A framework for analysis of ERISA preemption in suits against health plans and a call for reform.

• Author: Scheutzow, Susan O.

A FRAMEWORK FOR ANALYSIS OF ERISA PREEMPTION IN SUITS AGAINST HEALTH PLANS AND A CALL FOR REFORM

SUSAN O. SCHEUTZOW(1)

1. Introduction

2. Overview of Risk and the Structure of Health Plans

3. "Management if Care" and Types of Managed Care Liability

   1. Management of Care

   2. Types of Managed Care Liability

   1. Benefit Determination

   2. Utilization Review

   3. Negligent Selection, Supervision, and Plan Design

   4. Pure Vicarious or Derivative Liability

   5. Continuum of Liability

4. ERISA Preemption

   1. Benefit Determination

   2. Utilization Review

   3. Dependent Liability and Vicarious Liability For Provider Malpractice

5. A Call for Corrective Action

   1. Revealing Health Plan Financial Incentives to Patients

   2. Challenge to Benefit Denials and Utilization Decisions

   1. HMOs

   2. ERISA Plans VI. Conclusion

1. INTRODUCTION

   "To Sue or Not To Sue, a Wrinkle In Federal Law Makes It Harder Than Ever To Win a Malpractice Claim" -- Newsweek.(2) "HMOs Claiming Immunity Against Malpractice Suits" -- St. Louis Post Dispatch.(3) "HMOs Want To Dictate Care, Yet Avoid Malpractice Suits." -- The Sacramento Bee.(4) The popular press is replete with stories of the application of the preemption rules of the Employee Retirement Income Security Act of 1974 (ERISA)(5) to managed care plans and the resulting inability of individuals covered by ERISA regulated plans to sue their managed care plans for damages caused by provider malpractice.

   The public demand is growing for the courts to "level the playing field" and permit beneficiaries of ERISA regulated plans to sue their health plans for malpractice and thereby afford the same opportunities to beneficiaries of ERISA regulated health plans as are enjoyed by beneficiaries of health plans not regulated by ERISA.(6) This controversy has also gained the attention of the federal government with the United States Department of Labor filing amicus briefs in several major preemption cases requesting that the courts permit beneficiaries under ERISA regulated health plans to sue their plans for the malpractice of plan physicians(7) and former Labor Secretary Robert Reich speaking out in favor of the courts permitting ERISA regulated health plans to be sued for physician malpractice.(8)

   This debate, however, often has focused narrowly upon the ability of beneficiaries to sue their ERISA regulated health maintenance organizations (HMOs) for malpractice or has failed to make distinctions between suits against ERISA regulated plans for the independent actions of health plans in making benefit determinations and performing utilization review and vicarious liability suits against health plans for physician malpractice. While it is possible that the courts can allow plaintiffs to bring suits for damages against ERISA regulated health plans for physician malpractice, it is extremely unlikely absent legislative change that the courts will allow plaintiffs to bring suits for damages against ERISA regulated health plans for the plans' actions in utilization review and benefit determinations. In addition, while permitting suits against health plans arguably would be a deterrent to health plans engaging in overzealous benefit denials and utilization review and would provide redress for those who are injured by health plans' actions, permitting retrospective lawsuits is not sufficient to provide truly effective remedies. Since benefit denials and utilization decisions often result in the denial of coverage for life-saving treatment, the desired outcome in most of these cases is for the beneficiary to receive payment for the health care treatment in question so the treatment may be obtained. While multi-million dollar judgments make headlines, the parties involved undoubtedly would have preferred that payment for the treatment had been available and that the treatment had been obtained and the life of the loved one saved.

   In addition to health plan beneficiaries needing an effective method to compel benefits, also needed by those seeking medical care is an understanding of the incentives at work for providers making health care decisions so patients can factor in such incentives in making informed decisions about their own health care. Many health plans are designed to provide economic incentives or disincentives to encourage providers to make decisions regarding medical treatment which reduce the health plans' costs. Beneficiaries need this information to make informed health care decisions and to know when to seek benefits from a health plan

   This article provides a framework for an analysis of ERISA preemption of suits against health plans.(9) The types of decisions made by health plans will be categorized and ERISA preemption concepts applied to this categorization to determine the points of inequity between ERISA regulated health plans and non-ERISA regulated health plans. This article will then review the problems inherent in relying upon the malpractice area as the primary remedy for beneficiaries seeking care under ERISA regulated and non-ERISA regulated plans and identify a number of key points for reform.

   II Overview of Risk and the Structure of Health Plans

   Fundamental to understanding the ERISA preemption debate is the issue of risk for payment of health care expenses. Behind the myriad of names for managed care plans such as preferred provider organizations (PPOs), health maintenance organizations (HMOs), point of service plans (POS), and others, lies the entity which assumes the risk for payment of the health care costs. The National Association of Insurance Commissioners (NAIC) defines a risk-bearing entity as one or more persons that contract with individuals, employers, or other groups to arrange for or provide healthcare benefits on a basis that involves the assumption of insurance risk by the risk-bearing entity.(10) simply put, which entity actually provides the funds that pay a claim, and if the amount of money allocated on a monthly basis (premium, capitation, etc.) is not sufficient to pay the claims for services, which entity is legally responsible to pay the claims? The answer is generally one of four types of entities: a self-funded employer, an insurance company licensed by a state; an HMO licensed by a state; or a government such as the federal government through the Medicare program.

   The entity which assumes the risk is the entity that government regulators are most concerned about regulating, for if the risk bearing entity is insolvent, claims of individuals for the costs of health care services will be left unpaid. The risk bearing entity is the ultimate payer of health care claims and is referred to herein as the "health care payer."

   Health care payers that incorporate utilization review(11) and other devices to manage health care services in their plan design may perform this utilization and management themselves or separate it from the risk bearing entity. At times, the payer actually makes benefit determinations, provides the utilization review, and other management of care or the payer may purchase these services from another entity. Different types of payers may ultimately be bearing the risk yet offer plans which look and function alike. For example, both an insurance company and a self-funded employer may contract with the same preferred provider network and offer an identical PPO plan. Similarly, a self-funded employer may purchase the same HMO coverage that a non-self funded employer chooses for its employees. Identifying the ultimate payer may become particularly confusing because at times a self-funded employer may contract with a licensed insurance company whereby the insurance company supplies a provider panel, performs utilization services, and performs certain third party administration.(12) A beneficiary may actually hold an insurance card, and for almost all purposes, the beneficiary and provider feel the "coverage" is by an insured plan, however, the ultimate payer is a self-funded employer.

   The following examples show three different managed care structures and their possible contractual relationships to self funded and non-self funded employers.

   [ILLUSTRATION OMITTED]

   With any of these examples, employees of both self funded and non-self funded employers may be enrolled in identical health plans although the plans provided by the self funded employer are regulated by ERISA and the plans of the non-self funded employer are not.(13)

3. "MANAGEMENT OF CARE" AND TYPEs OF MANAGED CARE LIABILITY

   1. Management of Care

      Concomitant with the rise of managed care in the delivery of health care, has come a proliferation of types of managed care decisions. With the third party health care coverage of yesteryear, patients generally obtained treatment and a determination was made on a "retrospective basis" as to whether the treatment was covered. Few plans had requirements for pre-approval prior to receipt of benefits and it is doubtful whether some plans even had a mechanism for making such a determination if asked. If a patient did not seek treatment due to cost considerations she did so because it was clear from the description of benefits that coverage was not provided or she made her own determination that coverage did not exist under the plan.

      The types of decisions made on a retrospective basis were generally limited to whether benefits were available for a particular service and whether the service desired was "medically necessary." Some benefit determinations were simple, e.g., family planning services and "well baby" visits were covered; and others were open to interpretation, e.g., if investigational treatments were not covered, it was a particular desired treatment investigation. Medical necessity determinations usually focused on whether the treatment was necessary at all for a medical reason such as whether plastic surgery requested was purely cosmetic or was required due to an injury. Seldom did medical necessity determinations address the question of whether a...