Guest Article

(From the November 10, 2003 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Supreme Court Agrees to Hear ERISA Complete Preemption Case Involving State Law Negligence Claims Against HMOs

The Supreme Court on November 3 announced it would review two cases from the Fifth Circuit Court of Appeals that could prove to be major milestones in the ERISA preemption debate. At issue in Aetna Health Inc. v. Davila, 2003 U.S. LEXIS 5423 (November 3, 2003), and Cigna Healthcare of Texas, Inc. v. Calad, 2003 U.S. LEXIS 8003 (November 3, 2003) is whether the plaintiffs, who are participants in ERISA health plans, can pursue state law negligence claims against their HMOs in state court, or whether these are ERISA claims that must be litigated in the federal courts.

Recent media reports have indicated the Supreme Court may use this opportunity to resolve questions about whether ERISA preempts state law medical malpractice claims against HMOs providing benefits through ERISA plans. That issue is lurking in the background of these cases, but it may not be ripe for the Supreme Court to address at this time. The only question the Supreme Court has to answer, at least for now, is whether these claims-- which arise out of mixed treatment and eligibility decisions by HMOs-- are state law claims that belong in state court, or ERISA claims that belong in federal court. But if the Supreme Court allows these cases to proceed as state law claims, the stage could be set for the Court to revisit the conflict preemption question in the near future.

Case Background

The facts in Davila and Calad are similar. The plaintiffs in both cases participate in ERISA health benefit plans that provide benefits through HMOs. In Davila, the HMO refused to pay for a physician-recommended pain medication until the participant tried two cheaper alternatives. In Calad, the HMO forced the plaintiff to be discharged from the hospital just one day after surgery in spite of the doctor's recommendation that she stay longer. The plaintiffs in each case suffered harm they claim is attributable to the HMOs' medical decisions.

In each case, the plaintiffs sued the HMOs under the Texas Health Care Liability Act (THCLA). Among other things, the THCLA imposes on HMOs and other managed care entities a duty to exercise ordinary care when making "health care treatment decisions," and makes them liable for any harm that comes to an individual as a result of their failure to live up to that standard. The fundamental question in both cases is whether they should be allowed to proceed in state court or removed to federal court and recast as ERISA claims for benefits. If the cases are allowed to remain in state court, the question then becomes whether ERISA preempts the THCLA claims.

Two Types of ERISA Preemption

There are two types of ERISA preemption: complete preemption under ERISA section 502(a), and conflict preemption under ERISA section 514. The concept of complete preemption comes into play when a state creates a cause of action that duplicates or "falls within the scope" of a cause of action already available to employee benefit plan participants and beneficiaries under ERISA's civil enforcement scheme. If an ERISA plan participant or beneficiary attempts to bring one of these duplicative state law claims, the defendant plan (or plan administrator) can use complete preemption to force the case into federal court where it will be treated as an ERISA claim.

Conflict preemption is the more traditional form of ERISA preemption. According to ERISA section 514(a), ERISA supersedes "any and all State laws insofar as they ... relate to any" ERISA plan. Thus, even state laws that are not subject to complete preemption may not be applicable to ERISA plans because of ERISA section 514(a) conflict preemption.

What is the Issue Before the Supreme Court?

At this point the only issue specifically before the Supreme Court in both Davila and Calad is whether the ERISA complete preemption doctrine applies to the plaintiffs' THCLA claims. The Fifth Circuit Court of appeals ruled the complete preemption doctrine does not apply in either case because ERISA section 502(a) does not provide a cause of action for negligence. But the Fifth Circuit has not yet addressed whether ERISA section 514(a) preempts the THCLA claims, which makes it unlikely the Supreme Court will address that issue at this time. (The Fifth Circuit did address the section 514(a) conflict preemption issue in another case it decided at the same time as Davila and Calad. In Roark v. Humana Inc., the Fifth Circuit ruled ERISA section 514(a) preempted an ERISA plan participant's THCLA claim against an HMO. The court was clearly unhappy with this result, but indicated it was compelled by precedent. The Supreme Court has refused a request to review the Roark decision.)

Nonetheless, the Supreme Court's decision in this case will be significant. If the Supreme Court decides the THCLA claims are completely preempted, the claims will remain in the federal courts and be recast as ERISA benefit claims. In general, ERISA permits recovery for benefits improperly denied, but not for the types of personal injury awards the plaintiffs in these cases are seeking.

On the other hand, if the Supreme Court decides the THCLA claims are not completely preempted, it will remand the cases to the Texas state courts where one of the first issues will be whether the state law claims are preempted by ERISA section 514(a). Not surprisingly, state courts tend to be reluctant to rule in favor of federal preemption of state law.

Thus, if the Supreme Court decides Mr. Davila and Ms. Calad can pursue their THCLA claims in Texas state court they probably have a better chance of prevailing on the section 514(a) conflict preemption challenge. If they do, the Supreme Court almost certainly will have a chance to settle the issue it raised three years ago in Pegram v. Herdrich, 530 U.S. 211 (2000). In that case, the Supreme Court suggested-- but did not decide-- that ERISA conflict preemption may not apply to state law medical malpractice claims in these circumstances.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have questions or need additional information about this article, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094). Copyright 2003, Deloitte.