Unum Provident – Story Behind the Claims
The Story Behind the Belief That UnumProvident’s Claims Handling Practices are Unfair
Pillsbury & Coleman has handled many lawsuits against UnumProvident and has obtained one of the biggest judgments in the country against it for its handling of disability claims. ( Chapman v. UnumProvident Lawsuit)
There has been much press and criticism of UnumProvident Corporation and its handling of disability claims. Broadcast programs “60 Minutes” and “NBC Dateline” have done reports, and many newspapers have also written on the subject. Evidence in the Chapman v. UnumProvident case described a damaging picture of UnumProvident and its scheme to deny legitimate disability claims in order to meet financial goals.
According to documents and evidence submitted in court, beginning in 1994, Provident Life & Accident Insurance Company (before its merger with Paul Revere and UNUM), Paul Revere Life Insurance Company, UNUM Life Insurance Company of America, and others made a concerted effort to reverse staggering financial losses incurred in the disability business by denying more claims. Back in the 1980s, disability insurers such as Provident aggressively marketed and sold “own occupation” policies, which insured individuals against disabilities from their own specific occupational specialties. As “preferred professional” policies, they commanded higher premiums, which could then be invested to earn substantial returns in an era of high interest rates.
Beginning in the 1990s, however, interest rates dropped, the claims poured in and the insurers sustained heavy losses. Provident’s losses were so severe that in December 1993, it took an extraordinary charge of $423 million to meet its anticipated future liabilities on claims arising from own-occupation policies such as Dr. Chapman’s. At this time the CEO also resigned and a new CEO, named Harold Chandler was hired. Mr. Chandler came from a banking background and had essentially no background in insurance claims.
Looking back, Provident’s Senior Vice President of Risk Management, Tom Heys, in a confidential memo, explained the problem was that Provident sold policies without regard to the claims it would ultimately need to pay. He wrote:
The . . . 1980s were characterized by a highly competitive, growth-oriented market environment. Product provisions and underwriting were liberalized . . . as . . . competitors . . . attempted to grow share. The product sold . . . can neither be canceled nor its price raised, covering the own occupation of the individual . . .
In hindsight, it is generally viewed that the policies sold during the period were poorly underwritten and underpriced. This was common among competitors, but Provident seems to have taken it a few steps further. Provident in many cases, won the market share battle and, in fact, was very successful in certain high population growth states, such as California . . . Provident was also slow to recognize that deteriorating experience on this block of business in terms of taking early action. As a result, it is felt that, as other companies were tightening their offerings, many of the poor risks went to Provident.
In its amendment to its 1993 10-K financial report filed with the SEC, Provident extensively explained that it underestimated its exposure on “own occupation” policies, that it could no longer obtain high investment returns on the premiums it collected and that one of the principal solutions was to “improve claim handling procedures.” Heys described Provident’s claims department as being engulfed in a “crisis atmosphere” due to the “continuing high level of new claims.”
In response to this “crisis,” documents show Provident then undertook a deliberate and intentional plan to lower its claim payments through the simple device of denying more claims. In this regard, it developed various practices and procedures that had as the specific objective the denial of more claims. The engineer of this scheme was Provident’s new Senior Vice President of Claims, Ralph Mohney, who was appointed to that position in late 1994 by Provident’s new CEO, Harold Chandler. Chandler and Mohney immediately set about to “tighten up the claims-paying process.” Mohney readily admits that he had essentially no knowledge as to how to process a disability insurance claim. The primary skills he brought to his job were 25 years in various financial departments of Provident and a Master’s degree in Business Administration.
Nonetheless, he developed ten individual disability claims “performance objectives.” The first objective was to increase the number of claim “terminations.” Mohney measured the volume of terminations by the amount of reserves that Provident could eliminate from its books through claim terminations. 1 Thus, Mohney’s response to the increased volume of new claims was simple “deny even more claims.” In order to accomplish these increased terminations, Mohney instituted numerous changes set forth in a ten-point “Claim Improvement Initiatives” memo. Mohney had high expectations of the amount of money his initiatives could save the company. In a May 1995 memorandum to CEO Chandler, he reported that “a number of claim improvement initiatives have been identified and are currently being implemented. . . . We believe that aggregate improvements in the 5% – 10% ($30 million – $60 million annually) range are possible “once the initiatives have been fully implemented.” Mohney’s superior, Heys, was also optimistic. He reported to CEO Chandler that “ we have a good chance of meeting our goal of $132 million of terminations for the quarter” and “ terminations should be much stronger . . . We have a good shot at making our goal, which is 10% above last year.”
Mohney exceeded expectations. Throughout the succeeding months and years, Mohney submitted regular reports to his superiors “including CEO Chandler” of his high success rate at denying more claims. His monthly reports described the results as “favorable,” “highly favorable,” “unfavorable” and the like, depending on the level of terminations. For example, a typical Mohney report read, “Claim results were highly favorable in October . . . Terminations reached $45.1 million, the highest level ever for non-scrub months and 9% above the average.” Another typical report read, “Claim resolutions 2 of $43.6 million were . . . $9.4 million (27%) above the average of the last four first months of the quarter.” Mohney’s superior reported to the president of the company: “Claim terminations in May were $41 million, which is the highest they have ever been in a non-scrub month.” “We will have a good quarter in DI [disability insurance] terminations. Continued institutionalization of claim management practices is reflected in the numbers.”
By 1998, Provident had successfully reversed its losses. It had become the biggest disability insurer in North America and was looking to get bigger. Provident’s March 31, 1998 10-Q extolled its rising profits and attributed them directly to Mohney’s claims initiatives.
These various claims initiatives included inter alia, the increased use of surreptitious surveillance of insureds, increased use of supposed “independent medical examinations” 3, the development of a “network” of IME physicians who specialized in “forensics” instead of physicians who had an actual clinical practice, increased scrutiny of psychiatric claims which is considered “subjective”, and the direct targeting of inter alia, psychiatric claims, claims from own occupation policies, California claims, and claims from physicians. 4 Special units were created to handle specific claims. They were the psychiatric claims units, orthopedic claims units, cardiac claims units, cancer claims units, and general medical claims units. These units were supposed to develop specialized techniques uniquely suited to the management of these types of claims. Supposedly the members of each of these units would specialize in and be familiar with the specific types of injuries and sicknesses presented. Yet, all too often the claims adjusters had no special training, education or experience at all. Instead, consultants were hired to supervise the claims people and in-house medical doctors were hired. According to recent testimony and evidence in some cases, these consultants and medical advisors were biased and trained to look for ways to deny claims. In fact, many of the in-house medical doctors actually have stock options and other benefits, which are tied to the profitability of the insurance company, thereby giving them an incentive to look for ways to deny claims.
Another part of Provident’s initiatives was to “sharpen [its] legal defense” (in other words, paper the file or eliminate paper from the files) in cases with “bad faith/punitive liability in high exposure states” including California. However, Provident did not want to spend too much money on denying claims. Its goal was to limit the expenditure on claims to 2% of the amount of reserves the company saved through the termination. One of the most effective tools used by Provident was its weekly “roundtable meetings” an important part of its “sharpen legal defense” in bad faith states. Each claims adjuster was required to bring matters to the roundtable meeting. No agendas or notes exist as to what transpired during these meetings.
These roundtable meetings, however, were intended to accomplish one purpose the termination of an on-going disability claim, and thus the saving of reserves. Dr. William Feist was on the medical staff of Provident for fourteen years and, in 1995, he was its Medical Director. Part of his job was to sit in on the roundtable meetings once a week. Nearly all of the claims that came before the roundtable, were claims in which the reserve amount was significant. Dr. Feist was shocked and appalled by what transpired at these roundtable meetings. There was no effort to fairly evaluate the cases. The sole and transparent object of these meetings was to find a way to terminate a claim.
Provident acquired Paul Revere in 1997 and immediately set about to implement the claims initiatives at Paul Revere’s Worcester, Massachusetts office. Provident created a task force to ensure the successful implementation of the initiatives and anticipated the Worcester office would be fully integrated by early 1998. The task force created a timetable for adoption of Provident’s claims handling protocols, such as the roundtable reviews and the creation of a special unit to handle psychiatric claims. Provident was determined to train Worcester medical personnel to help deny claims. They were instructed how to “challenge certification,” in other words, how to disagree with a treating physician’s certification that his patient is disabled. Incredibly, even if they agreed with the treating physician’s conclusion that an insured was disabled, they were not allowed to write that conclusion in the file. 5 Instead, they were instructed to focus on whether appropriate treatment was being pursued and what the insured’s prognosis might be for a return to work. Provident immediately implemented various “performance measures” for the Worcester claims office, and began to monitor the number of IME’s, surveillance and roundtable reviews, as well as Mohney’s key yardstick, the net termination ratio.
Provident sent one of its senior executives, Jeff McCall, to Worcester to oversee the psychiatric unit. One of McCall’s first orders of business was to subject all-new high exposure claims to roundtable review and to track the number and dollar amount of claims terminated due to roundtable discussion. The focus on bottom-line results sunk to new lows. Each adjuster in the psychiatric unit, for example, was required to submit what can only be described as a “hit list” a running list of claims that were projected for closure in the coming months, together with the dollar amount of reserves held on those claims.
As with Provident’s Chattanooga office, the initiatives were remarkably successful. In his monthly reports, Mohney tracked the “key activities” in the Worcester office, including the quarterly dollar amount of terminations, and the amount of reserves released as a result of roundtable reviews. In his March 23, 1998 report, for example, Mohney reported that February’s claim results in Worcester were “highly favorable” and “resolutions were up roughly $3 million above the 1997 average.” And Mohney expected more of the same, projecting that the first-quarter results would be “significantly better than the first quarter of 1997.”
In 1999, Provident merged with Unum Life Insurance Company to become UnumProvident, by far the largest disability insurer in the country. Ralph Mohney became the head of that claims department and instituted his culture of denying claims throughout the company. Dr. Patrick McSharry was an in-house consultant who was hired to work in the claims department in the Chattanooga office. He reviewed claim files from throughout the country. He reported to the head of the medical department in the Chattanooga office and Dr. Robert Anfield, the medical director of all of the in-house consultants throughout the company. He testified that the procedures in Chattanooga were the same throughout the company.
In his recent deposition, Dr. McSharry described a company-wide practice designed to deny claims. The claims department was broken down into specific units. Each unit in the claims department had monthly and quarterly denial target numbers to meet. The numbers consisted of the total reserves that would be taken off the books upon the denial of claims and resulting in savings for the company. The way a unit reached its numbers was by denying claims with reserves totaling the target numbers for the month or quarter. As the month or quarter drew to a close, there was intense pressure on the claims units to deny claims in order to meet these targets. Those claims persons who denied the most reserves in claims were seen as the “top producers” among the claims people. Those units that did not meet their numbers were viewed unfavorably by the claims executives. Sometimes at the end of a month or quarter, the claims people would be required to come to work on Saturday in an attempt to get enough claims closed to meet the target numbers. Dr. McSharry produced an example of a hit list of claims targeted for denial at his deposition.
Dr. McSharry explains that the role of in-house medical consultants was, quite simply, to write reports in a particular manner that would permit the claims personnel to deny claims. Indeed, the claims personnel were considered the “business partners” of the in-house staff. It was clear that these medical doctors were not to provide independent evaluations. Instead, they were given a bonus and stock option incentives that were tied to the profitability of the company, and their job was to make their “business partners” happy by supporting denials and enabling them to meet their target numbers. Dr. McSharry was repeatedly criticized for expressing his actual opinion rather than opinions that were preferred by the claims department. He described a claims department that had a policy of not helping an insured perfect a claim, and instead had a policy of looking for any way to deny a claim.
In the case of the Chapman v. UnumProvident lawsuit, the trial testimony showed that UnumProvident still expects its claims officers to meet termination goals. However, instead of these goals being set forth in memos to Mr. Mohney, they are passed down by the heads of the regional offices to their subordinates and down the line, so that the claims adjusters know what it takes to obtain the approval of their superiors. These termination numbers are then passed to Mr. Mohney, who reports the number to the financial community.
1) Specifically, each claim has a liability held on the books of the company as a “reserve,” which is an estimate of the amount the company needs to pay in the future for that claim. The yardstick used by Mohney was a “ratio” created by the total amount of claim reserves which would be eliminated through claim terminations divided by the amount of reserves associated with new claims. For example, if defendants terminated ten claims with reserves of $100,000 each, the termination of those claims would result in a termination number of $1,000,000. If there were 12 new claims during the same period, each with a reserve of $100,000, the new claims reserve would then be $1,200,000. Thus, the ratio of terminations to new reserves would be $1,000,000 divided by $1,200,000, or 83%. Mr. Mohney testified that the net terminations prior to his ascendancy to the claims vice presidency was 80%. His goal in 1995 was to increase that net termination ratio to 84%. The higher the net termination ratio, the less Provident was required to pay out in claims. Thus, Mohney wanted to offset as much as possible each new claim coming in with a corresponding denial of an existing claim. Because the claims department had no ability to affect the reserves associated with new claims (as this was entirely dependent upon the claims that were filed), the only way that the termination to new reserves ratio could be increased was to increase the amount of reserves which the company saved by terminating claims. Thus, Provident had an incentive to terminate the claims with the largest reserves as that would have the greatest impact on the terminations to new reserves ratio.
In 1996, Mohney sought even more stringent goals. The net termination ratio goal was increased to 90%. In fact, he did much better. In January 1998, Mohney reported that the termination ratio for 1997 had reached a whopping 104%.
2) Mohney changed from using the phrase “terminations” and began using the more palatable-sounding term, “resolutions.” They mean the same thing.
3) The head of risk management (Heys) wrote the President on December 19, 1996, stating, “DI claim results were excellent in November . . . Our net resolution ratio year-to-date is 98%. This compares to 74% for the full year 1995 and 84% if the first quarter of 1995 is excluded. Clearly there has been a great payback for the investment we have made. A part of that investment has been in intensified surveillance and IME’s — expenses which will be over budget by $1.5 million in 1996 — but as we have done more of it, the higher activity level has been justified.”
4) These types of claims were identified as “known problem areas” and “poorly performing cells.”
5) Mohney himself reprimanded Dr. Feist for having done so.