.

                         conclusion of hearing

    Thank you all very much for being here, that concludes our 
hearing. The subcommittee will stand in recess subject to the 
call of the Chair.
    [Whereupon, at 1:40 p.m., Thursday, May 14, the hearing was 
concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]