ERISA Preemption Of Tort Suits Alleging Improper HMO Denial Of Coverage

Monday, November 1, 2004 - 01:00


In Aetna Health Inc. v. Davila,1 the U.S. Supreme Court unanimously held that ERISA completely preempted two tort suits by individuals alleging their health maintenance organizations (HMOs) violated the Texas Health Care Liability Act (THCLA) by refusing to cover certain medical treatment and services recommended by their treating physicians. THCLA imposes on HMOs a duty "to exercise ordinary care when making health care treatment decisions," and allows suit for damages if this duty is breached and the patient's injuries are proximately caused thereby. Alleging the HMOs breached this duty by providing negligent medical services, the individuals sought tort recovery.

In suit 1, the HMO refused payment for a medication prescribed by the treating physician. The patient did not appeal or contest, nor buy the medicine and seek reimbursement, instead taking a less expensive medication, which allegedly caused a severe reaction requiring extensive treatment and hospitalization. In suit 2, the HMO denied the treating physician's request for an extended post-surgery hospital stay after its discharge nurse determined the plan's criteria were not satisfied. Post-surgical complications required return to the hospital.

The Supreme Court held ERISA § 502(a)'s exclusive civil enforcement provisions completely preempted these state law claims and that THCLA is not "saved" by § 514(b)(2)(A) as a law regulating insurance. Under the "complete preemption" doctrine, a federal law not only preempts, but totally displaces, a state law claim such that it is treated as having been a federal claim from inception and thus removable to federal court. Although pleaded in state law tort claims, the substance of the Texas suits was denial of benefits by the HMOs under terms of the ERISA-governed plans. The Supreme Court held the claims were completely preempted by § 502(a)'s "interlocking, interrelated, and interdependent remedial scheme"2 and therefore removable to federal court.

Lower Court Proceedings

Under THCLA, the patients filed separate tort suits in state court against their HMOs. The HMOs argued the causes of action fit within ERISA § 502(a), and were therefore completely preempted and removable to federal court. The district courts agreed, declining to remand to state court and dismissing with prejudice after the patients refused to amend their complaints to bring explicit ERISA claims.

Consolidating the cases on appeal, the Fifth Circuit reversed and remanded,3 concluding that ERISA did not preempt the state law claims. First, it found the claims did not fall within the remedies under ERISA § 502(a)(2), a civil enforcement provision allowing suit for breach of fiduciary duty. It decided that under Pegram v. Herdrich,4 the HMOs were being sued for mixed eligibility and treatment decisions not fiduciary in nature. Second, reasoning that THCLA did not duplicate the ERISA cause of action, but rather allowed tort recovery for failure to exercise ordinary care, it found the state law claims fell outside the remedies under § 502(a)(1)(B), which allows suit to recover wrongfully denied benefits, to enforce rights under terms of the plan, or to clarify rights to future benefits thereunder. In the Fifth Circuit's view, the suits were not seeking benefits denied by the HMOs, but rather tort damages arising from an external, statutorily-imposed duty of ordinary care.

ERISA Preemption And Removal

The Supreme Court reversed the Fifth Circuit and remanded for further proceedings. It agreed with the HMOs that the suits fell within ERISA § 502(a)(1)(B). It also clarified and limited Pegram , which plaintiff lawyers were using to mischaracterize denial of eligibility claims as medical negligence claims, in an effort to escape ERISA and secure tort recovery against HMOs. The Court limited Pegram to the HMO context where the treating physician, or the HMO as the physician's employer, is making mixed eligibility and treatment decisions.

The Supreme Court reiterated that ERISA's purpose is to provide a uniform regulatory regime over employee benefit plans. To this end, ERISA includes expansive preemption provisions which preempt state law causes of action, making employee benefit plan regulation "exclusively a federal concern."5

ERISA's first expansive preemption provision is contained in § 514(a), which, simply stated, preempts state law claims which "relate to" ERISA plans in the sense of having a connection with or reference to them.6

ERISA's "comprehensive legislative scheme" also includes in § 502(a) what is sometimes called a complete preemption clause. This is "an integrated system of procedures for enforcement,"7 which would be undermined if participants could obtain state law remedies that were rejected by Congress in ERISA, such as tort recovery including damages for emotional distress and punitive damages.8 The Supreme Court held that any state law cause of action that duplicates, supplements, or supplants ERISA's remedies conflicts with the clear congressional intent to make the ERISA remedy exclusive and is therefore preempted.

The Supreme Court held the patients' coverage-denial suits fell within ERISA § 502(a)(1)(B) because the patients' only relationship or connection with the companies administering the HMOs was through ERISA-covered plans: "[I]f an individual brings suit complaining of a denial of coverage for medical care, where the individual is entitled to such coverage only because of the terms of an ERISA-regulated employee benefit plan, and where no legal duty (state or federal) independent of ERISA or the plan terms is violated, then the suit falls 'within the scope of' ERISA § 502(a) (1)(B)."

Extraordinary Preemptive Force Of ERISA § 502(a)

ERISA § 502(a)'s exclusive civil enforcement mechanism has such "extraordinary" preemptive power that it triggers jurisdictional consequences. ERISA converts an ordinary state common law complaint into one stating a federal claim for purposes of the well-pleaded complaint rule, hence allowing removal to federal court. In short, a suit is completely preempted and removable if a claimant at some point could have filed suit under § 502(a). Upon denial of benefits, the patients could have paid for the treatment and sought reimbursement from the HMOs in a § 502(a)(1)(B) action, or sought a preliminary injunction.

Pegram Distinguished

The Supreme Court distinguished Pegram on the ground it involved a suit against a physician-owned-and-operated HMO and the treating physician, for both medical malpractice and breach of an ERISA fiduciary duty. The treating physician was also the person charged with administering plaintiff's benefits; she was the person deciding whether certain benefits were covered. Thus, the physician's eligibility decision and treatment decision were inextricably mixed.

Pegram concluded Congress did not intend that defendant (or any other) HMO be treated as a fiduciary to the extent it makes mixed eligibility and treatment decisions acting through its physicians.9 Accordingly, the HMO was not subject to a malpractice claim packaged as a fiduciary breach suit under ERISA § 502(a)(2). Congress did not intend to interfere with the right of states to provide medical malpractice remedies.

Davila limited Pegram by explaining its dependence upon the critical point that the underlying negligence also plausibly constituted medical maltreatment by a party who can be deemed a treating physician or such physician's employer (the HMO). In Davila, the HMOs were simply acting as benefit administrators, determining scope of coverage and paying benefits under the ERISA plan terms.

Pure Eligibility Decisions vs. Treatment Decisions

The Supreme Court explained that final benefit determinations by an ERISA claims review fiduciary are part and parcel of the ordinary fiduciary responsibility connected to plan administration. The HMOs in question were making pure eligibility decisions, not treatment decisions. A benefit determination's infusion with medical judgment does not alter this result. When administering health care plans, HMOs must make discretionary decisions on benefit eligibility. To such extent they must be treated as plan fiduciaries governed by ERISA.

If an HMO correctly concludes that a particular treatment is not covered under plan terms, the HMO's coverage denial would not be the proximate cause of injuries arising from the denial. The proximate cause would be the plan's failure to cover the requested treatment. More significantly, THCLA states that the standards contained therein do not create any HMO obligation to provide treatment not covered by the plan itself. Thus, the suits do not attempt to remedy violation of a legal duty independent of ERISA.

In assessing Davila, it is important to bear in mind that denial of coverage is not the same as negligent medical treatment. Individuals can still pursue state law claims against HMOs for negligent care (e.g., medical maltreatment by a treating physician or such physician's employer - the HMO). The line may be difficult to draw. The Davila cases were relatively easy because the decisions were made by HMOs as partial plan administrators acting in a fiduciary capacity while making discretionary decisions regarding benefit eligibility. The decisions in question were pure scope- of-coverage decisions.

Inapplicability Of ERISA's State Insurance Regulation "Saving" Clause

THCLA was not "saved" from ERISA preemption by § 514(b)(2)(A) as a law regulating insurance. The Court reaffirmed its Pilot Life10 statement that the understanding of the "saving" clause must be informed by the legislative intent concerning the exclusivity of ERISA's § 502(a) remedies. Even if arguably characterized as "regulating insurance," a state law still will be preempted if it provides a separate vehicle to assert a claim for benefits outside of, or additional to, ERISA's remedial scheme.


State laws regarding patients' rights remain applicable to medical "treatment" activities. Plaintiffs can no longer argue that HMO coverage and payment decisions are equal to medical treatment, however, and sue for tort recovery under state medical negligence laws, when the patient's sole connection with the HMO is that it determines scope of coverage and pays for benefits under the terms of the ERISA plan. Davila points out that individuals enrolled in an HMO under an ERISA plan have two options when coverage is improperly denied: (1) seek injunction under ERISA requiring the HMO to cover treatment, or (2) pay for the treatment and pursue reimbursement under ERISA thereafter. Davila held that ERISA preempts a third choice - a suit for tort damages under state law.

1 542 U.S. 200, 124 S.Ct. 2488 (2004).
2 Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 146 (1985).
3 Roark v. Humana, Inc., 307 F.3d 298 (5 th Cir. 2002).
530 U.S. 211 (2000).
5 Alessi v. Raybestos-Manhattan, Inc . , 451 U.S. 504, 523 (1981).
See, e.g., New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co ., 514 U.S. 645 (1995).
Russell, 473 U.S. at 147 (internal quotation marks and citations omitted).
Russell, supra; Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987).
9 Pegram, 530 U.S. at 231.
481 U.S. at 52.

David L. Bacon, a Partner in the Los Angeles office of Thelen Reid & Priest LLP (offices also in New York, Washington, D.C., San Francisco, and Silicon Valley), was of counsel before the Supreme Court in the Russell and Pilot Life decisions cited in the Davila case. A graduate of Harvard University and Harvard University Law School, he is the lead author of Matthew Bender's Employee Benefits Guide and serves on the Editorial Board of Bender's Labor & Employment Bulletin. For more information about these products and a 10% discount, please visit Abridged from Bender's Labor & Employment Bulletin (Vol. 4, No. 8, August 2004). All rights reserved. © 2004 LexisNexis Matthew Bender.

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