April 01, 2013

Long-Term Care Insurance: How to Recognize Improper Claim Denials

First, an apology. This article puts the spotlight on improper claim practices, and by doing that, we commit the unfair act of not giving equal time to companies that do it right. Long-term care insurance provides a valuable safety net for a lot of people, and a good many insurers look for ways to pay claims, rather than looking for ways not to pay. Even companies that don’t always follow the rules are made up of mostly honest people who, in our view, want to do the right thing.

That said, the side we present is a story not often revealed and even less often understood. Improper claim practices impose a surreptitious tax on policyholders. But it isn’t just the consumer that pays. Companies that underpay claims can also price their insurance lower than those that don’t. Since the sale of insurance is largely price driven, companies that use these tactics gain an unfair competitive advantage over other companies that play by the rules. Eventually, other companies either have to adopt the same practices or else lose market share.

Why Read an Article about Insurance Claim Practices?

Maybe you are wondering whether it’s a waste of time to read an article about insurance claim practices. After all, you don’t practice insurance law, right? Well, I’ll make you a deal. Give me just two paragraphs to tell you a little story. After that, if it doesn’t sound meaningful to you, turn the page and find something better to read.

About 10 years ago, I asked my friend Jim to go with me to hear an insurance claims adjuster speak about the difference between proper and improper claim practices. Jim handles mostly worker’s compensation and Social Security cases and didn’t have much interest in hearing about insurance. “Why would I go to a seminar about insurance claims?” He sounded a little incredulous about it. “I don’t see any use in it.”

But for reasons I don’t remember anymore, he ended up going anyway. Afterwards he began to notice things he hadn’t paid much attention to before. In the years since, Jim’s had a series of incredibly successful insurance cases, several of which ended in jury verdicts of seven figures. One went to eight figures. These cases exposed systematic company practices and resulted in repayment to thousands of policyholders all over the United States. Most of Jim’s clients came from the same practice base he had before, and most began with claim denials involving only a few thousand dollars. The only thing that really changed was Jim’s understanding of claim handling behavior.

What Are “Improper Claim Practices”?

First, let’s deconstruct a myth. Improper claim practices don’t usually involve overtly malicious behavior. The claim handler isn’t out to get anyone. These are people with families to support, and they just want to do their job, make the boss happy, and get a bonus once in a while. In today’s world, most claim handlers have no training in the rules of insurance. Most don’t know what the word “fiduciary” means. They’ve heard of the Unfair Claims Settlement Practices Act but can’t tell you anything about it. Most have never even read the policy language they are required to apply. Instead, the company simply tells them about it. They are only taught how the company wants it done. That’s it. And that’s where you find improper claim practices. They are designed into the system.

Now let’s change perspectives. Let’s look at insurance through the policyholder’s eyes. Insurance is an amorphous product. When you buy a refrigerator, you can see what you are getting, and when you haul it home and plug it in, you know right away whether it does the job. When you pay for insurance, on the other hand, all you take home is a promise.

To make the slope even more slippery, the promise is complicated, with pages and pages of schedules, conditions, limitations, exclusions, and endorsements. Worse yet, the average policyholder has no idea that statutes, regulations, court decisions, and rules of construction play a role in defining coverage. The policyholder has to rely on the insurer to explain what he or she has coming.

This imbalance creates opportunities for insurance companies to design their claim processes in ways that don’t always comply with the actual policy language. The policyholder doesn’t know any better, and neither do most claim handlers. These practices can go on for years without being caught or corrected. If someone does challenge them, it goes up the chain of command until someone who does know the rules wisely announces that the company will pay that particular claim as a matter of expediency. They don’t tell the claim handler that the policyholder is right or that the procedure is wrong. Then it’s back to business as usual.

Improper Claim Practices Are More Common Than You Think

You’re probably thinking these situations are rare. But when something is easy, profitable, and rarely detected, how long do you think it takes for the invisible hand of the marketplace to move right in and start dealing from the bottom of the deck? No, improper claim practices are common, and once you start learning what to look for, you won’t have to look far.

When I first started, I spent several years just dealing with cases that originated from my own relatives and co-workers. For instance, my sister was diagnosed with cancer, and her insurer denied coverage for several thousand dollars in treatment expenses. I looked at the policy and the billings but didn’t understand the treatment protocols well enough to determine if the expenses fit the coverage.

That roadblock usually ends the matter. Not many people argue over a few thousand dollars when it costs at least that just to analyze it. But this was my sister. So I hired an oncology nurse to go through the billings line by line and explain each item to me. Then I compared that information with the description of coverage and rules of policy construction.

It turned out that the company owed a lot more than the items we initially asked it to pay. For instance, the policy covered chemotherapy and the “administration” of chemotherapy. But the company interpreted “administration” to mean only the service charges. The company silently excluded the costs of needles and syringes used to inject the medications. The company also excluded anti-nausea medications routinely used as part of the treatment protocol.

None of this complied with the policy language, but these practices went on for years. Without a line-item analysis by a medical expert and a lawyer who worked alongside each other, the company would still be doing it.

My sister didn’t live to see the end of her case, but the questions she asked eventually forced the company to repay millions to thousands of cancer patients nationwide.

Not long after the conclusion of that case, my paralegal, Brenda, asked me to look at a letter denying her husband Rod’s carpel tunnel surgery bills. Rod worked as a welder, and despite the lack of any evidence suggesting a cause other than work, the worker’s compensation carrier refused to pay.

Investigation showed that Rod’s employer, a quarry operation, frequently bid on government contracts in which reported injury rates played a role in the formula for awarding contracts. To reduce injury rates, the company set goals and then rewarded supervisors with vacations for meeting them. The company put up posters with titles like “Hawaii Is No Accident!” The result? Managers didn’t want to report injuries. The employer’s insurer worked with the employer to aggressively deny work relatedness of injuries.

We sued the insurer for bad faith and the employer for aiding and abetting bad faith. The insurance company settled, but the employer went to trial. The jury imposed compensatory and punitive damages totaling over $5 million.

Insurance is everywhere, and so are insurance claim practices. Few lawyers take the time to understand the systems at work behind the scenes, and most don’t recognize important cases. The purpose of this article is to suggest a new way to look. If you look in the right places, you will see things you never expected.

Long-Term Care Insurance: Evolution of the Product

If your practice involves estate planning, taxes, or anything else related to clients over the age of 60, you may see a number of clients or family members of clients with long-term care claim denials. Look closely, because this is a fertile area for opportunism. To understand the reasons for that, it helps to first look at the history of long-term care insurance.

Long-term care coverage is a relatively new product. The first “nursing home insurance” policies began appearing in the 1980s. With baby boomers approaching middle age, long-term care coverage seemed like a real profit center. Companies elbowed their way into the market, competing aggressively with lower premiums and more expansive benefits. Since underwriting procedures screened new policyholders and excluded those with imminent health problems, the first years allowed companies to collect premiums without paying a lot of claims. Hundreds of companies flocked into the market.

But the new product line also attracted a different kind of profiteering as well. A 1987 congressional report entitled Nursing Home Insurance: Exploiting Fear for Profit noted that:

It comes as no surprise that our nation’s older Americans are the most frequent targets of fraud and abuse in the health insurance market place. . . . [M]ost of the long term care insurers resort to the use of numerous restrictions and limitations which are uncommonly harsh, even when judged against the most outrageous practices in other aspects of the insurance industry.

The problems had only just begun. As policyholders aged, the industry discovered that LTC policyholders didn’t fit the same actuarial assumptions as medical insurance policyholders. These people not only bought policies, which is good for the company, but they kept them, which is bad for the company. That’s because insurance companies price their policies, in part, on estimated “lapse rates,” the number of people that buy the policy, pay the premiums for a few years, and then drop it before filing any claims. A higher lapse rate means more profit for the company, because when a policyholder pays premiums for a few years and then drops the policy, the company keeps the premiums while the risk of ever paying a claim drops to near zero. When the industry discovered it had overestimated lapse rates, profit projections fell.

That wasn’t the only bad news. Companies discovered they had miscalculated mortality rates. As the long-term care population aged, more of them survived, resulting in more claims, longer lasting claims, and claims that cost more. “The long-term care party of the 1990s gave us one hell of a hangover in the 2000s.” That’s how one company executive put it. Companies that had clamored to get in now wanted out. Those that stayed looked for ways to spend less and make more. And one of the first places they looked was the cost of paying claims.

Tricks Used to Systematically Underpay Claims

Long-term care policies usually contain either two or three “benefit qualifiers.” For purposes of this discussion we will focus on the triple-trigger, non-tax-qualified policy form, since it contains all three common benefit triggers, and allows us to catalog the common tricks used to defeat coverage under each of them.

The actual benefit trigger language of long-term care policies varies slightly, but frequently looks something like this:

To be eligible for any type of benefit under this policy your physician must show that you meet one of the three following benefit qualifiers:
(1) Medical Necessity: You must require covered care due to sickness or injury. The care prescribed must be consistent with accepted medical standards for treating the diagnosed condition and could not have been omitted without adversely affecting your condition. (2) Loss of Functional Capacity: You need active personal assistance to perform at least three of the six defined Activities of Daily Living, including eating, dressing, toileting, transferring, continence, and bathing. (3) Cognitive Impairment: You require continual supervision due to cognitive impairment to protect yourself or others.

Medical Necessity Gimmicks

Of the three eligibility triggers, the industry considers medical necessity to be the most generous to policyholders. Because of that, companies typically charge higher premiums for policies that contain the medical necessity trigger. But while medical necessity is viewed as the most generous of the three triggers, some companies actually teach their claim handlers exactly the opposite and give them improper instructions that make it very difficult for anyone to qualify under medical necessity.

Insurers Substitute the Word “Treatment” in Place of the Words “Covered Care”

The first sentence of the medical necessity provision above says, “You must require covered care due to sickness or injury.” But companies may instead train claim handlers to apply it as though it says, “You must require medical treatment due to sickness or injury.” This semantic sleight-of-hand dramatically decreases the cost of claim payments because only a small fraction of the care given in LTC facilities is “medical care.”

This practice is against the law in most states. One of the bait-and-switch tactics discussed in the 1987 congressional report quoted above involved the practice of selling nursing home insurance but tying that coverage to “skilled care.” Skilled care is that which is provided by licensed or certified medical personnel—in other words,—medical treatment.

Tying long-term care coverage to “skilled care” is highly deceptive because the lion’s share of care provided in long term care facilities is not “medical treatment” at all, but is instead “custodial care” provided by nonmedical personnel. Tying coverage to “medical treatment” as a condition of benefits is a sneaky way of eliminating much of the coverage the consumer thought he or she was buying.

To address this problem, model statutes proposed by the National Association of Insurance Commissioners provide that no long-term care insurance policy may provide coverage for skilled nursing care only or provide significantly more coverage for skilled care than for lower levels of care. Most states adopted this prohibition. Unfortunately, companies remove the requirement of skilled care from their policy language, but accomplish the same result by telling policyholders that medical necessity of care doesn’t qualify them for benefits unless the care is “medical care.” Very few policyholders know better, and neither do their lawyers. In fact, this tactic even flies under the radar of most state insurance officials.

Applying “Medical Necessity” as an Adjunct of the Other Two Triggers

Companies negate medical necessity in another way. They teach claim handlers that medical necessity usually arises as a result of the policyholder needing assistance with “activities of daily living” (ADLs), as defined in the functional capacity trigger, or cognitive impairment, as defined in the cognitive impairment trigger. Therefore, the story goes, if the policyholder doesn’t qualify under one of the other two triggers, they can’t qualify under medical necessity either. That fallacy, of course, negates medical necessity as a stand-alone, independent trigger.

The claim that medical necessity of care often arises from functional or cognitive impairment is partially true. But here is the trick: supervised care can be medically necessary because of a combination of mild functional and mild cognitive impairment, even though neither one, standing alone, is severe enough to meet the separate eligibility requirements under those triggers. These mild impairments can also combine to create an inability to safely perform other non-ADL activities, such as administering medications, driving, shopping, housekeeping, and laundry.

Indeed, the reason that “medical necessity” is the most generous trigger is because it takes the whole person into account, rather than just looking at one impairment at a time. An elderly patient may only be mildly forgetful, and might be capable of slowly performing most ADLs. But when these problems are combined with congestive heart failure, arthritic pain, weak and shaky legs, poor balance and coordination, osteoporosis causing weak and brittle bones, macular degeneration resulting in poor eyesight, high blood pressure causing lightheadedness with standing, and six or seven medications daily with side effects of dizziness and fatigue, the synergistic effects of all these combined problems can make assisted care a medical necessity.

Tricks Used to Negate Eligibility under the Cognitive Impairment Trigger

Companies raise the bar on cognitive impairment by again misinterpreting the policy language. Cognitive impairment is usually defined in a manner similar to this: “You require supervision and direction due to cognitive impairment which requires continual supervision to protect yourself or others” (emphasis added).

The words “continual supervision” are never defined. This is where the company gets the upper hand over policyholders. The company interprets it in the most restrictive manner possible, requiring “round-the-clock” supervision. For instance, here is testimony from one claim handler explaining how the company trained him to apply the “continual supervision” criteria:

Q. And would continual mean—well, how many hours a day would that mean? A. Continual, I would say—I would say around-the-clock.
Q. And what if they had to go to the bathroom? A. Then they—there would be—like I said, if they have to use the restroom, then there would be small breaks in the supervision.
Q. Okay. And so that’s what you would require in order for someone to meet the cognitive impairment trigger, what you’ve just described to us, correct? A. Someone being present continually?
Q. Yes. A. For supervision, yes.
Q. And you consistently applied it that way over the seven or eight years that you handled claims? A. As much as I can recall, yeah.

The level of supervision required by this claim handler is rarely provided in an intensive care unit. Assisted living or nursing homes never provide that kind of care.

The word “continual” is ambiguous because it is sometimes used to mean without interruption, but is also used to describe things that occur “regularly or frequently.” American Heritage College Dictionary (4th ed. 2004). The Blue Book of Grammar and Punctuation contains this explanation:

Continual vs. Continuous.

Continual means repeated, but with breaks in between; chronic. Example: The continual problem of our car not starting forced us to sell it.
Continuous means without interruption in an unbroken stream of time or space. Example: The continuous dripping of the faucet drove me crazy.

(See http://data.grammarbook.com/blog/definitions/continual-v-continuous.) In Watts v. Prudential Insurance Company of America, the court held that the words “continual oversight” are ambiguous, and it rejected Prudential’s interpretation of “continual oversight” as meaning “continuous oversight,” and it also rejected the notion that “continual oversight” required 24-hour care. The court held Prudential’s interpretation unreasonable, as well as arbitrary and capricious. No. 2:04CV2491 (W.D. La., 2005).

More recently, we tried a case in Montana federal district court, in which the court instructed the jury that the term “continual supervision” is ambiguous and that the insurer could not apply it as requiring round-the-clock supervision. In Hull v. Ability Insurance Company, No. 1:10CV00116-RFC (D. Mont., 2012), the insurer instructed its nurses that continual supervision, as used in the policy, means “continuous (round-the-clock) supervision from another person.” The company denied the claim on the basis that “she has to have supervision continually. Meaning someone has to be with her there at all times . . . .” The jury found breach of contract, as well as violation of the Montana Unfair Claim Settlement Practices Act, and it imposed compensatory and punitive damages of $34 million.

Tricks Used to Defeat Coverage under the Functional Impairment Trigger

The functional incapacity trigger usually reads something like this:

Loss of Functional Capacity: You need active personal assistance to perform at least three of the six defined Activities of Daily Living.

Misrepresenting the Words “Active Personal Assistance”

The definition above begins with the words “[y]ou need active personal assistance.” Nothing in that definition restricts active personal assistance to only “hands on” assistance. Yet, that is what policyholders are often told.

“Active personal assistance” can also include “stand-by” assistance or “cueing.” For instance, an elderly person capable of standing up from a chair may nonetheless exhibit such unsteadiness that safety requires someone stand by, within arm’s reach, just to steady or assist if necessary. Standby assistance might also be needed when an elderly patient enters the shower to bathe. A different kind of assistance is involved for elderly patients who are physically capable of dressing themselves but need “reminders” not to put on soiled clothes, or to dress appropriately, or to come to dinner. This assistance is known as “cueing.” Both cueing and standby assistance are “active personal assistance,” but claim handlers rarely disclose this important distinction to policyholders, and instead require “hands on” assistance.

Misrepresenting the Definition of “Eating”

The “eating” ADL often reads something like this: “You cannot, without the aid of another person, maintain an adequate food and fluid intake consistent with your dietary needs.” Under that definition, an elderly person no longer capable of preparing meals meets the requirement for assistance with the eating ADL. But instead of telling policyholders that, the company tells them that they must require help getting food from the plate to their mouth.

Misrepresenting the Definition of “Transferring”

The definition of “transferring” often appears as: “You cannot, without the aid of another person, walk or get in or out of a chair, wheelchair, bed, or other stationary position.” The company then limits analysis to whether the policyholder can get in or out of a chair or bed and ignores the words “or other stationary position.” This is a significant omission. If a policyholder can’t get up off the floor after falling down, or after kneeling to pick something up, or get out of the tub after taking a bath, he or she fits the definition of “other stationary position.” Once again, however, companies often apply these definitions in the manner most beneficial to the company, rather than the manner that benefits the policyholder, as the law in every jurisdiction requires. Here is testimony from one nurse case manager:

Q. The transferring definition says you cannot without the aid of another person walk or get in or out of chair, wheelchair, bed, or other stationary position. If somebody falls down and they are lying on the floor, that’s a stationary position, correct? A. Correct.
Q. If a person can’t get up off the floor without the aid of another person, tell me why they haven’t met that definition. A. I really don’t know how to answer that question.
Q. Can you give me a reason why not being able to get up off the floor without the aid of another person doesn’t meet that exact definition? A. I cannot.


These are only a few examples designed to get you thinking in a different way and looking with different eyes. If you look closely, you may discover tricks and gimmicks that we missed. Improper claim denials are so very common. The only thing that is not common is the lawyer who can recognize them and understand their real significance. Learning to litigate them is key, but it is first essential that lawyers develop a sense of the look and feel of such denials. This kind of awareness can be critical to any practitioner and his or her clients.