Health Plan Liability and ERISA: The Expanding Scope of State Legislation

Abstract

The federal Employee Retirement Income Security Act of 1974 (ERISA) supersedes state laws as they relate to employer-based health care plans. Thus, cases brought under ERISA are heard in federal courts.

We examined the intent, scope, and impact of recent laws passed in 10 states attempting to expand the legal rights of health plan enrollees to sue their plans. In June 2004, the US Supreme Court ruled that state-law causes of action brought under the Texas Health Care Liability Act involving coverage decisions by Aetna Health Inc and CIGNA Health Care of Texas were preempted by ERISA. The full implications of this decision are not evident at present.

THE US HEALTH CARE DELIVERY system is regulated through a maze of overlapping state and federal laws and regulations. In recent years there has been a steady stream of state legislation affecting the way in which managed care plans conduct their business.1–4 For example, states have passed physician antitrust exemption laws (the law passed in Texas allows independent physicians to join together under certain circumstances to negotiate reimbursement rates with managed care plans),5 any-willing-provider laws (which require a health plan to accept any qualified provider willing to abide by the terms and conditions of the plan),6 freedom of choice laws, laws mandating minimum lengths of stay for maternity admissions,7 other mandated benefit laws, and, most recently, laws that permit enrollees to sue their employee health benefit plans for negligence in state courts.

In large part, these laws have been enacted in response to the rapid growth of managed care plans and concerns about the impact these plans have on quality of care.8 In 1977, only 4% of American workers were enrolled in a managed care health plan and the remaining 96% were enrolled in an indemnity plan.9 In 2001, 93% of American workers were enrolled in a managed care health plan and 7% were enrolled in an indemnity plan.10

Because enrollees in managed care plans often must receive plan approval before obtaining a particular type of care (as opposed to workers in indemnity plans, who receive medical services and then file a claim with the insurer), a great deal of attention has been focused on the rights of enrollees in such plans. Cases in which individuals have suffered grievous harm as a result of being refused access to a specific health care service have garnered significant publicity and have focused attention on the limited legal recourse available to such individuals as a result of the preemption of state laws relating to employee health benefit plans.

The most recent state legislative initiatives concerning managed care plans reflect the belief that federal laws unfairly prevent enrollees from suing their plans for wrongful denial or delay in treatment.11 Here we examine the intent, scope, and impact of state laws designed to expand the legal rights of enrollees to sue their health plans.12 Texas passed the first such law in 1997, and 9 other states subsequently have passed similar laws.8,13,14

HEALTH PLAN LIABILITY

Background

Two types of liability—contract and tort—are relevant in litigation involving health plans.15 Contracts are voluntary agreements entered into for the material benefit of 2 parties; contract liability refers to the enforcement of contracts. In most cases, courts limit the penalties associated with breach of contract to the value of the services due under the contract.

Torts are civil, noncontractual wrongful actions in which injured persons seek monetary damages from the responsible entities. But tort liability may also exist in cases of contractual relationships. Malpractice claims made by patients against their physicians are tort claims. Physicians are liable for malpractice if the services they provide do not meet the customary standard of care, which is set by the medical profession. Courts have chosen to grant this authority to the medical profession because of the complexities inherent in medical decisionmaking and the belief that only physicians are capable of assessing the risks and benefits associated with various treatment regimens.16 Plaintiffs in malpractice suits must show that the physician had a duty to provide appropriate care, that this duty was breached, that this breach resulted in injury to the patient, and that the injury resulted in specific damages.17

In malpractice cases, patients may be compensated for all injuries they have suffered, and this compensation may include medical care costs, lost wages, and pain and suffering; in situations in which the provider is shown to have acted maliciously, punitive payments may be awarded as well. Punitive compensation is designed to prevent actions unlikely to be restrained by compensatory awards.

As a result of managed care entities having assumed a dominant role in the US health care landscape, the widespread adoption of prior-certification requirements has important implications for the nature and amount of damages at stake in lawsuits filed by enrollees against their health plans. Before the diffusion of managed care, the standard practice was for health care providers to supply services to patients, who in turn filed claims with their health plans.18 If their health provider refused to pay the claim, enrollees could appeal the decision, and if the appeal failed, they could sue the plan in court. Today, however, patients often must obtain approval from their health plans before receiving a particular type of care.19 Thus, in cases in which health plans require preapproval in regard to particular types of health care services, patients may sustain damage to their health as a result of their inability to obtain such services.

Health plans are responsible for coverage decisions, and they may be sued for decisions that violate their contracts with enrollees. Health plans are not, however, responsible for treatment decisions made by health care professionals. If health plan enrollees sustain injuries as a result of such treatment decisions, they may file a medical negligence suit in state court against the health care professional in question.

ERISA

The Employee Retirement Income Security Act (ERISA), a comprehensive federal statute enacted in 1974 to ensure the fiscal integrity of pension plans, applies to health benefit plans as well.11 Compensation in cases filed under ERISA is limited to that available under contract law (compensation equal to the value of the services required in the contract). Thus, even though enrollees may suffer serious medical consequences as a result of the actions of their health plans, they may sue only for the value of the services withheld or delayed. Indeed, until quite recently courts found that almost all tort common-law causes of action filed against employee health plans were preempted by ERISA.

The intent of Congress was for ERISA to provide uniform rules governing employee pension and welfare plans. ERISA’s provisions “supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan” (italics added).20 The fact that ERISA preempts not only state laws that conflict with ERISA but also all state laws that “relate to” employee benefit plans has been invoked by almost all employee benefit plans that have been sued by an enrollee in state court.21,22

In early ERISA decisions in cases involving employee benefit plans, the Supreme Court adopted a broad interpretation of the crucial phrase “relate to.” Legal grounds for most state actions were construed to be “related to” the employee’s health benefit plan and thus were preempted by ERISA. Thus, the only option available to enrollees who suffered injury as a result of the actions of their health plans was to file suit in federal court for the cost of services denied to them (an action allowed under ERISA).23,24 As a consequence, enrollees had little to gain through legal action, and attorneys were reluctant to accept such cases. In the mid-1990s, the Supreme Court limited the scope of the ERISA preemption, which afforded greater opportunities to enrollees to sue their health plans in state courts, where they could seek compensation for lost wages, medical expenses, and pain and suffering in addition to seeking compensation for the cost of medical services not provided.

As noted, employee health benefit plans were not the focus of ERISA, and ERISA provides little oversight in regard to the activities of such plans.25 For example, ERISA does not address the financial requirements of employee health benefit plans, whereas state laws generally impose stringent financial requirements on health insurers. These requirements are designed to guarantee the financial solvency of health insurers so that they are able to meet their commitments in terms of provision of health care services to enrollees. Employees who receive benefits from a self-funded employee health benefit plan have no such assurances.

Proponents of ERISA had little inkling that this law would become a major factor in shaping the US health care delivery system. ERISA became a pivotal piece of legislation because, to a large extent, it prevented states from regulating the activities of employee health benefit plans. However, although it precludes states from regulating health benefit plans, ERISA contains a “savings” clause that preserves the ability of states to regulate the business of insurance. According to this clause, “nothing in this title shall be construed or relieve any person from any law of any State which regulates insurance, banking, or securities.”26

Nevertheless, ERISA also contains a clause that prevents states from “deeming” employee health plans to be insurers. This clause is intended to prevent state circumvention of the intent of ERISA and to free employee benefit plans from conflicting state regulations. According to ERISA, an employee benefit plan is not to be “deemed . . . an insurance company or other insurer, bank trust company, or insurance company for purposes of a law of any State purporting to regulate insurance companies, insurance contracts, trust companies, or investment companies.”27 Because this clause stipulates that self-funded employee health benefit plans are not to be regulated as insurers, it affords these plans considerable protection from state oversight.

However, insurance companies that assume the risk of providing and supervising care for employees of a company may be regulated as insurance companies by the state. (Companies that administer health plans but do not assume any risk are referred to as administrative-services-only companies. An insurance company may act as an administrative-services-only company for one employer and serve as an insurance company [i.e., both administer and insure the employee health plan] for another employer.) On the other hand, an insurance company that does not assume risk for providing health care but administers an employee health benefit plan for an employer may not be regulated by the state. A recent law review article explains28: “Simply put, because a self-funded ERISA plan is not deemed an insurance company, it is unaffected by the saving clause and is relieved from any state laws that purport to regulate insurance. By contrast, an employee benefit plan that is insured remains subject to state insurance regulations by virtue of the saving clause.”

The Supreme Court emphasized the distinction between self-funded and insured plans, as just described, in its 1985 decision in Metropolitan Life Insurance Company v Massachusetts.29 In this decision, the court held that Massachusetts could mandate specific mental health benefits for insured health plans but not for self-funded health plans. In addition to being exempt from state-mandated benefit laws, self-funded health plans are exempt from premium taxes; consequently, many firms (especially large firms better able to accept risk) have opted to operate self-funded health benefit plans, and today about 55 million of the estimated 137 million workers covered by employer health benefit plans are enrolled in self-insured plans.13,14

Case Law

Given that court decisions over time have narrowed the scope of ERISA’s preemption clause, the future impact of ERISA on the health care industry is in question. In general, although courts interpreted the phrase “relate to” quite broadly in early ERISA decisions, they have not always been consistent in their interpretation of this phrase. Moreover, a host of novel theories have arisen over time in the course of attempts to hold health plans accountable for health care treatment decisions that they make or influence.

In the 1985 Metropolitan Life Insurance case, the US Supreme Court’s ruling was that the phrase “relate to” should be construed in its broadest common-sense meaning, and in 1987 the court reiterated this position in Pilot Life Insurance Company v Dideaux.30 Ten years later, however, the court narrowed ERISA’s preemption in Blue Cross & Blue Shield Plans v Travelers Insurance.31 In that case, the court rejected the expansive definition it had previously embraced, determining that a New York State law that imposed a 24% surcharge on patients covered by a commercial insurer was not “related to” an employee health benefit plan, even though many enrollees obtained their health insurance through the workplace.

Judicial interpretation of the phrase “relate to” has evolved considerably since the Travelers case. In a number of instances, courts have ruled that ERISA preempts challenges to administrative health plan actions but not challenges to actions that involve health care treatment decisions. This distinction has sometimes been framed in terms of quantity decisions (challenges to these decisions are preempted by ERISA) as opposed to coverage quality decisions (challenges to these decisions are not preempted by ERISA). However, the distinction between administrative (i.e., quantity or coverage related) decisions and treatment (i.e., quality or treatment related) decisions is often blurred.

In today’s health care delivery climate, the decision by a health plan not to cover a particular service generally means that the patient will not receive the service; adverse effects on the patient’s health may result (as noted by the Supreme Court in Pegram v Herdrich32). Many of the decisions made by health plans entail some degree of clinical judgment, and the courts have not been consistent in their rulings regarding whether such decisions are preempted by ERISA. This has occurred even though most courts acknowledge that health maintenance organizations (HMOs) are not exempt from all state causes of action, especially those articulated in state health plan liability laws.

The inconsistency of existing case law regarding the ability of enrollees to sue their health plans in state courts for negligence has elicited requests for clarification from many attorneys, plaintiffs, defendants, and, in some cases, even judges. For example, in October 2003, Justice Edward Becker of the US Court of Appeals (Third Circuit, Philadelphia) stated: “I believe that the fundamental distinction upon which federal case law currently relies—between quantity and quality decisions, or between eligibility and treatment decisions—is untenable, and that the blurring is becoming more severe, not less.”33

In November 2003, the US Supreme Court agreed to hear a combined appeal brought by Aetna Health Inc and CIGNA Healthcare of Texas concerning a decision of the US Circuit Court of Appeals for the Fifth Circuit34 that permitted employees and their dependents, under the Texas Health Care Liability Act of 1997, to file medical malpractice law suits in state courts against employer-sponsored health plans.35 In June 2004, the Supreme Court reversed the decision of the appeals court, ruling that employees whose health insurance coverage is provided through their employer cannot sue their health plans in state courts for coverage decisions.36

The Supreme Court found that the plaintiff’s cause of action fell within the scope of ERISA’s civil enforcement remedies and thus was completely preempted. According to ERISA’s civil enforcement remedies, a civil action may be brought to recover benefits due under the terms of a plan. Associate Justice Clarence Thomas delivered the opinion of the unanimous court: “[A]ny 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.”37

In making its decision, the Supreme Court refuted the argument that the plaintiff claims should not be preempted because the claims were labeled in tort rather than contract language. The court asserted that the ERISA provisions cannot be evaded simply by relabeling contract claims as tort claims. The court also rejected as faulty the reasoning that a health plan should not be treated as a fiduciary when it makes decisions that involve administrative and medical judgment, because a benefit decision, even if it involves a medical judgment, represents an ordinary fiduciary responsibility.

STATE HEALTH PLAN LIABILITY LAWS

As mentioned earlier, in 1997 Texas passed the nation’s first law holding health plans directly liable in tort for medical malpractice damages attributable to actions of their employees or agents. According to this law, “[a] health insurance carrier, health maintenance organization, or other managed care entity for a health care plan has the duty to exercise ordinary care when making health care treatment decisions and is liable for damages for harm to an insured or enrollee proximately caused by its failure to exercise such ordinary care.”38

This legislation is designed to assist health plan enrollees in taking legal action against employee health benefit plans for their refusal or reluctance to act in situations that result in medical injury to enrollees. Although the Texas law originally required enrollees to exhaust all internal and external appeals processes before filing suit against their plans, that requirement was removed in subsequent legislation.39 (However, such a requirement was included in 8 of the 9 state health care liability acts that have been enacted since 1997.)

After its passage, the Texas liability law was immediately challenged on the grounds that it should be barred under the ERISA general preemption clause. Following the reasoning first articulated by the US Supreme Court in the Travelers case, the US District Court ruled that the law’s provision regarding the ability of enrollees to sue their HMOs should not be preempted, because ERISA was not intended to supplant state regulation of health care quality. In June 2000, this decision was upheld by the US Court of Appeals for the Fifth Circuit in Corporate Health Insurance Inc. v Texas Department of Insurance.40

Two years after enactment of the Texas law, Georgia became the second state to pass a law expanding health plans’ liability.41 This law contains much of the same language as the original Texas law, including the requirement that enrollees exhaust all internal and external appeals procedures before filing suit in court; in fact, many of the state health plan laws passed after the Texas law have borrowed freely from its language (Table 1 ▶). The Georgia law is slightly different from the Texas law (and similar subsequent laws) in that it precludes punitive damage awards. It does, however, permit awards for economic (i.e., lost wages and medical expenses) as well as non-economic (i.e., pain and suffering) damages.

TABLE 1—

State Health Plan Liability Laws

State	Summary of Law	Effective Date
Arizona	“Health care insurer is liable for any damages caused to the insurer’s enrollee by the insurer’s delay in authorizing or failure to authorize a request for medical necessary health care services covered under the health care plan.” (This law does not require enrollees to exhaust the appeals process before filing suit.)	July 2000
California	“A health care service plan or managed care entity . . . shall have a duty of ordinary care to arrange for the provision of medically necessary health care services to its subscribers and enrollees, where the health care service is a benefit provided under the plan, and shall be liable for any and all harm legally caused by its failure to exercise that ordinary care.”	October 2001
Georgia	A managed care entity will “exercise ordinary diligence,” and “any injury or death to an enrollee resulting from a want of such ordinary diligence shall be a tort for which a recovery may be had against the managed care entity offering such plan, but no recovery shall be had for punitive damages for such tort.”	July 1999
Maine	“A carrier has the duty to exercise ordinary care when making health care treatment decisions that affect the quality of the diagnosis, care or treatment provided to an enrollee proximately caused by the failure of the carrier or its agents to exercise ordinary care.”	August 2000
New Jersey	“[A] carrier or organized delivery system shall be liable to a covered person for economic and non-economic loss that occurs as a result of the carrier’s or organized delivery system’s negligence with respect to the denial of, or delay in, approving or providing medical necessary covered services.”	September 2001
North Carolina	“Each managed care entity for a health benefit plan has the duty to exercise ordinary care when making health care decisions and is liable for damages for harm to an insured or enrollee proximately caused by its failure to exercise ordinary care.”	October 2001
Oklahoma	“[A] health care plan has the duty to exercise ordinary care when making health care treatment decisions and shall be liable for damages for harm to an enrollee proximately caused by breach of the duty to exercise ordinary care.”	July 2000
Texas	“A health insurance carrier, health maintenance organization, or other managed care entity for a health care plan has the duty to exercise ordinary care when making health care treatment decisions and is liable for damages for harm to an insured or enrollee proximately caused by its failure to exercise such ordinary care.” (This law was amended after passage to permit enrollees to file suit even if they have not exhausted all avenues of the appeals process.)	September 1997
Washington	“A health carrier shall adhere to the accepted standard of care for health care providers under chapter 7.70 Revised Code of Washington when arranging for the provision of medically necessary health services to enrollees. A health carrier shall be liable for any and all harm proximately caused by its failure to follow that standard of care when the failure resulted in the denial, delay, or modification of the health care service recommended for, or furnished to, an enrollee.”	July 2001
West Virginia	“After settlement or exhaustion of all legal appeals involving determinations of whether health care services are medically necessary or experimental, a managed care plan must comply with the decision rendered in an external review under this article and may be held civilly liable for all damages proximately to an enrollee for its failure to comply.”	July 2002

In 1999, California became the third state to pass a managed care liability law. Similar to the legislation passed in Texas and Georgia, the California law stipulates that health plans “have a duty of ordinary care to provide medically appropriate health care services to [their] subscribers” and that they are “liable for any and all harm legally caused by the failure to exercise ordinary care in arranging for the provision of, or denial of, health care services.”42 This law went into effect in January 2001 and, as is the case with the original Texas law and the Georgia law, it requires that all independent review system processes be exhausted before enrollees file suit.

Four states—Washington,43 Arizona,44 Maine,45 and Oklahoma46—passed laws in 2000 permitting enrollees to file suit in state court against their health plans for medical malpractice attributable to failure to provide ordinary care. The Arizona law does not require enrollees to exhaust the appeals process before filing suit; the Oklahoma law requires enrollees to both exhaust any applicable appeals and reviews and provide written notice to the health plan 20 days before filing the action.

In 2001, 3 more states—West Virginia,47 New Jersey,48 and North Carolina49—enacted legislation permitting enrollees to pursue civil causes of action for malpractice against health plans in state courts. Each of these laws requires an enrollee to exhaust internal and external grievance review procedures before filing an action, and the New Jersey law stipulates that the health plan is “liable for the health care treatment decisions of its employees, agents or other representatives over whom the carrier or organized delivery system has the right to exercise influence or control, or has actually exercised influence or control.” No state has passed a law creating tort liability for patient harm caused by managed care organizations since 2001.

POLICY IMPLICATIONS

During the past several years, the US Congress and state legislatures across the nation have debated a variety of bills intended to make it easier for enrollees to sue their employee health benefit plans for negligence in state courts. Congress has rejected several attempts to eliminate the ERISA preemption defense against negligence suits by enrollees in state courts, whereas 10 state legislatures have passed bills designed to hold employee health benefit plans responsible for the quality of care they provide to enrollees.50 Individuals and groups that oppose such bills invariably cite the costs associated with exposing employee health benefit plans to tort liability as a major reason for their opposition. For example, the American Association of Health Plans argues that “[e]xpanding health plan liability will significantly increase costs . . . and will cause hundreds of thousands of Americans to join the ranks of the uninsured.”51^(p3)

A number of studies have attempted to estimate the direct and indirect costs of permitting enrollees to sue their health plans for negligence in state courts. Direct costs of such litigation would include any additional legal costs borne by employer-based health plans, and indirect costs would include cost increases resulting from increases in the volume of services supplied to avoid the possibility of legal action.

Direct Costs

Several studies have estimated direct costs of revocation of the ERISA preemption. One study examined the liability costs incurred by several health plans that do not enjoy ERISA protection against suits in state courts.52 This latter study showed that litigation costs were quite low, averaging only $0.12 per enrollee per month. In another study, the Congressional Budget Office estimated costs associated with the Patients’ Bill of Rights Act of 199953; one of the provisions of this bill permitted enrollees to sue employer-based plans for personal injury and wrongful death under state tort laws. The Congressional Budget Office estimated that elimination of the ERISA preemption to suing health plans for malpractice in state courts would increase health plan liability costs by 1.4% of total premiums.

A 1998 report commissioned by the American Association of Health Plans estimated the financial effects of changes in liability laws that permit enrollees to sue their health plans for negligence in state courts.54 The results of this report showed that the liability costs of managed care plans amounted to between 0.5% and 2% of total premiums and that two thirds of all plans already had liability insurance.

According to a recent study conducted by Hall and Agrawal, minimal litigation has resulted from laws that impose tort personal injury liability on managed care plans.55 Hall and Agrawal focused on 3 states that have passed managed care patient protection laws (New Jersey, Texas, and Louisiana) and compared the experiences in these states with the experiences in 3 states with no liability laws (Iowa, Michigan, and Virginia). After conducting interviews with attorneys, health plan executives, state officials, and citizens in each of these states, they concluded that there was little difference in the volume of liability actions taken in states with and states without liability laws.

Indirect Costs

Studdert and colleagues56 interviewed 50 leaders in the health care field and found that insurance executives were especially concerned about elevated liability risks associated with the narrowing of ERISA protections against tort actions in state courts. In addition, a technical panel convened by the Barents Group found that federal legislation widening health plans’ exposure to tort liability suits in state courts would significantly increase the practice of “defensive medicine.” (“Defensive medicine” exists if fear of liability compels health care providers to provide services that do not have meaningful medical benefits. If defensive medicine is pervasive, the current liability system may create costs that greatly exceed the direct costs of litigation.) The Barents report also estimated that the indirect cost of rescinding the ERISA preemption of legal liability for employer-based health benefit plans would increase health care costs by an amount of 1.8% to 7.2%.54

The Texas Experience

The direct costs of the Texas health care liability law, the nation’s first, appear modest. Various sources have estimated that between 12 and 25 cases have been filed under the Texas health care liability law, and several of these cases have now gone to trial.13,50

Estimates of indirect costs also appear low. Data from the Texas Department of Insurance show that the rate of increase in HMO premiums in Texas between 1998 and 2001 was similar to the rate of increase in surrounding states.57,58 Moreover, there is evidence that health plan premiums for public employees in Texas not subject to ERISA has risen at about the same rate as health plan premiums for private employees in the state.58

CONCLUSIONS

Since its enactment in 1974, ERISA has cast a large shadow on the legal landscape of managed care. The ERISA preemption against state laws that “relate to” employee benefit plans has elicited a large volume of litigation, and 10 states have enacted laws attempting to enhance the ability of enrollees to sue health plans in state courts.

In November 2003, the US Supreme Court reviewed 2 cases addressing the breadth of ERISA’s preemption clause.60 These cases were consolidated, and the consolidated (Aetna Health Inc.) ruling was made in June 2004. The court ruled that negligence claims against employer-sponsored health plans are preempted by ERISA.

By eliminating the opportunity for injured patients who obtain health insurance from their employers to sue their health plans for damages in state courts, this decision may rekindle interest in passage of a federal bill of rights for patients.61 Indeed, Justice Ruth Bader Ginsburg, in her concurring opinion, suggested that congressional action amending ERISA may be the only mechanism available to provide patients with adequate compensation for damages incurred as a result of coverage decisions made by employer-sponsored health plans. Furthermore, shortly after the Supreme Court’s decision, Representative John Dingell (D, Mich) and Senator Edward Kennedy (D, Mass) called for passage of federal legislation permitting patients to sue their health plans for damages incurred as a result of a denial-of-coverage decision.62

Those who oppose this recent Supreme Court decision maintain that the court has afforded to managed care plans that cover enrollees through an employee benefit plan a type of immunity that will do little to deter these providers from disapproving requests to cover necessary but expensive health care services. They maintain that the decision ensures that managed care plans are liable for the value of the service denied but not for the medical consequences of the denial.

Those who support the decision maintain that it will help companies implement plans that are not inhibited by 50 different legal systems. They also maintain that workable processes are in place that enrollees may use to appeal a coverage decision and that this Supreme Court ruling will prevent a floodgate of lawsuits that would result in increased health care costs and higher insurance premiums.

In any event, it will take several years before the consequences of this decision are apparent and fully appreciated. In the meantime, it is certainly possible that the Supreme Court will issue a decision that alters some of the facets of its recent ruling or at least redefines the boundaries between coverage and medical decisions. If history is an accurate gauge, we can expect further judicial interpretation of the language and intentions of ERISA.