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Slouching Toward Managed Care Liability: Reflections on Doctrinal Boundaries, Paradigm Shifts, and Incremental Reform

Published online by Cambridge University Press:  01 January 2021

Wendy K. Mariner
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Following the seemingly endless debate over managed care liability, I cannot suppress thoughts of Yeats’s poem, “The Second Coming.” It is not the wellknown phrase, “Things fall apart; the centre cannot hold,” that comes to mind; although that could describe the feeling of a health-care system unraveling. The poem’s depiction of lost innocence — “The best lack all conviction, while the worst/Are full of passionate intensity” — does not allude to the legislature, the industry, the public, or the medical or legal profession. What resonates is the poem’s evocation of humanity’s cyclical history of expectation and disappointment, with ideas as grand as justice and occupations as pedestrian as managed care. Writing in 1919, Yeats described the end of an era with images of war’s destructive forces. The poem expresses a universal desire for some miraculous rebirth or resolution of all problems: “Surely some revelation is at hand.” But instead, the brutish Sphinx-like creature emerges, possibly the Antichrist. New gods displace old gods in the cycle of civilization, and man must muddle on.

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Journal of Law, Medicine & Ethics , Volume 29 , Issue 3-4 , Fall Winter 2001 , pp. 253 - 277
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Copyright © American Society of Law, Medicine and Ethics 2001

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ERISA § 502(a) authorizes participants in ERISA plans to bring suit against the plan in federal court for denying plan benefits or improper processing of benefit claims. 29 U.S.C. § 1332(a). See, e.g., Velez v. Prudential Health Care Plan of New York, Inc., 943 F. Supp. 332 (S.D.N.Y. 1996). However, the remedy for successful suits has been interpreted to be limited to the cost of the benefit — the amount payable to the provider for a diagnostic test, hospitalization, or treatment — and not to include damages for personal injury, such as lost income, additional medical expenses, or non-economic losses. The vast majority of courts have found that ERISA provides an exclusive federal remedy for patient claims of benefit denial. State law causes of action for benefit denials are therefore completely preempted by ERISA, and no claim for additional damages may be brought in state court. See, e.g., Bast v. Prudential Insurance Co. of America, 150 F.3d 1003 (9th Cir. 1998); Turner v. Fallon Community Health Plan, 127 F.3d 196 (1st Cir. 1997), cert. denied, 523 U.S. 1072 (1998). However, what counts as a benefit denial remains controversial. See discussionGoogle ScholarGoogle Scholar
Claims of personal injury caused by physician malpractice have been generally held to be actionable under negligence or medical malpractice law in state courts. These are not completely preempted because ERISA provides no remedy for such claims. Managed care organizations that provide benefits under ERISA plans have attempted to dismiss such claims on the grounds that they are subject to conflict preemption under ERISA § 514(a), which preempts any state law that “relates to” an ERISA plan. In other words, § 514(a) provides a defense to a state law cause of action, but does not provide a federal remedy. However, most courts have held that malpractice claims against a physician do not relate to an ERISA plan, but to the quality of care — a subject traditionally regulated by the states. See Dukes v. U.S. Healthcare, Inc., 57 F.3d 350 (3d Cir.), cert. denied, 530 U.S. 1242 (1995) (drawing on New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995). Such claims are not preempted and can go forward in state court. A managed care organization can be vicariously liable for the medical malpractice of an employee. See, e.g., Jass v. Prudential Health Care Plan, Inc., 88 F.3d 1482 (7th Cir. 1996); Rice v. Panchal, 65 F.3d 637 (7th Cir. 1995); Pacificare of Oklahoma, Inc., 59 F.3d 151 (10th Cir. 1995); Dukes v. U.S. Healthcare, Inc., 57 F.3d 350 (3d Cir.), cert. denied, 530 U.S. 1242 (1995). However, claims against a managed care organization that are not predicated on employee or agent malpractice and also do not assert any benefit denial under § 502(a) have generally been found to be preempted on the basis of § 514(a) conflict preemption. For example, a claim that a managed care organization delayed approving benefits so that the patient could not receive appropriate treatment charges the managed care organization, not the physician, with negligence or worse, but because benefits (some form of treatment) were ultimately received, the patient has no claim for benefit denial. See, e.g., Hull v. Fallon, 188 F.3d 939 (8th Cir. 1999) (medical malpractice claim for failure to diagnose myocardial infarction found to be claim for denial of benefits — namely, thallium stress test). Kuhl v. Lincoln National Health Plan of Kansas City, Inc., 999 F.2d 298 (8th Cir. 1993). Such cases leave the patient without any remedy, state or federal.Google Scholar
Dukes v. U.S. Healthcare, Inc., 57 F.3d 350 (3d Cir.), cert. denied, 530 U.S. 1242 (1995).Google Scholar
Bauman v. U.S. Healthcare, Inc. (In re U.S. Healthcare), 193 F.3d 151 (3d Cir. 1999), cert. denied, 530 U.S. 1242 (2000);Lazorko v. Pennsylvania Hospital, 237 F.3d 242 (3d Cir. 2000) (claim that managed care organization's refusal to rehospitalize patient with depression and schizophrenia resulted in patient's suicide was found to be an exercise of medical judgment about what, if any, treatment to provide, even if influenced by financial incentives to physicians, and not preempted by ERISA); Nealy v. U.S. Healthcare HMO, 93 N.Y.2d 209, 711 N.E.2d 621 (N.Y. 1999) (claim that physician delayed submitting request to health maintenance organization to authorize referral to out-of-network cardiologist found not to relate to ERISA plan because claim was for physician's own failure to treat patient, not the HMO's delay).Google Scholar
Bauman, 193 F.3d at 162 (plaintiffs claimed that their newborn died of meningitis that was not diagnosed or treated as a result of the MCO's hospital discharge policy and its utilization policies discouraging physicians from readmitting infants, despite acceptable medical standards indicating a need for immediate treatment).Google Scholar
The defendants could raise the defense that ERISA § 514(a) preempts the state law claims of malpractice in the state court action. Id.Google Scholar
More specifically, defendants move to remove cases brought in state court to federal court, typically on the grounds that the claim is really for the denial of benefits, which is completely preempted, and must be brought in federal court as an ERISA § 502(a) claim or not at all. See, e.g., Bidart, M.J. and Echeverria, R., “Litigating an HMO Bad Faith Case from the Plaintiff's Perspective and the Lessons of Goodrich v. Aetna,” Whittier Law Review, 22 (2000): 427–46 (outlining the plaintiff's arguments against ERISA preemption); Pomfret, S.D., “Emerging Theories of Liability for Utilization Review under ERISA Health Plans,” Tort & Insurance Law Journal, 34 (1998): 131–66 (outlining defense arguments for ERISA preemption).Google Scholar
See, e.g., Bast v. Prudential Ins. Co. of America, 150 F.3d 1003 (9th Cir. 1998); Tolton v. American Diodyne, Inc., 48 F.3d 937 (6th Cir. 1995); Kuhl v. Lincoln National Health Plan of Kansas City, Inc., 999 F.2d 298 (8th Cir. 1993). Spain v. Aetna Life Ins. Co., 11 F.3d 129 (9th Cir. 1993) (all including claims for delaying authorization of specific treatment or providers); Hollis v. Provident Life and Accident Insurance Company, 259 F.3d 410 (5th Cir. 2001) (bad faith denial of disability benefits claim).Google Scholar
Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41 (1987).Google Scholar
New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995); DeBuono v. NYSAILSA Medical and Clinical Services Fund, 520 US. 806 (1997); Unum Life Insurance Company of America v. Ward, 526 U.S. 358 (1999). Epstein and Sykes agree that ERISA's failure to allow consequential damages for personal injury resulting from an improper denial of benefits creates a clear incentive to deny benefits. They argue that routine denial of benefits is likely to result in complaints to the employer, who will react by changing health plans. Epstein, and Sykes, supra note 33, at 28. That is an empirical question that deserves study.Google Scholar
Lazorko v. Pennsylvania Hospital, 237 F.3d 242 (3d Cir. 2000) (husband argued that the patient's physician was influenced by the MCO's financial penalties on additional hospitalizations).Google Scholar
Id. at 250.Google Scholar
Pryzbowski v. U.S. Healthcare, 245 F.3d 266 (3d Cir. 2001). See discussion infra in text accompanying note 115.Google Scholar
Pegram v. Herdrich, 530 U.S. 211,120 S. Ct. 2143 (2000).Google Scholar
A bad faith claim based on a state statute might still be preempted by ERISA § 514(a) if the court determines that the state statute relates to the ERISA plan but is not saved as insurance regulation.Google Scholar
One might also argue that it may be necessary to refer to the ERISA plan to determine whether the MCO has the discretion to determine which provider provides the care and what, if any, standards it must use to do so, thereby relating the cause of action to the ERISA plan. This argument relies on a somewhat literal interpretation of the phrase “having a connection with or reference to” an ERISA plan, used inShaw v. Delta Air Lines, Inc., 463 U.S. 85, 97 (1083), and District of Columbia v. Greater Washington Bd. Of Trade, 506 U.S. 125,129 (1992). This seems a thin reed on which to hang current arguments.Google Scholar
These answers might apply as rebuttable presumptions, but the evidence required to determine whether the presumption applies in the first place should be sufficient to resolve the question on the merits, so that presumptions are not necessary.Google Scholar
Critics of these principles make the point that the abuse-of-discretion standard of review (for ERISA plans that grant plan administrators discretion to interpret the plan) grants excessive discretion to ERISA plan administrators to determine the scope of benefits. To the extent that such discretion has been permitted in cases that should have been allowed to proceed as negligence actions in state court, the personal medical information test may help to reduce the opportunities for overly expansive interpretations of discretion.Google Scholar
Jacobson, and Cahill, supra note 18 (proposing a detailed scheme distinct from existing tort duties); Mariner, supra note 18 (arguing for an extracontractual negligence standard by which to judge MCO patient care decisions); Mehlman, M.J., “Fiduciary Contracting: Limitations on Bargaining Between Patients and Health Care Providers,” University of Pittsburgh Law Review, 51 (1990): 365–417 (focusing on patient care decisions that fit most easily into traditional medical professional obligations).Google Scholar
Richmond, D.R., “Trust Me: Insurers Are Not Fiduciaries to Their Insureds,” Kentucky Law Journal, 88 (1999/2000): 1–32.Google Scholar
See Muir, D.M., “Fiduciary Status as an Employer's Shield: The Perversity of ERISA Fiduciary Law,” Journal of Labor & Employment Law, 2 (2000): 391–462 (explaining this distinction in the context of ERISA benefit plans).Google Scholar
Perhaps the most cited formulation is that of Judge Cardozo in Meinhard v. Salmon, 249 N.Y 458,164 N.E. 545, 546 (1928): “Many forms of conduct permissible in a workaday world for those acting at arm's length are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.” Law has imposed some conflicting obligations on professionals, such as the reporting duties of attorneys and physicians, but the result has sometimes been to characterize physicians as quasifiduciaries.Google Scholar
ERISA §404, 29 U.S.C.§ 1104(a), provides that an ERISA plan fiduciary “shall discharge his duties with respect to a plan solely in the interests of the participants and beneficiaries and — (A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan; (B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; ….” See S. Rep. No. 93-127, at 29 (1973), reprinted in 1974 U.S.C.C.A.N. 4639, 4865 “The fiduciary responsibility section, in essence, codifies and makes applicable to these fiduciaries certain principles developed in the evolution of the law of trusts.”; H.R. Rep. No. 93-533, at 11 (1973); Central States, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc., 472 U.S. 559, 570 (1985).Google Scholar
Ehlmann v. Kaiser Foundation Health Plan of Texas, 198 F.3d 552, 556 (5th Cir. 2000).Google Scholar
See, e.g., Friend v. Sanwa Bank California, 35 F.3d 466 (9th Cir. 1994) (“nowhere in the statute does ERISA explicitly prohibit a trustee from holding positions of dual loyalties”).Google Scholar
Schwartz v. Interfaith Medical Center, 715 F. Supp. 1190, 1195 (E.D.N.Y. 1989) (noting that the “‘prudent man standard of care’ relates primarily to the management of plan assets”).Google Scholar
Varity Corp. v. Howe, 516 U.S. 489 (1996); Metropolitan Life Insurance Co. v. Taylor, 438 U.S. 58 (1987).Google Scholar
Pegram v. Herdrich, 530 U.S. 211,120 S. Ct. 2143 (2000).Google Scholar
Rosoff, A.J., “Breach of Fiduciary Duty Suits Against MCOs: What's Left After Pegram v. Herdrich?,” Journal of Legal Medicine, 22 (2001): 55–75. However, several commentators assert that the decision can be used to argue that many patient claims of negligence under state law are not preempted by ERISA § 514. Stempel, J.W. and von Magdenko, N., “Doctors, HMOs, ERISA and the Public Interest After Pegram v. Herdrich,” Tort & Insurance Law Journal, 36 (2001): 687.Google Scholar
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The Court's decision was limited to fiduciary acts pertaining to decisions about health-care benefits. ERISA fiduciaries have other duties, including disclosure, which the Court has recognized in other cases and mentioned in a footnote in Pegram. See Rosoff, supra note 104.Google Scholar
Pegram, 530 U.S. at 228.Google Scholar
Mariner, supra note 2; Rosoff, supra note 104; Stempel, and von Magdenko, supra note 104.Google Scholar
The U.S. Supreme Court remanded cases involving state law claims of negligence for reconsideration in light of its decision in Pegram. U.S. Healthcare Systems, PA v. PA Hospital Ins. Co., 530 U.S. 1241 (2000), vacating and remanding Pappas v. Asbel, 724 A.2d 889 (Pa. 1998).Google Scholar
Pegram, 530 U.S. at 237.Google Scholar
Pappas v. Asbel, 768 A.2d 1089 (Pa. 2001) (confirming its decision at 724 A.2d 889 (Pa. 1998), which was vacated and remanded for reconsideration in light of Pegram).Google Scholar
The patient's claims included medical malpractice against the physicians and negligence on the part of Haverford in causing inordinate delay in obtaining a necessary transfer.Google Scholar
Pappas v. Asbel, 724 A.2d 889 (Pa. 1998).Google Scholar
U.S. Healthcare Systems, PA v. PA Hospital Ins. Co., 530 U.S. 1241 (2000).Google Scholar
Pryzbowski v. U.S. Healthcare, Inc., 245 F.3d 266 (3d Cir. 2001) (see discussion supra in text accompanying note 88).Google Scholar
Pryzbowski had undergone “numerous surgeries for her back” and sought treatment in 1993 for back pain from her MCO physicians. They identified an “extra-dural defect compressing the thecal sac, consistent with disc herniation,” and concluded that the non-network surgeon, Dr. Barolat, who had done her most recent surgery — to implant a neurostimulator — was the only one who might be able to diagnose or treat the new problem. 245 F.3d at 269. Dr. Barolat insisted on working with other non-network specialists. The treatment was approved and performed seven months later, but Pryzbowski still had back pain. She sued her MCO and its physicians, claiming that the delay in authorizing the surgery had caused her continuing pain. Her claims against the MCO included negligent, arbitrary, and capricious delay; breach of contract; bad faith; and breach of a duty to screen, hire, and train competent employees as decision-makers.Google Scholar
Barolat, Dr., who performed the surgery, said that the delay caused the persistent pain, but his opinion might be discounted by a court or jury.Google Scholar
Havighurst, supra note 26, at 1392.Google Scholar
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See, e.g., Pryzbowski v. U.S. Healthcare, Inc., 245 F.3d 266 (“It is for Congress and not the courts to decide whether it is sound policy for our health care system to limit or channel the relief available or whether ERISA should allow for broader remedies for beneficiaries in the world of managed care.”); Andrews-Clarke v. Travelers Insurance Co., 984 F. Supp. 49 (D. Mass. 1997).Google Scholar
See, e.g., Bipartisan Consensus Managed Care Improvement Act, H.R. 2723, passed by the U.S. House of Representatives on October 7, 1999; S. 889 (introduced by Senators Frist, Breaux, and Jeffords) and S. 283 (introduced by Senators McCain, Kennedy, Chafee, and Graham), both named the Bipartisan Patient Protection Act of 2001, 107th Congress, 1st Session, which were superseded by the Senate and House bills passed in the summer of 2001. See discussion of current bill infra in text accompanying note 131.Google Scholar
See Jordan, K.A., “Coverage Denials in ERISA Plans: Assessing the Federal Legislative Solution,” Missouri Law Review, 65 (2000): 405–72.Google Scholar
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Corporate Health Insurance, Inc. v. Texas Dept. of Insurance, 215 F.3d 526 (5th Cir. 2000), petition for cert. filed (October 24, 2000) (finding that ERISA preempted state statute requiring independent review of benefit decisions, but not of medical treatment decisions); Moran v. Rush Prudential HMO, Inc., 230 F.3d 959 (11th Cir. 2000), cert. granted, 121 S. Ct. 2589 (2001) (finding that a state statute requiring independent review of medical necessity disputes affected benefit determinations but was saved from preemption as applied to fully insured MCOs offering benefits as part of a fully insured ERISA plan).Google Scholar
For example, several district courts have found that a state law bad faith claim was saved from ERISA preemption under § 514(b)(2)(A), 29 U.S.C. § 1144(b)(2)(A), because it was a state law that regulated insurance. Gilbert v. Alta Health & Life Insurance Company, 122 F. Supp. 2d 1267 (N.D. Ala. 2000) (the Alabama common law tort duty of good faith in determining insurance benefits was codified in its insurance code and limited to insurance entities; the plaintiff sued his employer-provided health insurer for denying his claim for coverage of his hospital care); Hill v. Blue Cross Blue Shield of Alabama, 117 F, Supp. 2d 1209 (N.D. Ala. 2000) (distinguishing Pilot Life on the grounds that Mississippi's bad faith tort law was not limited to the insurance industry); Lewis v. Aetna U.S. Healthcare, 78 F. Supp. 2d 1202 (N.D. Okla. 1999). However, other district courts, often with little analysis of the facts, have found state law bad faith claims for denial of benefits to be completely preempted because they fell within the scope of ERISA § 510(a). Ginsberg v. Independent Blue Cross and QCC Insurance Company, No. 01-66, 2001, U.S. Dist. LEXIS 2845 (E.D. Pa. 2001); Richardson v. American Nonwovens Corporation, No. 1 :99CV-372-B-A, 2000 U.S. Dist. LEXIS 8515 (N.D. Miss. 2000).Google Scholar
The Court remanded Pryzbowski's claims against her HMO physicians to the district court for a determination on whether under New Jersey law physicians have a duty to the patient that they did not meet. The Court did decide that physicians do not currently have a legal duty to advocate on patients' behalf when an MCO delays or denies treatment recommended by the physician, although it took no position on whether the state should impose such a duty in the future. See Sage, W.M., “Physicians as Advocates,” Houston Law Review 35 (1999): 1529–630 (suggesting that physician advocacy for managed care benefits would entail changes in their roles and applicable law that could be excessive or counterproductive).Google Scholar
See Havighurst, supra note 2 (recommending that MCOs assume vicarious liability, with the option to shift liability downstream to physicians where providers are at fault).Google Scholar
But see Bovbjerg, , “Summary of Testimony,” supra note 65 (arguing that the fear of liability may discourage physicians from reporting errors).Google Scholar
S. 1052 passed June 29, 2001. H.R. 2563 passed August 2, 2001.Google Scholar
The bills also include a variety of consumer protection provisions, including standards for benefits offered by health insurance and managed care plans, disclosure of information to patients, and procedures for internal and independent external review of benefit decisions. For a comparison of the liability provisions in both bills, see Patient Rights Program White Paper: Different Systems of Liability to Patients — Comparative Analysis of the Senate and House of Representative Bills Entitled “Bipartisan Patient Protection Act” (S. 1052 and H.R. 2563) Provisions on Liability to Patients (Boston: Boston University School of Public Health, Health Law Department, Patient Rights Program, September 7, 2001) (monograph available from the Patient Rights Program).Google Scholar
Congressman Charles Norwood, a key sponsor of the original House bill, agreed with President Bush to amend H.R. 2563 in ways that the President, who had not supported its liability provisions, would accept. Several of Norwood's co-sponsors objected to Norwood's apparently unilateral action.Google Scholar
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The House bill does not make clear whether a health plan's decision to use a different treatment or provider than what the patient wants would be considered to be a benefit denial under the new liability provisions. If not, then patients would not have any right to recover compensation if they were injured as a result of a health plan's wrongful refusal to authorize a particular treatment or provider. The Senate bill contains a similar ambiguity that makes it difficult to determine whether federal or state law would apply, but it ensures patients a cause of action either way.Google Scholar
H.R. 2563 § 402 (adding new § 502(n)(9) to ERISA) (“A cause of action that is based on or otherwise relates to a group health plan's determination on a claim for benefits shall not be deemed to be the delivery of medical care under any State law. …”).Google Scholar
The House bill creates a cause of action against a designated decision-maker who “fails to exercise ordinary care” in making a determination denying a claim for benefits or failing to authorize benefits in compliance with the written determination of an independent medical review where the failure to receive or any delay in receiving benefits is a proximate cause of personal injury or death. H.R. 2563 § 402(a) (adding a new § 502(n)(1) to ERISA). “The term ‘ordinary care’ means, with respect to a determination on a claim for benefits, that degree of care, skill, and diligence that a reasonable and prudent individual would exercise in making a fair determination on a claim for benefits of like kind to the claims involved.” H.R. 2563 § 402(a) (adding a new § 502(n)(16)(E) to ERISA).Google Scholar
Although the House bill gives state courts concurrent jurisdiction over such claims, the new ERISA § 502(n) — federal law — would apply.Google Scholar
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The complexity is likely to multiply as the responsibilities of employers, insurers, and managed care organizations that administer self-funded ERISA plans, utilization review companies, and other subcontractors are sorted out.Google Scholar
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“Here, more than anywhere else in the world, the daily panorama of human existence — the unending procession of governmental extortions and chicaneries, of commercial brigandages and throat-slitting, of theological buffooneries, of aesthetic ribaldries, of legal swindles and harlotries — is so inordinately extravagant, so perfectly brought up to the highest conceivable amperage, that only the man who was born with a petrified diaphragm can fail to go to bed every night grinning from ear to ear and awake every morning with the eager, unflagging expectations of a Sunday school superintendent touring the Paris peep-shows.” Mencken, H.L., “On Being an American,” Prejudices: Third Series (New York: Knopf, 1922).Google Scholar