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In its June 2000 decision in Pinto v. Reliance Standard Life Insurance Co., the 3rd U.S. Circuit Court of Appeals ruled that “heightened scrutiny” is required when an insurance company both funds and administers an ERISA benefits plan since the combination of such fiduciary and non-fiduciary roles creates an inherent conflict of interest. Now, in a decision that significantly expands the scope of Pinto, the 3rd Circuit has held that even in cases where there is no obvious financial conflict of interest, courts must apply a “moderately heightened” standard of review if there is evidence of “procedural bias.” In its 13-page opinion in Kosiba v. Merck & Co., a unanimous three-judge panel found the lower court was correct in holding that there was no financial conflict of interest because Merck had delegated the task of claims administration to UNUM Life Insurance Co. But the panel said U.S. District Judge Mary Little Cooper of the District of New Jersey nonetheless should have applied a “moderately heightened” standard of review because “there is evidence of procedural bias in Merck’s intervention in the appeals process to request an independent medical exam.” Writing for the court, Senior U.S. Circuit Judge Edward R. Becker found that “the choice to request a third medical opinion therefore strongly suggests a desire to generate evidence to counter [the plaintiff's] physicians’ diagnoses.” As a result, Becker found that Cooper erred in rendering her verdict from a non-jury trial by applying the ordinary standard of review used in cases brought under the Employee Retirement Income Security Act, which calls for deference to the insurer’s decision unless it was “arbitrary and capricious.” Instead, Becker found that Cooper should have applied Pinto’s “sliding-scale” of heightened review due to the evidence of procedural bias on the part of Merck. “Because Merck’s intervention, notwithstanding its delegation of claims administration to a large and experienced carrier, undermines the defendants’ claim to the deference normally accorded an ERISA plan fiduciary with discretionary authority, we conclude that the district court should have applied a moderately heightened arbitrary and capricious standard of review,” Becker wrote in an opinion joined by 3rd Circuit Judges Thomas L. Ambro and Morton I. Greenberg. The decision revives a suit brought by Celeslie Epps-Malloy, a former Merck employee who claims she was wrongly denied long-term disability payments despite her doctor’s diagnosis that she suffered from chronic pain syndrome, fibromyalgia and sarcoidosis. (Fibromyalgia is a connective-tissue disorder characterized by pain, tenderness and stiffness of muscles. Sarcoidosis is a condition that results in lesions in the liver and on the lungs, skin and lymph nodes.) Michaleen Kosiba, the other named plaintiff in this case, settled her claims and did not participate in the appeal. According to court papers, Epps-Malloy worked for Merck as a cook and food-service attendant. Following her 1991 diagnosis, she was granted short-term disability benefits and was later approved for long-term disability in 1993 — but was reminded that periodic requests for medical information would be made in the future to ensure continued eligibility. Epps-Malloy was also awarded Social Security disability benefits after an administrative law judge in 1994 concluded that she was “permanently disabled” and overruled the Social Security Administration’s initial determination denying her benefits. Under Merck’s ERISA plan, the benefits were funded by Merck, but decisions to award or deny benefits were made by UNUM. In May 1996, UNUM requested additional information from Epps-Malloy’s doctors and later decided to cut off her disability payments, finding that she “no longer met the definition of being ‘unable to perform any and every duty’ of her occupation.” Epps-Malloy appealed and provided additional information from a third doctor who concluded that she “cannot return to gainful employment” because she was “permanently and totally disabled” and “suffers with severe anxiety.” UNUM responded by saying Merck had requested an independent medical exam, or IME, and that it had designated Dr. Gautam Dev to perform the examination. Dev said in his report that he disagreed with the diagnosis of sarcoidosis, but offered no opinion on her fibromyalgia diagnosis. On the basis of Dev’s report, UNUM upheld its decision denying benefits. In her verdict, Cooper found that UNUM’s decision was not arbitrary and capricious, and that no heightened standard of review was required because Merck had delegated the benefits decisions to UNUM. Now the 3rd Circuit has ruled that Cooper should have applied a moderately heightened standard of review due to Merck’s actions during the appeals process. “Merck intervened in Epps-Malloy’s appeal process,” Becker wrote. Although Merck had the power to demand an IME under its ERISA plan, Becker found that “the circumstances under which Merck made this request necessarily raise an inference of bias.” At the time of the IME request, Becker noted, “every piece of evidence in Epps-Malloy’s record — the opinions of two doctors … a consistent medical history, and an SSA determination that she was totally disabled — supported her contention that she was disabled.” Epps-Malloy’s treating physicians, Becker said, offered “unequivocal support” for her claims. Although Merck had delegated claims administration to UNUM, Becker found that Merck intervened with “a request for an additional medical examination to be performed by a physician of its own choosing.” Such a situation, Becker said, “arguably has a quality to it that undermines the administrator’s claim to the deference normally owed to plan fiduciaries.” Since the medical records were so favorable to Epps-Malloy, Becker concluded that “the most natural inference is that by intervening and ordering the retention of Dr. Dev, thus seeking evidence to counter Epps-Malloy’s physicians’ evaluation, Merck was not being a disinterested fiduciary.” Becker said he acknowledged the possibility that “Merck acted with a good-faith belief that Epps-Malloy’s application was a close call, and that it could resolve perceived ambiguities with a third physician’s opinion.” He also found that IMEs are “not uncommon in the claims administration world, and this is responsible plan administration that we would not wish to deter.” Nonetheless, Becker found that Cooper’s verdict must be set aside because “the procedural bias we have described in Epps-Malloy’s appeals process warrants a moderately heightened arbitrary and capricious standard of review.”

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