Three New Laws Aim to "Rein in Health Insurance"

The Colorado General Assembly recently passed three new laws aimed to increase the accountability of Colorado health insurance companies.

Insurance companies, as well as employers, plan sponsors, plan administrator, third-party administrators and others dealing with health and disability plans will need to become familiar with these new statutes—two of which are already in effect.

Developments in how these statutes are implemented, enforced and eventually interpreted by the courts will shape the impact of these laws.

Changes Under the New Laws

Brief descriptions of the new laws are provided below:

Increased Transparency To Consumers. HB 1385, sponsored by Rep. Dianne Primavera (D-Broomfield) and Sen. Gail Schwartz (D-Snowmass Village), directs the creation of an "apples-to-apples" consumer shopping guide for health insurance and requires insurance brokers to tell customers how much commission they make on each policy they sell. This law takes effect January 1, 2009.

Financial Responsibility for Unfair Business Practices in the Sale of Insurance. HB 1228, sponsored by Rep. Gwyn Green (D-Golden) and Senate Majority leader Ken Gordon (D-Denver), amends Colorado revised statue10-2-801 to allow the commissioner of the Colorado Division of Insurance to seek restitution damages against any infringing insurance company. It also prohibits insurance agents and companies from selling misleading insurance policies. This law became effective August 6, 2008.

Strengthening Penalties for Unreasonable Conduct of an Insurance Carrier. HB 1407, sponsored by House Speaker Andrew Romanoff (D-Denver) and Senate Majority Leader Ken Gordon, (D-Denver) purports to be a law regulating insurance. It creates private right of action in Colorado state court for first-party claimants whose benefits have been unreasonably delayed or denied. This legislation also prohibits insurance contract provisions that reserve discretion to an insurer, plan administrator or claim administrator to interpret the terms of the policy to determine eligibility for benefits. In addition, it requires insurance companies to pay double damages for any infraction. This law became effective August 6, 2008.

Potential ERISA Impact

It remains unclear how the consumer shopping guide for health insurance called for in HB 1385 will be assembled or maintained, or extent to which the Division of Insurance under HB 1228 will seek to review summary plan description and similar plan documents as potentially "misleading." It is evident, however, that HB 1407 makes a major change in the administration and review of health and disability claims.

Claims for benefits under most employee benefit plans are governed by federal law by means of the Employee Retirement Income Security Act of 1974 (ERISA). Employee benefit plans provide health, life, and disability coverage, often through the purchase of insurance. These policies typically contain language granting to the insurer the discretionary authority to determine eligibility for benefits and to interpret the terms of the policy and the plan.

Prohibition of Discretionary Clauses

In Firestone Tire & Rubber Co. v. Burch, 489 U.S. 101, 100 (1989), the Supreme Court held that when a plan contains a discretionary clause, the denial of benefits is reviewed by a court under the deferential, arbitrary and capricious standard.

There has been an effort in the past few years to prohibit the use of discretionary clauses in insurance policies and the deferential standard of review that flows from them. In 2002, the National Association of Insurance Commissioners (NAIC) adopted Model Act 42, which prohibits the use of discretionary language in health insurance plans. The NAIC expanded the Model Act two years later to include disability policies. Several states have enacted the Model Act or similar language, including Illinois, Maine, Montana, Utah, Nevada, and most recently, Colorado. The California Insurance Commissioner attempted to reach the same result via Opinion Letter.

The validity of such laws or regulations has been challenged, however, on the basis that the ERISA statute preempts all state laws "insofar as they may now or hereafter relate to any employee benefit plan." 29 U.S.C. § 1144(a). The counter-argument asserts that the statute is saved from preemption as a state law that "regulate[s] insurance." 29 U.S.C. § 1144(b)(2)(A).

Increased Court Involvement Likely

As noted above, two of these new laws are already in effect. As a result, courts will be much more involved. Perceived "errors" in administration can result in double-damages, as can unreasonable delays or denials of coverage. The term "unreasonable delay or denial" in this statutory context will have to be defined by the courts through litigation and will obviously vary from case to case.