Amicus Curiae Brief — American Mfrs. Mut. Ins. Co. v. Sullivan

IN THE

SUPREME COURT OF THE

OCTOBER TERM, 1998

AMERICAN MANUFACTURERS MUTUAL

INSURANCE COMPANY, ef al,

Petitioners,

Vv.

DELORES SCOTT SULLIVAN, et ai.,

Respondents.

On Writ of Certiorari to the United States Court of Appeals

for the Third Circuit

BRIEF AMICI CURIAE OF THE AMERICAN

ASSOCIATION OF RETIRED PERSONS, THE CENTER

FOR MEDICARE ADVOCACY, INC., THE NATIONAL

CENTER FOR YOUTH LAW, THE NATIONAL HEALTH

LAW PROGRAM, THE NATIONAL SENIOR CITIZENS

LAW CENTER, AND THE NATIONAL PARTNERSHIP

FOR WOMEN & FAMILIES

IN SUPPORT OF RESPONDENTS

SALLY HART GILL DEFORD

CENTER FOR MEDICARE (COUNSEL OF RECORD)

ADVOCACY, INC. SARAH LENZ LOCK

1730 EAST RIVER ROAD AARP FOUNDATION LITIGATION

SUITE 107 MICHAEL SCHUSTER

TUCSON, AZ 85718 AMERICAN ASSOCIATION OF

(520) 577-1611 RETIRED PERSONS

601 E STREET, NW

COUMSEL FOR AMICUS CURIAE WASHINGTON, D.C. 20049

CENTER FOR MEDICARE (202) 434-2060

ADVOCACY, INC.

COUNSEL FOR AMICUS CURIAE

AMERICAN ASSOCIATION OF

RETIRED PERSONS

[Additional Counsel Are Listed on Inside Cover]

-_——_——

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JEANNE FINBERG

NATIONAL CENTER FOR YOUTH LAW

114 SANSOME STREET, SUITE 900

SAN FRANCISCO,CA 91401

(415) 543-3307

FOR AMICUS CURIAE

NATIONAL CENTER FOR YOUTH LAW

JANE PERKINS PROGRAM

NATIONAL HEALTH phew

211 NORTH COLUMBIA

(919) 968-6308

COUNSEL FOR AMICUS CURIAE

NATIONAL HEALTH LAW PROGRAM

VICKI GOTTLICH ns SOS CENTER

NATIONAL SENIOR SI snag

1101 14TH STREET, N.W., ea

WASHINGTON, D.C. 20005

COUNSEL FOR AMICUS CURIAE ,

NATIONAL SENIOR CITIZENS LAW

JUDITH L. LICHTMAN AMILIES

NATIONAL PARTNERSHIP FOR WOMEN & F

1875 CONNECTICUT AVENUE, N.W., SUITE 710

W ASHINGTON, D.C. 20009

(202) 986-2600

COUNSEL FOR AMICUS CURIAE AMILIES

NATIONAL PARTNERSHIP FOR WOMEN & F.

“BEST AVAILABLE COPY!

TABLE OF CONTENTS

CED se vecwsbecsccccivcssesen ii

INTEREST OF AMICI CURIAE ...........22cecceees l

SUMMARY OF ARGUMENT ....................-. 8

SD : 60.6 aumianuds epinet epsaneest coneant 9

THE COURT BELOW CORRECTLY APPLIED

THE PRINCIPLES WHICH HAVE BEEN

ESTABLISHED BY THIS COURT AND

FORMULATED INTO A CLEARLY STATED

PETES Sh eGbeoneccebowoceseccecece 9

A. This Court should apply the state action

test which it has developed over time and

which it has now definitively delineated ... 9

B. The Third Circuit’s analysis and conclusion

rely on the principles and their application

which the Edmonson Court gleaned from

this Court’s prior decisions ............ 16

EE ctin cca ctetedwovdsesetasvecvcests 23

TABLE OF AUTHORITIES

CASES

Atkins v. Rivera, 477 U.S. 154 (1986) .......-- eee eee 5

Blum v. Yaretsky, 457 U.S. 991 (1982) ........--6-045. 12,23

Bodimetric Health Services, Inc. v. Aetna Life &

Casualty, 903 F.2d 480 (7th Cir. 1990) .........-.-00- 5

Burton v. Wilmington Parking Authority,

SIDS, FES od odcvccbcccdoctoccceesens 13,20

Catanzano v. Dowling, 60 F.3d 113 (2d Cir. 1995) .......... 5

Edmonson v. Leesville Concrete Co., Inc.,

SOO UD. GIA (IGP) .nccccccccccccccscccccces passim

Flagg Bros., Inc. v. Brooks, 436 U.S. 149 (1978) ........... 12

Geissal v. Moore Medical Corp.,

SEG TED. we dabacecccsncncicoccsvonsaan 4

Georgia v. McCollum, 505 U.S. 42 (1992) ...........- 8,16,20

Grijalva v. Shalala, 152 F.3d 1115

EEE ctecacepldedocceccecsaccsuny 4,5,8,15,17

Healey v. Shalala, No. 398CV00418DJS

(D.Conn. filed March 4, 1998) ..........005 cee eeeues 4

Herdrich v. Pegram, 154 F.3d 362 (7th Cir. 1998) ........... 6

Jackson v. Metropolitan Edison Co.,

SIDE POD. abddbse deciccvcccdccccvcedes 9,23

Lebron v. National R.R. Passenger Corp.,

SOD BE SOE “obebcecccccdcccocestbisuaun 9,10

Lugar v. Edmondson Oil Co.,

457 U.S. 922 (1982) ............ 8,11,12,13,14,15,16,17

Mark v. Borough of Hatboro, 51 F.3d 1137

DOG TED bdcecedov st atehtedocccsocatendes 15,21

Mathews v. Eldridge, 424 U.S. 319 (1976) .........--+045: 21

Moose Lodge No. 107 v. Irvis, 407 U.S. 163 (1972) ......... 12

Perry v. Chen, 985 F. Supp. 1197 (D. Ariz. 1996) ........... 5

Rendell-Baker v. Kohn, 457 U.S. 830 (1982) ..........-+.. 12

Sullivan v. Barnett, 139 F.3d 158 (3d Cir. 1998)

cert. granted sub nom. American Manufacturers

Mutual Ins. Co. v. Sullivan, 119 S. Ct. 128

CURED ds docontedacnesevedebeteccon’ 2,9,16,17,20,22

ill

Tulsa Professional Collection Services, Inc. v. Pope,

SR EEE ee eee 17,20

United Auto Workers v. Gaston Festivals, Inc.,

ee eee ae 20

West v. Atkins, 487 U.S. 42 (1988)... 2.2... cece cece 22

CONSTITUTION, STATUTES, REGULATIONS

AND RULES

eee SIL obo cae totce cocaine dc nceuasdene l

Balanced Budget Act of 1997,

Pub. L. No. 105-33, § 4001, 111 Stat. 251, 275

GENE. eudsescabeUewapsteduees duaccsccceccceses 7

Pub. L. No. 105-33, § 4701(a), 111 Stat. 251, 489

EE stbabssauseeetendbescedcscasctvccccsssece 7

Pennsylvania Workers Compensation Act,

We IRIE Tob cc ccccécadcccacoses 16,18

Oe IIE, Sec cdodecccccccaccceaubec 16

Eo noc no oc dncuee chnadnans 18

Fe ec ceateekne 18

77 Pa. Stat. Ann. § 531(6Mfiv) ..................00.. 19

63 Fed. Reg. 34968 (June 26, 1998) .............. peepee 7

DOT EE LuGetscasdeocsccececécees 16,18,19

I os ono ck dncadacecdeousne 19

PUT EEG Va. daSotcb curcessdbccéccnens 19

rr cr tet leet ge eee 18,19

pT dics eckldcteepackshacensbaauk’ 18

CEL 25. doteae ab cccett caceeeune 18

RR ES RRC a AM 19

I a 19

I a a 19

re Se oon oan ndenaded i ebcenetnads 19

as cd oe ceutdeucdsases 18

SPIES SCocbcdu dare deccbcanaceccdeccr 8

iV

MISCELLANEOUS

G. S. Buchanan, A Conceptual History of the State Action

Doctrine: The Search for Governmental Responsibility

(), 34 Hous. L. REV. 333, 345-351 (1997) ..........-- 13

G. S. Buchanan, A Conceptual History of the State Action

(ID, 34 Hous. L. REV. 665, 756-764 (1997) ........... 15

E. Chemerinsky, Rethinking State Action,

80 Nw. U. L. REV. 503 (1985) .... 22... ee ce eee eee 10

Health Care Financing Administration, Medicare Managed

Care Contract Report (Data as of * ov. 1,1998)

<http://www.hcfa.gov/stats/mmec! 198.txt>. ..........-. 7

Health Care Financing Administration, National Summary

of Medicaid Managed Care Programs and Enrollment

(Data as of June 30, 1997) <http://www.hcfa.gov/

medicaid/trends97 .htm>. ....... 66-60 se eee cece eeeees 6

R. J. Krotoszynski, Jr., Back to the Briarpatch: An

Argument in Favor of Constitutional Meta-analysis

in State Action Determinations, 94 MICH L. REV.

FOR, BEB CIGDS) 2c cccccsdicsccccccccccesce cs 10,13,15

Medicare Payment Advisory Commission, Health Care

Spending and the Medicare Program: A Data

Book, at 30 (July 1998)... 2... cece eee teen ene 6

B. R. Snyder, Private Motivation, State Action and the

Allocation of Responsibility for Fourteenth Amendment

Violations, 75 CORNELL L. REV. 1053 (1990) .......... 10

H. C. Strickland, The State Action Doctrine and

the Rehnquist Court, 18 HASTINGS. CONST. L.Q.

587, 588 (1991) (citation omitted) ...........-+-00s 10

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1998

No. 97-2000

AMERICAN MANUFACTURERS MUTUAL

INSURANCE COMPANY, ef al,

Petitioners,

v.

DELORES SCOTT SULLIVAN, et ai.,

Respondents.

On Writ of Certiorari to the United States Court of Appeals

for the Third Circuit

BRIEF AMICI CURIAE OF THE AMERICAN

ASSOCIATION OF RETIRED PERSONS, THE CENTER

FOR MEDICARE ADVOCACY, INC., THE NATIONAL

CENTER FOR YOUTH LAW, THE NATIONAL HEALTH

LAW PROGRAM, THE NATIONAL SENIOR CITIZENS

LAW CENTER, AND THE NATIONAL PARTNERSHIP

FOR WOMEN & FAMILIES

IN SUPPORT OF RESPONDENTS

INTEREST OF AMICI CURIAE”

Six national organizations join in this brief, which focuses

solely on the first question before the Court, whether the

petitioning insurance companies are state actors and therefore

required to provide basic procedural protections guaranteed by

the due process clause of the Fourteenth Amendment. As the

” No counsel for any party authored any portion of this brief. No persons

other than the amici curiae, their members, or their counsel made a

monetary contribution to the preparation and submission of this brief.

2

following descriptions of those organizations demonstrate,

they, their members, and their constituencies have a significant

interest in the outcome of this case and in upholding the Third

Circuit’s determination that the insurance companies’ activities

amounted to state action pursuant to prior decisions of this

Court. See Sullivan v. Barnett, 139 F.3d 158 (3d Cir.), cert

granted sub nom. American Manufacturers Mutual Ins. Co. v.

Sullivan, 119 S. Ct. 128 (1998).

The American Association of Retired Persons (AARP), a

nonprofit membership organization of more than 32 million

Americans age 50 or older, is dedicated to addressing the needs

and interests of older people. Through education, advocacy,

and service, and by promoting independence, dignity, and

purpose, AARP seeks to enhance the quality of life for all

citizens. In the effort to promote independence, AARP works

to foster the health and economic security of individuals as they

age by attempting to ensure the availability of quality and

economical health coverage.

The Center for Medicare Advocacy, Inc., which is staffed

by attorneys, paralegals, a nurse, and technical assistants,

provides legal advice, self-help materials, and representation to

the elderly and disabled who are unfairly denied Medicare

coverage. The Center’s work includes responding to over

8,000 telephone calls annually, producing educational

materials, pursuing Medicare coverage for beneficiaries who

are eligible for both Medicare and Medicaid, and engaging in

litigation of national importance. Furthermore, the Center

annually represents hundreds of individuals in appeals of

Medicare denials, particularly for home health care, and its staff

members act as consultants and trainers for groups which are

interested in learning about Medicare coverage and appeals or

in developing Medicare advocacy projec’s.

3

The National Center for Youth Law (NCYL) is a nonprofit

corporation which represents the interests of poor children and

adolescents in civil litigation. It also assists attorneys

nationwide ide in representing their indigent clients, and is the

primary national resource on children’s issues to more than

6,000 legal services attorneys and paralegals who request

advice, written materials, trainings, mentoring, and

co-counseling. NCYL’s clients are regular beneficiaries of

government-sponsored health care programs, such as Medicaid,

and NCYL frequently acts to enforce the rights of children and

adolescents in these programs under state or federal law.

The National Health Law Program (NHeLP) is a national

public interest law firm that seeks to improve health care for

America's working and unemployed poor, minorities, children,

elderly, and people with disabilities. NHeLP serves legal

services programs, protection and advocacy offices,

community-based organizations, the private bar, providers, and

individuals who work to maintain a health care safety net for

millions of low income people. NHeLP monitors Medicaid,

Medicare, and other publicly-funded health care programs,

seeks remedies when laws and policies are ignored, and helps

Americans to receive needed medical care.

The National Senior Citizens Law Center (NSCLC) is a

nonprofit organization that advocates on behalf of elderly poor

people. Since its formation in 1972, NSCLC has engaged in

litigation, legislative and administrative advocacy, technical

assistance, and training in many areas of elder law, including

Medicare and Medicaid. NSCLC has brought numerous law

suits on behalf of Medicare beneficiaries and Medicaid

recipients to protect their rights under those federal statutes and

their implementing regulations, and under the Constitution.

4

The National Partnership for Women & Families (National

Partnership) is a national advocacy organization that develops

and promotes policies to help women achieve equal opportunity

and obtain quality health care and economic security for

themselves and their families. Founded in 1971 as the

Women's Legal Defense Fund, the National Partnership works

to improve access to quality health care through research and

analysis, public education, advocacy, and litigation of

significant cases. The National Partnership is a leading voice

in the effort to ensure that women and families receive quality

health care through their health insurance plans, including

managed health care plans.

Each of the amici organizations thus advocates on behalf

of individuals throughout the country, seeking especially to

ensure access to health care and to protect and enhance their

rights to obtain quality health care. For instance, AARP filed

a brief amicus curiae last Term in support of the ultimately

victorious petitioners in Geissal v. Moore Medical Corp., 118

S. Ct. 1869 (1998). Similarly, attorneys for the Center for

Medicare Advocacy represent a nationwide class of plaintiffs

in a successful due process challenge which raises the issue of

state action in a Medicare context, with AARP filing a

supporting amicus brief in the Court of Appeals. See Grijalva

v. Shalala, 152 F.3d 1115 (9th Cir. 1998). And, the Center for

Medicare Advocacy, NSCLC, and AARP are co-counsel for a

nationwide class of Medicare beneficiaries seeking to enforce

procedural protections for recipients of home health care.

Healey v. Shalala, No. 398CV00418DJS (D.Conn. filed March

4, 1998).

The instant case is of particular concern to the amici

organizations because of its potentially broad and significant

impact on their members and constituencies. The state action

issue is obviously of great importance in the context of

>

workers’ compensation programs, and the decision’s effect on

that aspect alone of the nation’s health care system would

warrant attention. More broadly, however, this Court’s

resolution may affect the rights to and surrounding health care

in numerous other situations, as petitioners themselves

recognize, see Reply Brief for Petitioners on Petition for Writ

of Certiorari, at 5 & n.2, and as the courts have begun to

address.” As the relationships between state and federal

governments on the one hand, and private companies involved

in the health care industry on the other, are encouraged and

grow, the administration of the nation’s health care system is

increasingly becoming a joint venture, with dramatic

ramifications for the rights of those dependent on that system.

Historically, the two most important public health care

programs, Medicare and Medicaid, have involved private

entities to some degree. Medicaid, a welfare program

2dministered by each state subject to federal statutory and

regulatory requirements, see, e.g., Atkins v. Rivera, 477 U.S.

154, 156-157 (1986), pays private individuals and institutions

to provide the actual health care. Medicare, a federal insurance

program, not only relies on private providers but also utilizes

insurance companies to administer the program and distribute

payments. See, e.g., Bodimetric Health Services, Inc. v. Aetna

Life & Casualty, 903 F.2d 480, 482 n.3 (7th Cir. 1990). As

managed care models become increasingly more prevalent in

” For instance, state action holdings have played crucial roles in enforcing

procedural rights of beneficiaries of state Medicaid programs. See, e.g.,

Catanzano v. Dowling, 60 F.34 113, 117-120 (2d Cir. 1995); Perry v. Chen,

985 F. Supp. 1197, 1201-12C. (D. Ariz. 1996). Similarly, the right to

effective notices and timely hearings for Medicare beneficiaries enrolled in

ae ee Grijalva, 152 F.3d

at .

6

these public programs, however, the extent and context of the

private sector participation is dramatically ch.oging.

The line between providers and insurance companies is

becoming less distinct, and decisions regarding the

appropriateness of particular health care are being made before,

not after, that care is provided. Under the traditional fee-for-

service system, doctors provided the care and the question of

reimbursement came later; under managed care, where payment

is typically on a “capitated” basis (with the plan receiving a set

monthly amount per enrollee regardless of usage), there are

strong economic incentives for a private plan to question a

suggested course of treatment. See, e.g., Herdrich v. Pegram,

154 F.3d 362, 375 (7th Cir. 1998). This evolving new role for

the private entities involved in publicly funded and authorized

health programs renders their decision-making processes more

important than ever.

This increasing “privatization” of benefit programs is

moving forward rapidly. As of June 1997, more than 15

million Medicaid beneficiaries -- almost 48% of the Medicaid

population -- were enrolled in managed care plans, a dramatic

increase from the 2.7 million who had been enrolled just six

years earlier. Health Care Financing Administration, National

Summary of Medicaid Managed Care Programs and

Enrollment at 1 (Data as of June 30, 1997)

<http://www.hcfa.gov/medicaid/trends97.htm>. And, since

1988, the annual increase in Medicare beneficiaries enrolled in

risk-based HMOs has been as high as 36%, and in 1998 is still

over 20%, “far surpassing the annual growth in the beneficiary

population,” which has stayed well below 5%. Medicare

Payment Advisory Commission, Health Care Spending and the

Medicare Program: A Data Book, at 30 (July 1998).

Nationwide, more than 50,000 Medicare beneficiaries enroll in

these plans every month, id., with over six million presently

7

enrolled. Health Care Financing Administration, Medicare

Managed Care Contract Report at | (Data as of Nov.1,1998)

<http://www.hcfa.gov/stats/mmcec 1 198.txt>.

Of no less importance than this past growth is that January

1, 1999 marks the beginning date of the Medicare+Choice

program, Balanced Budget Act of 1997, Pub. L. No. 105-33,

§ 4001, 111 Stat. 251, 275 (1997), which is intended to change

the very nature of the Medicare program: “Alternatives

available to beneficiaries under the M+C program include both

the traditional managed care plans (such as HMOs) that have

participated in Medicare on a capitated payment basis ... as well

as a broader range of plans comparable to those now available

through private insurance ....” 63 Fed. Reg. 34968 (June 26,

1998). In short, spurred by Congressional action, the Medicare

program is aggressively encouraging increased beneficiary

participation in private managed care structures.” This will

increasingly place private entities into relationships with

beneficiaries that previously had been the province of

government agencies or their agents, which, of course, are

subject to constitutional restraints.

The evolution in the administration of government benefit

programs thus renders the state action determination important

to a rapidly expanding number of individuals. Whether in the

context of workers’ compensation, Medicaid, Medicare, or any

of a host of other programs devised and administered by state

and federal governments to secure economic and health security

for vulnerable populations, the active participation of private

” It is also anticipated that there will be significant growth in managed care

enroliment of Medicaid beneficiaries, as states are now permitted to require

their participation in managed care plans without obtaining a waiver from

the federal government. Balanced Budget Act of 1997, Pub. L. No. 105-33,

§ 4701(a), 111 Stat. 251, 489 (1997).

8

entities has become a critical component, but that development

should not occasion a deprivation of individual rights. Judge

Wiggins observed for the Ninth Circuit that “the government

cannot avoid the due process requirements of the Constitution

merely by delegating its duty to determine Medicare coverage

to private entities,” Grijalva, 152 F.3d at 1121, and, on behalf

of their members and constituencies, the amici organizations

are anxious to see that position upheld in the overall context of

the state action inquiry.’

SUMMARY OF ARGUMENT

Although the theory of state action is a difficult concept

and its evolution has engendered considerable debate, this

Court has developed and consistently employed a two-step

process. Lugar v. Edmondson Oil Co., 457 U.S. 922, 937

(1982). As Justice White explained for the Court in that

decision, the first step requires a determination of whether the

state has authorized the conduct at issue, and the second looks

to the additional factors which would convert private action

into state action. The three principles necessary to make this

second determination, by evaluating the totality of the

circumstances, were explicitly outlined in Edmonson v.

Leesville Concrete Co., Inc., 500 U.S. 614 (1991) and reiterated

in Georgia v. McColliim, 505 U.S. 42 (1992). These decisions

have not been overruled, and the court below relied on and

applied their principles in making its decision.

Since suspension of medical coverage was here authorized

by the statute, there is no doubt that the first Lugar step is met.

In considering the first of Edmonson’s three principles relevant

* The blanket written consents of the parties to the filing of amicus curiae

briefs has been filed with the Clerk of the Court pursuant to Supreme Court

Rule 37.3.

9

to the second step, the Third Circuit correctly noted the

insurance companies’ significant reliance on governmental

assistance in effecting the suspensions. The state is involved in

every facet of the dispute resolution process, and it could not be

accomplished without the state’s consistent involvement. The

court below also noted that suspension of benefits pending

dispute resolution is a traditional governmental function in

benefit programs. Third, the state aggravates the harm by

locking injured workers into a system which was intended to

provide a balance between the needs and rights of all parties

but which instead gives the insurers a significant advantage by

allowing unilateral suspension of health coverage with the

support and approval of the state. Especially when viewed

together, these factors conclusively demonstrate that the

insurance companies are state actors.

ARGUMENT

THE COURT BELOW CORRECTLY APPLIED THE

PRINCIPLES WHICH HAVE BEEN ESTABLISHED BY

THIS COURT AND FORMULATED INTO A CLEARLY

STATED FRAMEWORK.

A. This Court should apply the state action test which it

has developed over time and which it has now

definitively delineated.

1. It has become a truism that the state action inquiry is a

difficult one, which “frequently admits of no easy answer.”

Jackson v. Metropolitan Edison Co., 419 U.S. 345, 350 (1974).

The court below termed it “one of the most troublesome issues

of constitutional law,” Sullivan, 139 F.3d at 167, and this Court

recently acknowledged again the “difficult terrain”. Lebron v.

National R.R. Passenger Corp., 513 U.S. 374, 378 (1995).

10

Not surprisingly, the commentators have been anxious to

propose their solutions to the apparent dilemma,” appearing

almost gleeful in their criticism. One 1991 analysis stated that

“nearly every article about the state action doctrine published

in the last twenty years quotes and concurs with Professor

Charles Black’s characterization of the doctrine as ‘a

conceptual disaster area,”” Henry C. Strickland, The State

Action Doctrine and the Rehnquist Court, 18 HASTINGS CONST.

L.Q. 587, 588 (1991) (citation omitted), while another contends

that the doctrine “remains a dark thicket of constitutional law.”

Ronald J. Krotoszynski, Jr., Back to the Briarpatch: An

Argument in Favor of Constitutional Meta-analysis in State

Action Determinations, 94 MICH. L. REV. 302, 303

(1995)[hereinafter, Constitutional Meta-Analysis).

The difficulty of devising a state action standard, however,

should not lead to despair that such a task is impossible -- or

that, as one of the amicus briefs supporting petitioners

expressly requests, the Court simply replace the existing

standard. See Br. Amicus Curiae on Behalf of the National

Ass’n of Waterfront Employers, et a/., at 15-17 (urging “two

clarifications”). Indeed, the irony of attacking the Court’s

efforts to develop a fair and effective analytical tool is that the

Court has already done exactly that. While there undoubtedly

have been fits and starts in the process, and, as the Court itself

has noted, its decisions in the area “have not been a model of

consistency,” Lebron, 513 U.S. at 378 (quoting Edmonson v.

Leesville Concrete Co., Inc., 500 U.S. 614, 632 (1991)

(O’Connor, J., dissenting)), the Court, after analyzing state

action in a wide variety of legal and factual circumstances, has

” See, e.g., Barbara Rook Snyder, Private Motivation, State Action and the

Allocation of Responsibility for Fourteenth Amendment Violations, 75

CORNELL L. REV. 1053 (1990); Erwin Chemerinsky, Rethinking State

Action, 80 Nw. U. L. REV. 503 (1985).

ll

arranged those considerations into a viable conceptual

framework. While some factors were originally evaluated

independent of an integrated test, the Court has now described

and applied a mechanism which both observes past precedent

2. The first step to effect this organizational arrangement

took place in 1982, when the Court summarized its previous

holdings as “insist{ing] that the conduct allegedly causing the

deprivation of a federal right be fairly attributable to the State.”

Lugar v. Edmondson Oil Co., 457 U.S. 922, 937 (1982). To

establish this “fair attribution”, the Court divined, from prior

cases, two necessary components or principles:

First, the deprivation must be caused by the exercise of

some right or privilege created by the State or by a rule of

conduct imposed by the State or by a person for whom the

State is responsible .... Second, the party charged with the

deprivation must be a person who may fairly be said to be

a State actor.

Id.

Although this clear-cut statement and summary of the law

remains the standard for determining state action, petitioners

are determined to undercut its effective application. In a

transparent attempt to secure a rule which is less likely to bind

them to the inconvenient standards applicable to the

government, petitioners and their supporting amici are ready

and willing to decry the state of state action law and to request

that the Court “bring order to this cacophony.” Petition for

Writ of Certiorari (Pet. Writ Cert.) at 22. They begin this

attack by dismissing the first component of the Lugar test as

essentially meaningless, describing it as relevant only when the

12

private entity violates the law. Brief for Petitioners (Br. Pet’r)

at 14.

Justice White, the author of Lugar, explained the broader

sweep of that component by comparing two prior decisions. In

one, Moose Lodge No. 107 v. Irvis, 407 U.S. 163 (1972), the

Court had reached its conclusion of no state action by

“focus[ing] primarily on the question of whether the admittedly

discriminatory policy could in any way be ascribed to a

governmental decision.” Lugar, 457 U.S. at 937-938. By

contrast, in the second, Flagg Bros., Inc. v. Brooks, 436 U.S.

149 (1978), since “the State was responsible for the statute” at

issue, the analysis was directed at “the other component of the

state-action principle.” Lugar, 457 U.S. at 938.% While illegal

action by the private entity may place its behavior outside the

realm of state action, that is only part of the equation: any

conduct carried out without the authorization of the state has

the same effect and cannot be state action. In short, Lugar’s

first component allows a holding of state action only when the

state has sanctioned a private entity to undertake the allegedly

impermissible conduct. See also, e.g., Edmonson v. Leesville

Concrete Co., Inc., 500 U.S. 614, 620-621 (1991).

* Justice White added further explanation through his concurrences to two

other state action cases decided on the same day as Lugar. In both, he

agreed that there was no state action because the activity at issue was not

based on conduct or policy of the state. See Rendell-Baker v. Kohn, 457

U.S. 830, 843-844 (1982) (White, J., concurring in the judgment); Blum v.

Yaretsky, 457 U.S. 991, 1012 (1982) (White, J., concurring in the

judgment). And, as Justice White added, this was, for all practical purposes,

the crucial factor in the majority's B/um analysis: “This is the clear import

of the majority’s conclusion that the ‘decisions ultimately turn on medical

judgments made by private parties according to professional standards that

are not established by the state ...."” /d. (citation omitted).

motivated the Court through the years of state action analysis.

He focused on the fact that, once the state’s involvement had

been established through a rule or policy (the first component),

a State actor ....” Lugar, 457 U.S. at 939. To make this

determination requires the practical and realistic recognition

that state action may exist in a variety of circumstances, and

that, to respond to these variations, the Court has “articulated

a number of different factors or tests in different contexts.” Jd.

Although the Court has attached various labels to the several

“tests” which it has employed and the commentators have

attempted to further refine them or suggested other terminology

to describe them,” the bottom line of this second component is

the recognition first stated in 1961: “‘Only by sifting facts and

weighing circumstances can the nonobvious involvement of the

State in private conduct be attributed its true significance.’” Jd.

at 939 (quoting Burton v. Wilmington Parking Auth., 365 U.S.

715, 722 (1961)). The precise nature of these tests -- whether

confronts the Court in such a situation” —- need not be resolved.

Lugar, 457 U.S. at 939. The second component therefore

incorporates the considerations which imbue the actions of a

private party with the state’s mantle.

? See, e.g, G. Sidney Buchanan, A Conceptual History of the State Action

Doctrine: The Search for Governmental Responsibility (1), 34 Hous. L.

REV. 333, 345-351 (1997), Constitutional Meta-Analysis, supra, at 318-320.

14

3. Nine years later, in Edmonson, a case which petitioners

mention only in passing (see Br. Pet’r at 14, 18, 24) and with

studied indifference to its significance and relevance, the Court

took the next step in summarizing and setting out the guiding

principles for state action analysis. Applying “the framework

for state-action analysis set forth in Lugar,” the Court

concluded that the first component was met, as the right to

peremptory challenges clearly derived from state authority.

Edmonson, 500 U.S. at 620-621.

The Court then described the critical inquiry relating to the

second component:

[O)jur cases disclose certain principles of general

application. Our precedents establish that ... it is relevant

to examine the following: the extent to which the actor

relies on governmental assistance and benefits ...; whether

the actor is performing a traditional governmental function

...; and whether the injury caused is aggravated in a unique

way by the incidents of governmental authority ....

Id. at 621-622 (citations omitted). Applying “these three

principles to the circumstances” of the case, a court may then

determine whether the second aspect of the Lugar framework

is satisfied. Jd. at 622.

The Edmonson Court reviewed the three principles in turn,

relying on prior decisions to provide the supporting analysis.

In so doing, the Court indicated that no one factor is

determinative, that they are not discrete or distinct tests which

require complete satisfaction in order for state action to exist;

rather, “the principles of general application” should be looked

at in each instance to determine whether, in light of the totality

of those circumstances, the private entity may be deemed a

15

government actor. As Judge Greenberg of the Third Circuit has

summarized:

Rather than stating a series of discrete tests and applying

them separately to determine whether each by itself is

satisfied, the Court considered a number of factors, and

weighed them to determine whether, all things considered,

the otherwise private actor fairly could be deemed to be a

state actor. Under that new framework, courts should

consider the principles furthered by the previous tests as

part of a single balancing and weighing approach. And it

should apply to all cases involving the question of whether

a private actor is engaged in state action.

Mark v. Borough of Hatboro, 51 F.3d 1137, 1156 (3d Cir.

1995) (Greenberg, J., concurring); see also Grijalva, 152 F.3d

at 1120; accord, Constitutional Meta-Analysis, supra, at 337-

345; G. Sidney Buchanan, A Conceptual History of the State

Action Doctrine: The Search for Governmental Responsibility

(I), 34 Hous. L. REV. 665, 756-764 (1997).

The actual application of the three principles summarized

in Edmonson requires careful analysis of each situation’s

circumstances in light of this Court’s prior decisions. That

separate inquiry forms the next part of this brief, but the amici

wish to emphasize that the framework for the state action

Edmonson. And that analytical approach was expressly

reaffirmed in Georgia v. McCollum, 505 U.S. 42, 50-51 (1992).

Although neither the court below nor the Ninth Circuit in

Grijalva referred to the Lugar-Edmonson model, by implication

and explicit analysis both courts considered and applied the

principles which this Court imported from previous decisions

to define that framework. See Grijalva, 152 F.3d at 1119-

16

1120; Sullivan, 139 F.3d at 168-169. The petitioners’ strident

accusations -- that the Third Circuit “essentially threw up its

hands, justifying its conclusion ... by reference to a congeries of

seemingly unrelated factors”, Pet. Writ Cert. at 22, and, instead

of providing an “analytical structure”, id., “offered a vague set

of truths, half-truths, and irrelevancies,” Br. Pet’r at 14, and,

further, “did not think it necessary to offer a coherent theory,”

id. at 15 -- misapprehends that court’s reliance on the analyses

which this Court has condoned. The court below merely failed

to specify the precise contours of the tests and their place

within the overall framework. In its substance, however, the

analysis was entirely consistent with this Court’s

pronouncements, and no good reason exists to alter the

roadmap which now provides clear directions.

B. The Third Circuit’s analysis and conclusion rely on the

principles and their application which the Edmonson

Court gleaned from this Court’s prior decisions.

1. In this case, there can be no dispute that the first step of

the Lugar test -- that the deprivation at issue be caused “by the

exercise of some right or privilege created by the State,” 457

U.S. at 936 -- is met. Here, the denial of due process is

authorized by the utilization review procedures and supersedeas

mechanism in Pennsylvania Workers’ Compensation Act, 77

Pa.StatAnn. § 531(5) and (6), and its implementing

regulations. 34 Pa.Code § 127.208(e). A statute authorizing

the action which forms the basis for the deprivation represents

the paradigm for satisfaction oi this first element. See, e.g.,

McCollum, 505 U.S. at 51; Edmonson, 500 U.S. at 621. In all

likelihood, because this step was so obviously met, the court

17

below saw no reason to state the point explicitly.” Indeed, on

several occasions after the Lugar standard was announced, this

Court itself neglected to mention specifically this first part of

the test, see, e.g., Tulsa Professional Collection Services, Inc.

v. Pope, 485 U.S. 478, 485-486 (1988), but that failing does not

imply that a court is operating without an “analytical structure”.

2. In discussing the second part of the Lugar test, the Third

Circuit did not announce that it was considering the three

principles. But, again, the failure to do so does not condemn

the analysis as inherently faulty, especially where, as here, the

court demonstrated its awareness of the issues surrounding the

State action inquiry -- the difficulty of application, the

dependence “upon the factual contexts in which the

controversies arise,” and the use of variously worded standards

and the problems thereby occasioned. Sullivan, 139 F.3d at

167.

First, the Third Circuit carefully examined the extent to

which the insurance companies’ actions in stopping payments

relied on governmental assistance; it made clear that this was

one of the relevant principles informing its conclusion that the

insurers were state actors:

The insurers have no power to deprive or terminate such

benefits without the permission and participation of the

Commonwealth ...._ [T]he Commonwealth is intimately

involved in any decision by an insurer to terminate an

employee’s constitutionally protected benefits because an

© The Ninth Circuit also failed to mention this aspect of the Lugar test, see

Grijalva, 152 F.3d at 1119, and probably for the same reason. Since the

HMOs were operating under the authority of the federal statutes and rules

governing Medicare and pursuant to contract with the federal government,

id. at 1117-1119, there could be no doubt on this point.

18

insurer cannot suspend medical payments without first

obtaining authorization from the Bureau. However this

authorization may be characterized, any deprivation that

occurs is predicated upon the State’s involvement.

Id. at 168. Just as the private litigants in Edmonson were

unable to exercise peremptory challenges without invoking the

overt, significant assistance of the court, so too are the insurers

unable to halt medical benefit payments without employing the

power and assistance of state officials. The Pennsylvania statute

specifies that an insurer may only be relieved of its obligation

to pay for health coverage by following the utilization review

procedures, which mandate significant state involvement. 77

Pa. Stat.Ann. § 531(5).

The state creates the system of utilization review ("UR")

and must authorize and certify the organizations (“UROs”)

which will perform the reviews. 77 Pa.Stat.Ann. § 531(6)(i);

34 Pa. Code §§ 127.650-.670. The state mandates what kind

of provider may perform the review, what the review process

should be, how long it may take, and what information the

URO may examine to reach its conclusion. 77 Pa. Stat.Ann.

§ 531(6)(ii); 34 Pa. Code §§ 127.461-.476. The state’s

implementing regulations provide that the insurance company’s

obligation to make payment within thirty days “may be tolled

only if review . . . of the treatment is requested during the 30-

day period under the UR provisions." 34 Pa. Code

§ 127.208(e).

Furthermore, the insurer’s "request" for the UR is filed

with the state on a state prescribed form, 34 Pa. Code

§ 127.452(a) and (c), which asks the state to invoke the

statutorily created procedures of UR. 34 Pa. Code

19

§ 127.452(a).2 The state requires the insurer to certify that it

served its request for UR on all parties, including the employee,

but, significantly, does not require the insurer to provide notice

that, once the state accepts the request, the insurer may

terminate the injured employee’s medical benefits during the

review or for an even longer period of time, perhaps

permanently. See 34 Pa. Code §§ 127.208 (e) - (g), 127.452.

If the state determines that the form has been properly

completed, the state assigns the request to a URO and sends the

Notice of Assignment to the URO, the employee, the employer,

the insurer, and the provider. The Notice prominently features

its origin: The Commonwealth of Pennsylvania, Department of

Labor and Industry, Bureau of Workers’ Compensation. J.A.

at 6.

At this point, while the state-created URO resolves the

dispute, the state may toll the insurer’s obligation to pay for

health coverage. 34 Pa. Code § 127.208(e). The URO reports

to the state and sends a copy to the parties. See 34 Pa. Code

§§ 127.472, 127.476. A party may appeal the URO’s findings

by filing a petition with the state, on yet another state

prescribed form. See 77 Pa. Stat.Ann. § 531(6)(iv); 34 Pa.

Code § 127.551. The state assigns the appeal to an

administrative law judge, who engages in a de novo review, 77

Pa. Stat.Ann. § 531(6)(iv); 34 Pa. Code § 127.556, and makes

the final determination as to whether the insurer must pay.

® “I hereby request the Bureau of Workers’ Compensation assign an

necessity of proposed, current or past care of the above employee.”

“Utilization Review: Initial Request” J.A. at 5.

20

The state is thus intimately involved in every aspect of the

dispute resolution process, from its creation of the utilization

review system, to its authorization of the decision making

body; from its assignment of the case, to its receipt of the

report; from its provisions for notice, to its mechanisms for

appeal. The state is overtly providing significant assistance to

the insurer in tolling its obligation to pay worker’s health

benefits pending dispute resolution. As in McCollum, 505

U.S. at 52, Edmonson, 500 U.S. at 624, and Tulsa Professional

Collection Services, Inc., 485 U.S. at 486-487, the actions of

the private entity are not self-executing; in those cases, courts

were the state enablers, making it possible for the private actors

to carry out the challenged activity, while, in this situation, the

Bureau of Workers’ Compensation plays a critical role in the

continuum of activity which may result in the suspension of

health coverage. Also, like the parking authority in Burton, the

state has here created a partnership with the insurers to replace

the tort system; this is a working or symbiotic relationship

within a comprehensive statutory scheme, so that the state has

“so far insinuated itself into a position of interdependence with

[the private entity] that it must be recognized as a joint

participant in the challenged activity.” Burton, 365 U.S. at 725.

Second, the court below also recognized that the insurance

companies’ ability to "invoke the supersedeas, or to stop

payments, is a power that traditionally was held in the hands of

the State." Sullivan, 139 F.3d at 168% In creating and

There has been some dispute about the Edmonson Court's elimination of

the “exclusivity” element of the governmental function test. See, e.g.,

United Auto Workers v. Gaston Festivals, Inc., 43 F.3d 902, 906 n.2 (4th

Cir. 1995). This Court did take that action, however, and followed it in

McCollum, 505 U.S. at 52. In light of the Edmonson decision to weigh

several factors, rather than to require total compliance with one, it was

logical to “delete the ‘exclusivity’ requirement and use the public function

(continued...)

21

administering its worker’s compensation system, the state is

exercising its traditional police powers of resolving disputes

and creating remedies for injuries to its citizens, and this Court

has held that protecting the rights of litigants is a "critical

governmental function." Edmonson, 500 U.S. at 624. In

exchange for providing a courtroom forum in which injured

workers may seek redress for their injuries, Pennsylvania has

created administrative remedies, eliminating the need to prove

fault and establishing a statutory obligation to pay medical

benefits for the injured worker. Although the state compels the

insurer to pay the benefits prior to a determination that the

medical treatment is reasonable or necessary, the insurer may

dispute that obligation, and, while seeking resolution by the

state, may toll further payment. Tolling or suspension of a

legal obligation pending dispute resolution is unquestionably a

governmental function, one which courts and administrative

agencies traditionally perform. See, e.g., Mathews v. Eldridge,

424 U.S. 319, 324 (1976) (Social Security Administration

suspending disability benefits pending administrative and

judicial review). Pennsylvania has thus delegated to insurers the

discretion to delay their legal obligations when they invoke

utilization review, the state-created forum for dispute

resolution.

Third, the state’s significant participation in the unilateral

suspension of medical benefits prior to resolution of the dispute

aggravates the deprivation. The critical feature of

Pennsylvania’s scheme is the substitution of guaranteed and

quick wage and medical benefits for the possibility of

obtaining, in the long run, economic damages, damages for

pain and suffering, and punitive damages. This is a mandatory

i (...continued)

concept as part of a broader state action inquiry.” Mark, 51 F.3d at 1157n2

(Greenberg, J., concurring); see also id. at 1157-1158.

22

and exclusive system, with the workers having no option. As

the Third Circuit emphasized by comparing the injured workers

to the prisoners in West v. Atkins, 487 U.S. 42 (1988), “they are

locked into the system, and any relief that the employees obtain

is strictly through the program which the State has designed.”

Sullivan, 139 F.3d at 169.

The balance of this scheme is greatly skewed, however, by

the stat2’s elimination of the right to immediate payment of

medical benefits, which occurs when an insurance company

invokes the state’s procedures to delay or terminate the benefits

pending the dispute resolution. And, it is unmistakably the

state and its functionaries who ultimately determine whether

the worker will receive medical benefits; even the Notice of

Assignment for utilization review comes with the state’s

imprimatur, on Commonwealth letterhead complete with the

Commonwealth’s seal. It is the state which permits the insurer

to cease payment even before the state has made its

determination that the treatment was unreasonable -- despite the

fact that one of the statute’s fundamental premises was the

guarantee of health care to injured workers.

Although the forum in which this deprivation takes place,

the utilization review process, is administrative, it is as much

a creature of the state as were the courts in Edmonson. Just as

the courthouse in that situation served as the backdrop for, and

provided the implicit approval of, racial discrimination, so too

does the administrative process created by the state furnish the

stage on which the insurers deprive injured workers of medical

coverage.

In sum, the insurance companies’ actions are intertwined

with those of the state, and they can only suspend payments

pursuant to that relationship and in reliance on state authority.

23

Furthermore, taking that action is the typical function of a state

agency, as the insurers have been thrust into a role historically

played by agencies. Finally, the state has aggravated the harm

by locking injured workers into a system that was supposedly

a fair replacement for the expense and vagaries of tort law but

which instead authorizes unilateral and indefinite suspension of

that most cherished of modern rights, health coverage. This

situation is not a matter of mere state regulation, which alone

is not sufficient to describe state action, see, e.g., Jackson v.

Metropolitan Edison Co., 419 U.S. 345, 350 (1974), nor does

it depict only a state reaction to an independent private decision

made pursuant to professional standards, as in Blum, 457 U.S.

at 1008-1009. The insurers’ actions here are authorized by the

state as part of a comprehensive state-created and -run scheme

which encompasses all the participants in the drama: the

employers, the insurers, the workers, and the state. When

viewed in the totality of its circumstances which Edmonson

demands, this scenario depicts the essence of state action.

CONCLUSION

The judgment of the court of appeals should be affirmed.

Respectfully submitted,

GILL DEFORD

SARAH LENZ LOCK

AARP Foundation Litigation

MICHAEL SCHUSTER

American Association of Retired

Persons

SALLY HART

Center for Medicare Advocacy, Inc.

24

JEANNE FINBERG

National Center for Youth Law

JANE PERKINS

National Health Law Program

VICKI GOTTLICH

National Senior Citizens Law Center

JUDITH L. LICHTMAN

National Partnership for Women &

Families

DECEMBER 1998