# Amicus Curiae Brief — Pegram v. Herdrich

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0281%3A11

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2000
- **Citation:** 530 U.S. 211

## Text

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
a 9
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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0281%3A11. Public record. Not legal advice.