Healthcare Law - Summer 2005

• Second Circuit Court of Appeals Ushers in Next Phase of ERISA Preemption Litigation – By Michael H. Bernstein

• California Considers Expanding Silent PPO Disclosure Requirements on Health Insurers – By Robert C. Bohner

• Obtaining Dismissals for Healthcare Entities in Illinois: A Statutory Approach – By Fred A. Smith

• Wisconsin Supreme Court Finds Cap on Medical Malpractice Non-Economic Damages Unconstitutional – By Evan T. Smith, Scott D. Braun and Samuel B. Rainey

• ERISA Alert – By Dennis G. Rolstad

• New Medicare Prescription Drug Plan Effective January 2006 – By Erica S. Arousety

In Aetna Health, Inc. v. Davila, 542 U.S. 200, 124 S.Ct. 2488 (2004), the Supreme Court made clear that ERISA § 502(a)(1)(B) completely preempts state law claims against HMOs and managed care organizations based on allegations of so-called negligent benefit denials. A unanimous court held that suits against an HMO claiming that denial of benefits caused harm are completely preempted since the underlying benefit decision is one involving interpretation of an ERISA plan and not relating to direct patient care. Thus, where an ERISA plan participant has the ability to bring an action pursuant to ERISA § 502(a)(1)(B) to enforce rights to benefits under an ERISA plan, he or she is completely preempted from asserting any other rights under either state or federal law.

Notwithstanding the Court’s clear message in Davila, Justice Ruth Bader Ginsburg’s concurring opinion raised the specter of continuing litigation. Justice Ginsburg bemoaned the "regulatory vacuum" that exists as a consequence of the complete ERISA preemption doctrine. Justice Ginsburg suggested that there may be alternative remedies for "make whole" relief available to aggrieved plan participants through ERISA § 502(a)(3). That section provides a plan participant with a mechanism to seek redress against an ERISA plan fiduciary to "obtain other appropriate equitable relief."

In Rubin–Schneiderman v. Merit Behavioral Care Corp., 121 Fed.Appx. 414, 34 Employee Benefits Cas. 1616, 2005 WL 229862 (2d Cir. Jan. 31, 2005), the Second Circuit Court of Appeals relied on Justice Ginsburg’s concurrence by permitting a medical malpractice litigant to amend his complaint by adding an ERISA § 502(a)(3) cause of action. Rubin–Schneiderman involves a suit brought by an ERISA plan participant who claimed he attempted suicide following his ERISA plan’s denial of his treating psychiatrist’s pre-authorization request for in-patient psychiatric care. Defendant Merit Behavioral Corp. provided utilization review for Rubin–Schneiderman’s PPO, Empire Blue Cross/Blue Shield. Following review of Rubin– Schneiderman’s care and the request for in-patient services, Merit Behavioral denied the request. He was therefore treated on an outpatient basis.

Rubin–Schneiderman filed suit in New York State Supreme Court against Merit Behavioral and Empire Blue Cross/Blue Shield and alleged negligence and medical malpractice in refusing coverage for his in-patient psychiatric care. Defendants removed the matter to the Southern District of New York. The district court dismissed Rubin-Schneiderman’s claims on grounds of complete preemption by ERISA (Rubin–Schneiderman v. Merit Behavioral, et al., 2001 WL 1415165 (S.D.N.Y. Nov. 13, 2001)). Plaintiff appealed to the Second Circuit, which vacated the decision and remanded the matter based on its previous holding in Cicio v. Does, 321 F.3d 83 (2d Cir. 2003) (see Rubin–Schneiderman v. Merit Behavioral Care Corp., 60 Fed. Appx. 887, 2003 WL 1913131 (2d Cir. Apr. 18, 2003)). In Cicio, the Second Circuit had ruled that ERISA does not completely preempt state law medical malpractice claims based upon medical decision-making in the claim review process. On remand, however, the district judge reinstated his prior dismissal, finding no physician-patient relationship between the plan participant and the plan administrator and holding that the administrator’s role was confined to "informing a patient before receiving treatment whether that treatment would be covered under the plan" (Rubin–Schneiderman v. Merit Behavioral Care Corp., 2003 WL 22019833 (S.D.N.Y. Aug. 27, 2003)).

Rubin–Schneiderman appealed the second dismissal of his action to the Second Circuit. In the interim, the U.S. Supreme Court issued its Davila decision. Additionally, the Supreme Court had reversed and vacated the Second Circuit’s prior decision in Cicio v. Does, supra (see Vytra Health Plan v. Cicio, __ U.S. __, 124 S.Ct. 2902, 159 L.Ed.2d 808 (2004)). On remand from the Supreme Court, the Second Circuit vacated entirely its prior decision in Cicio v. Does and issued a new decision affirming the district court’s dismissal based on complete ERISA preemption (see Cicio v. Does, 385 F.3d 156 (2d Cir. 2004)).

In Rubin–Schneiderman v. Merit Behavioral (II), the Second Circuit affirmed the district court’s dismissal of the state law negligence and malpractice claims based on Davila and Cicio. Rubin–Schneiderman then argued to the circuit court that, based on Justice Ginsburg’s concurrence in Davila, he should be permitted to assert a claim for "other appropriate equitable relief" under ERISA § 502(a)(3). The Second Circuit again remanded the matter to the district court for "further consideration of plaintiff’s attempt at amendment of his Complaint to assert a claim under ERISA § 502(a)(3)."

Numerous cases hold that a plan participant with a viable ERISA § 502(a)(1)(B) claim against an ERISA plan may not pursue a claim for "other appropriate equitable relief" under ERISA § 502(a)(3) (see Great-West Life and Annuity Insurance Company v. Knudson, 534 U.S. 204, 122 S.Ct. 708 (2002); Varity Corp. v. Howe, 516 U.S. 489, 116 S.Ct. 1065 (1996); Brinker v. Pension Plan for Nine West Group, 347 F. Supp.2d 10, 14-15 (S.D.N.Y. 2004); Pronti v. CNA Financial Corp., 353 F. Supp.2d 320, 34 Employee Benefits Cas. 1691 (N.D.N.Y. 2005)). Nevertheless, it appears the Second Circuit is inclined to allow Mr. Rubin– Schneiderman to pursue this claim and create a record upon which the Second Circuit can rule on this issue. While it is unknown how the Second Circuit will rule, the court’s willingness to permit the litigant to develop this record strongly hints that it may reconsider the issue following Davila.

A preferred provider organization ("PPO") contracts with providers who agree to offer health services at negotiated rates and fees. The PPO then enters into contracts with payors, such as health plans, insurers, and selfinsured employers. PPOs sometimes then sell provider lists to payors.

To protect providers, California passed legislation requiring health plans to meet detailed disclosure and payment requirements for contracting and noncontracting providers. However, similar requirements have not been imposed on health insurers who are regulated by the California Department of Insurance ("DOI") rather than the California Department of Managed Health Care ("DMHC").

California is considering new legislation to expand disclosure and payment requirements on PPOs, thirdparty administrators and IPAs who sell lists of providers who have agreed to be paid on a discount basis. The bill, SB 634, would impose on health insurers under the DOI’s jurisdiction many of the disclosure requirements that already exist on DMHC-regulated health plans. SB 634 has passed the California Senate and is being considered by the California Assembly Committee on Health.

Healthcare entities are often named in suits alleging providers’ medical negligence. Regardless of whether the entity is an HMO, IPA or other institution, plaintiffs will allege (typically under an agency theory) that the entity is responsible for the provider’s actions. If the entity is an IPA, a plaintiff may also allege that the entity had a duty to screen its member. Plaintiff will then allege that failure to screen the provider led to the adverse medical outcome.

Several states (including Illinois, Michigan, New Jersey, Ohio, Pennsylvania and Wyoming) now have a statutory provision allowing defendants in medical negligence suits to seek early dismissal if they can certify by affidavit that they had no involvement in the medical occurrence. Using such a statutory section, a healthcare entity can be dismissed early on and save enormous amounts in legal expenses associated with discovery and other lawsuit-related activities.

Illinois Code of Civil Procedure § 5/2-1010(a) contains a typical non-involvement statute:

(a) In any action, whether in tort, contract or otherwise, in which the plaintiff seeks damages for injuries or death by reason of medical, hospital, or other healing art malpractice, a party, may, in lieu of answering or otherwise pleading, file an affidavit certifying that he or she was not directly or indirectly involved in the occurrence or occurrences alleged in the action. In the event such an affidavit is filed, the court shall order the dismissal of the claim against the certifying party...

The plaintiff can oppose the affidavit and conduct discovery with respect to the party filing it, but discovery must be completed within 60 days of the filing.

Section 5/2-1010(a) has been used with some success over the last ten years to obtain the dismissal of healthcare entities. To take advantage of this powerful defense tool, the practitioner should have the defendant organization sign the affidavit of non-involvement and attach it to a short motion to dismiss. The affidavit should state that the person signing is knowledgeable about the entity and that the entity had no direct or indirect involvement in the plaintiff’s medical care or treatment. The motion is then served on opposing counsel, and a court hearing is set.

In response to such a motion to dismiss, some plaintiff attorneys simply agree to voluntarily dismiss the entity. This is particularly true when there are other "deep pockets" in the action.

Alternatively, plaintiff attorneys may depose the person signing the affidavit, and courts often liberally permit the plaintiff some additional "involvement"-related discovery. Despite this discovery, a dismissal of the entity is often still obtained, since discovery frequently uncovers little to establish any involvement in the plaintiff’s medical care.

For healthcare entities sued in Illinois, § 5/2-1010(a) is a powerful tool that can lead to early dismissal. Similar statutes in other states, some recently enacted, should be just as effective, such as those in Michigan (M.C.L.A. 600.2912c), New Jersey (N.J.S.A. 2A:53A-40), Ohio (R.C. Par. 2323.45), Pennsylvania (40 P.S. Par. 1303.506) and Wyoming (W.S. 1977 Par. 1-1-117). Other states may pass similar legislation.

Filing a motion to dismiss for noninvolvement should be considered as a first line of defense in all jurisdictions that permit this strategy. These motions can greatly reduce legal expenses and curtail the period during which the entity is a named defendant. Such "quick resolutions" also improve loss history data with healthcare entities’ insurers. Further, they allow the entity to specify in their accounting data that they have no exposure with respect to the suit. These benefits make this statutory defense a compelling approach.

The Supreme Court of Wisconsin ruled on July 14, 2005, that the state’s $350,000 statutory cap on noneconomic damage awards in medical malpractice cases violated the Wisconsin Constitution’s equal protection guarantees. The court held that the statute failed to accomplish the legislative objective of compensating victims fairly. The statute placed an undue hardship on those who are more severely injured and thus unable to recover the full extent of their damages. Further, the statute had a greater impact on younger victims who are generally entitled to larger awards for pain and suffering given their longer life expectancy. The statute also had a disparate impact on victims with families, since family members’ claims for loss of society and companionship were applied against the $350,000 damage cap.

The state argued that the damage cap was rationally related to lowering the costs of medical malpractice insurance premiums. The court indicated the effect was "negligible" because few victims receive non-economic awards in excess of $350,000. The court further noted that insurance policy limits protect insurers against "unlimited" damages. With respect to the state’s goal of decreasing consumer healthcare costs, the court found that a reduction in premiums would have no effect on such costs. Finally, the court cited various studies which it found contradicted the state’s arguments that the damage caps prevent doctors from migrating out of state and practicing "defensive medicine."

A copy of the opinion can be found at http://www.wicourts.gov/sc/opinion/ DisplayDocument.html?content=html& seqNo=19014.

The Ninth Circuit Court of Appeals recently held in Gatti v. Reliance Standard Life Insurance, 409 F.3d 1061 (9th Cir. 2005), that procedural violations of ERISA, including failures to timely render appeal decisions, do not change the standard of review from discretionary to de novo unless those violations are so flagrant as to cause the beneficiary substantive harm. The Gatti decision is contrary to the current practice of many district court judges in California and elsewhere.

The Ninth Circuit determined that the regulatory deadlines are not a limitation on the exercise of discretion but, instead, establish a time at which a claimant will have exhausted administrative remedies even without an appeal decision having been rendered. Though the court was concerned with a claim under the "deemed denied" language in the subsequently superseded regulations, the decision is applicable to all ERISA claims.The court significantly expanded its decision to all procedural violations, holding that technical violations of ERISA’s requirements do not deprive a claims administrator of discretion unless the violations are so flagrant as to cause the beneficiary substantive harm. Left unstated for a future opinion are the parameters of the substantive harm that will change the standard of review.

The new voluntary Medicare outpatient prescription drug benefit plan takes effect on January 1, 2006. Part of the federal Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("MMA"), the drug benefit will be available to all Medicare beneficiaries. The benefit will be administered by entities called Medicare prescription drug plans ("PDPs") for beneficiaries enrolled in traditional fee-for-service plans. The PDPs will also administer the outpatient prescription drug benefits to those who have been receiving their drug benefits under Medi-Cal.

PDPs are risk-bearing entities that act as prescription drug insurance companies authorized by Medicare. PDPs generally must be licensed by the state in which they operate; the states, in turn, must apply fiscal solvency standards in granting licenses to PDPs. In California, risk-bearing entities providing health benefits are licensed and regulated by the Department of Managed Health Care, which requires compliance with access, continuity of care, language assistance and author ization review standards. The application and approval process for PDPs is now underway and is to be completed in time for the next open enrollment period beginning in November.

Sedgwick’s Healthcare Law Newsletter is a quarterly publication written by members of the Healthcare Practice Group at Sedgwick, Detert, Moran & Arnold LLP. For more information about Sedgwick’s Healthcare Practice Group, please contact David M. Humiston (Los Angeles), Chair.

This communication is published as an information service for clients and friends of the firm and is made available with the understanding that it does not constitute the rendering of legal advice or other professional service.

© 2005 Sedgwick, Detert, Moran & Arnold LLP

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.