IMPORTANT
INFORMATION
FOR HEALTH PLANS AND HMO'S
(Archives)
No Medicare Bad Faith
Action
In Redmond v.
Secure Horizons, Pacificare, Inc. (1997) 97 CDOS 9516, the Court of Appeal held that
an action for bad faith denial of coverage and delay in providing Medicare benefits must
be resolved through the Medicare plan's administrative review process as required under
the Medicare Act, and affirmed the trial court's order granting the plan's demurrer.
The Court distinguished the Ninth
Circuit opinion in Ardary v. Aetna on the grounds that the wrongful death action
against the Medicare plan was a "special" case exception from administrative
review created by the U.S. Supreme Court.
Thus, if a Medicare beneficiary sues
to malpractice or wrongful death caused by the plan, the action will not be dismissed.
But if the beneficiary sues for wrongful denial or delay in providing benefits,
administrative review is the only remedy for the beneficiary.
Delbert Gee,
February 1998
District courts
continue the trend towards permitting malpractice claims against HMO's and managed care
plans.
Over the last few years
the federal courts have wrestled with the question of whether state law based malpractice
claims can be brought against managed care plans and HMO's on a variety of theories. The
plans have consistently argued ERISA preemption with mixed success. Increasingly, the
federal courts are clearly distinguishing between claims for denial of benefits which are
held to be preempted, and claims for negligently provided care, which more and more
federal courts are deciding are not preempted.
Two new district court decisions have followed this trend by allowing state law based
malpractice claims to go forward against managed care plans. They are Amey Dykema v.
William A. King, M.D. et al. No. 8:97-256-13 (USDC D. South Carolina), and Paige N.
Lancaster, et al. v. Kaiser Foundation Health Plan of Mid-Atlantic States, Inc., et al No.
97-122-A (USDC E.D. Virginia- Alexandria Div.)
Brock Phillips, July
1997
HMO Arbitration
Agreement Upheld
-Engalla v. Kaiser
In Engalla v. Permanente Medical
Group, the California Supreme Court upheld Kaiser's right to compel private
arbitration of medical malpractice disputes as required under the terms of its health
plan. The Court rejected the Kaiser member's attempt to have the arbitration provision
declared unconscionable and unenforceable.
However, the Court did find evidence to support allegations of fraudulent conduct by
Kaiser in delaying initiation of arbitration process and remanded the case back to the
trial court for a factual determination as to whether Kaiser should be held liable for
fraud.
Delbert Gee, July
1997
State Rescission Law Preempted
In Security Life Ins. Co. of America v. Meyling 98 CDOS 5375 (9th Cir. 1998), the Ninth Circuit held that not only did ERISA
preempt state law rules on the interpretation of insurance policies, it also preempted
state laws allowing for rescission because of material misrepresentations in an
application. However, federal common law continues to permit rescission because of
material misrepresentations.
In Security Life v. Meyling, the
co-owner of a company misrepresented his health history on his application for his
companyís group health coverage. The insurer subsequently refused to provide
benefits for health services furnished to him after learning of the misrepresentation and
sought rescission of his coverage.
The Court noted that the insurer
could not rescind the coverage under state law because the state law was preempted under
ERISA. Under ERISA, a state law may be saved from preemption if common sense tells
us that the state law is specifically directed at the insurance industry, and if the state
law regulates the business of insurance in that it has the effect of spreading the
insurerís risk, affects an integral part of the insurer/insured relationship, or is
limited to regulation of just the insurance industry.
The Court noted that it was well
settled that state law rules governing the interpretation of insurance policies were
preempted by ERISA because the rules are a part of state law rules governing the
interpretation of any contract. Since general rules of contract interpretation are
not specifically directed at insurance policies and do not regulate the business of
insurance, they are not saved from preemption by ERISA.
However, the Ninth Circuit held that
federal common law allowed rescission of insurance policies if the misstatement in an
application was material in that it affected the applicantís insurability or amount of
premium charged.
In Security Life v. Meyling,
rescission was not allowed because the ERISA plan specifically provided the insurer with a
remedy for misrepresentations in the form of increased premiums.
In addition, the parties agreed that
a recently enacted statute (AB 1672) establishing a program for the issuance of health
care coverage for small employers was saved from preemption under ERISA. The Court
held that there was nothing in the statute prohibiting rescission of coverage for small
businesses.
Security Life v. Meyling appears to
create problems for ERISA plans seeking to rescind health coverage for material
misrepresentations in an application because it preempts state laws allowing for
rescission. However, it can be argued that federal common law allowing for
rescission is essentially identical to the laws of many states, and may contain
definitions of materiality which are easier for health plans to meet than that found in
state law.
Delbert C. Gee, July
1998
No Preemption If Not An ERISA Plan
In Zavora v. Paul Revere Life (98
CDOS 4447), the Ninth Circuit held that evidence that the employer merely publicized the
health plan, deducted or remitted premiums, and distributed the certificates of insurance
to its employees created a triable issue of fact as to whether the health plan was
"established or maintained" by the employer so as to be an ERISA plan.
This issue of fact was sufficient to defeat a motion for summary judgment that would have
preempted the employeeís bad faith action for denial of disability benefits.
The Court also held that in any
event, the record was insufficient to support a discretionary denial of benefits by the
plan because the denial had occurred without the plan reviewing the medical records of the
employee or interviewing him. The plan had rejected the conclusions of the
employee's physician without sufficient evidentiary basis for doing so.
Delbert C. Gee, July
1998
Bad
Faith Action Preempted
In Parrino v. FHP (98 CDOS 4491), the
Ninth Circuit held that a bad faith action for denial of health benefits for an
experimental proton beam therapy to treat brain cancer was preempted by ERISA.
Because the employeeís plan was sponsored and paid for by his employer, and it covered
all of the firm's employees, it was an ERISA plan because "Ö a reasonable person can
ascertain the intended benefits, a class of beneficiaries, the source of financing, and
procedures for receiving benefits."
Delbert C. Gee, July
1998
Settlement Agreement Not Preempted
In Graham v. Balcor (98 CDOS 4826),
an employee was terminated and in consideration for a waiver of any legal claims for
wrongful termination, the employer agreed to provide health coverage while the employee
was disabled. The employer subsequently terminated coverage and the employee sued in
state court for bad faith.
The Ninth Circuit held that the
settlement agreement applied to only one employee and enforcement of the agreement not a
part of the administration of the plan. Because the agreement did not relate to the
plan, the bad faith lawsuit was not preempted by ERISA.
Nevertheless, the Court did award the
employee attorney's fees under ERISA.
Delbert C. Gee, July
1998
U.S.
Supreme Court Petitioned to Consider Scope of ERISA Preemption for Malpractice Claims
Plaintiff Dianna Shea,
whose case lead to a startling decision by the Eighth Circuit, (Shea v. Esensten,
1997 WL 78350) has petitioned the U.S. Supreme Court to consider to what extent ERISA
preempts tort claims concerning the quality of medical services provided through an
employee benefit plan. The Eighth Circuit had upheld ERISA preemption of Ms. Shea's
wrongful death claim, but also announced that the Plan's failure to disclose financial
incentive arrangements designed to reduce referrals to specialists was a breach of the
Plan's fiduciary duties. The Supreme Court has not yet acted on the petition for hearing.
Brock Phillips,
September 1997
Multiple
Bills Pending in Congress to Eliminate ERISA Preemption or Create Federal Remedies for Bad
Faith and Malpractice Claims
Democratic Senator Dick Durbin (Ill.)
has introduced S.1136) which would repeal ERISA's preemption of state based legal claims
against insurers or providers of administrative services to ERISA plans. Durbin's
bill is one of numerous bills pending in both the House and the Senate which would either
eliminate ERISA's preemption of state law remedies or which would create new Federal
remedies within ERISA. The issue of remedies for ERISA plan beneficiaries is a
matter of considerable interest within Congress as part of the debate on health care
quality assurance. Whether any of these bills will develop enough momentum to pass
is far from certain. It seems probable that should such a bill pass in Congress,
President Clinton would sign it unless particularly objectionable unrelated riders were
attached to it
Brock Phillips,
September 1997
Republicans
Sponsor Bill to Eliminate ERISA Preemption
Republicans Alfonse D'Amato (Sen-NY)
and Charlie Norwood (House-GA) introduced "The Patient Right to Responsible Care
Act" (H.R. 1415) in April 1997. The act would amend ERISA in a number of ways,
including the addition of language stating ERISA, "shall not be construed to preclude
any State cause of action to recover damages for personal injury or wrongful death against
any person that provides insurance or administrative services to or for an employee
welfare benefit plan maintained to provide health care benefits." The likelihood of
this legislation actually being enacted is unknown at this time.
Brock Phillips, July
1997
