HMO LIABILITY: Avoiding ERISA Preemption in Light of Pacificare

PRECEDENT SETTING TENTH CIRCUIT CASE OPENS DOOR FOR HMO NEGLIGENCE SUITS
by Gregory R. Kauffman, M.D., J.D. and Cherie L. LaCour, J.D.

Characterizing HMOs as "The New Untouchables", a sadly misleading, front page headline in a recent issue of USA Today reads, "You Can't Sue Your HMO".¹ According to a recent article appearing in the Los Angeles Times and the Chicago Tribune, "HMOs administering employer-paid health care never pay damages to the patients they wrong." (emphasis added).² A May 29, 1997 article from the Baltimore Sun proclaims that "[if your] HMO treats you negligently, you may find you have nowhere to turn".³

Articles have appeared in nationally circulated legal publications discussing various causes of action against HMOs.⁴ Unfortunately, the theories set out in these articles may fall within provisions of the Employee Retirement Income Security Act (ERISA), relegating claimants to administrative remedies which may be wholly ineffective in cases of serious injury or death resulting from medical negligence.

One must wonder the extent to which the managed care industry itself has influenced the media to portray HMOs as legally immune. This is, of course, just what the industry would want the public to believe.

The Problem of HMOs

The provision of health care in the United States has been dramatically altered over the last decade by the relentless growth of managed care. Promising employers and legislators reduced costs of health care coverage, HMOs have now replaced traditional medical insurance plans for the vast majority of American workers. Patients no longer have freedom to choose their own doctors, but are either assigned a "primary" by their HMO, or given a limited list of doctors to choose from. Patients are no longer able to see a specialist when they deem it necessary, but only upon the referral of their primary, who may have economic incentives to deny referral. The practice of medicine is now defined by HMO guidelines promulgated by medically uneducated administrators whose goal is to maximize profit rather than provide good medical care. For many HMOs and HMO doctors, the practice of medicine is secondary to the business of medicine. The predatory proliferation of HMOs, with their creed of "do less to make more", has diminished the quality of medical care more than any other event in the history of medicine.

HMOs have often escaped responsibility for poor medical care by means of ERISA, which creates a federal preemption for any state claim that "relates to" any employee benefit plan. If an HMO benefit plan is ERISA-qualified, and claims against the HMO go to matters covered by ERISA, the preemption applies and the claimant is thereby limited to administrative remedies which only call for the HMO to do what it was required to do in the first place. For example, if referral to a specialist is denied or if treatment is withheld, the HMO could only be forced to pay for or provide the referral or treatment, but no other damages would be compensable. The HMO, then, has nothing to lose by denying benefits.

The time has come for HMOs to be held responsible for the damage they and the doctors working for them cause to subscribers. Even attorneys who regularly handle medical negligence cases commonly but erroneously think that HMO's cannot be held liable for the negligence of their non-employee doctors. On the contrary, the United States Court of Appeals for the Tenth Circuit has recently provided through Pacificare of Oklahoma, Inc. v. Burrage⁵ the tool attorneys need to hold HMO's responsible for negligent care.

ERISA Preemption

Many lawsuits against HMOs are dismissed due to preemption by ERISA. Congress enacted ERISA to establish a system to regulate employee welfare benefit plans that provide medical care or benefits in the event of sickness, accident, disability or death⁶. Included in ERISA is a preemption provision that allows the law to supersede all state laws that "relate to any employee benefit plan".⁷ A state law "relates to" a benefit plan "if it has a connection with or reference to such a plan."⁸

It is important to remember that the ERISA preemption provisions only apply if the employee benefit plan is ERISA-qualified. A plan is ERISA-qualified if it is provided by an employer or an employee organization. However, there are some exceptions. A plan is not governed by ERISA if it is (1) a governmental plan; (2) a church plan; (3) a plan maintained to comply with worker's compensation or disability insurance laws; (4) a plan maintained outside of the United States; or (4) an excess benefit plan⁹. If a suit is brought based on an insurance plan that falls under one of the above mentioned categories, then ERISA preemption is not an issue and the HMO can be sued under any applicable state laws. Otherwise, ERISA preemption must be considered.

There are four types of laws that are considered "related to" ERISA plans: (1) Laws that regulate the type of benefits or terms of ERISA plans; (2) laws that create reporting, disclosure, funding, or vesting requirements for ERISA plans; (3) laws that provide rules for the calculation of the amount of benefits to be paid under ERISA plans; and (4) laws and common-law rules that provide remedies for misconduct growing out of the administration of the ERISA plan."¹⁰ Laws of general application in areas that are traditionally state regulated and that effect ERISA plans in a remote way are frequently considered not to "relate to" an ERISA plan¹¹. The fact that the law has some economic effect on the plan does not invalidate the law. Before a law will be preempted the law must effect the administration of the plan or the relationship between ERISA plan entities¹².

Pacificare of Oklahoma, Inc. v. Burrage

Pacificare of Oklahoma, Inc. v. Burrage¹³ has ended the confusion caused by inconsistent rulings at the district court level and has opened the door to vicarious liability claims against HMO's. However, these claims must be approached with some caution. The claim may likely survive or succumb to ERISA preemption on the pleadings alone. A vicarious liability claim can be based on either an employer/employee relationship or an agency relationship or an ostensible agency, depending on the structure of the HMO involved and the relationship between the HMO and the doctor presented to the subscriber.

In certain HMOs the doctors may be employees of the HMO, and in such cases, traditional employer/employee vicarious liability theories apply. Commonly, the HMO will characterize its doctors as independent contractors. In those cases however, the HMO may be held liable for the HMO doctor's negligence on an agency or ostensible agency theory. It is important in these cases to show the authority which the HMO holds over the doctor, direction or limitation of the diagnostic or treatment plan by the HMO, the naming of the doctor in its provider lists, advertising in which the HMO claims to provide high quality medical services or access to certain physicians or physicians possessing particular characteristics or credentials, and the incentives and disincentives which the HMO uses to encourage its doctors to put cost-cutting ahead of patient care. The Tenth Circuit has ruled that these agency and ostensible agency claims are not preempted by ERISA.

In a case of first impression for a district court, the Tenth Circuit in Pacificare of Oklahoma, Inc. v. Burrage¹⁴, held a medical malpractice claim against an HMO based on an agency theory was not preempted by ERISA. The court stated that the claim against the HMO did not sufficiently "relate to" the plan to cause ERISA preemption. The court reasoned that a medical malpractice claim involves actions between the doctor and the patient and whether the doctor exercised the standard of care required in his community. These actions implicate the HMO through an agency relationship between the HMO and the doctor, and do not involve the administration of the plan, or the plan's benefits or the quality of benefits. Although it may be necessary to reference the plan to determine the relationship of the doctor and HMO, doing so "does not implicate the concerns of ERISA preemption".¹⁵

Subsequent Cases

The Tenth Circuit's decision in Pacificare has ended years of conflicting district court rulings dealing with the applicability of ERISA to vicarious liability claims.¹⁶ Several jurisdictions have cited Pacificare as dispositive of the ERISA preemption issue. In Prudential Health Care Plan, Inc. v. Lewis¹⁷ the Tenth Circuit upheld Pacificare and denied preemption in a medical malpractice case claiming an ostensible agency relationship between a doctor and an HMO.¹⁸

Federal and state courts, besides those within the Tenth Circuit, have also grabbed hold of Pacificare and have used it to deny preemption by ERISA of vicarious liability claims against HMOs. In Lancaster v. Kaiser Foundation Health Plan of Mid-Atlantic States, Inc.¹⁹, the United States District Court for the Eastern District of Virginia followed the reasoning in Pacificare to deny preemption in a vicarious liability suit against a group model HMO.²⁰ The court explained that although the vicarious liability claim "inescapably 'relates to' an employee benefit plan" because it is necessary to reference the plan to determine if an agency relationship exists, this reference does not implicate the objective of ERISA.²¹

Likewise, the Supreme Court of New York applied Pacificare in Andujar v. Lenox Hill Hospital²² and Tufino v. New York Hotel and Motel Trades Council.²³ In both cases, the state court held that vicarious liability claims against an HMO²⁴ are not preempted by ERISA because such claims do not implicate the administration of the ERISA plan or the extent of its benefits.²⁵

Conclusion

The Tenth Circuit in Pacificare of Oklahoma, Inc. v. Burrage has paved the way for vicarious liability suits against HMOs. Several jurisdictions have already relied upon this important case in holding HMOs responsible for the negligence of HMO doctors.

Public awareness of bad medical care at the hands of HMOs is steadily increasing. The bias often held by jurors in favor of doctors may not extend to an HMO corporate defendant and may, in fact, be a detriment, particularly if the HMO has restricted the doctor's ability to practice medicine in the best interests of the patient, instead pressuring the doctor to make the financial health of the HMO first priority. Doctor defendants and treating doctors will often go to ludicrous extremes at the behest of a common insurer or from a sense of camaraderie to avoid impugning another defendant or treating doctor not yet beyond the statute of limitations, but they are generally less willing to abandon science and honesty to protect HMOs. It is sad but true that many patient-beneficial changes in the way medicine is practiced come about only after negligent providers are made to pay for injuries and deaths resulting from bad care. With profit their lifeblood, HMOs will be no exception.

Plaintiffs' lawyers representing victims of medical malpractice must, in every case, carefully consider the question of HMO liability, and must endeavor to hold the HMO liable whenever it is in their client's best interest to do so.

¹William M. Welch, 1974 Pensions Law Sparks Political Fire, USA TODAY, June 19, 1998, at 1A.

²Jamie Court, Close the HMOs' Favorite Loophole; Healthcare: A Federal Law Protects the Industry From the Consequences of Denying Care, L.A.TIMES, Jan. 21, 1998, at 7; Jamie Court, In Critical Condition: Holding HMOs Accountable for Their Egregious Conduct, CHI.TRIB., June 22, 1998, at 13N.

³Jane Bryant Quinn, It's Difficult to Sue An HMO for Negligence, BALTIMORE SUN, June 16, 1997, at 13C

⁴Charles H. Baunberger, Vicarious Liability Claims Against HMOs, TRIAL, May 1998, 30; Jeffrey M. Liggio, Preparing the HMO Case, TRIAL, May 1997, at 26.

⁵59 F.3d 151 (10th Cir 1995).

⁶29 U.S.C. §1002(1)

⁷29 U.S.C. 1144(a).

⁸Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97 (1983).

⁹ 29 U.S.C. 1003(b).

¹⁰National Elevator Indus., Inc. v. Calhoon, 957 F.2d 1555, 1558-59 (10th Cir.), cert. denied, 121 L. Ed. 2d 331, 113 S. Ct. 406 (1992); see also Airparts Company, Inc., v. Custom Benefit Services of Austin, Inc., 28 F.3d 1062, 1064-65 (10th Cir. 1994); and Pacificare of Oklahoma, Inc., v. Burrage, 59 F.3d 151, 154 (10th Cir. 1995).

¹¹Airparts Co., 28 F.3d at 1065.

¹²See Pacificare, 59 F.3d 154.

¹³59 F.3d 151 (10th Cir 1995).

¹⁴Id.

¹⁵Id., at 155.

¹⁶See Id. at 153 n.2 (referencing a list of district court cases related to ERISA preemption).

¹⁷ 1996 U.S. App. Lexis 2595 (10th Cir. 1996).

¹⁸ Id. at 4-5.

¹⁹958 F. Supp. 1137 (E.D. Va. 1997).

²⁰A group model HMO contracts with a medical group to provide services to its members. The medical group hires and employs its own physicians, but the HMO provides the facilities, equipment and supplies.

²¹ Lancaster, 958 F. Supp. At 1149-50.

²²641 N.Y.S. 2d 532 (N.Y. App. Div. 1996).

²³646 N.Y.S. 2d 799 (N.Y. App. Div. 1996).