Amicus Curiae Brief — Pegram v. Herdrich

eee [Supreme cout us

FILED

1) DEC 20 1999

rig

No. 98-1949 Cer

In the

Supreme Court of the United States

Lori Pegram,

Petitioner,

V.

CYNTHIA HERDRICH,

‘ Respondent.

On Writ of Certiorari

To the United States Court of Appeals

For the Seventh Circuit

+

BRIEF OF THE STATES OF ILLINOIS

CALIFORNIA, DELAWARE, FLORIDA, IOWA,

MASSACHUSETTS, MISSISSIPPI, MISSOURI

MONTANA, NEVADA, NEW JERSEY, NORTH

CAROLINA, OHIO, OKLAHOMA, PENNSYLVANIA,

RHODE ISLAND, TENNESSEE AND TEXAS AS

AMICI CURIAE IN SUPPORT OF RESPONDENT

JAMES E. RYAN Nes

Attorney General of Illinois

* JOEL D.BERTOCCHI _—

Solicitor General of Illinois

Jacqueline Zydeck

Assistant Attorney General

100 West Randolph Street

Chicago, IL l

(312) 814-7175

Of Counsel:

Dan Schweitzer _

National Association of

Attorneys General

750 First St., N.E., Suite 1100

Washington, D.C. 20002

* Counsel of Record CPs

[additional counsel listed on inside cover]

| BEST AVAILABLE COPY

BILL LOCKYER

Attorney General of California

1300 I Street

Suite 1730

Sacramento, CA 95814

M. JANE BRADY

Attorney General of Delaware

t of Justice

820 N. French St.

Wilmington, DE 19801

ROBERT A. BUTTERWORTH

Attorney General of Florida

The Capitol, PL-01

Tallahassee, FL 32399-1050

THOMAS J. MILLER

Attorney General of lowa

Hoover Building

Des Moines, IA 50319

TOM REILLY

Attorney General

of Massachusetts

One Ashburton Place

Boston, MA 02108-1698

MIKE MOORE

Attorney General of Mississippi

P.O. Box 220

Jackson, MS 39205

JEREMIAH W. (JAY) NIXON

Attorney General of Missouri

Supreme Court Building

207 West Hight Street

Jefferson City, MO 65101

JOSEPH P. MAZUREK

Attorney General of Montana

P.O. Box 201401

215 N. Sanders

Helena, MT 59620-1401

FRANKIE SUE DEL PAPA

Attorney General of Nevada

100 N. Carson Street

Carson City, NV 89701-4717

JOHN J. FARMER, JR.

Attorney General of New Jersey

25 Market Street

P.O. Box 080

Trenton, NJ 08625

MICHAEL F. EASLEY

Attorney General

of North Carolina

P.O. Box 629

Raleigh, NC 27602

BETTY D. MONTGOMERY

Attorney General of Ohio

30 E. Broad Street

17" Floor

Columbus, OH 43215

x

W.A. DREW EDMONDSON

Attorney General of Oklahoma

2300 N. Lincoln Boulevard

Suite 112

Oklahoma City, OK 73105-4894

MIKE FISHER

Attorney General

of Pennsylvania

15 Floor

Strawberry Square

Harrisburg, PA 17120

SHELDON WHITEHOUSE

Attorney General

of Rhode Island

150 South Main Street

Providence, RI 02903

PAUL G. SUMMERS

Attorney General of Tennessee

Cordell Hull Building

Nashville, TN 37243

JOHN CORNYN

Attorney General of Texas

P.O. Box 12548

Austin, TX 78711

TABLE OF CONTENTS

Page

Nee tee ii

INTEREST OF THE AMJC] CURIAE ............ l

SUMMARY OF ARGUMENT ................. 2

LE Ee ee 6

I. HMOS ARE NOT ERISA PLANS--THEY

ARE HEALTHCARE BUSINESSES THAT

SELL PRODUCTS AND SERVICES ........ 6

A. The ERISA Plan and Benefit ........... &

B. HMO Services and Plan Administration ... 11

Il. THE ORIGINAL COUNT T[il IS NOT

PREEMPTED BY ERISA .............. 16

Il. RESPONDENT STATES AN ERISA CLAIM

WHEN SHE PLEADS THAT HMO

BENEFIT DETERMINATIONS IN

ADMINISTRATION OF THE PLAN WERE

BASED ON THE HMO’S OWN FINANCIAL

EEE re 23

DU MEPE CE CSc ccegecetceescsces 27

TABLE OF AUTHORITIES

Page

CASES:

American Drug Stores, Inc.,

v. Harvard Pilgrim Health Care, Inc.,

973 F.Supp. 60 (D. Mass. 1997) ............. 13-15

Anderson v. Humana, Inc.,

24 F.3d 889 (7th Cir. 1994) ..........22555- 20, 21

Arizona State Carpenters Pension Trust Fund

v. Citibank,

125 F.3d 715 (9th Cir. 1997) .........22000-- 12

Blue Cross of California

vy. Anesthesia Care Associates Medical Group, Inc.,

ype bl ale | 22

Cipollone v. Liggett Group,

. file !. Serr rrr re er 18

Conley v. Gibson,

SORT GRE 6 0h 60s ee cecccbvestbeets 23

Coyne & Delany Co. v. Selman,

98 F.3d 1457 (4" Cir. 1996) .........-2 2c ees 22

Curtiss-Wright Corp. v. Schoonejongen,

hil &.f aePrrrr Tay er et) 2

Custer v. Sweeney, .

89 F.3d 1156 (4th Cir. 1996) .........-- 220 ee 12

De Buono v. NYSA-ILA Medical

& Clinical Serv. Fund,

$20 U.S. 806 (1D9T) . 0. ccc ccc ceccvnes Passim

Donovan v. Bierwirth,

680 F.2d 263 (2d Cir.),

cert. denied, 459 U.S. 1069 (1982)... ........... 25

Donovan v. Dillingham,

GUS F.26 1367 (1 iG Cir. 1962)... 6. ee eee &

Dukes v. U.S. Healthcare, Inc.,

57 F.3d 350 (3d Cir.),

cert. denied, 516 U.S. 1009 (1995) ........... 16, 24

Engelhardt v. Paul Revere Life Ins. Co..,

139 F.3d 1346 (llth Cir. 1998) ............... 16

Fort Halifax Packing Co, Inc. v. Coyne,

i aU pci deewcceatewcncecs 9, 16

Herdrich v. Pegram,

oA le le | 24

Hospice of Metro Denver, Inc.

v. Group Health Ins. of Oklahoma, Inc.,

oe | 12

Hughes Aircraft Co. v. Jacobson,

ee 16

In re U.S. Healthcare, Inc.,

193 F.3d 151 (3% Cir. 1999) ............... 15, 22

Labor Standards Enforcement

v. Dillingham Construction, N.A., Inc.,

Sn cG ay eb ce swede saws ée 21

Libbey-Owens-Ford Co.

v. Blue Cross & Blue Shield Mut. of Ohio,

982 F.2d 1031 (6th Cir),

cert. denied, 510 U.S. 819 (1993) ............. 16

Lockheed Corp. v. Spink,

| RRR ae t as e ae g

Lupo v. Human Affairs Intern., Inc.,

ee GS GED cece cvcceseoucwsX

Massachusetts v. Morash,

ee ee ee ee ee

Metropolitan Life Insur. Co. v. Massachusetts,

eS bd 5 ov wo b.565s40 00 des e408

v. CIGNA Healthcare of Connecticut,

238 Conn. 216 (Sup. Ct. Conn. 1996),

cert. denied, 520 U.S. 1103 (1997) .............

New York State Conference of Blue Cross

& Blue Shield Plans v. Travelers Ins. Co.,

Se CD .daeehueesvesdcovdes Passim

Pacificare of Oklahoma, Inc. v. Burrage,

ee es ee eS SOU Web bee occ eet cle e's

Pilot Life Insurance Co. v. Dedeaux,

4 OU Lf eee cl rT eee 10,

Scheuer v. Rhodes,

SED. ci 6ecnen dhe dewieweneawe

Shaw v. Delta Airlines, Inc.,

SD: v.06 000 66000 b boned ee Uae

Shea v. Esensten,

107 F.3d 625 (8th Cir.),

cert. denied, 522 U.S. 914(1997) ..............

Tetz v. Continental DuPage Acura,

236 Ill. App. 3d 891 (2d Dist. 1992) .............

Vv

UNUM Life Insurance Co. v. Ward,

EE 8, 10, 16

Washington Physicians Serv. Ass'n v. Gregoire,

147 F.3d 1039 (9th Cir. 1998),

cert. denied, 119 S.Ct. 1033(1999) .......... Passim

STATUTES AND LEGISLATIVE MATERIALS:

Del. Code Ann. tit. 18, § 6407 (1998) ........... 14

ee eee 7

EES ee a 8

IS, hk eS ee Das 8

EE 18

Se ne 7

re te ea ds 5

eNO oi incu cd cceescdcus 8

29 U.S.C. § 1191b(a(1) ... 2.22... Pate Gates 9

a 9

40 Pa. Const. Stat. Ann. § 991.2112 (West Supp. 1999) i

a 5

Alaska Stat. § 21.86.150 (i)(2) (Michie 1999) ...... 14

vi

Alaska Stat. § 21.86.160(1)(4)(Michie 1998) ....... 14

Cal. Health & Safety Code § 1346.6 (West Supp. 1999) .

Georgia Code Ann. § 33-20A-G (Supp. 1999) ...... 14

Idaho Code § 41-3928 (1998 ................. 14

Ill. Rev. State ch. 815,

peng Sas yea rehearses 18, 19

Kansas Stat. Ann. § 40-4605 (Supp. 1998) ........ 14

La. Rev. Stat. Ann. § 22:215.19 (West Supp. 1999) .. 14

Md. Code Ann. Ins. § 15-113(c) (1997) .......... 14

Minn. Stat. § 72A.20, Subd. 33 (1999)........... 14

Mo. Rev. Stat. § 354.606(5) (Supp. 1999)......... 14

Mont. Code Ann. § 33-36-204(2) (1997).......... 14

Neb. Rev. Stat. § 44-7106(2)(h) (Supp. 1998) ...... 14

Nev. Rev. Stat. § 695G.260 (1998) ............. 14

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

Dc Uudcite aka kinekewdiarsiaene 14

Pa. Stat. Ann., tit. 40, § 991.2113 (Purdon 1999) .... 14

R.I. Gen. Laws § 23-17-17-3(B)(6) (1996) ........ 14

Tex. Ins. Code Ann. Arts. 20A.14(1), 3.70-3C, § (7)(d)

CUS GA GE 0 tid ei eosetetesactves 14

Fe ee

Vii

OTHER MATERIALS:

Karen A. Jordan,

Travelers Insurance: New Support for the

Argument to Restrain ERISA Pre-emption,

13 Yale J. Reg. 255 (1996)

ee 2? oe ee. 2 6.82 @ 8 2 8 2 a oa

INTEREST OF THE AMICI CURIAE

Amici curiae, the States of Illinois, California, Delaware,

Florida, lowa, Massachusetts, Mississippi, Missouri, Montana,

Nevada, New Jersey, North Carolina, Ohio, Oklahoma,

Pennsylvania, Rhode Island, Tennessee and Texas, submit this

brief in support of respondent Cynthia Herdrich. The issues

posed in this case have significant implications for the States’

ability to reguiate two areas of traditional state concern: the

medical care provided to their citizens and the business

practices of medical care providers. The amici States have a

strong interest in assuring that their citizens are provided with

competent medical care and that heaithcare businesses market

and perform their services fairly. As managed care, through the

proliferation of health maintenance organizations (HMOs), has

become a more common vehicle for healthcare delivery, the

States have become more active in its regulation. Amici

regulate medical care and the business of HMOs through

healthcare statutes, insurance statutes, laws of general

application such as consumer protection statutes, common law

standards and the provision of both statutory and common law

remedies.

The amici States also have a strong interest in the

construction of ERISA. ERISA preempts State laws that

“relate to” ERISA plans and are not saved from preemption by

ERISA’s insurance savings clause. This Court has held that

state laws that “mandate employee benefit structures or their

administration” “relate to” ERISA plans, New York State

Conference of Blue Cross & Blue Shield Plans v. Travelers Ins.

Co., 514 U.S. 645, 646 (1995), and that “‘myriad state laws’

of general applicability that impose some burdens on the

administration of ERISA plans” do not “relate to” ERISA

plans, De Buono v. NYSA-ILA Medical & Clinical Serv. Fund,

l

2

520 U.S. 806, 815 (1997). The Court’s determination of the

circumstances in which an HMO engages in ERISA plan

administration will have significant implications for the States’

ability to regulate HMOs. The States have a strong interest in

preserving the appropriate balance of authority between the

States and the federal government and in ensuring that ERISA

preemption is not extended beyond Congressional intent. This

is particularly important because the States protect consumers’

interests in healthcare in numerous respects, while ERISA

provides little substantive federal regulation of healthcare.

Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 78

(1995).'

SUMMARY OF ARGUMENT

In the late 1960s and early 1970s, when ERISA was drafted

and debated in Congress, the delivery of medical care was

dominated by reimbursed fee-for-service medicine. Physicians

rendered services they deemed appropriate for patients. After

services were provided, insurers were presented with the bill

and paid the reasonable cost. Healthcare services and the

payment for those services were separate functions, and there

was little “managed care.” ERISA was not enacted with HMOs

in mind.

Today, managed care is the norm. Healthcare services and

payment for care are integrated into a single organization,

typically the HMO. The trend toward managed care is

expected to continue into the next century.

The States have traditionally regulated healthcare and the

business of healthcare providers in order to protect consumers’

rights to healthcare and insurance. The “starting presumption”,

ad eA Sey aca gel 9 ries act 6 ee

3

Travelers, 514 U.S. at 654, is that Congress, when it enacted

ERISA, intended such State regulation to continue -- the Court

has “unequivocally concluded” that there was no intention to

undermine traditional State regulation. De Buono, 520 U.S. at

813. ERISA was enacted to protect consumers--“‘to promote

the interests of employees and their beneficiaries in employee

benefit plans,’ ...and ‘to protect contractually defined

benefits’’”'--and is thus consistent with State consumer

protection regulation and remedies. While Congress indicated

a desire for uniform administration of benefit plans, 7ravelers,

ERISA was never intended to protect healthcare businesses

from State regulation and from liability for wrongful acts under

State laws.

Because healthcare and managed care have become virtually

synonymous, regulation of healthcare implies regulation of

HMOs. In parsing federal and State interests with respect to

HMOs, amici believe the Court should be guided by five

general principles.

1. The HMO is not the ERISA plan. HMOs and other

managed care organizations are not ERISA plans. They are

healthcare businesses. They sell a product, healthcare, they

arrange services, and they manage their own business. These

areas are traditionally subject to State regulation, and ERISA

does not change this.

2. The fact that an HMO provides services to an ERISA plan

does not relieve it from State law regulation as a healthcare

business and provider of medical care. State law regulates

'Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 113 (1989).

See also 29 U.S.C. § 1001(b).

4

healthcare business and medical care and provides remedies to

consumers for wrongful acts of healthcare providers. ERISA

was enacted to augment these protections, not to eliminate

them.

3. The ERISA healthcare benefit is payment for healthcare.

ERISA plans are benefit plans created by employers. The plans

are comprised of a set of rules for disbursing employee

benefits. Employers may implement the plans in a variety of

ways: through the purchase of insurance, through self

insurance, by providing medical services themselves in-kind’

and/or by contracting with HMOs for the arrangement and

provision of medical services. The benefit is not any one of

these vehicles, nor is it any particular services--it is payment

for healthcare.

4. Only the administration of the ERISA plan implicates

ERISA duties; the administration of the HMO’s business,

including the arrangement and provision of healthcare, does

not. The administration of the ERISA plan is a matter of

federal concern. The administration of the HMO’s business is

a matter of State concern.

When the HMO is selected by the employer--or, as in this

case, by the employee who has been given a choice of

healthcare vehicles by the employer--the HMO arranges and

provides medical care. The delivery and arrangement of care

and the administration of the HMO’s own business are not acts

?An employee benefit plan can arrange to provide services in-kind

operating its own medical facility, as was done by the plan in De Buono,

or by contracting directly with a physician network.

hi a Gree Ene ae a ee Cie ok.

5

of ERISA plan administration. They are subject to State

regulation, not to ERISA duties.

When benefit determinations are delegated to the HMO, it

wears a second hat. Under this hat, the HMO participates in the

administration of the ERISA plan. When and to the extent it

does so, it is subject to ERISA duties.

5. Even when the HMO engages in plan administration, it

is subject to State regulation as an insurer. The HMO is an

insurer, assuming risk of healthcare loss. 42 U.S.C. §

300e(c)(2).? See also Washington Physicians Serv. Ass'n v.

Gregoire, 147 F.3d 1039, 1046 (9th Cir. 1998), cert. denied,

119 S.Ct. 1033 (1999). Even acts of plan administration may

be regulated by the States under State insurance, banking, or

securities laws. 29 U.S.C. § 1144(b)(2).

These principles have a number of implications for this case.

First, respondent’s original Count II]--that the HMO’s failure

to disclose its ownership structure and financial incentive

arrangements violated the Illinois Consumer Fraud Act--is not

preempted by ERISA. This claim was brought against the

HMO as a healthcare provider and business marketing its

product to consumers. It was not brought against the HMO for

acts of ERISA plan administration. The district court’s

preemption ruling was not appealed, but it was based on an

assumed equivalence between the HMO and the ERISA plan

that 1s incorrect.

*Pursuant to the statute, the HMO may share this risk with other

entities.

6

Second, there is no ERISA claim based on the existence of

financial incentives in HMO arrangements with providers, and

there is no ERISA claim based on medical treatment decisions

or the arrangement of medical care, even when the HMO is also

engaged in plan administration. The HMO’s business and its

healthcare services are not acts of plan administration. They

are matters of State, not federal, concern.

Third, when the HMO wears two hats--as healthcare arranger

and provider and as ERISA plan administrator--it is subject to

both State and federal requirements. Respondent’s original

Count III stated a State claim based on the HMO’s business as

healthcare provider. But after the district court dismissed this

claim, respondent amended her complaint, alleging in new

Count III that the HMO administered the ERISA plan

improperly. This is an ERISA claim. Respondent should be

given an opportunity to prove that the HMO’s administration

of the plan was based on the HMO’s financial interests and not

on the standards in the pian.

ARGUMENT

I. HMOS ARE NOT ERISA PLANS--THEY ARE

HEALTHCARE BUSINESSES THAT SELL

PRODUCTS AND SERVICES

The nature of ERISA plan administration is central to this

case. ERISA imposes fiduciary duties--and respondent states

an ERISA claim--only in connection. with acts of plan

management or administration. This is consistent with the

purpose of ERISA: to ensure that employees’ expectation of

benefits is not defeated by poor plan administration.

Massachusetts v. Morash, 490 U.S. 107, 112 (1989). ERISA

= ent ee Yn eh

eS ae pat ont ating

7

was enacted to control “the administration of benefit plans.”

Travelers, 514 U.S. at 651.

A person is an ERISA plan fiduciary “to the extent” that he

or she “exercises any discretionary authority or discretionary

control respecting management” of the plan or “has any

discretionary authority or discretionary responsibility in the

administration of such plan” (with certain exceptions not

relevant here*). 29 U.S.C. § 1002 (21)(A). An entity

contracting with an ERISA plan only acts as a fiduciary when

performing administrative functions for the plan. Varity Corp.

v. Howe, 516 U.S. 489 (1996).°

The nature of plan “administration” is also central to amici’s

interest in this case. State regulation and State remedies are

preempted when they “relate to” an ERISA plan (and are not

saved by the insurance savings clause). The Court interprets

“relate to”--a term of “frustrating difficulty”, Travelers, 514

U.S. at 656--with reference to the “basic thrust of the

preemption statute”: “to permit the nationally uniform

administration of employee benefit plans.” J/d., at 657

(emphasis added). A State law that regulates HMO plan

administration activities “relates to” the plan. A State law

“All ERISA plans are required to have a "named" fiduciary, a person,

group of persons or corporation, identified in a written plan instrument.

29 U.S.C. § 1102(a)(1). A person who provides investment advice to a

plan for a fee is also a fiduciary. 29 U.S.C. § 1002 (21)(A).

> Rendering services to a plan is not enough to make one a fiduciary

of the plan. Services providers, such as attorneys, accountants and

consultants act as an ERISA fiduciary only when they are exercising

discretionary authority in the administration or management of an ERISA

plan. See 29 C.F.R. § 2509.75-5.

regulating HMO activities that do not constitute ERISA plan

administration does not “relate to” the plan.*

Of course, under the “savings” clause, the States can also

regulate HMOs as insurers--petitioners agree that HMOs are

insurers (Pet. Br. 26-27’)--under State insurance: laws even

when such laws mandate plan administration and thus “relate

to” an ERISA plan. 29 U.S.C. § 1144(b)(2)(A). See,

e.g., UNUM Life Insurance Co. v. Ward, 526 U.S. 358 (1999).

A. The ERISA Pian and Benefit

ERISA defines an “employee welfare benefit plan” as “any

plan fund or program ... established or maintained by an

employer . . . for the purpose of providing 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). A “plan, fund or

program” is not defined in the statute but has been interpreted

to require the existence of benefits, intended beneficiaries, a

source of funding, and a procedure to apply for and collect

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

1982).

*See Washington Physicians Serv. Ass'n v. Gregoire, 147 F.3d at

1044. Gregoire is consistent with Metropolitan Life Insur. Co. v.

Massachusetts, 471 U.S. 724 (1985); the State law in Gregoire was

addressed to HMOs and not, as in Metropolitan Life, to employee plans.

™" An HMO is, by definition, an entity that assumes ‘full financial risk

on a prospective basis for the provision of basic health services....' 42

U.S.C. § 300e(c)(2)." Ibid. See also Washington Physician Serv. Ass'n

v. Gregoire.

ee ee es Ae

damnatenttet <bean.

shen

9

The plan itself is a set of rules that govern the benefit. These

rules guide “determin{ation of] the eligibility of claimants,

calculating benefit levels, making disbursements, monitoring

the availability of funds for benefit payments, and keeping

appropriate records.” Fort Halifax Packing Co, Inc. v. Coyne,

482 U.S. 1, 9 (1987). In this case, the ERISA plan comprised

the documents setting forth the terms under which State Farm,

respondent’s husband’s employer, provided benefits to its

employees and their families. The plan documents did not

contain the compensation arrangements between the HMO and

providers. Nor did they specify HMO financial incentives

available to providers.

Under ERISA, the healthcare benefit is payment for medical

care. While ERISA did not originally contain a definition of

“medical care,” the Health Insurance Portability and

Accountability Act, a 1996 amendment to ERISA, defines

“medical care” as used in ERISA to mean “amounts paid for”

medical care or medical insurance, 29 U.S.C. § 1191b (a)(2).

The amendment is applicable to an “employee welfare benefit

plan to the extent the plan provides medical care . . . to

employees or dependents . . . directly or through insurance,

reimbursement, or otherwise.” 29 U.S.C. § 1191b (a)(1).* See

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

due to [the participant] under the Plan . . . are payments of the

*This definition is appropriate because ERISA benefits are provided in

lieu of compensation. In most cases, ERISA benefits are strictly financial.

Cash distributions are given to a beneficiary upon the occurrence of some

contingent event, disability, retirement or death. Or the employer agrees

to arrange for payment of certain services (e.g., medical care, day care

and prepaid legal services) provided to plan participants. The employer

may arrange for payment in any one of several different ways, including

payment of the services in kind.

10

costs of medical services, not the medical services

themselves.”’).

Amici disagree with Judge Easterbrook’s statement that the

“HMO system”’--rather than payment for healthcare services--is

the ERISA plan benefit (Pet. App. 55a, 170 F.3d at 686). This

view is inconsistent with the statutory rubric. It would

essentially read plan administration out of ERISA. Judge

Easterbrook distinguishes “treating the Carle HMO as the

benefit, rather than treating the Carle HMO as the administrator

of the ERISA plan,” ibid., and appears to view these categories-

-the plan benefit and the administration of the plan--as mutually

exclusive. When the employer’s only involvement in

administration is to send checks to the HMO and when all other

administrative functions are delegated to the HMO, there will

be, in Judge Easterbrook’s formulation, no “administration”:

the HMO doesn’t administer because it is the benefit, and no

one else engages in any administration. And if HMO

membership, rather than payment for medical services, is the

benefit, once the participant becomes a member, there will be

no benefit to administer. ERISA fiduciary protections for acts

of plan administration would thus be diluted or eliminated,

frustrating a principal federal concern. HMOs would likely

argue, moreover, that everything they do “relates to” the

ERISA plan, since the HMO is the benefit, thus inhibiting State

regulation of healthcare. Congress could not reasonably have

intended--in enacting a statute for the protection of employee

benefits--to reduce both State and federal protections for

beneficiaries. ;

Judge Easterbrook’s statement is also inconsistent with the

Court’s decisions in Pilot Life Insurance Co. v. Dedeaux, 481

U.S. 41, 47-48 (1987) and UNUM, supra, which suggest that

a a

1]

under traditional insurance policies the benefit is payment

under the policy, not the policy. There is no reason to adopt a

different rule for HMOs.

B. HMO Services and Plan Administration

HMOs are not ERISA plans, they are businesses. They

administer their own affairs, which comprise, broadly speaking,

arrangements, often contractual in nature, with third parties to

obtain materials as diverse as office supplies, real estate, and

hospital and physician services, and to package these materials

as a product, healthcare.’ The product is available to be

purchased by members of the public, including ERISA plans.

While the nature of the product will affect the choices available

to the public, including ERISA plans, and may thus “affect a

plan’s shcpping decisions,” Travelers, 514 U.S. at 659, the

arrangements by which the HMO creates and markets the

product are not the plan and have no connection to the plan.

When an HMO is selected by an employer to provide

healthcare coverage to its employees, the HMO becomes a

service provider to the ERISA plan.’ Washington Physicians

Serv. Ass'n. v. Gregoire. This establishes a form of

“connection” between the plan and the HMO. Cf Shaw v.

*The group subscription agreement in this case identifies Carle Care

HMO as "an HMO product” of the Health Alliance Medical Plans, an

Illinois stock corporation. Pet App. 93-a.

It is not uncommon for ERISA plan to engage outside service

providers. Benefit consultants design plans for employers, investment

administer self-insured plans, and attorneys provide legal services, both to

the plan and to plan participants as part of the benefit of pre-paid legal

services.

12

Delta Airlines, Inc., 463 U.S. 85, 96-97 (1983). But it does not

mean that the HMO becomes the plan--any more than the

provision of accounting services to the plan makes such

services the plan. Nor does it mean that all services provided

by the HMO constitute plan “administration.” The States

routinely regulate the business of service providers to ERISA

plans.'’ “The mere fact that many ERISA plans choose to buy

health insurance for their plan members does not cause a

regulation of health insurance automatically to ‘relate to’ an

employee benefit plan--just as a plan’s decision to buy an apple

a day for every employee, or to offer employees a gym

membership, does not cause all state regulation of apples and

gyms to ‘relate to’ employee benefit plans.” Washington

Physicians Serv. Ass'n v. Gregoire, 147 F.3d at 1045.

In determining whether an HMO’s activities constitute

ERISA plan administration--and thus implicate ERISA duties

and establish “relat[ion] to” the plan--it is necessary to consider

the precise nature of the relevant activities.

1. HMO arrangements with providers. One of the

HMO’ activities is to establish contractual arrangements with

healthcare providers. These arrangements typically include

compensation terms and may, as in this case, include some

form of financial incentives designed to lower the cost of

healthcare.

"See, e.g., Arizona State Carpenters Pension Trust Fund v. Citibank,

125 F.3d 715 (9th Cir. 1997); Custer v. Sweeney, 89 F.3d 1156 (4th Cir.

1996); Hospice of Metro Denver, Inc. v.Group Health Ins. of Oklahoma,

Inc., 944 F.2d 752 (10 Cir. 1991).

13

“{Ijt is critical to distinguish between the carrier’s

administration of the ERISA plan and ‘its own administration

ofits business.’ [Professor Jordan] suggests that the appropriate

inquiry is “whether the practice affected . . . is one of the on-

going processes and practices developed to effectuate an

employer’s provision of benefits . . . or whether the practice is

more properly characterized as one for the administration of the

business of the third-party.’’’ American Drug Stores, Inc., v.

Harvard Pilgrim Health Care, Inc., 973 F Supp. 60, 67-68 (D.

Mass. 1997), quoting Karen A. Jordan, Travelers Insurance:

New Support for the Argument to Restrain ERISA Pre-emption,

13 Yale J. Reg. 255, 303 (1996) (ellipses in decision).

When an HMO establishes arrangements with providers, it

is administering its own business. It is not administering an

ERISA plan. “[S]Jelection and operation of provider networks

is not a traditional function of ERISA plans, and surely was not

a function Congress contemplated when it enacted ERISA.”

Id., at 67. This is so because the HMO’s provider arrangements

are with third parties, not with the ERISA plan. They are not

contained in the plan documents. They are contained in

contractual agreements with third parties. “In the emerging

integrated delivery systems, some entity must perform the

function of deciding which [providers] will comprise the

network . . . This function is clearly attenuated from functions

such as claims administration and therefore should be viewed

as constituting administration of its business [rather than]

administration of an ERISA plan.” /d., at 67, quoting Jordan,

13 Yale J. Reg. at 331 (ellipsis in decision). When the HMO

administers its own business by contracting with third party

providers, it is not administering the ERISA plan.

14

States regulate HMOs’ business arrangements with

providers in many ways. States limit or condition financial

incentive arrangements between HMOs and providers.'* They

regulate the size and exclusivity of HMO’s network

arrangements through any willing provider and any willing

pharmacy laws.'* They regulate HMO services through

alternative provider laws.'* They provide remedies for

inadequate disclosure of arrangements between HMOs and

providers.'° They regulate gag rules.'®

“The claim that a law regulating the manner in which a third-

party vendor offers a service or product is subject to

preemption because it affects the options available to ERISA

"See, e.g., Alaska Stat. § 21.86.160(I)(4)(Michie 1998); Cal. Health

& Safety Code § 1346.6 (West Supp. 1999); Georgia Code Ann. § 33-

20A-G (Supp. 1999); Idaho Code § 41-3928 (1998); Kansas 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(5) (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. Const. Stat. Ann. §

991.2112 (West Supp. 1999); R.I. Gen. Laws § 23-17-17-3(B)(6) (1996);

Tex. Ins. Code Ann. Arts. 20A.14(1), 3.70-3C, § (7)(d) (Vernon Supp.

2000).

"See, e.g., American Drug Stores.

“See, e.g., Washington Physicians Serv. Ass'n v. Gregoire.

See, e.g., Napoletano v. CIGNA Healthcare of Connecticut, 238

Conn. 216 (Sup. Ct. Conn. 1996), cert. denied, 520 U.S. 1103 (1997).

"See, e.g., Alaska Stat. § 21.86.150 (i)(2) (Michie 1999); Del. Code

Ann. tit. 18, § 6407 (1998); Pa. Stat. Ann., tit. 40, § 991.2113 (Purdon

1999).

15

plans relies on logic that is not easily bounded; this reasoning

could easily preclude state laws designed to control the quality

of health care. The Supreme Court in Travelers emphasized

that Congress did not intend ERISA to supersede such

legislation.” American Drug Stores, 973 F. Supp. at 69. The

arranging of medical services is part of the healthcare business

of the HMO, and it is not ERISA plan administration.

2. Healthcare services. One of the services that an

ERISA plan may purchase from the HMO is medical care. The

provision of medical care is not an ERISA plan administration

function. “[W]hen the HMO acts under the ERISA plan as a

health care provider, it arranges and provides medical

treatment, directly or through contracts with hospitals, doctors

or nurses. In performing these activities, the HMO is not acting

in its capacity as a plan administrator but as a provider of

health care, subject to the prevailing state standard of care.” Jn

re U.S. Healthcare, Inc., 193 F.3d 151, 162 (3 Cir. 1999).

The States routinely regulate the quality of healthcare

provided to their citizens, including members of ERISA plans,

by setting quality standards and providing remedies for

inadequate quality of care. This is an important State function

that the Court stated it “will never assume lightly that Congress

has derogated.” Travelers, 514 U.S. at 654. The provision of

healthcare services to an ERISA plan is not an act of plan

administration, and it does not relieve the HMO from its State

law responsibilities as a provider of healthcare. Jd., at 660.

3. Claims processing or benefit determinations. Of the

functions constituting plan administration, the determination of

benefits--whether particular services are covered under the

ERISA plan--is one of the most important to plan members.

16

Fort Halifax Packing, 482 U.S. at 9. This function may be

performed by the employer or may be delegated to a third

party, such as a company that specializes in plan

adumnistsation. The function may also be delegated to the

HMO.

When HMOs process claims and determine benefits under

an ERISA plan, they “play two roles, not just one.” Dukes v.

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

516 U.S. 1009 (1995). Insofar as the HMO provides or

arranges medical services for an ERISA plan, it is not engaging

in plan administration. But the HMO does engage in plan

administration--and is subject to ERISA fiduciary duties--when

and to the extent it makes a discretionary determination of

covered benefits. ' |

Il. THE ORIGINAL COUNT II IS NOT PREEMPTED

BY ERISA

Count III of the original complaint alleged that petitioners

violated the [Illinois Consumer Fraud Act by failing to disclose

material facts regarding the ownership of the HMO and the

—_

"It does not matter who makes the benefit determinations--the

employer, a third party administrator, an insurer, or an HMO. Any entity

processing claims is performing a plan administration function. See, e.g.,

Engelhardt v. Paul Revere Life Ins. Co., 139 F.3d 1346, 1352 (11th Cir.

1998); Libbey-Owens-Ford Co. v. Blue Cross & Blue Shield Mut. of Ohio,

982 F.2d 1031, 1035 (6th Cir), cert. denied, 510 U.S. 819 (1993).

'*~ See, e.g., Hughes Aircraft Co. v. Jacobson, 525 U.S. 432 (1999);

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

17

compensation of HMO physicians (Pet App 76a). The district

court dismissed the claim, ruling that it was preempted because

(1) it alleged that “defendants failed to disclose relevant

information regarding operation of the Plan” (Pet App. 77a),

(2) ERISA comprehensively regulates ERISA plan disclosure

requirements, and (3) the claim sought to impose additional

disclosure requirements on the plan administrator (Pet App.

77a).

This ruling was not appealed and is not before the Court.

But it was incorrect, and it demonstrates the danger of equating

the HMO with the plan and ignoring the functional distinctions

between the HMO’s administration of its business and the

HMO’s administration of the ERISA plan."

The HMO is not the ERISA plan. It performs services for

the plan. In this case, one of the services performed by the

HMO was plan administration, the determination of benefits.

But the HMO was not acting as ERISA plan administrator

when it set up its business. It was not acting as plan

administrator when it entered into compensation arrangements

with third parties. Nor was it acting as a plan administrator

when it failed to disclose these arrangements to consumers of

its medical services. The disclosure requirements of the Illinois

Consumer Fraud Act are imposed on HMOs as businesses that

sell healthcare products to consumers in Illinois. They are not

imposed on ERISA plans.

ERISA does require disclosure of certain plan information,

including the identity of plan trustees, eligibility requirements

'*Amici urge the Court to make clear that it does not endorse dismissal

of the State claim.

18

for participation and benefits, the source of financing, the

organization through which benefits are provided, claims

procedures, and appeal rights. 29 U.S.C. § 1022(b). But

respondent's State claim was predicated on the HMO’s failure

to disclose material facts about its own business, not about the

plan. ERISA is not concerned with the business arrangements

between service providers and third parties.

The Illinois Consumer Fraud Act permits consumers,

including ERISA plan participants, to make informed benefit

choices. The Act prohibits unfair or deceptive acts or practices

in any trade or commerce, including the concealment,

suppression or omission of any material fact with the intent to

induce reliance by others. II]. Rev. State ch. 815, para. 505/2

(1998); Totz v. Continental DuPage Acura, 236 Ill. App. 3d

891, 902 (2d Dist. 1992). It provides a remedy for a business’

failure to disclose material information under the terms of the

Act. ERISA plan participants are entitled to such routine

protections of State law with respect to consumer transactions

so long as those laws do not “relate to” an ERISA plan.

Travelers, 514 U.S. at 655-56.

In determining whether a State law “relates to” an ERISA

plan, the “starting presumption” is against “relat[ion] to” the

plan. Travelers, 514 U.S. at 654. “[W]e have worked on the

assumption that the historic police powers of the States were

not to be superseded by the Federal Act unless that was the

clear and manifest purpose of Congress.” /d., at 655 (citations

omitted). Consumer protection is an area of traditional state

concem, Cipollone v. Liggett Group, 505 U.S. 504, 530 (1992),

as is the “state’s historic powers to regulate matters of health

and safety” and the “two areas of traditional state governance--

the health care and insurance industries.” American Drug

PEP a ng Me) Ne em 2 wat a

19

Stores, 973 F.Supp. at 65. A party seeking to eliminate State

regulation or escape liability under State law “bear[s] the

considerable burden of overcoming ‘the starting presumption

that Congress does not intend to supplant state law.”” De

Buono, 520 U.S. at 814.

Armed with the presumption, the Court looks “to the

objectives of the ERISA statute as a guide to the scope of the

state law that Congress understood would survive.” Travelers,

514 U.S. at 656. The principal objective, the Travelers Court

found, is uniform plan administration. The Court stated that

this objective is not implicated where State law does not

“preclude uniform administrative practice or the provision of

a uniform interstate benefit package if a plan wishes to provide

one.” Jd., at 660. Nor is it implicated where State law “simply

bears on the costs of benefits” or where it “can affect a plan’s

shopping decisions, but it does not affect the fact that any plan

will shop for the best deal it can get... .” Ibid.

The Illinois Consumer Fraud Act does not “mandate

employee benefit structures or their administration.” /d ., at

658. It does not preclude uniform administrative practice or a

uniform interstate package. It does not regulate the terms of a

plan or the calculation of benefits under a plan. It only requires

a provider of services to disclose material information about its

business. Ill. Rev. State ch. 815, para. 505/2 (1998).

That there is no “relat[ion] to” the plan is clear from

consideration of a more draconian measure. Assume the State

outlawed HMO financial incentives entirely, prohibiting HMOs

from offering such incentives to providers. The only

conceivable affect on an ERISA plan would be an increase in

costs through the elimination of countervailing incentives to

20

lower cost. Benefits are unaffected. Administrative practices

are unaffected. Plan terms are unaffected. But the Travelers

Court has already said that a State law with “indirect economic

influence [that] does not bind plan administrators to any

particular choice” does not “relate to” an ERISA plan. A law

that only “bears on the costs of benefits” does not “relate to”

the plan. A law that only influences a plan’s “shopping

decisions” does not “relate to” the plan. /d., at 659-660.

Elimination of incentives in HMO contracts with third party

providers might make an HMO’s services more expensive, but

it would have no other affect on the plan, and a law prohibiting

such incentives would not “relate to” the plan. If a State law

that prohibits incentives entirely does not “relate to” an ERISA

plan, a State law that requires disclosure of such arrangements

surely cannot.

Two circuit court decisions have held that State law claims

against an HMO for failure to disclose financial incentive

arrangements were preempted. Shea v. Esensten, 107 F.3d 625

(8th Cir.), cert. denied, 522 U.S. 914 (1997); Anderson v.

Humana, Inc., 24 F.3d 889 (7th Cir. 1994). (Shea also ruled

that HMOs have a fiduciary duty under ERISA to disclose

financial incentives.) Both decisions are incorrect, and for the

same reason: the courts equated the HMO with the plan or

with plan administration. In Shea, the court found that the

claim addressed “plan disclosures” and that “administrators

would be forced to tailor their plan disclosures” to State

requirements. 107 F.3d at 627. But the plan did not contain

the incentive arrangements--these were contained in the

HMO’s arrangements with providers. And the “plan” was not

compelled to disclose anything; only the HMO was required to

ee ee 2 ney

ne

eer «

21

disclose information about its business.2? The Anderson court

found, similarly, that the plaintiff “wants employers” to change

“the descriptions of the welfare benefit plan... [in] literature

distributed as part of a plan’s administration,” 24 F.3d at 891.

Again, HMO financial incentives are not part of the plan. They

are part of the HMO’s business arrangements with third parties

and are not contained in plan documents. The employer in

Anderson didn’t have to do anything--only the HMO as

healthcare business was required to disclose material facts

about its business.

HMOs provide services to ERISA plans. But this does not

relieve them of their obligation to ensure that handbooks,

brochures and other marketing materials offered to the public,

including plan participants, contain disclosures about HMO

business practices required by State law. Because HMO

businesses differ from state to state (and even within states),

disclosures regarding HMO business practices will differ from

state to state (and even within states).’*' This does not impose

*The court also stated that "claims of misconduct against the

administrator of an employer’s health plan fall comfortably within

ERISA’s broad preemption provision.” 107 F.3d at 627. Even were

ERISA’s preemption “broad”, cf. Travelers; California Division of Labor

Standards Enforcement v. Dillingham Construction, N.A., Inc., 519 U.S.

316 (1997), De Buono, this is much too broad. Not all claims against a

plan administrator are preempted--only claims based on acts of plan

*"As a result of State insurance and business regulation, both the terms

and benefits offered by HMOs and the medical structures of HMOs will

vary from State to State, and thus (1) disclosure by HMOs will never be

uniform in all States and (2) a rule requiring disclosure of HMO financial

incentives will not disturb any existing uniformity in HMO disclosure

practices.

22

burdens on the ERISA plan, any more than HMO compliance

with State laws regulating landscaping or accounting burden

the plan.

The Illinois law is consistent with ERISA’s goal of

protecting plan members. It does not interfere in any way with

any ERISA function. It is not preempted.

not relate to benefit plans in the first instance.” Metropolitan

Life Ins. Co. v. Massachusetts, 471 U.S. at 74] 2 The

application of the Illinois Consumer Fraud Act to the HMO

does not “relate to” the ERISA plan, and the district court erred

in dismissing the original Count III and not remanding the case

to State court.

a professional malpractice claim against the consultant for negligence in

the design of the plan was not preempted. 98 F.3d 1457 (4th Cir. 1996).

sie 1a o-

oo .

23

Ill. RESPONDENT STATES AN ERISA CLAIM

WHEN SHE PLEADS THAT HMO BENEFIT

DETERMINATIONS IN ADMINISTRATION OF THE

PLAN WERE BASED ON THE HMO’S OWN

FINANCIAL INTERESTS

“A complaint should not be dismissed for failure to state a

claim unless it appears beyond doubt that the plaintiff can

prove no set of facts that would entitle him to relief.” Conley

v. Gibson, 355 U.S. 41, 45-46 (1957). It is axiomatic that the

complaint must be read in the light most favorable to the non-

moving party. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974).

At the district court’s direction, respondent re-pled Count III

under ERISA. The new claim no longer alleged failure to

disclose material facts. Instead, it alleged that the HMO

breached its fiduciary duty in two ways:

--i. by contracting with CARLE owner/physicians to

provide the medical services contemplated in the Plan and

then having those contracted owner/physicians:

(1) minimize the use of diagnostic tests;

(2) minimize the use of facilities not owned by CARLE; and

(3) minimize the use of emergency and non-emergency

consultation and/or referrals to non-contracted physicians [and]

--ii. by administering disputed and non-routine health

insurance claims and determining:

(1) which claims are covered under the Plan and to what

extent;

(2) what the applicable standard of care is;

(3) whether a course of treatment is experimental;

24

(4) whether a course of treatment is reasonable and

customary; and

(5) whether a medical condition is an emergency,

all in order to augment their incomes. Herdrich v. Pegram,

154 F.3d 362, 373 (7th Cir. 1998).

1. The claim based on medical services. The first claim

refers to decisions by physicians to perform (or not perform)

certain tests, to use (or not use) certain facilities, and to make

(or not make) certain referrals to other physicians. Claims

based on the provision or arrangement of medical services,

including claims based on physicians’ decisions as to the

appropriate treatment, place of treatment and provider of

treatment, are not ERISA ciaims. Physicians do not engage in

plan administration when they perform medical services or

make medical decisions. Any claim against the HMO based on

medical services of healthcare providers must be brought under

State law.”

2. The claim based on benefit determinations. While the

second claim is not clearly drafted, it appears to include both

allegations of improper medical decisions and improper benefit

determinations. Medical decisions are subject to State

regulation, whether such decisions are made by the doctor or

the HMO. If, for instance, the HMO, using medical judgment,

decided that a treatment was or was not medically necessary in

order to increase its income, this would implicate State (not

HMOs for wrongful acts of physicians. See, e.g., In re U.S. Healthcare;

Dukes v. U.S. Healthcare, Inc.: Pacificare of Oklahoma, Inc. v. Burrage,

59 F.3d 151 (10th Cir. 1995); Lupo v. Human Affairs Intern., Inc., 28

F.3d 269, 272 (2d Cir. 1994).

25

federal) regulation. Without a factual record, it is not possible

to ascertain whether the HMO conduct alleged in claim ii

involved medical decisions or benefit determinations or both.

While the ultimate disposition of this case will depend on

facts developed in discovery--and the facts may ultimately

show only improper medical judgment, subject to State

regulation, or discretionary determinations under the ERISA

plan, subject to ERISA fiduciary duties, or both--the complaint

alleges that the HMO “administer[ed] disputed and non-routine

health insurance claims and determine[d] which claims are

covered under the plan and to what extent... .” Petitioners

appear to acknowledge that they were subject to ERISA

fiduciary duties when administering claims; in their brief they

distinguish HMO business decisions from “coverage and

eligibility decisions” and concede that they are fiduciaries when

making such coverage and eligibility decisions (Pet. Br. 28).

Fiduciaries breach ERISA’s duty of loyalty when they place

their own financial interests ahead of the interests of plan

participants in making administrative decisions. See Donovan

v. Bierwirth, 680 F.2d 263 (2d Cir.), cert. denied, 459 U.S.

1069 (1982). A particularly black and white instance of such

a breach would occur when an administrator receives a cash

payment for denying a claim (see U.S. Br. 34). When an

administrator’s fiduciary decision is alleged to be based on a

personal financial interest or a corporate financial interest,

rather than an evenhanded approach based on plan criteria and

the employees’ interest in receiving plan benefits, there is a

claim for breach of an ERISA fiduciary duty.

HMOs act both as healthcare businesses and medical care

providers--subject to State law--and as ERISA plan

eT ee

26

administrators--subject to federal law. For this reason, HMOs

should be responsible for their wrongful business and medical

conduct under State law and for improper ERISA plan

administration under federal law--and in some cases, where

both business and/or medical conduct and plan administration

are improper, under both laws. Put another way, (1) HMOs

should not escape responsibility for their actions as ERISA plan

administrators simply because they are also healthcare

businesses and perform healthcare services and (2) the fact that

HMOs perform some acts of plan administration does not

relieve them of their State law responsibilities as healthcare

businesses and providers of medical services. Because the

precise nature of the HMO’s actions alleged in claim ii is

unclear, amici respectfully suggest that the case should be sent

back to the district court so that the HMO’s conduct may be

evaluated based on a full factual record.

27

CONCLUSION

The judgment of the court of appeals should be affirmed to

allow a full development of the record.

Respectfully submitted,

JAMES E. RYAN

Attorney General of Illinois

* JoEL D. BERTOCCHI

Solicitor General

100 West Randolph Street

Chicago, IL 60601

(312) 814-7175

Of Counsel:

Dan Schweitzer

National Association of

Attorneys General

750 First St., N.E., Suite 1100

Washington, D.C. 20002

* Counsel of Record

December 20, 1999