Despite their many protestations, it would seem that health insurance companies have clearly chosen which master they will serve, and that master is not the policyholder. In trying to conceal this fact from policyholders, they have ended up also doing a disservice to their stockholders. Perhaps more than a disservice: health insurance companies are now running dangerously close to the line of illegality, and may in fact have crossed it outright. Bigamy is, after all, illegal in this country. The current state of case law and SEC rules has now made “corporate bigamy” equally illicit.
First, the ability of heath insurance companies to hide behind ERISA came to an end with the 2000 Supreme Court case Pegram vs. Herdich. While the court decided in this case for the health insurance company, the decision greatly reduced the immunity of health insurance companies from litigation. In short, the Supreme Court decided that “an ERISA MCO is protected from liability when making a pure eligibility decision, but not in the case of a pure medical treatment decision or a mixed eligibility-medical decision.” [xxxii] According to the decision rendered by the justices, a health insurance plan is within its rights to deny coverage to a patient if – and only if – the policy explicitly states that such coverage is not included in the plan. But in every other circumstance where coverage is denied, the denial of care could be considered a breach of fiduciary duty, for which the company can now be held liable. This was, if you will, a kiss between mistress and master caught on camera.
Then came the Sarbanes-Oxley Act of 2002, which forced the Securities and Exchange Commission to enact many new reporting rules for corporations. One of these rules, seemingly innocuous, states that the financial disclosures of any public company should:
…provide investors with insight into the overall magnitude of a registrant’s off-balance sheet activities, the specific material impact of the arrangements on a registrant and the circumstances that could cause material contingent obligations or liabilities to come to fruition.[xxxiii]
What does this mean? First of all, because of Pegram vs. Herdich, all health insurance companies can be held liable for breach of duty if their denial of care stems from a medical or mixed medical and eligibility decision. The possibility of lawsuits because of a breach of care is now a contingent liability that must be accounted for in a health insurance company’s filings with the SEC. Insurance companies must report to their stockholders as well as to the SEC their duty to their policyholders, and what that might mean for the company’s bottom line. Investors will be reminded that a health insurance company is no mere widget manufacturer: they are in a business where they owe a “high duty of care” to their clients, and have a fiduciary, and not merely a contractual, obligation to them. The affair is out of the bag, and both spouse and mistress will now meet out in the open for the first time.
This should lead stockholders and other interested parties to ask the obvious question: is this contingent liability being disclosed by health insurance companies? Are they setting aside funds off their balance sheets for the possibility of failed law suits? Are these companies realizing that policyholders may, at long last, get their day in court? A close perusal of the audited statements submitted by these insurance companies to the SEC, however, will find no such disclosures.
Should this be so surprising? No husband, confronted by his wife with evidence that he’s had a dalliance with someone else, will readily admit to the fact. He’ll do his best to hide the truth for as long as possible. The husband of the scorned wife knows that if the she discovers the full extent of his unfaithfulness, he stands to lose much: a messy divorce proceeding where the wife can demonstrate she is not at fault can lead to hefty alimony payments, the loss of property and investments, and more. The situation is similar for the officers of health insurance companies. Their compensation packages are tied directly to their company’s profitability. [6] Their company’s profitability is, in turn, tied to keeping the true nature of the conflict in their fiduciary duties hidden.
The fact that this information is not disclosed by health companies in their SEC filings could lead to serious legal ramifications. Non-disclosure of information is serious enough. But material omission of information and conspiracy to conceal that information is quite another. This would place health insurance companies not only in jeopardy of lawsuits from their policyholders, but in danger of legal action for fraud. [7]
[1] Consider as one example Aetna, one of the nation’s leading health insurance providers. First, from their Second Quarter 2009 results: “Our second quarter results do not meet our expectations or the standards we have established over several years of strong operational execution and financial performance,” said Ronald A. Williams, chairman and CEO… “Aetna has a sound strategy. We have built a diverse portfolio of high-performing businesses; our brand continues to resonate in our key markets; and we have a sound business model. We are confident that we can achieve our goal of long-term profitable growth.” (http://www.aetna.com/news/newsReleases/2009/pr_2ndquarter2009_earnings.html, last accessed August 24, 2009). Second, contrast these last remarks with their mission statement: “Aetna is dedicated to helping people achieve health and financial security by providing easy access to safe, cost-effective, high-quality health care and protecting their finances against health-related risks… At Aetna, we put the people who use our services at the center of everything we do.” (http://www.aetna.com/about/aetna /ms/, last accessed August 24, 2009). Aetna wants both shareholders and the insured to believe they are at the center of what they do.
[2] Pegram vs. Herdich (98-1949) 530 U.S. 211 (2000).
[3] About $75 in today’s dollars, measured against the consumer price index. (http://www.measuringworth.com/uscompare, last accessed August 24, 2009)
[4] Most Americans live in dread of the idea of “rationed care,” which seems like such an un-American concept. The truth is that care is already rationed.
[5] ERISA applies to all employee pension and health plans established in the private sector (other than churches), including those established by employee groups like unions. ERISA does not apply to plans administered by federal, state, or local governments.
[6] In 2004, Aetna reported that the total compensation package for their CEO in 2001 was a little over $3.5 million. By 2008, total compensation for the position of CEO had grown to over $24 million, an almost seven fold increase in only seven years (information taken from Aetna’s Financial Proxy Statements).
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[i] The Gospel of Matthew 6:24, English Standard Version.
[ii] fiduciary. Dictionary.com. Dictionary.com Unabridged (v 1.1). Random House, Inc. http://dictionary.reference.com/browse/fiduciary (accessed: August 20, 2009).
[iii] Webster’s Third New International Dictionary of the English Language Unabridged 845 (1986).
[iv] fiduciary duties. The New Palgrave Dictionary of Economics and the Law. Tamar Frankel, Vol.2, p.127-128
[v] fiduciary duties. The New Palgrave Dictionary of Economics and the Law. Tamar Frankel, Vol.2, p.127-128
[vi] fiduciary duties. The New Palgrave Dictionary of Economics and the Law. Tamar Frankel, Vol.2, p.127-128
[vii] fiduciary duties. The New Palgrave Dictionary of Economics and the Law. Tamar Frankel, Vol.2, p.127-128
[viii] Anderson, Eugene. May 2002. Trust Me, Insurance Companies are Fiduciaries. AKO Policyholder Advisor. 11:3
[ix] Anderson, Eugene. May 2002. Trust Me, Insurance Companies are Fiduciaries. AKO Policyholder Advisor. 11:3
[x] fiduciary. Dictionary.com. Dictionary.com Unabridged (v 1.1). Random House, Inc. http://dictionary.reference.com/browse/fiduciary (accessed: August 20, 2009).
[xi] Stanford Law Review, March 1, 2008 Foundations of Shareholder Fiduciary Duties.
[xii] Baird, Douglas G. and Henderson, M. Todd. 2007. Other People’s Money. John M. Olin Law and Economics Working Paper No. 359, the Law School of the University of Chicago.
[xiii] Baird, Douglas G. and Henderson, M. Todd. 2007. Other People’s Money. John M. Olin Law and Economics Working Paper No. 359, the Law School of the University of Chicago.
[xiv] Baird, Douglas G. and Henderson, M. Todd. 2007. Other People’s Money. John M. Olin Law and Economics Working Paper No. 359, the Law School of the University of Chicago.
[xv] Baird, Douglas G. and Henderson, M. Todd. 2007. Other People’s Money. John M. Olin Law and Economics Working Paper No. 359, the Law School of the University of Chicago.
[xvi] McLean, Thomas R. and Edward P. Richards. 2004. Health Care’s ‘Thirty Years War:’ The Origins and Dissolution of Managed Care. NYU Annual Survey of American Law.
[xvii] McLean, Thomas R. and Edward P. Richards. 2004. Health Care’s ‘Thirty Years War:’ The Origins and Dissolution of Managed Care. NYU Annual Survey of American Law.
[xviii] McLean, Thomas R. and Edward P. Richards. 2004. Health Care’s ‘Thirty Years War:’ The Origins and Dissolution of Managed Care. NYU Annual Survey of American Law.
[xix] McLean, Thomas R. and Edward P. Richards. 2004. Health Care’s ‘Thirty Years War:’ The Origins and Dissolution of Managed Care. NYU Annual Survey of American Law.
[xx] http://www.cdc.gov/obesity/data/trends.html, last accessed August 24, 2009.
[xxi] McLean, Thomas R. and Edward P. Richards. 2004. Health Care’s ‘Thirty Years War:’ The Origins and Dissolution of Managed Care. NYU Annual Survey of American Law.
[xxii] McLean, Thomas R. and Edward P. Richards. 2004. Health Care’s ‘Thirty Years War:’ The Origins and Dissolution of Managed Care. NYU Annual Survey of American Law.
[xxiii] McLean, Thomas R. and Edward P. Richards. 2004. Health Care’s ‘Thirty Years War:’ The Origins and Dissolution of Managed Care. NYU Annual Survey of American Law.
[xxiv] McLean, Thomas R. and Edward P. Richards. 2004. Health Care’s ‘Thirty Years War:’ The Origins and Dissolution of Managed Care. NYU Annual Survey of American Law.
[xxv] http://www.dol.gov/dol/topic/health-plans/erisa.htm accessed August 21, 2009
[xxvi] McLean, Thomas R. and Edward P. Richards. 2004. Health Care’s ‘Thirty Years War:’ The Origins and Dissolution of Managed Care. NYU Annual Survey of American Law.
[xxvii] McLean, Thomas R. and Edward P. Richards. 2004. Health Care’s ‘Thirty Years War:’ The Origins and Dissolution of Managed Care. NYU Annual Survey of American Law.
[xxviii] McLean, Thomas R. and Edward P. Richards. 2001. Managed Care Liability for Breach of Fiduciary Duty after Pegram v. Herdrich: The End of ERISA Preemption for State Law Liability for Medical Care Decision Making. University of Florida Law Review.
[xxix] Himmelstein, David, et. al. 1999. Quality of Care in Investor-Owned vs. Not-for-Proft HMOs. Journal of the American Medical Association.
[xxx] Deveraux, P.J. et al. 2002. A systematic review and meta-analysis of studies comparing mortality rates of private for-profit and private not-for-profit hospitals. Canadian Medical Association Journal
[xxxi] Deveraux, P.J. et al. 2004. Payments for care at private for-profit and private not-for-profit hospitals: a systematic review and meta-analysis. Canadian Medical Association Journal.
[xxxii] McLean, Thomas R. and Edward P. Richards. 2004. Health Care’s ‘Thirty Years War:’ The Origins and Dissolution of Managed Care. NYU Annual Survey of American Law.
[xxxiii] Sarbanes-Oxley (2002), Section 401(a)-3.III.c.: Disclosure About Off-Balance Sheet Arrangements.
By Chris Ryan and Charles St. Onge