Law Feature - February 2010
Tex Med . 2010;106(2):49-52.
By Crystal Conde
Just when you thought you knew all of the things insurance companies could do to you and your patients, the Texas Medical Association and a state agency are working to eliminate a nasty clause in their policies.
The state's Office of Public Insurance Counsel (OPIC), TMA, the American Heart Association, AARP, the National Multiple Sclerosis Society, and a Texas physician-lawmaker are upset about insurers' use of discretionary clauses. Such clauses give the companies free rein to interpret policy terms and evaluate a patient's claim for benefits however they choose.
OPIC, a state agency that represents the interests of consumers in insurance matters, cites this example of a discretionary clause:
The company has full, exclusive, and discretionary authority to determine all questions arising in connection with the policy, including its interpretation, and when making a benefit determination under the policy, the company has the discretionary authority to determine your eligibility for benefits and to interpret the terms and provisions of the policy.
A statement on the OPIC Web site says it believes such clauses harm consumers because they "effectively nullify a carrier's promise to pay benefits owed. These clauses may also deny Texans the protections of the insurance and other laws of this state. Further, these clauses create an inherent conflict of interest as the insurer responsible for providing benefits also has discretionary authority to decide what benefits are due."
Public Insurance Counsel Deeia Beck says insurers use these clauses to deny coverage to patients and go back on their contractual obligation to provide health benefits. Six insurance companies operating in Texas currently employ discretionary clauses in disability insurance policies. They are Hartford, Aetna, Jefferson Pilot, Met Life, Unum, and Fortis.
Ms. Beck fears discretionary clauses could work their way into nearly all life, health, and disability policies, creating yet another barrier in patients' access to care if no one stops insurers from using them.
That's why TMA supports OPIC's petition urging Texas Department of Insurance (TDI) Commissioner Mike Geeslin to adopt a rule to prevent insurance companies from using discretionary clauses in policies with consumers. OPIC seeks to ban any policy, contract, or certificate of health insurance that contains provisions that:
- Reserve discretion to the insurer to interpret the terms of the contract, or
- Provide standards of interpretation or review that are inconsistent with Texas laws.
In the petition, Ms. Beck describes discretionary clauses as "unjust, unreasonable, and against both long-standing common law and public policy."
Should Commissioner Geeslin grant the request, he won't be the first to outlaw insurance companies from including discretionary clauses in contracts. Twenty-two states have banned discretionary clauses in some form.
Ms. Beck adds that discretionary clauses have been a point of contention since at least 2004, when the National Association of Insurance Commissioners (NAIC) adopted the Discretionary Clause Prohibition Act, a model used by several states to draft their own rules banning the clauses.
In a December letter to Commissioner Geeslin, TMA President William H. Fleming III, MD, asked TDI to prohibit discretionary clauses as unfair, deceptive insurance business practices.
Discretionary clauses, Dr. Fleming wrote, create a "fox guarding the henhouse situation that serves to provide the insurer with the authority to consistently deny benefits that a reasonable insured person would believe falls within the terms of the policy."
A Heavy Burden
In his letter, Dr. Fleming added that discretionary clauses are unfair to patients and employers who purchase insurance because they require an "incredibly high burden of proof" to challenge the interpretation of an insurance contract containing such clauses.
Patients have little recourse when insurance companies use discretionary clauses to deny coverage, Ms. Beck says.
Consumers may sue the insurance company, she says, but they'll have trouble finding a lawyer to take the case. If a case does go to trial, Ms. Beck warns that the patient has "a steep hill to climb" because of the high costs of trying the case and because plaintiffs typically must prove that an insurer's decision was both arbitrary and capricious. That standard, she says, gives insurers a great deal of protection.
"Right now, insurers have more leeway to do what they want because they know their determination is difficult to overturn in court," Ms. Beck said. "Consumers challenging insurers' decisions are subsequently entering a forum where the deck is stacked against them."
A 2003 case is an example of the high burden of proof plaintiffs must overcome when confronting insurance companies that use discretionary clauses.
A federal appeals court in Massachusetts upheld an insurer's decision to deny disability benefits to a paraplegic in Brigham v. Sun Life of Canada . The plaintiff, confined to a wheelchair for more than 40 years since a motorcycle accident when he was 16, was unable to establish that he couldn't perform any occupation for which he could be trained.
Although the court indicated it sympathized with Bradley Brigham's situation, it said, "The undisputed facts of record do not permit us to find that Sun Life acted in an arbitrary or capricious manner in terminating appellant Brigham's benefits."
Ms. Beck says OPIC wants "a more level playing field in which insurance companies can continue to evaluate claims, but if they deny coverage, they need to have a good basis for that decision. In the absence of discretionary clauses to fall back on, insurers would be subject to a full, fair court review of the case facts. Consumers could more easily hire an attorney, pursue their claims, and have a fair shot at proving they're indeed entitled to coverage."
Rep. Mark M. Shelton, MD (R-Fort Worth), supports OPIC's push to lend greater integrity to insurance companies' contractual agreements with patients. Representative Shelton wrote a letter to TDI in the fall urging Commissioner Geeslin to adopt OPIC's proposed rule.
"Texans need to know that once a contract has been executed, the terms and conditions cannot suddenly be changed by one of the parties. The law must protect Texans from discretionary clauses, which cause contract violations, particularly when the contract is between an individual and a large company," he said.
A Conflict of Interest
Texas Medicine was unable to get a response from insurance industry representatives by press time, but Ms. Beck says insurers justify discretionary clauses on the grounds that they allow claims handling and decisions to be more predictable.
"If the answer's always no, that's pretty predictable," Ms. Beck said. "Insurance companies also say that taking away their ability to use the discretionary clauses would increase the cost of coverage."
While Ms. Beck acknowledges that evaluating claims properly does require some additional expense by insurance companies, such as hiring qualified staff members to review claims, she says she's not convinced consumers would experience significant increases in policy premiums.
In his letter to TDI, Dr. Fleming wrote that the conflict of interest fostered by discretionary clauses and investor demands for profit and performance tempt insurance companies to make coverage decisions that benefit them financially.
"A discretionary clause makes the insurer the final arbiter of what the insurance contract actually means and eliminates any certainty that may have been contained within the policy," he wrote.
Dr. Fleming said discretionary clauses "extend that same vagueness across the entire contract" and asked TDI to prohibit the use of discretionary clauses by the insurance industry.
"Our patients and their employers, consumers of health insurance products, deserve to know that their premium dollar will go to health care, not elsewhere," he wrote.
In addition, Dr. Fleming says insurance companies' use of discretionary clauses is detrimental to a physician's ability to treat patients.
"Discretionary clauses can interfere with what the physician feels is adequate and appropriate treatment for the patient. These clauses allow insurance companies to go back and change the interpretation of an insurance policy regarding whether they'll cover certain treatments and procedures. And they can do that with no oversight," he said.
Ms. Beck says physicians have said that discretionary clauses damage the physician-patient relationship.
"Every physician I've talked to is disappointed that discretionary clauses exist. Insurers can deny coverage based on a physician's diagnosis. It's another example of an insurance carrier practicing medicine," she said.
In December, TDI hosted a meeting for stakeholders to discuss discretionary clauses in disability insurance policies, including future department policy and rulemaking development as deemed appropriate.
John Greeley, TDI public information officer, says TDI doesn't comment on proposed rules.
Should Commissioner Geeslin decide not to adopt rules to prohibit the use of discretionary clauses, Ms. Beck says the subject "would be appropriate for legislative action."
"From my conversations with several legislators, I believe that a bill will be introduced next session  if this issue is not resolved at this juncture," Ms. Beck said.
Crystal Conde can be reached by telephone at (800) 880-1300, ext. 1385, or (512) 370-1385; by fax at (512) 370-1629; or by e-mail at Crystal Conde .
February 2010 Texas Medicine Contents
Texas Medicine Main Page