Reply Brief — Aetna Health Inc. v. Davila

~Siprene Coun, Us. |

FILED

(25) FEB 2 6 2004

OFFICE OF THE CLERK |

No. 02-1845

IN THE

Supreme Court of the United States

AETNA HEALTH INC.,

Petitioner,

V.

JUAN DAVILA,

Respondent.

On Writ Of Certiorari

To The United States Court Of Appeals

For The Fifth Circuit

REPLY BRIEF FOR PETITIONER

AETNA HEALTH INC.

JOHN B. SHELY MIGUEL A. ESTRADA

KENDALL M. GRAY Counsel of Record

ANDREWS & KURTHLLP MARKA. PERRY

600 Travis, Suite 4200 WILLIAM M. JAY

Houston, Texas 77002 GIBSON, DUNN & CRUTCHER LLP

(713) 220-4200 1050 Connecticut Avenue, N.W.

Washington, D.C. 20036

Roy T. ENGLERT, JR. (202) 955-8500

ROBBINS, RUSSELL,

ENGLERT, ORSECK & J. EDWARD NEUGEBAUER

UNTEREINER LLP AETNA HEALTH INC.

1801 K Street, N.W. 980 Jolly Road (U19A)

Washington, D.C. 20006 Blue Bell, PA 19422

(202) 775-4500 (215) 775-5939

Counsel for Petitioner

i

The corporate disclosure statement included in the peti-

| RULE 29.6 STATEMENT

tion for a writ of certiorari remains accurate.

li

TABLE OF CONTENTS

Page

RULE 29.6 STATEMENT. ..........ccccccsscscscesesscscscsssecssceecoseeeesee, i

TABLE OF AUTHORITIES ..0....cccccccececccececceseseeceseeseececcecee, ili

| SN 2

I. Aetna Provides Plan Administration Services,

Not Medical Treatment ..........0....cccccecsessececeseecosesessecesees., 2

II. Davila’s THCLA Claim Falls Within The Scope

Of Section SO2(G) ....2.cocecsscessvssnsssssnasssasn 10

III]. The Section 514 Principles On Which Davila

Relies Are Inapposite ............ccsc.csscssesesessssssesesscescoscesees, 14

IV. The Court Should Decline The Invitation To

Overrule The Pilot Life Line Of Case o...ceccccccccccessee.--. 18

CONCLUSION 00.22.:0crsscccosceseeseesenssanasessmnii 20

ill

TABLE OF AUTHORITIES

Page(s)

Cases

Allied-Bruce Terminix, Inc. v. Dobson, 513 U.S. 265 ™

a

Allis-Chalmers Corp. v. Lueck, 471 U.S. 202 (1985) ....11, 12

Arana v. Ochsner Health Plan, 338 F.3d 433 (Sth Cir.

2003) (en banc), cert. denied, 124 S. Ct. 1044

I icetcsicdericnememmnnmetnneneacnennannnceaessevseeseqseees 17

Bell v. Hood, 327 U.S. 678 (1946) .......cccccccccsceeseeeeeeeeeeeeees 13

Black & Decker Disability Plan v. Nord, 123 S. Ct.

a ee 7,8

Boggs v. Boggs, 520 U.S. 833 (1997) .......ccceceeeererereneeeeneees 9

Buckman Co. v. Plaintiffs’ Legal Committee, 531

ee iieenteinterrenennetncnneensseneesnscnsneenenssececeee 17

California Division of Labor Standards Enforcement

v. Dillingham Construction, N.A., 519 U.S. 316

i eieitierieecietanereeennecnennseneneenennenensanscennennateeneeneseees 9

ilar Inc. v. Williams, 482 US. 386

“auth re 11, 12, 13,14

City of Chicago v. International College of Surgeons,

a 18

Decatur Memorial Hospital v. Connecticut General

Life Insurance Co., 990 F.2d 925 (7th Cir. 1993).............. 6

Egelhoff v. Egethoff, 532 U.S. 141 (2001) .........cccceceeeeneeeee: 9

Emard v. Hughes Aircraft Co., 153 F.3d 949 (9th Cir. '

i eererenretenpccenneensensennnnnsnssnesmncsncceneeneszess

iv

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987)........ 19

Franchise Tax Board v. Construction Laborers

Vacation Trust, 463 U.S. 1 (1983) .0.......cccccecsceesceeseeeeeeeees 13

Hull v. Fallon, 188 F.3d 939 (8h Cir. 1999)... cccccceceeeees 5

IBEW v. Hechler, 481 U.S. 821 (1987) ...ccccccccecceeeseseeeeee 11, 12

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

FETED cesensnessensnsnenenmenssinniantanasasinainaiiaiessbnaiitabinbiiiieaiaiaiiiaiiaiiel 9,17

Joyce v. RJR Nabisco Holdings Corp., 126 F.3d 166

I See ee cvversicieecevcninencsitniiciilcaniiiiaaiansialiiiiad denise 17

Kennedy v. Connecticut General Life Insurance Co.,

ee rectrrenicntninnininiiininniniaaiiaian 13

Lockheed Corp. v. Spink, 517 U.S. 882 (1996) ............ccc00000 7

Massachusetts Mutual Life Insurance Co. v. Russell,

Sa eh Ce ee rnnnsnisnieneneminiatinsensnenimnianiantienisamaiaiiiiis 19

Mertens v. Hewitt Assocs., 508 U.S. 248 (1993)..............0-+. 14

Metropolitan Life Insurance Co. v. Taylor, 481 U.S.

FU vriccianinereranniniaipmtinnctsiinbinanael 9, 12, 13, 14, 17, 20

Oklahoma City v. Tuttle, 471 U.S. 808 (1985)...............0000+ 16

Pegram v. Herdrich, 530 U.S. 211 (2000) ...........cccccccceseeeeeeee 8

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

FEIT crcnmsnesunnmerenenennsessiniennanainiainnniianictetds 1, 2, 7, 12, 16, 20

Republic Steel Corp. v. Maddox, 379 U.S. 650 (1965)........ 12

Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355

GE ccensnssessensoneaenmntaninanenenenimepnpapaitebiananinnsapinaie 7, 11, 16

South Central Bell Telephone Co. v. Alabama, 526

ee Se ee crnssssnesemenmaremennnninenmemstitineninnidiein 16

Steel Co. v. Citizens for a Better Environment, 523

Se i UE racennanensninsnnienanmenninennniunininiibinaidsne 13

ec

v

Tovey v. Prudential Insurance Co. of America, 42 F.

Supp. 26 919 (WD. Bho. 1999).........ccecrcceccccsccsccscvsnsececoes 17

UNUM Life Insurance Co. v. Ward, 526 U.S. 358

Se 11

Federal Statutes

1S U.S.C. § 1012 ...........c-ceececseeeeserereceeserersessncesensnsessnsessessees 15

2B USE, 6 SED eccnssncnccsssessssesnsccssresnssenemecenensemmncemnes 4

EOGRA 6 SBE, FO ULB. © WB ccccccvcscccsnssesssesssesszssnssssssensseses 17

ERISA § 3(1), 29 U.S.C. § 1002(1) .............ccccccsscssssseseereeees 18

ERISA § 3(3), 29 U.S.C. § 1002(3) .............cscccsecorssseseeeesees 18

Og OE 18

ERISA § 502(a), 29 U.S.C. § 1132(a)............cccccceeeeeees passim

ERISA § 514, 29 U.S.C. § 1144.00.00... 14, 15, 16, 17, 18

ERISA § 514(a), 29 U.S.C. § 1144(a)........cccccccceeeeeees 16, 18

ERISA § 514(b), 29 U.S.C. § 1144 (DO)... eeceeeeeeeeeeeeees 15

ERISA § 514(b)(2)(B), 29 U.S.C. § 1144(b)(2)(B) ............. 15

Cd a +

Pension Annuitants Protection Act of 1994, Pub. L.

Ue 20

Federal Regulations

a 14

Court Rules

EEE 15

State Law

Tex. Civ. PRAC. & REM. CODE § 88.001(5) ................0cccceeee 9

vi

TEX. Civ. PRAC. & REM. CODE § 88.002(C)(2) ....cceccccececoeees 10

TEX. Civ. PRAC. & REM. CODE § 88.002() o......cccceccccccseee. 10

1990 Kan. Op. Att'y Gen. No. 90-130, 1990 WL

Soave aia i inrecetensvnensemninreinaratinasiitcenaaniseninamitiam tn settee 5

1999 Ohio Op. Att’y Gen. 265, 1999 WL 692623... 5

Court Documents

Brief for Respondent, Pilot Life Insurance Co. vy.

Dedeaux, No. 85-1043 (Oct. 31, 1986) o.....cccccecececeececeeees 16

Other Authorities

American Medical Ass’n, Code of Ethics (2002)..0...-...00000... 6

ECONOMIC REPORT OF THE PRESIDENT (2004) .0.....-ceccccosese. 19

Health-Care Tab Hits $1.7 Trillion, WALL ST. J., Feb.

DCE Sea Teeny 19

J. Scott Andresen, Js Utilization Review the Practice

of Medicine?, 19 J. LEGAL MED. 431 a suticisinidiisindintnie’ 5

REPLY BRIEF FOR PETITIONER

AETNA HEALTH INC.

This Court granted review to examine the Fifth Circuit’s

holding that a challenge to Aetna’s “refus[al] to cover”—.e.,

pay for—a particular medication is not completely preempted

by ERISA because that challenge was artfully framed as a

“tort” claim for “damages” rather than an ERISA “contract”

claim for “benefits.” Aetna Pet. App. 2a, 16a. We restate the

Fifth Circuit’s holding because respondents evidently have

no desire to defend the decision below on its own terms. In-

stead, respondents and their amici advance several theories

designed—covertly or overtly—to persuade this Court to

modify or abandon Pilot Life Insurance Co. v. Dedeaux, 481

U.S. 41 (1987), and its progeny. Those theories—some of

which are advanced for the first time in this Court—no more

support the judgment below than did the Fifth Circuit’s dis-

credited, and largely abandoned, reasoning.

Davila and his amici now defend the outcome reached

by the Fifth Circuit based on four premises, each of which is

faulty legally or factually—or both. First, they repeatedly

assert that Aetna provided “medical treatment” to Davila or

that Aetna engaged in “medical malpractice,” when in fact

and law Aetna’s role was limited to making a coverage de-

termination under the ERISA plan. Second, they contend

that Davila’s state-law tort claim is not within the scope of

ERISA § 502(a), 29 U.S.C. § 1132(a), even though he could

have challenged Aetna’s decision under ERISA but chose not

to do so. Third, they argue that Section 514 of ERISA

should limit the complete-preemption analysis under Section

502, an argument that respondents clearly waived and this

Court has already rejected. Fourth, and finally, they urge

this Court to depart from two decades of settled precedent,

but principles of statutory stare decisis preclude such a result.

2

ARGUMENT

I. Aetna Provides Plan Administration Services, Not

Medical Treatment

Pilot Life held, and this Court has repeatedly reaffirmed,

that Section 502(a) of ERISA provides the exclusive avenue

for challenging allegedly improper denials of benefits under

ERISA plans. Pilot Life, 481 U.S. at 52. Davila and his

amici posit, however, that States traditionally have used their

police powers to regulate “health care,” and that such author-

ity may be invoked to regulate health insurers’ coverage de-

cisions because such decisions, #s a practical matter, “con-

trol” medical treatment or care.' Davila’s attempt to label his

state-law claim one for alleged “medical malpractice,” how-

ever, cannot paper over the fundamental divide between cov-

erage decisions and treatment.

Whatever power States retain to regulate “health care” in

the abstract, Congress clearly intended ERISA to regulate the

health benefits at issue here. That eligibility for such benefits

may turn, in part, on medical criteria does not change the

analysis: any welfare plan that provides health insurance

necessarily uses medical criteria to delimit the scope of cov-

erage.” Here, because Davila incontrovertibly challenges the

propriety of Aetna’s benefit determination—a coverage deci-

sion, whether or not it was based on any medical criteria—

his state-law claim is completely preempted under Pilot Life.

1. As our opening brief demonstrated, Aetna’s role un-

der the Monitronics Plan is to make “[d]eterminations regard-

' E.g., Resp. Br. 11 (“These are two medical-malpractice

actions”), 28 (“the claim is one for defective medical care”), 65

(“the state law substantively regulates medical decision-making”).

> “Medical necessity” plan terms also incorporate criteria

other than medical factors. Aetna Br. 5-6; J.A. 54-55.

ss

TN

eee ‘ ——~- ——/

3

ing eligibility for benefits, coverage for services, benefit de-

nials and all other terms of this Certificate.” J.A. 78 (bold-

face omitted). The Plan also explains that it “applies to cov-

erage only and does not restrict a Member’s ability to receive

health care services that are not, or might not be, Covered

Benefits.” Jd. at 40, 108 (boldface and capitalization omit-

ted). And the Plan makes clear that “[i]f the Member’s [phy-

sician] performs, suggests, or recommends a Member for a

course of treatment that includes services that are not Cov-

ered Benefits, the entire cost of any such non-covered ser-

vices will be the Member’s responsibility.” Jd. at 46 (bold-

face omitted).? These provisions refute Davila’s repeated

claims that Aetna’s role is to provide medical treatment.

Tellingly, the Plan itself is nowhere addressed in the hun-

dreds of pages of briefs submitted by Davila and his amici.

Even if the Monitronics Plan did not make this point so

clearly, Aetna could not make medical “treatment” decisions

as a matter of law. Insurers (including Aetna) are not li-

censed by Texas or any other State to practice medicine. In-

> The Plan also states, unambiguously, that “Participating

Providers [i.e., physicians] are not agents or employees of [Aetna]”

and that they “are solely responsible for any health services ren-

dered to their Member patients.” J.A. 31 (emphasis added; bold-

face omitted). Davila contends, based on contracts not in the re-

cord, that Aetna requires its participating physicians to “comply”

with its “medical-necessity decisions” (Resp. Br. 3 n.3), and thus

legally prevents doctors from making independent treatment deci-

sions. But the cited contracts establish only that physicians must

“comply” with Aetna’s “participation criteria” and “policies”—

matters such as precertification requirements, confidentiality of

medical records, or electronic submission of referrals. E.g., Resp.

Br. App. 19a. And other provisions of the same contracts—

omitted from Davila’s appendix—make clear that providers may

freely offer members services not covered by Aetna, so long as the

lack of coverage is clear to the patient. App., infra, 3a-4a.

4

deed, under the federal HMO Act, States cannot impede the

formation of HMOs by requiring that licensed physicians

have any particular role in the formation or management of

an HMO. See 42 U.S.C. § 300e-10(a). Nor can Aetna or any

other insurer prescribe any medications: prescriptions can be

written only by a licensed physician. 21 U.S.C. § 353(b).

Here, contrary to the overheated rhetoric of Davila’s amici

(e.g., CCHCC Br. 6; AMA Br. 11), Aetna did not prescribe

Naprosyn for Davila’s condition. It was entirely up to

Davila’s physician—Dr. Lopez—whether to prescribe Vioxx

(out of plan, if necessary), Naprosyn, or any other non-

steroidal anti-inflammatory drug (NSAID) covered under the

Monitronics Plan.* The decision to prescribe Naprosyn in

particular was undoubtedly a “treatment” decision, but it

clearly was one that was made by Dr. Lopez, not Aetna.”

* Under the formulary, Davila could have obtained Vioxx

coverage by showing intolerance, allergy, or contraindication to, or

unsatisfactory results with, any two generic NSAIDs, some of

which are considerably more expensive than naproxen (the generic

name for the brand name Naprosyn) but nonetheless are covered

without precertification. See Aetna Br. App. 29a.

* Citing the allegations of his complaint, Davila now sug-

gests that Aetna somehow prevented him from obtaining Vioxx on

his-own, since “he could not even get his pharmacy to fill [Dr. Lo-

pez’s] prescription [for Vioxx].” Resp. Br. 6. But even the com-

plaint does not assert that Aetna prevented Davila from obtaining

Vioxx out of plan; the complaint alleges instead that “[w]hen

{ Davila] tried to fill the [Vioxx] prescription, .. . he was informed

that his insurer . . . would not fill it.” Aetna Pet. App. 67a. In

other words, Aetna declined to pay for Vioxx. Davila remained

free to have the Vioxx prescription filled at his own expense, fol-

lowing which he (or his physician, as his representative or as-

signee) could have pressed his claim to coverage by filing an inter-

nal appeal, seeking [RO review, or bringing an action for reim-

bursement under ERISA. Nothing in the record—or in common

sense or experience—suggests that the pharmacist would not “fill”

5

The amici States now assert that “HMOs’ medical ne-

cessity determinations dictate treatment through the ‘utiliza-

tion review’ process.” States’ Br. 8. Not surprisingly, how-

ever, several of the same States have long recognized in for-

mal opinions that this is simply not true. See, e.g., 1999 Ohio

Op. Att’y Gen. 265, 1999 WL 692623, at *4 (an “adverse

determination” by an HMO “does not mean that the physi-

cian is precluded from providing the service or that the pa-

tient is precluded from obtaining the service from another

source or through other means”); 1990 Kan. Op. Att’y Gen.

No. 90-130, 1990 WL 547153, at *3 (“Care is not being ad-

ministered or withheld by the reviewing person. ... An in-

sured who is denied benefits by utilization review, on the

grounds that the treatment sought is not ‘medically neces-

sary’..., is not prevented from obtaining medical care”);

accord Hull v. Fallon, 188 F.3d 939, 943 (8th Cir. 1999).

See generally J. Scott Andresen, Js Utilization Review the

Practice of Medicine?, 19 J. LEGAL MED. 431, 441-45

(1998).°

Similarly, although the American Medical Association

makes the remarkable—and demonstrably false—assertion

(i.e., dispense) a valid prescription provided that Davila agreed to

pay for it by means other than his ERISA-governed health plan.

® Insurance coverage creates an incentive for an insured to

avail himself of covered services even when they are unnecessary;

utilization review allows plans to mitigate this incentive while still

covering a wide variety of treatments. See Aetna Br. 5. Vioxx has

been found to be particularly susceptible to this moral-hazard

incentive. See, e.g., Jalpa A. Doshi et al., The Jmpact of Drug

Coverage on COX-2 Inhibitor Use in Medicare, HEALTH AFFAIRS

Web Exclusive, Feb. 18, 2004, http://content.healthaffairs.org/cgi/

reprint/hlthaff.w4.94v1.pdf, at W4-102 (“[I)rrespective of the

[gastrointestinal] risk, people with the most generous prescription

plans in 2000 were more likely to use COX-2 inhibitors [such as

Vioxx]”).

6

that Davila did not “receive[] the course of treatment pre-

scribed by his ... treating physician” (AMA Br. 20), the

AMA’s own Code of Ethics specifically addresses the situa-

tion presented in this case, and it makes clear that the choice

of medication is ultimately the patient’s (in consultation with

his physician), not the insurer’s:

If physicians exhaust all avenues to secure a formulary

exception for a significantly advantageous drug, they are

still obligated to disclose the option of the more benefi-

cial drug to the patient, so that the patient can consider

whether to obtain the medication out-of-plan. Under cir-

cumstances in which the health care program will not

subsidize the drug, physicians should help patients by

identifying alternative forms of financial assistance, such

as those available through pharmaceutical companies’ as-

sistance programs.

Am. Med. Ass’n, Code of Ethics § E-8.135(6) (2002) (em-

phases added). And, according to the AMA’s own Code of

Ethics, doctors may recommend a covered medication only if

it is just as efficacious as any non-covered medication. See

id. § E-8.135(2); see also AMA Br. 9 (patients are protected

by physician self-regulation). If physicians disagree with

denials of coverage, they may provide the recommended care

or services and pursue the ERISA beneficiaries’ rights to

payment themselves, pursuant to the assignment of benefits

taken at the outset of providing care. See, e.g., Decatur

Mem’! Hosp. v. Conn. Gen. Life Ins. Co., 990 F.2d 925, 926-

27 (7th Cir. 1993).

2. The formulary exclusion of coverage for Vioxx under

circumstances like Davila’s does not constitute “medical

treatment.” Davila elected to enroll in an employer-

sponsored managed care plan whose prescription coverage

was subject to formulary requirements. Plainly, this Court’s

cases would not allow Davila to sue Aetna in state court for

harm resulting from a denial of Vioxx (however strongly his

7

doctor recommended it) if the Plan provided that Vioxx is

never a covered benefit. The conditional inclusion of Vioxx

in the Plan’s formulary does not alter either the relevant legal

analysis or the conclusion.

Nothing in ERISA requires employers to establish em-

ployee benefits plans, or to provide any particular benefits if

they do choose to have such a plan. Rather, employers have

great leeway to design welfare plans as they see fit. See

Black & Decker Disability Plan v. Nord, 123 S. Ct. 1965,

1970, 1971 (2003); Lockheed Corp. v. Spink, 517 U.S. 882,

887 (1996). And once an employer chooses to provide a par-

ticular benefit under a welfare plan, a// claims of improper

denial of that benefit must be brought under ERISA. Pilot

Life, 481 U.S. at 52. As this Court has emphasized repeat-

edly, ERISA’s policy is to “induc[e] employers to offer bene-

fits by assuring a predictable set of liabilities, under uniform

standards of primary conduct and a uniform regime of ulti-

mate remedial orders and awards when a violation has oc-

curred.” Rush Prudential HMO, Inc. v. Moran, 536 US.

355, 379 (2002). The AMA’s suggestion that Aetna should

be held liable for the formulary’s limitations on coverage for

Vioxx would allow state tort law retroactively to undo

Davila’s and his employer’s coverage decision and to rewrite

his insurance into a more expansive, and expensive, plan that

neither of them selected or paid for.

By conflating the structuring of benefits with the provi-

sion of treatment, Davila and his amici are asking this Court

to take an even larger step than the one rejected last Term in

Nord. There, as here, eligibility for benefits under an ERISA

welfare plan turned on assessing medical criteria. The

unanimous opinion in Nord rejected the notion that ERISA

plan administrators must give “more weight” to the opinion

of a treating physician: benefits administration, the Court

held, involves interpretation of the plan, which is not subject

to reasonableness review under medical standards. 123 S. Ct.

8

at 1972 & n.4. The argument advanced by Davila and the

AMA here would effectively require the administrator to give

conclusive weight to the opinion of a treating physician and

to pay for anything he recommends—or face the prospect of

potentially unlimited tort damages in state court for breach-

ing a purported state “duty of care.” If ERISA does not per-

mit a rule that zrants special weight to a treating physician’s

judgment even in a federal suit for the benefits in question, it

is difficult to see how Davila’s bid for a supplemental state-

court remedy to enforce that same professional judgment can

be squared with ERISA.

3. To sow confusion where there is none, Davila and his

amici recite this Court’s reference in Pegram to a “puzzling

issue of preemption” that justified reluctance to infer an ER-

ISA case of action in that case. Resp. Br. 28 (quoting Pe-

gram v. Herdrich, 530 U.S. 211, 236 (2000)) (internal quota-

tion marks omitted). But however “puzzling” the issue might

be in the context of the “mixed” decisions made by a physi-

cian owner of a group-model HMO (or a staff-model HMO,

where treating physicians, like the defendant in Pegram, also

make both coverage and treatment decisions), the issue is en-

tirely straightforward where, as here, coverage and treatment

are clearly separated. Davila offers no response to this dis-

tinction other than the question-begging assertion that HMOs

“should not be permitted to avoid malpractice liability” by

adopting this structure. Resp. Br. 36. But by engaging only

in benefits administration—which ERISA regulates exclu-

sively, leaving no room for additional state-law medical

standards—Aetna has never entered the sphere of traditional

medical practice that might justify subjecting it to state-law

malpractice liability.’ That sphere is left to physicians.

” As both Davila and the Texas Attorney General state, the

THCLA on its face applies even when the HMO provides no

medical treatment, if the plaintiff shows that the HMO’s coverage

A greet I IT ti: LE LEIP LI ue BIOL L BE Dem gH. Me

9

4. Davila’s erroneous assertion that he is challenging

health care “treatment” decisions—purportedly an area of

“traditional” state regulation—forms the principal basis for

his attempt to save his THCLA claims from preemption.

See, e.g., Resp. Br. 17. But Davila himself refutes his own

contention by conceding that the THCLA is not “traditional”

regulation of medicine at all, since it was enacted to supple-

ment and expand “traditional malpractice law.” Resp. Br. 4

(“Texas concluded that traditional malpractice law ... ac-

corded little real protection”).

Moreover, even if the THCLA could be viewed as part

of the States’ “traditional” regulation of medicine, Davila

still could not avoid Pilot Life and its progeny. States “tradi-

tionally” engaged in numerous forms of regulation that now

are clearly barred by ERISA, including—until Pilot Life—

punishing certain coverage decisions directly through the tort

of “bad faith” or through punitive damage awards. ERISA’s

language, and this Court’s decisions in Pilot Life and Metro-

politan Life Insurance Co. v. Taylor, 481 U.S. 58 (1987),

make clear that those state efforts are now completely pre-

empted. As this Court has noted, “ERISA certainly contem-

plated the pre-emption of substantial areas of traditional state

regulation.” Cal. Div. of Labor Standards Enforcement v.

Dillingham Constr., N.A., 519 U.S. 316, 330 (1997); see also

Egelhoff v. Egelhoff, 532 U.S. 141, 151 (2001) (domestic re-

lations); Boggs v. Boggs, 520 U.S. 833, 849-50, 852 (1997)

(same). In particular, it has long been clear to this Court that,

notwithstanding any general presumptions against preemp-

tion, “the exclusive remedy provided by § 502(a) is precisely

the kind of special feature that warrants pre-emption.” /nger-

soll-Rand Co. v. McClendon, 498 U.S. 133, 144 (1990) (in-

ternal quotation marks and alterations omitted).

decision had some effect on the care ultimately provided by the

physician. See TEX. CIV. PRAC. & REM. CODE § 88.001(5).

10

II. Davila’s THCLA Claim Falls Within The Scope Of

Section 502(a)

Stripped of the litigation-driven fiction that Aetna pro-

vides medical treatment to HMO participants, Davila’s claim

amounts to nothing more than the contention that Aetna erro-

neously declined to pay for Vioxx. That is nothing other

than an ERISA claim. Indeed, Davila concedes that he could

have invoked ERISA remedies when Aetna refused to pay.

Resp. Br. 13. That concession should be dispositive of this

case.

1. Davila’s THCLA claim attacks Aetna’s interpretation

of the plan to deny coverage, demanding punitive and com-

pensatory damages for Aetna’s alleged failure to comply with

a state-law standard of “ordinary care.” Contrary to Davila’s

contention (e.g., Resp. Br. 26) that the THCLA creates a duty

wholly independent of those created by the ERISA plan and

does not require plan interpretation, the THCLA cause of ac-

tion expressly incorporates the scope of coverage mandated

by the plan document. TEX. Civ. PRAC. & REM. CODE

§ 88.002(d).° If an HMO denies benefits that are “not cov-

ered by the health care plan,” it is not liable under the

THCLA; conversely, if it denies benefits that are covered

under the plan, it may be liable under the THCLA. Jd.”

* Indeed, the Attorney General of Texas admits as much, see

States’ Br. 14-15 (“[T]he plain text of the THCLA . . . establish[es]

that the provision will not be read to impose an obligation that is

not covered by the agreed health plan”), thus negating his own as-

sertion that the THCLA “imposes liability for failure to follow pro-

fessional standards of ordinary care, not for failure to fulfill the

benefit-plan agreement,” id. at 14.

* If the HMO promptly approves benefits, covered or not, it

cannot be held liable under the THCLA. TEX. CIV. PRAC. & REM.

CODE § 88.002(c)(2).

a

1]

Thus, far from adding a substantive plan term that could

permissibly be enforced under ERISA, see, e.g., Rush Pru-

dential, 536 U.S. at 379-80; id. at 399 (Thomas, J., dissent-

ing); UNUM Life Ins. Co. v. Ward, 526 U.S. 358, 376-77

(1999), the THCLA attempts to impose additional liability on

a subset of HMOs for failing to fulfill the very same duty that

ERISA imposes—to pay benefits in accordance with plan

terms. Davila and his amici therefore are entirely incorrect to

assert (e.g., Resp. Br. 20; Cmty. Rights Counsel Br. 19) that

the THCLA claim does not involve determining whether

coverage was correctly denied under the plan. Such a deter-

mination is an essential predicate to liability under the Texas

law. See also U.S. Br. 14. For that reason, it is impossible to

avoid the conclusion that the THCLA is precisely the type of

supplemental enforcement mechanism that is precluded by

Section 502(a)’s exclusive remedial scheme.

2. The LMRA cases that Davila cites as authoritative

(Resp. Br. 25, 27) in fact make clear that the THCLA claim

is completely preempted by Section 502(a). The THCLA

claim turns on interpretation of the plan document, because it

makes the denial of benefits covered by the plan grounds for

award of a supplemental state-law remedy. In the analogous

LMRA context, this Court has clearly held that if a state-law

claim requires interpretation of the collective bargaining

agreement, it is completely preempted. See /JBEW y.

Hechler, 481 U.S. 851, 862 (1987); Allis-Chalmers Corp. v.

Lueck, 471 U.S. 202, 214-15, 219-220 (1985)."°

'° Davila does not cite or discuss Allis-Chalmers or Hechler,

which are acknowledged as controlling in the LMRA-preemption

cases he does cite. E.g., Caterpillar Inc. v. Williams, 482 U.S.

386, 394-95 (1987). The consistent rule of this line of cases is

this: State-law claims are completely preempted if they involve

interpretation of the federally covered contract, i.e., the collective

bargaining agreement or ERISA plan. Lingle v. Norge Div. of

Magic Chef, Inc., 486 U.S. 399, 407-08 & n.7 (1988); Caterpillar,

12

3. Davila asserts that his complaint cannot be recharac-

terized as alleging a Section 502(a) claim because he forwent

the Vioxx and, thus, cannot now seek reimbursement for it.

E.g., Resp. Br. 22, 28. The twin holdings of Pilot Life and

Metropolitan Life—that Congress crafted Section 502(a) to

be exclusive and to federalize any state-law claim that dis-

rupts that exclusivity—would be utterly undone by accepting

Davila’s view that he can obtain state-law remedies merely

by waiting until ERISA remedies can no longer help him.

Cf Republic Steel Corp. v. Maddox, 379 U.S. 650, 653

(1965) (“A ... rule which would permit an individual em-

ployee to completely sidestep available gnevance procedures

in favor of a lawsuit has little to commend it”).

Davila plainly had a remedy under Section 502(a)}—a

suit to enforce his rights under the Monitronics Plan after ex-

hausting his internal appeal rights. He attempts to avoid ER-

ISA preemption by arguing that because he cannot now sue

(as he no longer seeks the Vioxx and incurred no expense

that can be reimbursed), his state-law claim is viable and

cannot be removed. Resp. Br. 22. Davila’s argument—that

Congress carefully delimited the remedies available under

ERISA, only to allow plaintiffs to overcome those limitations

at will by waiving their federal remedies—is contrary to both

common sense and settled principles of federal jurisdiction.

A claim ostensibly pleaded under state law but falling within

482 U.S. at 395; Hechler, 481 U.S. at 862; Allis-Chalmers, 471

U.S. at 218. Davila has no relationship with Aetna outside the

confines of his ERISA plan (whereas he does have such a relation-

ship with his treating physician), and his THCLA claim expressly

turns on interpretation of that plan, see supra pp. 10-11. Compare

Caterpillar, 482 U.S. at 396-97 (claim depended entirely on a con-

tract other than the collective bargaining agreement). Under the

LMRA cases, therefore, Davila’s claim plainly is completely pre-

empted—whether pleaded in tort or contract. See Allis-Chalmers,

471 US. at 213-15.

© eget re ERED | liga gay

13

the exclusive scope of Section 502(a) is one arising under

federal law. Metropolitan Life, 481 U.S. at 66, 67. Such a

claim, like any other within federal question jurisdiction, may

be brought in or removed to federal court even if it does not

state a viable claim on the merits. See Steel Co. v. Citizens

for a Better Env't, 523 U.S. 83, 95-96 (1998); Bell v. Hood,

327 U.S. 678, 682 (1945); see also Kennedy v. Conn. Gen.

Life Ins. Co., 924 F.2d 698, 700-01 (7th Cir. 1991) (Easter-

brook, J.). For this reason, this Court has expressly rejected,

as “squarely contrary” to precedent, the argument that com-

plete preemption is unavailable “unless the federal cause of

action relied upon provides the plaintiff with a remedy.”

Caterpillar Inc. v. Williams, 482 U.S. 386, 391 n.4 (1987).

Metropolitan Life—the sole cited source for Davila’s pro-

posed rule—holds that within Section 502(a)’s scope, only

federal claims are possible (see 481 U.S. at 64, 66); it does

not hold that only if federal relief is possible does a claim fall

within Section 502(a)’s scope.

This Court sent no contrary signal in Franchise Tax

Board v. Construction Laborers Vacation Trust, 463 U.S. 1

(1983), on which Davila and his amici rely for the proposi-

tion that complete preemption should be construed narrowly.

Resp. Br. 20-24. Franchise Tax Board, which antedated both

Metropolitan Life and Caterpillar, is inapposite because it

specifically left open the question presented here—i.e.,

whether plan beneficiaries’ state-law claims are federalized if

they fall within the scope of Section 502(a)—and that ques-

tion was later expressly answered in Metropolitan Life. See

481 U.S. at 64. The Franchise Tax Board’s collection action

did not fall within the scope of Section 502(a) because at no

time did that provision give it a remedy: state agencies—

unlike plan beneficiaries—are not proper plaintiffs under

Section 502(a). 463 U.S. at 25-27. Taylor, by contrast, was

a plan beneficiary who could have challenged plan-

administration decisions under ERISA but sought state-law

damages instead, placing his complaint—like Davila’s—

14

within the scope of Section 502(a). See 481 U.S. at 61. That

suffices to confer removal jurisdiction: it has been clear

since the first complete-preemption case that there is no addi-

tional requirement that the plaintiff state a viable federal

claim. See Caterpillar, 482 U.S. at 391 n.4.

4. The assertion that there can be no preemption in this

area because Congress has failed to create a remedial

scheme, or that displacing state law would leave behind a

“regulatory vacuum” (Resp. Br. 41), is simply inaccurate.

Congress has, in fact, created a thoroughly detailed remedial

scheme, which the Secretary of Labor has amplified by im-

posing specific and detailed requirements on the internal ap-

peals process that, in most cases, should obviate the need for

litigation at all. 29 C.F.R. § 2560.503-1. When plaintiffs

properly resort to litigation, remedies are available—not

every remedy a plaintiff might desire, but as this Court has

held, ERISA “resolved innumerable disputes between power-

ful competing interests—not all in favor of potential plain-

tiffs.” Mertens v. Hewitt Assocs., 508 U.S. 248, 262 (1993).

ERISA favors prospective remediation in the hope that judi-

cial review will prove unnecessary; where retrospective liti-

gation is necessary, however, a// members of this Court have

repeatedly agreed that Congress refused to permit recovery

of the punitive damages Davila seeks. See Aetna Br. 20-21.

III. The Section 514 Principles On Which Davila Relies

Are Inapposite

~ Davila and his amici mount a further assault on Pilot

Life and its progeny by attempting, first, to import into the

Section 502(a) preemption analysis the distinct requirements

of “relates to” preemption under ERISA § 514, 29 U.S.C.

§ 1144, and then to invoke exceptions to the latter species of

preemption. Most of those arguments are waived because

Davila never raised them before his brief on the merits in this

Court. All are, in any event, meritless.

——

ee

15

]

1. Davila contends that the “insurance savings clause’

and the federal-law exception found in ERISA’s general de-

fensive-preemption provision, Section 514, must also be read

to qualify the preemptive effect of any other provision of ER-

ISA, and in particular that those provisions should limit Sec-

tion 502(a)’s preemptive force. With respect to the federal-

law exception, Davila attempts to invoke the McCarran-

Ferguson Act, 15 U.S.C. § 1012, which has no substantive

effect other than to create a presumption that federal statutes

do not displace state insurance regulation—a presumption

rebutted by ERISA, which delineates in Section 514(b)

which state insurance laws are saved and which are not.''

a. At no point in this litigation—in the district court, in

the court of appeals, or at the certiorari stage—has Davila

previously asserted that Section 514’s insurance saving

clause or its federal-law exception applies to save his

THCLA claims for complete preemption. Davila’s merits

brief marks the first appearance of this contention.'? Indeed,

in resisting certiorari, Davila actually underscored the dis-

tinction between Section 502 and Section 514, noting that

“section 502(a) complete preemption is very different from

section 514’s ‘relates to’ preemption.” Br. in Opp. 1 n.1.

Because Davila never suggested to this Court until now that

the Fifth Circuit’s judgment could be sustained based on Sec-

tion 514’s insurance saving clause or federal-law exception,

those contentions are waived. See Sup. CT. R. 15.2; Okla.

Indeed, Davila’s attempt to import the McCarran-Ferguson

Act into ERISA would read Section 514(b)(2)(B)’s “deemer

clause” entirely out of the statute.

'? Respondents hal fheartedly claim to have raised the savings

clause in the court of appeals (Resp. Br. 51 n.25), but the sources

they cite do not bear out that assertion: a Rule 28(j) letter whose

discussion of Rush Prudential dealt exclusively with Section

502(a), and a footnote referring to the grant of certiorari.

16

City v. Tuttle, 471 U.S. 808, 815-16 (1985); see also, e.g., S.

Cent. Bell Tel. Co. v. Alabama, 526 U.S. 160, 171 (1999).

b. It is a bit hard to see how Davila can argue that the

THCLA is directed at the “business of insurance,” given his

primary contention that the Act addresses “medical malprac-

tice.” _But in any event, this Court has already considered

and rejected the notion that Section 514’s insurance savings

clause negates the complete preemption doctrine in the insur-

ance context. Precisely this argument was made to this Court

in Pilot Life. See Br. for Respondent, Pilot Life Ins. Co. v.

Dedeaux, No. 85-1043, at 6-7, 15-17 (Oct. 31, 1986). This

Court rejected that argument, stating that the state tort action

was not saved in part because it conflicted with Section

502(a). Pilot Life, 481 U.S. at 52, 57. Indeed, the Court ex-

plained that Section 502(a)’s exclusive remedial scheme was

the “most important[]” factor indicating that the state law

was not the business of “insurance” that Congress intended to

preserve for State regulation. /d. at 57; see also Rush Pru-

dential, 536 U.S. at 377 (noting that Pilot Life “anticipated”

that the savings clause “los[es] out” to “the congressional

policies of exclusively federal remedies’’).

In sum, Pilot Life teaches that the exclusivity of Section

502°s remedies is so essential to the statutory scheme that it

must inform whether specific conduct is the business of “in-

surance” that States may regulate. Put another way, laws that

attempt to supplement the exclusive remedies that Congress

provided in Section 502 do not address the, business of “in-

surance”; they address the business of ERISA. In resurrect-

ing this waived savings-clause argument seventeen years af-

ter its initial rejection, Davila signals yet again the weakness

of his arguments for affirming the Fifth Circuit’s judgment.

2. Davila also asserts that the “relate to” provision of

Section 514(a), the defensive-preemption provision, is a

component of the Section 502(a) analysis. This Court has

never even hinted that the complete preemption doctrine in-

17

corporates defensive preemption principles as an additional

component of the analysis,’ and the courts of appeals have

largely rejected such an approach as contrary to both the his-

tory of Section 502(a) and settled precedent. .

First, the complete preemption doctrine under ERISA

rests on Congress’s express incorporation of the analogous

doctrine under the LMRA. That statute has no preemption

clause, but as this Court unanimously concluded in Metro-

politan Life, Congress unambiguously directed that the nghts

of action under ERISA § 502(a) be given the same exclusive

sweep as the right of action under LMRA § 301. See also,

e.g., Tovey v. Prudential Ins. Co. of Am., 42 F. Supp. 2d 919,

923 (W.D. Mo. 1999) (citing cases). Davila’s contention that

the existence of a defensive preemption clause narrows the

reach of complete preemption therefore is unavailing, as

complete. preemption is premised on supplemental state

remedies’ conflict with the exclusivity of Section 502(a).

See, e.g., Buckman Co. v. Plaintiffs’ Legal Comm., 531 U.S.

341, 352 (2001); Aetna Br. 39 & n.21.

Second, as Davila himself emphasizes (Resp. Br. 20-22,

24), Section 514 defensive preemption creates a defense that

'> To the contrary: Jngersoll-Rand noted that the Texas cause

of action would be completely preempted by Section 502(a)

“fe]ven if there were no express pre-emption in this case.” 498

U.S. at 142.

'* The en banc Fifth Circuit recently concluded unanimously

that this Court’s cases compel the conclusion that defensive pre-

emption is not a prerequisite to complete preemption. Arana vy.

Ochsner Health Plan, 338 F.3d 433, 439-40 (Sth Cir. 2003) (en

banc), cert. denied, 124 S. Ct. 1044 (2004); accord Ervast v. Flexi-

ble Prods. Co., 346 F.3d 1007, 1014 (11th Cir. 2003); see also,

e.g., Joyce v. RJR Nabisco Holdings Corp., 126 F.3d 166, 171-72

(3d Cir. 1997). But see Emard v. Hughes Aircraft Co., 153 F.3d

949, 953 (9th Cir. 1998).

18

does not give nse to federal jurisdiction. Section 502(a)

complete preemption, by contrast, is not just a defense, but a

federalizing force that creates a federal cause of action de-

spite the plaintiff's attempt to avoid pleading one. Thus, a

federal court to which a completely preempted claim is re-

moved must first satisfy itself of removal jurisdiction by de-

ciding whether the claim falls within the scope of Section

502(a). See, e.g., City of Chicago v. Int'l Coll. of Surgeons,

522 U.S. 156, 163, 165 (1997) (“The propriety of removal

... depends on whether the case originally could have been

filed in federal court” (emphasis added)). If it does, the

plaiutiff's claim is recharacterized as necessarily federal and

any contrary aspects of the putative state-law claim are dis-

placed, with no further need to assert the defense created by

Section 514(a), whose sole effect is to displace state laws.

For those reasons, it is implausible to assert that the Section

514’s “relate to” analysis is somehow antecedent to the Sec-

tion 502(a) question, when standard removal procedure dic-

tates precisely the opposite.

IV. The Court Should Decline The Invitation To Over-

rule The Pilot Life Line Of Cases

This Court has already given plenary consideration to

the issues raised in this case on multiple occasions. As we

show above, the particular benefits at issue here and in Pilot

Life and Metropolitan Life are not materially distinguishable;

ERISA subjects welfare benefit plans to the same uniform

federal regulatory and remedial regime. See ERISA §§ 3(1),

3(3), 4, 29 U.S.C. §§ 1002(1), 1002(3), 1003.

Relying on these holdings, employers have structured

welfare benefit plans, and managed care companies and other

service providers have priced their services, all in the expec-

tation that they will be subject *» ERISA’s remedial scheme,

with its focus on internal dispute resolution and prospective

relief rather than courtroom litigation and exemplary dam-

ages. See, e.g., Aetna Br. 2-3, 43; AAHP-HIAA Br. 25-26;

———

19

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 10-11 (1987)

(unpredictable litigation burdens may well cause “employers

with existing plans to reduce benefits, and those without such

plans to refrain from adopting them”).'> The reliance interest

thus created in one of the largest sectors of the economy is

reason in and of itself to continue to adhere to Pilot Life so

long as the statutory text interpreted in that case remains un-

changed. See, e.g., Allied-Bruce Terminix, Inc. v. Dobson,

513 U.S. 265, 272 (1995); id. at 283-84 (O’Connor, J., con-

curring). In stark contrast to these tangible interests, the “set-

tled expectations” marshaled by Davila on the other side of

the scale (Resp. Br. 66-67)—i.e., the public’s interest in

“federalism,” which is to say in States’ supposed-ability to

override long-settled federal law in the name of “protect[ing]

.. . safety”’—smack more of sloganeering.

Davila insists that this Court retains unfettered discretion

to abandon Pilot Life and the cases that have built on it, on

the theory that what this Court has “judicially implied” it

may freely recant. But that notion utterly discounts the basis

of Pilot Life and Metropolitan Life. In both cases (as in Mas-

sachusetts Mutual Life Insurance Co. v. Russell, 473 U.S.

134 (1985), before them), this Court held that Congress had

clearly made the choices that the Court must implement: to

subject welfare benefits to the ERISA remedial scheme; to

'S A departure from that regime would undoubtedly increase

the already high cost of employer-provided health insurance. See

generally ECONOMIC REPORT OF THE PRESIDENT ch. 11 (2004).

Though Davila and his amici quibble over percentages, it is uncon-

tested that even a fractional increase in health care costs would add

tens of billions of dollars to the nation’s health care bill. See, e.g.,

Health-Care Tab Hits $1.7 Trillion, WALL ST. J., Feb. 12, 2004, at

D2. The precise dollar figure is, of course; in dispute, compare

U.S. Chamber Br. 25-26 with Resp. Br. at 67—but that dispute

serves only to reinforce the propriety of leaving this sort of classi-

cally legislative judgment to the political process.

20

make that remedial scheme thorough but to exclude certain

remedies from its scope; and to preempt any state-law nght

of action that disrupts that exclusivity. Metropolitan Life,

481 U.S. at 64-65 (citing Pilot Life, 481 U.S. at 54).

If Congress disagrees with this Court’s construction of

ERISA, or is persuaded that additional remedies should be

available to plan participants and beneficiaries, it remains

free to legislate in this area. Indeed, Congress has added ad-

ditional remedies to ERISA. E£.g., Pension Annuitants Pro-

tection Act of 1994, Pub. L. No. 103-401, 108 Stat. 4172.

Congress also has considered—but failed to enact—other

changes in benefits law, including expanding available reme-

dies, a number of times in recent years. E.g., Aetna Br. 42

n.23. Undaunted, the legislative proponents of those unsuc-

cessful measures now ask this Court to embrace remedies

that the Congress as a whole has declined to enact. See Br.

for Sen. Kennedy et al. 25 (asserting that it is “easier” for this

Court to change Pilot Life judicially than for Congress to do

it legislatively). But those pleas provide no legal basis for

eschewing this Court’s traditional adherence to statutory

stare decisis. Because there is no substantial basis for this

Court to revisit Pilot Life, Davila’s state-law claims must fail.

CONCLUSION

The judgment of the court of appeals should be reversed.

Respectfully submitted.

JOHN B. SHELY MIGUEL A. ESTRADA

KENDALL M. GRAY Counsel of Record

ANDREWS & KURTHLLP MARKA. PERRY

600 Travis, Suite 4200 WILLIAM M. JAY

Houston, Texas 77002 GIBSON, DUNN & CRUTCHER LLP

(713) 220-4200 1050 Connecticut Avenue, N.W.

Washington, D.C. 20036-5306

Roy T. ENGLERT, JR. (202) 955-8500

ROBBINS, RUSSELL,

ENGLERT, ORSECK & J. EDWARD NEUGEBAUER

UNTEREINER LLP AETNA HEALTH INC.

1801 K Street, N.W. 980 Jolly Road (UI9A)

Washington, D.C. 20006 Blue Bell, PA 19422

(202) 775-4500 (215) 775-5939

Counsel for Petitioner

February 26, 2004

APPENDIX

3.0

3.1

THIS AGREEMENT CONTAINS

AN ARBITRATION PROVISION

PRIMARY CARE PHYSICIAN AGREEMENT

Dear Primary Care Physician:

* * * *

COMPENSATION

Payment. Company’s compensation methodologies are

designed to promote Member access to quality care.

Company shall, or when it is not the applicable Payor

shall notify each Payor to, pay Physician for Primary

Care Services rendered to Members in accordance with:

(a) the Physician Compensation Model as described in

the Compensation Schedule; (b) any other applicable At-

tachment; or (c) the fee schedule then in effect as appli-

cable to such Members’ Plans; any of which may be

modified from time to time. Physician’s compensation

for non-capitated Covered Services rendered to Mem-

bers shall be (A) the lower of (i) the compensation ar-

rangement in effect hereunder, or (ii) Physician’s rea-

sonable and customary billed charge, (B) minus any ap-

plicable Copayments, Coinsurance or Deductibles.

Payments for non-capitated Covered Services are subject

to any and all valid and applicable laws related to claims

payment. Except for capitated services, in the event

Company fails to pay a Clean Claim within forty-five

(45) days of submission, upon written notice from Phy-

sician of such event, Company shall pay a contracted

penalty of [VARIABLE: one to twenty] percent

(VARIABLE: (1-20%)] per month simple interest on

the eligible, unpaid portion of such Clean Claim(s), be-

ginning on the 46th day after submission of that Clean

Claim through the date on which payment is made. Phy-

sician shall not be entitled to billed charges for any

Clean Claim. Physician shall not be entitled to receive

either billed charges or the contracted penalty for claims

under self-funded Plans. Physician shall notify Com-

2a

pany of any Overpayments or payments made in error

within ten (10) business days of becoming aware thereof,

and shall return or arrange the return of any such over-

payments or payments made in error to Company, or to

Payor or Member, as applicable. Physician shall hold

Company, Affiliates, Sponsors, Members and Payors

harmless against any and all claims by covering provid-

ers related to or arising out of payment for Covered Ser-

vices rendered to Members. Notwithstanding anything

to the contrary in this Agreement, to the extent Company

has communicated approval of payment for Covered

Services, Company shall pay for such Covered Services

absent: (a) fraud; (b) materially changed condition of

the Member’s health status (meaning a material change

in the Member health status between the time that Com-

pany communicates approval of payment for Covered

Services and the time that those Covered Services are

provided, such that the Covered Services for which

Company has communicated approval of payment are

not medically necessary due solely to the material

change in the Member’s health); or (c) the individual re-

ceiving the services was not a Member at the time such

care is delivered. Notwithstanding anything in this

Agreement to the contrary, during such time as Physi-

cian is a member of a Group, Physician seeks to seek

compensation solely from Group for those Covered Ser-

vices provided to Members and for which Group is com-

pensated by Company on behalf of Physician, and Phy-

sician shall in no event bill Company, its Affiliates, Pay-

ors or Members for any such Covered Services (except

for the collection of Copayments, Coinsurance, Deducti-

bles in accordance with Section 3.2). When Company is

not the Payor, Company shall have no obligation to pay

Physician in the event that the Payor or Member fails to

pay Physician. Company agrees that it shall not offer

Physician compensation arrangements that: provide ad-

ditional compensation for not exceeding certain budgets,

impose a penalty for incurring expenses that are medi-

cally necessary, make additional compensation available

3.2

3a

for limiting medically necessary services or will be af-

fected by the actual (as opposed to projected) costs of

services or the actual rate of utilization of services dur-

ing the contract year. This will not prohibit Company

from providing additional compensation to Physician for

providing preventive care or in the event the actual costs

or utilization of services were more than the projected

costs or utilization.

Billing of Members. Under certain Plans, members may

be required to pay Copayments, Coinsurance or De-

ductibles for certain Covered Services. Physician shall

collect any applicable Copayments, Coinsurance and

Deductibles from Members. Such amounts collected

must be based only on the compensation herein. Co-

payments shall be collected at the time that Covered

Services are rendered. Except for applicable Copay-

ments, Coinsurance and Deductibles, Physician may bill

Members only in the circumstances described below:

3.2.1 If the applicable Payor is not an HMO, Physician

may bill a Member for Primary Care Services

provided to the Member in the event that the

Payor becomes insolvent or otherwise breaches

the terms and conditions of its agreement to pay,

provided that: (a) Physician shall have first ex-

hausted all reasonable efforts to obtain payment

from the Payor; and (b) Physician shall not insti-

tute or maintain any collection activities against a

Member to collect any sums that are owed by a

Payor to Physician unless Physician provides

prior notice to Company of Physician’s intent to

institute such activities.

3.2.2 Services that are not Covered Services may be

billed to Members by Physician only if: (a) the

Member’s Plan provides and/or Company con-

firms that the services are not covered; (b) the

Member was advised in writing prior to the ser-

vices being rendered that the specific services

3.3

3.4

4a

may not be Covered Services; and (c) the Mem-

ber agreed in writing to pay such services.

Noting in this section is intended to prohibit or restrict

Physician from billing individuals who were not Mem-

bers at the time that services were rendered.

Coordination of Benefits. When a Payor is the primary

payor under applicable coordination of benefit princi-

ples, the Payor shall pay in accordance with this Agree-

ment, and when a Payor is secondary under said princi-

ples, Payor’s payment shall be limited as specified in the

applicable Plan. If the Plan fails to specify coordination

of benefits requirements, and unless prohibited by appli-

cable law, Payor’s payment shall be limited to the

amount which, together with the amount paid by the

primary payor following all reasonable efforts by Physi-

cian to collect same, equals the compensation due to

Physician under this Agreement, or if the primary payor

fails to pay, Payor’s payment shall be in accordance with

this Agreement. In no event shall amounts billed and re-

tained under coordination of benefits for Covered Ser-

vices exceed Physician’s usual and customary billed

charges for such services.

Claims Submission. Physician shall submit claims to

Company or the applicable Payor for non-capitated Pri-

mary Care Services rendered to Members. Claims shall

be submitted within ninety (90) days of the date of ser-

vice or Physician’s receipt of an explanation of benefits

from a primary payor. Billings shall include detailed

and descriptive medical and Member data and identify-

ing information on HCFA 1500 forms or any subsequent

form adopted for that purpose. Physician shall submit

bills electronically as required by Company or the appli-

cable Payor. Company primarily utilizes CPT for the

coding and description of services. If Physician has not

billed Company or the applicable Payor within the stated

time frame, Physician’s claim shall be deemed waived,

and Physician shall not bill any other person or entity,

including, but not limited to, Company, the applicable

3.5

Sa

Payor, Sponsor, or Member, for such services. Com-

pany may return to Physician any claims which are in-

complete, inaccurate, or not in the proper format as re-

quired by Company. Statements made in any claim or

related documentation submitted by or on behalf of Phy-

sician shall be considered statements made by Physician,

regardless of whether such statements are prepared by

Physician’s employees, agents, or representatives. Any

adjustments to claims submitted by Physician must be

filed with Company or the applicable payor within thirty

(30) days of the submission of the original claim, or the

original claim will be deemed final.

Holding Members Harmless. If the applicable Payor is

an HMO, Physician hereby agrees that in no event, in-

cluding, but not limited to, non-payment by the HMO,

insolvency of the HMO or breach of this Agreement,

shall Physician bill, charge, collect a deposit from, seek

compensation, remuneration or reimbursement from, or

have any recourse against a Member or persons (other

than the HMO) acting on a Member’s behalf for Covered

Services. This provision shall not prohibit collection of

Deductibles, Coinsurance, or Copayments from Mem-

bers in accordance with the terms of the Member’s Plan.

Physician further agrees that: (a) this provision shall

survive termination of this Agreement regardless of the

cause giving rise to termination and shall be construed

for the benefit of Members; and (b) this provision super-

sedes any oral or written agreement to the contrary now

existing or hereafter entered into between Physician and

a Member or persons acting on a Member’s behalf.

Any modifications, additions or deletions to the provi-

sions of this clause shall become effective on a date no

earlier than 15 days after the Commissioner of Insurance

has received written notice or such proposed changes.

* * * *