Proposed Patientís Rights Legislation--Understanding the ERISA Preemption

By Ronald L. Scott

While the U.S. Congress is considering various versions of "patientís rights" legislation, a serious difference has emerged in Democratic and Republican-sponsored approaches. The distinction centers on whether people in employer-sponsored health plans have a right to sue their managed care organizations (MCOs).  MCOs have argued that virtually all claims, whether for medical negligence, breach of contract, utilization review, credentialing, denial of benefits, or otherwise, are preempted by ERISA.

Group insurance sold to an employer or other group is subject to extensive state regulation, including regulation of the carrier, regulation of the sale and advertising of the insurance, and regulation of the content of the contracts. ERISA comprehensively regulates employee pension and welfare plans. A health insurance plan provided by an employer is an ERISA "welfare benefit plan" whether the benefits are provided through the purchase of insurance or otherwise. Plans may self-insure ("self-insured plans") or they may purchase insurance for their participants ("insured plans"). Insured plans are directly affected by state laws that regulate the insurance industry. Self-insured plans are not subject to such state regulation due to the ERISA preemption, and are essentially unregulated because ERISA contains almost no federal regulation of the terms of benefit plans.

Claims of negligence and breach of contract arising out of the alleged failure of an MCO to approve medically necessary treatment have been held preempted by ERISA. The preemption provisions of ERISA were included by Congress to avoid a patchwork of regulation among the states, so that employers do not have to deal with conflicting state regulations. For state common law claims, causes of action that "relate to" employee benefit plans are expressly preempted by ERISA, and a lawsuit may "relate to" an ERISA plan if the claims grow out of the administration of an ERISA plan. It has been held that decisions on whether to approve or deny treatment under a health care plan relates to the administration of an ERISA governed plan, and therefore any claims arising from such decisions are preempted by ERISA. Where a court reviews an ERISA benefit plan administratorís decision on eligibility for benefits, the administratorís decision will be upheld (assuming the administrator has discretionary authority) if the decision is rational in light of the planís provisions and not arbitrary or capricious. For a plan not subject to ERISA, decisions by a planís administrator would be subject to a higher standard of review, i.e., whether the enrollee of the plan is entitled to the benefits in accordance with the plans provisions, essentially a "contract" standard.

The extent of ERISA preemption is a hotly debated issue in managed care. The U.S. Supreme Court refused to hear a case on whether states can enforce so-called "any willing provider" laws. Louisiana enacted legislation that required preferred provider organizations (PPOs) to accept any licensed health care provider who would agree to the terms and conditions of the preferred provider contract. The U.S. Court of Appeals for the Fifth Circuit held the law was preempted by ERISA because it did "relate to" employee benefit plans by limiting the structure of the PPO networks that a plan could choose for its members. In contrast, the Connecticut Supreme Court has upheld "any willing provider" legislation as not "relating to" employee benefits plans and therefore not preempted. Outgoing Secretary of Labor Robert B. Reich, whose department is responsible for enforcement of ERISA, has argued that ERISA was never intended to limit MCOs' liability for malpractice. The federal government has filed several "friend-of-the-court" briefs in the last few years disagreeing with MCOs that argued for the ERISA preemption in malpractice cases. The Democratic-sponsored legislation would clarify that people who receive health care through employer-sponsored MCOs retain a right to sue their MCOs if such a suit is allowed under a stateís laws. The Republicans contend that making MCOs liable would increase the cost of health care, resulting in a decrease in coverage. A coalition of MCOs known as the HMO Group has been reported as supporting some regulation even more substantial than that proposed by the Republicans, but the group does not support Democratic provisions that would allow patients to sue MCOs and insurance companies for denial of medical care.