Rush Prudential Hmo v. Moran: Federal Intervention Looms as Supreme Court Rules That Erisa Does Not Preempt State Laws Requiring Independent Review of Medical Necessity Decisions and Lays Groundwork for Different Independent Review Provisions from All Fifty States

• Publication year: 2010

Rush Prudential HMO v. Moran: Federal Intervention Looms as Supreme Court Rules that ERISA Does Not Preempt State Laws Requiring Independent Review of Medical Necessity Decisions and Lays Groundwork for Different Independent Review Provisions from All Fifty States

Lindsey Gastright Churchill

Introduction

Debra Moran is covered by a health insurance plan funded by her husband's employer.[1] The plan is governed by the Employee Retirement Income Security Act of 1974 (ERISA)[2] and is managed by Rush Prudential, a Health Maintenance Organization (HMO) provider.[3] Moran's plan does not cover services that are not "medically necessary."[4]

Rush Prudential (Rush) denied Moran coverage for surgery recommended by her primary care physician on grounds that the particular surgery was not "medically necessary."[5] At her own expense, Moran had the surgery recommended by her physician, and then sued in state court under Section 4-10 of the Illinois Health Maintenance Organization Act (HMO Act)[6], which requires HMOs to provide an independent physician review of the patient's claim for treatment when the patient's primary care physician and HMO disagree about whether a treatment is medically necessary.[7] If the independent reviewing physician determines that the patient's treatment is medically necessary, the HMO Act requires the HMO to provide the treatment.[8]

The district court held that ERISA preempted Moran's state law claim under the Illinois HMO Act, leaving as her only means of recourse the civil enforcement provisions contained in ERISA.[9] However, the Court of Appeals for the Seventh Circuit disagreed, holding that Moran's claim was not subject to ERISA preemption.[10] The United States Supreme Court affirmed the Seventh Circuit's holding that ERISA does not preempt the Illinois HMO Act.[11]

Currently, forty-two states and the District of Columbia have enacted similar laws to the Illinois' HMO Act which require HMOs to submit to an independent physician review when there is a disagreement between a patient's primary care physician and the HMO over whether a course of treatment is medically necessary.[12] The states enacted these laws in an attempt to protect patients from "perceived abuses of managed care plans."[13] HMOs and Managed Care Organizations (MCOs) argue that these state mandated independent external review provisions are preempted by ERISA.[14]

The Supreme Court's decision in Moran resolved a split between the courts of appeals for the Fifth Circuit and the Seventh Circuit.[15] Before the Seventh Circuit held that the Illinois HMO Act independent review provision was not preempted by ERISA in Moran, the United States Court of Appeals for the Fifth Circuit reached the opposite result in Corporate Health Insurance, Inc. v. Texas Department of Insurance.[16] In Corporate Health Insurance, Inc., the Fifth Circuit ruled that a Texas statute providing for independent review of whether patient services were medically necessary was preempted by ERISA because the statute created an impermissible alternative mechanism through which plan members could gain benefits.[17] In Moran, The Supreme Court sided with the Seventh Circuit and held that ERISA does not preempt the independent review provision of the Illinois HMO Act.[18]

Congress enacted ERISA to provide a uniform system of federal regulation for employee benefit plans in order to eliminate "the need for interstate employers to administer their plan differently in each State in which they have employees."[19] Congress's goal was to make the regulation of employee benefit plans "exclusively a federal concern."[20] However, when ERISA was enacted in 1974, most employees were covered by traditional fee-for-service plans that were generally managed in-house.[21] Today, MCOs perform the same risk-bearing functions traditionally provided by health insurers in an attempt to reduce the price and quantity of health care services provided.[22]

The conversion from fee-for-service plans to managed care plans introduced new types of arrangements, relationships, and risk allocation not contemplated in 1974 when ERISA was conceived.[23] As a result, states have taken steps to regulate managed care entities in an effort "to curb real and perceived abuses of managed care plans," including "denying patient's access to treatment, restricting unlimited access to providers, . . . and providing financial incentives for providers to limit care."[24] In response, providers have quickly moved to challenge these state laws on ERISA preemption grounds.[25]

For over twenty years, courts have struggled with ERISA's complex preemption scheme in trying to determine when a state law "relates to" an employee benefit plan.[26] Before the Moran decision, the Supreme Court's interpretation of ERISA preemption was "confusing;" the Court "[did] not have an established, controlling doctrine that guide[d] its interpretation of ERISA — a statute that governs the lives of millions of employees and their dependents."[27]

This Comment reviews the issues presented in the Moran case regarding ERISA preemption of state laws requiring independent review of HMO medical necessity decisions. Part I gives an overview of the ERISA preemption doctrine and examines the historical development of ERISA preemption from its early broad interpretation by the courts to recent decisions that appear to narrow its scope. Part II reviews the factual and procedural history of the Moran case. Part III expounds the preemption arguments made by Moran and Rush Prudential, and how the Supreme Court decided each issue presented by the parties. Part IV discusses the Court's development of a complete framework for continued ERISA preemption analysis and explores the possible impact of potential federal legislation on current ERISA preemption.

I. Historical Development of ERISA Preemption

More than 100 million Americans are covered by over 2.5 million group health plans.[28] Most of these individuals are covered under group health plans subject to ERISA.[29] ERISA regulates employee benefit, pension, and welfare plans, and extends to group health plans that provide coverage through the purchase of insurance.[30] ERISA governs a plan, fund, or program "established or maintained" by an employer or employee organization for the purpose of providing employees with benefits.[31] ERISA does not govern the sixty million individuals covered by self-insured employers.[32]

Thirty years ago, many employee pension plans were insufficiently funded and some employers found ways to avoid paying pensions to employees who had loyally completed their service.[33] Congress intended for ERISA "to protect employees from administrative and funding abuses while establishing fair vesting requirements for pensions."[34] Additionally, the language of ERISA's preemption clause suggests that Congress intended to retain broad federal authority over all employee benefit plans covered by ERISA.[35]

A. Overview of ERISA Preemption

Section 514(a) of ERISA provides that ERISA "shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan."[36] The purpose of the preemption clause is to avoid "multiple and conflicting state laws" that regulate ERISA plans.[37] However, ERISA contains a "savings" clause that functions as an exception to the preemption clause.[38] Section 514(b)(2)(A) provides that "nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities."[39]

There are three distinct forms of ERISA preemption: ordinary (complete) preemption, field preemption, and conflict preemption.[40] Complete preemption is based on ERISA section 502, and is actually a rule of federal jurisdiction that acts as an exception to the well-pleaded complaint rule.[41] Under section 502, federal jurisdiction is permitted when Congress has exercised such broad preemption of an area of law that any claim in that area falls under federal law and is removable to federal court.[42] Thus, claims brought in state court under state laws might be properly removed to federal court if it is clear that Congress intended the law to fall within ERISA's provisions.[43] Section 502 also provides civil enforcement remedies under ERISA, which goes to the heart of the preemption controversy. Under ERISA's exclusive scheme, a plan participant or beneficiary may bring a civil action "to recover benefits due to him under the terms of his 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" and for a breach of fiduciary duty.[44] A plan participant may also bring a civil action "to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan," for a violation of the information disclosure provision, "to obtain other appropriate equitable relief," or "to collect any civil penalty" authorized by the civil enforcement provision.[45] These six exclusive ERISA remedies do not provide for compensatory or punitive damages.[46]

Section 502(a) also encompasses field preemption, which is Congressional intent to "preempt comprehensively the ‘field' of judicial oversight of employee benefits plans."[47] Field preemption expels state claims and remedies that would take the place of ERISA's exclusive section 502 claims.[48]

Finally, conflict preemption is invoked under ERISA's section 514(a) preemption clause, which provides that ERISA "supersede[s] any and all state laws insofar as they . . . relate to an employee benefit plan."[49] Section 514(a) preemption is based on a conflict between federal ERISA regulations and competing state laws.[50] Normally, a direct conflict between state law and ERISA results in ERISA preemption of the state law.[51] However, the most difficult conflict preemption situations arise when a state law purports...