Amicus Curiae Brief — United States Healthcare Systems of Pennsylvania, Inc. v. Pennsylvania Hospital Insurance

ty

Supreme Court, U.S. |

FIT ED

777) :

Z/ DFC 17 1999

No. 98-1836

TLE TL REI TIERS EAE LD NENT E LEE BANE PH LIL EERIE A

ae

In the Supreme Court of the United States

UNITED STATES HEALTHCARE SYSTEMS

OF PENNSYLVANIA, INC., PETITIONER

Vv.

PENNSYLVANIA HOSPITAL INSURANCE CoO., ET AL.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE SUPREME COURT OF PENNSYLVANIA

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE

SETH P. WAXMAN

Solicitor General

Counsel of Record

HENRY L. SOLANO EDWIN S. KNEEDLER

Solicitor of Labor Deputy Solicitor General

ALLEN H. FELDMAN JAMES A. FELDMAN

Associate Solicitor Assistant to the Solicitor

NATHANIEL I. SPILLER General

Deputy Associate Sclicitor Department of Justice

ELLEN L. BEARD Washington, D.C. 20530-0001

Attorney (202) 514-2217

Department of Labor

Washington, D.C. 20210

QUESTION PRESENTED

Whether Section 514(a) of the Employee Retirement

Income Security Act of 1974 (ERISA), 29 U.S.C. 1144(a),

preempts state law claims arising from a health maintenance

organization’s negligence in denying a claim for benefits

under an ERISA-governed health plan.

(I)

TABLE OF CONTENTS

} Page

Statement 1

Discussion 6

Conclusion ...... 20

“~ TABLE OF AUTHORITIES

Cases:

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

1994) 8-9

Bast v. Prudential Ins. Co. of Am., 150 F.3d 1003

(9th Cir. 1998), cert. denied, 120 S. Ct. 170 (1999) ........... 17

Cagle v. Bruner, 112 F.3d 1610 (11th Cir. 1997) .............. 13

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

1270 (10th Cir.), cert. denied, 519 U.S. 816 (1996) ......... 11,17

Corcoran v. United HealthCare, Inc., 965 F.2d 1821

(5th Cir.), cert. denied, 506 U.S. 1033 (1992) .......... 11, 12,17

Cox Broadcasting Corp. v. Cohn, 420 U.S. 469 (1975) ... 7

Danca v. Private Health Care Sys., Inc., 185 F.3d 1

(1st Cir. 1999) 9,17, 18

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

520 U.S. 806 (1997) 5, 16

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

1982) 9

Dukes v. U.S. Healthcare, Inc., 57 F.3d 350 (8d Cir),

cert. denied, 516 U.S. 1009 (1996) ...... - 6,8,10

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

Grimo v. Blue Cross/Blue Shield, 34 F.3d 148 (2d Cir.

ES en a See 9

Group Life & Health Ins. Co. v. Royal Drug Co., 440

U.S. 205 (1979) Sesidsitpinciess 8

Hull v. Fallon, 188 F.3d 939 (8th Cir. 1999) ............ce000 17

In Home Health, Inc. v. Prudential Ins. Co. of Am.,

101 F.3d 600 (8th Cir. 1996) ia 13

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

(1990) sais 7

(III)

Cases—Continued: Page

Jass v. Prudential Health Care Plan, Inc., 88 F.3d

1482 (7th Cir. 1996) 17

Kenney v. Roland Parson Contracting Corp., 28 F.3d

1254 (D.C. Cir. 1994) )

Kuhl v. Lincoln Nat'l Health Plan of Kansas City,

Inc., 999 F.2d 298 (8th Cir. 1998), cert. denied, 510

U.S. 1045 (1994) 11, 17,18

Lordmann Enters., Inc. v. Equicor, Inc., 32 F.3d 1529

(11th Cir. 1994), cert. denied, 516 U.S. 930 (1996) .......... 13

Lupo v. Human Affairs Int'l, Inc., 28 F.2d 269 (2d Cir.

1994) 10

Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S.

134 (1985) 8

Memorial Hosp. Sys. v. Northbrook Life Ins. Co.,

904 F.2d 236 (5th Cir. 1990) 13

Mertens v. Hewitt Assocs., 508 U.S. 248 (1998) .............. 8, 12

Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S.

TCD cetiensicrniinieiinianiaean 17

Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58

(1987) 18

New York State Conference of Blue Cross & Blue

Sheild Plans v. Travelers Insurance Co., 514 U.S.

645 (1995) 4,5, 16

Pacificare of Okla., Inc. v. Burrage, 59 F.3d 151 (10th

Cir. 1995) 10

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

denied, 119 S. Ct. 510 (1998) ........ccccsersssssesecseseseees 10-11

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

| SR ee 6, 14, 15, 16

Rice v. Panchal, 65 F.3d 637 (7th Cir. 1995) .......ssssssseees 10

Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1968) .......... 17

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

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

Cases—Continued:

Tolton v. American Biodyne, Inc., 48 F.3d 937 (6th

Cir. 1995)

Turner v. Fallon Community Health Plan, Inc.,

127 F.3d 196 (1st Cir. 1997), cert. denied, 523 U.S.

1072 (1998)

11

UNUM Life Ins. Co. of Am. v. Ward, 1198S. Ct. 1380

8, 14, 15, 16

(1999)

U.S. Healthcare, Inc., In re, 198 F.3d 151 (3d Cir.

1999)

Washington Pysicians’ Serv. Ass’n v. Gregoire,

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

S. Ct. 1083 (1999)

Statutes and regulations:

Employee Retirement Income Security Act of 1974,

29 U.S.C. 1001 et seq.:

§ 3(1), 29 U.S.C. 1002(1)

1,9

§ 502(a), 29 U.S.C. 1182(a)

13, 14, 15

12

§ 502(a)(1)(B), 29 U.S.C. 1132(a)(1)(B)

§ 502(a(3), 29 U.S.C. 1132(aX3)

12

§ 514, 29 U.S.C. 1144

8

§ 514(a), 29 U.S.C. 1144(a)

§ 514(b)(2)(A), 29 U.S.C. 1144(b)(2)(A)

14, 15

14

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

15

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

28 U.S.C. 1257(a)

29 C.F.R.:

Section 2560.503-1(c)

Section 2560.503-1(g)(2)

Section 2560.503-1(j)

VI

Miscellaneous: Page

63 Fed. Reg. (1998):

p. 48,406 11

p. 48,408 11

Employee Retirement Income Security Act ielangiban:

Remedies for Denied or Delayed Claims: Hearing

Before a Subcomm. of the Senate Comm. on Appro-

priations, 105th Cong., 2d Sess. (1998)

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

o-

In the Supreme Court of the United States

————

No. 98-1836

UNITED STATES HEALTHCARE SYSTEMS

OF PENNSYLVANIA, INC., PETITIONER

v.

PENNSYLVANIA HOSPITAL INSURANCE CO., ET AL.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE SUPREME COURT OF PENNSYLVANIA

- oe

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE

This brief is submitted in response to the Court’s invita-

tion to the Solicitor General to express the views of the

United States.

STATEMENT

1. The original plaintiffs in this case, Basile and Theodora

Pappas, were subscribers to a health maintenance organiza-

tion (HMO) operated by petitioner United States Healthcare

Systems of Pennsylvania, Inc., a subsidiary of Aetna, Inc.

Pet. App. 20a; Pet. ii. The Pappases received HMO coverage

through an employee welfare benefit plan as defined in Sec-

tion 3(1) of the Employee Retirement Income Security Act

of 1974 (ERISA), 29 U.S.C. 1002(1), sponsored by Mrs.

Pappas’ employer, The Charming Shoppes. Pet. App. 35a-

36a. Petitioner’s HMO provided most medical care by con-

(1)

2

tracting with participating providers. Pet. 2. In a medical

emergency, however, the HMO covered treatment by non-

participating providers. Super. Ct. Reproduced R. (“R.”)

156a (“Emergency care is covered anytime, anywhere.”); id.

at 158a (“In an emergency, you should contact your primary

care physician for help. When a delay would be detrimental

to your health, seek the nearest medical attention. Always

call the toll-free number on the back of your membership

card * * * within 24 hours after receiving emergency

care.”).

On May 20, 1991, Mr. Pappas went to his primary care

doctor, Dr. David Asbel, complaining of neck and shoulder

pain, and was treated with an injection of steroids. Pet. App.

35a. The next morning, after his condition had worsened,

Pappas was transported by ambulance to Haverford Com-

munity Hospital (Haverford), where he was admitted at

11:00 a.m. By that time, he was paralyzed from the chest

down. The emergency room physician, Dr. Stephen Dickter,

in consultation with a neurologist and a neurosurgeon, diag-

nosed a probable epidural abscess pressing on Pappas’ spine,

a neurological emergency requiring immediate surgery. By

12:30 p.m., Dr. Dickter had made arrangements to transfer

Pappas to Thomas Jefferson University Hospital (Jefferson),

which had a spinal cord trauma unit able to commit to his

immediate admission. Jd. at 2a-3a, 21a, 36a.

At 12:40 p.m/, the ambulance service that was to transport

Pappas to Jefferson told Dr. Dickter that petitioner would

not authorize Pappas’s transfer to Jefferson. At 12:50 p.m.,

Dr. Dickter called petitioner to request authorization, mak-

ing clear that the situation was a neurological emergency.

Pet. App. 3a, 21a, 36a. At 1:05, a representative of petitioner

told Dr. Dickter that petitioner would not authorize treat-

ment at Jefferson because it was not approved by petitioner,

but that it would cover treatment at any of three other

participating university hospitals. Jd. at 2la, 36a. Dr.

3 :

Dickter then initiated a series of telephone calls to arrange

for Pappas’s admission at one of the three approved

hospitals, resulting in further delays before he underwent

surgery that evening. Jd. at 3a, 21a-22a, 36a-37a. Pappas

now suffers from permanent quadriplegia caused by

compression of his spine by the abscess. /d. at 3a, 22a, 37a,

51a-52a.

2. The Pappases brought a common law tort action in

state court against Dr. Asbel and Haverford, alleging that

Dr. Asbel had committed medical malpractice and that

Haverford was negligent in causing an inordinate delay in

transferring Pappas. Pet. App. 3a, 22a. Haverford filed a

third-party complaint against petitioner, joining it as a de-

fendant for refusing to authorize Pappas’s transfer to Jeffer-

son and adopting (for purposes of that third-party complaint)

the negligence claims made against Haverford in the original

complaint. Jd. at 3a, 22a, 37a, 41a, 60a.’

The Pennsylvania trial court granted summary judgment

to petitioner. Pet. App. 34a-44a. It held that ERISA pre-

empts Haverford’s third-party complaint because “{aJll of

[its] allegations fall within the rubric of administration of an

employee benefit plan.” Jd. at 41a. Thus, it considered this

case analogous to cases preempting state claims for “failure

to pay a benefit claim or preapprove a procedure,” which

have an “obvious connection or reference to a benefit plan,”

and different from cases holding that “ERISA does not

preempt state law claims against an HMO sued on a theory

of vicarious liability generally or ostensible agency specifi-

cally” based on the negligence of others in furnishing care.

Id. at 42a-43a.

+ eee

1 Dr. Asbel also filed a cross-claim against petitioner seeking contribu-

tion and indemnity, Pet. App. 3a-4a, 22a, 37a, which apparently was not

pursued and is not before this Court. See Pet. 5-6; Pet. App. 22a n.2, 38a,

46a.

8 ESSE ee ee ee ee ne ee

4

Plaintiffs’ claims against Dr. Asbel and Haverford were

later settled. Pet. App. 4a n.2, 22a n.2, 45a-46a. The trial

court entered an order approving the settlement, substitut-

ing respondents Pennsylvania Hospital Insurance Company

and the Commonwealth of Pennsylvania Medical Profes-

sional Liability Catastrophe Loss Fund for Haverford as the

real parties in interest, and declaring final its earlier order

granting summary judgment to petitioner. Jd. at 46a. Re-

spondents appealed.

3. The Pennsylvania Superior Court reversed and re-

manded. Pet. App. 18a-33a. Characterizing the negligence

claim here as “an indirect source of merely economic influ-

ence on administrative decisions,” id. at 28a (citation omit-

ted), it reasoned that “ERISA is in no way implicated by the

claim that [petitioner] negligently caused Mr. Pappas’ inju-

ries by its delay in authorizing his transfer.” Jd. at 3la. De-

spite its observation that “the argument has never been ad-

vanced that the decision to withhold approval for transfer to

Jefferson was at all related to medical considerations,” id. at

27a, the Superior Court concluded that the claims are di-

rectly related to “general health care regulation” rather than

plan administration, and thus are presumptively left to the

States under New York State Conference of Blue Cross &

Blue Shield Plans v. Travelers Insurance Co., 514 U.S. 645

(1995). Pet. App. 26a-28a.”

2 The court also noted that, “if the original complaint had claimed that

[petitioner] was vicariously liable because of the negligence of its con-

tracting agents, Dr. Asbel and Haverford, in securing Mr. Pappas’ trans-

fer, there would be no question” that the claim would withstand preemp-

tion. Pet. App. 3la-32a. In fact, the record is unclear on whether either

Dr. Asbel or Haverford had a contractual relationship with petitioner as a _

participating provider in its HMO network. Since the HMO is structured

to provide services through primary care physicians, and Dr. Asbel, an

osteopath, performed that role for Mr. Pappas, we assume that he was a

participating provider. See Pet. App. 3a, 20a; R. 158a. Dr. Dickter, who

had worked full-time in Haverford’s emergency room for ten months at

5

4. The Pennsylvania Supreme Court affirmed. Pet. App.

la-13a. The court held broadly that “negligence claims

against a health maintenance organization do not ‘relate to’

an ERISA plan.” Jd. at lla. It reached that conclusion

based on the view that this Court “noticeably changed tack”

in its Travelers decision, id. at 7a, interpreting ERISA’s pre-

emption provision less expansively than in earlier cases. Id.

at 9a. Travelers, the court said, established that “Congress

did not intend to preempt state laws which govern the

provision of safe medical care.” Jd. at 1la. Since “(cJlaims

that an HMO was negligent when it provided contractually-

guaranteed medical benefits in such a dilatory fashion that

the patient was injured indisputably are intertwined with

the provision of safe medical care,” the court concluded that

the claims in this case are not preempted. /d. at 1la-12a.

The court also reasoned that state negligence laws of general

applicability have only a “tenuous, remote, or peripheral con-

nection with [ERISA] covered plans,” and have only an inci-

dental impact on the fees charged by HMOs to ERISA plans.

Id. at 12a (citing Travelers, 514 U.S. at 661, and De Buono v.

NYSA-ILA Med. & Clinical Servs. Fund, 520 U.S. 806, 814-

816 (1997)).*

Justice Nigro concurred separately. Pet. App. 14a-16a. In

his view, ERISA does not preempt the third-party claims

because petitioner’s actions “constituted, in effect, an indi-

vidual medical decision or judgment as opposed to a decision

affecting the administration of an employee benefit plan.”

Id. at 15a. Relying on Dukes v. U.S. Healthcare, Inc., 57

the time of these events, testified that he had never previously called

petitioner for any purpose. R. 60a, 67a. This suggests, if anything, that

Haverford was not a participating provider.

8 The court disagreed, however, with the Superior Court’s reasoning

that the state-law claims at issue here are not preempted because “Con-

gress, when crafting ERISA, was ignorant of the cost containment proce-

dures utilized by HMOs.” Pet. App. 12a n.6.

6

F.3d 350 (3d Cir.), cert. denied, 516 U.S. 1009 (1995), he

concluded that this case involves claims about the quality of

health care benefits actually received, which are not pre- -

empted by ERISA, rather than claims that the quantum of

benefits promised was not provided, a dispute that ERISA

does control. Pet. App. 15a-16a.

: DISCUSSION

The Pennsylvania Supreme Court held flatly that “negli-

gence claims against a health maintenance organization do

not ‘relate to’ an ERISA plan.” Pet. App. lla. In our view,

that holding is both overbroad and incorrect as applied to

this case. In many circumstances, including this case, the

blanket non-preemption rule announced by the Pennsylvania

Supreme Court conflicts with the core holding of Pilot Life

Insurance Co. v. Dedeaux, 481 U.S. 41, 48 (1987), that

ERISA preempts state common-law causes of action for im-

proper processing of a claim for benefits under an employee

benefit plan. The Pennsylvania Supreme Court’s decision

also conflicts with a number of federal court of appeals deci-

sions holding that ERISA preempts state-law claims chal-

lenging decisions by HMOs and other plan administrators to

deny or delay authorization for particular medical treat-

ments or treatment at particular hospitals. Finally, ques-

tions regarding the scope of ERISA preemption of negli-

gence claims against HMOs are currently of great nation-

wide importance. This Court’s disposition of Pegram v.

Herdrich, No. 98-1949 (to be argued Feb. 23, 2000), may have

relevance to this case, and we therefore suggest that the

Court hold the pétition in this case pending its decision in

Pegram. But both the conflict between the Pennsylvania

Supreme Court and several courts of appeals, and the impor-

tance of the question presented here, suggest that, if

|

7

Pegram does not clearly resolve this case, plenary review

would be warranted.‘

1. Based on the limited but undisputed facts of record in

this case, it appears that petitioner denied Mr. Pappas a

benefit he was entitled to receive under the terms of his plan

—emergency care at a hospital outside the HMO network—

and that respondents seek to hold petitioner liable for its

negligence in making that erroneous benefit determination.

When viewed in that light, respondents’ claims are pre-

empted by ERISA because they relate to plan administra-

tion and would provide an independent enforcement mecha-

nism as an alternative to ERISA’s limited remedies. As a

result, the Pennsylvania Supreme Court decision is both

incorrect in this case and overbroad as a general matter

under existing law.

4 Respondents argue (Br. in Opp. 4-5) that this Court lacks jurisdiction

under 28 U.S.C. 1257(a) because the decision of the Pennsylvania Supreme

Court is not a final judgment. We agree with petitioner (Reply Br. 1-6)

that this case meets the four requirements for immediate review under

Cox Broadcasting Corp. v. Cohn, 420 U.S. 469, 482-483 (1975): (1) the fed-

eral question, concerning ERISA preemption, has been finally decided; (2)

petitioner might prevail on remand on nonfederal grounds, making review

of the federal issue unnecessary; (3) reversal of the state court judgment

on preemption grounds would preclude further litigation; and (4) denying

immediate review might seriously erode federal policy regarding the

scope of ERISA preemption of tort claims against HMOs. This Court has

previously granted certiorari to review an ERISA preemption case in a

similar posture without commenting on any jurisdictional issue. See

Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 136-137 (1990) (reviewing

case in which Texas Supreme Court, holding that state wrongful discharge

claims were not preempted, had reversed and remanded for trial).

5 The Department f Labor has supported proposed amendments to

ERISA to provide more effective remedies for improper benefit deter-

minations, either by narrowing ERISA preemption or strengthening

ERISA remedies or both. See ERISA Preemption: Remedies for Denied

or Delayed Claims: Hearing Before a Subcomm. of the Senate Comm. on

Appropriations, 105th Cong., 2d Sess. 5-14 (1998) (testimony of Assistant

8

As we explain in our recent amicus brief in Pegram v.

Herdrich, No. 98-1949 (filed November 19, 1999), an HMO

can perform various functions in relation to an employee wel-

fare benefit plan. Jn re U.S. Healthcare, Inc., 193 F.3d 151,

162 (8d Cir. 1999); Dukes v. U.S. Healthcare, Inc., 57 F.3d

350, 361 (8d Cir.), cert. denied, 516 U.S. 1009 (1995). First,

by its very nature, an HMO serves as a medical-service pro-

vider to the plan, contracting for or directly providing medi-

cal care to the plan’s participants and beneficiaries. Jn re

U.S. Healthcare, 193 F.3d at 162. Second, it may serve as a

plan administrator, performing administrative duties such as

determining eligibility for benefits, calculating and disburs-

ing benefits, monitoring available funds, and keeping re-

cords. /bid.; see also Fort Halifax Packing Co. v. Coyne, 482

U.S. 1, 9 (1987).° Those roles can and should be distinguished

Secretary Olena Berg) [hereinafter Berg Testimony]; see also H.R. 2990,

106th Cong., 1st Sess. § 1302 (1999) (provision in House-passed version of

Patients’ Bill of Rights amending Section 514 of ERISA, 29 U.S.C. 1144, to

save from preemption certain state personal injury claims involving group

health plans). The Department’s position is based on the belief that par-

ticipants and beneficiaries of ERISA-covered health plans currently have

inadequate remedies for the negligence of plan administrators in making

benefit determinations. ERISA itself does not provide compensatory

damages for the improper processing of benefit claims. Mertens v. Hewitt

Assocs., 508 U.S. 248 (1993); Massachusetts Mut. Life Ins. Co. v. Russell,

473 U.S. 134 (1985). At the same time, under Pilot Life, ERISA appears

to preempt most, if not all, state-law causes of action that could provide

such relief. Cf. UNUM Life Ins. Co. of Am. v. Ward, 119 S. Ct. 1380, 1390-

1391 n.7 (1999).

6 An HMO also acts as an insurer to the extent that it bears risk. See

Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 227 n.34

(1979) (noting that “certain aspects” of advance-payment medicai-benefits

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

Act, 15 U.S.C. 1012). See also Washington Physicians’ Serv. Ass'n v. Gre-

goire, 147 F.3d 1039, 1045-1046 (9th Cir. 1998) (an HMO “provides medical

services directly” and also is “in the business of insurance”), cert. denied,

119 S. Ct. 1083 (1999); Anderson v. Humana, Inc., 24 F.3d 889, 892 (7th

“S"S 2

9

for purposes of ERISA preemption analysis, but the Penn-

sylvania Supreme Court failed to do so.

To understand those roles, it is helpful to begin with

ERISA’s definition of a plan—particularly since both Penn-

sylvania appellate courts incorrectly assumed that peti-

tioner’s HMO is identical to the employee benefit plan

sponsored by Mrs. Pappas’s employer. Pet. App. 4a n.1, 23a

n.8. ERISA defines an “employee welfare benefit plan” as

“any plan, fund, or program * * * established or main-

tained by an employer * * * for the purpose of providing

for its participants or their beneficiaries, through the pur-

chase of insurance or otherwise * * * medical, surgical, or

hospital care or benefits” or other benefits. 29 U.S.C.

1002(1). Based on that definition, the essentials of a plan

have been interpreted to be the existence of “intended bene-

fits, a class of beneficiaries, [a] source of financing, and pro-

cedures for receiving benefits.” Donovan v. Dillingham, 688

F.2d 1867, 1873 (11th Cir. 1982); accord Grimo v. Blue

Cross/Blue Shield, 34 F.3d 148, 151 (2d Cir. 1994); Kenney v.

Roland Parson Contracting Corp., 28 F.3d 1254, 1257-1258

(D.C. Cir. 1994) (collecting cases).

The ERISA plan in this case was the arrangement by

which The Charming Shoppes, Mrs. Pappas’ employer, un-

dertook to provide medical benefits to eligible employees

and their families, in this instance by purchasing member-

ships in petitioner’s HMO. The intended benefit was cover-

age for the specific kinds of medical care specified in the

Group Master Contract between petitioner and The Charm-

ing Shoppes, care that is generally provided (except in emer-

gencies) by doctors and hospitals under contract with peti-

tioner. R. 158a; see Danca v. Private Health Care Sys., Inc.,

185 F.3d 1, 6 n.6 (ist Cir. 1999) (explaining that the benefits

under an ERISA health plan are “the monetary payments

Cir. 1994). But see Texas Pharmacy Ass’n v. Prudential Ins. Co., 105

F.3d 1035, 1088-1039 (5th Cir.), cert. denied, 522 U.S. 820 (1997).

10

for medical services, not the services themselves”). The in-

tended beneficiaries were The Charming Shoppes’ em-

ployees and their dependents enrolled in the HMO. The

source of funding was The Charming Shoppes, which paid

premiums to petitioner. Pet. 2; Pet. App. 35a-36a. And the

procedure to apply for and collect benefits under the HMO is

outlined in the Member Handbook and Group Master Con-

tract. Under that procedure, petitioner decides whether to

authorize or reimburse treatment. R. 158a; Pet. 17. Peti-

tioner itself, however, is not an ERISA plan; rather, it is a

service provider to the plan and to its participants and

beneficiaries.

As was true here, HMOs can perform at least two

different roles in their relationship with members who are

enrolled under ERISA plans, and the correct identification

of the role being performed can have profound consequences

under ERISA. When an HMO acts as a medical service

provider, a number of courts have held—and we agree—

that the HMO is subject to suit under state law for negli-

gence in performing its medical duties. In re U.S. Health-

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

Pacificare of Okla., Inc. v. Burrage, 59 F.3d 151 (10th Cir.

1995); Dukes v. U.S. HealthCare, Inc., 57 F.3d 350 (8d Cir.),

cert. denied, 516 U.S. 1009 (1995); Lupo v. Human Affairs

Int'l, Inc., 28 F.3d 269 (2d Cir. 1994). In those cases, the non-

preempted claims were generally either vicarious liability

claims against an HMO for medical malpractice by its agents,

or direct claims against the HMO for its negligence in selec-

tion and supervision of those agents. See, e.g., Dukes, 57

F.3d at 352-353.

On the other hand, when an HMO makes benefit deter-

minations in its role as a plan administrator, most courts

have held—and we agree—that ERISA preempts any state-

law challenges to those decisions. See, e.g., Parrino v. FHP,

Inc., 146 F.3d 699 (9th Cir.) (HMO denial of particular cancer

11

treatment), cert. denied, 119 S. Ct. 510 (1998); Turner v.

Fallon Community Health Plan, Inc., 127 F.3d 196 (1st Cir.

1997) (same), cert. denied, 523 U.S. 1072 (1998); Cannon v.

Group Health Serv. of Okla., Inc., 77 F.3d 1270 (10th Cir.)

(HMO delay in authorizing particular cancer treatment),

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

Health Plan of Kansas City, Inc., 999 F.2d 298 (8th Cir.

1993) (HMO delay in authorizing surgery at non-network

hospital), cert. denied, 510 U.S. 1045 (1994).

The Labor Department’s ERISA claims regulations (both

current and proposed) also recognize that HMOs, like insur-

ance companies and other organizations outside the plan

itself, may be responsible for making claim determinations

under an employee benefit plan. See 29 C.F.R. 2560.503-1(c),

(g)(2) and (j); see also 63 Fed. Reg. 48,408 (1998) (proposed

amended claims regulation defining an “adverse benefit

determination” to include benefit denials “resulting from the

application of any utilization review directed at cost contain-

ment”); see also id. at 48,406 (addressing claims procedures

of plans in which benefits are provided by an HMO or similar

entity). As both the case law and the regulations show, such

benefit determinations will often involve a significant com-

ponent of medical judgment, and may have tragic medical

consequences. But, so long as the judgment is an adjunct to

a plan coverage decision, rather than a judgment made pri-

marily in the course of diagnosis or treatment, it is a “benefit

determination nonetheless.” Corcoran v. United Health-

Care, Inc., 965 F.2d 1321, 1332 (5th Cir.), cert. denied, 506

U.S. 1033 (1992).” And benefit determinations can be chal-

7 If, however, the HMO makes the treating physician’s medical judg-

ment in rendering treatment decisions the sole basis for coverage deter-

minations under an ERISA plan, ERISA would not preempt state mal-

practice claims against the treating physician or state vicarious liability

claims against the HMO for those treatment decisions (as opposed to the

benefit decisions).

12

lenged only under ERISA, not under state law, as this Court

held in Pilot Life (discussed at pp. 14-16, infra).

The distinction between plan administration and medical

treatment may not always be easy to apply in practice. In

this case, however, the Pennsylvania Supreme Court did not

suggest that petitioner acted other than in its role as plan

administrator, or, indeed, that petitioner exercised any

medical judgment at all. Rather, the undisputed facts indi-

cate that petitioner, responding to an inquiry from a physi-

cian on behalf of a patient, made a benefit determination.

Although that determination conflicted with the terms of the

plan regarding emergency care and may have contributed

to an avoidable personal tragedy for Mr. Pappas and his

wife, t was a “benefit determination nonetheless.” Corcoran,

965 F.2d at 1832. In these circumstances, it is clear that

any state-law action the Pappases themselves could have

brought against petitioner for negligent claims processing or

misinterpretation of plan terms would have been pre-

empted.® It is equally clear that the Pappases could have

(and did) bring a state negligence action against Dr. Asbel

and Haverford that is entirely outside ERISA’s preemptive

reach.

The preemption analysis is somewhat complicated because _

the claim before the Court was brought by Haverford, a

8 ERISA provides a participant or beneficiary with causes of action

“to recover benefits due to him under the terms of his plan, to enforce his

rights under the terms of the plan, or to clarify his rights to future

benefits under the terms of the plan,” 29 U.S.C. 1132(a)(1)(B), and “to

enjoin any act or practice which violates any provision vf [ERISA] or the

terms of the plan, or * * * to obtain other appropriate equitable relief,”

29 U.S.C. 1132(aX(3). By the time the Pappases could bring suit here, how-

ever, there was no further plan benefit due to them (appropriate treat-

ment, albeit critically delayed, had been provided and paid for), and there

was no injunctive or other equitable relief that could provide an appropri-

ate or meaningful remedy. Cf. Mertens v. Hewitt Assocs., 508 U.S. 248,

255-258 (1993) (only traditional equitable relief available under ERISA).

13

medical service provider, rather than directly by the Pap-

pases. Normally, a medical service provider has standing to

bring an ERISA claim only if it is an assignee of a partici-

pant or beneficiary. See 29 U.S.C. 1182(a); Cagle v. Bruner,

112 F.3d 1510, 1515 (11th Cir. 1997) (collecting cases). When

a service provider brings such a derivative claim, it is limited

to ERISA remedies, and ERISA preempts any remedies

under state law. See, ¢.g., Memorial Hosp. Sys. v. North-

brook Life Ins. Co., 904 F.2d 236, 250 (5th Cir. 1990). On the

other hand, a number of courts have held that a service pro-

vider can sometimes bring an independent state-law action

against a plan administrator for negligent misrepresentation

without running afoul of ERISA preemption. In Home

Health, Inc. v. Prudential Ins. Co. of Am., 101 F.3d 600, 604

(8th Cir. 1996) (collecting cases). In those cases, a service

provider has typically contacted a plan administrator to ask

whether an individual is covered by the plan, been assured

that coverage existed, provided services in reliance on that

assurance, and later been refused payment on the ground

that coverage did not exist under the plan. See, e.g., id. at

602; Lordmann Enters., Inc. v. Equicor, Inc., 32 F.3d 1529,

1530-1531 (11th Cir. 1994), cert. denied, 516 U.S. 930 (1995);

Memorial Hosp. Sys., 904 F.2d at 238.

Although neither line of service-provider cases addresses

the precise scenario presented here, their underlying princi-

ples support the conclusion that respondents’ claims are

preempted. Haverford’s third-party complaint alleged that

petitioner was liable for Haverford’s delay in transferring

Mr. Pappas to a suitable hospital. Pet. App. 60a. It did not

allege that petitioner misled it or reneged on any promise.

The only specific allegation against petitioner is that peti-

tioner refused to authorize coverage of treatment at Jeffer-

son, when asked to do so by Haverford on behalf of Mr.

Pappas. Under these circumstances, the complaint necessar-

ily alleges that petitioner made a benefit determination un-

14

der the plan, which can be challenged only under ERISA.

Respondents’ common-law negligence claim is therefore

preempted.’

2. In Pilot Life, the Court held that ERISA preempts

state common law causes of action “based on alleged im-

proper processing of a claim for benefits under an employee

benefit plan.” 481 U.S. at 48. It reached that conclusion for

three reasons: (1) there was “no dispute that the common

law causes of action asserted in Dedeaux’s complaint ‘relate

to’ an employee benefit plan” within the meaning of

ERISA’s express preemption provision, Section 514(a), 29

U.S.C. 1144(a), 481 U.S. at 47; (2) the state- law claims were

not saved from preemption by the insurance savings clause

in Section 514(b)(2)(A) of ERISA, 29 U.S.C. 1144(b)(2)(A),

481 U.S. at 48-51; and (3) the civil enforcement provisions of

Section 502(a) of ERISA, 29 U.S.C. 1132(a), are “the exclu-

sive vehicle for actions by ERISA-plan participants and

beneficiaries asserting improper processing of a claim for

benefits.” 481 U.S. at 52. The Pennsylvania Supreme

Court’s decision in this case conflicts with the first and third

rationales for the Pilot Life holding.”

® It is possible that other state-law causes of action could have been

alleged in this case that would not be preempted. For example, if Dr.

Asbel was a network provider, the Pappases could have alleged that peti-

tioner was vicariously liable for his malpractice or directly negligent in

selecting him as a provider. See cases cited at page 10, supra. But no

such claims were made.

10 The second rationale for the Pilot Life holding is not at issue in this

case. As previously noted, p. 8 n.6, supra, the Secretary has argued, and

several courts have held, that HMOs can be insurers for purposes of the

insurance savings clause to the extent they bear insurance risks. There is

no contention, however, that respondents’ claims against petitioner are

based on a state insurance law. Rather, like the claim in Pilot Life, they

are based on generally applicable tort law. Thus, unlike UNUM Life In-

surance Co. of America v. Ward, 119 S. Ct. 1880, 13890-1391 n.7 (1999), this

case does not involve ERISA’s insurance savings clause or its construction

ere nnn neers

15

Pilot Life involved a claim for long-term disability bene-

fits under an ERISA plan administered by an insurance

company, which bore the responsibility for making benefit

determinations; the plaintiff was a plan participant whose

benefits the insurer had terminated and reinstated several

times. 481 U.S. at 48. The Court, however, did not focus on

either the type of benefits or the reasons for their termina-

tion and reinstatement. Applying Pilot Life in this case, the

benefit at issue was coverage or payment for emergency

medical treatment at a hospital outside the HMO network of

participating providers. Coverage was denied before treat-

ment was provided, rather than after, even though pre-

authorization was not required in an emergency, and the

denial was for reasons that contradicted the plain language

of petitioner’s own brochure describing the covered benefits.

Nevertheless, as discussed at pages 12-13, swpra, the cause

of action here, like the one in Pilot Life, in essence is “based

on alleged improper processing of a claim for benefits under

an employee benefit plan,” which this Court held is expressly

preempted by Section 514(a) of ERISA. 481 US. at 48.

-Pilot Life also relied on a theory of field preemption,

holding that “Congress clearly expressed an intent that the

civil enforcement provisions of ERISA § 502(a) be the exclu-

sive vehicle for actions by ERISA-plan participants and

beneficiaries asserting improper processing of a claim for

benefits, and that varying state causes of action for claims

within the scope of § 502(a) would pose an obstacle to the

purposes and objectives of Congress.” 481 U.S. at 52. While

this Court has never delineated the boundaries of that

preempted field in the context of health care benefits, it

seems clear that they overlap with the boundaries of the

field that the Pennsylvania court declared nonpreempted—

that is, all negligence claims against HMOs. In addition, we

in Pilot Life. Nor does this case involve ERISA’s deemer clause, 29

U.S.C. 1144(b2\(B).

di 16

believe that Pilot Life field preemption applies to this case

because respondents’ claims—unlike some service-provider

claims against plans—essentially challenge petitioner’s de-

nial of benefits under the plan.”

The Pennsylvania Supreme Court disregarded Pilot Life

because it believed that this Court had limited that pre-

cedent’s expansive interpretation of the “relate[s] to” clause

in subsequent decisions such as New York State Conference

of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514

U.S. 645 (1995), and De Buono v. NYSA-ILA Medical &

Clinical Services Fund, 520 U.S. 806 (1997). Pet. App. 6a-

13a. But while Travelers and De Buono both involved state-

imposed economic burdens on the provision of health care

and emphasized that health care regulation is traditionally

left to the States, they did not involve state causes of action

for benefits against ERISA plans. As a result, neither case

can reasonably be read to limit Pilot Life’s holding that such

causes of action “relate to” plans or that “ERISA’s civil en-

forcement remedies were intended to be exclusive” with

respect to such causes of action. 481 U.S. at 54. On the con-

trary, Travelers reaffirms the Court’s earlier holdings that

ERISA preempts “state laws that mandate[] employee

benefit structures or their administration,” as well as “state

laws providing alternative enforcement mechanisms” to

those contained in ERISA. 514 U.S. at 658.”

11 We note that the Court indicated in Pilot Life that the field pre-

emption effect of Section 502 extended so far as to preempt even state

insurance laws that would otherwise be saved by ERISA’s insurance

savings clause. See 481 U.S. at 52-57. We have argued that that conclu-

sion may be subject to doubt. See U.S. Amicus Br. 20-25, UNUM Life Ins.

Co. of Am. v. Ward, 119 S. Ct. 1380 (1999). See also UNUM, 119 S. Ct. at

1390 n.7. That issue is not presented here, however, since the state-law

cause of action at issue here is not one arising under a law that would be

saved by ERISA’s insurance savings clause. See note 10, supra.

12 Because we do not understand the Pennsylvania Supreme Court to

have “impose[d] a substantive coverage requirement on ERISA-governed

,

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17

3. The Pennsylvania Supreme Court’s decision also con-

flicts with a long list of federal court of appeals decisions,

both before and after Travelers, holding that ERISA

preempts state-law challenges to decisions by HMOs, in-

surers, utilization review organizations, and other plan ad- —

ministrators to deny or delay authorization for particular

medical treatments or treatment at particular hospitals.

See, ¢.g., Hull v. Fallon, 188 F.3d 939 (8th Cir. 1999) (refusal

to authorize particular diagnostic test); Danca v. Private

Health Care Sys., Inc., supra (refusal to authorize treatment

at a particular hospital); Bast v. Prudential Ins. Co. of Am.,

150 F.3d 1003 (9th Cir. 1998) (delay in authorizing particular

cancer treatment), cert. denied, 120 S. Ct. 170 (1999); Jass v.

Prudential Health Care Plan, Inc., 88 F.3d 1482 (7th Cir.

1996) (refusal to authorize physical therapy after knee sur-

gery); Cannon v. Group Health Serv. of Okla., Inc., supra

(delay in authorizing particular cancer treatment); Tolton v.

American Biodyne, Inc., 48 F.3d 937 (6th Cir. 1995) (refusal

to authorize psychiatric benefits); Kuhl v. Lincoln Nat'l

Health Plan of Kansas City, Inc., supra (delay in authoriz-

ing surgery at non-network hospital); Corcoran v. United

HealthCare, Inc., supra (refusal to authorize hospitalization

during high-risk pregnancy). Two of those cases, Danca and

Kuhl, specifically involved decisions by a utilization review

or health maintenance organization to deny preauthorization

for treatment at a particular hospital recommended by the

patient’s treating physician.

In each of those cases from seven different circuits, the

courts treated a decision to deny pre-authorization for medi-

cal treatment as a type of benefit determination for which a

health plans,” Pet. 8, as distinct from having subjected petitioner to suit

for an erroneous or negligently delayed coverage determination, we do not

agree with petitioner that the decision below conflicts with Metropolitan

Life Insurance Co. v. Massachusetts, 471 U.S. 724, 739 (1985), or Shaw v.

Delta Air Lines, Inc., 463 U.S. 85 (1983). See Pet. 8-9.

18

state-law claim is preempted under Pilot Life, and also often

completely preempted under Metropolitian Life Insurance

Co. v. Taylor, 481 U.S. 58 (1987), requiring removal to fed-

eral court. See, e.g., Danca, 185 F.3d at 5-6; Kuhl, 999 F.2d

at 302-303. Thus, the federal courts of appeals have con-

cluded uniformly that Pilot Life mandates preemption of

state-law negligence claims alleging improper benefit deter-

minations by managed health care organizations acting on

behalf of ERISA plans. The decision of the Pennsylvania

Supreme Court is in conflict with those decisions.

4. We agree with petitioner (Pet. 19-22) that, regardless

of the merits, this is an area of law of great importance. A

majority of the 123 million Americans who receive health

care through ERISA-regulated employee benefit plans are

now subject to a managed care regime in which at least some

coverage decisions are made before treatment is provided.

See Berg Testimony at 14. The profusion of litigation in the

lower courts as to the extent of ERISA preemption with

respect to activities by HMOs is further testament to the

importance of the issues presented and the regularity with

which they arise. And while Congress may eventually enact

new legislation in this field, it has not yet done so, and the

issues under current law are significant enough to warrant

review by the Court.

5. In Pegram v. Herdrich, No. 98-1949 (to be argued Feb.

23, 2000), this Court granted certiorari to review a Seventh

Circuit decision holding that individuals who obtained mem-

bership in an HMO through an ERISA plan stated a claim of

breach of fiduciary duty, in violation of ERISA. The plain-

tiff’s allegations in Pegram concern the HMO’s allegedly

improper incentive payments to HMO physicians in connec-

tion with two kinds of conduct—the minimization of certain

costly forms of treatment and the physicians’ determination

of whether certain claims fall within the scope of the medical

benefits provided by the HMO.

19

There is a connection between the second set of allega-

tions—the “administration” or claims-processing allegations

—in Pegram and the allegations in this case. For example,

one of the arguments advanced by the petitioners in Pegram

(Pet. Br. 24-26)—an argument with which we disagree (see

U.S. Br. 24-26)—is that the “intended benefit” in an ERISA

plan that provides medical benefits through an HMO is

simply membership in the HMO, not the particular medical

benefits to be provided by the HMO. If, however, that

contention were correct, then the conduct of the HMO in this

case would not involve a claim for benefits under an ERISA

plan (because it would not involve a question of membership

in the HMO), and it is likely that the state-law negligence

claim would therefore not be preempted (though for a reason

different than that given by the Pennsylvania Supreme

Court). Even if the Court rejects petitioners’ contention in

Pegram (as we believe it should), the decision in Pegram still

could affect this case. We argue in Pegram (at Br. 20-23),

as we argue above, see pp. 11-12, that the “administration”

claims in Pegram are controlled by the principle that deter-

minations regarding the benefits due under ERISA plans

are governed by ERISA and its fiduciary duty standards,

and we rely on this Court’s precedents holding that state-

law claims based on the performance of such duties are pre-

empted precisely because they are governed by ERISA. If

the Court adopts that view in Pegram and reaffirms the

underlying principle, it would effectively hold or at least

strongly imply that claims (such as the “administration”

claims in Pegram and the claim in this case) regarding alleg-

edly improper benefits determinations under ERISA plans

are not subject to state law.

In short, the Court’s disposition of Pegram could signifi-

cantly illuminate the question presented in this case. For

that reason, the Court may wish to hold the petition in this

case pending its decision in Pegram. Nonetheless, the ques-

20

tion presented in this case (concerning preemption of state-

law causes of action) is fundamentally different from the

question presented in Pegram (concerning the scope of fidu-

ciary duties under ERISA). For the reasons given above,

the question presented here is an important one, the decision

below conflicts with decisions of a number of federal courts,

and the issues in this case are regularly subject to litigation -

around the country. Accordingly, if the decision in Pegram

does not fully dispose of the question presented in this case,

the Court should grant plenary review in this case to ensure

uniform interpretation of the extent to which ERISA

beneficiaries may bring state-law negligence claims against

HMOs.

CONCLUSION

The petition for a writ of certiorari should be held pending

this Court’s decision in Pegram v. Herdrich, No. 98-1949, and

then disposed of accordingly. Alternatively, the petition for

a writ of certiorari should be granted.

Respectfully submitted.

SETH P. WAXMAN

Solicitor General

Henry L. SOLANO EDWIN S. KNEEDLER

pe Be Deputy Solicitor General

Solicitor of Labor JAMES A. FELDMAN

ALLEN H. FELDMAN Assistant to the Solicitor

Associate Solicitor General

NATHANIEL I. SPILLER

Deputy Associate Solicitor

ELLEN L. BEARD

Attorney

Department of Labor

DECEMBER 1999