Fifth Circuit Considers Impact of ERISA on Texans’ Suits Against HMOs

By Barbara Evans, J.D., Ph.D., LL.M. Candidate
Graduate Research Assistant, Health Law & Policy Institute, Fall 2002

On September 17, the Federal Court of Appeals for the Fifth Circuit (“Fifth Circuit”) issued an opinion covering four suits by patients against Texas health maintenance organizations (HMOs).  Roark v. Humana, Inc., Humana Health Plan of Texas, Inc. and Humana HMO Texas, Inc. (Docket No. 01-10831); Calad and Thorn v. CIGNA Healthcare of Texas, Inc., Aetna U.S. Healthcare, and Aetna U.S. Healthcare of North Texas, Inc. (Docket No. 01-10891); Davila v. Aetna U.S. Healthcare, Inc. and Aetna U.S. Healthcare of North Texas, Inc. (Docket No. 01-10905).

The suits raised common questions about whether and when the federal Employee Retirement Income and Security Act of 1974 (“ERISA”) prevents patients from bringing suits against HMOs under Texas law.  The Fifth Circuit’s consolidated opinion is available at under Docket No. 01-10831.  Two key results are:

As things now stand, the impact of §514 preemption is briefly as follows: §514 preemption does not necessarily imply that a suit can be removed from state to federal court.  However, when a tort-like suit under THCLA does make its way into federal court for other reasons (as happened  in the case of plaintiff Roark below), §514 preemption could provide a basis for the suit to be dismissed.

The Calad and Davila Cases.  The Fifth Circuit applied similar reasoning to two of the cases:

Both these plaintiffs originally sued in state court under the THCLA. They alleged that their HMOs failed to exercise ordinary care in determining what was medically necessary and they sought to recover damages for injuries they suffered as a result.  The HMOs had the suits removed to federal district court on the theory that ERISA preempted state law.  The plaintiffs were not successful in having the suits remanded to state court.  Both refused to recast their suits in terms of ERISA violations rather than the THCLA violations they originally claimed.  At that point the suits the federal courts dismissed their suits.  Calad and Davila appealed to the Fifth Circuit. The Fifth Circuit determined that their state-law claims were not completely preempted by ERISA and that the district court should have remanded them to state court. Both suits will now go back to the district courts for further proceedings consistent with the Fifth Circuit’s decision.

Rationale.  The Fifth Circuit noted that two types of ERISA preemption are possible.  Whether a federal court can exercise jurisdiction over a case depends on which type of ERISA preemption applies.

1. ERISA §502(a) Preemption.  Under §502(a), a state law claim is preempted if it duplicates or falls within the scope of a remedy available under §502(a).  It is not necessary that the state remedy be at odds with the federal remedy; simply duplicating it is enough.  If the claims Calad and Davila brought under Texas law could have been brought under ERISA §502(a), the state claims would be “completely preempted.”  Complete preemption means that a federal court would have been correct to take jurisdiction over those claims.

2. ERISA §514 Preemption.  Even if a state-law claim is not preempted under §502(a), it may be preempted under ERISA §514.  Section 514 has the effect of preempting any state law that  “relates to” an employer-sponsored health insurance program, unless that state law falls within a rather narrow savings clause. The §514 savings clause preserves the ability of states to regulate their insurance industries. A key question in many ERISA cases is whether a given state law can be characterized primarily as an insurance law that only incidentally affected an ERISA program, in which case it could escape preemption under the savings clause. However, this was not the main focus of discussion in the four cases that the Fifth Circuit reviewed in Roark.

The opinion instead dwells more on the jurisdictional implications of the two types of ERISA preemption. When §514 preemption occurs, it does not necessarily have the effect of allowing a federal court to assume jurisdiction over a claim, as would be the case if the claim were preempted under  §502(a). Preemption under §514 is subject to the “well-pleaded complaint rule.”  Under this rule, a case can be removed to federal court only if the plaintiff’s claim involves a question of federal law, but not if the federal preemption is merely a defense against the claim. There is an exception to the well-pleaded complaint rule if a federal law “completely preempts” state law, as is the case with §502(a) preemption.  Courts reserve this concept for a few federal statutes that are deemed to have such force that they displace any related state causes of action.  The Fifth Circuit relied on cases that have treated §502(a) as affording complete preemption, but §514 as providing only ordinary preemption.

The Fifth Circuit focused on  §502(a) to determine whether the Calad and Davila cases should have been removed to federal court.  The issue was whether their THCLA claims duplicated claims that are available under §502 of ERISA. After reviewing the various causes of action available under §502(a), there were only two of them--§502(a)(2) and §502(a)(1)(B))—where duplication appeared to be a potential issue.  The Fifth Circuit ultimately concluded that the state claims brought by Calad and Davila were distinct from either of those ERISA causes of action—hence, no duplication.  This meant there was no §502(a) preemption and no basis for the suits to have been removed to federal court.

1. Non-duplication of state claims and ERISA§502(a)(2) claims.  Concerning §502(a)(2), the Fifth Circuit distinguished Calad and Davila’s suits from Pegram v. Herdrich, 530 U.S. 211 (2000).  There, the Supreme Court found that a patient cannot hold an HMO liable under §502(a)(2) for malpractice by the HMO’s physician.  Calad and Davila were not seeking to hold the HMO vicariously liable for their doctors’ decisions; they were seeking to hold their HMOs directly liable for the HMOs’ own decisions.

Still, the Fifth Circuit adopted the analytical framework of Pegram v. Herdrich insofar as it distinguished three types of decisions:  eligibility decisions (whether a given condition is covered at all), treatment decisions (choices about how to diagnose and treat a given condition), and mixed decisions combining elements of both.  Mixed decisions involve questions of “whether one treatment is so superior… and needed so promptly, that a decision to proceed would meet the medical necessity requirement.”  In Pegram v. Herdrich, the Supreme Court concluded that mixed decisions are not covered by §502(a)(2).  This is because §502(a)(2) relates to breach of obligations by a party that is acting as a plan fiduciary.  Mixed decisions by their nature are not fiduciary decisions—i.e., decisions that must be made solely in the interest of the patient—because they inherently require trade-offs between costs and patient welfare.

The Fifth Circuit found that Calad and Davila’s situations both presented mixed decisions.  In both cases there was no question that their conditions were covered but there were questions about the “when and how” of what was medically necessary.   Since these were mixed decisions, they were not fiduciary decisions that Calad and Davila could have challenged under ERISA §502(a)(2).  Consequently, their state law claims were not preempted under §502(a)(2).

2. Non-duplication of state claims and ERISA§502(a)(1)(B) claims.  The Fifth Circuit reasoned that ERISA §502(a)(1)(B) allows claims that are contractual in nature, such as a claim to enforce the terms of a health plan or to recover benefits that have been improperly denied under those terms.  Calad and Davila’s THCLA claims were basically tort claims rather than contract claims. They were not seeking to recover the value of the benefits they were denied  (such as the cost of an extra day in the hospital or the value of the higher-cost drug).  They were seeking compensation for injuries suffered because of the HMOs’ alleged failure to exercise ordinary care.  Citing various cases, the Fifth Circuit concluded that §502(a)(1)(B) would have preempted a state contractual claim to collect benefits, but that §502(a)(1)(B) was not intended to preempt state tort claims or to create a federal common law of medical malpractice.

The Roark Case.    Roark and her husband brought suit in state court alleging that their HMO delayed approval of needed treatment after she was bitten by a brown recluse spider, with the result that she eventually lost her leg.  Their case differed from Calad and Davila cases in that they brought claims not only under the THCLA, but under the Texas Deceptive Trade Practices Act (“DTPA”), the Texas Insurance Code, and common law breach of good faith, fair dealing, and contract claims.

The HMO removed the case to federal district court, citing ERISA preemption.  The district court found that ERISA §502(a) preempted the DTPA and Insurance claims and denied the Roark’s motion to remand the case to state court.  The Roarks then dropped those claims and sought to go forward only with THCLA claims that were similar to those in the Calad and Davila cases.  They filed a second motion to remand the THCLA claims to state court.  The district court ruled that the THCLA claims were completely preempted by ERISA and retained jurisdiction.  The Roarks refused to replead their case under ERISA and, at that point, their case was dismissed altogether.  They appealed to the Fifth Circuit.

The Fifth Circuit disagreed with the district court and noted that ERISA did not completely preempt the THCLA claims (as discussed in the Calad and Davila cases).  Even so, the Fifth Circuit affirmed the district court’s refusal to remand the case to state court.  What drove this was that the Roarks’ THCLA claims had initially been brought long with other types of claims. Some of those other claims were completely preempted by ERISA.  Because of this, the district court had the power, technically speaking, to take jurisdiction of the case as a whole.  The Fifth Circuit did question whether it was proper for the district court to have continued to exercise jurisdiction over the THCLA claims after the Roarks withdrew those other claims.  While affirming the district court’s decision not to remand the case, the Fifth Circuit recommended that the district court should evaluate whether “economy, convenience, fairness, and comity” would be better served by a remand.

Since the district court did have a basis for jurisdiction over the Roark case, the Fifth Circuit proceeded to consider a second question: Had the district court’s decision to dismiss the Roarks’ THCLA claims been correct?  The district court had cited ERISA §514 preemption as its basis for dismissing the claims. The Fifth Circuit affirmed the district court’s decision, but did so in a way that almost invites the Roarks to appeal the case further. The Fifth Circuit indicated that it felt constrained to follow its earlier decision in the 1992 Corcoran case. That case ruled that §514 preempts state cases to recover for torts that were allegedly committed in the course of handling a benefit determination—i.e., claims of the same general nature that the Roarks were asserting under the THCLA.  The Fifth Circuit reluctantly followed this precedent but discussed several post-Corcoran Supreme Court decisions that cast doubt on whether Corcoran is still good law.  It noted that the Roarks would need to seek relief from an en banc panel of the Fifth Circuit or from the Supreme Court in order to resolve that question.  Had the Fifth Circuit “been writing on a clean slate… the Roarks would have a strong case against ERISA preemption.”  The message was that the Roarks would have to appeal their case further, if they want to clean the slate.

The Thorn Case.   The Fifth Circuit also addressed a fourth case.  Plaintiff Thorn had initially brought suit jointly with Calad.  When Calad’s case was removed to federal court, Thorn successfully moved to have his claims remanded to state court, arguing that ERISA did not apply to his employment-related health plan because it was a governmental health plan. The HMO appealed the remand to the Fifth Circuit.  The Fifth Circuit affirmed the remand, basing its decision largely on procedural grounds.