Federal trumps state law in HMO disputes.

Health maintenance organizations breathed a sigh of relief on June 21, 2004, when the U.S. Supreme Court unanimously issued a decision in the consolidated cases of Aetna Health Inc. vs. Juan Davila and Cigna Healthcare of Texas Inc. and Cigna Corp. vs. Ruby R. Calad that the Employee Retirement Income Security Act pre-empts the Texas Health Care Liability Act. The court rejected the plaintiffs' right to sue their health plans for denied benefits, and thus essentially blocked managed-care liability provisions contained in patients' rights laws already enacted by 10 states.

"This was a significant decision for HMOs because it precludes the state law damages claims," said Robert Eccles, an attorney with O'Melveny & Myers LLP in Washington, D.C., who represented Cigna in the Calad case. "Health plans are relieved that they're not going to get slammed with large damage awards; but on the other hand, the world has already changed to regulate the process in a way that didn't exist five years ago."

Staving off large state-court damage awards can potentially save participants coverage costs and help health plans increase profits. The Congressional Budget Office reported that letting patients sue their health plans would increase health insurance premiums by an average of about $100 per person per year.

The two cases were brought independently in Texas state court by plaintiffs Juan Davila and Ruby Calad, who flied malpractice claims against Cigna and Aetna under the state liability act--a patients' rights law enacted in 1997. Davila, a post-polio patient with diabetes and arthritis, said Aetna refused to cover a prescription for Vioxx without first trying a less expensive alternative. After three weeks on the generic, Davila suffered bleeding ulcers, a near heart attack and spent several days in critical care.

For Calad, the suit against Cigna Healthcare of Texas came about because she was sent home against her doctor's orders the day after a complicated hysterectomy. A Cigna discharge nurse said Calad didn't meet the plan's criteria for a longer hospital stay so Cigna wouldn't pay for additional inpatient treatment. After her discharge, however, she had to return to the hospital for additional treatment.

Cigna and Aetna had both cases moved from state to federal court on the grounds that the federal ERISA preempts any claims regarding employee benefit plans. Under ERISA, patients can sue an HMO or other health plan for reimbursement of denied benefits but not for damages caused by the denial. On that basis, the federal district court dismissed both claims. The plaintiffs appealed, arguing that their HMOs' treatment denials represented negligent medical decisions and belonged in the state court. The U.S. Supreme Court, however, unanimously ruled that ERISA completely pre-empts the plaintiffs' state law claims, and the high court judges noted that under ERISA if an HMO concludes that a particular treatment isn't covered under the terms of the plan, its "denial of coverage would not be a proximate cause of any injuries arising from the denial."

Stephanie Kanwit, special counsel for America's Health Insurance Plans, said the Supreme Court's opinion maintains the status quo by indicating that ERISA prescribes uniform procedures that must be obeyed nationally and states can't decide to impose additional remedies. "It also confirms what we've been saying in the health plan community for years--external review works very well," she said.

The cases also minimize risks to insurers by cutting out the ERISA-based plans from the statutes, according to Austin-based attorney Lannis Temple.

Michael Bidart, an attorney with Shernoff Bidart & Darras LLE expects minimal impact, saying the ruling simply reaffirms a 1997 U.S. Supreme Court decision, Pilot Life vs. Dedeaux. The decision in that case established that whenever a beneficiary obtains group health coverage through an employer, benefits disputes are preempted by ERISA. "Since that decision, there's been a tremendous outcry by HMO consumers and many federal court judges having to do with perceived inequity, of having a situation where private sector employees who obtain their health insurance through a group insurance setting have dramatically less legal rights than public sector or church employees who aren't ERISA pre-empted," Bidart said.