Amicus Curiae Brief — Pegram v. Herdrich

Supreme Court, U.S.

FIL E D

No. 98-1949 > NOV 9 1999

In the Supreme Court of the United States

LORI PEGRAM, M. D., ET AL., PETITIONERS

U.

CYNTHIA HERDRICH

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING PETITIONERS

HENRY L. SOLANO

Solicitor of Labor

ALLEN H. FELDMAN

Associate Solicitor

MARKS. FLYNN

Senior Appellate Attorney

Department of Labor

Washington, D.C. 20210

SETH P. WAXMAN

Solicitor General

Counsel of Record

EDWIN S. KNEEDLER

Deputy Solicitor General

JAMES A. FELDMAN

Assistant to the Solicitor

General

Department of Justice

Washington, D.C. 20530-0001

(202) 514-2217

QUESTION PRESENTED

Whether respondent, an enrollee in a health maintenance

organization (HMO) offered through an employee welfare

benefit plan, states a claim of breach of fiduciary duty under

the Employee Retirement Income Security Act of 1974,

29 U.S.C. 1001 et seg., by alleging that the HMO has estab-

lished an incentive arrangement under which a bonus is paid

to physicians who (1) provide medical care in a manner that

minimizes diagnostic tests and referrals to non-HMO facili-

ties and non-HMO physicians and (2) determine whether

disputed and non-routine health insurance claims are

covered under the plan.

TABLE OF CONTENTS

Interest of the United States

Statement

Introduction and summary of argument

Argument:

A. An HMO is not itself an ERISA plan, although

it may function at various times as the pro-

vider of medical services to such a plan or as

administrator, and therefore fiduciary, of

such a plan

B. Petitioners were not acting as fiduciaries

under the “treatment” allegations of the

complaint, because they allege only conduct

that petitioners undertook as providers of

medical services

C. The “administration” allegations of the com-

plaint do state a claim that petitioners were

acting in a fiduciary capacity, but they allege

conduct that does not, as a matter of law,

violate any fiduciary duty under ERISA ...............

Conclusion

TABLE OF AUTHORITIES

Cases:

Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504

(1981)

Anderson v. Humana, Inc., 24 F.3d 889 (7th Cir.

1994)

Bailey v. Blue Cross & Blue Shield of Virginia,

67 F.3d 538 (4th Cir. 1995), cert. denied, 516 U.S.

1159 (1996)

Boggs v. Boggs, 520 U.S. 833 (1997)

(IIT)

Page

1

2

7

16

Cases—Continued:

Cannon v. Group Health Serv., Inc., 77 F.3d 1270

(10th Cir.), cert. denied, 519 U.S. 816 (1996)

o &

Conley v. Gibson, 355 U.S. 41 (1957)

Corcoran v. United Healthcare, Inc., 965 F.2d 1321

(5th Cir.), cert. denied, 506 U.S. 1083 (1992)

De Buono v. NYSA-ILA Med. & Clinical Servs.

Fund, 520 U.S. 806 (1997)

Donovan v. Bierwirth, 680 F. 2d 263 (2d Cir.),

cert. denied, 459 U.S. 1069 (1982)

Donovan v. Dillingham, 688 F 2d 1367 (11th Cir.

1982)

13-14, 17

5, 28-29

10

Doyle v. Paul Revere Life Ins., Co., 144 F.3d 181

(Ist Cir. 1998)

Dukes v. U.S. Healthcare, Inc., 57 F.3d 350

(3d Cir.), cert. denied, 516 U.S. 1009 (1995)

Englehardt v. Paul Revere Life Ins. Co., 139 F.3d

11, 14,17

1346 (11th Cir. 1998)

Firestone Tire & Rubber Co. v. Bruch, 489 U.S.

101 (1989)

7,28

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1

(1987)

Grimo v. Blue Cross/Blue Shield, 34 F.3d 148

(2d Cir. 1994)

Group Life & Health Ins. Co. v. Royal Drug Co.,

440 U.S. 205 (1979)

Hughes Aircraft Co. v. Jacobson, 119 S. Ct. 755

(1999)

Ingersoll-Rand Co. v. McClendon, 498 U.S. 133

(1990)

Kenney v. Roland Parson Contracting Corp.,

28 F.3d 1254 (D.C. Cir. 1994)

Kuhl v. Lincoln Nat'l Health Plan, Inc., 999 F. 2d

298 (8th Cir. 1998), cert. denied, 510 U.S. 1045

(1994)

— —

Cases Continued:

Libbey-Owens-Ford Co. v. Blue Cross & Blue

Shield Mut. of Ohio, 982 F. 2d 1081 (6th Cir.),

cert. denied, 510 U.S. 819 (1993)

Lockheed Corp. v. Spink, 517 U.. 882 (19960

Lordmann Enters., Inc. v. Equicor, Inc., 32 F.3d

1529 (11th Cir. 1994), cert. denied, 516 U.S. 930

16

(1995)

Lupo v. Human Affairs Int l Inc., 28 F.3d 269

(2d Cir. 1994)

14

Mertens v. Hewitt Assocs., 508 U.S. 248 (1993) . 1,11

New York State Conference of Blue Cross & Blue

Shield Plans v. Travelers Ins. Co., 514 US.

645 (1995)

Pacificare of Okla., Inc. v. Burrage, 59 F.3d 151

(10th Cir. 1995)

7, 14, 21

13

Parrino v. FHP, Inc., 146 F.3d 699 (9th Cir.),

cert. denied, 119 S. Ct. 510 (1998)

Pilot Life Ins. Co. v. Dedeauæ, 481 U.S. 41

(1987)

Rice v. Panchal, 65 F.3d 637 (7th Cir. 1995)

14

Texas Pharmacy Ass n v. Prudential Ins. Co.,

105 F.3d 1035 (5th Cir.), cert. denied, 522 U.S. 820

(1997)

Tregoning v. American Community Mut. Ins. Co.,

12 F.3d 79 (6th Cir. 1993), cert. denied, 511 U.S.

1082 (1994)

Turner v. Fallon Community Health Plan,

127 F.3d 196 (Ist Cir. 1997), cert. denied, 118

S. Ct. 1512 (1998)

UNUM Life Ins. Co. v. Ward, 119 S. Ct. 1380

(1999)

U.S. Healthcare, Inc., In re, No. 98-5222, 1999 WL

728474 (3d Cir. Sept. 16, 1999)

Varity Corp. v. Howe, 516 U.S. 489 (1996)

21,22

11, 13, 17

1. 11, 14, 15

VI

Cases—Continued:

Washington Physicians Serv. Ass’n v. Gregoire,

147 F.3d 1039 (9th Cir. 1998), cert. denied, 119 S.

Ct. 1033 (1999)

Statutes, regulations and rules:

Employee Retirement Income Security Act of

1974, 29 U.S.C. 1001 et seg.

Tit. I, 29 U.S.C. 1001 et seg.:

§ 302(1), 29 U.S.C. 1002(1)

§ 302(13), 29 U.S.C. 1002(13)

§ 302(21)(A), 29 U.S.C. 1002(21)(A)

§ 404, 29 U.S.C. 1104

§ 404(a)(1), 29 U.S.C. 1104(a)(1)

§ 404(a)(1)(A), 29 U.S.C. 1104(a)(1)(A)

§ 404(a)(1A)G), 29 U.S.C. 1104(a)(1 (AD) ..........-.

§ 408(c), 29 U.S.C. 1108(c)

§ 502(a)(1B), 29 U.S.C. 1132(a)(1)(B)

§ 506(b), 29 U.S.C. 1136(b)

§ 514, 29 U.S.C. 1144

§ 514(a), 29 U.S.C. 1144(a)

§ 711(b)(4), 29 U.S.C. 1185(b)\4) (Supp. III

1997)

§ 733(a)(1), 9 U.S.C. 1191b(a)(1) (Supp. III

1997)

§ 733(aX2), 29 U.S.C. 1191b(a(2) (Supp. III

1997)

McCarran-Ferguson Act, 15 U.S.C. 1012

Newborns’ and Mothers’ Health Protection Act of

1996, Pub. L. No. 104-204, § 603, 110 Stat. 2935 ...............

Public Health Service Act, 42 U.S.C. 300e

Women’s Health and Cancer Rights Act of 1998,

Pub. L. No. 105-277, 112 Stat. 2681:

§ 902(a):

112 Stat. 2681-436 (to be codified at 29 U.S.C.

1185b(a))

112 Stat. 2681-437 (to be codified at 29 U.S.C.

1185b(c)(2))

42 U.S.C. 1395w-22(j)(4) (Supp. III 1997)

42 U.S.C. 1396b(m)(2)(A)(x) (Supp. III 1997)

18

7

9, 28

28

1

21

3, 13

19

19

88s

— —

—— h

VII

Statutues, regulations and rules Continued:

Alaska Stat. § 21.86.150(i)(4) (Michie 1998)

Cal. Health & Safety Code § 1348.6 (West Supp.

1999)

Ga. Code Ann. § 33.20A-6 (Supp. 1996)

Idaho Code § 41-3928 (1998)

Illinois Consumer Fraud and Deceptive Business

Practices Act, 815 III. Comp. Stat. Ann. § 505/1

(West 1999)

Kan. Stat. Ann. § 40-4605 (Supp. 1998)

La. Rev. Stat. Ann. § 22:215.19 (West Supp. 1999)

Md. Code Ann. Ins. § 15-113(c) (1997)

Minn. Stat. f 72A.20 Subd. 33 (1999)

Mo. Rev. Stat. § 354.606(9) (Supp. 1999)

Mont. Code Ann. § 33-36-204(2) (1997)

Neb. Rev. Stat. § 44-7106(2)(h) (Supp. 1998)

Nev. Rev. Stat. § 695G.260 (1998)

Ohio Rev. Code Ann. § 1751.13(D)(1)(a) (Anderson

Supp. 1998)

40 Pa. Cons. Stat. Ann. § 991.2112 (West Supp.

(1999)

R. I. Gen. Law § 23-17.13-3(B\8) (1996)

Tex. Ins. Code Ann. § 3.70-3C(7)(d) (West Supp.

1999)

29 C. F. R.:

Section 2509. 75-8

Section 2560.503-1

Section 2560.503-1(c)

Section 2560.503-1(d)(3)

Section 2560.508-1(f)

Section 2560.503-1(g)(2)

Section 2560.503-1(j)

42 C. F. R. 484. 700) 2)

Fed. R. Civ. P. 12(b)(6)

a= SSRRSSRSs

VIII

Miscellaneous:

American Medical Ass’n, Council on Ethical and

Judicial Affairs, Code of Medical Ethics (1998-

1999 ed.)

5

— —

~]

145 Cong. Rec.:

p. $8623 (daily ed. July 15, 1999)

p. H9523-01 (daily ed. Oct. 7, 1999)

p. H11,341 (daily ed. Nov. 2, 1999)

63 Fed. Reg. (1998):

p. 48,390

p. 48,391

p. 48,405

p. 48,406

H.R. Res. 348, 106th Cong., Ist Sess. (1999)

Patients’ Bill of Rights Plus Act, S. 1344, 106th Cong.,

Ist Sess. (1999)

Quality Care for the Uninsured Act of 1999, H.R.

2990, 106th Cong., Ist Sess. (1999)

R NS SSS KKK

8

In the Supreme Court of the United States

No. 98-1949

LORI PEGRAM, M.D., ET AL., PETITIONERS

Vv.

CYNTHIA HERDRICH

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING PETITIONERS

INTEREST OF THE UNITED STATES

This case presents questions concerning the fiduciary

status and duties under the Employee Retirement Income

Security Act of 1974 (ERISA), 29 U.S.C. 1001 et seq., of a

health maintenance organization (HMO) that provides

medical care to members enrolled through an employee

welfare benefit plan and that maintains incentives for HMO

physicians to implement cost-containment measures. The

Secretary of Labor has primary responsibility for enforcing

and administering Title I of ERISA, including its fiduciary

duty provisions. 29 U.S.C. 1002(13), 1136(b). Accordingly,

the United States has a substantial interest in the case. The

United States has participated in many other ERISA cases

in this Court, including cases that have addressed the nature

and scope of fiduciary duties under ERISA, such as Hughes

Aircraft Co. v. Jacobson, 119 S. Ct. 755 (1999); Lockheed

Corp. v. Spink, 517 U.S. 882 (1996); Varity Corp. v. Howe,

516 U.S. 489 (1996); and Mertens v. Hewitt Associates, 508

U.S. 248 (1993).

(1)

STATEMENT

1. State Farm Insurance Company maintains a Group

Medical Health Plan (the State Farm Plan) for its em-

ployees, under which eligible employees may choose a group

medical insurance plan or, “as an alternative health care

choice,” a health maintenance organization (HMO). J.A. 101.

Respondent Cynthia Herdrich is married to a State Farm

employee who enrolled in an HMO, Carle Care HMO, offered

under the State Farm Plan. Pet. App. 84a.

The Carle Care HMO is “a product of” petitioner Health

Alliance Medical Plans (HAMP), a for-profit Illincis domestic

stock insurance corporation. Pet. App. 84a, 98a. HAMP, in

turn, is a wholly-owned subsidiary of petitioner Carle Clinic

Association, an Illinois professional medical corporation

owned by its physician shareholders. HAMP contracts with

Carle Clinic to furnish the medical services provided by the

HMO. Id. at 86a. The net effect of this arrangement is that

the physicians who provide care through the HMO are also

the owners of the HMO.

2. Respondent sought treatment for abdominal pain from

petitioner Laurie Pegram, a Carle Clinic physician, who

scheduled her for an ultrasound procedure eight days later

at a distant hospital affiliated with the HMO. Pet. App. 2a

n. I, 23a-24a. Respondent’s appendix ruptured in the interim,

resulting in peritonitis. Jd. at 2a n. 1. Respondent then

brought a two-count complaint in Illinois state court alleging

medical negligence by Pegram and seeking to hold Carle

Clinic liable under the doctrine of respondeat superior. Id.

at 3a, 66a.

Subsequently, respondent amended her state court com-

plaint to add a claim (Count III) against Carle Clinic,

alleging that it violated the Illinois Consumer Fraud and

Deceptive Business Practices Act, 815 Ill. Comp. Stat. Ann.

§ 505/1 (West 1999), by failing to advise her of material facts

3

regarding the ownership of HAMP and by failing to inform

her that the compensation of the HMO’s physicians was

increased to the extent they did not order diagnostic tests,

did not utilize facilities not owned by Carle Clinic, and did

not make emergency or consultation referrals. Pet. App. 3a

& n.2. She also brought a claim against HAMP (Count IV)

alleging that by implementing those cost-containment

measures, HAMP breached its state-law duty of good faith

and fair dealing. Ibid.

Petitioners removed the case to federal court, on the

ground that Counts III and IV were completely preempted

by ERISA. Pet. App. 2a, 3a. The district court thereupon

ruled that both counts were preempted and granted sum-

mary judgment on Count IV, but it gave respondent leave to

amend Count III. Id. at 80a.’

Respondent then amended Count III to assert the claim

now at issue, i. e., that HAM and Carle Clinic breached

fiduciary duties under ERISA.’ Respondent alleged that

petitioners had the exclusive right to decide all disputed and

non-routine claims under “the Plan,” which she defined as

1 The district court ruled that Count IV was preempted and could not

properly be amended to state an ERISA claim because respondent sought

extra-contractual damages that were not available under ERISA. Pet.

App. 67a-68a, 70a-76a. The court also ruled that Count III relateld] to”

an employee welfare benefit plan, 29 U.S.C. 1144(a), and thus was

preempted because it sought to impose additional disclosure requirements

on an ERISA plan administrator under state law in addition to those

expressly enumerated in ERISA’s comprehensive disclosure scheme. Pet.

App. 76a-80a. As explained below, when respondent subsequently

amended Count III to assert a fiduciary breach claim under ERISA, the

amendment did not allege any failure to disclose information.

2 Respondent also brought her fiduciary breach claim against Carle

Health Insurance Management Co., Inc. (CHIMCO), a management

entity, which like HAMP is alleged to be a wholly owned subsidiary of

Carle Clinic. Pet. App. 84a. CHIMCO is not a petitioner in this Court.

4

the Carle Care HMO,’ and exercised discretionary control of

claims management, property management, and administra-

tion of “the Plan.” Pet. App. 85a.

On the basis of those factual allegations, respondent

asserted that petitioners breached fiduciary duties under

Section 404 of ERISA, 29 U.S.C. 1104, because Carle Clinic

physicians receive a year-end distribution paid out of “sup-

plemental medical expense payments” that HAMP and

CHIMCO pay to Carle Clinic based on contractual provisions

requiring the physicians to minimize the use of diagnostic

tests, of facilities not owned by Carle Clinic, and of referrals

to “non-contracted” physicians. Pet. App. 85a-86a. Respon-

dent also asserted that petitioners sought to fund the year-

end payments by “administering disputed and non-routine

health insurance claims,” and determining, e.g., “which

claims are covered under the Plan and to what extent” and

“what the applicable standard of care is.” Jd. at 86a.

Respondent alleged that “the Plan” had been wrongfully

deprived of amounts comprising the supplemental medical

expense payments made by HAMP and CHIMCO to Carle

Clinic and sought an order requiring reimbursement by

Carle Clinic of the supplemental medical expense payments

received from HAMP and CHIMCO as well as such other

equitable relief as the court deemed just. Id. at 87a.

Petitioners moved to dismiss amended Count III under

Federal Rule of Civil Procedure 12(b)(6) for failure to state a

claim upon which relief can be granted. The district court

granted the motion on the ground that respondent had

Failled] to identify how any of the [petitioners] is involved

as a fiduciary to the Plan.” Pet. App. 63a (magistrate’s

report); see id. at 59a-60a (adopting magistrate’s report).

Respondent’s state-law medical malpractice claims were

3 As we explain below, pp. 9-11, infra, respondent’s use of the term

“plan” to refer to the HMO differs from the term’s meaning under ERISA.

2x ich ta de aie HA

5

then tried to a jury, which rendered a $35,000 verdict in her

favor. Id. at 6a, 8la-82a. After entry of final judgment,

respondent appealed the dismissal of her ERISA fiduciary

breach claim.

8. a. A divided panel of the court of appeals reversed.

Pet. App. la-38a. The panel majority held that respondent

had adequately alleged that petitioners were fiduciaries. Id.

at lla-15a. Noting that the complaint alleges that peti-

tioners “have the exclusive right to decide all disputed and

non-routine claims under the plan,” the court concluded that

“this level of control satisfies ERISA’s requirement that a

fiduciary maintain ‘discretionary control and authority.” Id.

at 14a (emphasis omitted).

The panel majority also held that respondent’s allegations,

if accepted as true, were sufficient to demonstrate that

petitioners breached their fiduciary duty because they acted

in their own interest, rather than “with an eye single to the

interests of the [plan’s] participants and beneficiaries.” Pet.

App. 16a (quoting Donovan v. Bierwirth, 680 F.2d 263, 271

(2d Cir.), cert. denied, 459 U.S. 1069 (1982)). The court noted

that the complaint alleged that the plan “dictated that the

very same HMO administrators vested with the authority to

determine whether health care claims would be paid, and the

type, nature, and duration of care to be given, were those

physicians who became eligible to receive year-end bonuses

as a result of cost-savings,” thus creating the incentive for

them to limit treatment to ensure a larger bonus. Id. at 18a-

19a (emphasis omitted).

The majority stated that it was not adopting a per se rule

“that the existence of incentives automatically gives rise to

a breach of fiduciary duty,” but only that such “incentives

can rise to the level of a breach where, as pleaded here, the

fiduciary trust between plan participants and plan fiduciaries

no longer exists.” Pet. App. 20a. Addressing the dissent’s

view that imposition of incentives to limit care should con-

stitute a fiduciary breach only when there is a “serious flaw”

in the manner in which the incentive arrangement is estab-

lished, the majority concluded that there was such a flaw in

that the “physician/owners of Carle * * * simultaneously

control the care of their patients and reap the profits

generated by the HMO through the limited use of tests and

referrals.” Id. at 21a (emphasis omitted). The majority

referred to the treatment of respondent’s appendicitis as an

example of the effects of the incentive scheme, id. at 24a,

32a-33a, and expounded its view that managed care is having

a deleterious effect on the quality of health care in this

country, id. at 24a-33a.

Finally, the majority concluded that respondent alleged a

loss to the plan attributable to the petitioners’ alleged

breach, in that the plan was deprived of the amounts paid as

incentives. Pet. App. 38a. Accordingly, the majority con-

cluded that respondent had alleged the requisite elements of

a claim for fiduciary breach under ERISA.

b. Judge Flaum dissented. Pet. App. 38a-47a. In his

view, respondent’s allegations about the structural incen-

tives for cost containment did not in themselves make out a

case of fiduciary breach, because ERISA tolerates some

conflict of interest on the part of ERISA fiduciaries, as by

permitting the employer or plan sponsor’s officer or em-

ployee to serve as fiduciary. Id. at 40a. The mere existence

of such incentives was not enough, in his view, to establish a

fiduciary breach because market forces protect the interests

of beneficiaries by making it unlikely that the HMO would

wish to alienate the employer-sponsor by maintaining an un-

duly restrictive approach to coverage. Id. at 40a-42a. More-

over, Judge Flaum stated his concern that the majority’s

decision would lead to “untethered judicial assessments of

permissible incentive levels in health care plans.” Id. at 44a.

4. The court of appeals denied rehearing en banc. Pet.

App. 48a-49a. Judge Easterbrook, joined by three other

judges, filed an opinion dissenting from the denial of

rehearing. Id. at 49a-58a. Judge Easterbrook concluded

that Carle Care’s decision to establish one set of cost-saving

incentives rather than another is not an exercise of dis-

cretion in the administration of the employee benefit plan,

but rather is an exercise of discretion by Carle Care in pro-

viding medical services. Id. at 52a-53a. He deemed respon-

dent’s complaint to allege that the benefit offered by State

Farm to its employees was the Carle Care HMO, in which

petitioners are acting as suppliers of a service to the plan,

not plan fiduciaries. Id. at 56a. Judge Easterbrook also

stated that in his view the majority’s rule was “impossible to

cabin, for the plan attacked in this case is an ordinary HMO.”

Id. at 56a.

INTRODUCTION AND SUMMARY OF ARGUMENT

The Employee Retirement Income Security Act of 1974

(ERISA), 29 U.S.C. 1001 et seg., “was enacted ‘to promote

the interests of employees and their beneficiaries in em-

ployee benefit plans, * and ‘to protect contractually

defined benefits. Firestone Tire & Rubber Co. v. Bruch,

489 U.S. 101, 113 (1989). The statute thus does not requirſe]

employers to provide any given set of minimum benefits, but

instead controls the administration of benefit plans, * * *

as by imposing reporting and disclosure mandates, * * *

participation and vesting requirements, * * * funding

standards, * * * and fiduciary responsibilities for plan

administrators.” New York State Conference of Blue Cross

& Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 651

(1995). Among the various duties that ERISA imposes on

fiduciaries of employee benefit plans is a duty of loyalty,

under which a “fiduciary shall discharge his duties with

respect to a plan solely in the interest of the participants and

beneficiaries.” 29 U.S.C. 1104(a)(1); see also 29 U.S.C.

1104(a)(1)(A)(i).

8

The court of appeals held that respondent stated a claim of

breach of the duty of loyalty owed by a fiduciary by alleging

that petitioners provided profit-based financial incentives for

HMO physicians. Liberally read, as they must be in the

context of a motion to dismiss for failure to state a claim,

Conley v. Gibson, 355 U.S. 41 (1957), respondent’s allega-

tions challenge a bonus (“year-end distribution”) allegedly

paid by petitioner HAMP to Carle Clinic physicians that is

“fund[ed]” by profits derived from two types of conduct.

Pet. App. 86a. The first type is the provision of medical

services by “owner/physicians” who allegedly “minimize the

use of diagnostic tests,” “minimize the use of facilities not

owned by Carle,” and “minimize the use of emergency and

non-emergency consultation and/or referrals” to non-HMO

physicians. Ibid. The second type is “administering dis-

puted and non-routine health insurance claims.” Ibid.

The first of these allegations—the “treatment” allega-

tions—fails to state a claim because it does not allege con-

duct by petitioners in their capacity as ERISA fiduciaries.

An HMO acts as a medical care provider, rather than an

ERISA fiduciary, when it establishes and implements an

arrangement for paying its physicians to treat their patients,

even if the arrangement includes incentives for using less

costly treatment regimens. If the court of appeals were

correct that the law of fiduciary duty under ERISA gov-

erned the treatment of patients by HMO doctors, then tradi-

tional state regulation of the practice of medicine—along

with traditional state-law malpractice and professional li-

censing regulations—would necessarily be preempted inso-

far as they applied to ERISA plans. In Travelers and sub-

sequent cases, this Court has rejected that overly expansive

view of ERISA’s scope, and it should do so again here.

By contrast, the activities involved in the second set of

allegations—the “administration” allegations—may involve

conduct by petitioners as ERISA fiduciaries, because an

9

entity such as an HMO that exercises discretion in deter-

mining whether claims for specific benefits are covered by an

ERISA plan is an ERISA fiduciary. Respondent, however,

has alleged only that petitioners generate income by per-

forming their roles as fiduciaries under ERISA. That

allegation is insufficient to state a claim of breach of fiduci-

ary duty under ERISA, because fiduciaries under ERISA

are expected to be compensated for the performance of their

duties. Cf. 29 U.S.C. 1108(c). Indeed, even if the complaint

could be read to include an allegation that petitioners employ

a profit-based system that permits those who assist in claims

administration to share in the petitioners’ general profits,

it would still fail to state a claim of breach of fiduciary duty

under ERISA. Unlike an incentive scheme in which claims

administrators are directly paid for denying (but not

for allowing) claims, a general profit-based compensation

arrangement does not in itself conflict with the duties owed

by fiduciaries under ERISA. Because none of respondent’s

allegations therefore states a claim of breach of fiduciary

duty under ERISA, the decision of the court of appeals

should be reversed.

ARGUMENT

A. An HMO Is Not Itself An ERISA Plan, Although It May

Function At Various Times As The Provider Of Medi-

cal Services To “»ch A Plan Or As Administrator, And

Therefore Fiduciary, Of Such A Plan

1. In order to determine whether an entity acts as an

ERISA fiduciary, it is critical to distinguish between the

ERISA plan itself (the administration of which by either the

plan sponsor or an outside entity confers fiduciary status on

an individual or other entity) and a provider of services to

the plan (usually an independent entity not subject to

ERISA’s fiduciary duty standards). ERISA defines an

“employee welfare benefit plan” as “any plan, fund, or

10

program * * * established or maintained by an employer

* * * for the purpose of providing for its participants or

their beneficiaries, through the purchase of insurance or

otherwise, * * * medical, surgical, or hospital care or

benefits” or other benefits. 29 U.S.C. 1002(1). Fhased on that

definition, the essentials of a plan have been interpreted to

be the existence of “intended benefits, a class of bene-

ficiaries, [a] source of financing, and procedures for receiving

benefits.” Donovan v. Dillingham, 688 F. 2d 1367, 1373 (11th

Cir. 1982); accord Grimo v. Blue Cross/Blue Shield, 34 F.3d

148, 151 (2d Cir. 1994); Kenney v. Roland Parson

Contracting Corp., 28 F.3d 1254, 1257-1258 (D.C. Cir. 1994)

(collecting cases).

2. In this case, the ERISA plan was the arrangement by

which State Farm Insurance, respondent’s husband’s em-

ployer, undertook to provide medical care benefits to eligible

employees and their families. See J.A. 51-52, 101 (Summary

Plan Description of State Farm Group Medical Health Plan,

which includes a group medical insurance option and HMO

options). As to employees who opt for the Carle Care HMO

option, the plan consists of the documents governing State

Farm’s purchase from HAMP of memberships in the HMO,

and the “intended benefit[],” Dillingham, 688 F.2d at 1373,

under the ERISA plan is coverage for the specific kinds of

medical care and treatment specified in the subscription

agreement between State Farm and the HMO, Pet. App.

89a-128a. That care in turn is provided by the doctors

employed by the HMO. The HMO and its parent entities are

thus service providers to the ERISA plan; they are not

themselves ERISA pians.

3. Because the HMO and its parent entities are not them-

selves ERISA plans, not all the acts that constitute man-

agement of the HMO are acts that constitute administration

of an ERISA plan, to which ERISA fiduciary duties may

11

attach. To the contrary, in determining whether an HMO is

acting as a fiduciary, two major roles in which an HMO

typically acts must be distinguished. An HMO typically

performs (at least) two distinct functions in the context of an

employee welfare benefit plan—providing medical services

to beneficiaries and administering certain aspects of the

plan. See, e. g., In re U.S. Healthcare, Inc., No. 98-5222, 1999

WL 728474, at *8 (3d Cir. Sept. 16, 1999); Dukes v. U.S.

Healthcare, Inc., 57 F.3d 350, 361 (3d Cir.), cert. denied, 516

U.S. 1009 (1995).° Those functions lead to differing conclu-

sions regarding an HMO’s status as an ERISA fiduciary.

4 Because the HMO is not the ERISA plan, the court of appeals erred

in suggesting, Pet. App. 16a, 36a, that petitioners here had control over

the assets of an employee welfare benefit plan. State Farm and its

employees paid a premium to HAMP for subscription in the HMO, J.A.

103; there is therefore apparently no underlying trust funding the ERISA

plan. The assets referred to in the complaint belong either to HAMP or

Carle Clinic, not to an ERISA plan. ——œ— —

supplemental payments to Carle Clinic, which in turn funded payments

physicians, therefore states nothing more than that HAMP used its own

funds as a business entity for that purpose.

It also follows that respondent's allegation (Pet. App. 87a) that “the

Plan” has been deprived of the “supplemental medical expense payments,”

and her corresponding request that petitioners therefore should make

reimbursement (presumably to “the Plan”) for those expenses, make no

sense in ERISA terms. The year-end payments were not plan assets in

the first place, and their return to the HMO would not constitute

reimbursement to an ERISA plan. Respondent also has sought “such

other equitable relief as th{e) court deems just.” Id. at 87a. If she were to

establish that the incentive arrangement was incompatible with ERISA’s

fiduciary duty provisions, she could obtain a prospective injunction against

the arrangement insofar as it affected ERISA plan participants. In

addition, to the extent she was adversely affected by the incentive

arrangement, she could obtain individual equitable relief, such as the

— . te Gn anh eudied

as to her. Varity Corp. v. Howe, 516 U.S. 489, 507 (1996); Mertens v.

Hewitt Assocs., 508 U.S. 248, 260 (1993).

Bo tg gf hy mele See ef ey ye

generally Group Life & Health Ins. Co. v. Royal 0.,

227 n.34 (1979) (noting that “certain aspects” of advance-payment medical-

12

a. Insofar as an HMO is a provider of medical services, it

is no more subject to ERISA fiduciary duty standards than

is any other provider of services to an ERISA plan. Under

ERISA, a person is a fiduciary if “he exercises any discre-

tionary authority or discretionary control respecting man-

agement of [an ERISA] plan * * * or control respecting

management or disposition of its assets,” if “he renders

investment advice * * * with respect to any moneys or

other property of such plan,” or if “he has any discretionary

authority or discretionary responsibility in the administra-

tion of [the ERISA] plan.” 29 U.S.C. 1002(21)(A). A pro-

vider of medical treatment to a patient does not fall within

any of those categories. Accordingly, an HMO, in its role as

provider of medical treatment to patients who are benefi-

ciaries of ERISA plans, is not an ERISA fiduciary.®

benefits plans may be the “business of insurance” under the McCarran-

Ferguson Act, 15 U.S.C. 1012). See also Washington Physicians Serv.

Ass'n v. Gregoire, 147 F.3d 1089, 1045, 1046 (9th Cir. 1998), cert. denied,

119 S. Ct. 1033 (1999); Anderson v. Humana, Inc., 24 F.3d 889, 892 (7th

Cir. 1994). But see Texas Pharmacy Ass'n v. Prudential Ins. Co., 105 F.3d

1035, 1038-1039 (5th Cir.), cert. denied, 522 U.S. 820 (1997).

In some cases, a treating physician in an HMO could exercise ad-

ministrative duties that are clearly distinct from his treatment responsi-

bilities and that therefore potentially subject him to ERISA fiduciary

standards when he is exercising those administrative duties. For exam-

ple, it is possible that a physician who believes that a particular treatment

is medically advisable for a patient has the discretionary administrative

responsibility within an HMO for determining whether a claim for such

treatment is covered by the ERISA plan. Even if a treating physician

may in some circumstances occupy such a dual role, however, that dual

role would not be triggered merely because the standards that govern the

physician’s ordinary treatment decisions—medical necessity, the existence

of an emergency, etc.—are also the standards governing the HMO’s obli-

gation to provide or pay for care for the patient. Otherwise, every treat-

ing physician would automatically become an ERISA fiduciary whenever

the physician makes a medical judgment about the appropriate care for a

patient. Respondent in this case did not allege that any particular

circumstances that would trigger such a dual role existed in this case.

Therefore, the question whether and to what extent a physician may

13

Were it otherwise, ERISA would threaten to carve out an

enormous hole in traditional state regulation of the practice

of medicine and other analogous professions. For if ERISA

fiduciary duty obligations governed HMOs in their capacity

as providers of medical treatment to patients covered by

ERISA plans (as opposed to their capacity as claims

administrators, for example), then state laws that govern the

same thing—the practice of medicine by HMOs—would nec-

essarily “relate to” ERISA plans and would be preempted

under Section 514(a) of ERISA, 29 U.S.C. 1144(a). Indeed,

the clearest cases of preemption under ERISA occur when a

state law attempts to impose standards on an entity that

differ from those imposed by ERISA. See, e.g., Boggs v.

Boggs, 520 U.S. 833, 841 (1997) (holding state community

property law preempted because it “conflicts with the

provisions of ERISA or operates to frustrate its objects”);

Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 142 (1990)

(state-law cause of action for wrongful discharge to avoid

pension obligation “conflicts directly” with ERISA causes of

action and is therefore preempted).’ The courts of appeals,

however, have correctly held that state laws governing the

practice of medicine by HMOs are not preempted by

ERISA. As this Court explained in De Buono v. NYSA-

occupy a dual role as treating physician and administrator of an ERISA

plan is not presently before the Court.

7 See also Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 10 (1987)

(“We have not hesitated to enforce ERISA’s pre-emption provision where

state law created the prospect that an employer’s administrative scheme

would be subject to conflicting requirements.”); Alessi v. Raybestos-

Manhattan, Inc., 451 U.S. 504, 524 (1981) (state law that “eliminates one

method for calculating pension benefits that is permitted by

federal law” is preempted).

8 See Pacificare of Okla., Inc. v. Burrage, 59 F.3d 151, 154-155 (10th

Cir. 1995) (ERISA Section 514(a) does not preempt state-law action

seeking to impose vicarious liability on HMO for malpractice of HMO

physician); ef. U.S. Healthcare, Inc., 1999 WL 728474, at *8-*9 (state-law

14

ILA Medical & Clinical Services Fund, 520 U.S. 806, 814 &

n.10 (1997), the fact that a state law is a “regulation of

matters of health and safety” “supports the application of the

‘starting presumption’ against pre-emption.”

Moreover, if the provision of medical treatment to pa-

tients by an HMO were governed by ERISA fiduciary

obligations, a single HMO doctor would be subject to ERISA

fiduciary obligations in treating members of the HMO who

are ERISA beneficiaries and differing state-law obligations

in treating other members of the same HMO. Similarly,

HMO physicians who treat ERISA beneficiaries would be

subject to fiduciary obligations, while physicians who treat

ERISA beneficiaries under a traditional fee-for-service

health insurance system would be subject to the quite dis-

tinct obligations imposed by state law. Indeed, respondent’s

own ability to pursue her state-law malpractice claim against

Dr. Pegram and against Carle Clinic as Dr. Pegram’s

employer—as she successfully did in the district court in this

case, see Pet. App. 8la—would be open to serious question.

“There is not so much as a hint * * * that Congress

intended to squelch * * * state efforts” to regulate the

practice of medicine when it included fiduciary duty provi-

sions in ERISA. Travelers, 514 U.S. at 665.

b. The fact that an HMO does not act as an ERISA

fiduciary when it provides medical treatment to patients,

however, does not mean that an HMO never acts as an

ERISA fiduciary. This Court explained in Varity Corp. v.

Howe, 516 U.S. 489 (1996), that a “person is a fiduciary with

respect to a plan,’ and therefore subject to ERISA fiduciary

claims against HMO for direct negligence and vicarious liability are not

subject to complete preemption doctrine under ERISA); Rice v. Panchal,

65 F.3d 637, 646 (7th Cir. 1995) (vicarious claims not completely pre-

empted); Dukes, 57 F.3d at 356 (vicarious and direct claims not completely

preempted); Lupo v. Human Affairs Int'l, Inc., 28 F.3d 269, 272 (2d Cir.

1994) (vicarious claims not completely preempted).

15

duties, ‘to the extent’ that he or she ‘exercises any discre-

tionary authority or discretionary control respecting man-

agement’ of the plan, or ‘has any discretionary authority or

discretionary responsibility in the administration’ of the

plan.” Jd. at 498 (quoting 29 U.S.C. 1002(21)(A) (emphasis

added)). In Varity, for example, since “obviously, not all of

[the employer's] business activities involved plan manage-

ment or administration,” the Court had to determine

whether the employer was “wearing its ‘fiduciary’ * * *

hat” when it made the particular representations that were

alleged to constitute a fiduciary breach. 516 U.S. at 498. See

also Hughes Aircraft Co. v. Jacobson, 119 S. Ct. 755, 763

(1999); Lockheed Corp. v. Spink, 517 U.S. 882, 887 (1996).

Varity, Hughes, and Lockheed establish that an entity

may become an ERISA fiduciary when it performs particu-

lar functions, even if it acts as an independent entity subject

to state law (such as a provider of medical services to an

ERISA plan and ERISA beneficiaries) in many other of its

activities. In particular, insofar as an HMO exercises “dis-

cretionary authority or discretionary responsibility in the

administration of [the plan],” it takes on fiduciary status

under ERISA. 29 U.S.C. 1002(21)(A). Activities that consti-

tute “administration of [the plan] include determining the

eligibility of claimants, calculating benefit levels, making dis-

bursements, monitoring the availability of funds for benefit

payments, and keeping appropriate records * * * to

comply with applicable reporting requirements.” Fort Hali-

fax Packing Co. v. Coyne, 482 U.S. 1, 9 (1987). In the con-

text of an HMO, the relevant administrative functions fre-

quently performed by an HMO consist of determining

eligibility under the ERISA plan, determining whether a

particular treatment is covered by the plan, sending re-

quired notices and filing reports, and keeping necessary

records. An HMO is an ERISA fiduciary only when and

16

insofar as it exercises discretionary control over those activi-

ties.”

4. Because an HMO frequently combines under one roof

non-fiduciary functions (such as the provision of medical

treatment) and fiduciary functions (such as the determina-

tion of whether particular medical services are an “intended

benefit” under the ERISA plan), it sometimes can be

difficult at the margins to sort out when an HMO is acting as

an ERISA fiduciary and when it is not. In this case, in

determining whether respondent’s complaint has alleged a

breach of fiduciary duty under ERISA, it is necessary to

examine carefully the allegations of respondent’s complaint,

in order to determine whether they allege conduct by peti-

tioners in their capacity as providers of medical services to

the ERISA plan and its beneficiaries, or in their capacity as

ERISA fiduciaries.

B. Petitioners Were Not Acting As Fiduciaries Under The

“Treatment” Allegations Of The Complaint, Because

They Allege Only Conduct That Petitioners Undertook

As Providers Of Medical Services

1. The “treatment” allegations of the complaint in this

case—referring to the year-end payments to physicians who

minimize the use of diagnostic tests and the referral of

patients to outside facilities and physicians—concern only

the way in which the HMO performs the medical services it

is contractually obligated to perform for the ERISA plan and

its beneficiaries. They relate to the medical treatment that

9 It is of course possible that a particular action can constitute both

administration of an ERISA plan and conduct hat the State can regulate

insofar as it affects outside parties. Cf. Lordmann Enters., Inc. v.

Equicor, Inc., 32 F.3d 1529, 1533 (11th Cir. 1994), cert. denied, 516 US.

930 (1995) (no preemption where health care provider—not plan bene-

ficiary—brings claim of negligent misrepresentation against ERISA plan

administrator based on faulty provision of information to health care pro-

vider about coverage of the plan).

Wisin

17

HMO physicians provide to their patients, and the way in

which HMO physicians are reimbursed for providing such

treatment. The court of appeals therefore erred in holding

that either the HMO or its parent entities were acting in a

fiduciary capacity under the “treatment” allegations of the

complaint.

2. There could be no basis to argue that, although the

HMO’s medical treatment of patients is governed not by

ERISA but by state law, the HMO’s decisions regarding

how to compensate its physicians who treat patients are sub-

ject to ERISA’s fiduciary duty standards. See U.S. Health-

care, 1999 WL 728474, at *10 (HMO acted in capacity of

“providing and arranging medical services” when it adopted

policies that encourage physicians to implement hospital

discharge and admittance policies); Dukes, 57 F.3d at 353,

360-361 (state-law claim that HMO was negligent in its

“selection, employment, and oversight of the medical per-

sonnel who performed the actual medical treatment” relates

to HMO’s role as arranger of medical care, and not to HMO’s

ERISA administration function) (emphasis added). The

permissible scope of a State’s regulation of medical care

clearly extends beyond the direct regulation of the quality of

treatment provided by a doctor to a patient and includes as

well the means of compensation by which a doctor may be

reimbursed for providing care to patients.“ Cf. De Buono,

520 U.S. at 814 & n.10 (traditional state “regulation of

matters of health and safety” includes taxation of hospitals).

As noted above, if ERISA fiduciary standards govern the

10 Cf., e g., American Medical Ass’n, Council on Ethical and Judicial

Affairs, Code of Medical Ethics § 8.05, at 128 (1998-1999 ed.) (provisions of

medical ethics code governing “contractual relationships that physicians

assume when they join or affiliate with group practices or agree to provide

services to the patients of an insurance plan”); id. § 8.051, at 129 (rules

regarding “conflict of interest under capitation” schemes of “[mJanaged

care organizations”).

18

compensation arrangements for doctors who treat ERISA

patients, then state laws that regulate the same subject

matter would be preempted. It would be perverse to argue

that state law may govern the quality of medical care

provided by HMO physicians to their patients, but it cannot

govern the compensation arrangements under which such

physicians are reimbursed and which the State may find

affect the treatment decisions made by physicians.”

Indeed, if the HMO’s business decisions, such as how to

compensate physicians for their treatment of patients, were

subject to ERISA fiduciary duty provisions, it is difficult to

understand how the HMO could function as a business

entity. As a business entity, HAMP has a financial incentive

to arrange for medical care at the least expense to itself; that

interest would conflict with its duty as a fiduciary to act

solely in the interests of the participants and beneficiaries

under ERISA Section 404(a)(1)(A), 29 U.S.C. 1104(a)(1)(A).

In determining how to compensate its doctors, HAMP would

thus be required to forgo consideration of costs, so that it

could act solely in the participants’ interests. Ibid. There is

nothing in ERISA that suggests that Congress intended to

place that kind of restraint on an HMO’s business activities.

Furthermore, if ERISA’s fiduciary duty provisions were

generally applicable to an HMO’s compensation of its physi-

11 Many States have enacted legislation limiting incentive payments

that may be made to physicians. See, e. g., Alaska Stat. § 21.86.150(i)(4)

(Michie 1998); Cal. Health & Safety Code § 1348.6 (West Supp. 1999); Ga.

Code Ann. § 33-20A-6 (Supp. 1999); Idaho Code § 41-3928 (1998); Kan.

Stat. Ann. § 40-4605 (Supp. 1998); La. Rev. Stat. Ann. § 22:215.19 (West

Supp. 1999); Md. Code Ann. Ins. § 15-113(c) (1997); Minn. Stat. § 72A.20

Subd. 33 (1999); Mo. Rev. Stat. § 354.606(9) (Supp. 1999); Mont. Code Ann.

§ 33-36-204(2) (1997); Neb. Rev. Stat. § 44-7106(2)(h) (Supp. 1998); Nev.

Rev. Stat. § 695G.260 (1998); Ohio Rev. Code Ann. § 1751.13(D)(1)(a)

(Anderson Supp. 1998); 40 Pa. Cons. Stat. Ann. § 991.2112 (West Supp.

1999); R. I. Gen. Laws § 23-17.13-3(B)(8) (1996); Tex. Ins. Code Ann. § 3.70-

3C(7Xd) (West Supp. 1999).

19

cians for treating ERISA beneficiaries, it would have been

unnecessary for Congress to have amended ERISA specifi-

cally to address the question of incentives for the contain-

ment of medical treatment, as it has done in certain specific

areas. In 1996, Congress enacted the Newborns’ and

Mothers’ Health Protection Act, Pub. L. No. 104-204, § 603,

110 Stat. 2935, which amended ERISA to prohibit any

“group health plan” or “health insurance issuer offering

group health insurance coverage in connection with a group

health plan” from offering incentives to an attending medical

provider to provide care inconsistent with the statutorily

specified two-day or four-day minimum length of hospital

stay for a mother and newborn child. 29 U.S.C. 1185(b)(4)

(Supp. III 1997). Significantly, a “group health plan” subject

to the Act is essentially defined as an ERISA plan

“providing medical care,” 29 U.S.C. 1191b(a)(1) (Supp. III

1997), while a “health insurance issuer” is separately defined

as “an insurance company, insurance service, or insurance

organization (including a health maintenance organization

* * *)” 29 U.S.C. 1191b(b)(2) (Supp. III 1997). In addition,

in 1998, Congress passed the Women’s Health and Cancer

Rights Act, Pub. L. No. 105-277, § 902(a), 112 Stat. 2681-437

(to be codified at 29 U.S.C. 1185b(c)(2)), which similarly

prohibits any “group health plan” or “health insurance

issuer” from providing incentives to induce any provider to

provide care in a manner inconsistent with its require-

ments.” Congress’s adoption of those provisions expressly

prohibiting health insurance carriers and HMOs that cover

ERISA health plans from employing certain types of

incentives for the containment of medical costs indicates that

12 The requirements generally provide that a group health plan that

offers coverage for a mastectomy shall also provide full coverage for

breast reconstruction surgery. § 902(a), 112 Stat. 2681-436 (to be codified

at 29 U.S.C. 1185b(a)).

20

ERISA’s general fiduciary duty provisions were not

intended to govern that conduct.”

C. The “Administration” Allegations Of The Complaint

Do State A Claim That Petitioners Were Acting In A

Fiduciary Capacity, But They Allege Conduct That

Does Not, As A Matter Of Law, Violate Any Fiduciary

Duty Under ERISA

1. In addition to alleging that financial incentives exist

for physicians to minimize diagnostic tests and certain refer-

rals in the course of providing medical care, respondent’s

complaint alleges that petitioners maintain a compensation

scheme in which a financial incentive exists for determining

claims. Although the complaint is not a model of clarity,

respondent appears to allege that Carle Care physicians re-

ceive year-end payments that are funded by having physi-

cians “determinfe] * which claims are covered under

the Plan and to what extent,” including, for example, deter-

mining “whether a course of treatment is experimental” or a

“medical condition is an emergency.” Pet. App. 86a. Those

allegations could encompass a situation in which a Carle

Care physician has discretionary authority to determine a

question of coverage under the plan, as for example by

18 Under provisions of the Social Security Act permitting Medicare

recipients to obtain benefits through enrollment in HMOs, specific restric-

tions apply to physician incentive payments that may be made by such

HMOs. See, e. g., 42 U.S.C. 1395w- 22(j X4) (Supp. III 1997) (HMO may not

make a “specific payment * * * toa physician or physician group as an

inducement to reduce or limit medically necessary services provided with

respect to a specific individual enrolled with the HMO). See also 42

U.S.C. 1396b(m)(2A)(x) (Supp. III 1997) (applying same rules to Medi-

caid); 42 C.F.R. 422.208 (implementing Medicare regulation); 42 C.F.R

434.70(aX(2) (implementing Medicaid regulation). A health care reform bill

recently passed by the House of Representatives, see pp. 25-26, infra,

would apply virtually the same restrictions to all group health plans and

health insurers. See H.R. 2990, 106th Cong., Ist Sess. § 1133 (1999). See

145 Cong. Rec. H9523-01 (daily ed. Oct. 7, 1999).

21

resolving a grievance challenging a Carle Care decision not

to pay for care that a beneficiary had already received at a

non-Carle Care facility, on the ground that the episode had

not been an emergency. See id. at 107a, 125.“ Insofar as

the complaint could be read to allege discretionary conduct

in claims administration, it alleges conduct by petitioners in

their capacity as ERISA fiduciaries.

In a long and consistent line of decisions under ERISA’s

preemption provision, 29 U.S.C. 1144, this Court has recog-

nized that the processing of claims for benefits by an insurer

is a plan function. In New York State Conference of Blue

Cross & Blue Shield Plans v. Travelers Insurance Co., 514

U.S. 645, 658 (1995), for example, the Court noted that state

laws that are preempted because they “relate[] to” employee

benefit plans include those that “mandat[e] employee benefit

structures or their administration.” Similarly, the Court’s

decision last Term in UNUM Life Insurance Co. v. Ward,

119 S. Ct. 1380 (1999), that a state-law rule regarding claims

processing by an insurer is saved by ERISA’s insurance

savings clause was necessarily based on the proposition that

the state-law rule “related to” the ERISA plan. See 119 S.

Ct. at 1386 (noting parties’ agreement on that point). And in

Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41, 47-48

(1987), the Court began its analysis of the question whether

the causes of action there were preempted by noting that the

plaintiff’s common-law causes of action against an insurer for

“bad faith” claims processing of the plaintiff’s disability

claim under an ERISA plan “relate to” the ERISA plan.

Those preemption decisions establish that, because claims

processing is a plan function even when performed by in-

14 The plan document cited in the text is the subscription agreement

between State Farm (the employer) and Carle Care (the HMO) that

provides for enrollment of State Farm employees in Carle Care and sets

the benefits to be provided.

22

surance companies or other entities that are separate from

the plan itself, state laws that attempt to regulate claims

processing under ERISA plans are preempted (unless saved

by ERISA’s insurance savings clause, see UNUM, 119 S. Ct.

at 1386-1391). Therefore, insurers that process claims under

ERISA plans are performing a plan-administration function

when they do so. And insofar as adjudicating claims involves

the exercise of some discretion, insurers that engage in the

administration of ERISA plans by performing claims

processing are acting as ERISA fiduciaries when they do

so.” Because there is no reason to distinguish between

traditional fee-for-service insurers and HMOs in any of these

respects, it follows that HMOs may act as ERISA fiduciaries

when they engage in claims administration under an ERISA

plan.

5 See, e. g., Englehardt v. Paul Revere Life Ins. Co., 189 F.3d 1346,

1352 (11th Cir. 1998); Bailey v. Blue Cross & Blue Shield of Virginia, 67

F.3d 53, 56 (4th Cir. 1995), cert. denied, 516 U.S. 1159 (1996); Tregoning v.

American Community Mutual Ins. Co., 12 F.3d 79, 82 (6th Cir. 1993),

cert. denied, 511 U.S. 1082 (1994); Libbey-Owens-Ford Co. v. Blue Cross &

Blue Shield Mut. of Ohio, 982 F.2d 1031, 1035 (6th Cir.) (an insurance

company with discretionary authority to determine claims is an ERISA

fiduciary “whether the * * * company is the carrier administering claims

under ar. insurance policy or is administering claims for a fee under

a self-irsured plan”), cert. denied, 510 U.S. 819 (1998).

16 The courts of appeals have held that state-law claims arising from

claims denials by HMOs are preempted (unless saved by the insurance

savings clause). See, ¢.g., Parrino v. FHP, Inc., 146 F 8d 699 (9th Cir.)

(state-law claim based on HMO’s denial of particular cancer therapy), cert.

denied, 119 S. Ct. 510 (1998); Turner v. Falion Community Health Plan,

127 F.3d 196 (Ist Cir. 1997) (same), cert. denied, 118 S. Ct. 1512 (1998);

Cannon v. Group Health Serv., Inc., T7 F.3d 1270 (10th Cir.) (state-law

claim of delay by HMO and insurers in authorizing particular cancer treat-

ment), cert. denied, 519 U.S. 816 (1996); Kuhl v. Lincoln Nat'l Health

Plan, Inc., 999 F.2d. 298 (8th Cir. 1993) (state-law claim of delay in HMO’s

authorization for out-of-network surgery), cert. denied, 510 U.S. 1045

(1994).

The Department of Labor’s claims-processing regulations

similarly establish that the processing of claims is an essen-

tial plan function. See 29 C.F.R. 2560.503-1. Those regula-

tions further recognize that claims processing may be done

by an insurer, 29 C.F.R. 2560.503-1(c), that a plan’s claims

procedures may provide that claims for benefits must be

filed with “an insurance company, insurance service, or other

similar organization,” 29 C.F.R. 2560.503-1(d)(3), and that

such organization may be designated to provide notice of

denial of a claim to a beneficiary, 29 C. F. R. 2560.503-1(f). Of

particular significance here, the regulations provide that,

with respect to plans in which benefits are provided by “an

insurance company, insurance service, or other similar orga-

nization,” the plan may provide that such organization “shall

be the ‘appropriate named fiduciary’” for purposes of decid-

ing appeals from denied claims. 29 C.F.R. 2560.503-1(g)(2).

The regulations furthermore provide that claims procedures

specified in the Public Health Service Act, 42 U.S.C. 300e,

are sufficient to satisfy ERISA requirements “with respect

to any benefits provided through membership in a qualified

health maintenance organization,” 29 C.F.R. 2560.503-1(j).

They thus make clear that HMOs, like other health insur-

ance entities, engage in the administration of ERISA plans

when they process claims."

*The Department of Labor has published a new proposed claims

procedure regulation. 63 Fed. Reg. 48,390 (1998). That regulation “would

establish new standards for the processing of group health, disability,

pension, and other employee benefit plan claims filed by participants and

beneficiaries.” Ibid. The proposed regulation was designed in large part

to address the “dramatic changes” that “have occurred in the health in-

dustry” caused by the “growth of managed care delivery systems.” Id. at

48,391. The proposed regulation therefore specifically addresses claims

procedures of “group health plan services or benefits,” see, ¢.g., id. at

48,405, and plans in which benefits are provided by “an insurance com-

pany, insurance service, third-party contract administrator, health main-

tenance organization, or similar entity,” id. at 48,406 (emphasis added).

24

2. For the foregoing reasons, we disagree with Judge

Easterbrook’s suggestion, dissenting from denial of rehear-

ing en banc, that “the Carle Care HMO system [is] the

benefit promised by the ERISA plan,” not the “particular

medical services” offered by the HMO. Pet. App. 55a. That

suggestion would place HMO coverage in an entirely differ-

ent regulatory category from other forms of health coverage,

such as traditional health insurance. This Court’s decisions

in Pilot Life and UNUM establish that the benefit offered in

a traditional insured ERISA plan is not the insurance policy,

but the specific benefits offered under the insurance policy;

because the processing of claims for particular benefits is a

subject addressed by ERISA, the state laws governing

claims processing in those cases “related to” ERISA plans.

Yet, if Judge Easterbrook’s rule were adopted, the rule

would be precisely the opposite in the case of an HMO.

There is no reason why the scope of ERISA’s coverage—

and, correspondingly, of state law’s application—should vary

so widely depending on whether an ERISA plan offers

traditional health insurance coverage or HMO coverage in-

stead.

Moreover, Judge Easterbrook’s proposal would have

serious consequences for the operation of HMOs. For

example, this Court’s decision in Pilot Life was based on the

premise that a state-law claim for “bad faith” processing of

claims by an insurer under an ERISA plan is preempted,

because such a claim “relates to” the ERISA plan. But if the

“intended benefit,” see p. 10, supra, of the ERISA plan is

simply membership in an HMO, then the only “claims pro-

cessing” that would occur under ERISA with respect to the

HMO is the processing of claims that an individual is entitled

to enroll in the HMO; claims for particular medical benefits

would not be claims for benefits under the ERISA plan, but

would rather be internal matters between the HMO and its

members. It follows that state laws governing the pro-

cessing of claims for particular medical benefits would gov-

ern that area entirely, including state law provisions per-

mitting compensatory and punitive damages and other

remedies not permitted by ERISA.

Congress currently has before it a variety of proposals

that would eliminate ERISA preemption of state-law causes

of action for damages (including, in some cases, punitive

damages) by ERISA beneficiaries against HMOs and other

group health plans. For example, H.R. 2990, a bill recently

passed by the House of Representatives, see 146 Cong. Rec.

H9523-01 (daily ed. Oct. 7, 1999), would eliminate preemption

of such damages actions “in connection with the provision of

insurance, administrative services, or medical services by [a]

person to or for a group health plan * * * or * * * that

arises out of the arrangement by [a] person for the provision

of such insurance, administrative services, or medical

services by other persons.” H.R. 2990, 106th Cong., Ist Sess.

§ 1302(a) (1999). It is a premise of the House bill that

ERISA currently operates to restrict such state-law causes

of action, because they would regulate benefits decisions

under ERISA. Under Judge Easterbrook’s reading, how-

ever, any such legislative change would be unnecessary,

since decisions by HMOs regarding whether particular medi-

cal benefits are covered would not be decisions concerning

the benefits due under an ERISA plan and would therefore

not be subject to preemption under ERISA. Any such far-

reaching change should be enacted by Congress, not by

18 A number of bills addressing HMOs and their relationship to ERISA

are currently in the forefront of congressional consideration. Quality Care

for the Uninsured Act of 1999, H.R. 2990, 106th Cong., Ist Sess., 145 Cong.

Rec. H9523-01 (daily ed. Oct. 7, 1999); Patients’ Bill of Rights Plus Act, S.

1344, 106th Cong., Ist Sess., 145 Cong. Rec. $8623 (daily ed. July 15, 1999)

(bill passed as amended); see H.R. Res. 348, 106th Cong., Ist Sess., 145

Cong. Rec. H11341 (daily ed. Nov. 2, 1999) (House cisagrees with Senate

amendment to H.R. 2990 and agrees to conference).

judicial fashioning of an artificially narrow definition—app-

arently applicable only to HMOs and not to traditional

insurers—of the “intended benefits” offered under an

ERISA plan.

3. Because processing of claims for medical benefits—

whether undertaken by the plan sponsor, a traditional fee-

for-service insurer, or an HMO—is a function of ERISA plan

administration, any individual or entity that exercises dis-

cretion in the processing of such claims is an ERISA fiduci-

ary. And to the extent the complaint in this case alleges that

Carle Care physicians make discretionary decisions in

deciding claims, it has alleged conduct that is fiduciary in

nature. Cf. Corcoran v. United Healthcare, Inc., 965 F.2d

1321, 1331-1332 (5th Cir.) (decision that a particular benefit

is not covered by the plan involves plan administration, even

though there is a medical component to the decision), cert.

denied, 506 U.S. 1033 (1992); see generally 29 C. F. R. 2509.75-

8 (determining benefit eligibility will involve fiduciary status

if discretion is exercised, i. e., if it involves more than min-

isterial functions * within a framework of policies,

interpretations, rules, practices and procedures made by

other persons”). Indeed, petitioners appear to have ac-

knowledged that fiduciary status and a duty of loyalty apply

in such a context, stating that in contrast to the HMO’s cost-

containment and other business decisions, the HMO “must

make coverage and eligibility decisions under the plan with

an ‘eye single’ to the interests of the patient/beneficiaries.”

Pet. 28. Similarly, in their reply brief at the certiorari stage,

petitioners stated that they “freely acknowledge that they

are plan fiduciaries when they engage in activities denomi-

nated as fiduciary by ERISA, e.g., when they provide infor-

mation to participants as required under ERISA and when

they make decisions about who is eligible for plan benefits.”

Pet. Reply Br. 7 (emphasis added).

27

The “administrative” allegations in the complaint, if liber-

ally construed, could be read to allege conduct by petitioners

in their fiduciary status. Those allegations state that peti-

tioners administerſ] disputed and non-routine health insur-

ance claims.” Pet. App. 86a. Specifically, the complaint

alleges that petitioners “determin[e] * which claims are

covered under the Plan” and several other issues that are

determinative of coverage, such as “what the applicable

standard of care is,” “whether a course of treatment is ex-

perimental,” “whether a course of treatment is reasonable

and customary,” and “whether a medical condition is an

emergency.” Ibid. Because those specific allegations are

phrased in terms of “administering” the plan, rather than

providing medical care, we do not read them to refer to a

treating physician’s determination of how to treat a patient,

whether a course of treatment is sufficiently proven to be

safe, or whether an emergency exists that calls for the use of

particular medical emergency protocols. Rather, we read

those allegations to refer to the claims administration pro-

cess within the HMO, which is triggered when individuals

(or, perhaps, treating physicians) seek determination of

whether particular medical services are covered by the plan.

Insofar as the complaint alleges that petitioners act in the

role of claims decisionmakers, the complaint therefore al-

leges that they act as ERISA fiduciaries. See also J.A. 102

(Summary Plan Description of State Farm Group Medical

Health Plan) (“Although State Farm * * * is the Plan

Administrator and Plan Sponsor * * *, any and all benefit

determinations will be made by each individual HMO.”).

4. Although the complaint does allege that petitioners

act as ERISA fiduciaries insofar as they make determina-

tions concerning benefits under the ERISA plan, the

question remains whether the complaint adequately alleges

the existence of an incentive scheme that would constitute a

violation of the duty of loyalty in the context of exercising

28

that particular fiduciary responsibility, i e., of deciding bene-

fit claims.

In our view, the fact that a denial of coverage by a Carle

Care physician represents a cost saving for the HMO and

that this same physician has some ownership interest in the

HMO would not in itself establish a fiduciary breach. Under

typical arrangements for employee benefit plans, such as an

insured health plan where the insurance company has dis-

cretionary authority to decide claims, or a plan under which

a company employee has such authority and the employer

pays claims out of its own assets, there is some measure of

divided loyalty on the part of a claims decisionmaker.

ERISA, however, tolerates the level of divided loyalty that

is intrinsic to those common arrangements, so that ERISA

plans will be created and insurance companies and others

will find it practical to work for them. Cf. 29 U.S.C. 1108(c)

(party-in-interest may serve as fiduciary).” The mere

existence of such a potential conflict is not therefore a basis

for a claim of breach of fiduciary duty.

On the other hand, a claim that an incentive scheme

constituted a breach of fiduciary duty would be established if

the scheme provided incentives of such a nature that the

individual deciding claims for benefits would be unable to set

aside personal interest and make the benefits determination

based on the terms of the plan. Cf. Donovan v. Bierwirth,

680 F.2d 263, 271 (2d Cir.) (trustees should “avoid placing

themselves in a position where their acts as officers or

directors of the corporation will prevent their functioning

19 Firestone Tire & Rubber established that any such arrangement

should be “weighed as a factor in determining whether there is an abuse of

discretion” in a claim for denial of benefits under ERISA Section

502(a(1(B), 29 U.S.C. 1182(aX 1B). 489 U.S. at 115 (internal quotation

marks omitted). The courts of appeals have varied in their approach to

factoring in such systemic divided loyalties. See Doyle v. Paul Revere

Life Ins. Co., 144 F.3d 181, 184 (Ist Cir. 1998).

with the complete loyalty to participants demanded of them

as trustees”), cert. denied, 459 U.S. 1069 (1982). For exam-

ple, a compensation scheme that provided direct financial in-

centives to plan fiduciaries for making adverse rulings on

benefits claims—e.g., a (highly unlikely) scheme providing

fiduciaries with a fee for each claim they deny—would run

afoul of the duty of loyalty.

5. Read literally, the “administrative” allegations in the

complaint merely allege that petitioners “seek to fund their

supplemental medical expense payments * * * by ad-

ministering disputed and non-routine health insurance

claims” and making the determinations necessary to such

administration. Pet. App. 86a. That is merely an allegation

that petitioners make a profit by administering the ERISA

plan, and it certainly does not state a claim of breach of

fiduciary duty. Even if it were construed, however, to allege

as well that petitioners employed some form of compensation

scheme in which those processing claims for the HMO shared

in the HMO’s general profits, it would not allege a breach of

fiduciary duty under ERISA, for the reasons given above.

Nothing in the complaint itself suggests that respondent

was intending to plead that petitioners employed the kind of

unusual incentive scheme, described above, in which those

who decide disputed claims would be paid on the basis of how

many claims they deny or would otherwise be paid in a way

that violates ERISA’s standards of fiduciary duty. Indeed,

the court of appeals read the complaint to allege only that

physicians at the HMO who participate in claims processing

are provided with a bonus payment based on the HMO’s

overall profits. See, eg., Pet. App. 19a (“Because the

physician/administrators’ year-end bonuses were based on

the difference between total plan costs (i.e., the costs of pro-

viding medical services) and revenues (i.e., payments by plan

beneficiaries), an incentive existed for them to limit treat-

ment and, in turn, HMO costs so as to ensure larger bo-

30

nuses.”) (emphasis omitted); id. at 21a (complaint alleges

that petitioners “control the care of their patients and reap

the profits generated by the HMO through the limited use of

tests and referrals”) (emphasis omitted). Because the “ad-

ministrative” allegations of the complaint therefore do not

allege a breach of fiduciary duty under ERISA, the judg-

ment of the court of appeals should be reversed.

CONCLUSION

The judgment of the court of appeals should be reversed.

Respectfully submitted.

SETH P. WAXMAN

Solicitor General

HENRY L. SOLANO EDWIN S. KNEEDLER

Solicitor of Labor Deputy Solicitor General

ALLEN H. FELDMAN JAMES A. FELDMAN

Associate Solicitor Assistant to the Solicitor

MARK S. FLYNN General

Senior Appellate Attorney

Department of Labor

NOVEMBER 1999

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