Order Code 98-286 A
Report for Congress
Received through the CRS Web
ERISA's Impact on Medical Malpractice
and Negligence Claims Against
Managed Care Plans
Updated June 27, 2002
Angie A. Welborn
American Law Division
Congressional Research Service ˜ The Library of Congress
ERISA's Impact on Medical Malpractice and Negligence
Claims Against Managed Care Plans
The Employee Retirement Income Security Act of 1974 (ERISA) provides a
comprehensive federal scheme for the regulation of employee pension and welfare
benefit plans offered by employers. To avoid the inconsistent regulation of employee
benefit plans by state laws, ERISA preempts “any and all” state laws as they relate
to any employee benefit plan. The effect of ERISA preemption on the ability to bring
state medical malpractice and negligence claims against health insurers, namely
health maintenance organizations (HMOs), has caused concern among participants
who seek the generally larger remedies that are available under state tort law.
Litigation involving managed care plans and ERISA preemption has steadily
increased. Various legislative proposals have been introduced to address managed
care plans generally and the preemption issue specifically. The claims at issue fall
basically into two categories. One type of claim brought against a managed care plan
involves the plan's denial of a request for treatment or hospitalization. A second type
of claim deals with the adverse consequences of treatment provided by a managed
care plan through its employees or through a managed care affiliate. The use of cost
containment practices by managed care plans and the treatment of cost containment
decisions when determining liability remain constant issues.
This report will examine the preemption provisions of ERISA, the U.S.
Supreme Court’s interpretation of these provisions, selected cases applying ERISA
to state medical malpractice and negligence claims, and the congressional response
to the issue.
ERISA and its Preemption Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
U.S. Supreme Court Interpretation of ERISA Preemption . . . . . . . . . . . . . . 3
ERISA Preemption and Managed Care Plans . . . . . . . . . . . . . . . . . . . . . . . . 6
Medical Malpractice Claims Against Managed Care Plans
Based on Utilization Review Decision . . . . . . . . . . . . . . . . . . . . . 6
Medical Malpractice Claims Against HMO and HMO Physician
Based on Vicarious Liability of HMO . . . . . . . . . . . . . . . . . . . . . 7
Liability Based on Financial Incentive Program . . . . . . . . . . . . . . . . . 11
Congressional Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
107th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
State Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Corporate Health Insurance v. Texas Department of Insurance . . . . . 15
Rush Prudential HMO v. Moran . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ERISA's Impact on
Medical Malpractice and Negligence Claims
Against Managed Care Plans
The number of privately-insured Americans receiving healthcare coverage
through some form of managed care has dramatically increased. In 1987, only 13
percent of privately-insured Americans received their health insurance from a
managed care organization.1 Today, 75 percent of privately-insured Americans
participate in some form of managed care.2 A significant number of managed care
participants are workers who receive coverage through employer-sponsored group
health plans. In most cases, these plans are subject to regulation under the Employee
Retirement Income Security Act of 1974 (ERISA).3
ERISA has had a significant effect on litigation involving managed care plans.
Until recently, its preemption provisions were interpreted broadly to preempt claims
based on the liability of a managed care entity. Frustration with ERISA has prompted
Congress to consider legislation that would amend ERISA to allow certain claims
against managed care entities. This report will review ERISA’s preemption
provisions, selected cases involving ERISA and medical malpractice and negligence
claims brought against managed care entities, federal proposals to reform managed
care, and the enactment of patient protection legislation at the state level.
ERISA and its Preemption Provisions
ERISA provides a comprehensive federal scheme for the regulation of employee
pension and welfare benefit plans offered by employers.4 While ERISA does not
See Center for Patient Advocacy, Managed Care Reform - A Top Priority (visited Sept. 15,
29 U.S.C. § 1001 et seq. (ERISA does not apply to employee benefit plans offered by
federal, state, or local governments; churches; or plans maintained to comply with
workmen’s compensation laws or unemployment compensation or disability insurance
ERISA defines an “employee welfare benefit plan”, in part, as “any plan, fund, or program
. . . established or maintained by an employer . . . for the purpose of providing for its
participants or their beneficiaries, . . . medical, surgical, or hospital care or benefits, or
benefits in the event of sickness, accident, disability, death or unemployment . . . .” 29
U.S.C. § 1002. A "participant" in an employee benefit plan is defined as "any employee or
former employee of an employer, or any member or former member of an employee
organization, who is or may become eligible to receive a benefit of any type from an
require an employer to offer pension and welfare benefits, it does mandate
compliance with its provisions if such benefits are offered. Congress enacted ERISA
to eliminate the conflicting and inconsistent regulation of pension and employee
welfare benefit plans by state laws. The provisions at issue in the preemption debate
are sections 502(a) and 514(a) of ERISA.5 Section 514(a) expressly preempts “any
and all State laws insofar as they may now or hereafter relate to any employee benefit
plan . . .”6 Section 502(a) creates a civil enforcement scheme that allows a
participant or beneficiary of a plan to bring a civil action for the following reasons:
“to recover benefits due to him under the terms of the plan, to enforce his rights
under the terms of the plan, or to clarify his rights to future benefits under the terms
of the plan.”7 Under section 502(a), a participant or beneficiary is also entitled “to
obtain other appropriate equitable relief.”8
ERISA regulates employee benefit plans that are offered by an employer to
provide medical, surgical, disability, and health insurance benefits.9 Many of these
employee benefit plans have turned to managed care as a way to provide low-cost
benefits. The term “managed care” refers to “a system of payment or delivery
arrangement where the health plan attempts to control or coordinate use of health
services by its enrolled members in order to control spending and promote improved
health.”10 Plans contain costs and monitor the delivery of health services through the
use of case management and utilization review. Case management typically involves
a third-party evaluation of information presented by the participant and his doctor.11
This evaluation is used to determine the need for and type of medical care to be
employee benefit plan which covers employees of such employer or members of such
organization, or whose beneficiaries may be eligible to receive any such benefit.” 29 U.S.C.
§ 1002(7). A "beneficiary" is defined as "a person designated by a participant, or by the
terms of an employee benefit plan, who is or may become entitled to a benefit thereunder.”
29 U.S.C. § 1002(8).
29 U.S.C. §§ 1132(a), 1144(a).
29 U.S.C. § 1144. See also 29 U.S.C. § 1132. There are exceptions to this rule and they
include, among others, causes of action or any acts or omissions occurring prior to January
1, 1975; state laws regulating insurance; use by the Secretary of Labor of services or
facilities of a state agency; banking or securities; generally applicable criminal laws; the
Hawaii Prepaid Health Care Act; state insurance laws regulating multiple employer welfare
arrangements; and qualified domestic relations orders issued by state courts.
29 U.S.C. § 1132(a)(1)(B).
29 U.S.C. § 1132(a)(3).
See note 4 for plans excluded from coverage.
See CRS Report 97-938, Managed Health Care: Federal and State Regulation , by Beth
Fuchs. For general information on managed care, see CRS Report 97-913, Managed Health
Care: A Primer, by Jason S. Lee.
Blum, An Analysis of Legal Liability in Health Care Utilization Review and Case
Management, 26 HOUS. L. REV. 191, 192-93 (1989).
Utilization review encompasses various techniques, including pre-certification
and concurrent review. Pre-certification requires plan participants to seek approval
from the managed care entity before obtaining certain medical procedures or utilizing
certain benefits, such as non-emergency hospitalization.12 Concurrent review occurs
when a participant must seek continuing approval for utilizing certain benefits.
While some form of utilization review is employed by most health plans, it is
characteristically a function of health maintenance organizations (HMOs).
An HMO is a managed care entity that "accepts financial risk for a defined set
of health care benefits in return for a fixed monthly per capita premium paid by or on
behalf of each enrolled member."13 Unlike fee-for-service plans or preferred provider
organizations (PPO) that allow some flexibility for selecting a provider, HMOs
require that healthcare be received through providers employed by or affiliated with
the HMO. HMOs are favored by some because of their ability to provide healthcare
in an efficient and cost-effective manner. However, there has been increasing
concern over the HMOs’ use of utilization review techniques and the quality of
healthcare provided through HMOs. This concern has sometimes resulted in
Some federal courts have applied the preemption provisions of ERISA to
preempt state tort claims of negligence or professional malpractice brought by
patients against their doctors, health insurers, and/or companies that conduct cost
containment measures on behalf of the health plan. The preemption of these claims
has significantly impacted plaintiffs by denying them the opportunity to recover
various types of damages under state law. In a state tort action, a plaintiff may
recover compensatory, consequential, or punitive damages. However, under ERISA,
a successful plaintiff may recover only the benefits he would have been entitled to
under the terms of the plan, reasonable attorney’s fees, and court costs.
U.S. Supreme Court Interpretation of ERISA Preemption
The scope and application of ERISA's preemption provisions have been
addressed by the U.S. Supreme Court. In general, the Court recognizes a
presumption against preemption unless Congress has explicitly or implicitly shown
an intent to preempt state laws.14 ERISA contains an explicit preemption clause at
section 514(a). The language of section 514(a) shows that Congress intended to
preempt any state law that “relate[s] to any employee benefit plan.”15 The Court has
interpreted this language as applying to any state law that “has a connection with or
reference to such a plan.”16 The Court has stated that “[u]nder this ‘broad common
sense meaning,’ a state law may ‘relate to’ a benefit plan, and thereby be pre-empted,
even if the law is not specifically designed to affect such plans, or the effect is only
CRS Report 97-913, Managed Health Care: A Primer. , by Jason S. Lee.
Id. at 4-5.
Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 95 (1982).
29 U.S.C. § 1144.
Shaw at 97.
indirect.”17 While the Court’s early decisions suggested that the application of
ERISA’s explicit preemption clause was limitless, its decision in New York State
Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co. signals a change
in the Court’s interpretation of section 514(a).
In Travelers, several commercial insurers challenged a state law that required
them, but not Blue Cross and Blue Shield, to pay surcharges.18 The commercial
insurers argued that the law was preempted by ERISA because it “relate[d] to”
employer-sponsored health insurance plans. In addressing the issue of ERISA's
preemption clause, the Court first noted that there is a “presumption that Congress
does not intend to supplant state law.”19 The Court then turned to whether Congress
intended to preempt state law by looking to “the structure and purpose of the Act.”20
The Court concluded that “nothing in the language of the Act or the context of its
passage indicates that Congress chose to displace general health care regulation,
which historically has been a matter of local concern.”21 In other recent cases, the
Court has similarly recognized the states’ ability to regulate matters of health and
safety, and has concluded that state laws of general applicability are not necessarily
preempted by ERISA.22
While section 514(a) provides a federal defense of ERISA preemption, section
502(a) implicates the jurisdictional doctrine of complete preemption. Section 502(a)
identifies how a participant or beneficiary may recover benefits or enforce or clarify
rights under the terms of a plan. The Court has reasoned that Congress may so
completely preempt a particular area that “any civil complaint raising [a] select group
of claims is necessarily federal in character.”23 Under the doctrine of complete
preemption, a state claim that conflicts with a federal statutory scheme may be
removed to federal court. In the context of ERISA, complete preemption refers to
state claims that duplicate causes of action provided under section 502(a).
In Pilot Life Insurance Co. v. Dedeaux, the Court found that ERISA preempted
the respondent’s state common law causes of actions asserting improper processing
Ingersoll-Rand v. McClendon, 498 U.S. 133, 139 (1990).
New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514
U.S. 645 (1995).
Travelers at 654.
Travelers at 655.
Travelers at 661. In analyzing whether the state surcharges violated ERISA's preemption
provision, the Court stated: “In Shaw, we explained that 'a law “relates to” an employee
benefit plan, in the normal sense of the phrase, if it has a connection with or reference to
such a plan.' The latter alternative, at least, can be ruled out . . . [T]he surcharge statutes
cannot be said to make 'reference to' ERISA plans in any manner.” Travelers at 656
De Buono v. NYSA-ILSA Medical and Clinical Services Fund, 520 U.S. 806 (1997) (State
tax on gross receipts of health care facilities not preempted by ERISA); California Div. of
Labor Standards Enforcement v. Dillingham Constr., 519 U.S. 316 (1997) (California's
prevailing wage law not preempted by ERISA).
Metropolitan Life Insurance Co. v. Taylor, 481 U.S. 58, 63-4 (1987).
of a claim for benefits under an employee benefit plan.24 In Metropolitan Life
Insurance Co. v. Taylor, a case decided on the same day as Dedeaux, the Court
considered whether the respondent’s state claims were not only preempted by
ERISA, but also “displaced by ERISA’s civil enforcement provision . . . to the extent
that complaints filed in state courts purporting to plead such state common law
causes of action are removable to federal court.”25
After reviewing the language of ERISA and its legislative history,26 the Court
in Taylor held that state law claims concerning benefit plans governed by ERISA
arise under the laws of the United States and are removable to federal court by the
defendants.27 Consequently, the respondent's remedies were limited to those
provided under ERISA, rather than the more generous remedies available under state
The procedure for determining whether a case will be moved from state court
to federal court is governed by Section 1441(a) of the Federal Rules of Civil
Procedure (FRCP). Under FRCP §1441(a) any civil action brought in state court may
be removed to federal district court if the defendants can show that the federal district
court has original jurisdiction.28 Courts follow the “well-pleaded complaint rule”
which allows the plaintiff to determine whether an action is heard in state or federal
court. The plaintiff is able to choose his forum because “[i]t is long settled law that
a cause of action arises under federal law only when the plaintiff’s well-pleaded
complaint raises issues of federal law.”29 The fact that the defendant's defense arises
under federal law is not enough to move the case to federal court. However, under
the doctrine of complete preemption, a state claim may be removed to federal court
if Congress has completely preempted a particular area.
The question of removal is important in liability cases against HMOs governed
by ERISA. In a typical liability case against an HMO, the plaintiff files a tort claim,
i.e., negligence, medical malpractice, wrongful death, personal injury, vicarious
liability, etc., in state court. The defendant will usually remove the case to federal
court and seek dismissal of the state law claims on the ground that such claims are
preempted by ERISA, which provides the only cause of action for the plaintiff's
claim. As a threshold issue, the federal district court must determine whether it has
jurisdiction over the claim. If it does not have jurisdiction, it must remand the claim
back to state court without considering the defendant's motion to dismiss. If the court
481 U.S. 41 (1987).
Taylor at 60.
The Court considered whether the civil enforcement provisions of ERISA are similar to
the preemption provisions of § 301 of the Labor Management and Relations Act (LMRA)
which the Court held fell within the exception to the well-pleaded complaint rule. The
Court reached its conclusion after reviewing the legislative history and finding express
language that ERISA’s provisions should be interpreted in the same manner as § 301.
Taylor at 65-6.
Taylor at 58.
28 U.S.C. § 1441(a).
Taylor at 63.
does have jurisdiction over the claim, then it will consider the defendant's motion to
dismiss the plaintiff's state liability claims. In determining whether the court has
jurisdiction over an ERISA claim, the court will examine whether the plan in
question is an ERISA plan and, if so, whether the state law claims are preempted by
ERISA Preemption and Managed Care Plans
Medical Malpractice Claims Against Managed Care Plans Based on
Utilization Review Decision. In Corcoran v. United Healthcare, Inc., one of the
first cases to address the intersection between ERISA and state tort claims, a patient
sued her employee disability plan for wrongful death and emotional distress after the
death of her unborn child.30 The patient belonged to a medical assistance plan which
contracted with the defendant to conduct cost containment measures. United used
several cost containment measures such as pre-certification, concurrent review, and
The patient was pregnant and her doctor recommended complete bed rest and
hospitalization so he could monitor the fetus. The patient's doctor sought precertification from United for the hospital stay. United denied the request and
authorized only ten hours per day for the services of a home health nurse. Although
the patient entered a hospital, she was forced to return home after United refused to
cover her hospital stay. Subsequently, the fetus went into distress and died at a time
when the home health nurse was not on duty.
The Corcorans brought suit in state court and the defendants removed the case
to federal court, arguing that the Corcorans' claim was preempted by ERISA. The
defendants also moved to dismiss the Corcorans' state tort claims by arguing that
their claim concerned the administration of benefits under a benefit plan governed
by ERISA. The federal district court agreed to dismiss concluding that “the ERISA
plan was the source of the relationship between the Corcorans and the defendants,
[and] the Corcorans' attempt to distinguish United's role in paying claims from its
role as a source of professional medical advice was unconvincing.”31
Upon appeal, the U.S. Court of Appeals for the Fifth Circuit considered whether
the state law giving parents a cause of action for the wrongful death of their child
“permits a negligence suit against a third party provider of utilization review services
. . .”32 The court reasoned that such a suit is possible, but could still be preempted
by ERISA. In determining whether a federal statute preempts state law, the court
looked initially to the intent of Congress: “In performing this analysis we begin with
any statutory language that expresses an intent to pre-empt, but we look also to the
purpose and structure of the statute as a whole.”33 The court found that the express
965 F.2d 1321 (5th Cir. 1992), cert. denied, 506 U.S. 1033 (1992).
Corcoran at 1325.
Corcoran at 1327.
Corcoran at 1328.
language in ERISA, as well as the legislative history, showed Congress' intent to
preempt state laws relating to ERISA plans.
The next question the court addressed involved the extent of ERISA’s
preemption of state laws that “relate to” ERISA plans. The Corcorans argued that
they were suing under generally applicable state negligence causes of action. United
maintained that they had not made a medical decision, but rather a decision about
what benefits were covered under the health plan. The court concluded that “United
gives medical advice - but it does so in the context of making a determination about
the availability of benefits under the plan.”34 As such, the court found that the
Corcorans’ claim was preempted by ERISA.35 Further, the court reasoned that the
lack of a remedy for medical malpractice under ERISA does not alter the conclusion
that ERISA preempts state tort claims for administration of benefits under an ERISA
With respect to damages, the Corcorans argued that under section 502(a)(3) of
ERISA, they were entitled to more than just benefits due under the plan. The
Corcorans contended that they were entitled to extracontractual damages, particularly
money for emotional injuries. Section 502(a)(3) allows a participant or beneficiary
to obtain “other appropriate equitable relief.”37 The court rejected this argument by
concluding that benefit plans are guided by principles of trust and contract law.
Because there was no trust relationship or contract between United, a third party in
the Corcoran's benefit plan, then no extracontractual damages were recoverable.
Since Corcoran, several similar lawsuits alleging malpractice have been filed
against HMOs or other managed care plans and their physicians. Some federal
circuit courts have found no ERISA preemption,38 while others have found
Medical Malpractice Claims Against HMO and HMO Physician
Based on Vicarious Liability of HMO. In Dukes v. U.S. Healthcare, Inc., the
U.S. Court of Appeals for the Third Circuit held that ERISA does not completely
Corcoran at 1331.
See also Jass v. Prudential Health Care Plan, Inc., 88 F.3d 1482 (7th Cir. 1995) (vicarious
liability claims against HMO and negligence claim against doctor preempted by ERISA
where HMO failed to approve and pay for physical therapy after knee surgery).
Corcoran at 1321.
29 U.S.C. § 1132(a)(3).
Dukes v. U.S. Healthcare, Inc., 57 F.3d 350 (3rd Cir. 1995), cert. denied, 516 U.S. 1009
Tolton v. American Biodyne, Inc., 48 F.3d 937 (6th Cir. 1995) (ERISA preempted
malpractice claims brought against health insurer who refused to approve psychiatric care
and patient later committed suicide); Kuhl v. Lincoln National Health Plan of Kansas City,
999 F.2d 298 (8th Cir. 1993), cert. denied, 510 U.S. 1045 (1994) (ERISA preempted
malpractice claims for wrongful death after delay in certifying insured for heart surgery);
Spain v. Aetna Life Ins. Co., 11 F.3d 129 (9th Cir. 1993), cert. denied, 511 U.S. 1052 (1994)
(ERISA preempted wrongful death claim based on withdrawal of authorization for surgery).
preempt state tort claims for negligence.40 The Dukes case presented two separate
plaintiffs whose claims were consolidated on appeal. The first plaintiff, Cecilia
Dukes, alleged that her husband's death resulted from the failure of the husband's
HMO physicians to conduct a timely blood test that would have detected an
extremely high blood sugar level.
The second plaintiffs, Ronald and Linda Visconti, alleged that their daughter
was born stillborn because their HMO physician ignored Mrs. Visconti’s symptoms
which indicated a serious, but treatable, medical condition. Both plaintiffs sued for
negligence and medical malpractice in state court against both the HMO and its
doctors, all of whom were designated participating physicians under their HMO plan.
Both plaintiffs alleged that the HMO should be held liable under theories of
ostensible and actual agency. The ostensible and actual agency theory is based on the
patient's reasonable belief that he or she is being treated by an employee of the
HMO.41 Both plaintiffs also sued under a direct negligence claim, asserting that the
HMO was negligent in selecting, training, and monitoring the physicians in question.
The defendants removed both cases to federal court on the grounds that the
federal court had jurisdiction over ERISA claims. The court stated initially that
although ERISA's preemption provisions are extensive, they preempt only state laws
that fall within the civil enforcement provisions of section 502(a)(1)(B), or claims
“'to recover benefits due . . . under the terms of [the] plan, to enforce . . . rights under
the terms of the plan, or to clarify . . . rights to future benefits under the terms of the
plan.'”42 The plaintiffs argued that their claims fell outside of ERISA's civil
enforcement provisions and thus were not preempted. They contended that the sole
benefit they received was membership in the HMO, and they were not contesting
their membership. U.S. Healthcare countered that the benefit is more than
membership in the HMO; that the benefit also includes the medical care received by
participants. The court agreed with U.S. Healthcare and found that the benefit to plan
participants includes medical care, as well as membership in the HMO. Nonetheless,
the court concluded that the plaintiffs' claims were not preempted by ERISA. The
Nothing in the complaints indicates that the plaintiffs are complaining about their
ERISA welfare plans' failure to provide benefits due under the plan. . . . Instead
of claiming that the welfare plans in any way withheld some quantum of plan
benefits due, the plaintiffs in both cases complain about the low quality of the
medical treatment that they actually received and argue that the U.S. Healthcare
HMO should be held liable under agency and negligence principles. . . . We are
confident that a claim about the quality of a benefit received is not a claim under
§ 502(a)(1)(B) to 'recover benefits due . . . under the terms of [the] plan.'43
57 F.3d 350 (3rd Cir. 1995), cert. denied, 516 U.S. 1009 (1995).
Dukes at 352.
Dukes at 356.
Dukes at 356-7. See also Pacificare of Oklahoma, Inc. v. Burrage, 59 F.3d 151 (10th Cir.
1995) (vicarious liability claim against HMO not preempted by ERISA).
The Dukes court distinguished its decision from Corcoran by noting that the
doctors in Dukes were not third party consultants, as in Corcoran, but doctors
employed by the HMO to provide medical care to plan participants.44 The court was
careful to note that the defendant in Corcoran had not “provide[d], arrange[d] for,
or supervise[d] the doctors who provided the actual medical treatment for plan
participants,” but only provided the administrative function of utilization review.45
The Dukes court went on to hold that claims based on administration of a benefits
plan would be preempted by ERISA, whereas claims based on the quality of care or
actual medical treatment provided would not be preempted under section
The Third Circuit followed this line of reasoning in Bauman v U.S.
Healthcare.46 In Bauman, the plaintiffs brought their claim in state court against their
doctor, hospital, and health plan after the death of their daughter. The Baumans were
covered under a managed care plan provided by U.S. Healthcare. The plan precertified twenty-four hours in the hospital after birth and Mrs. Bauman was
discharged after that time lapsed. The next day, the Baumans’ daughter fell ill. The
Baumans contacted the doctor for advice and requested a home visit from the plan.
The doctor did not instruct them to return to the hospital and the plan did not send
a nurse. The Baumans' daughter died the same day from a bacterial infection that
developed into meningitis.
Four of the six counts brought by the Baumans were against U.S. Healthcare.
Count One alleged that the plan was directly liable because its policy directly or
indirectly required the twenty-four hour discharge. The Baumans also alleged that
the plan was vicariously liable for the negligence of its agents in carrying out the
policy.47 Count Two alleged that the plan "manifested reckless indifference" to the
consequence of its policy.48 In Count Five, the Baumans alleged that the plan
negligently adopted the policy to discourage a physician from readmitting infants.
Count Six alleged that medically appropriate care required an in-home visit, which
The court stated:
In these cases, the defendant HMOs play two roles, not just one. In addition to
the utilization-review role played by United in Corcoran, the HMOs [in Dukes]
also arrange for the actual medical treatment for plan participants. Only this
second role is relevant for this appeal, however: on the faces of these complaints
there is no allegation that the HMOs somehow should be held liable for any
decisions they might have made while acting in their utilization-review roles.
Stated another way, unlike Corcoran, there is no allegation here that the HMOs
denied anyone any benefits that they were due under the plan. Instead, the
plaintiffs here are attempting to hold the HMOs liable for their role as the
arrangers of their decedents' medical treatment. Dukes at 361.
Dukes at 360.
1 F. Supp.2d 420 (D.N.J. 1998), aff’d in part, rev’d in part sub nom, In re U.S. Healthcare
Inc., 193 F. 3d 151 (3rd Cir. 1999).
Bauman at 155-6.
Bauman at 156-7.
the Baumans requested and which was available under their plan, but was not
The defendants removed the case to federal court asserting ERISA preemption.
The district court remanded Counts One, Two, and Five to state court and retained
jurisdiction over Count Six, as a claim properly heard under ERISA. On appeal, the
Third Circuit held that the four counts dealt with the quality of care provided, not
with quantity, and that they should all be remanded to state court. As in Dukes, the
court found that section 502 provides only partial preemption to those state law
claims that seek "to recover benefits due . . . under the terms of [the] plan, to enforce
. . . rights under the terms of the plan, or to clarify . . . rights to future benefits under
the terms of the plan."49 The court maintained that the Baumans’ claims were
distinguishable because they dealt with the quality of care once it was provided. The
court found "[i]t . . . significant that none of these three counts [Counts One, Two,
and Five] as pled allege[d] a failure to provide or authorize benefits under the plan
. . ." 50 With regard to Count Six, concerning the failure to provide an in-home visit,
the court chose to view the claim as a "state cause of action for violating a tort duty
'to provide [the Bauman family] adequate medical care, rather than a violation of a
[contractual] promise . . . made to them in their ERISA plan.'"51
Courts that have followed the Dukes line of reasoning include the Court of
Appeals for the Tenth Circuit in Pacificare of Oklahoma, Inc. v. Burrage.52 The
Tenth Circuit considered “whether ERISA preempts a claim that an HMO is
vicariously liable for alleged malpractice of one of its physicians. . . .” based on
quality of care.53 The court held that ERISA does not preempt such a claim because
the claim does not involve the delivery of benefits under the plan, and adjudication
of the claim does not require reference to the plan. In considering whether the claim
“relate[d] to” the employee benefit plan, the court stated that:
As long as a state law does not affect the structure, the administration, or the type
of benefits provided by an ERISA plan, the mere fact that the [law] has some
economic impact on the plan does not require that the [law] be invalidated.54
Other federal courts have reached the opposite conclusion of the court in Dukes
and Bauman, finding that state claims alleging direct or vicarious liability of HMOs
Bauman at 161. "We rejected U.S. Healthcare's complete preemption arguments in both
cases. Analyzing the gravamen of the complaints, we observed that neither one pled state
claims falling within the scope of ERISA's civil enforcement scheme because there was
nothing raised regarding a failure 'to provide benefits due under the plan.' The plaintiffs did
not allege that the failure to perform the tests arose in any way from a denial of benefits
under the ERISA plan involved. . . . Rather, both complaints asserted claims regarding the
quality of the care received."
Bauman at 162.
Bauman at 164.
59 F.3d 151 (10th Cir. 1996).
Pacificare at 153.
Pacificare at 154.
are preempted by ERISA. The First Circuit recently held that ERISA preempts a
state action for "negligent medical decisionmaking in the course of a precertification
requirement . . . mandated by an [ERISA plan]."55 In a Seventh Circuit case, Jass
v. Prudential Health Care Plan, Inc., the court concluded that the plaintiff's vicarious
liability claims against the HMO based on the negligence of the plaintiff's doctor
were preempted by ERISA.56 The decision in Jass may be distinguished from
Burrage because in Burrage, “the issue of the doctor's negligence can be resolved
without reference to the benefit plan.”57 A different outcome was reached in Jass
once the court determined that the doctor's “negligence is intertwined with the
benefits determination because the alleged negligence concerned a failure to treat
where the Plan denied payment for the treatment.”58
Liability Based on Financial Incentive Program. Although the Supreme
Court’s recent decision on ERISA and financial incentives offered by an HMO does
not address preemption directly, it has already been cited by the Fifth Circuit to
support its decision on ERISA’s preemptive effect on the Texas Health Care Liability
Act.59 In Pegram v. Herdrich, Cynthia Herdrich alleged that her HMO’s provision
of medical services under terms that rewarded physicians for limiting medical care
entailed an inherent or anticipatory breach of fiduciary duty under ERISA.60 Herdrich
argued that the terms created an incentive to make decisions in the physicians’ selfinterest rather than the plan participants’ exclusive interest.61
Herdrich was examined by Lori Pegram, her HMO physician, after experiencing
pain in the midline area of her groin. Six days after the examination, Dr. Pegram
discovered an inflamed mass in Herdrich’s abdomen. Despite the noticeable
inflammation, Dr. Pegram did not order an ultrasound diagnostic procedure at a local
hospital. Instead, she decided that Herdrich would have to wait eight days for an
ultrasound to be performed at a facility staffed by the HMO more than fifty miles
away. During these eight days, Herdrich’s appendix ruptured and she suffered
ERISA requires fiduciaries to discharge their duties with respect to a plan
“solely in the interest of the participants and beneficiaries.”62 ERISA further
provides that “[a]ny person who is a fiduciary with respect to a plan who breaches
any of the responsibilities, obligations, or duties imposed upon fiduciaries . . . shall
be personally liable to make good to such plan any losses to the plan resulting from
Danca v. Private Health Care Systems, Inc., 185 F.3d 1 (1st Cir. 1999).
88 F.3d 1482 (7th Cir. 1996).
Jass at 1494.
See Corporate Health Insurance, Inc. v. Texas Department of Insurance, 2000 WL 792345
(5th Cir. 2000).
120 S.Ct. 2143 (2000).
Pegram at 2146.
29 U.S.C. § 1104(a)(1).
each such breach, and to restore to such plan any profits of such fiduciary which have
been made through use of assets of the plan . . .”63
The District Court dismissed Herdrich’s claim after finding that the HMO did
not act as an ERISA fiduciary.64 The Court of Appeals for the Seventh Circuit
disagreed. It determined that the HMO did act as an ERISA fiduciary and reversed
the decision. Further, the Seventh Circuit maintained that although an incentive
program does not automatically give rise to a breach of fiduciary duty, such a
program may constitute a breach when physicians delay providing necessary
treatment or withhold administering proper care to a plan participant for the sole
purpose of increasing their bonuses.65
The Supreme Court concluded that an HMO does not act as a fiduciary when
its physicians make mixed eligibility and treatment decisions; that is, a treating
physician determines that a procedure or condition is either covered or not covered
based on a patient’s diagnosis. At common law, the Court reasoned, trustees and
other fiduciaries make decisions about assets and property distribution in the sole
interest of the beneficiary. While HMOs that act through their physicians make
similar decisions for the provision of healthcare for their participants, the Court
contended that because the physicians benefit from their decisions to refrain from
ordering or providing care, they bear only a limited resemblance to traditional
fiduciaries. Based on this distinction, the Court believed that it was unlikely that
Congress intended for HMOs to be treated as fiduciaries to the extent that they make
mixed eligibility and treatment decisions through their physicians.66
The Court supported its decision by considering the effect of recognizing mixed
decisions as fiduciary in nature. A participant would likely prevail in an ERISA
claim any time an HMO has a profit incentive to ration care because the HMO would
not be acting solely in the interest of the participant. For-profit HMOs would
probably be eliminated.67 Further, a claim of fiduciary breach by an HMO physician
making a mixed decision would likely resemble a malpractice claim. An HMO
defending itself in a fiduciary breach case would probably argue that its physician
was not acting out of financial interest, but for good medical reasons. Consequently,
the Court believed that the fiduciary standard would be nothing but the malpractice
standard applied in state actions against physicians.68 The Court concluded that
ERISA was not enacted to provide a federal fiduciary claim that applied the same
standard available under state malpractice law.
29 U.S.C. § 1109(a).
Pegram at 2148.
Pegram at 2155.
Pegram at 2156.
Pegram at 2157.
Both the Senate and House have passed patient protection bills during the first
session of the 107th Congress.69
The Senate passed the Bipartisan Patient Protection Act, S. 1052, on June 29,
2001.70 S. 1052 would amend ERISA to allow a federal cause of action against a
health plan for personal injury or wrongful death based upon the plan’s failure to
exercise ordinary care when considering a claim for benefits. Federal causes of
action may not involve a “medically reviewable decision.” The legislation would
amend section 514 of ERISA to allow a state cause of action for personal injury or
wrongful death, if the cause of action arises by reason of a medically reviewable
Under the federal cause of action, the health plan may be assessed civil penalties
of up to $5,000,000 if the plaintiff establishes that the alleged conduct carried out by
the defendant demonstrated bad faith and flagrant disregard for the rights of the
participant or beneficiary and was a proximate cause of the personal injury or
wrongful death. In a state cause of action, state law would be superceded insofar as
it provides for punitive, exemplary, or similar damages, if the plan has met the
utilization review, internal and external appeals provisions of the bill at the time of
the personal injury or death. Punitive damages would be allowed in state causes of
action for wrongful death, if the only damages available are punitive or exemplary
in nature, and in cases where the plaintiff establishes by clear and convincing
evidence that the defendant’s alleged conduct was carried out with willful or wanton
disregard for the rights or safety of others and was the proximate cause of the
personal injury or wrongful death.
The legislation does not authorize a federal or state cause of action against
employers or plan sponsors unless the employer or plan sponsor directly participated
in the decision of the plan or the plan’s failure to exercise ordinary care in making
the decision. Additionally, employers and plan sponsors may shield themselves
from liability by naming a designated decision maker. Group health plans that are
self-insured and self-administered by an employer, as well as multiemployer plans
that are self-insured and self-administered, cannot be held liable under the federal
cause of action for the performance of, or the failure to perform, any nonmedically
reviewable duty under the plan.
In general, all administrative remedies must be exhausted before a cause of
action may be brought. However, there are exceptions for cases where the external
review entity fails to make a determination within the time required, and the
For a detailed comparison of the Senate and House passed bills, see CRS Report RL30978,
Patient Protection During the 107th Congress: Side-by-Side Comparison of House and
S. 1052, as introduced, closely mirrored S. 283 and S. 872, earlier bills introduced by
Senator McCain and cosponsored by Senators Kennedy and Edwards.
participant or beneficiary may seek injunctive relief prior to the exhaustion of
administrative remedies in cases where the exhaustion of such remedies would cause
The House passed H.R. 2563, with a substantive amendment to the liability
provisions, on August 2, 2001. The Norwood Amendment to H.R. 2563 replaced
the bifurcated approach of the Senate-passed bill with a new federal cause of action,
over which state courts would have concurrent jurisdiction. Under H.R. 2563, as
passed, participants in group health plans would be able to bring a cause of action
against a health plan’s designated decision maker if the designated decision maker
failed to exercise ordinary care (1) in making a determination denying the initial
claim for benefits, (2) in making a determination denying the claim for benefits
during the internal review process, or (3) in failing to authorize coverage in
compliance with the determination of an independent external reviewer. If the
designated decision maker’s failure to exercise ordinary care contributed to a delay
in receiving benefits, or a failure to receive benefits, and the delay or denial was the
proximate cause of the participant’s injury or death, the designated decision maker
would be liable for economic and noneconomic damages.
The Norwood Amendment does not amend ERISA’s preemption language to
allow new causes of action to go forward under state law. However, state courts
would have concurrent jurisdiction over the new federal causes of action. Thus,
patients could either bring suit in federal court or in a state court located in the state
in which he or she resides.
Under H.R. 2563, as passed, economic damages are not limited, but
noneconomic damages may not exceed $1.5 million. Punitive damages not to exceed
$1.5 million may be awarded only if the denial of the claim for benefits was reversed
by an independent external reviewer and the designated decision maker failed to
authorize coverage in compliance with the external review determination. States
would be allowed to place additional limits on noneconomic or punitive damages.
In order to bring a cause of action, the participant would be required to exhaust
internal and external review procedures. However, a participant or beneficiary may
seek injunctive relief prior to the exhaustion of the internal and external review
processes if it is demonstrated to the court, by a preponderance of the evidence, that
the exhaustion requirement would cause irreparable harm to the health of the
participant or beneficiary.
Several states have enacted statutes that provide a cause of action to participants
in managed care plans who have been harmed by the failure to adhere to a duty of
care.71 In general, managed care entities and other health insurance carriers in the
While the causes of action differ somewhat, and the extent to which liability is imposed
varies, there are thirteen states that provide some form of a cause of action against managed
care plans. Those states are Arizona, California, Georgia, Louisiana, Maine, Missouri, New
eight states are bound by a specified duty of care. When this duty is breached,
participants have a cause of action against the managed care entities and carriers.
The cause of action appears to be a type of tort action alleging negligence and the
breach of the specified duty. In any tort action, the plaintiff must prove his case by
a preponderance of the evidence to be successful; that is, a plaintiff will prevail if the
evidence shows that the fact sought to be proved is more likely than not.
Corporate Health Insurance v. Texas Department of Insurance. The
Texas Health Care Liability Act, which was enacted on May 22, 1997, seeks to
regulate managed care in three ways.72 First, it provides a statutory cause of action
against managed care entities that fail to meet an ordinary care standard when making
healthcare treatment decisions. Second, it establishes an independent review
procedure to determine whether treatment is appropriate and medically necessary.
Third, it protects physicians from HMO-imposed indemnity clauses and from
retaliation by HMOs for advocating medically necessary care for their patients.
Aetna challenged the Act on the grounds that it was preempted by section 514 of
ERISA, but the U.S. Court of Appeals for the Fifth Circuit determined that various
provisions of the Act are not preempted by ERISA.73
The Fifth Circuit concluded that the liability, anti-indemnification, and antiretaliation provisions of the Act are not preempted by ERISA. However, the Court
determined that the independent review provisions are preempted. The Fifth
Circuit’s opinion is discussed in detail below.
Liability Provisions. The Fifth Circuit found that the liability
provisions impose liability for only a “limited universe of events.”74 The provisions
do not permit claims based on a managed care entity’s denial of coverage. Claims
involving coverage decisions in the administration of a plan would be preempted by
ERISA. In this case, the provisions allow claims based on the negligent delivery of
medical services and impose vicarious liability on managed care entities for that
negligence. The Fifth Circuit maintained that vicarious liability does not “relate to”
a provider’s role as an ERISA plan administrator or affect the structure of the plans
so as to require preemption.75 Further, the Fifth Circuit stated that it was not
persuaded that Congress intended for ERISA to supplant the state’s regulation of the
quality of medical practice.76
Jersey, New Mexico, Oklahoma, Oregon, Texas, Washington and West Virginia.
The Texas Health Care Liability Act was codified at Tex. Civ. Prac. & Rem. Code Ann.
Corporate Health Insurance, Inc. v. Texas Department of Insurance, 215 F.3d 526 (5th Cir.
Corporate Health Insurance at 534.
Id. at 535.
Anti-Indemnification and Anti-Retaliation Provisions. The Act’s
anti-indemnification provision prohibits a managed care entity from including an
indemnification clause in its contracts with doctors and other healthcare providers
that would hold it harmless for its own acts.77 The anti-retaliation provision prohibits
a managed care entity from refusing to renew a doctor or healthcare provider because
he advocated medically necessary treatment.78 Aetna argued that these provisions
impermissibly mandate the structure and administration of ERISA plan benefits.
The Fifth Circuit concluded that the anti-indemnification and anti-retaliation
provisions are not preempted by ERISA because they address the quality of care
provided by the managed care entities and “do not compel the entities to provide any
substantive level of coverage as health care insurers.”79 Further, the Fifth Circuit
contended that the provisions preserve a physician’s independent judgment in the
face of a managed care entity’s incentives for cost containment. Citing Pegram, the
Fifth Circuit reasoned that the effect of the provisions is consistent with the Court’s
finding that “states are currently allowed to impose malpractice liability on HMOs
for [providing incentives].”80
Independent Review Provisions. The Fifth Circuit found that
because the independent review provisions “attempt to impose a state administrative
regime” on coverage determinations they are preempted by ERISA.81 In responding
to Texas’ argument that the independent review provisions may be saved by ERISA’s
saving clause for laws that regulate insurance, the Fifth Circuit maintained that the
clause does not operate if “the state law at issue creates an alternative remedy for
obtaining benefits under an ERISA plan.”82 In this case, the independent review
provisions establish an alternate mechanism for obtaining benefits under the terms
of a plan. Because a plan would be bound by the decision of the independent review
organization, a participant could obtain a benefit even if he doesn’t follow ERISA’s
civil enforcement procedures.
Rush Prudential HMO v. Moran. In Moran v. Rush Prudential HMO, the
Seventh Circuit concluded that an Illinois external review statute did not conflict
with ERISA’s civil enforcement scheme and was saved from preemption by ERISA.
Like the Fifth Circuit, the court determined that the statute “related to” an employee
benefit plan. The court also found that the statute regulated insurance, and thus was
protected by ERISA’s saving clause. Further, the court maintained that ERISA’s
deemer clause was not applicable because the plan at issue was an insured plan, that
Id. at 536.
Id. at 536 n.34.
Id. at 537. Despite its general finding of preemption, the Fifth Circuit concluded that
additional independent review language accompanying the liability provisions and making
review voluntary on the entity’s part is not preempted. See CRS Report RS20845, Managed
Care and State External Review Statutes.
Id. at 539.
is offered by an HMO and not self-funded by an employer.83 The court relied on the
Supreme Court’s interpretation of the deemer clause in FMC Corp. v. Holliday.84 In
that case, the Court found that the deemer clause “makes clear that if a plan is
insured, a State may regulate it indirectly through regulation of its insurer and its
insurer’s insurance contracts.”85 In this case, the plan was offered by Rush Prudential
Unlike the Fifth Circuit, the Seventh Circuit found that the Illinois external
review statute does not create an “alternative remedy scheme” that conflicts with
section 502(a) of ERISA.86 Although the statute requires an HMO to provide a
covered service if an independent reviewing physician determines that the service is
medically necessary, the court found that the procedure created by the statute is “not
tantamount to the relief offered” under section 502(a).87 The court explained that
because the provisions of the statute were incorporated into the plaintiff’s insurance
contract, they did not operate as an alternative remedy for recovering benefits.
Rather, the provisions established an additional internal mechanism for making
decisions about when a service is medically necessary. The court appears to have
distinguished external review that becomes a part of a plan because of a state statute
from external review that is simply mandated by state law.
On appeal, the Supreme Court affirmed the judgement of the Seventh Circuit.88
The Court determined that section 4-10 of the Illinois statute was a regulation of the
business of insurance, and thus saved from preemption pursuant to ERISA’s savings
clause and the McCarran-Ferguson Act.89 The Court reviewed section 4-10 against
a multi-factor test used to determine whether a state law regulates the business of
insurance.90 Under the multi-factor test, the Court first asked whether, “with a
common-sense view,” the law was specifically directed toward the insurance
Moran, 230 F.3d at 970.
498 U.S. 52 (1990).
FMC Corp., 498 U.S. at 64.
Moran, 230 F.3d at 971.
In its opinion, the Supreme Court acknowledged that it granted certiorari to resolve the
conflict between the Fifth and Seventh Circuits. While this opinion does not directly
address the Fifth Circuit’s opinion regarding preemption of the Texas statute, it is likely that
the independent review provisions of the Texas statute will be recognized as permissible in
light of this opinion.
The McCarran-Ferguson Act requires that the business of insurance be subject to state
regulation. The statute provides, with certain exceptions, that “[n]o Act of Congress shall
be construed to invalidate . . . any law enacted by any State for the purpose of regulating the
business of insurance . . . .” 15 U.S.C. 1012(b).
See Metropolitan Life Ins. v. Massachusetts, 471 U.S. 724 (1985).
536 U.S. ___, slip op. at 8 (2002).
With regard to the Illinois statute, the Court found that, despite Rush’s contrary
assertions, the statute was directed at the insurance industry and did not apply to any
other industry.92 The Court then considered three factors established under
McCarran-Ferguson to determine whether the Illinois statute should be saved from
preemption. A state law would not be subject to preemption if it (1) has the effect
of transferring or spreading risk; (2) if it is an integral part of the policy relationship
between the insurer and the insured; or (3) if it is limited to entities within the
insurance industry.93 The Court noted that the factors were guideposts, and that a
state law is not required to satisfy all three to survive preemption.94 Applying the
three factors to the Illinois statute, the Court determined that the second and third
factors were clearly satisfied.
Recognizing that the statute could likely be saved from preemption under
McCarran-Ferguson, Rush also argued that preemption was appropriate because
Congressional intent should override ERISA’s savings clause. In making this
argument, Rush compared the provisions in the Illinois statute to the claims for
damages which the Court found to be preempted in Pilot Life Ins. Co. v. Dedeaux.95
In Pilot Life, the Court found that ERISA preempted a participant’s claim for
damages because the claim constituted an alternative remedy outside the limited
scope of remedies Congress provided for in ERISA.96 The Court distinguished the
Illinois statute from the remedy sought in Pilot Life and other cases, finding that the
Illinois statute merely prescribes “a state regulatory scheme that provides no new
cause of action under state law and authorizes no new form of ultimate relief.”97 The
Court also rejected Rush’s argument that independent review was an “alternative
scheme of arbitral adjudication,” and thus in conflict with Congress’ intent to confine
dispute resolution under ERISA to the courts.98 In dismissing Rush’s argument, the
Court noted that the state scheme was significantly different from arbitration, and
was actually closer to a “mandate for [a] second opinion” rather than arbitration.99
Many hoped that Corporate Health Insurance and Pegram v. Herdrich would
provide guidance for the resolution of managed care litigation under state law. The
Fifth Circuit appears to have interpreted Pegram to allow the state regulation of
managed care when such regulation targets the quality of care provided by a managed
care entity. This interpretation is consistent with the prior conclusions of other
Courts of Appeals. For example, in Dukes, the Third Circuit found that claims
Slip op. at 13.
Slip op. at 16 (citing Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982)).
See Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987).
Id at 57.
Slip op. at 23.
Slip op. at 25.
Slip op. at 27.
involving the quality of a benefit received by a participant are not preempted by
However, the Pegram Court understood the decisions of HMO physicians to
implicate both the quality (treatment decisions) and quantity (eligibility decisions)
of healthcare.100 The Court was unwilling to recognize these decisions as those made
by a fiduciary for purposes of imposing liability under ERISA. This unwillingness
has suggested to some that the Court believes that malpractice claims against an
HMO should be the subject of state tort law.101 However, this was not a central
holding of Pegram.
The Court’s acknowledgment that ERISA was not enacted to “federalize
malpractice litigation in the name of fiduciary duty” does suggest that state
malpractice claims will not be preempted.102 However, a definite conclusion will
probably be available only after additional case law is decided or upon enactment of
any federal legislation.
See Pegram at 2154.
See Susan L. Burke, Suing HMOs: State Your Case, LEGAL TIMES, July 31, 2000, at 60.
Pegram at 2158.