LIABILITY
FOR COVERAGE DENIALS BY MANAGED CARE PLANS (CON'T)
Brock D. Phillips
ERISA Preemption
The well known U.S. Supreme Court decision of Pilot Life v. Dedeaux, 481 U.S. 41, 107
S.Ct. 1549 (1987), established that whenever a beneficiary obtains health coverage through his or her employer, benefits disputes are preempted by ERISA (Employee Retirement Income Security Act of 1974). The value of the Pilot Life decision to carriers was immediate and dramatic.
First, the scope of the preemption was sweeping, because most Americans receive health coverage through their employer. Thus ERISA preempted all claims except those advanced by individuals who obtained their health coverage by purchasing it on their own, or those who worked for a federal, state, or local government, whose benefits were not subject to ERISA preemption. This preemption swept up a great majority of potential claimants who previously were advancing state law tort claims for denial of health benefits.
The primary reason carriers were so pleased with ERISA preemption related to the difference in potential damages available under ERISA claims versus state law based bad faith claims. As noted above, in bad faith claims, the great majority of jurisdictions treated the action as a tort claim which entitled the plaintiff to seek emotional distress and punitive damages. Under ERISA the only damages available are the cost of disputed benefits and attorneys fees. The absence of emotional distress and punitive damages removed most of the incentive to bring bad faith cases unless the cost of the disputed services was very substantial.
Since Pilot Life came down, much of the ERISA litigation has revolved around the precise limits of the preemption, the burden of proof and standard of review for litigating preempted claims and related types of issues.
Until 1995, the trend of federal decisions seemed to consistently expand ERISA preemption to every possible claim. But that trend has been halted by the U.S. Supreme Court in a trio of decisions which appear to retreat somewhat from the inclusive approach of the last 10 years. The first case to signal a modest retreat on the sweep of ERISA preemption was New York State Conference of Blue Cross & Blue Shield Plans
v. Travelers Ins. Co. 514 U.S. 645, 115 S. Ct. 1671 (1995). While the case was unrelated to plaintiffs' claims against health plans, the court's analysis of a dispute over the application of a New York statute that imposes hospital surcharges on certain HMO's and commercial insurers demonstrated an attempt to reestablish limits on the application of ERISA. The court cautioned that the "relate to" portion of the preemptive language in ERISA should not be "taken to extend to the furthest stretch of its indeterminacy".
The Supreme Court further signaled its desire to set limits on ERISA preemption in the cases of California Division of Labor Standards
v. Dillingham Construction, N.A., Inc. 519 U.S. 316, 117 S.Ct. 832 (1997); and DeBuono
v. NYSA-ILA Medical & Clinical Services Fund, 520 U.S. 806, 117 S.Ct. 1747 (1997). In DeBuono the court commented, But in Travelers we confronted directly the question whether ERISA's "relates to" language was intended to modify "the starting presumption that Congress does not intend to supplant state law." 514 U.S., at 654, 115
S.Ct., at 1676. [FN8] We unequivocally concluded that it did not, and we acknowledged "that our prior
attempt[s] to construe the phrase 'relate to' d[o] not give us much help drawing the line here."
While none of these three new Supreme Court cases directly address damage claims by disgruntled
insureds, the cases do seem to signal for the first time since Pilot Life a desire by the Supreme Court to curb the expansion of ERISA preemption. While ERISA preemption over bad faith claims involving employer purchased health coverage appears safe for now, pressure from the media and consumer groups has inspired the introduction in Congress of a number of bills intended to lift the preemption for purposes of bad faith claims against managed care plans. The future of any of these bills is difficult to predict, although generally the Republican majority has been hostile to efforts to eliminate ERISA preemption over such claims.
4. Theories of Malpractice Liability
Arising Directly Out of Plan Activities
In traditional indemnity arrangements, health plans were sufficiently separated, both factually and legally, from the provision of medical care that they had no liability for claims of alleged malpractice. However, as the structure of managed care plans has blurred the distinction between payor and provider, the legal liabilities which traditionally fell only on providers are now being asserted against plans themselves.
Managed care plans are now being directly sued for medical malpractice. These suits may include allegations that the plan itself was actively negligent in its discharge of its duties in a way which entitles a harmed plan member to seek damages from the plan. Claims of direct negligence asserted against a plan typically fall into one of two categories:
A. Plan action or failure to act directly effected the care provided to the claimant and constituted medical malpractice;
B. Plan failure to properly credential its health care providers caused the claimant to be harmed by a provider that the plan should have excluded from its panel.
Plan liability for action or failure to act in ways that directly effect health care are addressed below. Liability arising out of credentialing is addressed in another paper (and another presentation) also part of this conference.
A. Liability Claims Brought Against Plans Which Allege that Plan Action or Inaction was Directly Negligent and Caused Harm to the Claimant.
The more a plan "manages" the care available to its members, the greater the risk that it may be found directly liable for malpractice. While plans often argue that they play no role in care provided to their members, many plan activities contradict this assertion.
