ERISA Preemption of Claims against
Managed Care Organizations Based upon State Law
By: Michelle K. Buford, J.D., R.H.I.A.
Congress enacted the Employee Retirement Income Security Act (“ERISA”) in 1974 [29 U.S.C. § 1101, et seq.] to create and preserve national uniformity and consistency in the administration, funding and enforcement of ERISA pension and welfare plans. Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 111 S.Ct. 478, 112 L.Ed.2d 474 (1990). “The statute imposes participation, funding, and vesting requirements on pension plans[, and] sets various uniform standards, including rules concerning reporting, disclosure, and fiduciary responsibility, for both pension and welfare plans.” Shaw v. Delta Air Lines, Inc. 463 U.S. 85, 90, 91, 103 S.Ct. 2890, 2896, 77 L.Ed.2d 490 (1983). Congress included various safeguards to prevent abuse and to “secure the rights and expectations brought into being by this landmark reform legislation.” S.Rep. No. 93-127, p.36 (1973). These safeguards include ERISA’s broad preemption provision (the “Preemption Clause”) contained in Section 514(a) of the Act [29 U.S.C. § 1144(a)]; Section 510, [29 U.S.C. § 1140], which proscribes interference with rights protected by ERISA; and Section 502 [29 U.S.C. § 1132], which sets forth a carefully integrated civil enforcement scheme that “is one of the essential tools for accomplishing the stated purposes of ERISA. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 52, 54, 107 S.Ct. 1549, 1555, 1556-57, 95 L.Ed.2d 39 (1987).” Ingersoll-Rand Co., 498 U.S. at 137, 111 S.Ct. at 482.
ERISA’s express preemption clause provides that ERISA “’shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan . . . .’ § 1144(a). A saving clause then reclaims a substantial amount of ground with its provision that ‘nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities.’ § 1144(b)(2)(A).” Rush Prudential HMO, Inc. v. Moran, 536 U.S. ____, 122 S.Ct. 2151, 2159,153 L.Ed.2d 375 (2002). Additionally, where a state law claim duplicates a claim available under ERISA Section 502(a) [29 U.S.C. § 1132(a)], that claim is completely preempted. This “complete preemption” doctrine is jurisdictional. It forces a claimant to either bring his claim in federal district court under ERISA’s civil enforcement provisions [§ 502(a)], face remand to federal district court, and/or dismissal of the state law claim.
The United States Supreme Court has described the language of the Preemption and Saving Clauses as “unhelpful,” resulting in the Court’s spending a substantial amount of time trying to divine Congress’ intent. The “congressional language seems simultaneously to preempt everything and hardly anything. . . .” Moran, 122 S.Ct. at 1259 (citations omitted). In a span of twenty plus years from the time ERISA was enacted through the late 1990’s, the U.S. Supreme Court considered no less than fourteen cases involving the proper scope and interpretation of the Act’s Preemption and Saving Clauses. This number is steadily climbing. Prominent among these cases are those involving claims against managed care organizations, especially health maintenance organizations (“HMOs”). Instead of creating uniformity, the Act’s preemption language has spawned conflicting standards and confusion among state and federal courts, all striving to make sense of ERISA’s preemption language while maintaining uniformity where effectively none exists. With increasing frequency, the Supreme Court urges Congress to take action to clarify ERISA’s vague and confusing language in the area of preemption, but Congress remains silent on the issue.
An employee welfare-benefit plan or “Welfare Plan” under ERISA is defined as “one which provides to employees ‘medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability [or] death,’ whether those benefits are provided ‘through the purchase of insurance or otherwise.’ § 3(1), 29 U.S.C. § 1002(1). Plans may self-insure or they may purchase insurance for their participants. Plans that purchase insurance[, ‘insured plans,’] are directly affected by state laws that regulate the insurance industry,” pursuant to ERISA’s Saving Clause cited above. Self-insured plans are not. Metropolitan Life Ins. Co. v. Massachusetts Travelers Ins. Co., 471 U.S. 724, 733, 105 S.Ct. 2380, 2386, 85 L.Ed.2d 728 (1985). ERISA imposes a variety of substantive requirements relating to participation, funding and vesting on Pension Plans, and various uniform procedural standards regarding reporting, disclosure, and fiduciary responsibility on both Pension and Welfare Plans. “[However, i]t does not regulate the substantive content of welfare-benefit plans. See, Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 91, 103 S.Ct. 2890, 2896-2897, 77 L.Ed.2d 490 (1983).” Id. As a result, there is a growing body of case law that leaves us with a hodgepodge of varying, confusing, and oftentimes conflicting standards as to whether or not a state law affecting a Welfare Plan will be preempted by ERISA or, instead, governed by state law. Correspondingly, many Welfare Plan participants and beneficiaries have been left with essentially no remedy, and Welfare Plans are faced with the specter of more and more litigation.
The civil enforcement provisions of ERISA § 502(a) [29 U.S.C. § 1132(a)(1)(B)], permit Plan participants and beneficiaries to bring suits to recover Plan benefits, enforce rights under an ERISA Plan, or clarify rights to future benefits under the Plan. Ostensibly, these provisions are the exclusive vehicle for actions by ERISA Plan participants and beneficiaries under the Act. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 52, 107 S.Ct. 1549, 1555, 95 L.Ed.2d 39 (1987); 29 U.S.C. § 1132; and Ingersoll-Rand Co., 498 U.S. 133, 111 S.Ct. 478. However, the Act does not allow a claimant to recover extracontractual damages such as physical pain and suffering, emotional distress and punitive damages. See, e.g., Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985) (fiduciary to employee benefit plan could not be held personally liable to plan participant and beneficiary for extracontractual compensatory or punitive damages caused by improper or untimely processing of beneficiary’s claims). It is a perceived “shortfall” in available remedies that has spurred claimants to challenge ERISA and attempt to secure additional remedies under state law which are not available under the Act.
Since ERISA’s enactment, there has been a steady stream of litigation instituted by Welfare Plan participants and beneficiaries attempting to erode the protective stronghold of ERISA’s civil enforcement provisions and evade the broad preemptive scope of the Act. Utilizing artful pleading and relying upon various state statutes and common law, claimants continually attempt to reshape the contours of ERISA’s statutory scheme and the limited forms of relief available to Plan participants and beneficiaries under the Act. One fertile source of challenges to ERISA’s preemptive scheme and available remedies has been in the area of managed care. Welfare Plan participants and beneficiaries bring claims against managed care entities such as HMO’s for extracontractual compensatory damages based upon state law. The Supreme Court, Circuit Courts of Appeals and federal district courts have managed to preserve the remedies and protections of ERISA to some degree. However, Plan claimants, with the help of the courts, have also carved out a niche for certain types of claims which will not be preempted by ERISA and, therefore, may be governed by State laws.
One distinction drawn by the courts and utilized to avoid preemption of claims against HMO’s by Welfare Plan participants and beneficiaries is the “quality of care or treatment rendered versus quantity of benefits” distinction. For instance, in Dukes v. U.S. Healthcare, Inc., 57 F.3d 350 (3rd Cir. 1995), cert. denied, 516 U.S. 109, 116 S.Ct. 564, 133 L.Ed.2d 489 (1995), and In re U.S. Healthcare, Inc., 193 F.3d 151 (3d Cir. 1999), cert. denied, 530 U.S. 1242, 120 S.Ct. 2687, 147 L.Ed.2d 960 (2000), the HMO’s had assumed a dual role of administrator of the Welfare Plan and provider of medical services. In U.S. Healthcare, the Third Circuit held that the HMO’s policy of discharging newborn infants within twenty-four hours was, in essence, a “medical determination of the appropriate level of care.” 193 F.3d at 163. The Court also held that the claimant’s allegations of negligence based on the HMO’s alleged failure to provide an in-home visit by a pediatric nurse, in spite of its giving assurances that this service would be provided, was aimed at the HMO’s role as a medical provider. Id. at 164.
In Dukes, the plaintiff’s claims focused on the low quality of medical treatment actually received. The plaintiff argued that the HMO was vicariously liable for the actions of Plan physicians under an agency theory, and directly liable for its own negligence in selecting, retaining, screening, monitoring and evaluating the personnel who actually provided the medical services. The Third Circuit held that those claims did not involve failure to provide benefits due under the ERISA Plan and therefore were not completely preempted.
Similarly, in Lazorko v. Pennsylvania Hosp., 237 F.3d 242 (3rd Cir. 2000), the Third Circuit reviewed a claim brought by the surviving husband of a mental patient who committed suicide after receiving treatment for depression and schizophrenia. The plaintiff challenged, among other things, the financial disincentives imposed by the HMO on its treating physicians which allegedly discouraged them from recommending additional treatment. The plaintiff’s wife had been hospitalized for six months after attempting suicide. Following her discharge from the hospital, she began contemplating suicide again and sought re-hospitalization. Her treating physician denied the request and shortly thereafter, Mrs. Lazorko successfully committed suicide. Her husband brought suit in state court alleging that the HMO was directly and vicariously liable to him for his wife’s death because the HMO imposed financial disincentives on Mrs. Lazorko’s physician that discouraged him from recommending her for additional treatment. The HMO argued that the plaintiff’s claims were completely preempted by ERISA under Section 502(a)(1)(B), which gives a member of an ERISA plan an exclusive federal remedy for claims arising from the denial of benefits guaranteed by the plan. Id. at 246. The Court of Appeals commented that “drawing the line between the denial of benefits under a plan and the provision of substandard care is difficult.” Id. at 250. The Court then concluded that the plaintiff’s claim, as pled, fell on the standard of care side of the line, not denial of benefits. Id. Further, the Court stated:
We note, moreover, that since our decision in In re U.S. Healthcare, our district courts have consistently applied its reasoning to determine whether it is the quality of care provided or the denial of a plan benefit that is implicated when treatment is refused. See, e.g., Tiemann v. U.S. Healthcare, 93 F.Supp.2d 585 (E.D. Pa. 2000) (classifying failure to diagnose and treat disease properly as a question of benefit quality not quantity) (citation omitted).
Id. at 250.
The Lazorko Court held that the claim that the HMO was directly liable for a patient’s death because it imposed financial disincentives on the treating physician that discouraged him from recommending additional treatment, was not completely preempted by ERISA Section 502(a). Lazorko, 237 F.3. 242. Compare, Pryzbowski v. U.S. Healthcare, Inc., 245 F.3d 266 (3rd Cir. 2001) (claims that HMO delayed approval for treatment by out-of-network physician were preempted because they challenged plan administration rather than the quality of care provided).
In contrast, the Fifth Circuit Court of Appeals held that a utilization review determination by an independent company providing that service to a managed care organization involved a mixed question of medical evaluation of the patient’s case and determination if coverage would be afforded. Corcoran v. United Healthcare, Inc., 965 F.3d 1321 (5th Cir. 1992). Corcoran involved claims of the parents of an unborn child who died after the employee disability plan determined that hospitalization of the mother was not necessary. The plaintiffs alleged that Blue Cross wrongfully denied appropriate medical care, failed to adequately oversee the medical decisions of United Healthcare, and failed to provide United with the mother’s complete medical background showing similar problems with past pregnancies. Holding the plaintiffs’ claims to be preempted by ERISA, the Court stated:
We cannot fully agree with either United or the Corcorans. Ultimately, we conclude that United makes medical decisions – indeed, United gives medical advice – but it does so in the context of making a determination about the availability of benefits under the plan. Accordingly, we hold that the Louisiana tort action asserted by the Corcorans for the wrongful death of their child allegedly resulting from United’s erroneous medical decision is preempted by ERISA.
Id. at 1331.
Like Corcoran, the Eighth Circuit Court of Appeals held in Kuhl v. Lincoln Nat’l Health Plan, Inc., 999 F.2d 298 (8th Cir. 1993), cert. denied, 510 U.S. 1045, 114 S.Ct. 694, 126 L.Ed.2d 661 (1994), that a medical malpractice claim against an HMO for failure to authorize coverage for hospitalization was completely preempted by ERISA. The Court found that the claim was one involving plan administration and the benefits to which the claimant was entitled. Therefore, under ERISA’s civil enforcement provisions, the claim was completely preempted by federal law.
In Elsesser v. Hosp. of the Philadelphia College of Osteopathic Medicine, 802 F.Supp. 1286 (E.D. Pa. 1992), the district court ruled that allegations that the HMO withheld benefits were preempted because they involved the claimant’s eligibility for certain benefits. However, the court also ruled that claims of HMO negligence in the selection and evaluation of its primary care physicians were not preempted. In PacifiCare of Oklahoma, Inc. v. Barrage, 59 F.3d 151 (10th Cir. 1995), the Tenth Circuit Court of Appeals held that vicarious liability claims against an HMO for medical malpractice of a primary care physician, its ostensible agent, were not preempted because they did not involve the administration of Plan benefits which would have triggered ERISA preemption. The Court also would not find preempted the plaintiff’s claim that the HMO elected to directly provide medical treatment or services, or that it held the treating physician out as its agent.
In a very recent case, the U.S. Supreme Court considered whether Illinois’ HMO Act which required that Welfare Plan participants and beneficiaries be provided with a means of independent physician review of HMO coverage denials was preempted by ERISA. The Court held that this state law was “saved” from preemption by ERISA’s Saving Clause because it regulated insurance. Rush Prudential HMO, Inc. v. Moran, 536 U.S. ___, 122 S.Ct. 2151, 153 L.Ed.2d 375 (2002). See also, 29 U.S.C. § 514(b)(2)(A). Likewise, in UNUM Life Ins. Co. of America v. Ward, 526 U.S. 358, 119 S.Ct. 1380, 143 L.Ed.2d 462 (1999), the Supreme Court held that California’s notice-prejudice rule “regulate[d] insurance” within the meaning of ERISA’s Saving Clause and, thus, escaped preemption. However, the Court also held that the California common law rule allowing a policyholder-employer to be deemed an agent of the insurer in administering group insurance policies was preempted by ERISA. In Roark v. Humana, Inc., ___ F.3d ___, 2002 WL 31084216 (5th Cir. Tex.), the Fifth Circuit held that claims brought under the state’s medical malpractice statute challenging the HMO’s mixed eligibility and treatment decisions were not completely preempted, but ERISA’s civil enforcement provisions did completely preempt the plaintiffs’ state-court breach of contract claims against the HMO for its refusal to cover home nursing treatments. The Court found that the answer to whether the HMO violated the plan’s promise to provide “medically necessary” treatment turned on interpreting the plan’s language, not on the application of an external, statutorily imposed standard of care. The “mixed eligibility and treatment decisions” involved the alleged improper cutting short of a hospital recovery stay and improper requirement that the patient try pain medications other then the prescribed one. The Court found that these allegations did not challenge the plan administrator or plan interpretation. Rather, the plaintiffs asserted tort claims based on external, a statutorily imposed duty of care which were not preempted by ERISA.
The foregoing examples represent only a very small part of a host of cases involving claims by ERISA Plan participants and beneficiaries against managed care organizations and pension plans. Together, these cases illustrate the intricacies of ERISA and the difficulties with which the courts must struggle in determining whether a claim of negligence and/or medical malpractice, among others, by a Welfare Plan beneficiary or participant will be preempted by ERISA or allowed to go forward based upon state law. Oftentimes, the distinctions drawn by the courts are tenuous at best, and could just as easily be interpreted another, totally different way. Overall, it remains to be seen whether Congress will adequately respond, or respond at all to the Supreme Court’s call for clarification and/or modification of ERISA’s preemption clause and of the complete preemptive effect of ERISA’s civil enforcement provisions. Unless and until there is a legislative response, it is likely that the confusion and diverse standards created by the courts will continue to be formulated as more and more Plan claimants bring suit in state courts based upon state laws in an effort to enlarge the remedies available to them.