Appendix — Montemayor, Commissioner, Texas Department of Insurance v. Corporate Health Insurance

Supreme Court, U.S,

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xy

00 665 ver 24200

a EK

No.

3n the

Supreme Court of the United States

JOSE MONTEMAYOR, COMMISSIONER OF THE TEXAS

DEPARTMENT OF INSURANCE; JOHN CORNYN, ATTORNEY

GENERAL OF TEXAS,

Petitioners,

if

CORPORATE HEALTH INSURANCE, INC.; AETNA HEALTH PLANS

OF TEXAS, INC.; AETNA HEALTH PLANS OF NORTH TEXAS, INC.:

AETNA LIFE INSURANCE COMPANY,

Respondents.

On Petition for Writ of Certiorari

to the United States Court of Appeals

for the Fifth Circuit

APPENDIX TO PETITION FOR WRIT OF CERTIORARI

JOHN CORNYN DAVID C. MATTAX*

Attorney General of Texas Division Chief,

Financial Litigation Division

ANDY TAYLOR

First Assistant Attorney General CHRISTOPHER LIVINGSTON

Assistant Attorney General

JEFFREY S. BOYD

Deputy Attorney General P.O. Box 12548

Austin, Texas 78711-2548

GREGORY S. COLEMAN (512) 463-2018 Telephone

Solicitor General (512) 477-2348 Telecopier

COUNSEL FOR TEXAS

*Counsel of Record

PREP

TABLE OF CONTENTS

Page

Appendix A:

Opinion of the Fifth Circuit ............... A-|

Appendix B:

Opinion of the Southern District of Texas .... B-1!

Appendix C:

Final Judgment of the Southern

Sf | ea ere rere C-]

Appendix D:

Opinion on Rehearing ................... D-|

Appendix E:

Text of Texas Insurance Code Provisions

Held Preempted by the Fifth Circuit ........ E-|

IN THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT ~

NO. 98-20940

CORPORATE HEALTH INSURANCE, INC ;

AETNA HEALTH PLANS OF TEXAS, INC;

AETNA HEALTH PLANS OF NORTH TEXAS, INC _;

AETNA LIFE INSURANCE COMPANY

Plaintiffs - Appellees-Cross-Appellants,

V.

THE TEXAS DEPARTMENT OF INSURANCE

Defendant - Cross-Appellee,

JOSE MONTEMAYOR, COMMISSIONER OF THE TEXAS

DEPARTMENT OF INSURANCE; JOHN CORNYN,

ATTORNEY GENERAL, STATE OF TEXAS

Defendants - Appellants-Cross-Appellees.

On Appeal from the United States District Court

for the Southern District of Texas,

Houston Division

June 20, 2000

Before HIGGINBOTHAM and PARKER, Circuit Judges,

and ATLAS, District Judge.”

A-1

HIGGINBOTHAM, Circuit Judge:

Large changes in the delivery systems for medical services,

including the growth of health maintenance organizations

("HMOs") and managed care organizations ("MCOs"), came

as rapid responses to rising costs for medical services and to

the growth of medical expense reimbursement for employees.

These new entities injected an intermediary between doctor

and patient in setting medical care charges and making

payments; at the same time, the insurance industry began to

offer administrative services to employers and to contract with

doctors for services at set rates. Billions of dollars now flow

through these structures, generating equally large difficulties

of governance and daily tensions between quality and quantity.

Through much of this period, the preemptive reach of ERISA

made regulation of this market largely a federal enterprise,

shared with the states at its juncture points with insurance.

Today we decide questions regarding the ability of the State

of Texas to regulate the quality of health services when such

efforts impose a duty of care upon service providers to ERISA

plans.

This suit is a preemption challenge to Texas's Senate Bill

386.” Through that legislation, Texas asserted its police

power to protect its citizens in regulating the new field of

managed health care in three ways. First, it created a statutory

cause of action against managed care entities that fail to meet

an ordinary care standard for health care treatment decisions

A-2

(the "liability" provisions). Second, it established procedures

for the independent review of health care determinations to

decide whether they were appropriate and medically necessary

(the "independent review" provisions). Finally, it protected

physicians from HMO-imposed indemnity clauses and from

retaliation by HMOs for advocating medically necessary care

for their patients.

The plaintiffs, Corporate Health Insurance, Inc., Aetna Health

Plans of Texas, Inc., Aetna Plans of North Texas, Inc. and

Aetna Life Insurance Company,” are not ERISA plans. Aetna

Health Plans of Texas is an HMO licensed by the State of

Texas that contracts with more than 2,900 independent health

care providers and 39 hospitals. Aetna Life Insurance

Company sells various health insurance products to

employers, including programs available through a preferred

provider organization. In Texas, nearly one million individuals

participate in a managed care program of Aetna or one of its

affiliated entities.

Senate Bill 386 became effective on May 22, 1997. Aetna

promptly filed suit in the United States District Court,

claiming that the Act was preempted by ERISA's general

preemption clause, section 514, which preempts "any and all

state laws insofar as they . . . relate to any employee benefit

plan") and by the Federal Employees Health Benefit Act

("FEHBA"). The plaintiffs named as defendants John

Cornyn, the Attorney General of Texas, Jose Montemayor,

Commissioner of the Texas Department of Insurance, and the

Department of Insurance itself. The Commissioner remains a

party, but the Department of Insurance has been dismissed.“

A-3

The parties filed cross-motions for summary judgment, which

the district court granted in part and denied in part. The

district court found no FEHBA or ERISA preemption of the

liability provisions of Senate Bill 386 but found that ERISA

preempted the anti-retaliation, anti-indemnification, and

independent review provisions of the legislation. Both Aetna

and Texas appeal.

Texas argues that Aetna lacks standing to challenge the Act's

new standards for liability. Texas contends that Aetna has not

suffered the requisite injury under Article III because Aetna

has thus far been exposed to a duty of care and will have

standing only if it defends a private suit for the breach of that

duty. Texas concedes that Aetna has standing to challenge the

other provisions given the Commissioner's oversight authority.

Aetna replies that it has standing because the liability

provisions expose it not only to private suits but also to the

regulatory reach of the Attorney General. We agree. This is

not a case in which private suits are the only means of

enforcing a challenged statutory standard. The Attorney

General can pursue Aetna through an action under the Texas

Deceptive Trade Practices Act and the Insurance Code.” This

regulatory oversight is sufficient to create the requisite

imminent injury for standing.

ill

We have repeatedly struggled with the open-ended character

of the preemption provisions of ERISA and FEHBA.“ We

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faithfully followed the Supreme Court's broad reading of

"relate to" preemption under § 502(a) in its opinions decided

during the first twenty years after ERISA's enactment. Since

_ then, in a trilogy” of cases, the Court has confronted the

reality that if “relate to" is taken to the furthest stretch of its

indeterminacy, preemption will never run its course, for

“really, universally, relations stop nowhere." Justice Souter,

speaking for a unanimous court in Travelers, acknowledged

that "our prior attempt to construe the phrase 'relate to' does

not give us much help drawing the line here." Rather, the

Court determined that it "must go beyond the unhelpful text

... and look instead to the objectives of the ERISA statute as

a guide to the scope of the state law that Congress understood

would survive."

In Travelers, a New York statute required hospitals to collect

surcharges from patients insured by a commercial carrier but

not from certain HMOs. The plain purpose of the surcharge

was to encourage the HMOs to provide open enrollment

coverage. The Second Circuit found that the surcharges

"related to" ERISA plans because they imposed economic

burdens with an impermissible impact on plan administration

and structure. In rejecting the Second Circuit's approach, and

in shifting its own approach, the Court observed that such

indirect economic influences "d{id}] not bind plan

administrators to any particular choice,” but rather affected the

costs of benefits and the “relative costs of competing

insurance to provide them."“'” The Court grounded the "relate

to” clause in the complex realities of the market for medical

services.

A-5

Dillingham, the second of the trilogy, came two terms later.

The case challenged a California law which required public

works contractors to pay a prevailing wage but allowed lower

wages to be paid in qualified apprenticeship programs. A

unanimous Court found the law not preempted, holding that

regulation of the underlying industry of which the employers

were members does not require preemption. The Court began

with the "assumption that the historic police powers of the

States were not to be superseded by the Federal Act unless

that was the clear and manifest purpose of Congress."

Justice Scalia, in a concurring opinion joined by Justice

Ginsburg, urged the Court to acknowledge directly that it had

returned to traditional preemption analysis and that "relate to"

states no special test but rather identifies the field in which

ordinary field preemption applies.“

Four months later, the Court handed down De Buono,

upholding New York's tax on gross receipts for patient

services at health care facilities. The Court again rejected the

theory that the effects of even a direct tax on an ERISA plan

required a finding of preemption. The Court was persuaded

that the tax was not the type of state law that Congress

intended ERISA to preempt.“

In each of these three cases, the Court was returning to a

traditional analysis of preemption, asking if a state regulation

frustrated the federal interest in uniformity. This analysis is

similar to the Court's approach in determining whether state

law is preempted by federal common law”) - even there,

where the conflict between federal policy and state law need

A-6

not be as sharp as for preemption when Congress legislates in

a field that the states have traditionally occupied, the Court

has insisted on a significant conflict with an “identifiable

federal policy or interest." And significantly for our case,

this return has included the observation that a broader reading

of "relates to" would sweep away common state action with

indirect economic effects on the costs of health care plans,

such as quality standards which may vary from state to state.

IV

This brings us to the merits of the claim that Senate Bill 386

is preempted. We turn first to its liability provisions. In

Section 88.002, the bill provides:

A health insurance carrier, health maintenance organization, or

other managed care entity for a health care plan has the duty

to exercise ordinary care when making health care treatment

decisions and is liable for damages for harm to an insured or

enrollee proximately caused by its failure to exercise such

ordinary care."

The statute gives "health care treatment decision" a defined

meaning:

[A] determination made when medical services are actually

provided by the health care plan and a decision which affects

the quality of the diagnosis, care, or treatment provided to the

plan's insureds or enrollees.”

The Act also defines the agents for whose health care

decisions the entities can be vicariously liable.?” Further, the

Act includes a disclaimer: it avoids imposing any obligation on

the entity "to provide to an insured or enrollee treatment

which is not covered by the health care plan of the entity."°”

Aetna argues that the liability provisions "relate to" an ERISA

plan and affect plan administration. Aetna contends that a

claim that medical services were negligently provided will

inevitably question the provider's determinations of coverage

under an ERISA plan. Texas replies that Senate Bill 356 has

avoided the difficult genre of cases complaining of medical

care and service which were not provided by excluding a duty

to provide treatment not covered by a plan.

We agree with Texas's interpretation of the Act. When the

liability provisions are read together, they impose liability for

a limited universe of events. The provisions do not encompass

claims based on a managed care entity's denial of coverage-for

a medical service recommended by the treating physician: that

dispute is one over coverage, specifically excluded by the Act.

Rather, the Act would allow suit for claims that a treating

physician was negligent in delivering medical services, and it

imposes vicarious liability on managed care entities for that

negligence.

This vicarious liability does not "relate to" the managed care

provider's role as an ERISA plan administrator or affect the

structure of the plans themselves so as to require preemption.

Courts have observed that HMOs and MCOs typically

perform two independent functions -- health care insurer and

A-8

medical care provider.” A managed care entity can provide

administrative support for an insurance plan, which may entail

determining eligibility or coverage. At the same time, a

managed care entity can act as an arranger and provider of

medical treatment.

Although state efforts to regulate an entity in its Capacity as

plan administrator are preempted, managed care providers

operate in a traditional sphere of state regulation when they

wear their hats as medical care providers. ERISA preempts

malpractice suits against doctors making coverage decisions

in the administration of a plan, but it does not insulate

physicians from accountability to their state licensing agency

or association charged to enforce professional standards

regarding medical decisions.” Such accountability is

necessary to ensure that plans operate within the broad

compass of sound medicine. We are not persuaded that

Congress intended for ERISA to supplant this state regulation

of the quality of medical practice °® While it may impose

some indirect costs on ERISA plans, the Court has considered

such effects too tenuous to require preemption.

We also are not persuaded that the liability provisions are

preempted as "referring to" ERISA plans. Under this strain of

preemption analysis, we examine whether the law acts

immediately and exclusively upon ERISA plans or whether the

existence of an ERISA plan is essential to the law's

operation.”” A law does not "refer to" ERISA plans if it

applies neutrally to ERISA plans and other types of plans.2*)

Aetna asserts that the definitions of "health care treatment

decision" and "health care plan" refer to ERISA plans because

A-9

they make reference to "plans."°? We disagree. The

provisions are indifferent to whether the health care plan

operates under ERISA and do not rely on the existence of

ERISA plans for their operation.°”

We see nothing to take the liability provisions from the

regulatory reach of states exercising their traditional police

powers in regulating the quality of health care. A suit for

medical malpractice against a doctor is not preempted by

ERISA simply because those services were arranged by an

HMO and paid for by an ERISA plan. Likewise, the vicarious

liability of the entities for whom the doctor acted as an agent

is rooted in general principles of state agency law. Seen in this

light, the Act simply codifies Texas's already-existing

standards regarding medical care. These standards of care are

at the heart of Texas's regulatory power.

V

We turn to the anti-retaliation and anti-indemnification

provisions under sections 88.002(f) and (g) of the Act. The

anti-retaliation provision forbids a managed care entity from

dropping or refusing to renew a doctor or health care provider

for advocating medically necessary treatment.°") The

anti-indemnification provision prohibits a managed care entity

from including an indemnification clause in its contracts with

doctors and other health care providers that would hold it

harmless for its own acts.°” Aetna contends that these

provisions improperly mandate the structure and

administration of ERISA plan benefits because ERISA plans

are forced to contract with doctors only on those terms.

A-10

We are not persuaded that these provisions mandate the

structure and administration of plans. Our analysis again stems

from our recognition that HMOs and MCOs perform

functions both as health care insurers and as medical care

providers. The anti-indemnity and anti-retaliation rules govern

the managed care entities as health care providers by

regulating the terms on which the provider contracts with its

agents. The rules do not compel the entities to provide any

substantive level of coverage as health care insurers.

Our past cases addressing "any willing provider" statutes are

consistent with this analysis. In those cases, the state statutes

at issue required managed care entities to contract with any

pharmacy willing to do business on the entity's terms.”

Because those state laws essentially mandated that plan

beneficiaries could choose from a larger pool of providers,

they affected substantive plan benefits in a way that the

provisions at issue here do not.

The anti-retaliation and anti-indemnity provisions complement

the Act's liability provisions by realigning the interests of

managed care entities and their doctors. The liability and

indemnity provisions force the managed care entity to share in

its doctors’ risk of tort liability; the anti-retaliation provision

avoids the situation in which the doctor must choose between

satisfying his professional responsibilities and facing retaliatory

action by the managed care entity. Together, the provisions

thus better preserve the physician's independent judgment in

the face of the managed care entity's incentives for cost

containment. Such a scheme is again the kind of quality of

care regulation that has been left to the states.°*

A-11

VI

We come to the statute's provisions for independent review of

determinations by managed care entities. The authorization for

such review is codified at several locations in the Texas Code.

The first set of provisions, codified in section 88, allows suit

against an entity only after the patient has followed an

independent review procedure.“ The provision describes the

patient's complaint as "the claim," which refers back to the

basis of the cause of action.°” This language allows

independent review only of claims for which patients may

bring suit under the liability provisions. As such, the review

provisions are not preempted. Any duty imposed on managed

care entities by the independent review provisions extends no

further than that imposed by the liability provisions. Moreover,

because the 1999 amendments to the section make such

review voluntary on the entity's part,°* the entity cannot

complain that the provision is at odds with its duties under

ERISA.

Another set of provisions, codified at various sections of the

Insurance Code,” does not appear to so limit independent

review. The Act adds procedures through which patients may

appeal "adverse determinations" --

[A] determination by [an HMO] or utilization review agent

that the health care services furnished or proposed to be

furnished to an enrollee are not medically necessary or are not

appropriate.°

A-12

The Act further requires that a utilization review agent

“comply” with the independent review organization's

determination of medical necessity."

It is apparent that "adverse determinations" include

determinations by managed care entities as to coverage, not

just negligent decisions by a physician. The provisions allow

a patient who has been denied coverage to appeal to an

outside organization.” Such an attempt to impose a state

administrative regime governing coverage determinations is

squarely within the ambit of ERISA's preemptive reach.“

Vil

Texas and the federal government urge that the preempted

independent review provisions are saved under ERISA's

saving Clause for laws regulating insurance.) The Supreme

~~ Gourt has interpreted the clause as designed to preserve

Congress's reservation of the business of insurance to the

states under the McCarran-Ferguson Act. In determining

whether the clause applies, the Supreme Court considers

whether the rule regulates insurance as a commonsense

matter, looking as well to the three McCarran-Ferguson

factors as "guideposts:" (1) whether the practice has the effect

of transferring or spreading the policyholder's risk; (2)

whether it is an integral part of the policy relationship between

the insured and the insurer; and (3) whether the practice is

limited to entities in the insurance industry.“ The law need

not satisfy each of these tests.”

ee

The common sense test measures whether the law is

specifically directed toward the insurance industry.“* A law is

A-13

so aimed when the state has developed a specific scheme

governing insurance, as opposed to a flexible rule used in

many legal contexts.“ Here, the independent review

provisions create a regulatory scheme governing health benefit

_ determinations. They do not rely on general legal rights used

in other areas of law.

That the provisions apply to managed care entities as well as

to traditional insurers does not exclude them from the saving

clause. In determining whether a statute regulates the

insurance industry, courts have examined whether a statute

governs only entities acting as insurers. A statute may regulate

insurance if it applies to insurers, health care service

contractors, and HMOs.” If the law sweeps more broadly,

however, covering employers and others not engaged in

insurance practices, it cannot be said to be reguiating

insurance.“ Our own cases are consistent with this

distinction.“” Here, the preempted provisions apply to

HMOs‘) and to utilization review agents for insurers,

administrators, and non-ERISA health benefit plans. In

making benefit determinations, these entities are functioning

as insurers.

The common sense test also considers whether the law plays

an integral part in the policy relationship between the insured

and the insurer. Laws that create a mandatory contract term

between the parties, including procedural requirements, go to

the core insured-insurer relationship. Here, the independent

review provisions create a procedural right of the insures

against the entity. As the independent review provisions are

aimed at insuring entities and regulate the insured-insurer

‘ A-14

relationship, they meet the common sense test of the saving

clause.

For the same reasons, the provisions satisfy the second and

third prongs of the McCarran-Ferguson test: they are integral

to the policy relationship and regulate the insurance industry.

While the provisions probably do not meet the first factor of

reallocating the risk between the insured and insurer, that

failure is not fatal to Texas's saving clausesclaim.

Our analysis does not end here, however, because even if the

provisions would otherwise be saved, they may nonetheless be

preempted if they conflict with a substantive provision of

ERISA. In Pilot Life v. Dedeaux, the Supreme Court held

that "our understanding of the saving clause must be informed

by the legislative intent concerning [ERISA's] civil

enforcement provisions."*” The Court interpreted Congress's

intent regarding the exclusivity of ERISA's enforcement

scheme very broadly, concluding that the scheme preempts not

only directly conflicting remedial schemes, but also

supplemental state law remedies.“ Thus, the saving clause

does not operate if the state law at issue creates an alternative

remedy for obtaining benefits under an ERISA plan.”

Here, the independent review provisions do not create a cause

of action for the denial of benefits. They do, however,

establish a quasi-administrative procedure for the review of

such denial and bind the ERISA plan to the decision of the

independent review organization. This scheme creates an

alternative mechanism through which plan members may seek

benefits due them under the terms of the plan - the identical

A-15

relief offered under § 1132(a)(1)(B) of ERISA. As such, the

independent review provisions conflict with ERISA's exclusive

remedy and cannot be saved by the saving clause.

Vill

Aetna argues that all of the provisions at issue are preempted

by the terms of plans operating under FEHBA, the statute

governing federal employee heaith insurance. The preemption

language of that statute reads:

The terms of any contract under this chapter . . . which relate

to the nature, provision, or extent of coverage or benefits

(including payment with respect to benefits) shall supersede

and preempt any State or local law, or any regulation issued

thereunder, which relates to health insurance or plans.”

The statute was amended in 1998 to add a "relate to" clause

like that in ERISA.

The provisions of the Texas Act that we have held do not

"relate to" ERISA plans similarly would not "relate to" any

FEHBA plans because they do not concern coverage or

benefits.” As we have construed those provisions, they

address only managed care entities’ duties as health care

providers, not as insurers. While Congress has an identifiable

federal interest in providing uniform benefits to government

employees,” there is no significant conflict here between that

interest and Texas's regulation of quality of medical care. And

we decline to require FEHBA preemption simply because state

regulation might indirectly increase the costs of managed care.

A-16

As to the independent review provisions which would be

ERISA-preempted, we find that FEHBA plans would preempt

such review under general conflict principles. The independent

review provisions specifically conflict with the administrative

remedy provided by the Office of Personnel Management

concerning benefits disputes.

IX

As we have found some of the Act's provisions preempted, we

must consider whether they are severable from the remainder

of the statute. Severability turns on the intent of the state

legislature, we examine whether the provisions are so

independent that the legislature would have passed the

remaining statute without the disallowed provisions.“

After the district court's determination holding the IRO

provisions preempted, the Texas Legislature passed a bill

making those procedures optional as to the liability

provisions. Although that amendment does not apply to the

independent review provisions we have held preempted, we

find it instructive as to the legislature's intent regarding

independent review generally. As the district court noted, it

appears that the legislature was concerned both with the

quality of care and with denials of care. While the review

provisions regarding the denial of care are preempted under

ERISA and FEHBA, we find that the legislature would

nonetheless wish to give effect to those provisions targeting

the quality of care.

A-17

We sever articles 20A.12A, 21.58A § 6(c), and 21.58A §6 A,

as well as those portions of 20A.09(e) and 21.58A § 6(b)

amended by the Act, from the remainder of the Act and hold

them preempted. We conclude that the liability provisions of

the Texas statute, and the independent review provisions

insofar as they are merely a prerequisite to the filing of suit,

are preempted neither under ERISA nor FEHBA because they

allow suit only for health services actually delivered, not for

coverage disputes. We also find that the anti-indemnity and

anti-retaliation provisions are not preempted: they too address

traditional state concerns regarding the quality of health care.

AFFIRMED IN PART; REVERSED IN PART.

1. District Judge of the Southern District of Texas, sitting by

designation

2. Codified at Tex. Civ. Prac. & Rem. Code § 88.001 et seq ;

Tex. Ins. Code art. 20A.09(e) (formerly (a)(3)), 20A.12(a)

and (b), 20A.12A, 21.58A §6(b) and (c), 21.58A §6A, 21.58A

§8(f) & 21.58C.

3. We will refer to the plaintiffs generally as "Aetna."

4.29U SC. § 1144(a).

5.5 U.S.C. § 8901 et seq.

6. We will refer to the defendants generally as "Texas." The

United States Secretary of Labor is charged with interpreting

and enforcing all provisions of Title | of ERISA, see 29

A-18 ©

USC 1001 et seq., but not FEHBA. The Secretary filed an

amicus brief and participated in oral argument in this case. We

will refer to the Secretary as the federal government.

7. On the Attorney General's right of action, see Tex. Ins.

Code Ann. art. 21.21 § 15(a); Tex. Bus. & Com. Code Ann

§ 17.47. Relevant provisions imposing liability include Tex.

Ins. Code Ann. art. 21.21-2 §2(b)(5) (unfair and deceptive to

compel policyholders to institute suits to recover amounts

due), art. 21.21 §4(10)(ii) (prohibiting the failure to pay claims

when liability has become reasonably clear); id. at art.

21.21-2(B)(4) (same).

8. See, e.g., CIGNA Healthplan of La Inc. v. Louisiana, 82

F.3d 642 (Sth Cir. 1996): Corcoran v. United HealthCare,

Inc., 965 F.2d 1321 (Sth Cir. 1992).

9. De Buono v. NYSA-ILA Med & Clinical Serv's Fund, 117

S. Ct. 1747 (1997); California Div. of Labor Standards

Enforcement v. Dillingham Constr. N.A. Inc., 117 S. Ct. 832

(1997); New York State Conference of Blue Cross & Blue

Shield Plans v. Travelers Ins. Co., 115 S. Ct. 1671 (1995).

10. Travelers, 115 S. Ct. at 1677.

11. Id.

12. Id. at 1679.

13. Dillingham, 117 S. Ct. at 838 (quoting Rice v. Santa Fe

Elevator Corp., 331 U.S. 218, 230 (1947)).

A-19

14. Id. at 843 (Scalia, J., concurring).

15. De Buono, 117 S. Ct. at 1752.

16. See also Boggs v. Boggs, 117 S. Ct. 1754 (1997)

(analyzing whether state community property law frustrates

federal interests in determining ERISA preemption).

17. Boyle v. United Tech Corp., 487 U.S. 500 (1988).

18. Boyle, 487 U.S. at 507.

19. Tex. Civ. Prac. & Rem. Code Ann. § 88.002(a) (1999).

20. § 88.001(5).

21. § 88.002(b).

22. § 88.002(d).

23. See Dukes v. U.S. Healthcare, Inc., 57 F.3d 350, 360-61

(3d Cir. 1995); Lancaster v. Kaiser Found. Health Plan of

Mid-Atlantic States, Inc., 958 F. Supp. 1137, 1139 n.2 (E.D.

Va. 1997).

24. Fort Halifax Packing Co., Inc. v. Coyne, 482 U.S. 1, 9

(1987).

25. This distinction is consistent with Corcoran's holding that

medical decisions involving coverage determinations are

preempted.

A-20

26. The Second, Third, and Seventh Circuits have held that

medical negligence claims against HMOs for vicarious and

direct liability are not within the scope of § 502(a) and,

therefore, are not completely preempted because they involve

conduct by the HMO in its capacity as a provider and arranger

of health services and not as plan administrator. See Rice v.

Panchal, 65 F.3d 637, 646 (7th Cir. 1995) (vicarious claims);

Dukes, 57 F.3d at 356 (vicarious and direct claims); Lupo v.

Human Affairs Int'l, Inc., 28 F.3d 269, 272 (2d Cir. 1994)

(direct claims). District courts have also allowed suit for

vicarious liability. See Ray v. Value Behavioral Health, Inc..

967 F. Supp. 417, 423-24 (D. Nev. 1997); Yanez v. Humana

Medical Plan, Inc., 969 F. Supp. 1314, 1316 (S.D. Fla. 1997):

Schachter v. Pacificare of Okla., Inc., 923 F. Supp. 1448,

1451 (N.D. Okla. 1995); Chaghervand v. CareFirst, 909 F.

Supp. 304, 311 (D. Md. 1995); Smith v. HMO Great Lakes,

852 F. Supp. 669, 671-72 (N_D. Ill. 1994).

27. See Dillingham, 117 S. Ct. at 837-38.

28. Id. at 839; see also District of Columbia v. Greater Wash.

Bd. of Trade, 506 U.S. 125, 127 (1992) (holding law referred

to ERISA plans because it targeted employers to provide

certain health insurance coverage to their employees, an

obligation under law by reference to ERISA). Our decision in

CIGNA is distinguishable: there, the statute contained an

explicit reference to employers. CIGNA, 82 F.3d at 648.

29. See § 88.001(2) and (5).

A-2]

30. We also decline to hold the entire Act preempted on the

basis that some of its independent review provisions are

codified in a statute that includes an explicit exclusion of

ERISA plans. Even if such mention required preemption of the

exclusionary provision itself (a provision not challenged in this

suit), or of other statutory provisions which it affected, it

could have no preemptive effect on the Act's provisions

codified elsewhere in the Texas Code.

31. See Tex. Civ. Prac. & Rem. Code § 88.002(f).

32. See § 88.002(g).

33. See Texas Pharmacy Ass'n v. Prudential Ins. Co., 105 F.3d

1035, 1036 (Sth Cir. 1997); CIGNA, 82 F.3d at 645.

34. In addition, those cases were decided before Dillingham

and DeBuono. The Texas Pharmacy court noted that its

holding was only valid pending further guidance from the

Supreme Court. See Texas Pharmacy, 105 F.3d at 1039. ¢u.

35. The Supreme Court's most recent discussion of ERISA

confirms this analysis. In Pegram v. Herdrich, the Court held

that ERISA confers no cause of action against HMOs for

providing incentives to their doctors for limiting the costs of

testing and treatment. Part of the Court's reasoning was that

states are currently allowed to impose malpractice liability on

HMOs for such action. 530U.S.__, [24] (June 12, 2000).

36. See Tex. Civ. Prac. & Rem. Code § 88.003.

37. See id.

A-22

i

€

4

i

‘

‘3

38. See § 88.003(a) and (c).

39. See Tex. Ins. Code art. 20A.09(e) (codified in 1997 at

20A.09(a)(3)) and 20A. 112A (amendments to the Texas Health

Maintenance Organization Act); 21.58A §6(b) and (c) and

§6A (amendments to the Utilization Review Agent Act).

40. Art. 20A. 12A(a)(1) (codified in 1997 in slightly amended

form at 20A.12(c)(1)).

41. Art. 21.58A §6A(3). The provision refers specifically to

"utilization review agents" for insurers and administrators.

HMOs are directed to follow the rules applicable to utilization

review agents. See art. 20A.12A(b).

42. Texas notes that the provisions of the Act codified in the

State's utilization review agent ("URA") statute, Tex. Ins.

Code art. 21.58A, may not even apply to ERISA plans. The

URA statute includes an exclusion for ERISA plans - "This

article shall not apply to the terms or benefits of employee

welfare benefit plans as defined in. . . [ERISA]." § 14(e).

Texas states that its Insurance Commissioner generally treats

such provisions as excluding self-funded ERISA plans, not

insured ERISA plans. To the extent the provisions regulate

insurers for ERISA plans, they still "relate to" ERISA plans

and are preempted.

43. This preemption does not reach three provisions of the Act

codified in the Insurance Code which do not create a right to

independent review: Tex. Ins. Code art. 21.58C (setting forth

general standards and rules for independent review

A-23

organizations); 21.58A §8(f) (confidentiality provision); and

20A.12(a) and (b) (making minor changes to preexisting

~ provision).

44.29 U.S.C. § 1144(b)(2)(A) (1999).

45. See Metropolitan Life Ins. v. Massachusetts, 471 U.S.

724, 744 n.21 (1985).

46. See UNUM Life Ins. Co. v. Ward, 119 S. Ct. 1380, 1386

(1999).

47. See Ward, 119 S. Ct. at 1389.

48. See id. at 1387-88. ’

49. See id. (law met the common sense test because the state

had developed a specific scheme governing the rights of an

insured); Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 51

(1987) (the state's common law of bad faith, developed from

tort and contract law generally, was not an integral part of the

policy relationship).

50. See Washington Physicians Serv. Ass'n v. Gregoire, 147

F.3d 1039, 1045 (9th Cir. 1998).

51. See Prudential Ins. Co. of America v. National Park Med.

Ctr.. Inc., 154 F.3d 812, 825 (8th Cir. 1998) (distinguishing

Gregoire based on scope of statute).

52. See Texas Pharmacy, 105 F.3d at 1039 (not insurance

regulation where law applied to employers and pharmacy

groups as well as HMOs); CIGNA, 82 F.3d at 650 (not

regulation where rule applied to self-funded organizations and

employers).

<

53. See Tex. Ins. Code art. 20A.12A. aise ac

54. See 21.58A § 2(21); § 14(e) (excluding ERISA plans).

55. See Ward, 119 S. Ct. at 1390 & nS.

56. See id. at 1390.

57. Pilot Life, 481 U.S. at 52. ERISA's enforcement

provisions are set out at 29 U.S.C. § 1132.

58. Id. at 56.

59. See Kanne v. Connecticut Gen. Life Ins. Co., 867 F.2d

489, 493-94 (9th Cir. 1988); In re Life Ins. of North America,

857 F.2d 1190, 1194-95 (8th Cir. 1988). But see Franklin H.

Williams Ins. Trust v. Travelers Ins. Co.. 50 F 3d 144, 151(2d

Cir. 1995).

60. In Ward, the Supreme Court noted the federal

government's change in position since Pilot Life on the issue

of whether a provision in conflict with ERISA's enforcement

provision is nevertheless saved by the saving clause. Because

the issue was not necessary to the resolution of the case,

A-25

however, the Court declined to revisit it. See Ward, 119 S. Ct.

at 1390 n.7.

61. 5 U.S.C. § 8902(m)(1) (1999).

62. See also Negron v. Patel, 6 F. Supp.2d 366, 371 (E.D. Pa.

1998) (vicarious liability claim not preempted by FEHBA).

63. See Caudill v. Blue Cross & Blue Shield of N.C., 999 F.2d

74, 78 (4th Cir. 1993).

64.5U.S.C. § 8902(j); 5 CFR. § 890.105 - 890.107; see also

Bryan v. Office of Personnel Management,165 F.3d 1315,

1318 (10th Cir. 1999) (FEHBA creates only one remedy for —

the administrative review of benefit denials).

65. See Association of Tex. Educators v. Kirby, 788 S.W.2d

827, 830 (Tex. 1990).

66. See Tex. S.B. 1884, 76th Leg, R.S. (1999), Bill Analysis.

A-26

OE

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

CORPORATE HEALTH §

INSURANCE INC., ET AL. §

| §

versus § CIVIL ACTION

| § NO. H-97-2072

THE TEXAS DEPARTMENT OF §

INSURANCE, ET AL. §

ORDER

Pending before the Court are Defendants’ motion to

dismiss, which has been converted into a motion for summary

judgment, (Instrument No. 10), and Plaintiffs’ motion for

summary judgment, (Instrument No. 20). Based on the

parties’ submissions and the applicable law, the Court finds

that Defendants’ and Plaintiffs’ motions should be

GRANTED in PART and DENIED in PART

I. Background

Plaintiffs Corporate Health Insurance, Inc., Aetna

Health Plans of Texas, Inc., Aetna Health Plans of North

Texas, Inc., and Aetna Life Insurance Company bring this

action against Defendants Texas Department of Insurance (the

“Department’’) and Elton Bomer (“Bomer”), Commissioner of

the Texas Department of Insurance, and Dan Morales

(“Morales”), Attorney General of the state of Texas, in their

B-]

official capacities, seeking declaratory and injunctive relief.

Plaintiffs request a declaration that Texas Senate Bill 386, the

Health Care Liability Act (the “Act”), codified as TEX. Civ.

PRAC. & REM. CODE ANN. §§ 88.001-88.003 (West 1998),

and which adds or amends TEX. INS. CODE ANN. arts. 20A.09,

20A.12, 20A.12A, 21.58A, and 21.58C (West 1998), is

preempted by the Employee Retirement Income Security Act

of 1974 (“ERISA”), 29 U.S.C.A. § 1001 ef seg. (West 1985

& Supp. 1998), and by the Federal Employees Health Benefit

Act (“FEHBA”), 5 U.S.C.A. § 8901 ef seg. (West 1967 &

Supp. 1996). Plaintiffs also seek, if necessary, to enjoin the

enforcement of the Act as it relates to employee benefit plans

covered by ERISA and FEHBA.

The Act allows an individual to sue a health insurance

carrier, health maintenance organization, or other managed

care entity for damages proximately caused by the entity’s

failure to exercise ordinary care when making a health care

treatment decision. TEX. CIV. PRAC. & REM. CODE ANN. §

88.002(a) (West 1998). In addition, under the Act, these

entities may be held liable for substandard health care

treatment decisions made by their employees, agents, or

representatives. /d. § 88.002(b).' The Act also establishes an

'The Act provides, in pertinent part, the following:

§ 88.002. Application

(a) A health insurance carrier, health maintenance

organization, or other managed care entity for a health care plan

has the duty to exercise ordinary care when making health care

treatment decisions and is liable for damages for harm to an

insured or enrollee proximately caused by its failure ro exercise

B-2

independent review process for adverse benefit determinations

and requires an insured or enrollee to submit his or her claim

challenging an adverse benefit determination to a review by an

independent review organization if such a review is requested

by the managed care entity. Jd. § 88.003(c). Additional

responsibilities for HMOs and further requirements concernin g

the review of an adverse benefit determination by an

independent review organization are also addressed by the

Act. See TEX. INS. CODE ANN. arts. 20A.09, 20A. 12,

20A.12A, 21.58A, and 21.58C (West 1998).

On July 21, 1997, Defendants filed a motion to dismiss

under Federal Rule of Civil Procedure 12(b)}(6) for failure to

State a claim and to dismiss Plaintiffs’ suit against the

Department and Bomer as improper parties. Defendants

argue that dismissal is appropriate for the following reasons:

such ordinary care.

(b) A health insurance carrier, health maintenance

organization, or other managed care entity for a health care pian

is also liable for damages for harm to an insured or enrollee

proximately caused by the health care treatment decisions made

by its:

(1) emplovees;

(2) —_ agents;

(3) ostensible agents: or

(4) representatives who are acting on its behalf and

over whom it has the right to exercise influence or control

or has actually exercised influence or control which result

in the failure to exercise ordinary care.

TEX. Civ. PRAC & REM. CODE ANN. §§ 88.002(a) and (b) (West

1998). |

B23

—

Senate Bill 386 regulates the quality of care provided

by the HMO{(s] operating in Texas. ERISA and

FEHBA, in contrast, govern what types of regulations

may be placed on an employee benefit plan. The plain

meaning of the statute shows that the purpose of

Senate Bill 386 is to prevent health plans from

escaping liability for the medical decisions they

“make,” “control” or “influence.” Senate Bill 386

does not seek to regulate how HMO’s make benefit or

coverage determinations; nor does it proscribe

requirements governing the structure of a benefit plan.

Accordingly, the ERISA and FEHBA preemption

clauses do not apply to Senate Bill 386.

(Defendants’ Summary of Argument, Instrument No. 25 at 1).

If the Court were to determine that certain provisions of the

Act relate to employee welfare benefit plans, Defendants ask

this Court to sever any “non-liability” provisions of the Act

that it finds to be preempted, saving the valid quality of care

liability provisions. (Defendants’ Reply, Instrument No. 24 at

8 n3). Defendants also contend that the Eleventh

Amendment bars suit against both the Texas Department of

Insurance and Bomer because the state of Texas is immune

from suit. Furthermore, according to Defendants, there is “a

real question” as to whether Elton Bomer is a proper party

given the Plaintiffs’ allegations in their complaint.

(Defendants’ Brief, Instrument No. 11 at 38 n.37).

On July 29, 1997, Plaintiffs filed a motion for summary

judgment, contending that the Act “impermissibly interferes

with the purpose, structure and balance of ERISA and

B-4

FEHBA, thereby injecting state law into an area exclusively

reserved for Congress.” (Plaintiffs’ Summary of Argument,

Instrument No. 21 at 1). Plaintiffs contend that the language

in the Act expressly “refers to” ERISA plans, and that the Act

has a connection with ERISA plans because it purports to

impose state law liability on ERISA entities and to mandate

the structure of plan benefits and their administration.

Plaintiffs also maintain that the Act wrongfully binds

employers and plan administrators to particular choices and

impermissibly creates an alternate enforcement mechanism.

On April 24, 1998, the Court held a hearing on

Defendants’ motion to dismiss and Plaintiffs’ motion for

summary judgment. At the hearing, the Court informed the

parties that Defendants’ motion to dismiss would be converted

into a motion for summary judgment. Then, on May 15,

1998, Plaintiffs filed their First Amended Complaint for

Declaratory Judgment and Permanent Injunction, adding

Morales as a defendant in this case.

II. 12(b)(6) Motion to Dismiss Standard of Review

Rule 12(b)(6) allows for dismissal if a plaintiff fails “to

state a claim upon which relief may be granted[.]” FED. R.

Civ. P. 12(b)(6). Such dismissals, however, are rare, Clark v.

Amoco Prod. Co., 794 F.2d 967, 970 (5th Cir. 1986), and

only granted where “it appears beyond doubt that the plaintiff

can prove no set of facts in support of his claim which would

entitle him to relief.” Conley v. Gibson, 355 U.S. 4] , 45-6, 78

S. Ct. 99, 102 (1957). Dismissal can be based either ona lack

of a cognizable legal theory or the absence of sufficient facts

B-5

alleged under a cognizable legal theory. Balistreri v. Pacifica

Police Dept., 901 F.2d 696, 699 (9th Cir. 1990); Vines v. City

of Dallas, Texas, 851 F. Supp. 254, 259 (N.D. Tex. 1994).

In determining whether a dismissal is warranted

pursuant to Rule 12(b)(6), the Court accepts as true all

allegations contained in the plaintiff's complaint. Gargiul v.

Tompkins, 704 F.2d 661, 663 (2d Cir. 1983), vacated on

other grounds, 465 U.S. 1016, 104 S. Ct. 1263 (1984); Kaiser

Aluminum & Chem. Sales, Inc. v. Avondale Shipyards, Inc..,

677 F.2d 1045, 1050 (Sth Cir. 1982). In addition, all

reasonable inferences are to be drawn in favor of the plaintiff's

claims. Kaiser Aluminum, 677 F.2d at 1050. “To qualify for

dismissal under Rule 12(b)(6), a complaint must on its face

show a bar to relief.” Clark, 794 F.2d at 970.

If the court, in its discretion, accepts for consideration

matters that are beyond the pleadings then the motion to

dismiss is converted into a motion for summary judgment

under Rule 12(b). Rule 12(b) states, in pertinent part, that:

[i]f, on a motion asserting the defense

numbered (6) to dismiss for failure of the

pleading to state a claim upon which relief can

be granted, matters outside the pleading are

presented to and not excluded by the court,

the motion shall be treated as one for summary

judgment and disposed of as provided in Rule

are

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tat ea CS ee eee

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FED. R. Civ. P. 12(b). A court is more likely to consider

matters outside the pleadings if the “‘extra-leading material is

comprehensive and will enable a rational determination of a

summary judgment motion{.]"” /squith ex rel. Isquith v.

Middle South Utilities, Inc., 847 F.2d 186, 193 n.3 (Sth Cir.

1988) (quoting 5 C. WRIGHT & A. MILLER, FEDERAL

PRACTICE AND PROCEDURE § 1366 (1969)). However, the

Court is unlikely to do so when it is scanty, incomplete, or

inconclusive. /d.

The court must give all parties notice of such a

conversion and provide them with an opportunity both to be

heard and to present further materials in support of their

positions on the motion. Nowlin v. Resolution Trust Corp., 33

F.3d 498, 504 (Sth Cir. 1994). Following conversion, the

° . Sn

court should permit the parties to engage in discovery as

appropriate before ruling on the converted motion.

Washington v. Allstate Ins. Co., 901 F.2d 1281 (Sth Cir.

1990).

In this case, having received for consideration matters

that are beyond the pleadings of the parties such as affidavits,

contracts for health benefit plans, and statistical data, the

Court will convert Defendants’ motion to dismiss into a

motion for summary judgment. Given that Plaintiffs

subsequently filed a motion for summary judgment on the

same issues, Plaintiffs have received ample notice that the

~>ease may be decided at this stage on the merits. Furthermore,

at the motions hearing held on April 24, 1998, the Court

informed the parties of its intention to convert Defendants’

motion into a motion for summary judgment. The parties also

B-7

had an additional opportunity to be heard at the hearing and to

present any additional evidence. Thus, both partiés had

sufficient notice of the conversion.

lif. Summary Judgment Standard

Summary judgment is appropriate if no genuine issue

of material fact exists and the moving party is entitled to

judgment as a matter of law. FED. R. Civ. P. 56. A fact is

“material” if its resolution in favor of one party might affect

the outcome of the suit under governing law. Anderson v.

Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S. Ct. 2505, 2510

(1986). An issue is “genuine” if the evidence is sufficient for

a reasonable jury to return a verdict for the nonmoving party.

Id. If the evidence rebutting the motion for summary

judgment is only colorable or not significantly probative,

summary judgment should be granted. /d. at 249-50, 106 S.

Ct. at 2511; see Lewis v. Glendel Drilling Co., 898 F.2d

1083, 1088 (Sth Cir. 1990).

Under Rule 56(c) of the Federal Rules of Civil

Procedure, the moving party bears the initial burden of

informing the district court of the basis for its belief that there

is an absence of a genuine issue for trial and for identifying

those portions of the record that demonstrate such absence.

Matsushita Elec. Ind. Co. v. Zenith Radio Corp., 475 U.S.

574, 586-87, 106 S. Ct. 1348, 1355-56 (1986); Leonard v.

Dixie Well Serv. & Supply, Inc., 828 F.2d 291, 294 (Sth Cir.

1987).

B-8

Where the moving party has met its Rule 56(c) burden,

the nonmovant “must do more than simply show that there is

some metaphysical doubt as to the material facts ___ [T]he

nonmoving party must come forward with ‘specific facts

showing that there is a genuine issue Sor trial.” Matsushita,

475 U.S. at 586-87, 106 S. Ct. at 1356 (quoting FED. R. Civ.

P. 56(e)) (emphasis in original); Celotex Corp. v. Catrett, 477

U.S. 317, 322-23, 106 S. Ct. 2548, 2552 (1986); Leonard,

828 F.2d at 294. To sustain the burden, the nonmoving party

must produce evidence admissible at trial. Anderson, 477

U.S. at 255, 106 S. Ct. at 2514; Thomas v. Price, 975 F.2d

231, 235 (Sth Cir. 1992) (“To avoida summary judgment, the

nonmoving party must adduce admissible evidence which

creates a fact issue... .”). :

IV. Improper Parties

Defendants argue that the Department and Bomer are

improper parties to this suit. (Defendants’ Motion, Instrument

No. 10 at 10; Defendants’ Reply, Instrument No. 24 at 10).

First, Defendants contend that the Eleventh Amendment bars

suit against both parties. The Eleventh Amendment provides

that “[t]he judicial power of the United States Shall not be

construed to extend to any suit in law or equity, commenced |

or prosecuted against one of the United States by citizens of

another state or by citizens or subject of any foreign state.”

U.S. CONST. amend. XI. In addition, the Eleventh

Amendment “bars suit against a state entity... regardless of

whether money damages or injunctive relief is sought. In

determining whether an entity is entitled to... immunity, [the

court]. . . ‘must examine the particular entity in question and

B-9

oo

its powers and characteristics as created by state law. . . .

Voisin’s Oyster House, Inc. v. Guidry, 799 F.2d 183, 186 (Sth

Cir. 1986) (quoting Laje v. R.E. Thomason Gen. Hosp., 665

F.2d 724, 272 (Sth Cir. 1982)).

Several factors are considered in determining whether

an agency is an arm of the state including: (1} whether state

statutes and case law view the agency as an arm of the state;

(2) the source of the entity’s funding; (3) whether the entity is

concerned with local or statewide problems; (4) the degree of

the agency’s authority which is independent from the state; (5)

whether the entity can sue and be sued in its own name; and

(6) whether it has the nght to hold and use property. Guidry,

799 F.2d at 186-87. “Positive answers to the latter two

inquines mitigate against an entity’s being an alter ego of the

State and thus against Eleventh Amendment immunity.”

Correa v. City of Bay City, 981 F. Supp. 477, 479 (S_D. Tex.

1997).

The Department ts clearly a state agency, created by

the laws of the state of Texas. See TEX. INS. CODE ANN. art.

1.01 ef. seg. (West 1998); E/ Paso Elec. Co. v. Texas Dep't

of Ins., 937 S.W.2d 432, 434 (Tex. 1996). Its primary

responsibility is “to regulate the business of insurance in this

state.” TEX. INS. CODE ANN art. 1.01A (West 1998). The

Department is in the executive branch of the state government,

and is controlled by an executive officer, the Commissioner,

who is appointed by the Department with the advice and

consent of the Senate of Texas. /d. art. 1.09. Several

members of the Department, such as deputies, assistants, and

other personnel, are appointed by the Commissioner. /d. art.

B-10

1.02. All of the above factors favor a finding that the

Department is an arm of the State of Texas and therefore

entitled to Eleventh Amendment immunity. See Correa, 981

F. Supp. at 479. Consequently, the Court DISMISSES the

Department from this lawsuit.

With respect to state officials, “‘a gaping hole in the

shield of sovereign immunity created by the [E}leventh

[A]mendment and the Supreme Court’ is the doctrine” of kx

Parte Young, 209 U.S. 123, 28 S. Ct. 44] (1908). Saltz v.

Tennessee Dep't of Employment Sec., 976 F.2d 966, 968 (Sth

Cir. 1992) (quoting Brennan v. Stewart, 834 F.2d 1248, 1252

(1988)). Under the Ex Parte Young doctrine, “a federal court.

consistent with the Eleventh Amendment, may enjoin state

Officials to conform their future conduct to the requirements

of federal law, even though such an injunction may have an

ancillary effect on the state treasury.” Quern v. Jordan, 440

U.S. 332, 337, 99 S. Ct. 1139, 1143 (1979). “The essential

ingredients of the Ex Parte Young doctrine are that a suit must

be brought against individual persons in their official Capacities

as agents of the state and the relief sought must be declaratory

or injunctive in nature and prospective in effect.” Saltz, 976

F.2d at 968 (footnote omitted); see also ( ‘igna Healthplan of

La. v. Louisiana, 82 F.3d 642, 644 n.1 (Sth Cir. 1996)

(recognizing “the federal courts have jurisdiction to hear suits

against state officials where, as here, the plaintiffs seek only

prospective declaratory or injunctive relief to prevent a

continuing violation of federal law”).

In this case, Plaintiffs have sued Bomer in his official

capacity and also seek prospective injunctive relief, not

B-11

monetary damages. Therefore, Defendants’ argument that suit

against Bomer is barred by the Eleventh Amendment fails.

Second, Defendants argue that “[t]here may be a real

question whether Commissioner Bomer is a proper party”

based on the Plaintiffs’ allegations in their complaint.

(Defendants’ Brief, Instrument No. 11 at 38.37). According

to Defendants, Plaintiffs’ “only allegation. . [regarding

Bomer’s] official administrative capacity .. . [concerns] his

responsibility for enforcing state insurance law. The only role

for the Commissioner in Senate Bill 386 is to approve IROs

(independent review organization) and it is very unclear

whether . . . [Plaintiffs are] alleging [that] the IRO procedures

are preempted.” (/d. at 38 n.37). In response, Plaintiffs

maintain that Bomer is a proper party to this suit because as

the Commissioner, Bomer “is responsible for ensuring

compliance with .. . the establishment and supervision of

independent review organizations.” (Plaintiffs’ Motion,

Instrument No. 20 at 5). The Court agrees with Plaintiffs’

contention.

Clearly, Plaintiffs contest the inclusion of the IRO

provisions in the Act. In particular, Plaintiffs state that the

“IRO procedure improperly affects the administration of

employee benefit plans, and is therefore an unwarranted

extension into an area governed by ERISA... . As such,

either directly or indirectly, HMOs and PPOs will incur costs

in connection with the establishment of IROs under the Act,

thereby also supporting a finding of preemption.” (Plaintiffs’

Motion, Instrument No. 20 at 17 n.17). Plaintiffs elaborated

on this position at the hearing held on April 24, 1998.

B-12

(Transcript, Instrument No. 60 at 21). Furthermore.

Defendants concede that Bomer, as the Commissioner. is

responsible for approving the IRO procedure. (Defendants’

Brief, Instrument No. 11 at 38 n 37)

Moreover, Defendants do not provide the Court with

any authority for their proposition that Bomer is an improper

party to this suit. On the contrary, the Commissioner of the

Texas Board of Insurance has been named as a defendant in

other cases similar to the instant case. See NGS Am., Inc. v.

Barnes, 998 F.2d 296 (Sth Cir. 1993) (enjoining the

Commissioner of Insurance for the State of Texas from

enforcing a Texas statute that was preempted by ERISA). /--

Systems, Inc. v. Pogue, 929 F.2d 1100 (Sth Cir. 1991)

(holding that the Texas Administrative Services Tax Act was

preempted by ERISA and enjoining the Commissioner of

Insurance from collecting the tax); Texas Commerce

Bancshares, Inc. v. Barnes, 798 F Supp. 1286 (W_D. Tex

1992) (examining plaintiff's award of attorney fees and costs

in ERISA preemption action filed against the Commissioner of

Insurance). Consequently, given Bomer’s role with the IRO

procedure and other cases where the C Ommissioner has been

named as a defendant, the Court finds that Bomer is a proper

party to this suit.

V. Insurance Savings Clause

Plaintiffs claim that the Act is preempted by ERISA

Thus, as an initial matter, the Court will examine whether the

Act is saved from preemption by ERISA’s insurance savings

clause.

B-13

ERISA provides that “nothing in this title shall be

construed to exempt or relieve any person from any law of any

State which regulates insurance, banking or securities.” 29

US C.A. § 1144(b)(2)(a) (West 1985) (emphasis added). The

Supreme Court “delineated the requirements that a state

statute must meet in order to come within the insurance facet

of the savings clause” in Metropolitan Life Ins. Co. vy.

Massachusetts, 471 U.S. 724, 741-47, 105 S. Ct. 2380, 2389-

93 (1985). The Supreme Court in Metropolitan Life took the

following conjunctive two-step approach:

First, the [C]Jourt determined whether the statute in

question fitted the common sense definition of

insurance regulation. Second, it looked at three

factors: (1) [w]hether the practice (the statute) has the

effect of spreading policyholders’ risk; (2) whether the

practice is an integral part of the policy relationship

between the insurer and the insured; and (3) whether

the practice is limited to entities within the insurance

industry. If the statute fitted the common sense

definition of insurance regulation and the court

answered “yes” to each of the questions in the three

part test, then the statute fell within the savings clause

exempting it from ERISA preemption.

Tingle v. Pacific Mut. Ins. Co., 996 F.2d 105, 107 (Sth Cir.

1993) (footnote omitted) (emphasis added). Therefore, “if a

statute fails either to fit the common sense definition of

insurance regulation or to satisfy any one element of the three-

factor Metropolitan Life test, then the statute is not exempt

from preemption by the ERISA insurance Savings clause.”

Cigna, 82 F.3d at 650.

When the Court begins to apply this test to the Act, it

can both start and finish its analysis with the third factor of the

Metropolitan Life test: on its face, the Act is obviously not

“limited to entities within the insurance industry.” Even

though the Act lists health insurance carriers as one group

covered by its terms, it also specifies that it applies to health

maintenance organizations or other managed care entities for

a health care plan. TEX. CIV. PRAC. & REM. CODE ANN. §

88.002(a) (West 1998). As the Act fails to meet the third

factor of the Metropolitan Life test, the Court finds that the

Statute is not saved from preemption by the insurance

exception of Section 514(b) of ERISA. See Cigna, 82 F.3d at

650 (holding that Louisiana’s Any Willing Provider statute

was not exempt from preemption by ERISA’s Savings clause

because the statute was not limited to entities within the

insurance industry).

VI. ERISA Preemption

Having determined that the Act is not saved by the

insurance savings clause, the Court must next examine

whether the Act is preempted by Section 5 14(a) of ERISA.

Section 514(a) governs the preemption of state laws

by ERISA. More specifically, Section 5 14(a) provides that

ERISA “shall supersede any and all State laws insofar as they

.. . relate to any employee benefit plan...” 29USCA §

1144(a) (West 1985) (emphasis added). Under ERISA

B-15

preemption analysis, a state law relates to an ERISA plan if it

has a connection with or reference to such a plan. Cigna, 82

F.3d at 647.

If the Court determines that certain portions of a state

statute are preempted by ERISA and therefore, contravene

federal law, then the Court may sever those portions from the

statute provided that their invalidity does not affect the

remainder of the statute. Texas Pharmacy Ass ‘nv. Prudential

Ins. Co. of Am., 105 F.3d 1035, 1039 (Sth Cir. 1997). The

Court’s decision to sever a statute is also based on whether or

not that state statute has a provision for severability or

nonseverability. /d.

Since pre-emption turns on Congress’s intent, the

court must begin “with the text of the provision in question,

and move on, as need be, to the structure and purpose of the

Act in which it occurs.” New York State Conference of Blue

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

645, 655, 115 S. Ct. 1671, 1676 (1995). “A facial challenge

to a legislative Act is, of course, the most difficult challenge to

mount successfully, since the challenger must establish that no

set of circumstances exists under which the Act would be

valid.” U.S. v. Salerno, 481 U.S. 739, 745, 107 S. Ct. 2095,

2100 (1987). Thus, in this case, the Court must determine

whether any claims brought under the Act would relate to an

employee benefit plan and would, therefore, be preempted by

Section 514(a) of ERISA.

A. What is an ERISA Plan?

First, the Court must examine what constitutes an

ERISA plan. An employee welfare benefit plan (which

includes health benefits plans), is defined as:

any plan, fund, or program which was heretofore or

is hereafter established or maintained b yy an employer

or by an employee organization, or by both to the

extent that such plan, fund, or program was

established or is maintained for the purpose of

providing for its participants or their beneficiaries,

through the purchase of insurance or otherwise, (A)

medical, surgical, or hospital care or benefits, or

benefits in the event of sickness, accident. disability

29U.S.C.A. § 1002(1) (West Supp. 1998) (emphasis added)

The first phrase—plan, fund, or program—has been

interpreted as requiring an “ongoing administrative program”

on the part of the employer. See Fort Halifax Packing Co. v.

Coyne, 482 U.S. 1, 11, 107 S. Ct. 2211, 2217 (1987) A

“plan, fund, or program” under ERISA is established if “from

the surrounding circumstances a reasonable person can

ascertain the intended benefits, class of beneficiaries, the

source of financing, and the procedures for receiving

benefits.” Donovan v. Dillingham, 688 F.2d 1367, 1371,

1373 (11th Cir. 1982); see Peckham v. Gem State Mut of

Utah, 964 F.2d 1043, 1047-48 (7th Cir 1992) The

administrative program, however, need not be elaborate

Peckham, 964 F.2d at 1048.

B-17

The second phrase of the definition—established or

maintained by an employer—

is designed to distinguish situations in which the

employer merely acts as a conduit for the marketing of

an insurance policy to individual employees (in which

case no ERISA plan exists), from the situation in

which the employer financially pays for some or all of

the plan and/or otherwise is involved in its

administration (e.g. defining and administering

employee eligibility, or listing the plan as a benefit of

employment).

RAND ROSENBLATT, LAW AND THE AMERICAN HEALTH CARE

SYSTEM 190 (Supp. 1998). In particular, this second phrase

is designed to “ensure that the plan is part of an employment

relationship. .. . [This] requirement seeks to ascertain whether

the plan is part of an employment relationship by looking at

the degree of participation by the employer in the

establishment or maintenance of the plan.” Peckham, 964

F 2d at 1049.

In Meredith v. Time Ins. Co., 980 F.2d 352, 355 (Sth

Cir. 1993), the Fifth Circuit outlined its “comprehensive test

for determining whether a particular plan qualifies as an

‘employee welfare benefit plan’” under ERISA. Under

Meredith, the test requires the full analysis of

whether a plan: (1) exists; (2) falls within the safe-

harbor provision established by the Department of

Labor; and (3) satisfies the primary elements of an

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ERISA “employee benefit plan’—establishment or

maintenance by an employer intending to benefit

employees. If any part of the inquiry is answered in

the negative, the submission is not an ERISA plan... ~

. [The Court’s] analysis is informed by reference to

ERISA itself, including germane indications of

congressional intent, and to the extent Congress has

failed to state its intention on the precise issue in

question, we refer to permissible interpretations by the

agency charged with administering the statute—the

Department of Labor.

Id. Furthermore, ERISA does not regulate “bare purchases of

health insurance where . . . the purchasing employer neither

directly or indirectly owns, controls, administers or assumes

responsibility for the policy or its benefits.” 7aggert Corp. v.

Life & Health Benefits Admin., Inc., 617 F.2d 1208, 1211

(Sth Cir. 1980). Thus, in this case, the Court must determine

whether the provisions of the Act relate to any employee

benefit plan as defined by Meredith.

In this case, Defendants make the following argument:

[Plaintiff] AEtna blurs the distinction between an

ERISA plan (established by an employer to provide

benefits to an employee) and a health plan (established

by health insurance entities as a vehicle for bearing the

risks of health insurance and providing coverage to an

ERISA plan for those employees). AEtna admits

plaintiffs ‘offer products in the form of managed health

care coverage to employees who are enrolled in

B-19

ERISA and FEHBA plans in Texas.’ AEtna may

operate as a ‘health plan,’ but AEtna is not an ERISA

plan established by an employer.

(Defendants’ Reply, Instrument No. 24 at 1). In essence,

Defendants argue that Plaintiffs are operating health plans, but

that they are not operating ERISA plans that would be

preempted by ERISA. The Court agrees.

The Act expressly regulates health insurance carriers,

health maintenance organizations and managed care entities by

specifically addressing their health plans and not the ERISA

plans of employers. Under the Act, “[a] health insurance

carrier, health maintenance organization, or other managed

care entity for a health care plan has the duty to exercise

ordinary care when making health care treatment decisions

and is liable for harm to an insured or enrollee proximately

caused by its failure to exercise such ordinary care.” TEX

Civ. PRAC. & REM.CODE ANN. = § 88.002(a) (West 1998)

A health insurance carrier “means an authorized insurance

company that issues policies of accident and sickness” under

Article 3.70-1 of the Texas Insurance Code. TEX. CIV. PRAC.

& REM. CODE ANN. § 88.001(6) (West 1998). A health

maintenance organization includes “organization[s] licensed

under the Texas Health Maintenance Organization Act[_]” /d

§ 88.001(7). A managed care entity under the Act is defined

as

any entity which delivers, administers, or assumes risk

for health care services with systems or techniques to

control or influence the quality, accessibility,

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utilization, or costs and prices of such services to a

defined enrollee population, but does not include an

employer purchasing coverage or acting on behalf of

its employees or the employees of one or more

subsidiaries or affiliated corporations of the employer

or a pharmacy licensed by the State Board of

Pharmacy.

Id. § 88.001(8) (emphasis added)

The health plans provided by health insurance carriers.

health maintenance organizations, or managed care entities, as

previously defined, and the health care entities themselves

cannot constitute ERISA plans because the third inquiry under

the Fifth Circuit's test—whether the plan satisfies the primary

elements of an ERISA “employee benefit plan”— must be

answered in the negative. Plaintiffs admit that they “offer

products in the form of managed health care coverage to

employees who are enrolled in ERISA and FEHBA plans in

Texas.” (Plaintiffs’ Motion, Instrument No 20 at 3)

Plaintiffs and the coverage provided by them, however, are

not established or maintained by an employer

Plaintiffs concede that they fall “within the term

‘managed care entity’ as defined in the Act[.]” (/d at 4) A

managed care entity does not include “an employer purchasing

coverage or acting on behalf of its employees[_]” TEx. Civ

PRAC. & REM. CODE ANN. § 88.001(8) (West 1998)

Therefore, by definition, Plaintiffs and the managed health care

plans that Plaintiffs offer would not satisfy the primary

elements of an ERISA employee benefit plan because they are

B-21

not established or maintained by an employer. Rather,

Plaintiffs are medical service providers to ERISA plans and

their members.’ Plaintiffs operate health plans rather than

ERISA employee benefit plans. Consequently, the Court finds

that Plaintiffs and the particular arrangement or services

provided by them, that are addressed under the Act, are not

ERISA employee benefit plans since the coverage is not

established or maintained by anemployer. See Cigna, 82 F 3d

at 648 (recognizing that Plaintiffs, an HMO and a health

insurer, were not ERISA plans); Washington Physicians Serv.

Ass'n v. Gregoire, No. 97-35536, 1998 WL 318759, *3 (9th

Cir. 1998) (stating that the statute makes it clear that the term

“health plans” “refers to the plan offered by the health carrier

(e.g. an HMO), not the benefit plan offered by the

employer”), Dukes v. U.S. Healthcare, 57 F.3d 350, 356 (3d

Cir. 1995) (noting the Department of Labor’s argument that

plaintiff's claims merely attacked “the behavior of an entity

completely external to the ERISA plan{,] [the HMO]”).

Nonetheless, Plaintiffs argue that the fact that Aetna is

not an ERISA health plan is of “no significance to the

preemption analysis.” (Plaintiffs’ Surreply, Instrument No. 33

at 1). Plaintiffs rely on Cigna Healthplan of La., Inc. v.

Louisiana, 82 F.3d 642 (Sth Cir. 1996), for this argument

At the hearing held on April 24, 1998, Mr. John B. Shelv.

counsel for Plaintiffs, argued that Plaintiffs “provide various

services to emplovee benefit plans that are ERISA plans.”

(Transcript, Instrument No. 60 at 6).

B-22

In Cigna, CIGNA Healthplan of Louisiana

(“CIGNA”), a licensed HMO, and Connecticut General Life

Insurance Company (“CGLIC”), a licensed health insurer, filed

suit against Richard Ieyoub, the Attorney General of the state

of Louisiana, seeking a declaratory judgment that Louisiana’s

Any Willing Provider statute was preempted by ERISA 82

F.3d at 644 “The Any Willing Provider statute

mandate[d] that ‘([nJo licensed provider... who agree[d] to

the terms and conditions of the preferred provider contract

[could] be denied the right to become a preferred

provider.”” /d at 645 (quoting LA REV. STAT ANN §

40:2202(5)(c) (West 1992)) The Fifth Circuit concluded that

the statute was preempted by ERISA both because it referred

to ERISA-qualified plans by including certain enumerated

entities, and because it had a connection with such plans by

mandating that “certain benefits available to ERISA plans

_ be construed in a particular manner.” /d at 648-49

Since the Court found that the statute in Cigna directly

affected benefits provided under the plan, the Court did not

have to examine whether or not CIGNA or CGLIC was an

ERISA plan. Rather, the Court based its decision on the

substantial effect that the statute had on all insured plans. /d

at 648. The Court, however, did remark that the fact that

CIGNA and CGLIC were not themselves ERISA plans was

inconsequential. /d at 648. It made this statement while

discussing the statute’s “connection with” ERISA plans. /d

The Court further explained that CIGNA’s and CGLIC’s

Status was inconsequential because:

B-23

[b]y denying insurers, employer, and HMOs the right

to structure their benefits in a particular manner, the

statute [wa]s effectively requiring ERISA plans to

purchase benefits of a particular structure when they

contract with organizations like CIGNA and CGLIC.

In that regard, the statute “bfore] indirectly but

substantially on all insured plans” and [wa]s

accordingly preempted by ERISA.

Id. at 648-49 (quoting Metropolitan Life, 471 U.S. at 739,

105 S. Ct. at 2389).

In accordance with Cigna, the Court finds that

whether or not Plaintiffs in this case are ERISA plans is

inconsequential because, under current Fifth Circuit law,

certain severable provisions of the Act, as discussed below,

“relate to” ERISA employee benefit plans.

B. “Relates To” Analysis

A state law relates to an ERISA plan “in the normal

sense of the phrase if it has a connection with or reference to

such a plan.” Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-

97, 103 S. Ct. 2890, 2899-2900 (1983) (emphasis added).

The Supreme Court has given the phrase “relates to” a “broad

common-sense meaning.” Pilot Life Ins. Co. v. Dedeaux, 481

U.S. 41, 47, 107 S. Ct. 1549, 1553 (1987)). Under this

definition,

A state law can relate to an ERISA plan even if that

law was not specifically designed to affect such plans,

B-24

and even if its effect is only indirect. If a state law

does not expressly concern employee benefit plans, it

will be preempted insofar as it applies to benefit plans

in particular cases. . . .

Cigna, 82 F.3d at 647. “The most obvious class of pre-

empted state laws are those that are specifically designed to

affect ERISA-governed employee benefits plans.” Corcoran

v. United HealthCare, Inc., 965 F.2d 1321, 1328 (Sth Cir.

1992).

In determining whether a state law “relate[s] to” an

ERISA plan, the Supreme Court has adopted a pragmatic

approach. See Travelers, 514 U.S. 645 at 654-57, 115S. Ct.

at 1676-77. In Travelers, the Court stated that it “must go

beyond the unhelpful text [of Section 514(a)] and the

frustrating difficulty of defining its key term [‘relates to’], and

look instead to the objectives of the ERISA statute as a guide

to the scope of the state law that Congress understood would

survive [preemption].” 514 U.S. at 656, 115 S. Ct. at 1677.

As stated by the Court in New York Conference of

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

passing Section 514,

Congress intended ‘to ensure that plans and plan

sponsors would be subject to a uniform body of

benefits law; the goal was to minimize the

administrative and financial burdens of complying with

conflicting directives among States or between States

B-25

and the Federal Government . . ., [and tu prevent] the

potential for conflict in pact law...

requiring the tailoring of plans and employer conduct

to the peculiarities of the law of each jurisdiction.’

514 US. at 656, 115 S. Ct. at 1677 (quoting /ngersoll-Rand

Co. v. McClendon, 498 U.S. 133, 142, 111 S. Ct. 478, 484

(1990)). Therefore, “[t]he basic thrust of ... [ERISA’s] pre-

emption clause . . . was to avoid a multiplicity of regulation in

order to permit the nationally uniform administration of

employee benefit plans.” 7ravelers, 514 U.S. at 657, 115 S.

Ct. at 1677-78.

Although the text of Section 514(a) is clearly

expansive, in so far as it affects all state laws that relate to

ERISA plans, the phrase “relate[s] to” does not “extend to the

furthest stretch of its indeterminacy[.]” /d. at 655, 115 S. Ct.

at 1677. Ifthat were the case, “then for all practical purposes

pre-emption would never run its course” and courts would be

required “to read Congress’s words of limitation as mere

sham, and to read the presumption against preemption out of

the law whenever Congress speaks to the matter with

generality.” /d. Thus, in particular, ERISA’s “relate[s] to”

language was not “intended to modify ‘the starting

presumption that Congress does not intend to supplant state

law’” which falls within areas of traditional state regulation.

De Buono v. NYSA-ILA Med. & Clinical Servs. Fund, 520

U.S. 806, —, 117 S. Ct. 1747, 1751-52 (1997) (quoting

Travelers, 514 U.S. at 654-55, 115 S. Ct. at 1676).

B-26

“The historic powers of the State include the

regulation of matters of health and safety.” De Buono, 520

U.S. at —, 117S. Ct. at 1751-52 (citing Hillsborough County

v. Automated Med. Lab., Inc., 471 U.S. 707, 716, 105S. Ct

2371, 2376 (1985)). The Act, in this case, regulates the

medical decisions of health insurance Carriers, health

maintenance organizations, and other managed care entities,

see TEX. CIV. PRAC & REM CoDE ANN. § 88.002 (West

1998), and therefore, clearly operates in a field that has been

traditionally occupied by the States. “[W]here federal law is

said to bar state action in fields of traditional state regulation,”

this Court should work on the “assumption that the historic

police powers of the States were not to be superseded by the

Federal Act unless that was the clear and manifest purpose of

Congress.” Travelers, 514US_at 654-55, 115 S. Ct. at 1676

(quoting Rice v. Santa Fe Elevator ( ‘orp., 331 U.S. 218, 230,

67S. Ct. 1146, 1152 (1947)). Consequently, Plaintiffs “bear

the considerable burden of Overcoming ‘the starting

presumption that Congress does not intend to supplant state

law.’”” De Buono, 520 US. at —, 117 S. Ct. at 1752.

1. “Reference To”

Under the “reference to” inquiry, the Supreme Court

has “held preempted a law that ‘impos[ed] requirements by

reference to [ERISA] covered programs,’ .. . a law that

specifically exempted ERISA plans from an otherwise

generally applicable garnishment provision, .. . and a

common-law cause of action premised on the existence of an

ERISA plan.” California Div. of Labor Standards

Enforcement, N.A., Inc. v. Dillingham Constr. 519 U §. 3 16,

B-27

—, 1178S. Ct. 832, 837-38 (1997) (citations omitted) (quoting

District of Columbia v. Greater Washington Bd. of Trade,

506 U.S. 125, 131, 113 S. Ct. 580, 584 (1992)). Thus,

“[w]here a State’s law acts immediately and exclusively upon

ERISA plans . . . or where the existence of ERISA plans is

essential to the law’s operation . . . that ‘reference’ will result

in pre-emption.” Dillingham, 519 U.S. at —, 117 S. Ct. at

838.

In Travelers, the Supreme Court examined New York

statutes that imposed “surcharges on bills of patients whose

commercial insurance coverage [wa]s purchased by employee

health-care plans governed by ERISA and... . on HMOs

insofar as their membership fees . . . [were] paid by an ERISA

plan.” 514 US. at 649, 115 S. Ct. at 1673-74. Notably, the

surcharge on HMOs was “not an increase in the rates to be

paid by an HMO to a hospital, but a direct payment by the

HMO to the State’s general fund.” /d. at 650, 115 S. Ct. at

1674. The Court held that the “surcharge statutes . . . [could

not] be said to make ‘reference to’ ERISA plans in any

manner” because the surcharges were “imposed upon patients

and HMOs, regardless of whether the commercial coverage or

membership, respectively, [wa]s ultimately secured by an

ERISA plan, private purchase, or otherwise[.]” /d. at 656,

115 S. Ct. at 1677.

Similarly, in this case, the Act imposes a standard of

ordinary care directly upon health insurance carriers and health

maintenance organizations when making health care treatment

decisions, regardless of whether the commercial coverage or

membership therein is ultimately secured by an ERISA plan.

B-28

See TEX. CIV. PRAC. & REM. CODE § 88.001-88.002 (West

1998). The Act also requires managed care entities to

exercise ordinary care when making medical decisions. /d §

88.002(a). However, as already mentioned, the Act

specifically excludes ERISA plans from the definition of a

“managed care entity.” See id. § 88.001(8). Section

88.001(8) of the Texas Civil Practice and Remedies Code, as

added by the Act, provides that a “managed care entity” does

not include “an employer purchasing coverage or acting on

behalf of its employees.” /d. Consequently, as in 7ravelers.

the Act cannot be said to make any reference to ERISA plans.

Plaintiffs, however, maintain that preemption is

mandated because the Act has an express reference to ERISA

plans in several other provisions. (Plaintiffs’ Motion,

Instrument No. 20 at 7). In particular, Plaintiffs seem to argue

that the mere inclusion of certain terms that allegedly refer to

ERISA plans, such as “plan,” “health care plan,” “health

maintenance organization,” and “managed care entity,”

warrants preemption. (Plaintiffs’ Motion, Instrument No. 20

at 7-9). Plaintiffs rely on District of Columbia v. Greater

Washington Bd. of Trade, 506 U.S. 125, 113 S. Ct. 580

(1992), and Cigna for this proposition?

Plaintiffs also claim that the Fifth Circuit's opinion in 7exas

Pharmacy Ass'n v. Prudential Ins. Co. of Am., 105 F.3d 1035

(5th Cir. 1997), mandates a finding that the Act “refers to”

ERISA plans. However, in Texas Pharmacy, the Court never

discussed the “reference to” or “refers to” analysis. See id. at

1037. Rather, the Court simply concluded that the “Texas statute

relate[d] to ERISA plans because it ‘eliminate[d] the choice of one

B-29

In Greater Washington, 506 U.S. at 130, 113 S. Ct. at

583, the Supreme Court determined that “Section 2(c)(2) of

the District’s Equity Amendment Act specifically refer[red] to

welfare benefit plans regulated by ERISA and on that basis

alone [wa]s pre-empted.” Section 2(c)(2) of the Equity

Amendment Act provided the following: “Any employer who

provides health insurance coverage for an employee shall

provide health insurance equivalent to the existing health

insurance coverage of the employee while the employee

receives or is eligible to receive workers’ compensation

benefits under this chapter.” /d. at 128, 113 S. Ct. at 582

(quoting D.C. CODE ANN. § 36-307(a-1)(1) (Supp. 1992)

_(emphasis added)). Furthermore, the employer had to provide

this health insurance coverage for a maximum of 52 weeks “at

the same benefit level that the employee had at the time the

employee received or was eligible to receive workers’

compensation benefits.” /d. (quoting D.C. CODE ANN. § 36-

307 (a-1) (3) (Supp. 1992)). Thus, the health insurance

coverage required of employers was “measured by refererice

method of structuring benefits,’ by prohibiting plans from

contracting with pharmacy networks that exclude any willing

provider.” /d. Thus, the Court found that Texas’s Any Willing

Provider statute had a “connection with” ERISA plans. /d.

The Court also mentioned that the statute applied to

ERISA benefits plans themselves because it defined “managed

care providers to include HMOs, PPOs or ‘another organization’

that provide[d] health care benefits.” /d. at 1038. Notably, the

Court emphasized the phrase “another organization” as the entity

that could conceivably constitute an ERISA plan. /d.

B-30

fo ‘the existing health insurance coverage’ provided by the

employer” and had to be maintained at the same benefit level

Id. at 130, 113 S. Ct. at 583-84 (emphasis added) (quoting

D.C. CODE ANN. § 36-307(a-1)(1) and (3) (Supp. 1992)).

The Court then determined that “[t]he employee's

‘existing health insurance coverage,’ in turn, [wa]s a welfare

benefit plan under ERISA |. . because it involv[ed] a fund or

program maintained by an employer for the purpose of

providing health benefits for the employee ‘through the

purchase of insurance or otherwise.” /d at 130,113 S Ct

at 584 (quoting 29 U.S.C. § 1002(1)). Thus, since the Equity

Amendment Act imposed requirements by reference to such

employer-sponsored health insurance programs that were

subject to ERISA regulation, the Court concluded that the Act

was preempted by ERISA. /d. at 130-31, 113 S. Ct. at 584

Contrary to Plaintiffs’ contention, in Greater

Washington, the Supreme Court did not conclude that the

statute referred to ERISA plans simply because it contained

certain terminology. Rather, as explained in ( falifornia Div.

of Labor Standards Enforcement, N.A., Inc. v. Dillingham

Constr., 519 U.S. at —, 117 S. Ct. at 838, the Court reasoned

that the reference to ERISA plans resulted in preemption

because the existence of ERISA plans was essential to the

Sstatute’s operation.’ Unlike the statute in Greater

‘The Supreme Court reached the same conclusion in Ingersoll-

Rand Co. v. McClendon, 498 U.S. 133, 111 S. Ct. 478 (1990)

In Ingersoll-Rand, the Court held that a Texas wrongful discharge

claim made “specific reference to, and indeed [wa]s premised on,

B-31

Washington, the Act is not premised on the existence of an

ERISA plan. It merely requires health insurance carriers,

HMOs, and other managed care entities to exercise ordinary

care when making medical decisions. The Act imposes this

standard on these entities without any reference to or reliance

on an ERISA plan.

In Cigna, 82 F.3d at 645-47, the Fifth Circuit held that

Louisiana’s Any Willing Provider statute was preempted by

ERISA because it referred to ERISA-qualified plans. The

statute required all licensed providers “who agre[ed] to the

terms and conditions of the preferred provider contract” to be

accepted as providers in the preferred provider organization

(“PPO”). LA. REV. STAT. ANN. § 40:2202(5)(C) (West 1992)

(emphasis added). Under the Health Care Cost Control Act,

a “preferred provider contract” was defined as “an agreement

‘between a provider or providers and a group purchaser or

purchasers to provide for alternative rates of payment

specified in advance for a defined period of time.’” Cigna, 82

F.3d at 647-48 (quoting LA. REV. STAT. ANN. § 40:2022(5)(a)

(emphasis added)).

the existence of a pension plan.” /d. at 140, 111 S. Ct. at 483

(emphasis added). In order to prevail on this wrongful discharge

claim, plaintiff had to plead and the court had to find “that an

ERISA plan exist[ed] and the emplover had a pension-defeating

motive in terminating the employment.” /d. Therefore, since the

Court’s inquiry had to be “directed to the [ERISA] plan,” the

Court found that the cause of action “relat[ed] to” an ERISA plan.

Id.

B-32

oe

;

E

3

The Fifth Circuit then examined the definition of

“group purchasers.” Under the statute, group purchasers may

have included entities “such as ‘Taft-Hartley trusts or

employers who establish or participate in self funded trusts or

programs,’ which ‘contract [with health care providers] for

the benefit of their... employees.’” Cigna, 82 F.2d at 648

(quoting LA. REV. STAT. ANN. § 40:2022(5)(a) (emphasis

added)). Since the entities encompassed by the term “group

purchasers” included ERISA plans, the Court determined that

Louisiana’s Health Care Cost Control Act, “and through it the

Any Willing Provider statute, expressly refer[red] to ERISA

plans.” /d. .

Unlike the statute in Cigna, the requirement imposed

by the Ac: does not contain a reference to ERISA plans. The

Act states that health insurance carriers, HMOs, and other

managed care entities have a duty to exercise ordinary care

when making health care treatment decisions. TEX. CIV.

PRAC. & REM. CODE ANN. § 88.002 (West 1998). None of

these enumerated entities constitute ERISA plans since, by

definition, they are not “established or maintained by an

employer or by an employee organization . . . for the purpose

of providing” health care benefits for employees. 29 U.S.C.A.

§ 1002(1) (West Supp. 1998); see TEX. CIV. PRAC. & REM.

CODE ANN. § 88.001 (West 1998).

In this case, the Court finds that, as in 7rave/ers, the

existence of an ERISA plan is not essential to the operation of

the Act. Furthermore, the Act does not work “immediately

and exclusively upon ERISA plans.” Dillingham, 514 U.S. at

—, 1178S. Ct. at 838. Consequently, the Court concludes that

B-33

the Act “cannot be said to make a ‘reference to’ ERISA plans

in any manner.” Travelers, 514 U.S. at 656, 115 S. Ct. at

1677.

Plaintiffs also suggest that the Act explicitly refers to

ERISA plans by its use of the term “health care plan” and

“managed care entity.” (Plaintiff s Motion, Instrument No. 20

at 8). The Act defines “health care plan” as “any plan whereby

a person undertakes to provide, arrange for, pay for, or

reimburse any part of the cost of any health care services.”

TEx. Civ. PRAC. & REM CODE ANN. § 88.001(3) (West

1998). The Act then states that a “managed care entity for a

health care plan” must exercise ordinary care when making

medical decisions. /d. § 88.002(a) (emphasis added). The

phrase “health care plan” cannot be isolated from the term

“managed care entity” simply to create a reference to an

ERISA plan. In this context, “health care plan” cannot

constitute an ERISA plan because a “managed care entity

does not include an employer purchasing coverage or acting

on behalf of its employees[.]” /d. § 88.001(8)

2. “Connection With”

“A law that does not refer to ERISA plans may yet be

pre-empted if it has a ‘connection with’ ERISA plans.”

Dillingham, 519 U.S. at —, 117 S. Ct. at 838. “To determine

whether a state law has the forbidden connection, [the court

looks]. . . both to ‘the objectives of the ERISA statute as a

guide to the scope of the state law that Congress understood

would survive,’ as well as to the nature of the effect of the

state law on ERISA plans.” /d. (quoting 7ravelers, 514 US

B-34

——————EE

at 656, 115 S. Ct. at 1677); see De Buono, 520 US. at —.

117 S. Ct. at 1750 (noting the Court’s rejection of a strictly

literal reading of Section 514(a) and emphasis on the

objectives of the ERISA statute).

Here, Plaintiffs contend that the Act has a “connection

with” ERISA plans in several ways. Plaintiffs claim that the

Act improperly imposes state law liability on ERISA entities,

impermissibly mandates the structure of plan benefits and their

administration, unlawfully binds plan administrators to

particular choices, and wrongfully creates an alternate

enforcement mechanism. (Plaintiffs’ Motion, Instrument No

20 at 9-18).

i. Imposition of State Law Liability

According to Plaintiffs, the “Fifth Circuit has twice

held that attempts to impose state law liability on managed

care entities in ‘connection with’ their ‘health care treatment

decisions’ fall within the scope of the preemption clause.”

(Plaintiffs’ Response, Instrument No. 20 at 10). In particular,

Plaintiffs rely on the Fifth Circuit's decisions in Corcoran v.

United HealthCare, Inc., 965 F.2d 1321 (Sth Cir. 1992), and

Rodriguez v. Pacificare of Tex., Inc., 980 F.2d 1014 (Sth Cir

1993) for this argument

In Corcoran, 965 F.2d at 1331, the Fifth Circuit held

that a Louisiana tort action for the wrongful death of an

unborn child was preempted by ERISA. In that case, United

HealthCare (“United”), the provider of utilization review

services’ to an employee benefit plan, determined that Mrs.

Corcoran’s hospitalization during the final months of her

pregnancy was not necessary despite her doctors’ repeated

recommendations for complete bed rest. /d. at 1322-24. The

contract between United and Mrs. Corcoran’s employer

provided that United would “contact the Participant’s

physician and based upon the medical evidence and normative

data determine whether the Participant should be eligible to

receive full plan benefits for the recommended hospitalization

and the duration of benefits.” /d. at 1331 (quotation omitted).

Contrary to her doctor’s requests, United only authorized ten

hours per day of home nursing care for Mrs. Corcoran. /d. at

1324.

While the nurse was off-duty, the fetus went into

distress and died. /d. Subsequently, the Corcorans brought

suit against United for wrongful death, alleging “that their

unborn child died as a result of various acts of negligence

committed by” the mother’s health plan and United. /d. at

1324.

“Utilization review” is a form of cost-containment service that

“refers to ‘external evaluations that are based on established

clinical criteria and are conducted by third-party payors,

purchasers, or health care organizers to evaluate the

appropriateness of an episode, or series of episodes, of medical

care.”” Corcoran, 965 F.2d at 1323 (quoting Blum, An Analysis

of Legal Liability in Health Care Utilization Review and Case

Management, 26 Hous. L. REV. 191, 192-93 (1989)).

B-36

United argued that the Corcorans’ claims were

preempted by ERISA because its “decision [was] made in its

capacity as a plan fiduciary [and was] about what benefits

were authorized under the [p]lan.” /d. at 1329. According to

United, the company simply applied previously established

eligibility criteria in order to determine whether Mrs. Corcoran

was qualified for the benefits provided by the plan. /d. Thus,

United maintained that, under prevailing ERISA preemption

law, the Corcorans could not “sue in tort to redress injuries

flowing from decisions about what benefits are to be paid

under a plan.” /d. at 1330.

The Corcorans, on the other hand, contended that their

cause of action sought “to recover benefits solely for United's

erroneous medical decision that Mrs. Corcoran did not require

hospitalization during the last month of her pregnancy.” /d. at

1330. Therefore, the Corcorans continued, United’s exercise

of medical judgment fell “outside the purview of ERISA

preemption.” /d.

Unable to agree with either characterization, the Fifth

Circuit concluded that United made “medical decisions . . . in

the context of making a determination about the availability of

benefits under the plan.” /d. at 1331. The Court reasoned

that “United decide[d] ‘what the medical plan... [would] pay

for.” When United’s actions [we]re viewed from this

perspective, it . . . [became] apparent that the Corcorans

[we]re attempting to recover for a tort allegedly committed in

the course of handling a benefit determination.” /d. at 1332

(quoting the Quality Care Program (“QCP”) booklet which

contains a description of the QCP, a cost-containment service

B-37

plan, and the services provided by United). Since United

made the erroneous medical decision as a “part and parcel of

its mandate to decide what benefits [we]re available under the

... plan{,]” the Court concluded that ERISA’s preemption of

“state-law claims alleging improper handling of benefit claims

[wa]s broad enough to cover the cause of action asserted

here.” Jd. “Although imposing liability on United . . . [may]

have the salutary effect of deterring poor quality medical

decisions, . . . [the Court found there was] a significant risk

that state liability rules would be applied differently to the

conduct of utilization review companies in different states.”

Id. at 1333.

Despite its finding of preemption, the Court

acknowledged “the fact that . . . [its] interpretation of the

preemption clause . . . [left] a gap in remedies within a statute

intended to protect participants in employee benefit plans” and

suggested a reevaluation of ERISA. /d. at 1333, 1338-39.

Indeed, the Fifth Circuit recognized that:

[t]he result ERISA compels us to reach means that the

Corcoranshave no remedy, state or federal, for what

may have been a serious mistake. This is troubling for

several reasons. First, if eliminates an important

check on the thousands of medical decisions routinely

made in the burgeoning utilization review system.

With liability rules generally inapplicable, there is

theoretically less deterrence of substandard medical

decision making. Moreover, if the cost of compliance

with a standard of care . . . need not be factored into

utilization review companies’ cost of doing business,

B-38

bad medical judgments will end up being cost-free to

the plans that rely on these companies to contain

medical costs. ERISA plans, in turn, will have one

less incentive to seek companies that can deliver both

high quality services and reasonable prices.

Second, in any plan benefit determination,

there is always some tension between the interest of

the beneficiary in obtaining quality medical care and

the interest of the plan in preserving the pool of funds

available to compensate all beneficiaries... .

Finally, cost containment features such as the

one at issue in this case did not exist when Congress

passed ERISA. While we are confident that the result

we have reached is faithful to Congress’s intent neither

to allow state-law causes of actions that related to

employee benefit plans nor to provide beneficiaries in

the Corcoran’s position with a remedy under ERISA,

the ‘world of employee benefit plans has hardly

remained static since 1974. Fundamental changes

such as the widespread institution of utilization review

would seem to warrant a reevaluation of ERISA so

that it can continue to serve its noble purpose of

safeguarding the interests of employees. Our system,

of course, allocates this task to Congress, not the

courts, and we acknowledge our role today by

interpreting ERISA in a manner consistent with the

expressed intentions of its creators.

B-39

Id. at 1338 (emphasis added).° Since Corcoran, the Supreme

Court has reevaluated the “potentially infinite reach of

‘relations’ and ‘connections’” under ERISA preemption and

has rendered three decisions, namely Travelers, Dillingham,

and De Buono v. NYSA-ILA Med. & Clinical Servs. Fund, 520

U.S. 806, 117 S. Ct. 1747 (1997), that “reveal the proper way

to analyze{ ] ERISA preemption.” American Drug Stores,

Inc. v. Harvard Pilgrim Health Care, Inc., 973 F. Supp. 60,

64-65 (D. Mass. 1997) (quoting 7ravelers, 514 U.S. at 656,

115 S. Ct. at 1677).’

‘The Fifth Circuit also requested further clarification from the

Supreme Court and further legislative action from Congress in

Texas Pharmacy, 105 F.3d at 1039-40. In Texas Pharmacy, the

Court “conclude[d] that the result in that case [wa]s compelled by

the unmistakable breadth of ERISA preemption recognized by the

Supreme Court[.]” /d. at 1040. The Court, however, emphasized

that “[a] different result... [would] require further guidance from

the Supreme Court or further action from Congress.” /d.

"Indeed, in light of the fundamental changes that have taken place

in the health care delivery system, it may be that the Supreme

Court has gone as far as it can go in addressing this arca and it

should be for Congress to further define what nights a patient has

when he or she has been negatively affected by an HMO’s

decision to deny medical care. Congress has begun to examine the

“cost containment” objectives of health plans, referenced in

Corcoran, to determine whether their original intent to disallow

state causes of action related to the denial of benefits is still

reasonable. See Larry Lipman & Rebecca Carr, Rival Bills Aim

to Heal HMO Issues, ATLANTA J. & ATLANTA CONST., July 17,

1998, at Al. “A House Repub!ican task force outlined a bill that

B-40

"

Without the benefit of these recent opinions, the Court

in Corcoran stated that “the fact that states traditionally have

regulated in a particular area is no impediment to ERISA pre-

emption.” 965 F.2d at 1334. As such, the Court did not

begin, as the recent Supreme Court cases did, with the

presumption against preemption where the statute at issue

addresses a historic police power of the states—namely, a

seeks to give patients . . . an appeals process for managed care

decisions... .” /d.

However, in a recent statement regarding H.R. 4250, the

Patient Protection Act, Congressman Pete Sessions indicated the

legislature’s desire to have the judiciary define the scope of

ERISA preemption. 144 CONG. REC. E1471-04 (daily ed. July

30, 1998) (speech of Representative Pete Sessions). Regrettably,

Rep. Sessions sought to “ensure that the Patient Protection Act

neither broaden{ed] nor change[d] the current scope of ERISA

preemption as it [wa]s being developed in the courts.” /d. at

E1472. This statement clearly exemplifies the legislature's

misunderstanding as to the role of the judiciary. The courts can

neither narrow nor broaden the scope of ERISA preemption in a

vacuum. Rather, the courts can only attempt to interpret the

scope of the ERISA preemption clause, as enacted by Congress

some 24 years ago, in light of the congressional intent. Defining

the scope of ERISA preemption is a responsibility delegated to the

legislative branch of government. Interpreting the legislative

intent concerning the scope of ERISA preemption can only be

accomplished by the courts after the legislature has done its job.

If Congress wants the American citizens to have access to

adequate health care, then Congress must accept its responsibility

to define the scope of ERISA preemption and to enact legislation

that will ensure every patient has access to that care.

B-4]

matter of health and safety. See Dillingham, 519 U.S. at —,

117 S. Ct. at 838; De Buono, 520 U.S. at —, 117 S. Ct. at

1751-52; Travelers, 514 U.S. at 653-55, 115 S. Ct. at 1676-

77. Instead, the Court in Corcoran reasoned that “Congress

perhaps could not have predicted the interjection into the

ERISA ‘system’ of the medical utilization review process[,]”

and therefore, concluded that “Congress enacted a preemption

clause so broad and a statute so comprehensive that it would

be incompatible with the language, structure, and purpose of

the statute to allow tort suits against entities so integrally

connected with a plan.” Corcoran, 965 F.2d at 1334

(emphasis added). Although the fact that “the States

traditionally regulated . . . [certain] areas would not

immunize their efforts[,]” since Corcoran, it is clear that there

must be an “indication in ERISA . . . [or] its legislative history

of any intent on the part of Congress to preempt” a

traditionally state-regulated substantive law. Dillingham, 519

U.S. at —, 117 S. Ct. at 840-41 (emphasis added).

Furthermore, in Corcoran, the Court noted that:

[t]he cost of complying with varying substantive

standards would increase the cost of providing

utilization review services, thereby increasing the cost

to health benefit plans of including cost containment

features such as the Quality Care Program (or causing

them to eliminate this sort of cost containment

program altogether) and ultimately decreasing the poo!

of plan funds available to reimburse participants.

965 F.2d at 1333. However, the Supreme Court in 7ravelers

emphasized that an “indirect economic influence .. . does not

B-42

AR Tale

bind a plan administrator to any particular choice and thus

function as a regulation of an ERISA plan itself.” 514 U.S. at

659, 115 S. Ct. at 1679. Moreover,

if ERISA were concerned with any state action—such

as quality of care standards or hospital workplace

regulations—that increased the cost of providing

certain benefits, and thereby, potentially affected the

choices made by ERISA plans, [then] we could

scarcely see the end of ERISA’s pre-emptive reach,

and the words ‘relate to’ would limit nothing.

Dillingham, 519 U.S. at —, 117 S. Ct. at 840 (citing

Travelers, 514 U.S. at 663-64, 115 S. Ct. at 1681).

In light of the Supreme Court’s recent mandate

regarding ERISA preemption analysis, perhaps the Fifth

Circuit would reach a different decision in Corcoran today.

Even so, this Court finds the facts in Corcoran to be

distinguishable from the conduct covered by the Acct.

The plaintiffs in Corcoran filed suit against their HMO

regarding a medical decision made in relation to the denial of

certain plan benefits. \n this case, a suit brought under the

Act would relate to the quality of benefits received from a

managed care entity when benefits are actually provided, not

denied. The Act imposes a duty of ordinary care upon certain

entities when making health care treatment decisions and holds

those entities liable for damages proximately caused by a

failure to exercise that duty. TEX. CIV. PRAC. & REM. CODE

ANN. § 88.002(a) (West 1998). Furthermore, the Act clearly

B-43

“ee

states that a “health care treatment decision” is “a

determination made when medical services are actually

provided by the health care plan and a decision which affects

the quality of the diagnosis, care, or treatment provided to the

plan’s insureds or enrollees.” /d. § 88.001(5) (emphasis

added). Thus, Corcoran is factually distinguishable from the

instant case.°

The facts in Rodriguez v. Pacificare of Tex., Inc., the

other case cited by Plaintiffs for their argument that the Act

wrongfully imposes state law liability on managed care

entities, may be distinguished for the same reason. In

Rodriguez, David Rodriguez (“Rodriguez”) brought a

negligence action against his HMO and his primary care

physician. 980 F.2d at 1016. Rodriguez attempted to seek

medical attention for himself and his children after they were

‘The Court in Corcoran recognized a similar distinction. The

Court discussed Independence HMO, Inc. v. Smith, 733 F.

Supp. 983 (E.D. Pa. 1990), a case in which the district court

held that a malpractice action brought against an HMO was not

preempted by ERISA, and acknowledged that the Smith case

initially appeared to support the Corcorans’ position since “the

plaintiff was attempting to hold an ERISA entity liable for

medical decisions." Corcoran, 965 F.2d at 1333 n.16.

However, the Court distinguished the facts in Smith from the

Corcorans’ situation because “the medical decisions at issue .

. . {in Smith did] not appear to have been made in connection

with a cost containment feature of the plan or any other aspect

of the plan which implicated the management of plan assets, but

were instead made by a doctor in the course of treatment.” /d.

B-44

Oe ee ee Leet

a tor ete we Ven Bik it

involved in an automobile accident. /d Rodriguez believed

that he and his children needed to see an orthopedic surgeon,

but he was unable to obtain the requisite referral letter from

their primary care physician or his HMO. /d Without

obtaining the needed letter, Rodriguez and his family went to

see an orthopedic surgeon who placed Rodriguez ona therapy

program. /d. Rodriguez’s HMO refused to cover the

expenses because Rodriguez had not first obtained approval

for such expenses as required by his plan. Jd Rodriguez

thereafter filed suit against his HMO and primary care

physician “for failing to ‘provide prompt and adequate medical

care and coverage.’” /d. (quoting Rodriguez’s complaint filed

in Texas state court).

The Fifth Circuit determined that Rodriguez's state

law claims were sufficiently related to the employee benefit

plan” because his “claims, at bottom, result(ed] from

dissatisfaction over ... [his HMO’s] handling of his medical

claim.” /d. at 1017. Unlike Rodriguez's claims against his

HMO and primary care physician, a suit brought under the Act

may challenge the quality of benefits actually received without

challenging a denial of benefits or the handling of a medical

claim. A suit addressing the quality of care actually received

is more akin to the claims asserted by plaintiffs in Dukes v.

U.S. Healthcare, Inc., 57 F.3d 350 (3d Cir. 1995) °

*As an additional argument, Defendants suggest that “AEtna is

barred by res judicata from asserting ERISA preemption as a

defense to the quality of care claims embodied in Senate Bill 386.”

(Defendants’ Response, Instrument No. 46 at 19). According to

Defendants, the Dukes case is “res judicata as to AEtna because

B-45

In Dukes, the Third Circuit examined two separate

claims. The first claim involved the death of Darryl Dukes

(“Dukes”). Dukes had several ailments which prompted him

to visit his primary care physician who identified a problem

with his ear. Dukes, 57 F.3d at 352. Later, another doctor

performed surgery on Dukes’s ear and ordered blood tests to

AEtna is the successor in interest to the defendant in Dukes, U.S.

Healthcare.” (/d.). “As the successor in interest to US.

Healthcare after Dukes was decided, [Defendants continuc,]

AEtna was in essence the HMO that lost in Dukes, wherein the

court clearly limited and expressly distinguished the holding of

Corcoran from cases in which the claims are based on the quality

of care provided by the HMOs.” (/d.).

The Fifth Circuit’s “test for res judicata requires that: (1)

The parties be identical in both suits, (2) A court of competent

jurisdiction rendered the prior judgment, (3) There was a final

judgment on the merits in the previous decision, and (4) The

plaintiff raises the same cause of action or claim in both suits.”

In re Howe, 913 F.2d 1138, 1143-44 (Sth Cir. 1990). In this

case, Defendants’ res judicata argument clearly fails to meet the

fourth requirement. Plaintiffs seek a declaration that the Act is

preempted by Section 514(a) of ERISA whereas, in Dukes, 57

F.3d at 351, U.S. Healthcare, Inc. sought a determination that

removal of the plaintiffs’ claims to federal court was proper under

the complete preemption doctrine. Furthermore, in Dukes, the

Third Circuit did not address whether the plaintiffs’ state law

claims were preempted under Section 514(a)—the exact issue in

this case. /d. at 361. Rather, the Court left this issue open for

resolution by the state courts on remand. /d. Consequently, the

Court finds that Aetna is not by barred by res judicata from

arguing that the Act is preempted by ERISA.

B-46

be performed. /d. For some unknown reason, when Dukes

presented the prescription to the laboratory, the hospital

refused to perform the blood tests. /d. On the next day,

Dukes went to see a third doctor who also ordered blood

tests. /d. The hospital performed the tests. Jd. However, by

that time, Dukes’s condition had worsened and he

subsequently died. At the time of his death, Dukes’s blood

sugar level was extremely high—a condition that allegedly

could have been detected through a timely blood test. /d.

The other claim, examined in Dukes, concerned

Ronald and Linda Visconti and their stillborn child. /d. at 353.

The Viscontis maintained that Linda’s obstetrician negligently

ignored symptoms that Linda exhibited during the third

trimester of her pregnancy that were typical of preeclampsia.

Id.

“[T]he plaintiffs in these two cases filed suit in state

court against health maintenance organizations (“HMOs”)

organized by U.S. Healthcare, Inc., claiming damages, under

various theories, for injuries arising from the medical

malpractice of the HMO-affiliated hospitals and medical

personnel.” /d. at 351. The defendant HMOs removed both

cases to federal court based on the “complete preemption

doctrine.”'® /d. at 351. The Court held that since plaintiffs’

"The “complete preemption” exception provides that “Congress

may so completely pre-empt a particular area that anv civil

complaint raising this select group of claims is necessarily federal

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

63-64, 107 S. Ct. 1542, 1546 (1987). “The Supreme Court has

B-47

claims fell outside the scope of the ERISA provision granting

the right to recover benefits and enforce rights due under

terms of the plan or to clarify rights to future benefits then the

compiete preemption doctrine did not permit removal. /d. In

particular, the Court held that “/q/uality control of benefits,

such as health care benefits provided here, is a field

traditionally occupied by state regulation /d. at 357

(emphasis added) (citing 7ravelers, 514 U.S. at 657-59, 115

S. Ct. at 1678-79). The Court then “interpret[ed] the silence

of Congress as reflecting an intent that it remain as such.” /d

This Court finds the discussion in Dukes to be

applicable here.'' The Court, in Dukes, made a distinction

determined that Congress intended the complete-preemption

doctrine to apply to state causes of action which fit within the

scope of ERISA’s civil-enforcement provisions.” Dukes, 57 F.3d

at 354 (quoting Metropolitan Life, 481 U.S. 64-66, 107 S. Ct. at

1547-48).

Plaintiffs claim that this Court cannot rely on the discussion in

Dukes because it is a removal case. (Plaintiffs’ Motion.

Instrument No. 20 at 31). The Court recognizes that a

determination that a claim is not completely preempted under

Section 502(a) of ERISA does not necessarily mean that that

claim is not preempted under Section 514. See Dukes, 57 F.3d at

352 (holding that plaintiffs’ claims are not completely preempted

under Section 502, but remanding the case to the state court for a

determination of whether plaintiffs’ claims are preempted under

Section 514(a)): Rice v. Panchal, 65 F.3d 637, 646 n.10 (7th Cir.

1995). However, the Court finds the Third Circuit's discussion

of state regulation of “quality of care” to be quite relevant to the

B-48

between a claim for the withholding of benefits and a claim

about the quality of benefits received. The Court reasoned

that “[i]nstead of claiming that the welfare plans in any way

withheld some quantum of plan benefits due, the plaintiffs in

both cases complain[ed] about the /ow quality of the medical

treatment that they actually received... .” Id. at 357

(emphasis added). In particular, “Dukes d[id] not allege . __

that the Germantown Hospital refused to perform blood

studies on Darryl because the ERISA plan refused to pay for

those studies. Similarly, the Viscontis d[id] not contend that

Serena’s death was due to their welfare plan’s refusal to pay

for or otherwise provide for medical services.” /d. at 356-57.

In this case, a suit may be brought under the Act that simply

challenges the quality of the benefits received, not a benefit

determination.

Also in Dukes, the Court distinguished the Corcoran

case based on the dual roles that may be assumed by an HMO.

i. Dukes, 57 F.3d at 360-61. The Court emphasized that in

Corcoran, United “only performed an administrative function

inherent in the ‘utilization review’” whereas the defendant

HMOs in Dukes played two roles—the utilization review role

and the role as an arranger for the actual medical treatment for

— plan participants. /d. at 361. “[U]nlike Corcoran, [in Dukes]

there .. . [was] no allegation .. . that the HMOs denied

instant case.

Notably, despite their supposed opposition to removal

cases, Plaintiffs also request this Court to rely heavily on two

other removal cases, Corcoran and Rodriguez.

B-49

anyone any benefits that they were due under the plan.

Instead, the plaintiffs [in Dukes were] . . . attempting to hold

the HMOs liable for their role as the arrangers of their

decedents’ medical treatment.” /d. Likewise, a plaintiff

bringing suit under the Act may seek to hold a HMO liable in

its position as the arranger of poor quality medical treatment,

thereby, avoiding any allegation that the HMO wrongfully

denied benefits under the plan and therefore, any connection

with ERISA."”

Thus, the distinction can be summarized as follows:

Claims challenging the quality of a benefit, as in

Dukes, are not preempted by ERISA. See Pacificare

of Oklahoma, Inc. v. Burrage, 59 F.3d 151, 154 (10th

Cir. 1995) (medical malpractice claim not preempted

by ERISA when issue of doctor’s negligence required

assessment of providing admittedly covered treatment

or giving professional advice). Claims based upon a

failure to treat where the failure was the result of a

"The Third Circuit cautions that “the distinction between quantity

- Of benefits due under a welfare plan and the quality of those

benefits will not always be clear . . . where the benefit contracted

for is health care services rather than money to pay for such

services.” Dukes, 57 F.3d at 358. In some cases, “it may be

appropriate to conclude that the plan participant or beneficiary

has been denied benefits under the plan.” Jd. Such a

determination should be made on a case-by-case basis. See

Schmid v. Kaiser Found. Health Plan of Northwest, 963 F. Supp.

942, 945 n.1 (D. Or. 1997).

B-50

Avie

OSE,

determination that the requested treatment wasn’t

covered by the plan, however, are preempted by

ERISA. Corcoran v. United HealthCare, Inc., 965

F.2d 1312, 1331 (Sth Cir.), cert. denied, 506 US.

1033, 113 S. Ct. 812, 121 L. Ed. 2d 684 (1992)

(medical determinations made by an HMO preempted

by ERISA because made in context of benefits

determination under the plan).

Schmid v. Kaiser Found. Health Plan of Northwest, 963 F.

Supp. 942, 944 (D. Or. 1997).

In this case, the Act addresses the quality of benefits

actually provided. ERISA “simply says nothing about the

quality of benefits received.” Dukes, 57 F.3d at 357. “A

reading of ... [Section] 514(a) resulting in the preemption

of traditionally state-regulated substantive law in. ._ - [an]

area[] where ERISA has nothing to say would be

‘unsettling.”” Dillingham, 519 U.S. at —, 117 S. Ct. at 840

(quoting Travelers, 514 U.S. at 664-65, 115 S. Ct. at 1681).

Furthermore, “the Supreme Court has cautioned that

‘[s]ome state actions may affect employee benefit plans in too

tenuous, remote, or peripheral a manner to warrant a finding

that the law ‘relates to’ the plan.” Cigna, 82 F.3d at 647

(quoting Shaw, 463 U.S. at 100 n.21, 103 S. Ct. 2890, 2901

n.21). For example, “‘run-of-the-mill state-law claims such as

unpaid rent, failure to pay creditors, or even torts committed

by an ERISA plan are not pre-empted.” Corcoran, 965 F.2d

at 1329 (quoting Mackey v. Lanier Collection Agency &

Serv., Inc., 486 U.S. 825, 833, 108 S. Ct. 2182, 2187

B-51

(discussing these types of claims in dicta)). In addition,

“ERISA does not preempt state laws that have ‘only an

indirect economic effect on the relative costs of various health

insurance packages’ available to ERISA-qualified plans” such

as quality standards. Cigna, 82 F.3d at 647 (quoting

Travelers, 514 U.S. at 659-60, 115 S. Ct. at 1680); see

Dillingham, 519 U.S. at —, 117 S. Ct. at 840 (noting that if

ERISA were concerned with any state action, such as medical

care quality standards, that increased costs of providing

certain benefits then courts could scarcely see the end of

ERISA’s preemptive reach); Pacificare, 59 F.3d at 154 (“As

long as a state law does not affect the structure, the

administration, or type of benefits provided by an ERISA plan,

the mere fact that the [law] has some economic impact on the

plan does not require that the [law] be invalidated.”). As

such, the Court finds that “/q]uality control of benefits, such

as the health care benefits provided [by HMOs and other

managed care entities], is a field traditionally occupied by state

regulation and . . . interprets the silence of Congress as

reflecting an intent that it remain such.” Dukes, 57 F.3d at

357 (emphasis added).

Accordingly, the Court concludes that the Act does

not constitute an improper imposition of state law liability on

the enumerated entities.'’

"Plaintiffs also argue that Section 88.002(b) of the Texas Civil

Practice and Remedies Code, as added by the Act, improperly

imposes vicarious liability on the enumerated entities for the

negligent health care treatment decisions of their emplovees,

agents, ostensible agents, or other representatives. (Plaintiff's

B-52

ii Mandating the Structure and

Administration of Plan Benefits

Next, the Court will examine Plaintiffs’ argument that

the Act has a connection with ERISA plans because it

Motion, Instrument No. 20 at 14). Plaintiffs claim that the

Seventh Circuit’s decision in Jass v. Prudential Health Care

Plan, Inc. , 88 F.3d 1482 (7th Cir. 1996), calls for this conclusion.

In Jass, the HMO’s agent determined that physical therapy to

rehabilitate the plaintiff's knee after her surgery was not

necessary. /d. at 1485. After suffering permanent damage to her

knee, the plaintiff filed a negligence claim against the agent and a

vicarious liability claim against the HMO and surgeon. /d. The

Court dismissed the plaintiff's claim against her HMO for

vicarious liability based on the agent’s conduct because her cause

of action was held to be a Section 502(a) denial of benefits claim,

not a quality of care suit. /d. at 1491. Thus, the Jass case is

inapposite since this Court has already determined that a suit may

be brought under the Act that challenges the quality of a benefit

received.

. Furthermore, whether a suit brought under the Act against

an HMO for vicarious liability based on the actions of a doctor

would be preempted should be determined on a case-by-case basis

and would be dependent upon the provisions of the plan and the

claims asserted by the plaintiffs. The Court may or may not be

required to examine the plan to determine the nature of the

relationship between the parties. See e.g., Jass, 88 F.3d at 1493

(dismissing vicarious liability claim against HMO based on

doctor’s conduct because agency relationship was solely a result

of HMO’s health care plan and because claim required

examination of the plan).

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improperly mandates the structure of plan benefits and their

administration in violation of clear Supreme Court authority.

In Travelers, the Court noted that, given the objectives of

ERISA and its preemption clause, Congress intended for

ERISA to preempt “state laws that mandate[] employee

benefit structures or their administration.” 514 U.S. at 658,

115 S. Ct. at 1678. For-example, in Shaw v. Delta Air Lines,

Inc., 463 U.S. 85, 97, 103 S. Ct. 2890, 2900 (1983), the

Court held that a New York statute “which prohibit[ed]

employers from structuring their employee benefit plans in a

particular manner that discriminate[d] on the basis of

pregnancy .. . {and another statute] which require[d]

employers to pay employees specific benefits . . . clearly

‘relate(d] to’ benefit plans.” ERISA preempted these New

York statutes because their “mandates affecting coverage

could have been honored only by varying the subjects of a

plan’s benefits whenever New York law might have applied,

or by requiring every plan to provide all beneficiaries with a

benefit demanded by New York law if New York law could

have been said to require it for any one beneficiary.”

Travelers, 514 U.S. at 657, 115 S. Ct. at 1678. Therefore,

“absent preemption, benefit plans would have been subjected

to conflicting directives from one state to the next.” Coyne &

Delany Co. v. Selman, 98 F.3d 1457, 1468 (4th Cir. 1996)

(citing Shaw, 463 U.S. at 99, 103 S. Ct. at 2901).

Plaintiffs claim that the Act “imposes a ‘negligence’

standard of review on HMOs and PPOs... in contravention

of the federally mandated abuse of discretion standard of

review ofa factual benefit determination under ERISA[,]” and

“purports to re-define the standard for ‘appropriate and

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medically necessary’ as it pertains to ERISA plans.”

(Plaintiffs’ Motion, Instrument No. 20 at 15).

With respect to Plaintiffs’ first contention, the Court

reiterates its conclusion that a suit may only be brought under

the Act that challenges the quality of care received, not a

benefit determination. Such a claim would not implicate the

abuse of discretion standard required under ERISA for factual

benefit determinations. See Pierre v. Connecticut Gen. Life

Ins. Co., $32 F.2d 1552, 1562 (Sth Cir. 1991) (holding that

“for factual determinations under ERISA plans, the abuse of

discretion standard of review is the appropriate standard”’).

Whether a claim brought under the Act seeks a review of a

plan administrator's factual benefit determination rather than

a review of a medical decision should be examined by the

Court on a case-by-case basis. At that time, the Court could

determine whether or not the particular claim conflicts with

the standard of review provided under ERISA.

Plaintiffs also claim that the Act wrongfully purports

to redefine the standard for “appropriate and medically

necessary” as it pertains to ERISA plans. (Plaintiffs’ Motion.

Instrument No. 20 at 15). Section 88.001(1) of the Texas

Civil Practice and Remedies Code, which was added by the

Act, defines “appropriate and medically necessary” as “the

standard for health care services as determined by physicians

and health care providers in accordance with the prevailing

practices and standards of the medical profession and

community. TEX. CIV. PRAC. & REM. CODE ANN. § 88.001(1 )

(West 1998). Plaintiffs contend that “[t]his imposed definition

of medical necessity is different from that contained in many

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ERISA plans.” (Plaintiffs’ Motion, Instrument No. 20 at 15).

Since Plaintiffs’ health care plans purportedly confer authority

upon the plan administrator to make coverage determinations

in accordance with the terms of the plan, Plaintiffs argue that

the Act’s definition of “appropriate and medically necessary”

changes “the terms of employee benefit plans and restrict[s]

the ability of plans to deny claims based upon medical

necessity or other terms defined in the plan.” (/d. at 16).

With respect to the Act’s definition of when a health

care benefit is “appropriate and medically necessary,” the

Court must examine this term in conjunction with the

procedure provided by the Act for the review of claims

relating to an adverse benefit determination by an independent

review organization (“IRO”). Section 88.003 of the Texas

Civil Practice and Remedies Code, as added by the Act,

provides the following:

(a) A person may not maintain a cause of action

under this chapter against a health insurance carrier,

health maintenance organization, or other managed

care entity that is required to comply with the

utilization review requirements of Article 21.58A,

Insurance Code, or the Texas Health Maintenance

Organization Act (Chapter 20A Vernon’s Insurance

Code), unless the affected insured or enrollee or the

insured’s or enrollee’s representative:

(1) has exhausted the appeals and review

applicable under the utilization review

requirements; or

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(2) before instituting the action:

(A) gives written notice of the

claim as provided by Subsection (b):

and

(B) agrees to submit the claim toa

review by an independent review

organization under Article 21.58,

Insurance Code, as required by

Subsection (c).

(b) the notice required by Subsection (a)(2)(A)

must be delivered or mailed to the health insurance

carrier, health maintenance Organization, or other

managed care entity against whom the action is made

not later than the 30th day before the date the claim is

filed.

(c) The insured or enrollee or the insured’s or

enrollee’s representative must submit the claim to a

review by an independent review organization if the

health insurance carrier, health maintenance

organization, or managed care entity against whom

the claim is made requests the review not later than

the 14th day after the date notice under Subsection

(a)(2)(A) is received by the health insurance Carrier,

health maintenance Organization, or other managed

care entity. If the health insurance Carrier, heaith

maintenance organization, or other managed care

entity does not request the review within the period

specified by this subsection, the insured or enrollee or

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the insured’s or enrollee’s representative is not

required to submit the claim to independent review

before maintaining the action.

(d) Subject to Subsection (e), if the enrollee has

not complied with Subsection (a), an action under this

section shall not be dismissed by the court, but the

court may, in its discretion, order the parties to

submit to an independent review or mediation or other

nonbinding alternative dispute resolution and may

abate the action for a period of not to exceed 30 days

for such purposes. Such orders of the court shall be

the sole remedy available to a party complaining of an

enrollee’s failure to comply with Subsection (a).

(e) The enrollee is not required to comply with

Subsection (c) and no abatement or other order

pursuant to Subsection (d) for failure to comply shall

be imposed if the enrollee has filed a pleading alleging

in substance that:

(1) harm to the enrollee has already

occurred because of the conduct of the health

insurance carrier, health- maintenance

Organization, or managed care entity or

because of an act or omission of an employee,

agent, ostensible agent, or representative of

such carrier, organization, or entity for whose

conduct is liable under Section 88.002(b); and

~*~

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(2) the review would not be beneficial to the

enrollee, unless the court, upon motion by a

defendant carrier, Organization, or entity finds

after that such pleading was not made in good

faith, in which case the court may enter an

order pursuant to Subsection (d).

(f) If the insured or enrollee or the insured’s or

enrollee’s representative seeks to exhaust the appeals

and review or Provides notice, as required by

Subsection (a), before the statute of limitations

applicable to a claim against a managed care entity has

expired, the limitations period is tolled until the later

of:

(1) the 30th day after the date the insured

or enrollee or the insured’s or enrollee’s

representative has exhausted the process for

appeals and review applicable under the

utilization review requirements; or

(2) the 40th day after the date the insured

or enrollee or the insured’s or enrollee’s

representative gives notice under Subsection

(a)(2)(A).

(g) This section does not prohibit an insured or

enrollee from pursuing other appropriate remedies,

including injunctive relief, a declaratory judgment, or

relief available under law, if the requirement of

exhausting the process for appeal and review places

the insured’s or enrollee’s health in serious jeopardy.

TEX. CIV. PRAC. & REM. CODE ANN. § 88.003 (West 1998)

(emphasis added).

In addition, the Act amended and added several

provisions to the Texas Insurance Code that address specific

responsibilities of an HMO and further explain and define the

procedure for independent review of an adverse benefit

determination by an IRO. See TEX. INS. CODE ANN. arts.

20A.09, 20A.12, 20A.12A, 21.58A, and21.58C (West 1998).

Article 20A.09, which was amended by the Act, now requires

an HMO to issue evidence of coverage to an enrollee that

describes “the enrollee’s right to appeal denials of an adverse

determination . . . to an independent review organization.”

TEX. INS. CODE ANN. art. 20A.09(e)(4) (West 1998).

Under the amendments to Article 20A. 12 of the Texas

Insurance Code, every HMO must establish a complaint

system that provides for the “resolution of oral and written

complaints initiated by enrollees concerning health care

services.” /d. art. 20A.12(a). The complaint system

mandated by Article 20A.12 has several requirements that

reference the IRO procedure. Specifically, Article 20A.12A,

which was also added by the Act, states that the complaint

system must include:

(1) notification to the enrollee of the enrollee’s

right to appeal an adverse determination to an

independent review organization;

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(2) notification to the enrollee of the procedures

for appealing an adverse determination to an

independent review organization; and

(3) notification to an enrollee who has a life-

threatening condition of the enrollee’s right to

immediate review by an independent review

organization and the procedures to obtain that review.

Id. arts. 20A.12A(a) and (b). Article 20A.12A then defines

“adverse determination,” “independent review organization,”

and “life-threatening condition.” /d. art. 20A. 12A(c).

The Act also amends Article 21.58A Section 6 of the

Texas Insurance Code. If the appeal of an adverse

determination is denied, Section 6 now requires the utilization

review agent to submit a clear and concise Statement to the

appealing party informing him of his “right to seek review of

the denial by an independent review Organization under

Section 6A .. . and the procedures for obtaining that review.”

Id. art. 21.58A(6)(b)(5)(C). Furthermore, if the enrollee is -

faced with a life threatening condition then he “is entitled to an

immediate appeal to an independent review organization as

provided by Section 6A[.]” /d. art. 21 .S8A(6)(c).

Furthermore, the Act adds a new section 6A to Article

21.58A of the Texas Insurance Code which outlines the

utilization review agent’s responsibilities with respect to the

independent review of adverse determinations. Id. art.

21.58A(6A). In particular, Section 6A of Article 21.58A

provides that:

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A utilization review agent shall:

(1) permit any party whose appeal of an adverse

determination is denied by the utilization review agent

to seek review of that determination by an independent

review organization assigned to the appeal in

accordance with Article 21.58C of this code;

(2) __ provide to the appropriate independent review

organization not later than the third business day after

the date that the utilization review agent receives a

request for review a copy of.

(A) any medical records of the enrollee that

are relevant to the review;

(B) any documents used by the plan in

making the determination to be reviewed by

the organization;

(C) the written notification described in

Section 6(b)(5) of this article;

(D) any documentation and _ written

information submitted to the utilization review

agent in support of the appeal; and

(E) alist of each physician or health care

provider who has provided care to the enrollee

and who may have medical records relevant to

the appeal,

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(3) comply with the independent review

Organization’s determination with respect to the

medical necessity or appropriateness of health care

items and services for an enrollee; and

(4) __ pay for the independent review.

Id. art. 21.58A(6A). Notably, under Article 20A. 12A, the

provisions in Article 21.58A that relate to independent review,

namely Section 6A, apply to an HMO as if the HMO were a

utilization review agent. /d. art. 20A.12A(b). Moreover,

given the addition of the IRO procedure by the Act, Section

8 of Article 21.58A now provides that “[c]onfidential

information in the hands of a utilization review agent may be

provided to an independent review Organization” subject to

the rules and standards already in effect under the Texas

Insurance Code. /d art. 21.58A(8)(f).

Lastly, the Act added Article 21.58C to the Texas

Insurance Code. This section outlines the standards for

independent review organizations, such as certification

requirements. /d. art. 21.58C. For example, Article 21.58C

explains the Commissioner of the Texas Insurance Board’s

responsibilities for the certification and designation of

independent review organizations and how an entity may be

certified as an independent review Organization. /d

Plaintiffs argue that an administrator’ s determination

as to “whether a claim for benefits is covered under the

medical necessity definition contained in the plan implicates an

interpretation of a plan’s term.” (Plaintiffs’ Motion,

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Instrument No. 20 at 16). Therefore, Plaintiffs continue, the

Act which contains these procedures for an independent

review of a benefit determination is preempted because it

mandates the structure and administration of benefits.

In response, Defendants maintain that “the IRO is

geared solely to corporate determinations of ‘medical

necessity,’ the practice of medicine admittedly being a non-

preempted traditional area of state regulation.” (Defendants’

Response, Instrument No. 46 at 11). Defendants also explain,

and Plaintiffs do not dispute, that “[o}]nly when AEtna, or

another managed care entity, makes adverse determinations

that benefits are not medically necessary [do] the IRO

provisions [become applicable].” (/d. at 14). According to

Defendants, “the only possible HMO action that could be

called a ‘benefit determination’ which could ever be grounds

for action under the IRO provisions of . . . [the Act] are

‘adverse determinations.’ Adverse determinations are

necessarily limited to ‘medical necessity’ decisions[.]” (/d. at

12).

In Travelers, the Supreme Court provided guidance as

to the scope of plan administration that Congress intended to

protect from state interference. 514 U.S. at 657-68, 115 S.

Ct. at 1678. The Court discussed

earlier decisions which held various state statutes

preempted for “mandat[ing] employee benefit

structures or their administration.” . . . The Court

[also] explained that ERISA preempted the statutes at

issue in Shaw because they imposed “mandates

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affecting coverage” which directly affected the benefit

structures which ERISA plans could offer... . The

law at issue in FMC Corp. v. Holliday interfered with

benefit calculations; by prohibiting plans from

obtaining subrogation, the law frustrated any attempt

at providing uniform national benefits... . In Alessi v.

Raybestos-Manhattan, Inc.,.. . ERISA preempted a

statute which prohibited plans from using a method of

calculating benefits permitted by federal law... | In

each of these cases, the [Supreme] Court was

concerned with administrative and structural matters

central to the administration of ERISA plans

themselves.

American Drug, 973 F. Supp. at 68 (emphasis added)

(quoting Travelers, 514 U.S. at 657-58, 115 S. Ct. at 1677-

78). The Act’s use of independent review process implicates

the “limited range of administrative functions which are part

of operating an employee benefit plan[,]” namely determining

the eligibility of claimants. American Drug, 973 F. Supp. at

66; see Fort Halifax, 482 U.S. at 8-9, 107 S. Ct. 2211, 2216

(1987).

Furthermore, the Act’s definition of “appropriate and

medically necessary” along with the provisions under Section

88.003 for reviewing an adverse determination by an IRO and

the further clarification of the IRO procedure and

requirements in Articles 20A.09(4), 20A. I2A, 21.58A(6),

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(6A), and (8)(f) and 21.58C" are akin to the situation

addressed by the Fifth Circuit in Corcoran. In Corcoran, the

Court recognized that United gave medical advice, but

emphasized that such advice was made or given while

administering the benefits under the plan. 965 F.2d at 1331.

Consequently, since ERISA preempts state law causes of

action alleging the improper handling of benefit claims, the

Corcorans’ state law claims were preempted by ERISA

because part of “United’s actions involve(d] benefit

determinations.” /d. at 1332. As in Corcoran, by

participating in the separate review process provided for under

the Act, an insured or enrollee is seeking a review of a benefit

determination. Moreover, under Article 21.58A of the Texas

Insurance Code, a utilization review agent must comply with

the IRO’s determination and must pay for the review. TEX.

INS. CODE ANN. arts. 21.58A(6A)(3) and (4) (West 1998).

Allowing state based procedures for independent

review of an adverse benefit determination, like the one at

issue here, “would subject plans and plan sponsors to burdens

not unlike those that Congress sought to foreclose through -

.. [Section] 514(a). Particularly disruptive is the potential for

conflict in state law. . .. Such an outcome is fundamentally at

odds with the goal of uniformity that Congress sought to

“As mentioned, Article 20A.12 of the Texas Insurance Code

requires HMOs to maintain both an oral and a written complaint

system. TEX. INS. CODE ANN. art. 20A.12 (West 1998). This

article does not discuss the IRO procedure that is addressed by the

other amendments.

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implement.” /ngersoll-Rand, 498 US. at 142, 111 S. Ct. at

484.

Consequently, as explained by the Supreme Court in

Travelers, 514 U.S. at 657, 115 S. Ct. at 1677-78, the Court

finds that the provisions for an independent review improperly

mandate the administration of employee benefits and

therefore, have a connection with ERISA plans. See Coyne,

98 F.3d at 1468 (indicating that state laws which mandate

employee benefit structures or their administration have a

connection with ERISA plans). “Congress intended ERISA

to preempt state laws[,] [such as the IRO provisions in the

Act,] that ‘mandate[] employee benefit structures or their

administration.” /d. (quoting Travelers, 514 U.S. at 658, 115

S. Ct. at 1678). However, the Court finds that the relevant

language in Section 88.003 of the Texas Civil Practice and

Remedies Code, the relevant language added by the Act in

Articles 20A.09(e)(4), 21 .58A(6)(b)(5), and 21.58A(6)(c) of

the Texas Insurance Code, and that Articles 20A. 12A,

21.58A(6A), 21.58A(8)(f), and 21.58C of the Texas Insurance

Code, all addressing the IRO procedure, can be severed from

the Act without affecting the other provisions or conflicting

with the legislative intent.

“Whether portions of a state statute found to

contravene federal law are severable is a question of state

law.” Texas Pharmacy, 105 F.3d at 1039. The Texas Code

Construction Act provides that:

[iJn a statute that does not contain a provision for

severability or nonseverability, if any provision of the

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statute or its application to any person or circumstance

is held invalid, the invalidity does not affect other

provisions or applications of the statute that can be

given effect without the invalid provision or

application, and to this end the provisions of the

statute are severable.

TEX. GOV’T CODE ANN. § 311.032(c) (West 1988); see also

TEX. GOV’T CODE ANN. § 312.013 (a) (West 1988) (providing

the same standard). Thus, “[u]nder the Texas Code

Construction Act, a Texas statute should be deemed severable

if the invalidity of one provision does not affect the other

provisions, unless it has an express provision for severability

or nonseverability.” Texas Pharmacy, 105 F.3d at 1039; see

In re Johnson, 554 S.W.2d 775, 787 (Tex. Civ.

App.—Corpus Christi, 1977, writ ref'd n.r.e.) (noting that

where invalid sections on an act may be separated, the court

“must do so and not permit the invalid part to destroy the

whole law”). However, the court should “sustain the

remainder only if the result is consistent with the original

legislative intent.” Black v. Dallas County Bail Bond Bd.,

882 S.W.2d 434, 437 (Tex. Civ. App.—Dallas 1994, no writ);

see Anderson v. Wood, 152 §.W.2d 1084, 1087 (Tex. 1941)

(concluding that the whole statute was void because the

remainder, by reason of its generality, would have given the

act a broader scope than was intended by the legislature).

In this case, the Act does not have an express

provision for severability or nonseverability of the statute.

Furthermore, an examination of the legislative history of the

Act reveals the dual purpose that the legislature sought to

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achieve with the passage of- the Act. Specifically, the

legislature sought to address two distinct issues: quality of

care and denial of care. With respect to quality of care, the

Act establishes a standard of care for HMOs and other

managed care entities and allows participants to sue an HMO

or a managed care entity for negligent medical decisions.

(Index of Legislative History-Testimony of Rep. Smithee.

Instrument No. 17, Exh. A at AGOI585 and Exh B at

AG01607). With regard to denial of care, the Act creates an

independent review process that reviews adverse benefit

determinations by an HMO or a managed care entit y (/d2.)In

particular, as a prerequisite to filing a lawsuit under the Act,

a participant would “be able to get an independent review [of

his or her HMO’s denial of coverage] by a doctor [in order] to

try and get the care” that he or she needs. (Index of

Legislative History-Testimony of Rep. Smithee, Instrument

No. 17, Exh. B at AGO1607). Thus, the Court finds that it

was Clearly the intent of the legislature to address both the

quality of care issue and the denial of care issue under the Act.

The Court has already determined that the IRO

provisions concern the review of an adverse benefit

determination and are therefore, an improper mandate of

benefit administration. As such, the IRO provisions and, in

particular, the relevant language in Section 88.003 of the

Texas Civil Practice and Remedies Code, the relevant

language added by the Act in Articles 20A.09(e)(4),

21.58A(6)(b)(5), and 21.58A(6)(c) of the Texas Insurance

Code, and Articles 20A.12A, 21.58A(6A), 21.58A(8)(f), and

21.58C of the Texas Insurance Code would have no effect on

lawsuits that may be brought under the Act challenging the

B-69

quality of a benefit that an individual has actually received.

The Court can still give effect to the provisions of the Act that

only address quality of care. In other words, even without

these sections which address the IRO procedure, suits

addressing the quality of a benefit may still be brought under

the Act against an HMO or other managed care entity. This

goal under the Act—quality of care—is separate and distinct

from the independent review process which solely addresses

adverse benefit determinations by a plan administrator or

utilization review agent. Thus, upholding the other provisions

of the Act is consistent with the legislative intent. Moreover,

where the invalid sections of an act may be separated, the

Court “must do so and not permit the invalid part to destroy

the whole.” /n re Johnson, 554 §.W.2d at 787. Therefore,

since the Act can still be given effect without these sections,

the Court finds that they may be severed from remainder of

the Act.

iii. Binding Employers or Plan Administrators

to Particular Choices

The Court agrees with Plaintiffs’ next argument that,

under existing Fifth Circuit authority, certain provisions in the

Act bind employers or plan administrators to particular

choices. In Cigna, the Fifth Circuit held that the statute had

a connection with ERISA plans because it required “ERISA

plans to purchase benefits of a particular structure when they

contracted with organizations like CIGNA and CGLIC.” 82

F.3d at 648. The Court reasoned that:

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ERISA plans that choose to offer coverage by PPOs

. are limited by the statute to using PPOs of a certain

- Structure—i.e., a structure that includes every willing,

licensed provider. Stated another way, the statute

prohibits those ERISA plans which elect to use PPOs

from selecting a PPO that does not include any willing,

licensed provider. As such, the statute connects with

ERISA plans.

Id. Furthermore, the Court found that it was “sufficient for

preemption purposes that the statute eliminate[d] the choice

of one method of structuring benefits.” /d.; cf Dillingham,

519 U.S. at —, 117 S. Ct. at 842 (holding that prevailing

wage statute is not preempted by ERISA because statute

merely “alters the incentives. . but does not dictate the

choices, facing ERISA plans”).

Later, in Texas Pharmacy Ass'n v. Prudential Ins. Co.

of Am., the Fifth Circuit relied on its opinion in Cigna and

determined that Texas’s Any Willing Provider statute was

preempted by ERISA. 105 F.3d at 1037 The Court

explained that “[a]s with the Louisiana Statute at issue in

Cigna, the Texas statute relates to ERISA plans because it

‘eliminates the choice of one method of structuring benefits,’

by prohibiting plans from contracting with pharmacy networks

that exclude any willing provider.” /d (citing Cigna, 82 F.2d

at 648).

Based on the Fifth Circuit’s holding in Cigna and

Texas Pharmacy, the Court finds that the Act creates two

provisions that bind employers or plan administrators to

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particular choices—Sections 88.002(f) and (g) of the Texas

Civil Practice and Remedies Code.'* Section 88.002(f)

provides that:

[a] health insurance carrier, health maintenance

organization, or managed care entity may not remove

a physician or health care provider from its plan or

refuse to renew the

physician or health care provider with its plan for

advocating on behaif ofan enrollee for appropriate and

medically necessary health care for the enrollee.

'sPlaintiffs also argue that Section 88.002(b) of the Texas Civil

Practice and Remedies Code, as added by the Act, “purports to

transform the independent contractor relationship [it has with

certain providers] into one of agency, express or implied, in

contravention of the express terms of the contract.” (Plaintiffs’

Motion, Instrument No. 20 at 17). Under Section 88.002(b), the

named entities are held liable for a negligent health care treatment

decision made by its emplovees, agents, ostensible agents, or other

representatives. TEX. CIV. PRAC & REM. CODE ANN. § 88.002(b)

(West 1998). To the extent that certain providers are independent

contractors, not agents of the HMO, then the court should address

that concern on a case-by-case basis. Other suits against a

managed care entity for vicarious liability, such as those based on

the conduct of an HMO’s emplovee, are still viable. Furthermore,

even assuming that Plaintiffs’ argument is valid, this consequence

does not deny the named entities the right to structure their

benefits in a particular manner—they still have the option to

employ providers only as independent contractors.

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TEX. CIV. PRAC. & REM. CODE ANN. § 88.002(f) (West 1998)

(emphasis added). Section 88.002(g) states that:

[a] health insurance carrier, health maintenance

Organization, or managed care entity may not enter

into a contract with a physician, hospital, or other

health care provider or pharmaceutical company

which includes an indemnification or hold harmless

clause for the acts or conduct of the health insurance

carrier, health maintenance Organization, or other

managed care entity. Any such indemnification or

hold harmless clause in an existing contract is hereby

declared void.

Id. § 88.002(g) (emphasis added).

Thus, in the instant case, ERISA plans that choose to

offer coverage by either a health insurance carrier, HMO, or

other managed care entity are limited by the Act to using an

entity of a certain Sstructure—i.e., a structure that does not

remove a physician or health care provider from its plan for

advocating on behalf of an enrollee for appropriate and

medically necessary health care and a structure that does not

include a prohibited indemnification or hold harmless clause

In other words, the Act prohibits ERISA plans from using a

managed care entity that does not conform to the

requirements in these provisions. By denying health insurance

carriers, HMOs, and other managed care entities the right to

structure their benefits in a particular manner, the Act

effectively requires ERISA plans to purchase benefits of a

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particular structure when they contract with organizations like

Plaintiffs. See Cigna, 82 F.3d at 648.

Since these provisions require ERISA plans to

purchase benefits of a particular structure they essentially

cause the Act to have a “connection with” such plans.'°

'*The decisions in Cigna and Texas Pharmacy clearly hold that

these type of provisions have a connection with ERISA plans.

Thus, as stated by the Fifth Circuit in Texas Pharmacy, this Court

notes that “a different result will require further guidance from the

Supreme Court or further action from Congress.” 105 F.3d at

1040.

A recent district court case from Massachusetts, however.

noted that “where a third-party, such as a carrier, provides

administrative services for a plan, it is critical to distinguish

between the carrier’s administration of the ERISA plan and ‘its

own administration of its business.” American Drug, 973 F.

Supp. at 68. In American Drug Stores, Inc. v. Harvard Pilgrim

Health Care, Inc. , the Court determined that Massachusetts’ Any

Willing Provider statute did not have a connection with ERISA

plans because it did not mandate emplovee benefit structures or

administration. Jd. at 69. The Court, therefore, found that the

statute was not preempted by ERISA. /d. The Court reasoned

that “the organization and offering of restricted pharmacy

networks should be seen as part of the carrier's own

administration rather than its administration of ERISA plans.” /d.

at 68. The Massachusetts statute, the Court continued, did not

concern administrative and structural matters central to the

administration of ERISA plans themselves.” /d. Furthermore.

even more recently, in Washington Physicians Serv. Ass'n v.

Gregoire, No. 97-35536, 1998 WL 318759, *4 (9th Cir. June

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However, the Court finds that these provisions may be severed

from the remainder of the statute.

Although these provisions at issue would clearly serve

to enhance the quality of care that could be provided, the

absence of these sections from the Act does not affect the

otherwise valid provisions concerning quality of care. A suit

may still be brought under the Act challenging the quality of

a benefit actually received. Moreover, upholding the validity

of the remainder of the Act is in accord with the legislative

18, 1998), the Ninth Circuit stated that:

[t]he mere fact that many ERISA plans choose to buy

health insurance for their plan members does not cause a

regulation of health insurance to automatically ‘relate to’

an employee benefit plan—just as a plan’s decision to

buy an apple a day for every employee, or to offer

employees a gym membership, does not cause all state

regulation of apples and gyms to ‘relate to’ emplovee

benefit plans.

Although the Courts in both American Drug and

Washington Physicians present convincing arguments, this Court

must find that Sections 88.002(f) and 88.002(g) of the Texas Civil

Practice and Remedies Code have a connection with ERISA plans

in light of current Fifth Circuit authority. A different result will

require Congress to act on the promise to ensure that ““[nJo

human being in need of legitimate care should be stopped from

getting it.’” Larry Lipman & Rebecca Carr, Rival Bills Aim to

Heal HMO Issues, ATLANTA J. & ATLANTA CONST., July 17,

1998, at Al (quoting a statement made by House Speaker Newt

Gingrich at the George Washington University Medical Center).

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intent. The floor debates as well as the testimony, in support

of the Act, given before the Senate Interim Committee on

Managed Care and Consumer Protections and the Senate

Economic Development Committee reveal the proponents’

and the legislature’s concern over managed care entities and

the lack of quality care. (Index of Legislative History,

Instrument Nos. 14, 16). Eventhough these provisions clearly

were designed to promote quality medical care, this goal care

be given effect without these invalid provisions and

accordingly, the Court finds that they may be severed from the

Act.

iv. Alternate Enforcement Mechanism

Lastly, Plaintiffs argue that the liability sections created

by the Act, Sections 88.002(a) and (b) of the Texas Civil

Practice and Remedies Code, purport to create an alternate

enforcement mechanism. (Plaintiffs’ Surreply, Instrument No.

53 at 6).

State laws that provide “alternate enforcement

mechanisms [for employees to obtain ERISA plan benefits]

also relate to ERISA plans, triggering pre-emption.”

Travelers, 514 U.S. at 658, 115 S. Ct. at 1678; Coyne, 98

F.3d at 1468 (noting Congress’ intent to preempt state laws

that provide alternate enforcement mechanisms for employees

to obtain ERISA plan benefits). In this case, the Court has

already determined that the liability sections of the Act,

namely Sections 88.002(a) and (b) of the Texas Civil Practice

and Remedies Code, provide a cause of action for challenging

the quality of benefits received. Such a lawsuit would not

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create an alternate enforcement mechanism for employees to

obtain ERISA benefits. See Dukes, 57 F.3d at 360-361

(distinguishing between an HMO’s denial of plan benefits and

an HMO’s role as the arranger of a participant’s medical

treatment which implicates the quality of care that a

participant receives). Rather, it would ensure the quality of

care that employees actually receive. Whether a claim seeks

a review of an adverse benefit determination or to secure

quality coverage should be determined by the Court ona case-

by-case-basis. See Schmid, 963 F. Supp. at 945 n.1 (noting

that a “determination of whether or not a particular claim is

preempted by ERISA must be made ona case-by-case basis”).

It is not apparent to the Court that every claim that may be

asserted under the Act would establish an alternate

enforcement mechanism for benefit determinations

Based on the foregoing analysis, the Court holds that

Plaintiffs have not met their burden of proving that every claim

brought under the Act would be preempted by ERISA. Even

though some economic impact may result, a claim concerning

the quality of a benefit actually received would remain valid.

Vil. FEHBA Preemption

Plaintiffs finally argue that the Act is preempted by

FEHBA. In response, Defendants maintain that “FEHBA

preemption applies only when there exists a conflict between

the particular state law being relied upon in litigation and

contractual provisions in a FEHBA policy ‘which relate to the

nature or extent of coverage of benefits.” (Defendants’ Brief.

Instrument No. 1 | at 36). According to Defendants, Plaintiffs

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fail “to set forth any facts alleging any particular FEHBA

policy or contract language conflicting with” the Act. (/d.).

Conversely, Plaintiffs argue that FEHBA preemption

is required given the Fifth Circuit’s decision in Burkey v. Gov't

Employees Hosp. Ass'n, 983 F.2d 656 (Sth Cir. 1993).

Plaintiffs contend that Defendants’ argument, raised by the

plaintiffs in Burkey, was clearly rejected by the Fifth Circuit.

As with ERISA, FEHBA provides that state law may

be preempted. However, “FEHBA preemption is far more

narrow than that of’ ERISA. Arnold v. Blue Cross & Blue

Shield of Texas, Inc., 973 F. Supp. 726, 732 (S.D. Tex.

1997). Congress expressed its intent to pre-empt state law

under FEHBA in 5 U.S.C.A. § 8902(m)(1) (West Supp.

1996), which states that:

_ [t]he provisions of any contract under this chapter

which relate to the nature or extent of coverage or

benefits (including payments with respect to benefits)

shall supersede and preempt any State or local law, or

regulation issued thereunder, to the extent that such

law or regulation is inconsistent with such contractual

provisions.

This language makes it clear “that Congress did not intend for

state law to be entirely pr

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