In a much anticipated decision having long-term ramifications for employer-sponsored group health plans, the U.S. Supreme Court unanimously held on June 21, 2004, that participants in group health plans subject to the Employee Retirement Income Security Act (ERISA) cannot sue their HMOs under state law for refusing to pay for a physician’s recommended treatment. In Aetna Health Inc. v. Davila (and its companion case, CIGNA Healthcare of Texas, Inc. v. Calad), the court ruled that ERISA completely preempts state laws that attempt to supplant, duplicate or supplement the civil enforcement remedies provided under ERISA. In essence, the Supreme Court ruled that the insurers’ decisions were benefit eligibility decisions, rather than medical treatment decisions, and must be litigated exclusively in federal court as ERISA cases.
Juan Davila and Ruby Calad individually sued the insurers that provided the HMOs under which each was covered, alleging that they experienced health problems resulting from the HMO’s decision to pay for treatment that differed from that recommended by their treating physicians. Juan Davila’s physician had prescribed Vioxx to treat his arthritis pain, but Aetna would approve payment for Vioxx only if cheaper medications caused a detrimental reaction or failed to improve his condition. Davila suffered a severe reaction to the alternate medication and was hospitalized for a heart attack and internal bleeding. Ruby Calad underwent surgery and, despite her physician’s recommendation, was denied coverage for an extended hospital stay. Calad suffered post-surgery complications and returned to the emergency room a few days later; she attributed those complications to her early release. In each case, the treating physician was not employed by the HMO. Davila and Calad brought civil actions in state court under the Texas Health Care Liability Act, a state law that gives participants the right to sue their health plans in state court for damages caused by a failure to exercise ordinary care when making health care treatment decisions.
Why State Court?
It is important to understand why participants want to sue their HMOs in state court when they suffer adverse medical consequences. The most prominent reasons include the following:
the availability of consequential and punitive damages
the application of a standard of review that is more lenient for plaintiffs than the “arbitrary and capricious” standard typically applied in ERISA cases when assessing the benefit eligibility decisions of ERISA plan fiduciaries
the availability of a jury trial
the ability to recover attorneys’ fees without court approval
In sharp contrast, an ERISA action provides participants with a limited remedy—participants generally may seek recovery only for the benefits provided under the plan. If Davila and Calad were forced to bring their lawsuits in federal court, they effectively would have had no way to challenge the HMOs for the alleged adverse medical consequences that occurred following the HMO payment decisions.
The History of the Case
The insurers asked the Texas state court to move the Davila and Calad cases to federal court, arguing removal was required because ERISA preempted the Texas law. When Davila and Calad sought to return their cases to state court, the district courts refused and dismissed the cases with prejudice when Davila and Calad failed to amend their complaints to include an ERISA claim. The two cases were combined on appeal. The U.S. Court of Appeals for the Fifth Circuit reversed the district court decisions, holding that the Texas law was not completely preempted by section 502(a) of ERISA. The Fifth Circuit essentially ruled that the HMO decisions were treatment decisions that could be challenged in state court, rather than benefit eligibility decisions that could be challenged only in federal court.
The Supreme Court Reverses
In the Davila case, the Supreme Court reversed the Fifth Circuit’s decision. The Supreme Court concluded that ERISA’s enforcement mechanism has such extraordinary preemptive power that it completely preempts any state law cause of action that comes within the scope of the ERISA remedies. In effect, a state law complaint is converted into a federal claim that can be removed to federal court even if an individual, in accordance with the “well-pleaded complaint” rule, has not pleaded a cause of action under federal law. To conclude otherwise, the Supreme Court noted, would undermine the system of limited liability established under ERISA to encourage companies to adopt health insurance plans for their employees.
The Supreme Court ruled that a state law remedy is preempted by section 502(a) of ERISA unless the state law imposes duties and responsibilities that arise independently of ERISA and the plan terms. But the court noted that the plaintiffs’ cause of action was not independent of ERISA because benefit plan interpretation was an essential part of the claims. In the court’s view, Davila and Calad could prevail under the Texas law only if they established that the HMOs improperly denied benefits based on specific interpretations of provisions in the employers’ ERISA plans.
The court’s decision also attempted to distinguish medical decisions regarding treatment from medical decisions regarding the scope of benefit eligibility under the plan. The court recognized that if a treating physician also has responsibility for making eligibility decisions that require the exercise of medical judgment, any negligence by the decision-maker might constitute medical malpractice and may not be preempted by ERISA. However, this reasoning would not apply to Davila and Calad because their HMOs had no treatment responsibilities and were acting only to decide whether benefits should be paid under the plan. The court stressed that the participants could have chosen to pay for the treatment recommended by their physicians and then could have appealed the denial of that coverage by the HMOs. Any litigation resulting from that denial clearly would have fallen exclusively under ERISA in federal court.
The Davila decision seeks to end the confusion resulting from a 2000 Supreme Court decision (Pegram v. Herdrich), in which the court implied that decisions by HMOs are “mixed” eligibility and treatment decisions and can be litigated in state courts. That decision created uncertainty for employer-sponsored group health plans (particularly those providing an HMO coverage option) due to the fear that benefit eligibility decisions would be challenged in state court as treatment decisions. In the Davila decision, the Supreme Court announced that the Pegram decision “cannot be read so broadly.” Where the treating physician is not employed by the HMO and is not making both the treatment decision and the benefit eligibility decision at the same time, the HMO’s benefit eligibility decision falls under ERISA and must be treated as a benefit determination that can be litigated only in federal court.
Implications for Employers
The Supreme Court’s decision in the Davila case provides a degree of comfort for employers and insurers, particularly those in states with “right to sue” laws similar to the Texas Health Care Liability Act. A decision in favor of Davila and Calad would have increased liability risks, driven up the cost of health insurance and made companies less willing to sponsor ERISA health plans for employees and their families. As it stands, however, the Davila decision will effectively negate state right to sue laws and limit malpractice-type lawsuits against insurers and employers.
Some members of the Supreme Court recognized that the Davila decision leaves plan participants without an effective remedy for the medical consequences of a health plan’s coverage decisions. In a concurring opinion, Justice Ruth Bader Ginsburg (joined by Justice Stephen Breyer) encouraged the U.S. Congress to fill the “regulatory vacuum” with some form of “make-whole” relief under ERISA. This will undoubtedly prompt certain lawmakers to resurrect federal patients’ bill of rights legislation, with an eye toward expanding the list of available ERISA remedies.
If ERISA is amended to increase the risk of employer liability, many employers may conclude that they can no longer manage the financial risk of offering an ERISA health plan to employees. Other employers will work with their advisors to carefully evaluate the increased risk and will consider contractual and reinsurance options to manage the increased risk. The best defense, of course, is for employers to remain especially vigilant with respect to attempts to expand ERISA liability.