Guest Article

TPAs Can Make Mixed Eligibility/Treatment Decisions That Subject Them to State-Law Challenges, Court Finds

The ability to make mixed eligibility and treatment decisions under a group health plan is not just limited to managed care entities such as HMOs, a federal district court noted. Rather, TPAs also can fall under this umbrella when they use health care providers to make medical necessity determinations -- even though the TPAs themselves do not provide medical treatment. Therefore, the court ruled that state-law claims against a TPA involving such decisions would not raise exclusive ERISA issues that are solely under federal court jurisdiction. The case is Isaac v. Seabury & Smith, Inc., 2002 WL 1461710 (S.D. Ind., July 5, 2002).

In this case of first impression within the 7th U.S. Circuit Court of Appeals, the federal district court analyzed Pegram v. Herdrich, where the U.S. Supreme Court held that mixed eligibility and treatment decisions by HMOs do not raise ERISA issues. Based on its analysis, the Isaac court concluded that, "we fail to see how, under the Pegram regime, the nature of the enterprise -- HMO or TPA -- is a pertinent factor in determining whether" a claim would be completely under the purview of ERISA.

Facts of the Case

Judy Amburgey, an employee of Spartech Corp., was covered by the company's group health plan, which was insured by First Allmerica Life Insurance Co. Seabury & Smith was the TPA. The plan was indemnity-based -- it was not an HMO.

After Amburgey was initially treated for leukemia, her oncologist wrote an Aug. 10, 1999, letter to Seabury marked "Urgent Review Requested." The letter indicated that it was unlikely chemotherapy or radiation would cure her condition. Therefore, the oncologist requested authorization of the "only documented therapy capable of curing this disease" -- "bone marrow transplantation from a histocompatible donor." He sought this authorization quickly because of Amburgey's "unstable medical condition."

Seabury denied coverage Aug. 25, 1999, stating that the procedure was not "medically necessary" under the plan terms, based upon a review of the supporting documentation by "a board-certified oncologist." However, this decision was modified nearly one month later, when a doctor working on Seabury behalf gave "conditional approval" for the transplant. But Amburgey died in October before having the transplant.

Ronald Isaac, Amburgey's personal representative, sued Seabury and First Allmerica for state-law claims of breaching its duty to exercise fairness, reasonableness and good faith in handling her insurance claim, and medical negligence. Seabury removed the case to federal court based on ERISA preemption issues. Isaac challenged that removal, but Seabury maintained that his lawsuit was really an ERISA breach-of-fiduciary-duty claim masquerading as a state-law claim.

The court noted that this "case of first impression in our circuit" ultimately turns on the proper interpretation of Pegram v. Herdrich, 530 U.S. 211 (2000), which made a distinction between three types of decisions, including mixed treatment and eligibility decisions, in resolving an ERISA breach-of-fiduciary duty dispute.

PegramRecap

Pegram involved whether an HMO breached its fiduciary duty to plan enrollees by offering HMO providers a financial incentive to deny benefits. The U.S. Supreme Court held that offering such an incentive was not an ERISA fiduciary duty decision; therefore, no ERISA claim existed. The Pegram decision focused on three kinds of decisions that HMOs make:

The Isaac court described these decisions as ones in which a physician or other decisionmaker determines whether a procedure is medically necessary and therefore, whether the patient is "eligible" for the "treatment." As the Pegram decision noted:

In practical terms, these eligibility decisions cannot be untangled from physicians' judgments about reasonable medical treatment . . . The eligibility decision and the treatment decision were inextricably mixed, as they are in countless medical administrative decisions every day. [Emphasis added by the Isaac court]

Significantly for the Isaac court, the Supreme Court characterized many mixed decisions as "medical necessity determinations," and "utilization review" (UR). Based upon this reasoning, the Isaac court determined that its case involved a mixed eligibility and treatment decision because:

Based upon Pegram, such mixed decisions are not fiduciary decisions under ERISA, therefore, "in the narrow sense, this means that a lawsuit alleging breach of fiduciary duty which involves a mixed decision" should be dismissed, according to the court.

TPAs Not Exempt From Pegram

Seabury made several arguments in support of ERISA preemption, the key one being that it and First Allmerica are not HMOs; in particular, Seabury is a TPA and has no role in patient "treatment." The court noted that this argument makes the case unique in its circuit, and this reasoning has found support in rulings from the 5th Circuit and several district courts.

However, the Isaac court disagreed with those rulings for the following reasons:

Accordingly, the court concluded that the claims did not raise exclusive ERISA issues, and remanded them to state court. In doing so, the court noted that it was not ruling on whether the claims are actually preempted by ERISA -- because the claims "conflict" with certain ERISA provisions, for example -- or are "saved" from preemption. Those determinations will be resolved in later state court proceedings.

Implications

In holding that TPAs also can fall under the scope of making mixed eligibility and treatment decisions, the Isaac court further erodes the protections of ERISA preemption. Here, the court's key point was that although Pegram involved HMOs in their dual roles of insurers and health care providers, that ruling is not limited to managed care entities such as HMOs. Rather, even TPAs that use medical providers to make medical necessity determinations are making mixed eligibility and treatment decisions, in the view of the Isaac court. This is even the case although, unlike HMOs, TPAs do not provide medical treatment. Regarding UR organizations, their decisionmaking process regarding benefits by its nature would appear to involve mixed eligibility and treatment decisions, and therefore would be subject to state-law challenges.

This ruling potentially exposes TPAs and UR organizations -- particularly those under this court's jurisdiction -- to state-law challenges regarding benefit denials. Therefore, these entities should consult with legal counsel on the best approaches to minimize their liability for state-law claims. While this decision undermines the ERISA principle of uniform benefits laws, it is a standard established earlier in Pegram, which the Isaac court applied to its particular facts.

Excerpted from the September 2002 supplement to Employer's Guide to Self-Insuring Health Benefits, © Thompson Publishing Group, Inc., 2002. All rights reserved.

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