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Managed care organizations have also been accused of shorting doctors to cut costs. Doctors have had some success pursuing HMOs for racketeering. Richard Scruggs, the lawyer largely responsible for Big Tobacco class action suits, got the ball rolling in Miami in 1999. Since then, a few major HMO class action suits have been winding their way through the courts. In one class action,
Shane et al vs. Humana,
Aetna agreed to a $120 million settlement in October 2004 to prevent a suit alleging they used automatic payment systems, among other forms of chicanery, to underpay doctors. Cigna, another big health insurer named in the suit, agreed to a settlement of $85 million. Another class action suit alleging similar violations,
United Health Group vs. Klay,
was approved by the Supreme Court in January 2005. The Supremes rejected the insurer’s pleas that the class of thousands of health care professionals from several states was too loose to sue. However, the class shouldn’t stock up on champagne just yet. Right after that, the Bush admin achieved one of its tort-reforming goals: class action suits now proceed to federal courts, rather than state courts, as state courts have been more lavish with punitive damages, and they tend to be more sympathetic than federal courts have been to those screwed by insurance.

Some states have lobbied for a patient’s right to sue. Texas, for example, has a law that permits patients to sue their insurers. This right to sue became law in 1997, back when Dubya was governor, before he converted to the gospel of tort reform. A 2004 Supreme Court decision, in the case of
Aetna vs. Davila,
decreed that the Texas state law was overruled by a federal law called the Employee Retirement Income Security Act (ERISA), passed in 1974. ERISA was intended to regulate the managers of funds, and to protect the assets of the employees contributing to pension or health insurance funds. But ERISA was written before HMOs became so prevalent, and the act preempts employee rights to sue their health care provider for denial of necessary care.
Aetna vs. Davila
is just the latest in a series of attempts by lawyers to prove that care managers have run afoul of ERISA by denying medical benefits to policyholders. In the
Davila
decision, the Supremes mentioned the precedent set by a 2000 case called
Pegram vs. Herdrich.
A patient named Cynthia Herdrich sued her doctor and her HMO for making her wait for care for a stomach pain that turned into a ruptured appendix. Herdrich argued that this denial of care was a breach of fiduciary duty under ERISA. The Supreme Court ultimately ruled that the cost-containment measures used by HMOs did not constitute a breach of ERISA statutes, and that, furthermore, to rule that they did would pretty much put HMOs out of business, since they all use the same cost-containment measures.

The managed care battle isn’t taking place just in the courts. Patients’ rights legislation has also been on the federal agenda since Clinton. In August of 2001, after many adjustments and a muchness of negotiation, the Senate and House finally passed patients’ rights legislation, amending ERISA to respond to issues specific to HMOs. The sticking point amid all the bipartisan compromising was the right to sue, and how much people could sue for. The Democrats, who do very well by trial lawyers donation-wise, were generous in that regard. The Republicans, who receive more from insurance companies and the financial services lobby, took the line that the right to sue would drive up premium costs. The bill allows patients a limited right to sue, but not until all other avenues are exhausted. The lawsuit must be approved by an outside adjudicator, so as to discourage flights of legal frivolity. The law also caps punitive damages at $1.5 million. Bush wanted to limit that to $500,000, but had to concede to the higher cap to keep rogue Republicans on side. Needless to say, the industry claimed the new law would only serve to increase premiums and the number of uninsured, which just goes to show what you get when you let the dead hand of regulation tickle the market.

Patients’ rights legislation may well be a bee in the industry’s bonnet, but I think that there is another piece of legislation out there that is having a far more profound effect on the industry. In 1999, the Gramm-Leach-Bliley Financial Services Modernization Act repealed barriers that had held bankers, securities dealers, and insurance companies at arm’s length from one another since the Glass-Steagall Act of 1933. I’m going to refer to the GLB act, aka the FMA, as the Glob, since it essentially gathers all forms of financial services, including insurance, together into one great blobby Glob. Part of the impetus for the Glob was the Federal Reserve’s decision the year before to approve a merger between Citibank and Travelers insurance. The merger, which produced behemoth Citigroup, has been touted as the future of financial services, a sort of supermarket where you can shop for your stocks, checks, and insurance policies. Of course, there were good reasons why, in 1933, people reckoned that particular convenience wasn’t worth the risk, but sixty-odd years later, all that total economic collapse jive was so much ancient history. It was time for the legislation to catch up with the industry, and the industry doesn’t seem to mind federal regulation when it favors them, or when it frees them from the burden of state laws. The Glob preempts state laws about banks merging with insurers, or cross-selling insurance; states have the option of enforcing stricter laws, but at the implicit cost of insurers hightailing it to slacker states.

Cross-selling is big business, and another side effect of the legislation is a glorious information-sharing. Insurers are starting to use credit checks as part and parcel of the underwriting process, and privacy advocates are howling about how the consolidation of the financial services industry makes this much easier for insurers. The Glob also ferries your premium dollar ever further into the casino economy of speculation. The kind of convergence that the Glob encourages has been creeping up on us for a while. In 1991, one of California’s largest insurance companies, Executive Life, was sold to a front company for a group of French investors that included bank Credit Lyonnais. The sale violated state law, as it was illegal for a bank, particularly a foreign bank, to buy a California insurer. The French investors’ group had no interest in running an insurance company, but they had to take the company to get their hands on its bond portfolio. They paid only $3.5 billion for the insurance operation and its bond portfolio, even though the bonds alone were ostensibly worth about $6 billion. The California attorney general estimates that 300,000 policyholders lost $4 billion in coverage after the sale and subsequent collapse of Executive Life.

You may not recognize the name of the man who helped broker the sale for the illegal investors. His name is Leon Black, and he still runs an investment company called the Apollo Group, which participated in the Executive Life deal and helped channel the bonds into a bunch of French fronts that also began with the letter A, like Altus and Artemis. You may not know Black, but you are probably familiar with his former co-worker and crony at Drexel Burnham Lambert: Mike Milken. Milken called the sale of Executive Life “the investment opportunity of the decade” in a 1992 jailhouse interview with
Forbes
magazine. The junk bond crash, fueled in part by Milken’s indictment and the Drexel investigation, meant that Executive Life was sitting on a lot of cheap assets. Black and the French investors made a killing on the bonds once the junk scare subsided. In 1999, after complaints from angry policyholders, the attorney general and the insurance commissioner filed suit against those involved in the Executive Life deal. In 2002, Black and his associates agreed to testify against the French in exchange for immunity. In 2005, after beaucoup de
international legal wrangling, the French investors involved in the suit paid over $600 million to settle the case.

What I find sadly funny about this sordid tale is that the insurance industry won’t sell somebody a measly policy because they’ve got diabetes or a DUI, but somehow, someone with a great weeping ethical sore like “Mike Milken’s Right-Hand Man” on his CV gets to broker the sale of an entire insurance company. The kicker is that the state insurance commissioner put Executive Life up for sale in the first place because the company had suffered losses on junk bonds bought from the boys at Drexel Burnham Lambert. That’s some solid risk management, and some well-managed cross-selling, indeed.

It’s not just the new, integrated financial services companies, like Citigroup and GE Capital, that are placing insurance monies at greater risk. There’s a burgeoning market in reinsurance, too. Reinsurance is when insurers sell insurance on insurance to insurers. When your reinsurer has a reinsurer, then that company is called a retrocessionary. Reinsurers don’t pay out claims, but they help reimburse the insurance companies that do. As previously noted, the reinsurance industry has been helpful in spreading the costs for September 11 among several concerns, but the fact that more than half the balance is being paid out by reinsurers shows the extent of this business, which most of us know very little about. How easy is it to claim your rightful settlement, when insurers sell part of their risks to other insurers, who sell part of their risk to other insurers—and then they sell it to two friends, and so on, and so on? Reinsurance allows insurance companies to write a greater volume of policy risk than they could otherwise absorb, but that may not be in our best interests, since it means that insurers can go overboard with the underwriting, and may end up playing hot potato, tossing losses to the next insurer, who then passes them to another insurer—and so on and so on.

Even eminently savvy people like Warren Buffett and Saul Steinberg lost bales of spondulicks thanks to a reinsurance tangle involving a pool of workers’ comp insurance policies that originated at Unicover, a smallish New Jersey insurer. They were sold repeatedly, by several major firms to several major firms, apparently before anyone had an idea of exactly how much risk they had taken on. There’s a charming name for this practice. It is called “passing the trash.” They probably don’t call it that when they’re selling you a policy, so I doubt you can ask for it by that name. Other dodgy practices by reinsurers have made them part of Spitzer’s insurance probe. General Re—the reinsurance wing of Warren Buffett’s Berkshire Hathaway group—AIG, and Swiss Re are some of the major reinsurers being questioned about “nontraditional insurance products and certain assumed reinsurance transactions.” This is euphemese for “helping our clients cook their books.” The attorney general alleges that some transactions that looked like reinsurance or risk-sharing may have been nothing more than sweetheart loan arrangements.

I don’t disagree with the concept of insurance. People don’t save money, and disease and disaster can strike at any time, so insurance is a necessary evil. However, this necessity is precisely why it is so galling to see insurance monies, private and public, become embroiled in complex, sporadically fraudulent, financial schemes that enrich the fortunate few at the expense of legions of policyholders. Legislation like the Glob channels more insurance money into the wider financial services industry, and Bush’s plan to privatize Social Security dispatches public insurance monies in that general direction as well. All the money people think they are salting away for hospital care, fire damage, car wrecks, hurricanes, and old age is sliding further and further into the capable hands of the nice people who brought you corporate scandals and the stock market bust.

Spitzer isn’t the only one trying to stick it to the great growing Glob of insurance and banking via the courts. In 2005, Britney Spears filed suit against her consortium of insurers. They failed to cough up the $9 million she claimed for losses related to a canceled tour. The insurers argued that Britney had failed to disclose that she had a bad knee when she took out the policies. Since the tour was canceled on account of that same blown knee, her claim was rejected. Britney’s attorneys argue that the insurers were happy to collect more than a million dollars in premiums from the pop tart, and, like, see ya in court. This case, like insurance itself, leaves me of two minds. It is nice to see insurers reject the long, proud tradition of insuring celebrity body parts and enriching the already rich for spurious losses. It is good to know that there is at least one stalwart sector that remains immune to Spears’s dubious charms. On the other hand, Britney filed a claim. Britney lost. Do you have as many lawyers, and as much money, as Britney? If there is no satisfaction for Britney, in the wordy bizarro world of insurance, what chance do we mere mortals have?

CHAPTER EIGHT

Who’s number one? THE CUSTOMER!

—T
HE
W
AL
-M
ART EMPLOYEE CHEER