Articles

[Reprinted with permission of TRIAL (September 2005) Copyright The Association of consumer justice attorney of America.]

9/1/05 - Trial Magazine: "A Wrong Without a Remedy"

Court interpretations of ERISA preemption have left many patients with no options for recovery when HMOs wrongfully deny care.

Linda Peeno, Theodore J. Leopold, and Benjamin Salzillo

The U.S. Supreme Court’s decision last year in Aetna Health, Inc. v. Davila dealt a devastating blow to patient and consumer rights.¹ The Court’s ruling paves the way for HMOs to deny medical benefits to patients without the threat of being held accountable in a court of law.

Consumer advocates had hoped the Court would use Davila to accelerate the recent trend in both federal courts and state legislatures to increase HMO accountability and secure patient rights.² Instead, the decision sounded a death knell for these efforts by holding that the Employee Retirement Income Security Act (ERISA)³ completely preempted a Texas statute that allowed patients to sue their HMOs for breach of their “duty to exercise ordinary care when making health care treatment decisions.”⁴ Now only Congress can give patients the relief they need.

ERISA was enacted in 1974 to protect employee pension funds from theft, waste, and mismanagement.⁵ Without much apparent foresight, a congressional committee extended its applicability to all employee-based plans, including health insurance.⁶

Congress designed ERISA as a uniform and comprehensive regulatory scheme.⁷ Its expansive preemptive provisions are coupled with exclusive remedies for aggrieved plan members. Together, these features were intended to ensure that the regulation of employee-based plans remains “exclusively a federal concern.”⁸

ERISA gives an injured plan member two forms of redress. Under §502(a), he or she can sue “to recover benefits due . . . under the terms of his plan” or “to enforce his [or her] rights under the terms of the plan.”⁹ This section also allows claims against a plan or plan administrator for breach of his or her fiduciary duties to the plan. Damages for these causes of action are limited to the costs of the benefit due, declaratory relief prohibiting the denial of benefits, and, in some circumstances, costs and attorney fees.¹⁰ Neither consequential nor punitive damages are allowed.

These remedies are exclusive because §514 provides that any state laws that “relate to” employee benefit plans are “superseded by” the act. Courts have held that these provisions show that Congress intended ERISA to preempt all state laws that conflict with it.¹¹ The only exception to this general rule comes from the act’s so-called savings clause, which exempts from preemption any laws that “regulat[e] insurance.”¹²

The Supreme Court set the stage for expansive ERISA preemption in Davis v. Delta Air Lines, Inc., by finding that “a law ‘relates to’ an employee benefit plan [for preemption purposes] if it has a connection with or reference to such a plan.”¹³

Working with this definition, the Court headed down the preemption road of no return in Pilot Life Insurance Co. v. Dedeaux.¹⁴ In that case, the plaintiff sued his disability insurer for tortious breach of contract, breach of fiduciary duty, insurance bad faith, and fraud in the inducement for refusing to provide him disability benefits. Emphasizing “both the breadth and importance of [ERISA’s] preemption provisions,” the Court found that the act’s remedies were the only means of redress for the “improper processing of a claim for benefits under ERISA-regulated plans.”¹⁵

The Court then compounded the problem by construing the savings clause so narrowly that it practically disappeared from ERISA jurisprudence. Somehow, the Court figured that state law tort claims against an insurer did not “regulate insurance” and were therefore not saved from preemption.

Lower courts relied on Pilot Life to find preemption of state law tort claims against all employee-based plans, including health plans administered by HMOs. These cases concluded that so-called eligibility decisions—such as whether a particular benefit was due under a policy—were preempted because they challenged a plan’s administration, which ERISA prohibited.¹⁶

This reasoning was seductive in its simplicity, but it did not fully appreciate how managed care companies actually administer benefits and influence medical treatment. These cases revealed that ERISA’s exclusive remedies, though perhaps sufficient in cases involving pension benefits, were woefully inadequate to compensate patients wrongfully denied essential medical care.

A perfect storm

Congress could not have foreseen these limitations when it passed ERISA in 1974. At that time, most Americans received their health care on a fee-for-service basis: Patients paid insurance premiums, doctors provided treatment, and insurers paid the bill. Under this scheme, insurers could deny payment only if the patient’s policy excluded treatment, which it almost never did. Insurers had no role in determining whether and how a physician would treat a patient.

This all changed radically in the 1980's as near-runaway health care inflation caused the private sector to seek ways to reduce the cost of insuring its workforce. Out of this need arose managed care. With the promise of assuming risks and controlling costs, it soon became the new paradigm for the delivery of and payment for health care.

This shift began in 1973 when Congress passed the Health Maintenance Organization Act to establish new forms of health care delivery and finance.¹⁷ A long-standing separation between physicians and insurers collapsed as new “prepaid” plans developed management techniques—collectively termed “managed care”—to control patient and physician decision-making. These early plans, called health maintenance organizations, thrived under the theory that “prevention” and “health maintenance” could reduce costs enough to justify bureaucratic influence and control of patients and physicians.

As it became clear that long-term gains from health maintenance were not as profitable as short-term gains from cost management, insurance companies shifted attention to what they termed “low-hanging fruit”—aspects of patient care, such as hospitalizations, access to specialists, expensive tests like MRI's, and common but costly medical treatments like hysterectomies—to generate the most immediate and lucrative savings.

Before managed care, physicians had professional autonomy in deciding patient care. However, when the insurance industry began to require approvals for “medical necessity” to authorize services, doctors and patients soon discovered that outside agents were changing the conditions of clinical care. Instead of retrospective evaluations of claims, which affected only reimbursement, companies began to use in-house doctors and nurses to limit, substitute, and deny medical services before or during their receipt. These practices—variously called utilization review or management, precertification, prior authorization, and concurrent review—used economic leverage to control clinical care.

Although the insurance industry insists it makes only payment decisions, it is clear that decisions about “ medical necessity” require medical personnel to assess medical information and make medical decisions. Functionally, organizations and company physicians engage in the practice of medicine as they use medical knowledge, skills, judgment, and authority to affect decisions and outcomes for medical care.

With the advent of managed care, physicians no longer practice medicine alone. The health industry continues to develop ways to influence and control doctors and patients. Although the early forms of managed care primarily involved “medical-necessity denials,” new forms of managed care rely on highly evolved strategies for determining the who, what, where, and when of clinical care. Some of these new tactics involve complex practices, such as disease management, restrictive guidelines and protocols (“evidence-based medicine”), illusory benefits (medical policies that make covered benefits impossible to get); cost-shifting; physician profiling and incentives; and other methods of influence (bonuses).¹⁸

By the mid-1990's, aggressive cost controls and financially driven managed care created a consumer backlash—patients felt vulnerable and were losing trust in the health industry in general and managed care in particular. Responding to public pressure, legislators passed laws requiring insurers and HMOs to cover the costs of specific medical care for certain conditions, such as 24-hour hospital stays for maternity patients.

Aside from this brief focus on protecting patients, courts and legislatures have largely ignored the problem of managed care. During the past decade, patients have found that as much (or more) harm can come from decisions made in a boardroom as from those made at a bedside. Patients can still expect accountability and redress in our legal system for physician malpractice, but they can expect little if anything from the legal system for the harm caused by the failures of a health plan’s administration and physicians.

A (brief) light in the tunnel

As managed care exploded in the 1671s and ERISA’s strong preemptive grip took hold, millions of Americans found themselves unable to check HMOs’ power over their medical treatment. Not surprisingly, this put substantial pressure on courts to narrowly construe or find exceptions to ERISA’s preemptive effect.

In New York State Conference of Blue Cross & Blue Shield v. Travelers, the Supreme Court signaled what many thought was the start of a preemption rollback by indicating that its prior decisions had perhaps interpreted §514’s “relate to” language too broadly. Justice David Souter wrote for a unanimous Court, “If ‘relate to’ were taken to extend to the furthest stretch of its indeterminacy, then for all practical purposes preemption would never run its course, for really, universally, relations stop nowhere.”¹⁹

Thus, instead of finding preemption based only on a state law’s remote or tenuous relation to an employee benefit plan, the Court announced that it would adhere to the “assumption that the historic police powers of the states were not to be superseded by the federal act unless that was the clear and manifest purpose of Congress.”²⁰

Federal courts seized on Travelers as evidence that ERISA did not co-opt state tort law’s imposition of liability for the negligent provision, or withholding, of medical care.²¹ For example, the Third Circuit held in Dukes v. U.S. Healthcare, Inc., that ERISA did not preempt claims against HMOs for negligently “selecting, retaining, screening, monitoring, and evaluating” plan physicians who committed malpractice.²²

Noting that the plaintiffs attacked the quality rather than the quantity of benefits received, the court concluded that plaintiffs’ claims did not impinge on ERISA §502 remedies because they did not seek “to recover benefits due . . . under the terms of [the] plan, or to clarify . . . rights to future benefits under the terms of the plan.”²³ The court found “nothing in the legislative history suggesting that §502 was intended as part of a federal scheme to control the quality of plan benefits.”²⁴

The court carefully limited its holding, however, to claims against HMOs for “arranging” the negligent provision of medical care, noting that ERISA could still preempt claims for wrongful denials made by HMOs “while acting in their utilization-review roles.”²⁵ This decision paradoxically left managed care companies liable for their doctors’ malfeasance, but not for their own. Other federal appellate decisions confirmed this distinction by finding that ERISA preempted claims alleging medical malpractice against HMOs for making quality-of-treatment decisions in the context of benefit determinations under an ERISA plan.²⁶

In Pegram v. Herdrich, the Supreme Court seemed to at once complicate and clarify the line between claims attacking the quantity of benefits provided and those challenging their quality.²⁷ In that case, an HMO physician found an inflamed mass in Cynthia Herdrich’s abdomen. Instead of immediately sending her for an ultrasound at a local hospital, the doctor told Herdrich she would have to wait eight days so she could get the procedure done more than 50 miles away at an affiliated HMO facility. This turned out to be a horrible decision: Her appendix ruptured in the meantime, resulting in peritonitis.

Herdrich sued her physician for medical malpractice and the HMO (and physician) for breach of their fiduciary duties under ERISA. Unlike most ERISA suits against HMOs, this one did not seek damages under state tort law or argue that the claim was outside the act’s preemptive reach. Instead, it alleged that the HMO and physician failed to “discharge their duties with respect to the plan ‘solely in the interest of the participants and beneficiaries.’”²⁸

Herdrich based this claim on an incentive scheme under which the HMO encouraged its physicians (financially) to limit care by not prescribing emergency and out-of-network care. She contended that these incentives caused her doctor to prescribe an eight-day wait and 50-mile trip for a simple ultrasound that could have been performed immediately right down the street.

Despite what seemed to be a discrete issue of whether Herdrich properly stated a claim for breach of fiduciary duty, the case took on a life of its own from the Court’s conclusion that the physician’s prescription of care was a “mixed eligibility and treatment decision.”²⁹ In the context of the case itself, the Court held that decisions involving both medical judgments and benefit determinations—such as a finding that an ultrasound is necessary but can wait until it can be done at a participating facility—did not implicate ERISA’s fiduciary duties because they were not limited solely to the administration of plan benefits.³⁰

In the broader context of ERISA jurisprudence, however, lower courts began to view suits against HMOs through the prism of “mixed eligibility and treatment” in order to avoid the effect of complete preemption. Citing Pegram, the Second and Eleventh Circuits and the Florida Supreme Court ruled that ERISA did not preempt state law tort claims for misrepresentation and medical malpractice.³¹ Some commentators suggested that Pegram and its progeny signaled a loosening of ERISA’s tight preemptive grip.³²

The Court’s latest word

Meanwhile, advocates for patients’ rights pressed state legislatures for HMO accountability laws. Texas responded by passing the Texas Health Care Liability Act. Two cases quickly tested that law’s validity.

In the first, Aetna made Juan Davila take a generic arthritis drug instead of a name brand that his doctor prescribed. When a severe reaction to the generic caused extensive medical treatment and hospitalization, Davila sought redress under the state law for Aetna’s failure to use ordinary care in making a medical treatment decision.

In the second case, a discharge nurse determined that Ruby Calad did not meet plan criteria for a continued hospital stay following her hysterectomy despite her treating physician’s recommendation. Postsurgery complications sent her back to the hospital. She sued Cigna Healthcare under the Texas law.

Relying on ERISA §502(a), the HMOs sought to remove the cases to federal court, arguing that the claims were preempted. The Fifth Circuit disagreed, finding that under Pegram the cases were not preempted because the HMOs’ actions had been based on mixed eligibility and treatment decisions.³³

However, the Supreme Court flatly rejected the notion that Davila’s and Calad’s claims fell within the mixed-eligibility-and-treatment rubric. Writing for the Court, Justice Clarence Thomas found that in denying coverage, the HMOs made only benefit determinations, not medical decisions—that Davila’s plan covered only generic drugs, and Calad’s plan did not cover an extended hospital stay. Based on this logic, the Court reasoned that the plaintiffs’ claims were preempted because they concerned only how the defendant HMOs administered the ERISA-regulated plans and therefore “[did] not attempt to remedy any violation of a legal duty independent of ERISA.”³⁴ As the Court explained more fully:

It is clear, then, that respondents complain only of denials of coverage promised under the terms of ERISA-regulated employee benefit plans. . . . [A] managed care entity could not be subject to liability under the [state statute] if it denied coverage for any treatment not covered by the health care plan that it was administering. Thus, interpretation of the terms of respondents’ benefit plan forms an essential part of their [state law] claim and . . . liability would exist here only because of [the HMOs’] administration of ERISA-regulated benefit plans. [Their] potential liability under the [state statute] in these cases, then, derives entirely from the particular rights and obligations established by the benefit plans.³⁵

The Court also limited Pegram’s holding on mixed eligibility and treatment decisions to instances when a doctor or his or her employer, not a plan administrator or agent, determines medical necessity.

Justice Ruth Bader Ginsburg’s concurring opinion lamented a “series of the Court’s decisions [that] has yielded a host of situations in which persons adversely affected by ERISA-proscribed wrongdoing cannot gain make-whole relief.”³⁶ She urged Congress to remedy the situation by allowing consequential damages under ERISA.

Reviving patients’ rights

After Davila, 140 million private employees in the United States do not have the same constitutional rights as the government officials who make policy and law. The right to sue health insurers, HMOs, and other managed care entities is available only to select groups. After Davila, consumer advocates, health care analysts, and even federal judges are looking to Congress to correct the disparity of rights—either through elimination or overhaul of ERISA’s effects.³⁷

In the meantime, patients must be protected the best way possible in our patchwork system. New state external-review laws and 2002 ERISA health plan appeal regulations by the Department of Labor make some denials easier to challenge, but people need lawyers knowledgeable about the complexities of these appeals and willing to help even when little payment is expected. Patients are harmed in increasing, unprecedented ways from the same kinds of corporate malfeasance well known in other industries.³⁸

Lawyers who understand the health care system and its inner workings can find ways to hold corporate entities and their employees accountable for actions that harm individuals or groups of patients. In the business world, the threat of public disclosure and the risk of significant economic damages often offer the only constraints on negligence, fraud, and other corporate wrongdoing.

When opportunities arise to work on behalf of individuals who are not covered by ERISA (government employees, people who are privately insured, and Medicaid and Medicare patients) and to push ahead with ERISA cases, lawyers should seek to shine the light on HMO industry practices for public viewing.

Voters, legislators, courts, policy-makers, and researchers cannot make good decisions about the health care system without knowing how the system really works. Protecting patients begins with understanding the cause of harm. Justice requires that those wronged have a means to obtain both correction and remedy. These require transparency, which the force of law can bring.

As Justice Louis Brandeis wrote nearly a century ago: “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”³⁹

Notes

1. 124 S. Ct. 2488 (2004).
2. See DiFelice v. Aetna U.S. Healthcare, 346 F.3d 442, 453 (3d Cir. 2003) (Becker, J., concurring) (recognizing a “rising judicial chorus urging that Congress and the Supreme Court revisit what is an unjust and increasingly tangled ERISA regime”).
3. 29 U.S.C. §1001-1461 (2000).
4. Tex. Civ. Prac. & Rem. Code Ann. §88.002 (a) (2004 Supp.).
5. See H.R. 2, 93d Cong. (1973)(“It is hereby . . . declared to be the policy of this act to protect . . . the interest of participants in private pension plans”); H.R. 462, 93d Cong. (1973) (“It is a declared policy of this act to protect . . . the equitable interest of participants in private pension plans and their beneficiaries”).
6. See 29 U.S.C. §1002(1) (2000).
7. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 44 (1987) (“ERISA comprehensively regulates, among other things, employee welfare benefit plans”).
8. Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 505 (1981).
9. 29 U.S.C. §1132(a) (2000).
10. Id. §§1132(a)(1)(B) and 1132(g)(1).
11. See, e.g., Darcangelo v. Verizon Communications, 292 F.3d 181, 186-87 (4th Cir. 2002).
12. 29 U.S.C. §1144(b)(2)(A).
13. 463 U.S. 85, 97 (1983).
14. 481 U.S. 41.
15. Id. at 46, 56.
16. See, e.g., Tolton v. Am. Biodyne, Inc., 48 F.3d 937, 942 (6th Cir. 1995); Kanne v. Conn. Gen. Life Ins. Co., 867 F.2d 489, 493-94 (9th Cir. 1988).
17. 42 U.S.C. §§300e-300e-14a (2000).
18. Linda Peeno, The Second Coming of Managed Care, TRIAL, May 2004, at 18.
19. 514 U.S. 645, 655 (1995) (internal quotations and citations omitted).
20. Id. (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947)).
21. See, e.g., Cent. States, S.E. & S.W. Areas Health & Welfare Fund v. Pathology Labs, P.A., 71 F.3d 1251, 1254 (7th Cir. 1995) (finding that ERISA does not require federal courts to “take over the entire subject of medical care”); Moreno v. Health Partners Health Plan, 4 F. Supp. 2d 888, 892-93 (D. Ariz. 1998) (“Congress has expressed no desire that ERISA be used to degrade the quality of health care”).
22. 57 F.3d 350, 352 (3d Cir. 1995).
23. Id. at 356.
24. Id. at 357.
25. Id. at 361.
26. Corcoran v. United Healthcare, 965 F.2d 1321 (5th Cir.), cert. denied, 506 U.S. 1033 (1992).
27. 530 U.S. 211 (2000).
28. Id. at 212 (quoting 29 U.S.C. §1104 (a)(1)).
29. Id. at 229.
30. Id. at 229-30.
31. Cicio v. Does, 321 F.3d 83, 103-04 (2d Cir. 2003); Land v. CIGNA Healthcare of Fla., 339 F.3d 1286, 1291-93 (11th Cir. 2003); Villazon v. Prudential Health Care Plan, Inc., 843 So. 2d 842, 849-50 (Fla. 2003).
32. See, e.g., Karene M. Boos & Eric J. Boos, Killing the Fatted Calf: Managed Care Liability in a Post Pegram World, 24 N. ILL. U. L. REV. 63 (2003); Thomas R. McLean & Edward P. Richards, Managed Care Liability for Breach of Fiduciary Duty After Pegram v. Herdrich: The End of ERISA Preemption for State Law Liability for Medical Care Decision-Making, 53 FLA. L. REV. 1 (2001).
33. Roark v. Humana, Inc., 307 F.3d 298 (5th Cir. 2002).
34. Davila, 124 S. Ct. 2488, 2498.
35. Id.
36. Id. at 2503 (Ginsburg, J., concurring).
37. Id. at 2503-04 (Ginsburg, J., concurring) (cataloging complaints of federal appellate courts).
38. Peeno, supra note 18.
39. LOUIS D. BRANDEIS, OTHER PEOPLE’S MONEY & HOW THE BANKERS USE IT 62 (1914), available at http://library.louisville.edu/law/brandeis/opm-ch5.html (last visited July 26, 2005).

Linda Peeno is a Louisville, Kentucky, physician and consultant on corporate health care practices, managed care, and health care ethics. Theodore J. Leopold and Benjamin Salzillo practice with Ricci Leopold in Palm Beach Gardens, Florida. ©2005, Linda Peeno, Theodore J. Leopold, and Benjamin Salzillo.