Chapter 4.F.2--HMO Liability

This page has the following materials:
- General notes about HMO Liability
- Notes about ERISA pre-emption of HMO liability

Theories of HMO Liability

Florida has recently joined Illinois in applying a more expansive version of vicarious liability to network model HMOs.  Villazon v. Prudential Health Care Plan, _________ (Fla. 2003).  The court commented:  “The thought of visiting a private and independent office of a totally independent physician may now be one more of history and cultural conditioning than current reality.  The economic structures alone may so impact the relationships that the prism through which we consider and evaluate issues of control must be honed for this current reality.”

The Agrawal and Hall article was published at 47 St. L. U. L. J. 235 (2003).

Following the denial of class certification in the patients’ large class action suits against major HMOs, In re Managed Care Litigation, 209 F.R.D. 678 (S.D. Fla. 2002), the claims were settled for minor amounts.  However, the class actions by physicians, where the classes were certified, were settled for more substantial amounts.

An important article that analyzes the full range of liability issues regarding managed care, from a law and economics perspective, is Jennifer Arlen & Wm. MaCleod, Malpractice Liability for Physicians and Managed Care Organizations, 78 NYU L. Rev. 1929 (2003).

One court held that an HMO has a duty to patients to avoid payment arrangements to its providers that are likely to result in substandard care.  Pagarigan v. Aetna, Cal. Ct. App., No. B167722, 10/25/05 
Consumer-driven health care opens up an entirely new arena of potential health plan liability, in the form of failure to provide full or accurate information about health care options, according to the extenstive analysis by Kristin Madison in ERISA and Liability for Provision of Medical Information, 84 N.C. L. Rev. 471-546 (2006).

ERISA Pre-emption

Extensively developing the point made in note 2, p. 264, that ERISA pre-emption should not apply to claims under insurance "plans," only to employers' promise to purchase insurance, see Russell Korobkin, The Failed Jurisprudence of Managed Care, and How to Fix It, UCLA L. Rev. (March 2003).

The Supreme Court issued the following major decision resolving much of the uncertainty that has prevailed in the lower courts over ERISA pre-emption of managed care liability:

543 U.S. ____(2004)

Justice THOMAS delivered the opinion of the Court.

     In these consolidated cases, two individuals sued their respective HMOs for alleged failures to exercise ordinary care in the handling of coverage decisions, in violation of a duty imposed by the Texas Health Care Liability Act (Texas Act). We granted certiorari to decide whether the individuals' causes of action are completely pre-empted by the . . . Employee Retirement Income Security Act of 1974 (ERISA) . . .

    [Davila was covered by Aetna through his employer, and Calad was covered by CIGNA through her husband’s employer.] Respondents both suffered injuries allegedly arising from Aetna's and CIGNA's decisions not to provide coverage for certain treatment and services recommended by respondents' treating physicians. Davila's treating physician prescribed Vioxx to remedy Davila's arthritis pain, but Aetna refused to pay for it. Davila did not appeal or contest this decision, nor did he purchase Vioxx with his own resources and seek reimbursement. Instead, Davila began taking Naprosyn, from which he allegedly suffered a severe reaction that required extensive treatment and hospitalization. [Editors’ note:  The Court fails to mention that Davila nearly died from bleeding ulcers and that, although Vioxx is much more expensive than Naprosyn, it has fewer side effects relating to bleeding ulcers. ]

    Calad underwent surgery, and although her treating physician recommended an extended hospital stay, a CIGNA discharge nurse determined that Calad did not meet the plan's criteria for a continued hospital stay. CIGNA consequently denied coverage for the extended hospital stay. Calad experienced postsurgery complications forcing her to return to the hospital. She alleges that these complications would not have occurred had CIGNA approved coverage for a longer hospital stay.

     [In separate state-court suites,] respondents . . . argued that petitioners' refusal to cover the requested services violated their "duty to exercise ordinary care when making health care treatment decisions," and that these refusals "proximately caused" their injuries. Petitioners removed the cases to Federal District Courts, arguing that respondents' causes of action fit within the scope of, and were therefore completely pre-empted by, ERISA . . .  The United States Court of Appeals for the Fifth Circuit consolidated their cases with several others raising similar issues. . . After examining the causes of action available under [ERISA], the Court of Appeals determined that respondents' claims could possibly fall under . . . § 502(a)(1)(B), which provides a cause of action for the recovery of wrongfully denied benefits. . . .  [However, the court ruled that this case does not fall under ERISA because] respondents "are not seeking reimbursement for benefits denied them," but rather request "tort damages" arising from "an external, statutorily imposed duty of 'ordinary care.'" . . .

     Congress enacted ERISA to "protect ... the interests of participants in employee benefit plans and their beneficiaries" by setting out substantive regulatory requirements for employee benefit plans and to "provid [e] for appropriate remedies, sanctions, and ready access to the Federal courts." 29 U.S.C. §  1001(b). The purpose of ERISA is to provide a uniform regulatory regime over employee benefit plans. To this end, ERISA includes expansive pre-emption provisions, see ERISA §  514, which are intended to ensure that employee benefit plan regulation would be "exclusively a federal concern."  ERISA's "comprehensive legislative scheme" includes "an integrated system of procedures for enforcement." . . . As the Court said in Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987):

"[T]he detailed provisions of § 502(a) set forth a comprehensive civil enforcement scheme that represents a careful balancing of the need for prompt and fair claims settlement procedures against the public interest in encouraging the formation of employee benefit plans. The policy choices reflected in the inclusion of certain remedies and the exclusion of others under the federal scheme would be completely undermined if ERISA-plan participants and beneficiaries were free to obtain remedies under state law that Congress rejected in ERISA. 'The six carefully integrated civil enforcement provisions found in §  502(a) of the statute as finally enacted ... provide strong evidence that Congress did not intend to authorize other remedies that it simply forgot to incorporate expressly.'"
Therefore, any state-law cause of action that duplicates, supplements, or supplants the ERISA civil enforcement remedy conflicts with the clear congressional intent to make the ERISA remedy exclusive and is therefore pre-empted. . . .  It follows that if 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 . . . if an individual, at some point in time, could have brought his claim under ERISA § 502(a) . . . then the individual's cause of action is completely pre-empted by ERISA. . . .

      The only action [Davila] complained of was Aetna's refusal to approve payment for Davila's Vioxx prescription. Further, the only relationship Aetna had with Davila was its partial administration of Davila's employer's benefit plan. Similarly . . . Calad contests only CIGNA's decision to refuse coverage for her hospital stay. . . It is clear, then, that respondents complain only about denials of coverage promised under the terms of ERISA-regulated employee benefit plans. Upon the denial of benefits, respondents could have paid for the treatment themselves and then sought reimbursement through a §  502(a)(1)(B) action, or sought a preliminary injunction. . . .  [FN 2:  Respondents also argue that the benefit due under their ERISA-regulated employee benefit plans is simply the membership in the respective HMOs, not coverage for the particular medical treatments that are delineated in the plan documents. Respondents did not identify this possible argument in their brief in opposition to the petitions for certiorari, and we deem it waived.]

     Respondents contend, however, that the complained-of actions violate legal duties that arise independently of ERISA or the terms of the employee benefit plans at issue in these cases. Both respondents brought suit specifically under the Texas Act, alleging that petitioners "controlled, influenced, participated in and made decisions which affected the quality of the diagnosis, care, and treatment provided" in a manner that violated "the duty of ordinary care." . . . The Texas Act does impose a duty on managed care entities to "exercise ordinary care when making health care treatment decisions," and makes them liable for damages proximately caused by failures to abide by that duty. However, if a managed care entity correctly concluded that, under the terms of the relevant plan, a particular treatment was not covered, the managed care entity's denial of coverage would not be a proximate cause of any injuries arising from the denial. Rather, the failure of the plan itself to cover the requested treatment would be the proximate cause.  More significantly, the Texas Act clearly states that "[it] . . . create[s] no obligation on the part of the health insurance . . . entity to provide to an insured or enrollee treatment which is not covered by the health care plan of the entity." Hence, . . . interpretation of the terms of respondents' benefit plans forms an essential part of their [state law] claim, and [state law] liability would exist here only because of petitioners' administration of ERISA-regulated benefit plans. Petitioners' potential liability under the Texas Act in these cases, then, derives entirely from the particular rights and obligations established by the benefit plans. . .  [R]espondents bring suit only to rectify a wrongful denial of benefits promised under ERISA-regulated plans, and do not attempt to remedy any violation of a legal duty independent of ERISA. . . .

     [T]he Court of Appeals found significant that respondents "assert a tort claim for tort damages" rather than "a contract claim for contract damages," and that respondents "are not seeking reimbursement for benefits denied them." But, distinguishing between pre-empted and non-pre-empted claims based on the particular label affixed to them would "elevate form over substance and allow parties to evade" the pre-emptive scope of ERISA simply "by relabeling their contract claims as claims for tortious breach of contract." . . . In [previous Supreme Court cases finding pre-emption], the plaintiffs all brought state claims that were labeled either tort or tort-like. . . .

      Respondents also argue--for the first time in their brief to this Court--that the Texas Act is a law that regulates insurance, and hence that ERISA § 514(b)(2)(A) saves their causes of action from pre-emption.  [ERISA §  514(b)(2)(A) reads, as relevant: "[N]othing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities."]  This argument is unavailing. . . . ERISA § 514(b)(2)(A) must be interpreted in light of the congressional intent to create an exclusive federal remedy in ERISA § 502(a). Under ordinary principles of conflict pre-emption, then, even a state law that can arguably be characterized as "regulating insurance" will be pre-empted if it provides a separate vehicle to assert a claim for benefits outside of, or in addition to, ERISA's remedial scheme.

     Respondents, their amici, and some Courts of Appeals have relied heavily upon  Pegram v. Herdrich, 530 U.S. 211 (2000), in arguing that ERISA does not pre-empt or completely pre-empt state suits such as respondents.' . . . Pegram cannot be read so broadly. In Pegram, the plaintiff sued her physician-owned-and-operated HMO (which provided medical coverage through plaintiff's employer pursuant to an ERISA-regulated benefit plan) and her treating physician, both for medical malpractice and for a breach of an ERISA fiduciary duty. The plaintiff's treating physician was also the person charged with administering plaintiff's benefits; it was she who decided whether certain treatments were covered. We reasoned that the physician's "eligibility decision and the treatment decision were inextricably mixed." We concluded that "Congress did not intend [the defendant HMO] or any other HMO to be treated as a fiduciary to the extent that it makes mixed eligibility decisions acting through its physicians." . . .

     [I]it was essential to Pegram 's conclusion that the decisions challenged there were truly "mixed eligibility and treatment decisions," i.e., medical necessity decisions made by the plaintiff's treating physician qua treating physician and qua benefits administrator. Put another way, the reasoning of Pegram "only make[s] sense where the underlying negligence also plausibly constitutes medical maltreatment by a party who can be deemed to be a treating physician or such a physician's employer." Cicio v. Does, 321 F.3d 83, 109 (C.A.2 2003) (Calabresi, J., dissenting in part). Here, however, petitioners are neither respondents' treating physicians nor the employers of respondents' treating physicians. Petitioners' coverage decisions, then, are pure eligibility decisions, and Pegram is not implicated. . . .

 Justice GINSBURG, with whom Justice BREYER joins, concurring.

      . . . [This] decision is consistent with our governing case law on ERISA's preemptive scope. I therefore join the Court's opinion. But, with greater enthusiasm . . . I also join "the rising judicial chorus urging that Congress and [this] Court revisit what is an unjust and increasingly tangled ERISA regime." DiFelice v. AETNA U.S. Healthcare, 346 F.3d 442, 453 (C.A.3 2003)(Becker, J., concurring). Because the Court has coupled an encompassing interpretation of ERISA's preemptive force with a cramped construction of the "equitable relief" allowable under § 502(a)(3), a "regulatory vacuum" exists: "[V]irtually all state law remedies are preempted but very few federal substitutes are provided."

     A series of the Court's decisions has yielded a host of situations in which persons adversely affected by ERISA-proscribed wrongdoing cannot gain make-whole relief [because] “there is a stark absence in [ERISA] itself and in its legislative history of any reference to an intention to authorize the recovery of extracontractual damages” for consequential injuries. . . . [F]resh consideration of the availability of consequential damages under § 502(a)(3) is plainly in order. See 321 F.3d, at 106, 107 (Calabresi, J., dissenting in part) ("gaping wound" caused by the breadth of preemption and limited remedies under ERISA, as interpreted by this Court, will not be healed until the Court "start[s] over" or Congress "wipe[s] the slate clean"); DiFelice, 346 F.3d, at 467 ("The vital thing ... is that either Congress or the Court act quickly, because the current situation is plainly untenable."); Langbein, What ERISA Means by "Equitable": The Supreme Court's Trail of Error in Russell, Mertens, and Great-West, 103 Colum. L.Rev. 1317, 1365 (2003). . . The Government notes a potential amelioration. . . . [It] suggests that the Act, as currently written and interpreted, may "allo[w] at least some forms of 'make- whole' relief." . . . As the Court points out, respondents here declined the opportunity to amend their complaints to state claims for relief under § 502(a). . . . But the Government's suggestion may indicate an effective remedy others similarly circumstanced might fruitfully pursue.

     "Congress ... intended ERISA to replicate the core principles of trust remedy law, including the make-whole standard of relief." Langbein 1319. I anticipate that Congress, or this Court, will one day so confirm.


Notes and Questions on Aetna v. Davila

1.  Is it more appropriate for the courts or for Congress to fix the problems noted by the concurrence?  Will Davila increase pressure on Congress to enact a federal patients' bill of rights with a liability provision?

2.  Davila reminds us that, despite all the complications in this area, courts are essentially trying to distinguish between tort claims based on insurance coverage decisions, which are pre-empted, and medical malpractice liability, which is not pre-empted.  Note that, in drawing this line, Davila makes no reference at all to the quantity vs. quality distinction introduced in Dukes v. U.S. Healthcare, 57 F.3d 350 (3d Cir. 1995) and relied on by many lower courts.  Instead, the Court focuses on whether the insurer or the treating physician made the critical decision. Is that distinction likely to be sufficiently clear in most cases?  What about situations where the treating physician is employed full time by an HMO, and the HMO instructs the physician that a particular treatment option is not approved, for instance, that women should not remain in the hospital longer than 48 hours following normal childbirth?  That might be regarded as a coverage decision based on the insurance policy’s medical appropriateness criteria, or it might be regarded as a form of direct HMO liability for interfering with physicians’ ability to make good treatment decisions.  Does Davila resolve which is the correct characterization?

3.  One further complication:  if it is possible to find an agency relationship between the HMO and the treating physician, should it matter that the HMO is not the physician’s employer?  Isn’t the critical factor whether or not the physician agreed with, or acquiesced in, the HMO’s decision?  In Davila, the HMO refused to pay for treatments the physicians ordered, but, in many other cases, physicians may not order treatment they know the HMO won’t pay for or that will cost the physician money under the HMO’s payment incentives.  Shouldn’t patients be able to blame the HMO, at least in part, when this happens?  In such cases, should Davila apply?

4.  Exploring the possibility raised in the concurrence of extending consequential damages under ERISA itself to include personal injury, see Sarah Spisich, The Aftermath of Davila: Are Healthcare Enrollees Now in a Sinking Ship Without a Paddle?, 17(4) Health Lawyer 22 (Aug. 2005).  For additional commentary and analysis of the case generally, see Leonard A. Nelson, Aetna v. Davila/CIGNA v. Calad: a missed opportunity, 31 Wm. Mitchell L. Rev. 843-896 (2005), Note, 84 Tex. L. Rev. 1347-1383 (2006).

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