HMO Liability After Aetna Health Inc. v. Davila: Are Patients' Rights at Risk?

• Author: Elizabeth Khoury
• Position: J.D. Candidate, The University of Iowa College of Law, 2006
• Pages: 06

Elizabeth Khoury: J.D. Candidate, The University of Iowa College of Law, 2006; Master of Health Administration Candidate, The University of Iowa College of Public Health, 2007; B.A., The University of Texas at Austin, 2002. I would like to thank my family and friends for their overwhelming support throughout my academic career.

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I Introduction

Imagine undergoing a complicated heart procedure.¹ After completion of the surgery, your doctor recommends a post-operation stay of four days in the hospital. However, because your health insurance company determined the extra days were not medically necessary, your discharge nurse overrides your doctor's decision and releases you after only one day. Following your discharge, you suffer severe complications and irreversible harm. Can you sue your health insurance company for negligence for its denial of your doctor's medically recommended treatment?² At the heart of this issue lies the Employment Retirement Income and Security Act of 1974 ("ERISA").³

In 1974, Congress enacted ERISA to regulate employee benefit plans and to protect workers' rights in those plans.⁴ Legislators designed ERISA primarily to "provide a uniform regulatory regime over employee benefit plans."⁵ To prevent multi-state employers from having to deal with several conflicting state laws and to support uniformity, Congress incorporated "strong preemption language" into the Act.⁶

ERISA's preemptive force is outlined in sections 502 and 514.⁷ Section 502 is the civil-enforcement provision, also known as the "complete preemption" clause.⁸ Under this section, ERISA preempts a state cause of Page 1624 action that interferes with ERISA's civil-enforcement remedy of benefits.⁹Section 514, also known as the "conflict preemption" clause, discusses ERISA's preemptive power on state laws.¹⁰ Section 514 states that ERISA "shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan."¹¹ Therefore, "multiple and conflicting state laws" are avoided.¹² Once a state law is deemed preempted under section 514, a defendant who is sued in state court can use this section as a defense to have the claim dismissed.¹³ The comprehensive nature of these two provisions highlights the power of ERISA's preemption clauses.

If ERISA preempts a state claim, limited remedies are available.¹⁴ When a Health Maintenance Organization ("HMO") denies coverage under a plan's provisions, ERISA's remedy is limited to recovering the benefit denied.¹⁵ For example, in the context of ERISA-governed-employeehealthcare plans, a plaintiff who is wrongfully denied coverage for a hospital stay will be reimbursed for the cost of any care wrongfully denied, but not for any consequences suffered due to such a denial. ERISA does not allow for tort damages or "extra-contractual" damages.¹⁶ Page 1625

This particular aspect of federal preemption of state claims is troubling. In a previous Senate committee hearing to revise ERISA, one senator said:

Under current law, States can do nothing to ensure that insurance companies act fairly. When an insurance company denies a claim, an individual has little hope of finding an attorney to take his or her case. For the few who do succeed in retaining an attorney, all they can hope for is that after two or 3 years of court action their claim will be paid, but with no damages.¹⁷

This illustrates the issue that consumers of healthcare plans face: whether health insurance companies are properly denying medical coverage. If clear wrongdoing exists and results in harm, consumers of ERISA-governedhealthcare plans have little redress for such a negligent denial of treatment.

In response to healthcare consumers' rage over managed-care organizations and the denials of care, Texas passed the Texas Health Care Liability Act ("THCLA") in 1997.¹⁸ Texas was the first state to pass an act of this kind.¹⁹ This Act "allow[ed] patients to sue their HMOs in state court for poor quality of care."²⁰ If an HMO did not exercise ordinary care when it made a medical-treatment decision, it would be held liable for damages suffered as a result of such negligence.²¹ Because of "the Act's potential negative effects on the managed care industry," Aetna sued to have the THCLA invalidated, claiming that it conflicted with ERISA.²² A federal judge, however, rejected the health insurance company's arguments and upheld most of the THCLA.²³ Seven years later, in 2004, the Supreme Court invalidated the THCLA tort-liability provisions and clarified whether HMOs Page 1626 could be held liable for negligence in cases where an HMO denies a doctor's medically recommended treatment.²⁴

In the landmark case Aetna Health Inc. v. Davila, the Supreme Court held that ERISA section 502(a) completely preempted state tort claims against an allegedly negligent HMO for denying medical coverage to a patient.²⁵ In Davila, two patients were denied medical coverage by their insurance carriers.²⁶ As a result, they each suffered severe medical consequences allegedly arising from their medical insurers' decisions not to follow the doctor's treatment recommendations.²⁷ Each patient filed suit in a state court under the THCLA, in an attempt to recover damages from this denial of proper treatment.²⁸ The Court reaffirmed that eligibility decisions, even if determined by a medically necessary protocol, are still benefits decisions.²⁹ Therefore, a claim against an HMO for the denial of benefits would be governed by section 502(a), not state law. This Note examines the reason for ERISA preemption in Davila, the Court's classification of HMOs' eligibility decisions, and the exclusive federal remedy made available to such patients post-Davila.

Part II of this Note briefly discusses ERISA and its effect on HMO liability and also examines ERISA's preemption abilities under section 502. Specifically, this Part will discuss an individual's legal rights to recover from a denial of coverage available under section 502(a). Part II will highlight the limited options available to patients under the current legal doctrines and judicial interpretations. Subsequently, this section will examine the nature of a fiduciary act under ERISA section 502. Part III provides a brief background of the Supreme Court's examination of ERISA preemption in HMO state tort claims and discusses how precedent supported preemption. It discusses Aetna Health Inc. v. Davila and addresses the analysis leading to the Court's decision to deny a patient's right to sue HMOs in a state court. This Note also discusses Justice Ginsburg's concurrence in Davila to highlight the issues complicated by and left unresolved in Davila.³⁰

Finally, this Note will address the negative impact Davila has on patients' rights. This Note revisits the congressional solution for preserving patients' rights, the "Patient's Bill of Rights."³¹ Further, this Note reevaluates Page 1627 the role of an HMO as a healthcare provider. The Note concludes by suggesting that HMOs are essentially medical providers that should be held to the same standards as physicians.

II Background

A The Rise Of Managed-Care Organizations

Managed-care organizations arose in the late 1970s as a "framework of financing and organizing health care."³² Managed care is a term for healthcare-payment systems that strive to contain costs by controlling the quantity and type of healthcare services provided.³³ An example of a managed-care organization is a health-maintenance organization.³⁴ HMOs strive to provide quality healthcare at cheaper costs.³⁵ To achieve this goal, HMOs use preauthorization to prevent frivolous coverage.³⁶Preauthorization is a process whereby HMOs use a "utilization review process," which is a cost containment procedure that helps administrators determine what medical procedures are necessary and, thus, approvable.³⁷Through these cost containment measures, HMOs ration care and maintain financial viability.³⁸ Consequently, HMOs do not allow coverage for medical treatment if they deem it not medically necessary.³⁹ Page 1628

Before managed healthcare plans arose, the fee-for-service model dominated healthcare delivery.⁴⁰ Under the fee-for-service model, the patient chose his physician or provider, and the physician and patient chose a treatment plan.⁴¹ The physician would provide the services, and the insurer would reimburse the provider for the expenses he paid.⁴² In the feefor-service model, the insurance company typically paid for all the services the doctor billed.⁴³ Due to the rising costs of healthcare, there was a shift from the fee-for-service model to HMOs.⁴⁴ Because of this shift, ERISA began to play a role in regulating healthcare plans.

B ERISA And Its Effect On Managed Healthcare Plans

ERISA regulates pension plans and employee-welfare-benefit plans.⁴⁵ An example of a welfare plan...