Topic:
RETIREMENT AND PENSION SYSTEMS; SUPREME COURT DECISIONS; HEALTH MAINTENANCE ORGANIZATIONS; LIABILITY (LAW);
Location:
INSURANCE - HEALTH - MANAGED CARE; LIABILITY, LEGAL; RETIREMENT AND PENSIONS SYSTEMS;

OLR Research Report


July 16, 2004

 

2004-R-0550

ERISA BARS HMO LIABILITY LAWSUITS IN STATE COURT

By: Janet L. Kaminski, Associate Legislative Attorney

You asked for a summary of the recent U.S. Supreme Court ruling regarding a patient's right to sue their HMO in state court for not covering doctor-recommended care and its affect on patients and states.

SUMMARY

On June 21, 2004, the U.S. Supreme Court ruled unanimously that the federal Employee Retirement Income Security Act of 1974 (ERISA) preempts state claims against health maintenance organizations (HMO) for failing to pay for doctor-recommended care. (Aetna Health v. Davila, 542 U.S. __ (2004), 124 S.Ct. 2488, copy enclosed).

As a result, such claims brought in state court can be removed to federal court and are limited to ERISA-specified remedies: (1) recovery of benefits due, (2) enforcement rights under the plan, or (3) clarification of rights to future benefits under the plan (ERISA 502(a), 29 U.S.C. 1132(a)). ERISA does not provide for punitive damages and other remedies available under state law. The decision struck down a Texas state “right-to-sue” law and casts doubt on similar provisions in other states' patient protection laws. Connecticut, however, does not have a right-to-sue law and so the Court's decision does not call into question a Connecticut law.

In its decision, the Court limited the application of its earlier ERISA preemption decision, Pegram v. Herdrich, 530 U.S. 211 (2000). In Pegram, the HMO employed the treating physician, allowing the Court to find that the HMO made a “mixed” eligibility and treatment decision. As a result, the Court held that ERISA did not preempt the claim, permitting the claimant to seek state tort remedies. In Davila, the Court specified that the Pegram holding applies only to cases where the underlying negligence is caused by a treating physician or a physician's employer.

In her concurring opinion in Davila, Justice Ginsburg agreed with federal courts that believe Congress should revisit ERISA to ensure that it provides a complete remedy scheme. In reaction to the Court's decision, some Congress members have renewed their support for a federal patients' rights bill that, among other provisions, would allow patients' to collect monetary damages if an HMO's bad faith conduct is the proximate cause of injury or death.

U.S. SUPREME COURT DECISION

On June 21, 2004, the U.S. Supreme Court ruled unanimously that the federal Employee Retirement Income Security Act of 1974 (ERISA) preempts state claims against health maintenance organizations (HMO) for failing to pay for doctor-recommended care (Aetna Health v. Davila, 542 U.S. ___, 124 S.Ct. 2488 (2004)). The decision addressed two cases in which claimants alleged they were physically harmed by their health care plan's denial of benefits: Aetna Health v. Davila and CIGNA HealthCare of Texas v. Calad.

Proceedings

Both patients brought a lawsuit in Texas state court claiming that his HMO was the proximate cause of his injury by its refusal to cover certain medical services in violation of the HMO's duty “to exercise ordinary care” under the Texas Health Care Liability Act (THCLA) (Tex. Civ. Prac. & Rem. Code Ann. 88.002(a)). The HMOs, Aetna and CIGNA, removed the cases to federal district courts, each asserting that the claims were preempted by ERISA. The district courts agreed and dismissed the cases after the plaintiffs failed to amend them to bring ERISA claims.

On appeal, the Fifth Circuit consolidated the cases and reversed, holding that ERISA did not preempt the actions. The appeals court relied on previous U.S. Supreme Court decisions concerning (1) mixed eligibility and treatment decisions that are not fiduciary in nature and (2) when available state remedies differ from ERISA remedies. (Pegram v. Herdrich, 530 U.S. 211 (2000) and Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355 (2002)). The Supreme Court granted certiorari to review the Fifth Circuit's decision, which it reversed.

Facts

Juan Davila and Ruby Calad were covered by ERISA-regulated health care plans administered, respectively, by Aetna and CIGNA. Both argue that the HMOs, in denying coverage, made health care treatment decisions in a manner that violated the Texas-required duty of ordinary care.

Aetna Health v. Davila. Juan Davila's treating physician prescribed Vioxx to alleviate his arthritis pain, but Aetna denied payment for it. Davila did not appeal Aetna's decision or purchase the Vioxx from his own resources. Instead, he took Naprosyn, suffered an acute reaction, and had to be hospitalized.

CIGNA HealthCare of Texas v. Calad. CIGNA preauthorized Calad for a one-day hospital stay for surgery. Following surgery, Ruby Calad's treating physician recommended an extended stay. CIGNA determined that Calad did not meet the plan's criteria for an extended hospital stay and denied coverage for it. Calad was apparently discharged after the one-day stay. After discharge, she suffered postoperative complications for which she was readmitted to the hospital.

ERISA Law

ERISA was enacted in 1974 as a federal regulatory scheme for employee benefit plans, including health care plans. It sets forth requirements for benefit plan participation, funding, and vesting of benefits. It also establishes uniform standards for reporting, disclosure, and fiduciary duties, generally freeing multi-state employers from inconsistent state regulation in these areas.

ERISA does not require employers to offer benefits, but if they do, the Court has found that Congress intended for ERISA to be the dominant regulatory authority. The Court has also found that, at the same time, Congress intended to preserve the states' regulatory power over the “business of insurance” through a specific three-part provision in the act. ERISA (1) preempts state laws that “relate to” employee benefit plans, (2) saves from preemption those state laws that regulate insurance, and (3) “deems” employee benefit plans to be neither insurers nor engaged in the business of insurance for purposes of state regulation (ERISA 514, 29 U.S.C. 1144). The preemption provision is typically referenced in terms of its preemption, savings, and deemer clauses.

The Court has held that ERISA does not preempt state laws that have “only a tenuous, remote, or peripheral connection with covered plans, as is the case with many laws of general application” (District of Columbia v. Greater Washington Board of Trade, 506 U.S. 125, 129 n.1 (1992)). However, when the state law in question regards plan administration (e.g., claim processing, eligibility determination), the Court has held that ERISA preempts it, in line with Congress' goals to minimize plan administration burdens and encourage employers to offer employee benefit plans.

The Court has also held that Congress intended for ERISA's civil remedies to be exclusive (Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987)). Under ERISA, a plaintiff is only allowed to (1) recover benefits due under the terms of a plan (e.g., have a claim denial reversed and coverage provided), (2) enforce rights under a plan, and (3) receive a clarification of rights to future benefits under a plan (ERISA 502(a), 29 U.S.C. 1132(a)).

Holding

In reaching its decision, the Court noted that to remove a case from state to federal court, the plaintiff's complaint must establish that the case arises under federal law. Alternatively, if a federal law completely displaces state law, the state claim can be removed to federal court (28 U.S.C. 1441(a)).

If a person could have brought his claim under ERISA and no other independent legal duty (state or federal) is implicated by the defendant's conduct, then the cause of action is completely preempted by ERISA. Davila and Calad sued only to have benefit denials reversed and their only relationship with Aetna and CIGNA is the HMOs' benefit plan administration. Therefore, Davila and Calad could have brought claims under ERISA. The Court pointed out that upon denial, the patients could have paid for the treatment themselves and then sought reimbursement through an ERISA action, or sought a preliminary injunction.

In addition, the Court found that the claims did not arise independently of ERISA or the plan terms. The Texas law imposes a duty to “exercise ordinary care when making health care treatment decisions” but imposes no liability if the relevant health care plans do not provide coverage for the particular medical procedures. Since interpretation of benefit plans was an essential part of the claims, they were preempted by ERISA.

Further, the Court noted that its earlier ERISA preemption decisions never held that ERISA preempts only those state actions or remedies that exactly duplicate ERISA's.

The Court held that ERISA completely preempts the state-law cause of action raised and, thus, the cases were removable to federal court.

Limited Application of Pegram

In its ruling, the Court limited one of its earlier ERISA-preemption decisions, Pegram v. Herdrich, 530 U.S. 211 (2000). In Pegram, the Court held that ERISA does not preempt mixed eligibility and treatment decisions made by HMOs. The Court reviewed a Seventh Circuit decision that allowed a claim to move forward against a physician-owned HMO alleging a breach of fiduciary duty by offering incentives to physicians to hold down the cost of care.

The HMO employed the treating physician, who had decided that an inflamed abdominal mass was not an emergency and delayed an ultrasound by eight days. During the wait, Herdrich's appendix burst, requiring emergency surgery. The Supreme Court found that ERISA's fiduciary duty requirements do not attach to an HMO's (1) treatment decisions or (2) mixed eligibility and treatment decisions. It also found that benefit determinations are “part and parcel” of ordinary fiduciary responsibilities when administering a plan and do come within ERISA.

Since the issue in Pegram was the quality of care provided, there was no ERISA fiduciary duty and therefore, no ERISA preemption. As a result, Herdrich was not limited to ERISA remedies, thus state court tort remedies could be sought. In Davila, however, the issue was found to be solely one of plan administration (i.e., benefit eligibility), thus requiring ERISA's preemptive force.

The Court took the opportunity in Davila to note that several federal courts have been interpreting the Pegram decision too broadly. It stated that its reasoning there “only makes sense” when the underlying negligence is caused by a treating physician or a physician's employer. Since neither Aetna nor CIGNA were Davila or Calad's physician or physician's employer, Pegram was not applicable.

STATE LAWS

According to the National Conference of State Legislatures (NCSL), 12 states have laws relating to a patient's right to sue his managed care company that are affected by the U.S. Supreme Court's June 2004 decision. The 12 states are: Arizona, California, Georgia, Louisiana, Maine, New Jersey, North Carolina, Oklahoma, Oregon, Texas, Washington, and West Virginia.

NCSL reports that the Court's ruling will have “substantial adverse legal impact” in these 12 states, but that the number of pending cases brought under these state laws appears to be small.

CONGRESSIONAL ACTION

According to the Bureau of National Affairs (BNA) Health Law Reporter, Congressional Democrats responded swiftly to the Supreme Court's Davila decision, calling for a federal patients' rights bill that would permit patients allegedly injured by their health plans' decisions to sue under state laws. Proposed H.R. 4628, the Patients' Bill of Rights Act of 2004, guarantees certain rights to health insurance plan subscribers. The measure would provide (1) standards for access to care, including clinical trials; (2) the ability for patients to access their own doctor, and for doctors to communicate openly with them without fear of HMO retaliation; (3) that doctors, not HMOs, would make patient care medical decisions according to sound medical principles; (4) an independent external review process if care is denied by an HMO; and (5) the right to hold a health plan liable if the HMO's negligent medical decision resulted in injury or harm (13 HLR 931, 6/24/04).

The bill amends the remedies available under ERISA to include a civil assessment, not to exceed $5,000,000, payable to a claimant who establishes by clear and convincing evidence that the alleged defendant HMO's conduct demonstrated “bad faith and flagrant disregard for the rights of the participant or beneficiary under the plan and was a proximate cause of the personal injury or death that is the subject of the claim” (H.R. 4628 402).

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