Protecting medical malpractice claims against ERISA preemption.

ERISA is all too often turned into a shield to protect large for-profit medical service providers from liability.

When a client comes to your office with a medical malpractice claim, the last thing you may think of is ERISA, the Employee Retirement Income Security Act.(1) But when your target is an HMO and your client takes part in an employer-sponsored health benefit plan, ERISA--a law designed to protect employees--is all too often turned into a shield to protect large for-profit medical service providers from liability.

Preserving the medical malpractice claim from an HMO's ERISA preemption defense is a matter of filing the right claim, keeping it in the right court, and challenging the contentions about the breadth of the act's preemption provision. Although the law is still developing, the Department of Labor has asserted,(2) and courts all over the country have recognized, that an HMO should not escape liability for the negligence of the physicians it hires, recommends, or oversees simply because its patients participate in ERISA plans.

Filing the claim

The form of a medical malpractice complaint against an HMO depends on the HMO's organization and the state's vicarious liability remedies.

There are three primary HMO organization models.

* Under the staff model, the HMO directly employs physicians and other health care providers and owns or leases the facilities.

* Under the independent practice association model, the HMO forms an alliance with associations of health care providers, known as IPAs, which contract with individual physicians to serve HMO subscribers. The HMO pays member IPAs a fixed, periodic amount, and the IPAs pay member physicians on a fee-for-service basis.

* Under the group model, the employer contracts with a single medical group to care for its employees. Fees are paid to the group on a capitation basis.

Most HMOs have characteristics of more than one model.(3)

HMOs have been found liable for medical malpractice-related injuries suffered by subscribers under various theories, including vicarious liability based on respondeat superior or ostensible agency and direct liability based on the negligent hiring, retention, and supervision of the physician.(4)

Under respondeat superior, the plaintiff must demonstrate a master-servant relationship between the HMO and the physician. Courts look to factors such as the manner of selection and hiring of a physician, the HMO's right of control over the physician and the extent to which it is exercised, the method of physician compensation, and the ownership of facilities and instrumentalities.(5) Staff model HMOs are more likely to meet these master-servant standards.

Under an ostensible or apparent agency theory, courts look at whether the HMO held out the physician as an employee and whether the patient looked to the HMO, rather than the physician, as the health care provider.(6) This theory may be used even when there is no direct agency relationship between the physician and the HMO.(7)

Generally, courts have not held HMOs liable for direct liability claims such as wrongful death, medical malpractice, or loss of consortium based on the theory that these are in reality claims for denial of a benefit under an ERISA plan,(8) even though these denials of coverage may effectively prevent needed medical treatment. Patients routinely follow the utilization review company's recommendation because they think it is a medical opinion or because they cannot afford the procedure.

Keeping your claim in state court

Typically, the first response of HMOs to a state medical malpractice suit is to file a notice of removal to federal district court under 28 U.S.C. [sections] 1441(a). This allows for removal of any "civil action brought in a State court of which the district courts of the United States have original jurisdiction." This is done because HMOs believe that federal courts are more sympathetic to the procedural defense of preemption and, if that fails, to substantive defenses.

Plaintiffs should oppose the removal by filing a motion to remand based on the "well-pleaded complaint" rule, which requires plaintiffs to state a federal cause of action on the face of their complaint.(9) A case cannot be properly removed to federal court unless the court would have had jurisdiction over the claim as it was originally filed. A federal defense, such as preemption, is insufficient to support removal.

The HMO will counter that its defense invokes the "complete preemption" doctrine--an exception to the well-pleaded complaint rule. The doctrine "is not a preemption doctrine but rather a federal jurisdiction doctrine."(10) It allows a select group of state claims to be characterized as federal if federal law has occupied the field so completely as to displace any state claims that may arise. This exception applies, and removal is appropriate, only where the federal law vindicates the same interest as the state law it purportedly preempts.(11)

The Supreme Court examined complete preemption in the context of ERISA in Metropolitan Life insurance Co. v. Taylor.(12) Arthur Taylor sued in state court for benefits under an employer-sponsored disability plan that were denied by the insurer, Metropolitan Life. The case was removed to federal court.

The Supreme Court found that the complete preemption doctrine exception applied and, thus, the plaintiffs benefit claim was properly removed. The Court found that ERISA's civil enforcement provision, [sections] 502, displaced the state law causes of action. The Court held that Congress had clearly manifested an intent to make causes of action within the scope of the provision removable to federal court. Included within the scope of [sections] 502(a) are suits to recover benefits from an ERISA plan, like those made by Taylor.(13)

Defendant HMOs often rely on this decision. However, medical malpractice law-suits are not filed to recover benefits but to assure the quality of benefits. Therefore, [sections] 502(a) does not displace state medical malpractice claims, nor did Congress intend it to, and complete preemption does not apply. Unless the federal law has created a federal remedy, no matter how limited, it will only arise as a defense to a state law action, rather than on the action's face, and the action cannot be removed.(14)

The Third Circuit carefully analyzed complete preemption as it applies to medical malpractice claims against HMOs. In Dukes v. U.S. Healthcare, a consolidated appeal of two cases against U.S. Healthcare, Cecilia Dukes brought suit against the HMO under Pennsylvania's ostensible agency theory for the negligence of HMO doctors, and under a direct negligence theory for failure to exercise reasonable care in selecting, retaining, screening, monitoring, and evaluating their personnel.(15)

In the second case, Linda and Ronald Visconti sued the HMO under an actual and ostensible agency theory, alleging that the HMO held out her gynecologist as competent, and under a direct liability theory for the HMO's role in his selection, employment, and oversight. In both cases, the HMO removed and the removal was overturned on appeal.

The Third Circuit held that the state claims were filed to assure the quality of benefits rather than to recover them, enforce the terms of the plan, or clarify future rights. Thus, the claims did not fall under ERISA [sections] 502(a). The federal enforcement scheme did not offer a remedy, and the claims could not properly be subject to federal jurisdiction under the complete preemption doctrine.

The Seventh Circuit also rejected the complete preemption doctrine in a medical malpractice case against an HMO under respondeat superior. The court denied removal to federal court based on the doctrine, finding that ERISA did not displace state law by creating a federal remedy, the subject matter was not within the scope of the act, and the claim did not involve interpretation of an ERISA plan.(16)

It is important to remember that complete preemption is analytically distinct from substantive preemption under ERISA [sections] 514, with which it is sometimes confused by judges and lawyers alike. "There are two different standards of preemption under ERISA one, `complete preemption' under [sections] 502(a), is used solely to determine whether removal jurisdiction exists; the other, substantive preemption under [sections] 514(a), is used in all other instances to determine whether a plaintiff can maintain a state-law claim in a case that involves an ERISA plan."(17)

Challenging summary judgment

Upon removal or subsequent remand, the HMO will file a motion to dismiss or for summary judgment under [sections] 514(a), which preempts "any and all State Laws insofar as they . . . relate to any employee benefits plan." Congress devised this language to "eliminat[e] the threat of conflicting or inconsistent state and local regulation of employee benefits plans."(18)

To rebut the preemption argument, plaintiffs must show the state law does not relate to an employee benefit plan, the HMO is not an employee benefit plan, and HMO liability for medical malpractice does not thwart Congress's intent of uniformity.

At the heart of the preemption defense is a determination of whether the state law relates to the plan. A state law relates to a plan "in the normal sense of the phrase, if it has a connection with or reference to such a plan."(19) The Supreme Court has consistently emphasized that "relates to" must be construed broadly.(20) A law may be preempted whether or not it

* is consistent with the goals and requirements of ERISA,(21)

* is specifically designed to affect ERISA plans,(22) or

* affects plans only indirectly.(23)

While ERISA's preemption provision is broad, it does not sweep away state laws that have "only a `tenuous, remote, or peripheral' connection with covered plans, as is the case with many laws of general applicability."(24) In general, courts examine the state law for its impact on the administration of the plan; on the type of benefits or structure of the plan; and on the relationship between primary ERISA entities, such as plan fiduciaries and participants.(25)

A recent Supreme Court case offers strong guidance on interpreting preemption in the health regulation field. In New York Conference of Blue Cross & Blue Shield v. Travelers Insurance Co., the Supreme Court upheld a state law that required hospitals to collect surcharges from commercially insured patients.(26) While the law subjected some HMOs to surcharges, it did not apply to defendant Blue Cross/Blue Shield plan participants. HMO plaintiffs argued that the surcharges should be preempted because they would add costs to commercially insured policies, limiting the plan administrators' service-provider choices impermissibly.

The Court upheld the surcharge because it had an indirect economic influence that does not bind plan administrators to a particular choice and, thus, does not regulate the plan itself. Moreover, the surcharge had no effect on either uniform administration of plans or the type of benefit that could be offered.

Most important for state law malpractice claims, the Court examined the legislative history of [sections] 514(a). It held that the state law was nothing more than an extension of the state's traditional power to regulate hospital fees: "[N]othing in the language of the Act or the context of its passage indicates that Congress chose to displace general health care regulation, which historically has been a matter of local concern."(27)

Like health regulation generally, medical malpractice has historically been a matter of state concern. Thus, claims made under state medical malpractice laws should not be preempted because they do not relate to a plan.

The HMO may also contend that the medical malpractice claim is preempted because it relies on the existence of an ERISA plan. In response, plaintiffs should argue that the claim is based on the HMO-doctor relationship, not on the participant-plan relationship. Consequently, the existence of a plan has no bearing on the quality of medical care or the liability the HMO has assumed for that care.

Another argument for preemption is that the HMO is the plan. An ERISA plan is defined as a plan, fund, or program established by an employer to provide, among other things, medical or health benefits to its employees through the purchase of insurance or otherwise.(28)

Typically, the employer will contract with an HMO to provide medical services and to make benefit determinations under the plan in exchange for a fixed fee or premium. Plaintiffs should argue that the patient's employer did not establish the HMO, nor does the HMO enjoy the special tax status of an ERISA plan. Thus, the HMO is not the plan, but merely a service provider to the plan. As such, state law claims that relate to HMOs do not, for that reason alone, relate to ERISA plans.(29)

An additional argument for preemption is that payment of malpractice claims affects the way a plan delivers benefits by influencing the nature of the doctor-HMO relationship and increasing costs to the plan. Plaintiffs should contend that the HMO's exposure to liability under state law directly affects its own efforts to control its own costs, not the employer plan's costs. Even if the HMO's exposure affects the employer's premium, the Supreme Court has ruled that such an indirect financial impact alone does not invoke preemption.(30)

HMOs may also contend that this exposure would impair the plan's ability to function simultaneously in a number of states. Plaintiffs should point out that because the HMO is not the plan, the plan has no liability. The doctors are not agents of the plan, nor does the plan supervise doctors. Thus, multistate plans cannot be impeded.

Substantive preemption and the courts

Substantive preemption, like complete preemption, is a complicated and frequently confusing legal doctrine based on a statute that is "not a model of legislative drafting."(31) District courts have split as to whether medical malpractice claims against HMOs are preempted, reaching decisions in some cases when they may not have had subject matter jurisdiction under complete preemption doctrine. Several courts have distinguished between vicarious liability claims, which are generally allowed,(32) and direct liability claims, which are generally preempted.(33)

Only one circuit--the Tenth Circuit--has ruled on substantive preemption and medical malpractice. In two cases, it held that medical malpractice laws are laws of general application that do not affect the structure, administration, or benefits provided by the ERISA plan.(34) The court did not preempt the plaintiffs' vicarious liability claims, but did preempt a direct liability claim for loss of consortium based on the HMO's unspecified negligent or fraudulent administration of the plan. Florida has also ruled on this issue.(35)

Direct liability claims are generally preempted where the medical judgment in question was a determination as to whether the procedure sought was covered as a plan benefit. Courts have viewed the HMO's decision as determining whether the patient is eligible for treatment and how treatment will be delivered--administrative issues. Eligibility determination is frequently based on plan language that promises coverage for an insured's "medically necessary" treatment.

But the decision as to what is medically necessary is indistinguishable from a treatment decision, which could prompt medical malpractice liability. In Corcoran v. United Healthcare, Inc., the utilization review provider to Florence and Wayne Corcoran's insurer felt physician-prescribed hospitalization for pregnancy complications was unnecessary and authorized 10 hours of in-home nursing per day.(36) When the nurse was not on duty, the fetus went into distress and later died.

The Corcorans sued United Healthcare for medical malpractice. The Fifth Circuit found that the claim was preempted. The court recognized that although utilization review providers and HMOs make medical decisions, this decision was administrative because it involved a determination of plan benefits.

The court found that the medical aspects of the provider's decision were only part of the administrative decision as to whether the benefit contract covered the proposed treatment.

Although United Healthcare decided only what care it would pay for, as a practical matter, it decided what treatment Corcoran would receive. The Fifth Circuit recognized that the provider's recommendation is more likely to be followed. Still, every court that has considered the issue of direct liability in this context has preempted the patient's claims.(37)

The bottom line for attorneys is that if a defense attorney can convince the trial court that the client's claim, however phrased in the complaint, is a denial of benefits, a direct liability claim will be both completely preempted under [sections] 502, because ERISA offers a remedy for claims for benefits, and substantively preempted under [sections] 514.(38)

Protecting clients

HMOs being sued for medical malpractice are quick to hide behind ERISA's preemption provisions. Claims against HMOs generally are not eligible for removal to federal court based solely on the complete preemption defense. Substantive preemption, except in cases where benefits have been denied, can generally be avoided by thoroughly distinguishing the plan from the HMO.

Attorneys must carefully structure their claims and responses, anticipating procedural and substantive maneuvers, to protect their clients' right to recovery.

Notes

(1.) 29 U.S.C. [subsections] 1001-1461 (1985).

(2.) The Department of Labor has filed amicus curiae briefs in Dukes v. US. Healthcare, Inc., 57 F.3d 350 (3d Cir. 1995), and Rice v. Panchal, 65 F.3d 637 (7th Cir. 1995). Copies of these briefs are available from Karen Handorf, U.S. Dept. of Labor, Office of the Solicitor, Plan Benefits Security Division, P.O. Box 1914, Washington, DC 20013.

(3.) For more information on HMOs, see generally William A. Chittenden III, Malpractice Liability and Managed Health Care: History and Prognosis, 26 TORT & INS. L.J. 451 (1991).

(4.) See, e.g., McClellan v. Health Maintenance Org., 604 A.2d 1053, 1059 (Pa. Super. Ct.1992), appeal denied, 616 A.2d 985 (Pa.1992).

(5.) See, e.g., Schleier v. Kaiser Found. Health Plan, 876 F.2d 174 (D.C. Cir. 1989).

(6.) See, e.g., Elsesser v. Hospital of the Philadelphia College of Osteopathic Med., 802 F. Supp. 1286, 1290 (E.D. Pa. 1992).

(7.) See RESTATEMENT (SECOND) OF TORTS [subsections] 267, 429 (1965).

(8.) See, e.g., Tolton v. American Biodyne, Inc., 48 F.3d 937,942 (6th Cir. 1995).

(9.) Franchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1, 9-12 (1983).

(10.) Lister v. Stark, 890 F.2d 941, 943 n.1 (7th Cir. 1989).

(11.) Bartholet v. Reishauer A.G., 953 F.2d 1073, 1075 (7th Cir. 1992).

(12.) 481 U.S. 58 (1987).

(13.) 29 U.S.C. [sections] 1132(a).

(14.) See, e.g., Lupo v. Human Affairs Int'l, Inc., 28 F.3d 269, 272-73 (2d Cir. 1994) (medical malpractice claim against health care provider for negligent hiring and supervision of psychiatrist was not within the scope of [sections] 502(a) and, thus, removal improper).

(15.) 57 F.3d 350 (3d Cir. 1995).

(16.) Rice, 65 F.3d 637.

(17.) Constantine v. Minis, 910 F. Supp. 657, 662 (S.D. Ga. 1995).

(18.) Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 46 (1987).

(19.) Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 97 (1983) (citing BLACK'S LAW DICTIONARY 1158 (5th ed. 1979)).

(20.) See, e.g., Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 138 (1990).

(21.) Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 739 (1985).

(22.) Shaw, 463 U.S. 85, 98.

(23.) Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 525 (1981).

(24.) See, e.g., District of Columbia v. Greater Washington Bd. of Trade, 506 U.S. 125, 130 n.1 (1992) (citations omitted).

(25.) See, e.g., United Wire, Metal and Mach. Health and Welfare Fund v. Morristown Mem'l Hosp., 995 F.2d 1179, 1195 (3d Cir. 1993).

(26.) 115 S. Ct.1671 (1995).

(27.) Id. at 1680.

(28.) 29 U.S.C. 1002(i).

(29.) But see Jass v. Prudential Health Care, 88 F.3d 1482 (7th. Cir. 1996) (a vicarious liability claim against the HMO for the doctor's actions was preempted under [sections] 514 because the relationship between the doctor and PruCare was a function of the plan rather than how PruCare conducts its medical service provision business).

(30.) Mackey v. Lanier Collection Agency & Serv., 486 U.S. 825, 831 (1988); Travelers Ins. Co. 115 S. Ct. 1671, 1679.

(31.) Metropolitan Life, 471 U.S. 724, 739.

(32.) See, e.g., Chaghervand v. CareFirst, 909 F. Supp. 304, 311 (D. Md. 1995).

(33.) See, e.g., Stroker v. Rubin, No.94-5563, 1994 U.S. Dist. LEXIS 18379, at *20-*21 (E.D. Pa. Dec. 22, 1994). But see Smith v. HMO Great Lakes, 852 F. Supp. 669, 672 (N.D. Ill. 1994) (direct and vicarious claims not distinguished, medical malpractice claims generally not preempted).

(34.) Pacificare of Oklahoma, Inc. v. Burrage, 59 F.3d 151 (10 Cir. 1995); Prudential Health Care Plan v. Lewis, No. 95-6255, 1996 U.S. App. LEXIS 2595 (10th Cir. Feb. 21, 1996).

(35.) See, e.g., In re Estate of Frappier, 678 So.2d 884 (Fla. Dist. Ct. App. 1996) (vicarious liability claim not preempted; direct, corporate, and contract claims preempted).

(36.) 965 F.2d 1321 (5th Cir.), cert. denied, 113 S. Ct. 812 (1992).

(37.) See, e.g., Tolton, 48 F.3d 937, 942.

(38.) Pilot Life, 481 U.S. 41, 57. Faced with removal, plaintiffs may be able to obtain a preliminary injunction compelling medical services or payment for medical services in emergency situations. See, e.g., Wilson v. CHAMPUS, 65 F.3d 361 (4th Cir. 1995).

Linda A. Way, a third-year law student at the University of Virginia, was an intern at the Office of the Solicitor, Plan Benefits Security Division (PBSD), U.S. Department of Labor; in 1996. William Scott, Senior Trial Attorney in the Office of the Solicitor, PBSD, and Morton Klevan, Senior Policy Director, Pension and Welfare Benefits Administration, U.S. Department of Labor, provided assistance. Glen Borkowski, a legal intern at PBSD in 1995, also helped. This article does not necessarily represent the views of the Department of Labor.