Will Health Plans Keep Their Erisa Shield?

For more than two decades, a complex federal law has been interpreted to protect HMOs from malpractice liability claims. Now experts believe that protection could be in jeopardy.

In the court of public opinion, these are not the happiest times for managed care companies. The news media routinely trot out horror stories about HMOs denying care to patients, resulting in serious injury or death. Election ballot initiatives pop up that would ban financial incentives such as capitation. State legislatures rush to impose handcuffs on managed care, ranging from laws imposing minimum maternity and mastectomy stays to “gag rule” legislation that bars health plans from restricting physician-patient discussions about treatment options not covered by the plans.

But there’s another court where HMOs may face even bigger problems: the court of law. The combination of recent growth in managed care enrollment and a growing perception (fueled by the steady drumbeat of critical media reports) that HMOs cut corners has led to increased litigation against health plans. A decade ago, managed care encompassed less than 10 percent of the nation’s work force. But that proportion has since grown to 77 percent, according to a 1996 benefits survey by the employee benefits consulting firm A. Foster Higgins.

Larger numbers of enrollees, patient visits and medical interventions have increased the potential for bad outcomes and therefore for finger-pointing at both physicians and HMOs. Patients are filing lawsuits against managed care plans on several grounds: breach of contract for failing to provide covered treatment; denial of needed specialist referrals or hospitalizations; negligent credentialing, selection or retention of network physicians; and negligent utilization review procedures.

Recently, and more ominously for the managed care industry, malpractice plaintiffs have had some success with two legal theories. They are claiming that HMOs are “vicariously liable” for substandard care rendered by physicians in their provider networks. HMOs, the argument goes, control to some degree the performance of these physicians, who act essentially as their agents; therefore, the HMOs are responsible for the physicians’ actions. Staff-model HMOs, which employ salaried physicians and nurses, have long been considered vicariously liable for the malpractice of their employees. But vicarious liability may also extend to the negligence of physicians in private practice who independently contract–on an individual basis, through a group practice, or through an independent practice association–with various managed care plans.

A second theory, corporate liability, holds that managed care companies are directly liable for their own negligent acts and omissions, such as delaying hospitalization approvals when such delays cause harm to a patient. In these claims, plaintiffs argue that managed care organizations are, in effect, practicing medicine because they actively manage patient care and influence physicians’ medical treatment decisions.

Typically, these lawsuits are filed against both the physician and the managed care plan. Of course, as with any legal claim, medical malpractice plaintiffs must prove that the injury they suffered was directly caused by the negligence of the defendant.

The malpractice plaintiffs’ bar is increasingly eyeing managed care companies as potential defendants. New types of suits are emerging, and more are expected to follow, as plaintiffs’ attorneys and the courts gain a clearer understanding of managed care. While health plans are still less likely to be sued than are doctors and hospitals, that fact may change as the plaintiffs’ bar increasingly perceives managed care organizations to have the deepest pockets.

ERISA limits claims

Until recently, managed care organizations enjoyed many years of relative immunity from malpractice lawsuits. That’s because most patients are effectively blocked from suing HMOs for medical malpractice by a federal law that regulates employee benefit plans offered by private employers and unions. Known as the Employee Retirement Income Security Act (ERISA), the law is a complex, comprehensive statute that lawyers and judges have struggled to interpret ever since it was enacted in 1974.

Concerned about the nation’s shaky private pension system and looting of employees’ pension benefits by shady employers, Congress passed ERISA to provide federal protection for employee retirement benefits. The law does not require that employers provide pension plans, but those that choose to do so must comply with the law’s standards for employee participation, vesting of pension benefits and disclosure and reporting of information.

Almost as an afterthought, Congress also included group health insurance and other employee benefit plans under the law’s protection, although it provided few standards for group health plans to meet. Today, the law oversees employee pensions as well as health coverage for 120 million people, nearly half of all Americans.

The purpose of ERISA was to ensure that employee benefits across the country would be uniformly regulated by a single federal standard, thereby helping multistate companies avoid having to comply with a patchwork quilt of 50 different state employee benefit laws. So Congress included a provision in the law that effectively blocks states from directly regulating employer health and other benefit plans.

This preemption provision has been broadly interpreted by the courts to include any state legislation, regulation or court decisions that “relate to” an employee benefit plan, such as laws mandating mental health coverage, or “any willing provider” laws. Until recently, courts have also interpreted the preemption clause to include exemption from malpractice and negligence lawsuits against managed care organizations that contract with employers under ERISA.

In a confusing twist of the law, states are allowed to regulate health insurers, but not health benefit plans of employers who choose to self-fund and retain the financial risk of providing health care to their employees. In roughly half of ERISA health plans, employers purchase health care coverage from a third-party insurer that is subject to state insurance laws and insurance premium taxation. These employers are not exempt from state regulations such as mandated-benefit laws. But self-funded plans are not deemed to be insurance, so ERISA preempts them from state regulation. Additionally, government employees, participants in health plans sponsored by churches, and individuals buying their own health coverage are not subject to ERISA.

Suing for malpractice

Here’s how a medical malpractice claim is typically played out. A patient who receives health coverage through a plan provided by her employer brings a lawsuit against her HMO in state court for injuries allegedly caused by the HMO’s negligence. The HMO responds by removing the case to federal court, where it argues that the claim should be dismissed because it “relates to” an employee benefit plan and so is governed by ERISA, which supersedes state malpractice law. The federal judge may side with the patient and send it back to the state court for trial. Or, as is more often the case, the court may agree with the HMO and dismiss the claim. Alternatively, the patient can try to prove that the HMO breached its contract by improperly denying her health benefits covered under the plan and if successful, she may recover the cost of the medical treatment she didn’t receive.

Unlike state malpractice laws, ERISA offers very limited remedies. Plaintiffs can only collect if a specific benefit has been denied by the managed care plan, and then recovery is limited to the cost of the test, procedure or other benefit that it should have provided. ERISA does not permit the big bucks normally available in other types of tort actions, such as lost wages, pain-and-suffering awards and punitive damages. State malpractice laws, on the other hand, allow patients to sue for these damages as well as medical expenses.

“Under ERISA, if your mother dies of breast cancer because her HMO wouldn’t authorize a mammogram, you can recover the $100 cost of the test, but nothing for her pain and suffering, her lost earnings, or the loss of her life,” says Carol O’Brien, senior attorney at the AMA in Chicago.

Thus, health plans often assert in court that malpractice claims “relate to” employer-based health insurance plans and are therefore preempted by ERISA. Under this reasoning, managed care organizations can’t be held responsible for the medical malpractice of their network physicians. The practical result: Managed care enrollees can sue doctors for malpractice in state courts, but generally can’t sue health plans. That’s why managed care companies embrace this arrangement, while many physician and consumer groups condemn it.

Some legal experts believe that ERISA has been distorted way beyond its original intent. Since the law predated the rise of managed care, they say, its drafters didn’t foresee that it would become a shield to protect health plans.

“ERISA has become a loophole for HMOs to wiggle out of malpractice suits,” argues Stephen J. Pokiniewski, a Philadelphia attorney who has represented plaintiffs in negligence actions against managed care plans. The law was designed to safeguard employees’ benefits, but instead, “it’s being used as a sword against employees in taking away their rights of redress for injuries and even deaths caused by health plans,” he adds. “A good thing has been turned to a bad use. A number of federal cases I’ve read in which patients have been refused medical treatment just make you want to cry.”

Bill Scott, senior trial attorney with the Office of the Solicitor at the U.S. Department of Labor, agrees. “There is absolutely no evidence that Congress intended to preempt the state law of medical malpractice or extinguish malpractice remedies against health care providers when it enacted ERISA.” The Department of Labor has been actively opposing managed care organizations’ use of the ERISA defense, and has filed friend-of-the-court briefs in several cases to make its point.

In a brief filed with a Nevada district court, Scott wrote: “As the federal agency with primary enforcement authority for numerous ERISA provisions, the Department of Labor has a strong interest in ensuring that preemption principles are applied appropriately to ensure that participants of ERISA-covered employee benefit plans are not stripped of rights and remedies under state law.”

Managed care critics also worry that patients’ inability to have their day in court may tempt HMOs to skimp on quality. “ERISA’s preemption of state law remedies provides very little incentive for health plans to make clinically appropriate decisions,” O’Brien warns. “Injured patients may be left with no recourse but to sue their physicians, who may have done nothing wrong and who may even have been prevented by the plan from providing their patients with the care they deemed necessary.”

HMOs don’t see things that way. Jeff Kloster, vice president of legal affairs and general counsel of PCA Health Plans of Texas Inc., an Austin-based HMO, bristles at the suggestion that without a liability hammer over their heads, HMOs will cut corners. “We wouldn’t be in business very long if we didn’t offer employers with whom we do business cost-efficient, quality health care for their employees,” he says.

“Trial lawyers complain that HMOs are totally immune from liability,” he continues. “That’s simply untrue. We get sued all the time under the state common and statutory law for deceptive trade practices, breach of the duty of good faith, and other claims. It’s my job to say, ‘What’s our exposure?’ Every decision we make is guided, in part, by concern that we’ll be sued if we’re wrong. Virtually every case that passes my desk has some settlement value. We don’t sit around and tell plaintiffs, ‘You have no recourse because we will automatically remove your claim to federal court, where it will be preempted by ERISA.’

“People also forget that health plans are very heavily regulated,” Kloster goes on. “After the last legislative session alone, the Texas Department of Insurance promulgated well over 100 pages of new rules governing our operations, including plan complaint and appeals processes. I know of few other businesses that have the extensive internal grievance procedures that we do. State regulators are in the middle of our business every day. So there are timely decisions being made up front which, I think, go a long way to preventing HMOs from acting cavalierly. To paint a picture that we’re wholly unregulated and out there denying care left and right based upon no medical criteria is simply wrong.”

Kloster is skeptical of the need to change ERISA either legislatively or through the courts in order to make it easier for patients to sue managed care organizations for malpractice. “I think patients already have enough adequate remedies,” he notes. “We don’t need yet another wide-open legal claim that will, in the long run, impede efforts to ensure widespread accessibility to health care.”

Kloster and other managed care attorneys believe that opening up the floodgates of ERISA to a wave of new malpractice suits will serve mostly one special-interest group–plaintiffs’ trial lawyers eager to get their hands on health plans as an easy target with deep pockets.

Managed care executives also fear that more lawsuits will simply drive up health care costs that will eventually be passed on to businesses and consumers. HMOs could simply start approving every proposed treatment in order to defend themselves against possible liability suits, and physicians would have new incentives to abandon the practice of cost-efficient medicine because HMOs would always be on the hook, says Geoff Wurzel, executive director of the Texas HMO Association in Austin.

Do HMOs practice medicine?

A traditional defense of managed care companies hit with malpractice suits is that they don’t make medical decisions and thus shouldn’t be liable for malpractice, as doctors can be. Instead, these companies contend, they merely determine which treatments are covered as benefits, arrange coverage, and administer employee health plans.

Managed care organizations make coverage decisions based upon their contracts with employers, asserts Harold Iselin, the Albany, N.Y.-based counsel to the HMO Conference of New York, an organization of 26 HMOs and 10 prepaid health service plans serving more than five million New Yorkers. “HMOs simply say, ‘This treatment is or isn’t covered,'” he adds. “HMOs are generally not providing hands-on medical treatment, so they can’t be liable for the quality of care. If a plan improperly denies a covered service to enrollees, they can sue for breach of contract under ERISA, but not for malpractice. Medical treatment decisions are made first and foremost by physicians. Since physicians are accountable for actually providing care, malpractice lawsuits properly lie with them.”

The Labor Department’s Scott vigorously disputes this contention. “Saying that HMOs are not in the operating room doesn’t mean they aren’t involved in the delivery of medical care,” he argues. “When HMOs hire and monitor providers, oversee referrals and create clinical guidelines for doctors to follow, we don’t think that’s plan administration, but rather the delivery of medical care.”

The AMA’s O’Brien concurs. “As health plans more actively intrude in what were traditionally physician-made decisions–which specialist the patient should see, whether to hospitalize a patient and for how long–courts are beginning to hold them liable to the extent they are responsible for any injury to patients,” she adds.

Cracks in the shield

HMOs still rely heavily on ERISA in defending malpractice claims, but some courts are beginning to penetrate the law’s liability shield. The courts are divided on whether patients who belong to employee group health plans that are subject to ERISA may sue managed care organizations for malpractice. Many judges have made a rather strained distinction between lawsuits alleging that a patient received poor quality medical care (which, they rule, can be decided by state courts because these suits are not subject to ERISA preemption) and claims that the plan failed to provide a covered treatment (which are dismissed because they are preempted by ERISA).

The case most often cited by HMOs to support their position is Corcoran vs. United Healthcare Inc. In that case, Florence Corcoran’s doctor, in response to her high-risk pregnancy, recommended that she be hospitalized prior to her delivery date. Mrs. Corcoran’s employee group health plan was administered by Blue Cross and Blue Shield of Alabama, which contracted with United to provide utilization review services. United determined that hospitalization was unnecessary, and instead authorized 10 hours per day of home nursing care. The fetus went into distress and died when the nurse was off duty.

Corcoran sued United in Louisiana state court for the wrongful death of her baby, but United removed the case to federal court, which dismissed the claim as preempted by ERISA. She appealed to the U.S. Court of Appeals for the Fifth Circuit and lost again.

In a 1992 decision, the Fifth Circuit found that United did make medical decisions, but only for the purpose of determining what benefits were available under the plan, which fell under the ERISA preemption. The court distinguished between malpractice claims against entities like United that administer benefits through utilization review–which are dismissable under ERISA –and claims against HMOs that provide, arrange for or supervise doctors who give actual medical treatment, which may not be preempted.

In recent years, other federal appeals courts have issued rulings that erode the protection that managed care organizations have claimed from ERISA. In the leading case of Dukes vs. U.S. Healthcare, the Third Circuit Court of Appeals held in 1995 that ERISA did not automatically preempt Darryl Dukes’s malpractice claim against U.S. Healthcare, the HMO through which he received employer-sponsored health coverage. Dukes’s physician diagnosed an ear disorder, performed surgery, and ordered blood tests which the hospital refused to perform (for unspecified reasons). Dukes saw another physician who had the tests performed at a clinic, but his condition had worsened and he died shortly thereafter with extremely high blood sugar.

The court ruled that ERISA should not block the lawsuit because Dukes was complaining that he had received poor “quality” care, not that United had erroneously withheld benefits due. “Patients enjoy the right to be free from medical malpractice regardless of whether or not their medical care is provided through an ERISA plan,” the court said.

Enter Congress

Congress is increasingly interested in filling in the “regulatory black hole” created by ERISA, says Bill Pierron, public affairs associate at the Washington D.C.-based Employee Benefit Research Insti- tute, a nonpartisan research organization. “ERISA does a good job of protecting employees’ pensions, but it leaves health care consumers with very little legal recourse,” he adds. “What will drive the debate in Congress is how many anecdotal horror stories come out about patients who are denied care but have no remedies because of the law.”

In fact, the first stirrings of congressional reform have already arrived. In late April, Republican Sen. Alfonse D’Amato of New York and Republican Rep. Charlie Norwood of Georgia introduced a bill that would essentially remove managed care organizations’ ERISA shield in malpractice lawsuits. Other provisions in the bill would limit “gag clauses,” expand patients’ choice of providers, and ensure due process rights for plan enrollees. “This bill will put the fear of God into employers and health plans,” remarks Pierron.

“Managed care plans have done a fine job of holding down health care costs, and that’s helped keep health insurance affordable for millions of families,” says Norwood, a former dentist. “But in the process, many of those families are left with no real choice in decisions involving their health.”

In the House of Representatives, the bill has attracted 70 co-sponsors, including conservative Republicans and liberal Democrats. Norwood believes that his proposal represents a strong bipartisan effort to open up the legal process for consumers. He predicts a groundswell of support for his legislation, but passage remains far from certain. As Pierron notes, however, there is still plenty of time left in the current session for Congress to take action.

Contributing editor David L. Coleman, an attorney and health care writer, was the author of “Have You Had Your Day Out of Court?” in the April Managed Care.

A case of unintended consequences

Even the stoutest defender of the legal position of HMOs wouldn’t contend that their exemption from malpractice damage claims under the complex ERISA law was envisioned when that law was enacted 23 years ago. But changing ERISA might have unintended results, too.

The courts kind of took what was there and, through their interpretation of the language, made it grow and grow and grow,” says Kirk Fisher, J.D., of the Greenville, S.C., law firm of Christian and Davis. He’s talking about the Employee Retirement Income Security Act of 1974. When President Gerald Ford signed the wide-ranging law Sept. 2 of that year, he didn’t say anything about exempting health maintenance organizations from malpractice damage claims. Instead, he spoke of protecting the pensions of working people. By offering protections to employers, the law was intended to encourage them to offer benefit plans.

Could there be a danger in changing ERISA? Possibly, implies Don White of the American Association of Health Plans. “The question becomes,” he says, “if you open up ERISA for amendment, what does that do to the employer community?”


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