Overcoming ERISA.

HMOs are making life-and-death medical decisions. When those decisions cause harm, attorneys must clear preemption hurdles to win justice for clients.

In September 1999, the U.S. Court of Appeals for the Third Circuit decided In re U.S. Healthcare, Inc.(1) This seminal case examined several separate medical malpractice claims pleaded by plaintiffs Steve and Michelle Bauman against their HMO and rejected preemption of all the claims under the Employee Retirement Income Security Act (ERISA).(2)

In reaching its decision, the court not only reinforced but also extended the developing doctrine that [sections] 502 of ERISA preempts only a limited category of medical malpractice claims. To understand what progress this developing doctrine represents, it is helpful to look at the historical background.

In the 1990s, with the full-scale advent of managed care, two aspects of traditional medical malpractice actions began to change. First, because more and more people were receiving their health care through HMOs and because these organizations were making medical decisions, plaintiffs increasingly began naming HMOs as defendants. Second, HMOs began removing these state law actions to federal court, arguing that ERISA both provided federal jurisdiction for and preempted these claims.

Congress passed ERISA in 1974 to protect employee rights to receive benefits (primarily pension benefits) promised by employers. Despite this purpose, the HMOs argue that the law prohibits these same employees from exercising their traditional right to bring a state law medical malpractice action against a managed care company. Accepting this argument would have far-reaching implications because many Americans receive payment for their medical care through ERISA-covered plans sponsored by their employers.(3)

Before In re U.S. Healthcare, two federal appeals court decisions had been particularly important in developing the application of ERISA preemption principles to medical malpractice claims against HMOs: Corcoran v. United Healthcare, Inc.(4) and Dukes v. U.S. Healthcare, Inc.(5)

In Corcoran, the plaintiff's doctor recommended that Florence Corcoran be hospitalized late in her pregnancy because of problems that needed continuous monitoring. Despite this recommendation, United Healthcare determined hospitalization was unnecessary, instead authorizing only 10 hours a day of home nursing care. At a time when no nurse was on duty, the fetus went into distress and died.

The Corcorans sued United in state court, alleging that its negligence had caused their unborn baby's death. United removed the case to federal court and argued that ERISA preempted the suit.

The Fifth Circuit held that ERISA preempted the Corcorans' medical negligence claim against United. Even though the court found that United had made a medical decision, the judges concluded that the act protected the company from medical malpractice liability because the decision was made "in the context of making a determination about the availability of benefits under the plan."(6) The court found the result it reached "troubling" because it left the Corcorans without a remedy for a "serious mistake," but it placed the blame for this unjust result with Congress, instead of with its own interpretation of congressional intent.

This was the origin of the myth, still prevalent in many circles today, that ERISA preempts all medical malpractice claims against HMOs and that the only way to remedy this injustice is for Congress to amend the law. HMOs continue to attempt to evade liability by arguing that they are involved in benefit determinations rather than medical decision making.

In Dukes, the second important appellate decision on the issue, the Third Circuit rejected U.S. Healthcare's argument that Corcoran should be read broadly to "hold that medical malpractice claims against an HMO should be [preempted] whenever an HMO provides the complained-about medical treatment as a benefit of an ERISA-covered health plan."(7)

Dukes specifically held that medical malpractice claims based on vicarious liability of the HMO for the actions of a physician alleged to be its agent were not preempted under [sections] 502 of ERISA. The court remanded these claims to state court, where the defense of preemption by [sections] 514(a) of ERISA could be considered. In addition, Dukes enunciated the important principle that "patients enjoy the right to be free from medical malpractice regardless of whether or not their medical care is provided through an ERISA plan."(8)

Distinguishing between [sections] 502 and [sections] 514

HMOs have used two sections of ERISA to argue that the act preempts all medical malpractice actions against them. The first is [sections] 502, which provides that a "civil action may be brought ... by a participant or beneficiary ... to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan."(9)

Managed care companies argue that lawsuits like Corcoran and Dukes are not medical malpractice actions at all but suits under [sections] 502 "to recover benefits due" under the terms of an ERISA-covered plan. If a case is in reality a suit under [sections] 502, then it may be removed to federal court because it arises under federal law.(10)

In fact, this theory is not a preemption doctrine at all. Instead, it is a federal jurisdiction doctrine, because it provides federal jurisdiction to a category of actions brought under state law.(11) Unfortunately for plaintiffs, if a court finds federal jurisdiction under [sections] 502 for a medical malpractice action brought in state court, the HMO will automatically be dismissed from the case under one of two theories.

Under the first theory, since the only remedy available under [sections] 502 is an order to provide benefits due or to pay for expenses incurred, a plaintiff seeking damages caused by an HMO's failure to provide a benefit has no remedy. Therefore, this claim against the managed care company must be dismissed.(12) Under the second theory, since the court has already found the plaintiffs' case preempted under the relatively narrow preemption grounds of [sections] 502, it necessarily follows that it must also be preempted under the broader preemption grounds of [sections] 514.(13)

Section 514(a) states that the provisions of ERISA "shall supersede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan" covered by the act.(14) The words "relate to" can be broadly applied. Courts that have held malpractice claims preempted under [sections] 514 have emphasized this broad language. While courts call [sections] 502 preemption "complete preemption," they call [sections] 514 preemption "conflict preemption" because of the potential conflict between a state law claim and federal law. (15)

Although understanding the distinction between the two types of preemption is important analytically, this article focuses primarily on avoiding [sections] 502 preemption of medical malpractice claims against HMOs. The battle over [sections] 502 preemption is usually the first one fought. If the plaintiff loses, the federal court will not only take jurisdiction over the claim but will also dismiss it. The issue of [sections] 514 preemption will either never be reached or will be automatically decided in the HMO's favor. If the plaintiff wins the battle over [sections] 502 preemption, the case will usually be remanded to state court.(16)

Viable liability theories

In re U.S. Healthcare affirmed and extended the opinion of the New Jersey district court in Bauman v. U.S. Healthcare.(17) In doing so, the Third Circuit recognized a number of liability theories that can be used to hold HMOs accountable for medical negligence.

Michelle and Steve Bauman pleaded several different claims against U.S. Healthcare. Michelle gave birth to their first child, Michelina, on May 16, 1995. Under U.S. Healthcare's 24-hour discharge policy, mother and child were released from the hospital the following day. Michelina died the next day, May 18, at about 6 p.m., as a result of a virulent infection. Had Michelina remained in the hospital beyond 24 hours, the infection would almost certainly have been diagnosed and treated, and she would be alive today.

The Baumans argued that U.S. Healthcare should be held liable for their daughter's death under several different claims of direct and indirect negligence.

Vicarious liability

The Baumans' complaint alleged that U.S. Healthcare was vicariously liable for the negligence of the hospital and the pediatrician who discharged Michelina after 24 hours and then failed to readmit her on May 18 despite repeated calls from the Baumans, beginning at 6 a.m.

Vicarious liability claims do not seek to hold HMOs accountable for medical decisions they have made, but rather assert a traditional theory of liability for the negligence of their employees or agents. Since the Third Circuit decided Dukes, almost all courts considering this issue have held that vicarious liability claims against HMOs for the negligence of hospitals and physicians in its network are not actions "to recover benefits due" and consequently are not preempted under [sections] 502.(18) In In re U.S. Healthcare, the court found that the Baumans' vicarious liability claims were "indistinguishable in any meaningful way" from those found not to be preempted in Dukes.(19)

Negligent selection and supervision

The Baumans also alleged that U.S. Healthcare was negligent in "the selection, supervision, training, and/or monitoring" of the pediatrician. Like the vicarious liability claim, this claim applies to the HMO principles of medical malpractice liability traditionally applied to other entities, usually hospitals.

Federal courts since Dukes have generally ruled that these claims are not claims to recover benefits due and so are not preempted by [sections] 502. Again, the Third Circuit found that the Baumans' negligent selection and supervision claim was "indistinguishable" from a similar claim in Dukes and that "such claims do not involve an attempt to recover benefits due, enforce rights, or clarify future benefits under a plan."(20)

Direct negligence: overt policy

Dukes had already paved the way for the Baumans' success on their vicarious liability and negligent supervision claims. What is striking about In re U.S. Healthcare is their breakthrough in establishing that HMOs may be held liable for direct negligence caused by an overt policy.(21)

U.S. Healthcare had a policy limiting its members to 24 hours of hospitalization after delivery of a newborn. The Baumans alleged that the HMO acted negligently in adopting this policy.

Agreeing with the Baumans, the district court found that this claim was not preempted by [sections] 502 because it was not an action "to recover benefits due." The court noted that the Baumans were not entitled to additional hospitalization under the terms of the plan. The Third Circuit similarly rejected U.S. Healthcare's contention that this claim was preempted by ERISA, stating, "This is not a claim that a certain benefit was requested and denied."(22)

This ruling is important because it holds the HMO accountable for policies that the company itself has adopted, rather than for its selection of employees or its employees' negligence. These claims may improve the quality of health care in the same way that suits against auto manufacturers for policies that ignored safety have improved the safety of automobiles.

Because these claims challenge policies that put profits first and health last, they also carry the potential for punitive damages, which act as a powerful force deterring HMOs from reckless conduct that jeopardizes the health of members. The Baumans sought these damages, asserting that U.S. Healthcare adopted its 24-hour discharge policy motivated only by financial profit.

The plaintiffs in an Ohio case, Ouellette v. Christ Hospital, presented a similar theory of liability. Their HMO had a policy limiting hospital stays of patients undergoing ovary removal to two days. Because Ms. Ouellette was discharged after two days, she suffered complications that could otherwise have been avoided. The district court determined that her negligence claim was not preempted by [sections] 502 because it was not a claim for benefits under the plan, but rather a claim against an HMO policy that undermined the quality of care Ms. Ouellette received.(23)

Direct negligence: covert policy

The Baumans also alleged that U.S. Healthcare's policies contributed to the pediatrician's negligent decision not to readmit Michelina to the hospital when they called her on May 18.

Often, HMOs give physicians financial incentives that discourage diagnostic testing, hospitalization, and referrals to specialists. They usually accomplish this by using a "withhold" system, which decreases payment to doctors if their utilization in these areas exceeds a certain standard, or a bonus system, which increases doctors' compensation if their utilization in these areas is low. Unlike overt policies, which clearly specify limits on hospital stays or other medical care, these incentives are seldom known to patients and operate as covert policies that quietly affect many important decisions doctors make.

The trial court held that the Baumans' negligence claim based on the HMO's financial incentives was not preempted. Rather than focus "'exclusively' on whether U.S. Healthcare provided plaintiffs with benefits due under the plan," the court said, the claim sought "to hold U.S. Healthcare accountable for adopting policies that cause its participating physicians to provide inadequate medical care."(24)

The Third Circuit expanded on this important ruling. The court noted that the Baumans' claims focused on HMO policies that encouraged participating physicians to discharge newborns and discouraged physicians from readmitting them "when the appropriate standard of care required otherwise."(25) Basing a plaintiff's claim against an HMO on the state law "standard of care" is essential to properly narrow the scope of ERISA preemption.

Lancaster v. Kaiser Foundation Health Plan, Inc., reached a contrary result on the issue of covert financial incentives.(26) For four years the HMO doctors failed to order diagnostic tests or refer a young patient to a specialist even though she continually complained of nausea, intense localized headaches, and similar symptoms. The symptoms were eventually determined to be caused by a brain tumor, and the plaintiffs alleged that the doctor's failure to act more aggressively was a result of the financial incentive policies that discouraged doctors from referring patients to specialists and ordering diagnostic tests.

The plaintiffs had not known about the financial incentives and had never requested specific plan benefits. Even so, the court found their negligence claims preempted under [sections] 502 because it likened the HMO's financial incentive system to an "administrative decision that has the effect of denying benefits."(27)

Direct provider of care

In some situations, rather than acting as the organization that arranges medical care by various providers, an HMO acts as a direct provider of care. The Baumans alleged that U.S. Healthcare was acting as a direct provider when it negligently failed to provide them with a post-delivery home visit by a pediatric nurse.

Because the health plan indicated that the Baumans were entitled to a visit, the district court found that their negligence claim was preempted as a claim "to recover benefits due" under the plan. However, the Third Circuit found that "the mere fact that the Baumans referred in their complaint to a benefit promised by their health care plan does not automatically convert their state law negligence claim into a claim for benefits under Section 502."(28)

Instead, the court looked to the essence of the plaintiffs' claim: that U.S. Healthcare, in its role as health care provider, failed to meet the standard of care, which required a timely home visit by a pediatric nurse. The plaintiffs had pleaded "a state cause of action for violating a tort duty 'to provide [the Bauman family] adequate medical care, rather than a violation of a [contractual] promise ... made to them in their ERISA plan."(29) The latter claims are appropriately preempted under ERISA; the former are not.

The Baumans persuaded the court that the dispositive issue was whether their claim was based on rights created by the plan or rights already existing under medical malpractice law.

Shannon v. McNulty presents another example of holding an HMO accountable when it acts as a direct provider of medical care.(30) The HMO, Health America, acted as a direct provider by staffing an emergency number that subscribers could call if they experienced problems during pregnancy. When Mrs. Shannon had symptoms indicating she was in preterm labor, she repeatedly called the emergency line but was never advised to see a doctor until it was too late. Her baby was born prematurely and died two days later.

Applying a theory of corporate negligence previously applied to hospitals, Shannon held that the HMO had violated its "duty to oversee all persons who practice medicine within its walls as to patient care."(31) The court ruled that "when a benefits provider, be it an insurer or a managed care organization, interjects itself into the rendering of medical decisions affecting a subscriber's care, it must do so in a medically reasonable manner."(32)

Additional claims

HMOs have also raised ERISA preemption in their attempts to dismiss two other claims of negligent conduct not raised in the Baumans' case.

Denial of treatment under utilization review 

HMOs have met with their greatest success in arguing for ERISA preemption when medical malpractice claims are based on denial of treatment as a result of a utilization review decision. Utilization review is a procedure by which the HMO reviews physicians' treatment recommendations with an eye toward cutting costs. When a managed care company denies treatment, the patient may suffer serious, sometimes catastrophic, consequences.

Unfortunately, starting with Corcoran, many courts have concluded that when a medical malpractice action arises after a denial of treatment during utilization review, the lawsuit constitutes a claim "to recover benefits due." Consequently, it is preempted by [sections] 502.(33)

However, many of these cases were wrongly decided if the principle set forth in In re U.S. Healthcare for determining HMO liability as a direct provider of care is applied. This principle focuses on whether the plaintiff's claim is based on a promise in the plan or on a deviation from the standard of care. In the Corcoran case, for example, if the plaintiff's claim was that she was entitled to full-time hospitalization based on the standard of care--rather than based on a contractual entitlement created by her ERISA plan--her claim should not have been preempted.

Delay in treatment

When a patient suffers from a condition requiring emergency medical treatment, the standard of care requires that the examining doctor act quickly so that the patient may receive treatment in a timely manner. If the doctor does not act quickly and the plaintiff is harmed as a result, the doctor may be held accountable in a medical malpractice action. Similarly, when the actions of an HMO cause a delay in patient treatment, the law should hold the HMO accountable.

This was the holding of the Pennsylvania Supreme Court in Pappas v. Asbel.(34) The plaintiff went to the local hospital emergency room with symptoms of paralysis and numbness in his extremities. The emergency room physician correctly diagnosed Mr. Pappas as suffering from a neurological emergency and immediately arranged for his transfer to a university hospital equipped to handle the problem. However, U.S. Healthcare denied authorization for transfer to this hospital, and several hours were lost before the doctor could arrange to transfer Mr. Pappas to a different hospital approved by the HMO. Mr. Pappas now suffers from permanent quadriplegia, which could have been prevented if his transfer had not been delayed.

U.S. Healthcare argued that the medical malpractice claim against it should be dismissed because it was preempted by [sections] 514 of ERISA.(35) Accepting the HMO's invitation to decide the broad issue of "whether negligence claims against a health maintenance organization 'relate to' an ERISA plan," the Pennsylvania Supreme Court determined that they do not.

The court observed that "claims that an HMO was negligent when it provided contractually guaranteed medical benefits in such a dilatory fashion that the patient was injured indisputably are intertwined with the provision of safe medical care." It concluded that Congress, in enacting ERISA, never intended "to preempt state laws concerning the regulation of the provision of safe medical care."(36)

Accountability

Many consumers, doctors, journalists, and politicians recognize that HMOs are actively involved in making medical decisions. The courts should also acknowledge this reality.

The purpose of a medical malpractice lawsuit is to hold those who make negligent medical decisions accountable to those they injure. A careful review of ERISA and the intentions of the lawmakers who enacted it demonstrates that the act should not be interpreted to insulate HMOs from accountability when their actions result in injury to patients.

Notes

(1). 193 F.3d 151 (3d Cir. 1999), petition for cert. filed (Feb. 17, 2000).

(2). 29 U.S.C. [sections] 1001-1461 (1994).

(3). Currently this number is 122 million, according to U.S. Department of Labor estimates from Employee Benefit Research Institute tabulations, based on the March 1997 Current Population Survey (Bureau of the Census).

(4). 965 F.2d 1321 (5th Cir.), cert. denied, 506 U.S. 1033 (1992).

(5). 57 F.3d 350 (3d Cir.), cert. denied, 516 U.S. 1009 (1995).

(6). Corcoran, 965 E2d 1321, 1331.

(7). Dukes, 57 F.3d 350, 360.

(8). Id. at 358.

(9). 29 U.S.C. [sections] 1132 (a)(1)(B)(1994).

(10). See Jass v. Prudential Health Care Plan, Inc., 88 F.3d 1482, 1487-88 (7th Cir. 1996).

(11). Id. at 1486-87.

(12). See, e.g., Cannon v. Group Health Serv., Inc., 77 F.3d 1270 (10th Cir.), cert. denied, 519 U.S. 816 (1996).

(13). Rice v. Panchal, 65 F.3d 637, 646 n.10 (7th Cir.), amended, reh'g en banc denied, 1995 U.S. App. LEXIS 31419 (7th Cir. Nov. 6, 1995).

(14). 29 U.S.C. [sections] 1144(a).

(15). Rice, 65 F.3d 637, 639-40.

(16). This is because preemption under [sections] 514 is a federal defense to a state law claim; unlike [sections] 502, it does not create federal jurisdiction for a state law claim. Dukes, 57 F.3d 350, 355.

(17). 1 F. Supp. 2d 420 (D.N.J. 1998).

(18). See, e.g., Santitoro v. Evans, 935 F. Supp. 733, 735-36 (E.D.N.C. 1996); Prihoda v. Shpritz, 914 F. Supp. 113, 116-18 (D. Md. 1996).

(19). In re U.S. Healthcare, 193 F.3d 151,162.

(20). Id. at 163.

(21). To the extent that one views an HMO's policy on an issue as one aspect of its duty to supervise its network physicians and hospitals, all direct negligence claims against HMOs are subsumed under the rubric of negligent supervision.

(22). In re U.S. Healthcare, 193 F.3d 151, 163.

(23). 942 F. Supp. 1160 (S.D. Ohio 1996).

(24). Bauman, 1 F. Supp. 2d 420, 423.

(25). In re U.S. Healthcare, 193 F.3d 151, 163.

(26). 958 F. Supp. 1137 (E.D. Va. 1997).

(27). Id. at 1147.

(28). In re U.S. Healthcare, 193 F.3d 151,164.

(29). Id. (emphasis added).

(30). 718 A.2d 828 (Pa. Super. Ct. 1998).

(31). Id. at 831.

(32). Id. at 836.

(33). See, e.g., Jass, 88 F.3d 1482 (denial of physical therapy after knee replacement); Cannon, 77 F.3d 1270 (denial of bone marrow transplant for leukemia patient).

(34). 724 A.2d 889 (Pa. 1998).

(35). Since U.S. Healthcare was not an original defendant in the case but was brought in under a third-party complaint by defendant Haverford Hospital, it did not contend that the case arose under [sections] 502. Therefore, preemption under [sections] 502 was not an issue.

(36). Pappas, 724 A.2d 889, 893 (emphasis added).