For those of you who don’t know, Massachusetts is in the process of dragging its insurance system out of some sort of strange, almost pre-Thatcherite British collectivist era, and into the modern American economic hurly-burly that marks pretty much every other part of consumer life. Today’s Boston Globe has an interesting little article on the contretemps over the insurance commissioner’s willingness to allow auto insurers, in bringing marketplace competition into that market, to use credit scores in underwriting or setting premiums. The critics hold that insurers should not be allowed to use this information at all, on the thesis that it discriminates against low income purchasers of insurance. Could be, but maybe not: the article doesn’t exactly present any objective evidence as to this one way or the other. But what was interesting to me is that its focus on credit scores makes it appear as though reliance on socioeconomic data in rate setting in Massachusetts’ auto insurance market would be some sort of departure, and for the worse, from past practices that existed under Massachusetts’ prior regulatory auto insurance pricing system. Although auto insurance and pricing for it isn’t my gig, my recollection is that, even under the prior system, rates varied depending on the consumer’s zip code, or at least on where in the state they lived and garaged their cars. There is little doubt in my mind that place of garaging led to lower rates in wealthier communities, and thus the place of garaging approach similarly structured auto insurance pricing on the basis of income levels. That may or may not be a good thing, but one thing is for sure: the proposal to do it now through credit scoring isn’t some break from a past in which income levels were not a factor in setting rates. The only thing different is that now it would be a declared factor, in the form of credit scoring, if critics are right that scoring runs in tandem with income level (which may or may not be true), rather than hidden from sight by means of rate setting on the basis of location of residence.

By the way, I meant to mention this on Monday, but a million different fires that had to be put out got in the way, so I’ll mention it today instead: Suzanne Wynn’s ERISA carnival from this past weekend surveys and provides links to a truly interesting range of posts on ERISA related issues. I’d recommend taking a few minutes and looking at the posts she collected, many of them from some of the best known, as well as best, ERISA and benefit related bloggers around.

The title of today’s post, by the way, is a deliberate reference to The Band’s song from the early 70s.

I have posted a fair amount on the impact of what are becoming known generically as “Fair Share” statutes, which are attempts to “reform” health insurance on a state level by means of mandating that employers provide health insurance benefits. I have talked about three main themes in my various posts on this topic, all of which stem from a certain skepticism as to whether these types of legislative responses to the problem of the uninsured are as well thought out as they are well intended. The first is the question of whether they are preempted by ERISA, and whether the rush by many states into this topic is a waste of resources, on the thesis that these state initiatives are likely to be found preempted, under the current state of the law. The second is the question of intended and unintended outcomes, and whether many of these state laws are really well thought out, or, two, whether the legislatures enacting them really know what they are getting into (for instance, just think of the Maryland legislature naively believing it could enact a statute that only mandated health insurance for Wal-Mart employees without running afoul of ERISA preemption, which of course ended in the federal courts striking the act down as preempted). And the third, finally, is the fact that these acts don’t target the real problem underlying the high rates of the uninsured, namely the ever increasing costs of health insurance. I have talked about all of these quite a bit, and you can find posts on them by clicking on the preemption, health insurance, or Massachusetts Health Care Reform Act headings over on the left hand side of this blog.

Here’s a couple of interesting articles I wanted to pass along that hit on at least two, and maybe three, of these themes. The first is this article here, titled “Labor Market Effects of Employer Provided Health Insurance,” which explores the question of how mandating that employers provide health insurance, as many of these state reform acts do, impacts employment. One of its findings? That mandating health insurance for all workers does in fact distort the labor market, but that even more interestingly, although perhaps as one would expect, “mandating the insurance only for full-time workers leads to higher [rates of] coverage than [without a mandate, but also to] an increased number of part-time workers.” If, as one would expect and this article suggests, there is a trade off between employment and the extent to which state laws mandate health insurance coverage, one would hope that state legislatures carefully analyze this issue before joining the current rush to mandate health insurance coverage.

Now, I am beginning to feel obliged by the tenor of my posts on this issue to note that I don’t disagree that the rate of the uninsured in this country is a real problem, and that my skepticism really runs to whether the increasing number of state attempts to address the problem – something they are probably foreclosed from doing by ERISA preemption anyway – represents the most thoughtful and effective way to tackle this problem. And this thought leads to the second paper I wanted to mention, which is law student Darren Abernathy’s upcoming law review note addressing the question of how to draft these types of laws to avoid ERISA preemption. This, at least, is a thoughtful attempt to get around some of the problems that arise when states target the problem of the uninsured by means of health insurance reform statutes. We need more of that type of forward looking and proactive analysis, and less of the willy nilly charge into the issue we are seeing by many state and local governments, who, having apparently learned nothing from Maryland’s experience, just keep enacting legislation on the slim hope that it won’t be preempted, rather than on an analysis and strategy that might place the statutes they enact outside the scope of ERISA preemption.

What is the sound of the internet clapping? Who knows. A healthy round of applause is due, though, for prominent insurance coverage blogger David Rossmiller, who has spent the last several months on his blog -aptly named the Insurance Coverage Law Blog – detailing and dissecting the insurance coverage disputes arising in the aftermath of Hurricane Katrina. Really, probably no one has covered that aspect of the disaster more thoroughly and consistently, in any media. Appleman on Insurance has now just published his 42 page treatise on the history and application of the anti-concurrent cause language in insurance policies, with a focus on its application to losses arising from Hurricane Katrina. David has now posted the article on his blog, right here.

David, incidentally, somehow manages to practice as a partner in a Portland firm, post to his blog every single work day (even on vacation), and still write scholarly articles like this one. Either he doesn’t sleep, or the three hour time difference between where he is – Oregon – and where I am -Boston – somehow gives him a 27 hour day.

If David Rossmiller can do a potpourri to avoid writing a full fledged blog post then, by gosh, so can I. Conveniently enough, I had some three small items on my mind this morning anyway, all of which I will mention here in one fell swoop:

? More on Bowater: For those of you who were interested in yesterday’s post about the First Circuit’s ruling in Bowater, concerning termination of a benefit plan and a foul up in executing it as part of a corporate acquisition, the ever watchful S.Cotus, who never misses anything on any subject at the First Circuit over at Appellate Law & Practice, has this in-depth review of the Bowater decision. S.Cotus delves into the labor law issues that were also at play in the case, in addition to the ERISA issue that I commented on yesterday. 

? I posted earlier in the week on the question of rising health insurance costs and how that was the elephant in the room that all of these state based attempts to reform health insurance were avoiding, and how that justified the preemption of those state acts in favor of a federalized and consistent nationwide approach to the problem. The Boston Globe has a detailed article today laying out the extent of the increase in health insurance costs just here in Massachusetts. The essence of the article is in the opening paragraph: “Massachusetts health insurers are predicting their rates will increase by about 10 percent next year for most residents covered through employer health plans, marking the eighth consecutive year of double-digit premium hikes.” Funny, but Massachusetts just implemented health reform legislation, so how can this be? The answer, I suspect, is in this post here.

? And finally, on a sillier note, the Wall Street Journal Law Blog is fascinated right now with preemption, posting several times on various applications of the doctrine in the last few days. Yet despite the fixation on preemption, they omit entirely what we all know is the most important and interesting application of preemption, namely ERISA preemption. While I write slightly tounge in cheek on this point, the truth is that, as we see with the attempts of states to legislate health insurance coverage in the face of ERISA preemption, this is in fact the one area of preemption that consistently affects broad numbers of everyday, real life people, as opposed to the smaller subset of directly affected businesses involved in the preemption cases discussed by the Wall Street Journal Law Blog over the last couple of days.

Just a fairly short post on a technical ERISA issue that the First Circuit ruled on a few days ago, namely the steps that have to be followed to terminate or amend a benefit plan, at least with regards to the documentation and formalities needed to do so. In Coffin v. Bowater, Inc., the First Circuit provides a clear and definitive road map to follow to effectuate such a termination, and the court makes clear that veering off of that road map will result in a finding that the benefit plan has not been terminated. While the legal rule itself presented in the case isn’t all that gripping, although it is certainly a technical point that is important to know, the context of the case and some of the discussion in it are interesting in and of themselves, for at least two reasons. The first is the fact pattern of the case itself, which involved the failure of a plan sponsor and an acquiring company to effectively terminate a benefit plan as part of a corporate acquisition, causing them to later have to try to convince a court – unsuccessfully – to create some sort of common law exception to the rules established by the courts and ERISA that would excuse their failure to follow the basic requirements for a plan termination. Its simply interesting to see this important issue poorly executed in a complex corporate transaction, and the end result of litigation and additional liability that results.

The second is that the panel ventures into the question of the standard of review – de novo or arbitrary and capricious – in this circuit with regard to benefit issues and interpretation of plan language. As certain judges of the First Circuit have done in a couple of earlier decisions, this panel suggests that the time may be right for the First Circuit to revisit this question en banc and reset the law in the First Circuit on this issue, although the panel makes clear that doing so is not necessary for purposes of Bowater because the result would be the same under any standard of review that could apply. One wonders how much more pot stirring of this nature on the issue of the standard of review there can be before the circuit chooses a case to fully review and possibly revise the law in this circuit on this issue.

Someone once said that Marx was wrong about a lot of things, but he was right that everything is economics. Nothing illustrates this maxim more than the various attempts by states to get around ERISA preemption – such as discussed here and here – and mandate health insurance coverage in one manner or another. These attempts by states – which are simply doomed to eventual court declarations that they are preempted- seek to force employers to expand health care availability and, in some cases such as Massachusetts, to get those who fall outside of the employer provided health insurance system to buy their own coverage. The problem is that these legislative attempts don’t affect the real problem, which is that the costs of providing health insurance has escalated to the point where employers face huge financial disincentives to expand their offerings of health insurance and uncovered employees cannot afford their own policies. Here it is in stark black and white (literally, since it comes from the NY Times, rather than from the USA Today, where I guess it would be in stark color): “[t]he cost of employer-sponsored health insurance premiums has increased 6.1 percent this year, well ahead of wage trends and consumer price inflation, but below the 7.7 percent increase in 2006, the Kaiser Family Foundation reported today.” Beyond that, the article points out that “health costs had increased 78 percent since 2001, more than four times as fast as prices and wages.”

The ever increasing impact on the bottom line of providing health insurance is why the employer provided system isn’t expanding to cover more people, and why the uninsured cannot insure themselves. Although the Massachusetts reform act takes some steps towards altering that dynamic, at least with regards to those not covered by employer provided plans and who must instead insure themselves, the simple fact is the various state reform acts aren’t really directed at fixing this fundamental base line problem (and they probably can’t attack this problem effectively on a state by state basis, just further driving home a point I have made previously, that the availability of health insurance coverage probably should not be addressed on a state by state basis, should be addressed on a national basis, and that ERISA preemption of these types of state acts is a good thing as a result). Unless and until the base problem of the economic numbers is tackled, these reform acts aren’t targeting the actual disease, just some of the symptoms of it.

I have blogged before about behavioral economics, and the question of whether how we structure retirement investment choices will affect whether plan participants successfully save for retirement. Two recent articles really drive home this point. In the first one, “Choice Architecture and Retirement Savings Plans,” the authors posit that the design of 401(k) plans will in fact affect retirement savings and investment choices. Here is the abstract, which lays out their thinking: 

In this paper, we apply basic principles from the domain of design and architecture to choices made by employees saving for retirement. Three of the basic principles of design we apply are: (1) there is no neutral design, (2) design does matter, and (3) many of the seemingly minor design elements could matter as well. Applying these principles to the domain of retirement savings, we show that the design of retirement saving vehicles has a large effect on saving rates and investment elections, and that some of the minor details involved in the architecture of retirement plans could have dramatic effects on savings behavior. We conclude our paper by discussing how lessons learned from the design of objects could be applied to help people make better decisions, which we refer to as “choice architecture.”

In the second, "Individual Account Investment Options and Portfolio Choice:
Behavioral Lessons from 401(K) Plans," the authors present the honestly fascinating finding that as 401(k) plans disproportionately add higher cost actively managed funds to their menu selections, plan participants move disproportionately into those funds instead of into less expensive alternatives that are also present in the menu of investment choices available to them in their plans, with the result that plan costs increase and participants’ returns on investments decrease. Here is the abstract from their paper, more extensively describing the authors’ findings:

This paper examines how the menu of investment options made available to workers in defined contribution plans influences portfolio choice. Using unique panel data of 401(k) plans in the U.S., we present three principle findings. First, we show that the share of investment options in a particular asset class (i.e., company stock, equities, fixed income, and balanced funds) has a significant effect on aggregate participant portfolio allocations across these asset classes. Second, we document that the vast majority of the new funds added to 401(k) plans are high-cost actively managed equity funds, as opposed to lower-cost equity index funds. Third, because the average share of assets invested in low-cost equity index funds declines with an increase in the number of options, average portfolio expenses increase and average portfolio performance is thus depressed. All of these findings are obtained from a panel data set, enabling us to control for heterogeneity in the investment preferences of workers across firms and across time.

In other words, the architecture – or layout of investment choices – in a given 401(k) plan actively affects how participants invest, with the result that adding too much of the wrong kind of choices – in the view of these papers, actively managed high cost funds – negatively affects performance, even though the plans do not preclude participants from investing in better choices that are available to them in the plan and which would reduce expenses to them and increase the return in their portfolios.

The first question that jumps out at me from all of this concerns why such higher cost funds are added to menu choices more often than are lower cost, less actively managed choices. Is it because, given the fee structure, the fund companies have a greater incentive to sell those funds, and to convince the administrators and sponsors of 401(k) plans to include those funds in their roster of choices? And the second question that pops up is, if adding such funds is known to decrease returns even if the administrators also include less expensive choices in the investment menu, then is it a breach of fiduciary duty to overload the menu selections with higher cost choices? In essence, if the design of the plan itself will subtly affect the returns in this way, then don’t sponsors, advisors and administrators -at least those who rise to the level of a fiduciary, functional or otherwise, for purposes of ERISA – commit a breach of fiduciary duty if they don’t push back against fund companies’ pitches to include a disproportionate number of costly investment choices and don’t prevent the architecture of their plans from becoming distorted in this manner?

These questions raise a multitude of issues, including how far plan fiduciaries should really have to go to protect plan participants from themselves. For instance, if the plan gives the participants the choice to invest in lower cost funds, isn’t that enough? Should the plan’s fiduciaries really be responsible for decisions by participants to allocate their investments into other, higher cost options? But at the same time, one can certainly argue that it is proper for the fiduciaries to bear the responsibility of making sure that menu selections will not lead to reduced performance because they include a disproportionate amount of high cost options, when: (1) it is a given that most participants will not be sophisticated enough to effectively allocate across both low cost and high cost choices in the most effective manner possible; (2) it is known that inclusion of too many high cost investment choices in a menu will drive down returns; and (3) it is the fiduciary who is in the best position to avoid overloading menus with higher cost products, and who has the ability to bring in advisors to prevent this type of overloading of the investment selection menu to the detriment of participants and their return on investments.

Just a quick note on something you may not want to miss, while I work on something more elaborate and, to me, thought provoking to post either later today or on Monday; those of you interested in hedge funds and pension investments may want to take a look at this article in today’s New York Times on Congressional hearings into taxation of hedge funds. The point of the article is whether increasing tax rates on hedge fund income will affect pension plan returns. The tone of the article is skeptical that it would have any significant effect, and much of the testimony at the hearing appears to have been along those lines. Obviously, though, as you can see from the article, many of those who would get hit with the higher tax rate think otherwise.

I’m really not enough of a tax expert – and I don’t play one on the internet either – to comment on this issue in any depth, although I do think the truth is probably in the comments of Russell Read, the chief investment officer of Calpers, who noted that “[i]t’s hard to tell what the effect [on returns by pension plans] would be” as a result of a change, but who “hopes” – I would substitute the word expects for the word hopes – “that it would be small.”

Pretty much since I started writing this blog I have talked about how, in my experience, commercial arbitration is not a panacea and often is not a better forum than litigation for resolving disputes. My main point has always been that it depends on the particular dispute and on the details of a party’s position, including the strengths and weaknesses of that party’s case. Since beginning my run of comments on that theme, there has been no shortage of pieces in major media outlets basically saying the same thing, some of which I have linked to on occasion here on this blog.

I particularly like this latest one on the subject, however, by Jo Ann Shotwell Kaplan, the general counsel of the New England Legal Foundation, and thought I would pass it along. The article reports on a seminar the foundation hosted on the subject of commercial arbitration as a forum for deciding business disputes. One of the things that makes it worthwhile reading on a subject that has otherwise been well plowed elsewhere is the strength of the panel discussing the issue, and the article’s ability to capture some of the more subtle considerations in determining whether arbitration, or instead the courtroom, is the way to proceed. As an example, I particularly appreciated the point raised by one of the panelists, counsel to a major consumer products company, that arbitration is best used in the context of recurring disputes between the same players because in those instances the parties are motivated to make the best use of the system, but that arbitration is simply a failure when applied to one and done disputes that are subject to arbitration only because of a pre-dispute mandatory arbitration clause.

The second thing I liked about the article was a point it made which I simply have not seen made anywhere else, which in this world of media saturation is a rare occurrence. The article discusses the views of one arbitration expert that commercial arbitration, whatever its merits may be when resolving other types of disputes, is actually preferable to litigation with regard to international disputes, for two reasons. The first is that using arbitration puts the parties on the same playing field, removing from the equation the differences between the different legal systems applicable in the different countries where the businesses involved in the dispute are domiciled. The second, and almost stunning reason, is that commercial arbitration rulings out of this country are often more respected in other countries’ court systems than are court verdicts. The panelist, a Boston University Law School professor: 

explained that a U.S. arbitration award has more international currency than a decision of the U.S. Supreme Court. Apparently other countries don’t think too much of our system of jury trials in civil cases and runaway punitive damage awards. They have agreed to enforce our arbitration awards, but not our court judgments.