Employer-Based Managed Care Plans: ERISA's Effect on Remedies for Benefit
Denials and Medical Malpractice (Letter Report, 07/13/98,
GAO/HEHS-98-154).

Pursuant to a congressional request, GAO reviewed how people enrolled in
employer-based managed care plans are compensated when they are
improperly denied health care benefits or when they experience negligent
medical care and the role that the Employee Retirement Income Security
Act (ERISA) plays, focusing on: (1) whether the transition from
traditional employer-based fee-for-service health plans to managed care
has changed the process of benefit determination; (2) the remedies that
ERISA provides to participants in employer-based managed care plans who
are improperly denied benefits; (3) whether ERISA affects the ability of
participants to be compensated for injuries that result from either
medical malpractice or improper benefit denials at employer-based
managed care plans; and (4) the consequences of changing ERISA's
remedies.

GAO noted that: (1) managed care plans attempt to ensure that enrollees
receive services that are necessary, efficiently provided, and
appropriately priced; (2) since the 1980s, employers have shifted to
offering managed care plans that use such techniques as prospective
utilization review (UR); (3) as a result, benefit coverage decisions
have increasingly shifted from being made after services are provided to
before; (4) ERISA effectively limits the remedies available when
employees of private-sector firms claim to have been harmed by plans'
decisions to deny coverage of a particular service; (5) under ERISA,
plans must have an appeal process for participants who are dissatisfied
with a benefit denial; (6) if participants are not successful, they can
file a civil lawsuit; (7) ERISA's exclusive remedy for improper benefit
denials is to require the plan to provide the denied service and, at the
court's discretion, pay attorney fees; (8) groups representing consumers
believe that ERISA's limited remedy neither provides sufficient
compensation for injuries that benefit denials contribute to nor
effectively deters unjustified benefit denials; (9) ERISA can affect
participants' ability to be compensated for injuries sustained while in
an employer-based health care plan; (10) ERISA's preemption of state
laws that relate to employee health benefit plans enables managed care
plans and UR firms to avoid liability under state law for medical
malpractice; (11) compelling evidence is lacking on the likely effects
of amending ERISA to provide either expanded remedies for losses due to
disputed benefit denials or the ability to sue managed care plans for
medical malpractice under state tort laws; (12) consumer groups and
others assert that additional remedies could: (a) improve health care
quality by holding plans accountable for the consequences of their
benefit coverage decisions; and (b) provide participants with a course
of remedies more comparable to state tort laws; (13) managed care plan
and employer groups maintain that these additional provisions would
result in increased costs or benefit reductions; and (14) to date, data
are not available to accurately estimate the extent to which the quality
of health care would improve or the amount by which the costs of plans,
employers, and employees might change if ERISA's remedies or preemption
of state laws were amended.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-98-154
     TITLE:  Employer-Based Managed Care Plans: ERISA's Effect on 
             Remedies for Benefit Denials and Medical Malpractice
      DATE:  07/13/98
   SUBJECT:  Managed health care
             Litigation
             Consumer protection
             Damages (legal)
             Liability (legal)
             Eligibility determinations
             Proposed legislation
             Malpractice (medical)
             Employee medical benefits

             
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Cover
================================================================ COVER


Report to Congressional Requesters

July 1998

EMPLOYER-BASED MANAGED CARE PLANS
- ERISA'S EFFECT ON REMEDIES FOR
BENEFIT DENIALS AND MEDICAL
MALPRACTICE

GAO/HEHS-98-154

ERISA Remedies and Managed Care

(101562)


Abbreviations
=============================================================== ABBREV

  DOL - Department of Labor
  ERISA - Employee Retirement Income Security Act
  HMO - health maintenance organization
  IPA - independent practice association
  POS - point of service
  PPO - preferred provider organization
  SPD - summary plan description
  UR - utilization review

Letter
=============================================================== LETTER


B-276104

July 13, 1998

The Honorable Alfonse M.  D'Amato
United States Senate

The Honorable Gene Green
The Honorable Dale E.  Kildee
The Honorable Nita M.  Lowey
The Honorable George Miller
The Honorable Fortney (Pete) Stark
House of Representatives

The Congress enacted the Employee Retirement Income Security Act
(ERISA) nearly a quarter of a century ago to protect employee pension
and welfare benefits.  Employers often provide health care coverage
as an employee welfare benefit.  While employers have voluntarily
provided health care benefits for more than 50 years, a major change
has occurred in the type of benefits they now offer.  By 1995, nearly
three-quarters of those who received coverage through private,
employer-based plans were enrolled in some form of managed care
rather than in traditional fee-for-service plans.  Many believe that,
given this change, the protections under ERISA for those who have
disputes over health care benefits should be reexamined. 

You expressed concern about how people enrolled in employer-based
managed care plans are compensated when they are improperly denied
health care benefits or when they experience negligent medical
care--medical malpractice--and the role that ERISA plays.  You asked
us, therefore, to

  -- describe whether the transition from traditional employer-based
     fee-for-service health plans to managed care has changed the
     process of benefit determination,

  -- identify the remedies that ERISA provides to participants in
     employer-based managed care plans who are improperly denied
     benefits,

  -- determine whether ERISA affects the ability of participants to
     be compensated for injuries that result from either medical
     malpractice or improper benefit denials at employer-based
     managed care plans, and

  -- describe the consequences of changing ERISA's remedies. 

To meet these objectives, we reviewed (1) ERISA and its accompanying
regulations, (2) studies addressing ERISA as it relates to providing
health care, and (3) federal court decisions focusing on ERISA health
benefit denials and medical malpractice in the context of
employer-based managed care.  We concentrated our review of federal
court decisions on cases that were decided by federal appellate
courts--cases with the broadest applicability.  We also reviewed law
review articles and health, business, and other articles we found in
professional journals and other publications.  Collectively, these
articles discussed ERISA, its remedies, and the implications for
employers, plan participants, managed care plans, and health care
providers.  The bibliography at the end of this report lists the
studies and the articles.  In addition, we interviewed
representatives of selected employer, consumer, managed health care
plan, and health care provider groups, and the Department of Labor
(DOL).  In our study, we describe ERISA's effect on the remedies
available for improper benefit denials and medical malpractice
claims.  In doing so, we describe relevant features of employer-based
managed care plans such as grievance and appeal procedures and
utilization review.  We performed our work between April 1997 and May
1998 in accordance with generally accepted government auditing
standards. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

In contrast to traditional fee-for-service insurance, managed care
plans attempt to ensure that enrollees receive services that are
necessary, efficiently provided, and appropriately priced.  Such a
cost containment strategy can alter the process and timing of
"benefit determination"--
deciding whether a plan covers and hence will pay for a service for a
participant.  Since the late 1980s, employers have largely shifted to
offering managed care plans that use such techniques as prospective
utilization review (UR).  As a result, benefit coverage decisions
have increasingly shifted from being made after services are provided
to before.  Consequently, when services are determined not to be
covered, plan participants who are unable to obtain financing may not
be able to obtain the services their physicians recommend, or perhaps
any service at all. 

ERISA effectively limits the remedies available when employees of
private-sector firms claim to have been harmed by plans' decisions to
deny coverage of a particular service.  Under ERISA, plans must have
an appeal process for participants who are dissatisfied with a
benefit denial.  If participants are not successful in obtaining the
denied benefit through this process, they can file a civil lawsuit. 
ERISA's exclusive remedy for improper benefit denials is to require
the plan to provide the denied service and, at the court's
discretion, pay attorney fees.  ERISA does not provide for
compensating participants who have sustained losses because of the
denial or a plan's failure to provide a plan benefit.  Groups
representing consumers believe that ERISA's limited remedy neither
provides sufficient compensation for injuries that benefit denials
contribute to nor effectively deters unjustified benefit denials. 
The groups believe that this may allow plans to limit access to care. 
Groups representing employers maintain that ERISA contains
appropriate provisions to protect plan participants against improper
benefit denials. 

ERISA can affect participants' ability to be compensated for injuries
sustained while in an employer-based health care plan.  If injured
through the negligence of health care professionals--medical
malpractice--
patients or their families may pursue compensation against these
providers for monetary and nonmonetary losses and punitive damages
under state tort laws.  ERISA does not affect these cases.  In
contrast, ERISA's preemption of state laws that "relate to" employee
health benefit plans enables managed care plans and UR firms (which
are involved in administering employee health benefit plans) to avoid
liability under state law for medical malpractice. 

In deciding cases in which plan participants seek compensation for
alleged injuries, the courts must first decide whether the dispute
relates to benefit administration or medical care.  Federal courts
have been trying to decide how far ERISA preemption of state laws
extends as it relates to consumers' negligence claims against an
employer-based managed care arrangement.  When federal appellate
courts have concluded that a claim arose through a benefit
determination, they have ruled that ERISA preempts the claim.  When
claims are filed against managed care plans because of the negligence
of their health care providers, appellate courts have differed on
whether ERISA preemption applies. 

Compelling evidence is lacking on the likely effects of amending
ERISA to provide either expanded remedies for losses due to disputed
benefit denials or the ability to sue managed care plans for medical
malpractice or other negligence under state tort laws.  Predictions
about the effects of amending ERISA differ markedly, depending on the
perspectives of the group involved.  Consumer groups and others
assert that additional remedies could (1) improve health care quality
by holding plans accountable for the consequences of their benefit
coverage decisions and (2) provide participants with a course of
remedies more comparable to state tort laws when injuries result. 
However, managed care plan and employer groups maintain instead that
these additional provisions would result in increased costs or
benefit reductions.  Some suggest that additional costs could result
from defensive measures and increased service use to guard against
potential disputes or liability.  According to plan and employer
groups, managed care plans that experienced higher costs from
increased liability would be likely to pass these costs on to
employers who, in turn, might increase employee cost-sharing or cut
back on health care coverage.  To date, data are not available to
accurately estimate the extent to which the quality of health care
would improve or the amount by which the costs of plans, employers,
and employees might change if either ERISA's remedies or preemption
of state laws were amended.  However, many have suggested that an
"upstream" approach--that is, one that seeks to address disputed
benefit denials at an earlier stage and thus prevent court suits--may
also warrant consideration during the debate on ERISA. 


   BACKGROUND
------------------------------------------------------------ Letter :2

ERISA was enacted to protect participants in employer-based pension
and welfare benefit plans.\1 After several highly visible pension
plan failures and abuses in the 1960s and early 1970s, the Congress
enacted ERISA in 1974.\2

Although it was established primarily as a pension law, ERISA also
regulates welfare benefits--including health care benefits--that
participants and their beneficiaries receive through employers.\3 \4

ERISA lays out the framework within which employer-based health
benefit plans must operate.  ERISA requires plans to (1) designate a
named fiduciary to administer a plan in the sole interest of the
participants, (2) provide pertinent documents and plan-related
information to participants, and (3) file annual reports with
DOL--the federal agency responsible for overseeing ERISA's
implementation.\5 However, ERISA's regulatory requirements for
employer-based health care plans are not nearly as comprehensive as
are those for pension plans.  ERISA's requirements do not focus
solely on health care but apply to a variety of employer-based
welfare benefit plans.\6 Also, ERISA provides no financial or
solvency standards to which employer-based health benefit plans must
adhere. 

By enacting ERISA, the Congress created a federally administered
regulatory scheme that applies, with some exceptions, to all
employer-based pension and welfare benefit plans, including
employer-based health plans.\7 The Congress included a section in
ERISA that states that ERISA supersedes, or preempts, all state laws
that "relate to" an employee benefit plan.\8 According to employer
groups, this "preemption" provision helps eliminate problems for
multistate employers who could face conflicting and burdensome state
statutes and regulations when they provide health benefits in more
than one state. 

Because the states have traditionally been granted the power to
regulate the business of insurance, the Congress "saved" insurance
laws from ERISA's preemption provision.  That is, ERISA cannot
supersede a state insurance law.  However, an employer-based health
plan cannot be deemed to be a health insurer for the purposes of
being regulated by state insurance laws under this "savings" clause. 

Employers who choose to provide health care benefits can do so in
different ways.  An employer can self-fund the coverage--that is,
assume the financial risk associated with health insurance.  Because
self-funded plans are not considered to be an insurance product, they
are exempt from state insurance laws and are therefore regulated
solely through ERISA.  Alternatively, an employer can purchase a
health insurance product directly from an established health insurer. 
State laws regulating health insurers are saved from preemption. 
Consequently, the states can regulate the insurance product that the
ERISA plan purchases.  For example, an insurance product purchased by
an employer would have to cover all state-mandated health care
benefits, but all those benefits would not have to be covered in a
self-funded plan.  Similarly, such a product would be subject to
state law requirements for grievance and appeal procedures. 

The distinction between self-funded and purchased health plans does
not apply to the remedies available under ERISA for benefit claims
disputes under employee benefit plans.  With respect to these
remedies, ERISA does not distinguish between the disputed benefit's
being provided through an employer-purchased plan or a self-funded
plan.  As the Supreme Court has found, ERISA preempts state law
claims for compensatory damages that result from benefit denials
because the state laws governing such claims "relate to" employee
benefit plans.  Furthermore, under its preemption clause, ERISA may
or may not supersede state tort laws that govern the kinds and
amounts of compensation that may be available for health-care-related
injuries. 

Most workers and their families in the private sector receive their
health insurance coverage through employers.  According to DOL
statistics, about 125 million people receive health insurance through
about 2.5 million employer-based health care plans covered by ERISA. 
While the exact number of people who receive health care through
self-funded employer-based plans is unknown, several studies have
estimated that approximately 40 percent of insured people are
enrolled in self-funded plans, plans that are free from state
insurance regulation. 

During the past decade, the number of people enrolled in
employer-based managed health care plans has continued to increase. 
About 29 percent of those who received health insurance through an
employer-based plan were enrolled in some type of managed care in
1988, according to KPMG Peat Marwick.  Figure 1 shows that a far
greater percentage of people who received health insurance through an
employer in 1995 were enrolled in managed care plans than in
fee-for-service, even compared with just 2 years earlier.\9

Furthermore, four times as many employers offered no fee-for-service
option in 1997 as in 1988. 

   Figure 1:  Percent of People
   Receiving Health Insurance
   Through Employer-Based Plans by
   Type of Plan, 1993 and 1995

   (See figure in printed
   edition.)

Source:  Data for 1995 are a composite of the results of two national
surveys conducted in the spring of 1995.  One survey, conducted by
KPMG Peat Marwick, surveyed firms with 200 or more workers.  The
other, conducted by Wayne State University, surveyed firms with 200
or fewer workers.  Findings for 1995 were compared with those of a
1993 survey that used similar methods and questionnaires.  These data
were reported in a study by Gail A.  Jensen and others, "The New
Dominance of Managed Care:  Insurance Trends in the 1990s," Health
Affairs, Vol.  16, No.  1 (1997), p.  126. 


--------------------
\1 ERISA seeks to protect "the interests of participants in employee
benefit plans and their beneficiaries, by requiring the disclosure
and reporting to participants and beneficiaries of financial and
other information with respect thereto, by establishing standards of
conduct, responsibility, and obligation for fiduciaries of employee
benefit plans, and by providing for appropriate remedies, sanctions,
and ready access to the Federal courts." 29 U.S.C.  1001(b). 

\2 Public Law 93-406, 88 Stat.  829 (codified as amended at 29 U.S.C. 
1001-1461 (1994)). 

\3 An ERISA-regulated "welfare plan" includes any plan or program
established by an employer for the purpose of providing medical care
or benefits to its employees through the purchase of insurance or
otherwise.  29 U.S.C.  1002(1). 

\4 "Participants" as used throughout this report includes both plan
participants and their beneficiaries. 

\5 ERISA defines a fiduciary as anyone who exercises discretionary
control or authority over the management of a plan or renders
investment advice to a plan (29 U.S.C.  1002(21)(A)).  ERISA
established fiduciary standards to protect employee benefit plan
participants from plan mismanagement. 

\6 As described in ERISA, a welfare benefit plan generally provides
for hospital, medical, surgical, sickness, accident, disability,
death, unemployment, or certain other benefits. 

\7 ERISA does not apply to health plans sponsored by governments and
churches.  29 U.S.C.  1003(b)(1), (2). 

\8 29 U.S.C.  1144(a).  The question whether state laws "relate to"
an employee benefit plan in specific circumstances has given rise to
substantial litigation.  In addition, ERISA's civil enforcement
provision (29 U.S.C.  1132(a)) has been interpreted by the Supreme
Court as providing for "complete preemption." Complete preemption
means that a state-related cause of action can be moved directly to a
federal jurisdiction because federal law so completely occupies the
area that it would displace any state claims that may arise. 

\9 The proportion of employees at medium- to large-sized companies
enrolled in managed care plans was 81 percent in 1997 according to
KPMG Peat Marwick. 


   PROSPECTIVE DECISIONS ABOUT
   WHETHER A POLICY COVERS A
   PROCEDURE ARE A FEATURE OF
   MANAGED CARE
------------------------------------------------------------ Letter :3

Paying for health care in the United States has become increasingly
expensive.  In the 1980s, employers in the private sector, who
shoulder much of the health care costs, were becoming particularly
attuned to the alarming speed at which these costs were rising.  As
cost growth continued at double-digit rates, employers began to
search for more economical ways of providing health care benefits
while maintaining or improving the quality of care.  In their search,
many employers began to turn away from traditional fee-for-service
health care and look to managed care--which, among other things,
selectively contracts with providers and manages the use of services. 
This transition to managed health care has made benefit
determinations more critical for participants in employer-based
plans. 


      MANAGED HEALTH CARE PLANS
      OPERATE DIFFERENTLY FROM
      FEE-FOR-SERVICE PLANS
---------------------------------------------------------- Letter :3.1

For many years, private-sector employers relied on traditional
fee-for-service health insurance to provide their employees with
health care benefits.  Health insurance became increasingly
expensive, partly because participants had virtually an unlimited
choice of health care providers with few controls on service use or
costs.  Traditional fee-for-service insurers paid the bills for
covered services and typically did not become involved in medical
treatment decisions.  These insurers played primarily a financial
role and left medical decision-making to physicians and hospitals.\10
Under a traditional fee-for-service health insurance plan, (1) the
attending physician usually decided when medical services were
necessary, (2) the patient received the services, and (3) the insurer
either paid or did not pay, depending on an independent retrospective
review of the claim.  Therefore, benefit disputes usually focused on
whether the insurer would pay, not on whether services would be
provided. 

Generally, managed health care attempts to contain costs by
addressing both the price and quantity of health care services. 
Managed care plans attempt to ensure that services provided to plan
enrollees are necessary, delivered efficiently, and priced
appropriately.  Managed care covers a broad spectrum of health care
delivery arrangements and financing.  Types of managed care plans
include health maintenance organizations (HMO), preferred provider
organizations (PPO), and point of service (POS) plans.\11 HMOs--the
oldest form of managed care--operate under several different models. 
For example, staff model HMOs employ health care providers directly
and often serve only enrolled HMO patients at facilities owned by the
HMOs.  Independent practice association (IPA) model HMOs contract
with providers who serve other patients as well as HMO enrollees in
the providers' own offices. 


--------------------
\10 See Wendy K.  Mariner, "Liability for Managed Care Decisions: 
The Employee Retirement Income Security Act (ERISA) and the Uneven
Playing Field," American Journal of Public Health, Vol.  86, No.  6
(1996), p.  864. 

\11 HMOs provide or arrange for services to enrollees--for a fixed,
prepaid amount of money--through a panel of providers.  HMOs use
primary care physicians as gatekeepers who manage the enrollees' use
of services.  PPOs contract with providers for discounted fees for
services to plan members.  Members have a financial incentive to use
participating providers.  POS plans give members a choice when
services are needed as to how to receive services, whether through an
HMO, a PPO, or a fee-for-service plan. 


      PROSPECTIVE UR HAS
      CONSEQUENCES FOR BENEFIT
      DETERMINATIONS
---------------------------------------------------------- Letter :3.2

Managed care plans may use different methods to control access to
care, but prospective UR--used to determine in advance the medical
necessity or appropriateness of more costly, nonroutine health care
services--is distinctive.  Prospective UR adds a layer of review to
the decision-making between attending physicians and their patients. 
In managing patient care, most managed care plans have adopted
prospective UR procedures.  Prospective UR determines whether the
attending physician's proposed course of medical treatment and
proposed service location are necessary based on clinical criteria. 

Managed care plans often assume the administrative function of making
benefit determinations--that is, determining whether a specific
treatment or procedure is covered by the employer's plan.  Plans may
assume this function when employers contract with HMOs and other
types of managed care to provide health care services for ERISA
participants or when the plans administer employer-based ERISA
self-funded plans. 

Prospective UR procedures vary among managed care plans.  Plans
differ in the services requiring prior authorization, the type of
personnel making decisions, and the criteria used to determine
medical necessity.\12 Plan-based medical personnel such as physicians
or nurses may be involved at different stages of the process and may
exercise independent clinical judgment rather than relying
exclusively on plan-specified criteria.  However, they exercise this
judgment for the purpose of determining plan coverage for the service
in question.  Such decisions are made independently from the
decisions made by a patient's attending physician.  (The attending
physician and plan officials may discuss the plan's benefit coverage
decision.) Figure 2 shows that compared with traditional
fee-for-service care, the coverage decisions at managed care plans
for some services are often made through a prospective UR
process--before the patient receives health care services.\13

   Figure 2:  Providing Health
   Care Through Traditional
   Fee-for-Service and Managed
   Care

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)

Ultimately, the health plan decides whether a particular service is
covered based on the review conducted by its agents.  A health plan's
decision to deny coverage does not preclude the attending physician
from providing treatment--if the patient can obtain other funding to
pay for it.  Nonetheless, it may be that for financial or other
reasons, the patient may not obtain the recommended service. 
Consequently, benefit disputes involving managed care plans often
focus on whether the plan should compensate the patient for any
injuries or damages that may have occurred because the disputed
service was not provided. 


--------------------
\12 Two common examples of prospective UR procedures are preadmission
certification of hospital admissions and authorization for expensive
diagnostic testing. 

\13 Although the managed care industry asserts that plans do not
reward providers for withholding "medically necessary" care,
capitation payments and other economic incentives could also
influence a health care provider's actions or recommended treatments. 
For example, because of economic incentives, a health care provider
may choose not to provide a more costly service and therefore would
not refer the request for a prospective UR coverage decision.  In
such a case, no benefit denial would occur and the service would not
be provided.  Moreover, no benefit denial dispute would arise because
the patient may not be aware that a service was an option and not
provided.  Therefore, plans' ability to ensure that appropriate care
is provided requires a mechanism to counterbalance the economic
incentives of capitation. 


   ERISA PROVIDES THE EXCLUSIVE
   REMEDY FOR ALL EMPLOYER-BASED
   HEALTH BENEFIT DENIALS
------------------------------------------------------------ Letter :4

Plan participants who believe they have been denied a plan benefit
can seek to reverse the denial through the plan's claims appeal
process.  If participants are unsuccessful, they can sue the plan as
a last resort.  If participants are successful in court, the only
remedy under ERISA allows them to receive the denied benefit and, at
the court's discretion, attorney fees.  Groups representing consumers
are concerned that ERISA's remedy does not sufficiently deter
inappropriate benefit denials and that it is difficult to pursue
claims in court.  Conversely, employer groups believe that ERISA
already provides the appropriate mechanism for protecting plan
participants. 


      ERISA'S BENEFIT DENIAL AND
      APPEAL PROCESS
---------------------------------------------------------- Letter :4.1

ERISA requires that employer-based health benefit plans provide
participants with information on covered benefits in a summary plan
description (SPD).  The SPD gives details on the plan and describes
the rights, benefits, and responsibilities under the plan.  Plans
that meet federal standards for HMOs are permitted to omit certain
information from their SPDs and are deemed to satisfy ERISA's
requirements for resolving benefit disputes.\14

ERISA requires plans to have a system for resolving benefit disputes. 
The minimum procedures that an employer-based health benefit plan
must follow when denying a benefit and for resolving any dispute that
arises from the denial are specified in ERISA and its implementing
regulations, which were published in 1977.\15 Generally, as shown in
table 1, it can take up to 1 year to complete the benefit denial and
resolution process:  (1) plans have 90 days in which to deny a
benefit, although they can request an extension of up to 90 days; (2)
a participant has up to 60 days to appeal after the denial, or
request a review of the decision; and (3) the plan must resolve the
appeal promptly, within 60 days, although an additional 60 days can
be requested under special circumstances. 



                          Table 1
          
           Claim Denial and Appeal Process Under
                           ERISA

ERISA requirements            Time period
----------------------------  ----------------------------
Benefit denials               Plans have 90 days to make
                              denial

Initial denial must

--be written

--be understandable

--state reason

--refer to the plan
provision

--state how to resolve

--identify how to appeal

Plans can request extension   Plans can request up to 90
under special circumstances   more days

Participant can request       Participant has 60 days to
review of decision            request review

Benefit appeals               Plans have 60 days to decide
                              appeal

Plans can request extension   Plans can request up to 60
under special circumstances   more days
----------------------------------------------------------
Source:  DOL regulations in 29 C.F.R.  2560.503-1--Claims procedure. 

ERISA's requirements for handling benefit appeals are limited in some
respects.  For example, the regulations contain no provisions for
expedited appeals.\16

Furthermore, there is no provision for an independent review of the
plan participant's appeal.  The same entity that initially denied the
benefit can make the appeal decision.\17 If not satisfied with the
results of the appeal process, a plan participant has the final
recourse of suing the plan. 


--------------------
\14 See 29 C.F.R.  2520.102-5, 2560.503-1; 42 U.S.C.  300e et seq. 

\15 The relevant passages in ERISA and the regulations are in 29
U.S.C.  1133 and 29 C.F.R.  2560.503-1.

Almost all states require HMOs to establish consumer grievance
procedures.  Insured, state-regulated ERISA health benefit plans are
subject to these state requirements.  Legislation or regulation
mandating external review has been enacted by 16 states.  Data are
from the National Conference of State Legislatures as shown in HMO
Complaints and Appeals:  Most Key Procedures in Place, but Others
Valued by Consumers Largely Absent (GAO/HEHS-98-119, May 12, 1998). 
Also, according to representatives of the American Association of
Health Plans--the principal trade association representing more than
1,000 HMOs, PPOs, and other network health plans--many health plans
contracting with self-funded ERISA plans often find it expedient to
follow state-mandated grievance procedures in place for their other
lines of business. 

\16 DOL solicited public comments in the fall of 1997 on the need to
change ERISA's procedures and in May 1998 was in the process of
developing regulatory changes.  Areas under consideration, among
others, include (1) requiring that claims for urgent medical care be
processed within a time period appropriate to the emergency but in no
event more than 72 hours, (2) making clear that a statement of the
right to appeal and a description of the appeal process must
accompany the benefit denial, and (3) determining whether there is a
need to establish uniform minimum standards for all ERISA plan claims
procedures, including plans providing benefits through federally
qualified HMOs.  See Request for Information, 62 Fed.  Reg.  47262
(1997). 

\17 DOL says it lacks the authority to require independent review. 


      ERISA LIMITS REMEDIES TO
      BENEFITS DENIED
---------------------------------------------------------- Letter :4.2

ERISA provides that when a participant is not satisfied with the
results obtained through a plan's appeal process, the only way to
resolve the benefit denial is to sue the plan to obtain the
benefit.\18 This remedy applies to participants in all employer-based
health plans, except those sponsored by governments and
churches--both those self-funded and those purchased from an insurer. 
While this type of civil suit can be filed initially in either a
federal or state court, frequently the cases in state courts are
removed to a federal court on a defendant's motion.  If successful in
court, however, the participant is entitled only to receive the
denied benefit and, at the court's discretion, attorney fees.  If a
participant establishes in a lawsuit that a plan wrongfully denied a
benefit, ERISA authorizes the court to order that the benefit be
provided.\19 ERISA does not contain any provisions for compensating
for damages that may occur because of the benefit denial such as lost
wages, additional health care costs, or pain and suffering.\20 Nor
does ERISA provide for any punitive damages. 

Generally, when a benefit is refused or a claim is denied, a
participant's ultimate recourse is to sue under ERISA.  (The
participant may be required first to go through an administrative
appeal process.) In such a case, the participant asserts that a
service promised through the employer-based health care plan was not
provided.  Under ERISA, the plan's fiduciary is responsible for
protecting the interests of the participants.  ERISA states that
fiduciaries have a duty to act "solely in the interest of the
participants and beneficiaries and for the exclusive purpose of
providing benefits to participants and their beneficiaries.  .  .  ."
In this role, a fiduciary must be prudent and act according to the
plan documents.  Under ERISA, the failure to pay a valid claim may
constitute a breach of a fiduciary's responsibilities.  However,
courts ordinarily uphold the fiduciary's decision unless the
participant can show that the decision was "arbitrary and
capricious."\21 Arbitrary and capricious behavior may include such
activities as (1) using undisclosed medical criteria that are more
restrictive than those used by other insurers, (2) basing a denial on
an ambiguous provision of the benefit agreement, or (3) failing to
comply with ERISA's notification and reconsideration procedures if
that failure prevented a request of reconsideration of an adverse
determination.\22


--------------------
\18 29 U.S.C.  1132(a). 

\19 In this and subsequent references to wrongful denial of benefits,
we describe the remedy as an order to provide the denied benefit,
because ERISA specifically provides for that.  (It also permits
lawsuits to clarify a participant's right to future benefits or to
enforce his or her rights under the terms of the plan.) Often,
however, providing the benefit is not an adequate remedy--for
example, when the participant has already received the benefit at his
or her own expense or has died.  ERISA does not expressly authorize
reimbursement for the cost of a denied benefit.  However, when
necessary to do justice, a court might order reimbursement under its
so-called equity power, under which judges may craft appropriate
remedies not provided for in the law. 

\20 In Pilot Life Ins.  Co.  v.  Dedeaux, 481 U.S.  41 (1987), the
Supreme Court held that ERISA contains a civil enforcement scheme
that was intended to provide an exclusive remedy.  The Court found
that state law claims for compensatory damages "related to" employee
benefit plans and were therefore preempted by ERISA. 

\21 Where an administrator of an employee benefit plan has
discretionary authority to determine eligibility for benefits or
interpret plan terms, the courts can overturn the administrator's
decision only if it is arbitrary, capricious, or an abuse of
discretion.  See Firestone Tire & Rubber Co.  v.  Bruch, 489 U.S. 
101 (1989). 

\22 According to James L.  Touse, "Medical Management and Legal
Obligations to Members," The Managed Health Care Handbook
(Gaithersburg, Md.:  Aspen Publishers, Inc., 1993), p.  487. 


      CONSUMER GROUPS BELIEVE
      ACCESS TO HEALTH CARE MAY BE
      DENIED
---------------------------------------------------------- Letter :4.3

Benefit coverage determinations have taken on a more critical role as
employers have changed from traditional fee-for-service health care
to managed care.  Benefit denials can now more easily restrict access
to care because benefit determinations are often made before services
are provided, especially for nonroutine, high-cost services or
treatments.  This is a different situation from traditional
fee-for-service coverage.  A participant may not be financially able
to obtain more costly services if the plan does not pay. 

According to representatives of consumer groups, ERISA's remedy does
not deter inappropriate benefit denials.  ERISA provides no penalty
when benefits are denied inappropriately.  If found to be in the
wrong, the employer-based plan must then only provide the benefit
that had been denied.\23 In addition, consumer groups believe that
saving money gives employer-based health plans an incentive to deny
benefits. 

Plan participants may face other problems pertaining to benefit
denials, according to consumer group representatives.  For example,
participants may not be aware of or understand the information
contained in the SPDs that explains the benefit appeal process or
ERISA's remedy.  A recent study found that according to state
regulators, most plan participants neither read nor understood plan
documents.\24

Furthermore, it may be difficult for a plan participant to pursue a
benefit denial in court because the participant may not be able to
find or afford legal representation.  Attorneys often accept cases on
a contingency fee basis--they receive a percentage of the final
settlement or award made by the court.  However, the ultimate success
in winning an ERISA case is receiving the denied benefit and, at the
court's discretion, reasonable attorney fees.  There is no chance for
a large monetary award based on damages.  Therefore, attorneys have
little financial incentive to take these cases. 


--------------------
\23 Such views are shared by some insurance regulators.  Some
insurance regulators interviewed for a 1996 study also "observed that
insurers and HMOs sometimes refuse care or payment because they know
they have nothing to lose by doing so." See Patricia Butler and Karl
Polzer, Private-Sector Health Coverage:  Variation in Consumer
Protections Under ERISA and State Law, Special Report (Washington,
D.C.:  National Health Policy Forum, 1996), p.  49. 

\24 See Karl Polzer and Patricia A.  Butler, "Employee Health Plan
Protections Under ERISA," Health Affairs, Vol.  16, No.  5 (1997), p. 
95.  This study does not address a related hypothesis:  plan
participants may have little incentive to learn about appeals and
related procedures until faced with a benefit denial.  However,
systematic data on such plan participants and their ability to get
timely information are not available. 


      EMPLOYER GROUPS AND MANAGED
      CARE INDUSTRY BELIEVE
      PARTICIPANTS ARE ADEQUATELY
      PROTECTED
---------------------------------------------------------- Letter :4.4

According to groups that represent employers, the Congress sought to
strike a balance in the remedy it provided for benefit denials when
it enacted ERISA.  Representatives of employer groups believe that
the Congress chose to include a remedy that was not overly burdensome
on employers because they provide health care benefits voluntarily. 
These groups believe that ERISA's remedy must consider the employers
who voluntarily provide health care coverage and the plan
participants who expect to receive services they believe are covered
by the plan.  Furthermore, the ERISA Industry Committee--which
represents major private employers regarding public policy and
related matters affecting employee benefit plans--believes that
despite employers' shift since 1974 from predominantly
fee-for-service health benefit plans to mostly managed care plans,
ERISA continues to provide an adequate framework for protecting plan
participants.  According to this employer group, ERISA protects
participants by requiring that plan fiduciaries act in their sole
interest and that denied claims receive fair hearings. 

Employers have no incentive to deny benefits that are rightly due to
plan participants, according to several employer groups.  Employer
groups say that employers provide health benefits to keep their
employees healthy so that the employees can be productive.  In
addition, representatives of the American Association of Health Plans
believe that significant counterbalances prevent inappropriate
benefit denials.  According to the association, health plans are also
concerned about making improper benefit denials.  For example, health
plans could face a loss of business and reputation and could risk
incurring unfavorable publicity.  Furthermore, representatives of
employer groups said that plan fiduciaries can be assessed penalties
if they are found to make arbitrary and capricious benefit
determinations.  For example, they said that ERISA provides the
authority to ban individuals or entities from acting as plan
fiduciaries, effectively putting them out of business.  In principle
this sanction is available, but in practice it is rarely invoked. 


   ERISA MAY LIMIT PARTICIPANTS'
   ABILITY TO SUE MANAGED CARE
   PLANS FOR DAMAGES UNDER STATE
   LAW
------------------------------------------------------------ Letter :5

ERISA's preemption clause generally prevents plan participants from
holding managed care plans directly liable under state laws for the
damages that result from their negligent acts or omissions, and it
complicates plan participants' ability to hold managed care plans
indirectly liable for the negligence--medical malpractice--of their
providers.  This situation has caused much debate.  Federal courts
are addressing the scope of ERISA preemption as it relates to
negligence in an employer-based managed care arrangement. 


      STATE LAW, NOT ERISA, ALLOWS
      SUITS FOR DIRECT NEGLIGENCE
      AGAINST PROVIDERS AND
      ORGANIZATIONS
---------------------------------------------------------- Letter :5.1

Physicians and other health care providers can be held directly
liable for their own negligent acts--generally called medical
malpractice.  Medical malpractice is defined as acts of omission or
commission, usually based on negligence, that result in injuries. 
Plan participants may attempt to hold health care providers directly
liable for injury by filing medical malpractice claims seeking
compensation for monetary and nonmonetary losses.\25 In addition to
monetary and nonmonetary losses, plaintiffs can seek to obtain
punitive damages. 

Medical malpractice claims are generally governed by state tort
law.\26 State tort laws may differ with respect to the kinds and
amounts of compensation that are available.  A determination of
liability for medical malpractice is based upon four elements:  (1)
the existence of a duty of care to the patient, (2) an applicable
standard of care and its violation, (3) a compensable injury to the
patient resulting from that breach, and (4) a causal connection
between the violation of the standard of care and the harm complained
of.\27 The medical malpractice liability system is generally thought
to have three primary goals:  (1) provide compensation to people who
are injured through negligent medical care, (2) create an incentive
for physicians to provide careful treatment, and (3) provide
accountability in dispute resolution.\28

In addition, health care organizations, including hospitals and
managed care plans, can be held directly liable for their own
negligent acts or omissions.  That is, a managed care plan can be
held directly liable for its own failure to fulfill a duty owed to
its patients in non-ERISA-based plans and can be sued for damages
under state laws.  For example, a negligence claim brought against a
managed care plan can be based on a benefit denial or some other
aspect of employee benefit plan administration, including UR and
preauthorization of services, alleging that the actions of the plan
constitute direct negligence. 


--------------------
\25 Monetary losses include medical bills, rehabilitation costs, and
lost income.  Nonmonetary losses include pain, suffering, and
anguish. 

\26 A tort is a wrongful act or omission (not based on a contract)
that causes injury to another person.  Tort law provides a framework
for compensating medical malpractice damages. 

\27 Henry Campbell Black, Black's Law Dictionary, 6th ed.  (St. 
Paul, Minn.:  West Publishing Co., 1990),
p.  959. 

\28 Daniel Kessler and Mark McClellan, "Do Doctors Practice Defensive
Medicine?" The Quarterly Journal of Economics, Vol.  111, Issue 2
(1996), p.  353.

Randall R.  Bovbjerg, "Medical Malpractice on Trial:  Quality of Care
Is the Important Standard," Law and Contemporary Problems, Vol.  49,
No.  2 (1986), pp.  321-48. 


      ORGANIZATIONS CAN BE HELD
      INDIRECTLY LIABLE FOR
      PROVIDERS' NEGLIGENCE UNDER
      STATE LAW
---------------------------------------------------------- Letter :5.2

An injured person's right to sue a managed care plan--for example, an
HMO--under state law for the medical malpractice of its health care
providers is evolving in much the same way that the right to sue a
hospital for the negligence of its providers evolved.  Initially,
hospitals were viewed as only providing a place where patients could
receive services from independent health care providers.\29 However,
courts eventually began to address whether hospitals could be held
"vicariously" or indirectly liable for the actions of health care
providers--who were either employees or independent contractors--in
addition to being held directly liable for their own actions.\30

Plan participants are increasingly attempting to hold HMOs to be
vicariously liable when health-care-related injuries occur.  For
example, an employer can be held indirectly responsible for the
actions of its employees under the legal theory of "respondeat
superior."\31 This theory of law applies most clearly to staff model
HMOs in which health care providers are directly employed by the
HMO.\32 A staff model HMO's employed health care providers are
typically physicians, nurses, and others, including those who make UR
decisions.  Consequently, plan participants' attorneys can try to
hold staff model HMOs liable for the negligent actions of their
health care providers.\33

Most HMOs, however, treat physicians as independent contractors
rather than retaining them as direct, salaried employees.  When an
HMO contracts with physician associations to provide health care
services--the IPA model--the HMO also may be held liable for
negligent medical care if the plan participant perceives the HMO to
be providing the health care.  This is the "ostensible agency" theory
of law.  Courts must determine whether the HMO represented the
physician to be its employee and whether the patient looked to the
HMO, rather than the physician, as the health care provider.\34 If
the patient has no choice when selecting a treating physician, the
patient could more reasonably look to the HMO as a provider.\35


--------------------
\29 See Lisa Panah, "Common Law Tort Liability of Health Maintenance
Organizations," Journal of Health and Hospital Law, Vol.  29, No.  3
(1996), pp.  146-59 and 192. 

\30 The case starting the trend to holding hospitals responsible for
the actions of physicians was Bing v.  Thunig, 143 N.E.2d 3, 163
N.Y.S.2d 3, 8 (N.Y.  1957). 

\31 Respondeat superior or "vicarious liability" is the doctrine of
tort law that an employer is liable for the negligent acts of an
employee acting within the scope of his or her employment. 

\32 Plaintiffs must demonstrate a "master-servant" relationship
between the HMO and the provider.  Courts look for such factors as
how the HMO chooses, hires, controls, and compensates providers and
whether the HMO owns the facilities. 

\33 The plaintiff must prove that the provider performed negligently,
there was a direct employment relationship between the HMO and the
provider, and the provider was acting within the scope of employment. 

\34 When determining whether the HMO presents the physician as its
employee, the courts look at the HMO's representations to the
patient.  When determining whether the patient looks to the HMO for
care, the courts consider the degree of control the plan exerts over
the patient's selection of physicians and whether the physician's
malpractice arose out of the performance of an inherent function of
the plan. 

\35 See L.  Frank Coan, Jr., "You Can't Get There From
Here--Questioning the Erosion of ERISA Preemption in Medical
Malpractice Actions Against HMOs," Georgia Law Review, Vol.  30, No. 
4 (1996), pp.  1023-60. 


      ERISA PREEMPTION ROLE IS NOT
      ALWAYS CLEAR
---------------------------------------------------------- Letter :5.3

ERISA's preemption clause complicates the ability of employer-based
health care plan participants to sue managed care plans when injuries
occur.  In fact, ERISA has become a major source of confusion as to
whether a plan participant may recover damages from a managed care
organization for the negligence of its health care providers.\36
Because ERISA preempts state laws that "relate to" employee benefit
plans, managed care plans have argued that ERISA preempts the ability
to sue them under state tort laws either directly for their own
negligence or indirectly for the negligence of health care providers. 
When sued by an ERISA plan participant in a state court, the managed
care plan can seek to move the case to federal court because of ERISA
and, even in state court, can assert ERISA preemption as a defense. 
As ERISA provides more limited remedies than state tort laws--only
the benefit denied and no compensatory or punitive damages--there are
incentives for managed care organizations to claim the ERISA
preemption. 

Managed care entities increasingly perform several functions
simultaneously for employer-based plans--UR, plan administration,
arranging or providing medical treatment--and consequently the
distinction between administering a plan and providing health care
may be less clear.  Federal courts have found that the UR entity may
make medical decisions in the context of making a benefit
determination under an employer's ERISA plan.\37

DOL has intervened as amicus curiae--"friend of the court"--in eight
lawsuits addressing ERISA's preemption of state tort laws.\38 In
these cases, DOL argued that ERISA does not preempt negligence or
medical malpractice claims against HMOs when the plan participant is
part of an employer-based health plan. 


--------------------
\36 See F.  Christopher Wethly, "Vicarious Liability Malpractice
Claims Against Managed Care Organizations Escaping ERISA's Grasp,"
Boston College Law Review, Vol.  37, No.  4 (1996), pp.  813-60. 

\37 A well-publicized UR example in which ERISA was held to preempt a
malpractice claim against a UR entity is found in the lawsuit filed
by Florence Corcoran (Corcoran v.  United Healthcare, Inc., 965 F.2d
1321 (5th Cir.  1992), cert.  denied, 506 U.S.  1033).  Because of a
high-risk pregnancy, Mrs.  Corcoran's attending physician determined
that she needed to be hospitalized for close monitoring.  Because of
a requirement of participation in her employer's health plan, Mrs. 
Corcoran's physician sought precertification for the hospital
admission.  The firm performing UR for the employer's plan determined
that hospitalization was not medically necessary and would not be
covered.  Instead, a period of part-time home nursing care was
authorized for Mrs.  Corcoran.  Subsequently, during a period while a
nurse was not on duty, the fetus became distressed and died.  In this
case, the court found that the UR firm made medical decisions and
gave medical advice but did so in the context of making a
determination about the availability of benefits under the health
plan.  The court also noted that prospective UR decisions influence
treatment choices to a far greater degree than retrospective review,
saying that "a beneficiary, faced with the knowledge of specifically
what the plan will and will not pay for, will choose the treatment
option recommended by the plan in order to avoid risking total or
partial disallowance of benefits." However, in the Corcoran case, the
plan's SPD stated that all decisions regarding medical care were up
to plan participants and their physicians. 

\38 The eight cases were (1) Dukes v.  U.S.  Healthcare, (2) Visconti
v.  U.S.  Healthcare, (3) Rice v.  Panchal, (4) Ravenel v.  Kaiser
Foundation Health Plan of Texas, (5) Robbins v.  HIP of New Jersey,
(6) Bledsoe v.  Brown, (7) Shea v.  Esensten, and (8) Nascimento v. 
Harvard Community Health Plan. 


      FEDERAL COURTS ALLOW ERISA
      PREEMPTION FOR BENEFIT
      DETERMINATION DECISIONS
---------------------------------------------------------- Letter :5.4

Federal appellate courts have concluded that when the action of a
managed care plan involves benefit administration, ERISA preempts
damage claims under state law, even though the plan's action may have
been a wrongful denial of benefits.  Whether a plan action is benefit
administration or a medical decision is not always clear; the
distinction often depends on the facts of each case.  Courts have
generally concluded that benefit determinations by plans--for
example, that a particular medical service is not covered--fall in
the category of benefit administration.  Once the action of the plan
is characterized as benefit administration, ERISA preempts state
causes of action. 

The federal courts are divided on the effect of ERISA when the
managed care plan acts not merely as a benefit administrator but as a
provider of medical care.  Some courts have held that ERISA does not
preempt malpractice suits against managed care plans under state law
when the complaint is based on medical advice or care by the plan
provided through an employee or an agent of the plan.  Other courts
have held that ERISA preempts suits against managed care plans under
state law based on malpractice by plan employees or agents.\39 The
appendix summarizes some of the decisions on ERISA by the federal
courts addressing these issues. 


--------------------
\39 The ERISA Industry Committee pointed out that a recent law review
article maintains that managed care organizations such as HMOs, PPOs,
and integrated delivery systems should be held legally responsible
for the negligence of physicians treating their subscribers or
enrollees.  This is known as enterprise liability.  The article
states that "it does not appear that ERISA will block state courts in
imposing enterprise liability on M[anaged]C[are]O[rganization]s."
However, the author acknowledges that courts have not yet adopted
such an approach and are unlikely to do so soon.  See Clark C. 
Havighurst, "Making Health Plans Accountable for the Quality of
Care," Georgia Law Review, Vol.  31 (1997), pp.  587-647. 


      COMPETING CONCERNS OF
      SEVERAL GROUPS COMPLICATE
      DEBATE ON ERISA'S ROLE
---------------------------------------------------------- Letter :5.5

When ERISA's preemption of state tort law applies, plan participants/
consumers, employers, and managed care plans are affected
differently.  As a result, each of these groups has its own distinct
reaction to the role that ERISA's preemption clause plays in the
ability to file claims for medical malpractice and benefit denials
under state law. 

Consumer groups object to ERISA's preemption clause because it denies
plan participants the ability to pursue damage claims against plans
for benefit decisions under state law.  As federal court cases have
shown, ERISA plan participants have been left without any legal right
to sue for damages when injuries occur as a result of such benefit
coverage decisions.\40 There are no data to show how often
participants are left without the right to sue for damages. 
Moreover, the high cost of treatments may effectively keep plan
participants from paying for care themselves that employer-based
plans determine to be medically unnecessary or not covered.  In
addition, ERISA's remedy for injuries occurring because of benefit
denials is insufficient, according to consumer advocates.  They
believe that providing more remedies would also improve the quality
of health care that consumers would get by holding managed care plans
accountable for unfair denials, limitations, or reductions in care. 

Employers provide health care benefits voluntarily to help attract
and retain workers, especially in a competitive environment, and to
help keep trained employees healthy and productive.  Many employees
consider these benefits to be important.  When employers choose to
provide health care benefits, employer groups believe that ERISA's
preemption gives them the ability to design innovative health plans
that can be consistent across state borders.  Employer groups say
that if plan fiduciaries were subject to compensatory or punitive
damages, employers would be less likely to provide health benefits
because of the higher costs associated with them. 

When managed care plans administer employer-based health care
benefits, they believe that they are protected from state law
remedies by ERISA's preemption clause.  They view making benefit
determinations--including whether a particular service is medically
necessary--as administrative functions associated with benefit plans
covered by ERISA.  They believe that subjecting such decisions to
state law remedies would raise costs as participants/consumers and
trial lawyers seek damages from plans because of their perceived
"deep pockets." According to the American Association of Health
Plans, the very methods that have made health plans successful at
arranging for affordable, high-quality health care would be
undermined.  Also, the association maintains that the need to defend
against tort claims for denial of benefits would cause health plans
to take defensive measures.  For example, the association notes that
plans may authorize coverage for more services, whether or not they
are medically necessary, to avoid possible litigation.  However, the
scope of defensive measures may be limited.  One survey showed that
the final benefit denial rate was no more than 3 percent, although
higher denial rates may be associated with certain services or
specialties.\41


--------------------
\40 While the Corcoran court found for ERISA preemption, the court
acknowledged that it "eliminates an important check on the thousands
of medical decisions routinely made in the burgeoning utilization
review system.  With liability rules generally inapplicable, there is
theoretically less deterrence of substandard medical decisionmaking. 
Moreover, .  .  .  bad medical judgments will end up being cost-free. 
.  .  .  ERISA plans, in turn, will have one less incentive to seek
out the companies that can deliver both high quality services and
reasonable prices." (965 F.2d 1321, 1338, 5th Cir.  1992).  In
addition, a federal court in another federal circuit found that while
ERISA preempted the specific claim filed, "ERISA has evolved into a
shield of immunity that protects health insurers, utilization review
providers, and other managed care entities from potential liability
for the consequences of their wrongful denial of health benefits,"
(Diane Andrews-Clark v.  Travelers Insurance Co., 984 F.  Supp.  49,
53 (1997)). 

\41 According to a 1995 survey of physicians, first-round denials of
coverage for physician-recommended services were less than 6 percent. 
However, many of these initial denials were ultimately approved, so
the final denial rate was no more than 3 percent.  (Although the
majority of physicians had no coverage denials for the forms of care
studied, denial rates exceeded 20 percent for some physicians.) The
overall denial rate was highest for mental health, substance abuse,
and referral to a specialist of choice.  See Dahlia K.  Remler and
others, "What Do Managed Care Plans Do to Affect Care?  Results From
a Survey of Physicians," Inquiry, Vol.  34 (fall 1997), pp.  196-204. 
This study did not, however, attempt to account for the possible
deterrence of denials on the physicians' recommendations regarding
services. 


   NO CONSENSUS EXISTS REGARDING
   CHANGES TO ERISA
------------------------------------------------------------ Letter :6

In effect for more than two decades, the remedies ERISA provides are
facing increased scrutiny.  While they were considered to be
sufficiently fair when enacted by the Congress in 1974, much has
changed since then.  Now, as more federal court cases challenge ERISA
preemption, many members of the Congress believe that the time has
come to revisit either ERISA's civil enforcement scheme--its remedies
section--or its preemption clause.  In addition to the legislative
proposals that have been introduced, alternative solutions may merit
further exploration.  Nonetheless, any changes made to ERISA will
evoke positive reactions by some of those who are affected and
negative reactions by others. 


      CONGRESSIONAL PROPOSALS TO
      CHANGE ERISA
---------------------------------------------------------- Letter :6.1

In the first session of the 105th Congress, two different types of
amendments to ERISA were introduced to address the question of
compensating plan participants who are injured as a result of
improper medical decisions made by managed care entities.  Generally,
these proposals would either (1) provide for compensation in ERISA's
civil enforcement section or (2) change ERISA's preemption clause so
that it does not supersede state tort laws.  The two proposal types
differ with respect to how injured plan participants would be able to
seek relief.  Under the first type, ERISA itself would provide more
remedies for alleged injuries.  Under the second, ERISA would make it
easier for participants to pursue state-provided remedies when
seeking compensation from managed care plans. 


      ALTERNATIVES TO AMENDING
      ERISA'S CIVIL ENFORCEMENT OR
      PREEMPTION SECTIONS
---------------------------------------------------------- Letter :6.2

The courts are the arena within which participants pursue remedies
when injuries occur under employer-based managed care plans, but more
could be done to try to avoid litigation.  Several studies and groups
have supported this preventive or "upstream" strategy.  Rather than
amending ERISA to provide for the ability to pursue increased
remedies for damages that result from medical decisions made by
managed care entities, more attention could be placed on resolving
disputes earlier. 

The National Association of Insurance Commissioners took the position
that ERISA should be changed to ensure more government oversight and
authority over ERISA health plans' claim and coverage determinations. 
Also, according to the association, ERISA needs to provide
participants with more meaningful internal and external appeal
mechanisms in addition to the appeals to courts that are permitted. 
It also suggested that ERISA could be revised to require each ERISA
health plan to provide independent alternative dispute resolution
mechanisms to mediate or adjudicate disputes with participants that
cannot be resolved through internal review.\42 The association
believed that ERISA should be amended to give participants in ERISA
health plans access to state tort law remedies, subject to reasonable
limits, only if its other suggested changes were not implemented. 

A recent study on managed care plan liability stated that having a
procedure through which participants could appeal a managed care
plan's benefit denials to an outside reviewer could resolve disputes
before harm occurred and could prevent the need for lawsuits later
on.\43 Analysts sponsored by the National Institute for Health Care
Management reported that an ideal system for resolving benefit
disputes should "Recognize the inevitability of conflict between
emotionally vulnerable patients and any economically rational health
system by anticipating common disputes, tempering expectations with
clear rules and implementing timely, efficient dispute resolution
mechanisms."\44

Also, several groups we spoke with representing consumers, health
care plans, and employers told us that more emphasis needs to be
placed on strengthening the grievance and appeal procedure within
managed care plans. 

Furthermore, the President's Advisory Commission on Consumer
Protection and Quality in the Health Care Industry stated that a
timely appeal process can help reduce the incidence of injury.  As a
result, the commission recommended that the internal and external
appeal process be enhanced.  The Commission recommended the
establishment of external review systems that would be limited to
reviewing (1) decisions relating to services that are "experimental"
or "investigational," (2) decisions in which a service is determined
not to be medically necessary and the cost exceeds a "significant
threshold," and (3) decisions in which the denial, based on medical
necessity, could jeopardize the life or health of a patient.\45


--------------------
\42 Consumer groups generally oppose the use of any mechanism that is
binding on participants and takes away the opportunity to appeal a
decision to the courts.  Access to federal courts is guaranteed under
ERISA and consumer groups do not want that right weakened in exchange
for a "better" appeal procedure. 

\43 See Patricia A.  Butler, Managed Care Plan Liability:  An
Analysis of Texas and Missouri Legislation (Menlo Park, Calif.:  The
Henry J.  Kaiser Family Foundation, 1997), p.  22. 

\44 See Linda A.  Bergthold and William M.  Sage, Medical Necessity,
Experimental Treatment and Coverage Determinations:  Lessons From
National Health Care Reform, (Washington, D.C.:  National Institute
for Health Care Management, 1994), p.  4. 

\45 Quality First:  Better Health Care for All Americans, Final
Report to the President of the United States, The President's
Advisory Commission on Consumer Protection and Quality in the Health
Care Industry (Washington, D.C.:  1998), pp.  155-61. 


      DOL SUPPORTS STRONGER
      REMEDIES TO ENHANCE A
      PREVENTIVE COMPLIANCE
      STRATEGY
---------------------------------------------------------- Letter :6.3

While DOL supports the need to strengthen ERISA's claim resolution
procedure, it also believes that stronger remedies are needed. 
According to DOL, stronger remedies are needed at the end of the
process to ensure compliance with the process "upstream." That is,
DOL believes that it could develop a regulation to implement a better
claim resolution procedure for plan participants but could not ensure
compliance if there was no cost imposed for failure to comply. 
Consumer groups also concur with DOL's concern that current ERISA
remedies do not adequately protect plan participants or deter plans
from noncompliance. 


      CHALLENGES IN BALANCING
      CONCERNS WHEN CONSIDERING
      CHANGES TO ERISA
---------------------------------------------------------- Letter :6.4

Any effort to amend ERISA or make other changes would likely involve
tradeoffs among the divergent interests of consumers, managed care
plans, and employers.  For example, if the Congress amended either
ERISA's preemption clause or remedies section as discussed
previously, plan participants would have access to a broader array of
remedies for adverse outcomes under employer-based managed care
plans.  Patients commonly expect that the medical care they receive
is of reasonable quality.  ERISA's preemption of the liability of
health plans may remove a powerful incentive to provide high-quality
service.\46 An amendment to make it easier to hold managed care plans
liable for injuries could cause plans to take more actions to avoid
injuries, and the number of adverse outcomes could decrease. 
Furthermore, the denial of benefits can, if it affects the course of
treatment, cause physical injury, which in turn may result in the
loss of income or one's job.  Such losses cannot be recovered by
reimbursing the patient for the cost of the denied benefit.\47

Amending ERISA could change this. 

If more participants were able to pursue benefit disputes, however,
the courts could potentially have to handle more cases.  The limited
data available indicate that in recent years more medical malpractice
claims are being filed.  The number could increase if ERISA were
amended.  But an adverse outcome does not necessarily mean that a
claim will be filed.  The findings of a study conducted at New York
hospitals and reported in The New England Journal of Medicine in 1991
showed that the number of negligent adverse outcomes was eight times
the number of tort claims filed.\48 Thus, as shown by this study,
many individuals who are injured by medical negligence may not file a
claim.  Some contend that even when patients bring malpractice suits,
the current liability system for resolving such claims is inefficient
and ineffective.  Many agree that in the current system, claims take
a long time to be resolved, legal costs are high, and settlements and
awards are unpredictable.  Further, there is concern about whether
the system deters the negligent practice of medicine. 

In contrast, according to managed care and employer groups, health
care costs could increase if ERISA were amended to provide
compensation in its civil enforcement section or to change its
preemption clause so that it does not supersede state tort laws. 
Some have expressed concern that the increases would be significant. 
According to the Corporate Health Care Coalition, expanding ERISA's
remedies to encourage more litigation without improving the quality
of decision-making would greatly increase plan liabilities and have a
"chilling effect" on the use of managed care techniques.\49 As a
result, health plans might find it more difficult to deny even
inappropriate claims.  However, data to accurately estimate the
likely extent of such potential increases are lacking.\50

If managed care plans can be sued under state tort law, plan
representatives say that they will pass the costs associated with
these suits on to employers--the payers of health care.  Employers
say that faced with such cost increases, they might in response (1)
reduce health care benefits, perhaps by excluding from coverage
particular treatments and procedures; (2) provide a "defined
contribution," or a fixed amount earmarked for such costs, to
employees' health care costs; (3) shift more of the cost to employees
by making them pay a higher percentage of the premiums; or (4)
eliminate health care benefits completely.\51 Consequently, plan
participants could end up with expanded remedies for adverse outcomes
but potentially fewer or more expensive health care benefits. 

Employer groups also suggest that the increased ability of plan
participants to sue managed care plans and UR firms would lead to
what ERISA preemption was intended to prevent.  That is, benefit
determination decisions would be considered treatment decisions
(which would elicit the full array of malpractice remedies), and
plans operating in multiple states would be subject to various laws. 
In addition, employers are concerned that they would be more likely
to be sued for damages resulting from benefit denials or medical
negligence because of their perceived "deep pockets." To date,
however, no employers have been held liable for such damages. 


--------------------
\46 See Jack K.  Kilcullen, "Groping for the Reins:  ERISA, HMO
Malpractice, and Enterprise Liability," American Journal of Law &
Medicine, Vol.  22, No.  1 (1996), pp.  7-50. 

\47 See Wendy K.  Mariner, "Liability for Managed Care Decisions: 
The Employee Retirement Income Security Act (ERISA) and the Uneven
Playing Field," p.  868. 

\48 A.  Russell Localio and others, "Relation Between Malpractice
Claims and Adverse Events Due to Negligence," The New England Journal
of Medicine, Vol.  325, No.  4 (1991), pp.  245-51. 

\49 G.  Lawrence Atkins and Kristin Bass, ERISA Preemption:  The Key
to Market Innovation in Health Care (Washington, D.C.:  Corporate
Health Care Coalition, 1995), p.  43. 

\50 Several studies have attempted to estimate the potential costs
associated with amending ERISA to extend malpractice liability to
managed care plans.  The estimates of these studies vary widely. 
However, the Congressional Budget Office is developing a paper to
capture the cost implications of a broad range of proposed
managed-care-related changes, including consumer protection and ERISA
remedy issues.  It expects this paper to be completed by the summer
of 1998. 

\51 A 1995 study shows that employer-based health care coverage may
be declining.  Between 1988 and 1993, the percentage of the
nonelderly population with employer-based coverage dropped from 67.0
percent to 61.1 percent.  While several factors may have contributed
to this decline, the study reported that some employers may be less
willing to offer coverage because of its cost, and some employees may
decline coverage because employers are requiring them to pay a higher
premium.  See John Holahan, Colin Winterbottom, and Shruti Rajan, "A
Shifting Picture of Health Insurance Coverage," Health Affairs, Vol. 
14, No.  4 (1995), pp.  254 and 255. 


   OBSERVATIONS
------------------------------------------------------------ Letter :7

When the Congress enacted ERISA in 1974, it would have been nearly
impossible to predict the state of the U.S.  health care delivery
system in the late 1990s.  Managed care has grown rapidly only within
the past decade.  Benefit coverage decisions now are more often made
in advance of treatment, which creates a new kind of potential legal
liability not faced by traditional fee-for-service health
insurers--and not envisioned a quarter of a century ago. 

ERISA's remedies section and preemption clause and their effect on
compensation for injured plan participants have posed challenging
questions for the courts.  Recent case law displays a trend toward
expanding liability beyond health care providers to include managed
health care organizations.  Generally, an HMO will be held liable
when it directly provides medical services, when the provider is
acting as its agent, or when it leads a beneficiary to reasonably
believe that the provider is its agent.  However, plan participants
can be left without a remedy for injuries when they occur because of
benefit denials.  As managed care enrollment continues to grow, HMO
exposure to liability will undoubtedly increase. 

Proposed changes to ERISA's remedies section or its preemption clause
seek to provide for fair and appropriate remedies for participants in
managed care plans.  However, analysts' efforts to assess the merits
of such changes have been far from definitive, in part because the
contending parties' interests and views differ sharply and in part
because strong evidence on the effects of amending ERISA on cost and
quality is absent.  That is, there is no research on how or how much
plans', employers', and consumers' costs would change if ERISA were
amended.  To date, much of the debate surrounding ERISA's current
remedies has focused on a proposed "downstream" approach--which seeks
to change the remedies available through the courts.  Many have
suggested that an "upstream" approach--which seeks to prevent court
suits and protracted litigation--may warrant consideration as well. 


   AGENCY COMMENTS AND OUR
   RESPONSE
------------------------------------------------------------ Letter :8

DOL reviewed a draft of this report and provided technical comments,
which we incorporated as appropriate.  We also furnished a draft of
this report for review to the American Association of Health Plans,
Association of Private Pension and Welfare Plans, the ERISA Industry
Committee, two ERISA experts--one of whom specifically represented
the consumer viewpoint--and one expert in medical malpractice. 

In commenting on the draft, the American Association of Health Plans
focused on several areas that it believed needed to be clarified and
revised.  These included (1) distinguishing better between benefit
coverage determinations and treatment decisions and clarifying the
roles of physicians and plans in those decisions; (2) clarifying the
discussion of plans' direct liability and vicarious liability for
physicians' medical malpractice; and (3) providing additional
information on state requirements for managed care plans' grievance
and appeal processes, the incidence of service denials, and existing
"counterbalances" to plans' inappropriate denial of benefits.  The
association also suggested the need both to discuss more fully the
concern of some about proposed expansions of state tort law damages
for health care liability and to make more prominent the discussion
of "upstream" solutions such as improved grievance and appeal
procedures for participants.  The final report contains revisions to
reflect these clarifications and additions. 

In its comments, the ERISA Industry Committee emphasized that ERISA
is an adaptable and flexible law that is as relevant now as when it
was enacted in 1974.  Furthermore, the committee believed that the
nature of benefit determinations has not fundamentally changed
because of the transition from fee-for-service to managed health
care.  The committee stated that because in most cases health plans
are making payment decisions and not treatment decisions,
participants are not prohibited from obtaining treatment at their own
expense and health care providers can still treat participants. 
Therefore, the committee believed that the draft report overstated
the significance of changes in the health care delivery system as
they relate to the legal issues associated with ERISA's appeal
procedures and remedies.  While we acknowledged the committee's
position on the role that ERISA's standards play in the current
health care environment, we believe the evidence suggests that
prospective benefit coverage decisions can, in fact, affect
participants' ability to obtain needed treatments, especially if
other financial resources are not available. 

The ERISA Industry Committee suggested, as did the American
Association of Health Plans, that we distinguish better between
benefit coverage determinations and treatment decisions, as well as
elaborating on concerns about the effectiveness of the tort system as
a remedy.  The committee also commented that the report could better
reflect the role of an employer-sponsored health benefit plan's
fiduciary in safeguarding participants' interests and the potential
that increased liability could cause benefit plan administrators to
take defensive and other measures, with resulting increased costs and
decreased coverage.  We revised the final report to reflect these
clarifications and perspectives. 

In response to additional comments from these and other reviewers, we
clarified certain distinctions and made technical changes as
appropriate.  We did not receive comments from the Association of
Private Pension and Welfare Plans. 


---------------------------------------------------------- Letter :8.1

As we arranged with your offices, unless you announce the report's
contents earlier, we plan no further distribution of it until 30 days
after the date of this letter.  We will then send copies to the
Secretary of Labor.  We will make copies available to others on
request.  If you or your staff have any questions, please call me at
(202) 512-7114.  This report was prepared initially under the
direction of the late Michael Gutowski; his role was later assumed by
Jonathan Ratner.  Major contributors to this report include Joseph
Petko, Roger Thomas, Susan Poling, and Barry Bedrick. 

William J.  Scanlon
Director, Health Financing
 and Systems Issues


FEDERAL COURT CASES ADDRESSING
ERISA, PREEMPTION, BENEFIT
DENIALS, AND MEDICAL MALPRACTICE
==================================================== Appendix Appendix

The preemption clause of the Employee Retirement Income Security Act
of 1974 (ERISA) provides that ERISA supersedes any and all state laws
"insofar as they .  .  .  relate to any employee benefit plan"
covered by the act.  In many instances, the courts have concluded
that ERISA preempts participant claims against managed care
providers.  Although plan participants may have limited remedies
under ERISA, the remedies under state law that would typically be
more generous, such as compensatory, punitive, or extracontractual
damages, are barred by ERISA preemption.  As managed care has become
more widespread, plan participants or beneficiaries have sought to
sue ERISA plans, employers, and organizations conducting utilization
review (UR) under state law for malpractice, wrongful death, or
benefit denials because of their actions or determinations under the
plans.  The plans, employers, and UR providers have argued that under
the preemption clause, these state remedies are not available.  (They
have also argued that suits of this kind filed in state court must be
removed to federal court.) In this appendix, we discuss these issues
and describe some of the cases.  In preparing this appendix, we
reviewed federal case law and law review articles.\52

The federal courts have found that ERISA may or may not preempt state
law governing negligence or malpractice in suits against a managed
care plan by a plan participant, depending on the circumstances of
the case.  It seems clear that if a court concludes that a claim is
based on the wrongful denial of a benefit offered by the health plan,
ERISA will preempt any claim for relief under state law.  Under
ERISA, the only remedy available to plan participants may be a court
order requiring that the benefit be provided; ERISA preempts remedies
authorized under state law such as compensatory, punitive, or
extracontractual damages for malpractice.  Some federal courts have
permitted malpractice suits under state law against managed care
plans to go forward where the provider is considered to be an agent
of the plan or where the plan directly provides medical services. 


--------------------
\52 Especially helpful were the following law review articles:  Ellen
A.  Fredel, "ERISA and Managed Care:  What the Courts Are Saying,"
Benefits Law Journal, Vol.  8, No.  3 (1995), pp.  105-18, and
Gabriel J.  Minc, "ERISA Preemption of Medical Negligence Claims
Against Managed Care Providers:  the Search for an Effective Theory
and an Appropriate Remedy," Journal of Health and Hospital Law, Vol. 
29,
No.  2 (1996), pp.  97-106. 


   MANAGED CARE ARRANGEMENTS
-------------------------------------------------- Appendix Appendix:1

A managed care arrangement usually involves cost containment or some
other control of the use of medical services.  Several types of
managed care arrangements are commonly used.  A health maintenance
organization (HMO) provides medical services to members for a flat or
fixed fee.\53 HMO subscribers or members are usually required to use
an HMO-employed or HMO-contracted physician in order to qualify for
coverage.  A preferred provider organization (PPO) typically arranges
for independent physicians, specialists, servicing hospitals, and
other providers to provide medical care to subscribing members based
on a fixed, usually discounted, fee.\54

Both PPOs and HMOs typically use UR in some form.  Under UR, the
organization or a third party under contract with it evaluates
proposed procedures or treatments to determine on the basis of
clinical criteria whether they are medically necessary.\55

Many employers who provide health care benefits through group plans
regulated under ERISA have turned to managed care to control health
care costs.  As managed care has emerged as a principal cost-control
measure, ERISA's federal preemption has affected the ability of
participants to seek compensatory or punitive damages from managed
care plans, based on a plan's role in providing medical care. 

Critics of ERISA preemption believe that it is fundamentally unfair
that ERISA supersedes state control over medical malpractice or
negligent care cases.  They also object to the limited remedies
available under ERISA for the denial of a claim, which contrasts with
state extracontractual, punitive, or compensatory damages for the
same denial outside ERISA:  When a UR organization determines that a
particular treatment is not medically necessary, it is arguably
making a medical decision.  Yet ERISA leaves plan participants
without a remedy for negligence or medical malpractice by a UR
organization. 


--------------------
\53 Fredel, "ERISA and Managed Care," p.  105. 

\54 Fredel, "ERISA and Managed Care," p.  105. 

\55 Fredel, "ERISA and Managed Care," p.  105. 


   ERISA PREEMPTION
-------------------------------------------------- Appendix Appendix:2

ERISA was enacted to protect the interests of employees and their
beneficiaries through comprehensive federal requirements and
protections for employee pension and welfare benefit plans.\56 It
sets standards for pension plans, including standards for vesting,
accrual, and funding, and provides fiduciary standards for both
pension and welfare benefit plans.  ERISA's federal preemption
provision is intended to avoid conflicting state rules on the
administration of these federally regulated plans.\57

The ERISA preemption provision--section 514(a) of ERISA--says that
with certain exceptions, ERISA "shall supersede any and all State
laws insofar as they may now or hereafter relate to any employee
benefit plan" covered by ERISA.\58 If a plan participant or
beneficiary claims to have been the victim of negligence or medical
malpractice,\59 or wrongful denial of benefits by the plan, and
injury or other damage resulted, then preemption is significant: 
Although state law typically authorizes punitive, compensatory, or
extracontractual damages, such as for emotional distress, loss of
consortium,\60 or injury,\61 ERISA does not. 

The federal courts are increasingly being called upon to define more
precisely the scope of ERISA preemption.  Courts of appeals for the
various federal circuits have interpreted the preemption provision
differently.  Conflicts among the circuits can be resolved by a
definitive ruling by the Supreme Court or by legislation. 

The courts have also identified a second kind of preemption that may
apply to ERISA claims; in addition to preemption under section 514(a)
of ERISA, which determines whether state law applies, ERISA claims
are subject to so-called complete preemption under section 502.\62
Section 502 provides that state and federal courts have concurrent
jurisdiction over claims "to recover benefits due to [a participant
or beneficiary] under the terms of his plan, to enforce his rights
under the terms of the plan, or to clarify his rights to future
benefits under the terms of the plan .  .  .  ."\63 Complete
preemption under section 502 is a jurisdictional concept; if the
defendant successfully argues that complete preemption applies, the
case is removed to federal court. 

In general, if a plaintiff chooses to file an action in state court,
the defendant cannot force the removal of the action to federal court
unless the plaintiff's complaint specifically raises issues of
federal law.  Suits filed in state court alleging malpractice or
breach of contract in violation of state law would therefore
ordinarily not be subject to removal on the defendant's motion. 
Presumably, in ERISA cases, defendants seek removal to federal court
because they believe their federal defense--that section 514 preempts
state law--will receive a more sympathetic hearing there than in
state court.  However, merely raising a federal issue as a defense
does not ordinarily justify removal.\64

Complete preemption is an exception to the general rule that removal
is required only when the plaintiff's complaint raises a federal
issue.  The Supreme Court decided in Metropolitan Life Ins.  Co.  v. 
Taylor that a defendant may have a case removed from state to federal
court even though the plaintiff's complaint does not raise federal
issues if federal legislation has "so completely pre-empt[ed] a
particular area that any civil complaint raising this select group of
claims is necessarily federal in character."\65

Complete preemption applies to ERISA claims under section 502.  In
Metropolitan Life, the plaintiff's complaint was based on common law
contract and tort claims under state law only.  However, the court
found that any complaint brought against a plan under section 502,
regardless of whether it is based on state causes of action, will be
viewed as arising under federal law.\66

Whether the case is heard in state or federal court, complete
preemption does not resolve the issue of section 514 preemption.  The
plaintiff may still argue that his or her claim is not one that
"relates to any employee benefit plan" and therefore that section 514
does not preempt his or her state cause of action.\67

Deciphering the meaning and outer limits of "relates to" has been
contentious and difficult.\68 One federal appellate court described
the law in this area as "a veritable Sargasso Sea of obfuscation."\69
The Supreme Court in Shaw v.  Delta Air Lines Inc.  provided a basic
definition:  a state law "relates to" an employee benefit plan,
within the meaning of the preemption clause of ERISA, if the law has
"a connection with or reference to such a plan."\70 The Court noted
that it is not enough that a state law affects employee benefit
plans; the effect may occur "in too tenuous, remote or peripheral a
manner" to warrant concluding that the law relates to the plan for
purposes of the preemption clause.\71

The Supreme Court refined its interpretation of what it means for a
state law to "relate to" an employee benefit plan in New York State
Conference of Blue Cross and Blue Shield Plans v.  Travelers
Insurance Co.\72 In that case, the Court concluded that ERISA did not
preempt a state law that mandated surcharges on the hospital bills of
patients insured by commercial insurers (and certain HMOs) but not on
the bills of patients insured by Blue Cross and Blue Shield.  The
Court concluded that these laws were not "related to" ERISA plans,
even though the surcharges would have an indirect economic effect on
ERISA plans:  "if `relate to' were taken to extend to the furthest
stretch of its indeterminacy, then for all practical purposes
pre-emption would never run its course for `[r]eally, universally,
relations stop nowhere.'"\73

The Court in Travelers relied on the fact that the surcharge under
the state statute applied whether or not the health services were
furnished through an ERISA-covered plan.  The Court noted that

"while Congress's extension of pre-emption to all `state laws
relating to benefit plans' was meant to sweep more broadly than
`state laws dealing with the subject matters covered by ERISA,
reporting, disclosure, fiduciary responsibility, and the like,' .  . 
.  nothing in the language of the Act or the context of its passage
indicates that Congress chose to displace general health care
regulation, which historically has been a matter of local concern . 
.  .  ."\74

In Travelers, the Supreme Court made clear that state laws that have
only an indirect influence on ERISA plans are not preempted.  State
laws that indirectly affect "the relative costs of various health
insurance packages in a given State," or that do not preclude plan
administrators from adopting uniform administrative practice or
uniform interstate benefit packages, do not implicate those
"conflicting directives" from which the Congress meant to insulate
ERISA plans and are therefore not preempted.\75

A more recent Supreme Court decision, De Buono, N.Y.  Commissioner of
Health v.  NYSA-ILA Medical and Clinical Services Fund, illustrates
this distinction.\76 At issue was a New York law that imposed a tax
on gross receipts for patient services at hospitals, residential
health care facilities, and diagnostic and treatment centers to
defray the cost of the state's Medicaid program.  The administrator
of an ERISA plan for longshore workers alleged that it was a state
law that "relates to" a health plan within the meaning of ERISA.  The
Supreme Court stated that "a consideration of the actual operation of
the state statute leads us to the conclusion that the [tax] is one of
`myriad state laws' of general applicability that impose some burdens
on the administration of ERISA plans but nevertheless do not `relate
to' them within the meaning of the governing statute.  The HFA
[Health Facility Assessment--a gross receipts tax] is a tax on
hospitals."\77 The Supreme Court concluded that any state tax, or
other law, that increases the cost of providing benefits to covered
employees will have some effect on the administration of ERISA plans,
but that does not mean that every such state law is preempted by
ERISA.\78


--------------------
\56 Employee Retirement Income Security Act of 1974, H.R.  Rep.  No. 
93-533 (93rd Cong., 1974), reprinted in U.S.  Code Congressional and
Administrative News, 4639-4670 (1974). 

\57 According to Seema R.  Shah, "Loosening ERISA's Preemptive Grip
on HMO Medical Malpractice Claims:  A Response to PacifiCare of
Oklahoma v.  Burrage," Minnesota Law Review, Vol.  80, No.  6 (1996),
pp.  1545 and 1554, n.  45, the "rationale behind uniformity
[preemption] was to avoid the administrative burdens that compliance
with different federal and state laws would impose upon employers. 
Members of Congress were concerned employers would shift the cost of
the administrative burdens to employees and their beneficiaries by
lowering benefit levels.  To avoid this problem, `Congress intended
preemption to afford employers [and employee benefit plans] the
advantages of a uniform set of administrative procedures governed by
a single set of regulations.'"

\58 29 U.S.C.  1144(a).  As discussed below, ERISA litigation may
also involve "complete preemption." Complete preemption has to do
with whether a case filed in state court must be removed to federal
court at the defendant's request, not with whether state law is
preempted by ERISA.  It is the latter that is commonly referred to as
ERISA preemption. 

\59 Shah, "Loosening ERISA's Preemptive Grip," p.  1545, n.  7. 

\60 Compensable loss of consortium occurs when a tort damages the
relationship between a husband and wife.  It encompasses not only the
material assistance of the injured spouse but such intangible
benefits as companionship, cooperation, and affection.  As discussed
below, it has in recent years been extended to relations between
parents and children.  See Henry Campbell Black, Black's Law
Dictionary, 6th ed.  (St.  Paul, Minn.:  West Publishing Co., 1990),
p.  309. 

\61 Laura H.  Harshbarger, "Note:  ERISA Preemption Meets the Age of
Managed Care:  Toward a Comprehensive Social Policy," Syracuse Law
Review, Vol.  47 (1996), pp.  191-224. 

\62 Harshbarger, "Note:  ERISA Preemption Meets the Age of Managed
Care," p.  194, n.  15. 

\63 29 U.S.C.  1132(a)(1)(B), (e)(1) (1994). 

\64 This is the so-called well-pleaded complaint rule.  Other
conditions may have to be met as well; for example, the federal court
has original jurisdiction over the cause of action.  See Franchise
Tax Bd.  v.  Construction Laborers Vacation Trust, 463 U.S.  1, 9-12
(1983). 

\65 481 U.S.  58, 63-64 (1987). 

\66 Metropolitan Life, 66. 

\67 Metropolitan Life, 66. 

\68 Minc, "ERISA Preemption of Medical Negligence Claims," p.  97. 

\69 Travelers Ins.  Co.  v.  Cuomo, 14 F.3d 708, 717-719 (2d Cir. 
1993), rev'd, 514 U.S.  645 (1995).  This characterization by the
Court of Appeals of the difficulties of interpreting ERISA was in
effect confirmed when the Supreme Court overturned its decision. 

\70 463 U.S.  85, 96-97 (1983); see also District of Columbia v. 
Greater Washington Board of Trade, 506 U.S.  125 (1992).  In Shaw,
the court found that a state law forbidding employee benefit plans
from discriminating on the basis of pregnancy and a state law
requiring employers to pay sick-leave benefits to employees unable to
work because of pregnancy both "relate to" employee benefit plans
within the meaning of the preemption clause of ERISA.  Shaw, 96. 

\71 Shaw, 100, n.  21; Greater Washington Board of Trade, 130. 

\72 514 U.S.  645 (1995). 

\73 514 U.S.  645, 655. 

\74 514 U.S.  654, 661. 

\75 514 U.S.  654, 656-661. 

\76 Barbara A.  De Buono, New York Commissioner of Health et al.  v. 
NYSA-ILA Medical and Clinical Services Fund, 117 S.  Ct.  1747
(1997). 

\77 De Buono, 1752. 

\78 De Buono, 1753.  However, the Court further noted in the relevant
footnote that "as we acknowledged in Travelers, there might be a
state law whose economic effects, intentionally or otherwise, were so
acute as to force an ERISA plan to adopt a certain scheme of
substantive coverage or effectively restrict its choice of insurers
and such a state law `might indeed be preempted under section 514.'
That is not the case here."


   REMEDIES UNDER ERISA
-------------------------------------------------- Appendix Appendix:3

ERISA's enforcement provisions prescribe the causes of action and
remedies available under this federal law.  Managed care
organizations involved in medical malpractice lawsuits have asserted
that ERISA preempts these state law claims.  A managed care
arrangement that successfully asserts such a defense may effectively
avoid state tort remedies of extracontractual, compensatory,
punitive, or exemplary damages.\79

ERISA provides that a participant or beneficiary may bring a civil
action "to recover benefits due to him under the terms of the plan,
to enforce his rights under the terms of the plan, or to clarify his
rights to future benefits under the terms of the plan."\80

Only the benefits to which a plan participant or patient is
contractually entitled under the terms of the plan are available
under ERISA.\81 Thus, if a benefit is denied, the remedy is to obtain
the benefit.\82 Under ERISA, no civil action can be brought for
malpractice, emotional distress, wrongful death, or negligence. 


--------------------
\79 Minc, "ERISA Preemption of Medical Negligence Claims," p.  98. 

\80 Section 502(a)(1)(B); 29 U.S.C.  1132(a)(1)(B). 

\81 Minc, "ERISA Preemption of Medical Negligence Claims," p.  98. 

\82 In this and subsequent references to wrongful denial of benefits,
we describe the remedy as an order to provide the denied benefit,
because ERISA specifically provides for that.  (It also permits suits
to clarify a participant's right to future benefits or to enforce his
or her right under the terms of the plan.) Often, however, providing
the benefit will not be an adequate remedy, as for example when the
participant has already received the benefit at his or her own
expense or has died.  ERISA does not expressly authorize
reimbursement for the cost of a denied benefit.  However, a court
might base an order for reimbursement on the so-called equity power,
under which judges may craft appropriate remedies not provided for in
the law when necessary to do justice. 


   CASE REVIEW
-------------------------------------------------- Appendix Appendix:4


      DENIAL OF BENEFITS CASES
      UNDER UR
------------------------------------------------ Appendix Appendix:4.1

A review of the cases that can be categorized as a denial of a
benefit as a result of a UR decision indicates that ERISA preempts
state law claims for negligence, wrongful death, medical malpractice,
and the like. 

Corcoran v.  United Healthcare, Inc.  illustrates the difficult
issues relating to jurisdiction, remedies, and public policy faced by
a court applying ERISA preemption in the managed care context.\83
Because of the plaintiff's high-risk pregnancy, her physician asked
that the expectant mother be hospitalized for close monitoring. 
Under the plaintiff's employer's health plan, precertification and UR
were necessary for the hospital admission and the length of the
hospital stay.  The firm performing UR for the employer's plan
determined that hospitalization was not necessary, but authorized up
to 10 hours a day of home nursing care.  When a nurse was not on
duty, the fetus went into distress and died. 

The parents filed a wrongful death action in state court, alleging,
in part, that Mrs.  Corcoran's unborn child had died as a result of
the negligence and denial of hospital care by both the health plan
and the UR firm.  The defendants removed the action to federal court
and moved for summary judgment.  They characterized the plaintiffs'
wrongful death action as, in reality, an action for mishandling a
claim by firms retained merely to administer benefits under an
ERISA-covered plan.  Their relationship to the plaintiffs, they
contended, was wholly defined by the terms of the employer plan; as a
result, plaintiffs' claims "related to" an ERISA plan and were
therefore preempted.  Plaintiffs answered that preemption would
"contravene the purposes of ERISA by leaving them without a
remedy."\84

The Court of Appeals for the Fifth Circuit upheld the district
court's judgment that ERISA preempted the state tort claims against
the health plan and the UR firm.  The court noted that "it is by now
well established that the `deliberately expansive' language of this
[ERISA preemption] clause .  .  .  is a signal that it is to be
construed extremely broadly.  .  .  ."\85 The court concluded that
state laws "relate to" employee benefit plans not only with respect
to the specific subjects dealt with in ERISA, such as reporting,
disclosure, and fiduciary obligations, but also, in a much broader
sense, whenever the state laws have "a connection with or reference
to" an employee benefit plan.\86

The UR firm argued that it did not make medical decisions or provide
medical advice; all it did was determine whether Mrs.  Corcoran
qualified for the benefits provided by the plan by applying
previously established eligibility criteria.  The court disagreed but
held that while the UR firm made medical decisions and gave medical
advice, it did so in the context of making determinations about the
availability of benefits under the health plan.  In the court's view,
this was enough of a relationship to an employee benefit plan to
require ERISA preemption.\87

In Tolton v.  American Biodyne, Inc.  the Court of Appeals for the
Sixth Circuit used the same analysis to conclude that ERISA preempted
state causes of action based on UR.\88

In that case, the covered employee,
Mr.  Tolton, was drug-dependent and suicidal.  His employer's managed
care health plan included a UR requirement.  On several occasions,
Mr.  Tolton met with or talked to a psychologist who performed UR
and, on that basis, denied him inpatient care.  After attempting to
obtain treatment from a variety of health care providers on a number
of occasions,
Mr.  Tolton committed suicide. 

Mr.  Tolton's estate brought an action in state court against the
employer's health plan, the plan administrator, and each of the
health care providers who had treated him, including the psychologist
who had performed UR.  The claims included wrongful death and medical
malpractice.  On the motion of the plan, the case was removed to
federal court based upon ERISA preemption.  Summary judgment was
subsequently granted, in part on this same basis.\89

On appeal, the Sixth Circuit Court of Appeals affirmed the lower
court's holding that ERISA preempted the wrongful death and medical
malpractice claims.  The court further noted that "the result ERISA
compels us to reach means that the [plaintiffs] have no remedy, state
or federal, for what may have been a serious mistake."\90 The court
also found that any cause of action based on the psychologist's UR
decision and the denial of
Mr.  Tolton's claim was also preempted. 

Similar facts resulted in the same outcome in a district court
decision in the First Circuit, while also generating a strongly
worded opinion by a judge who believed that the result was an
injustice and that the Congress should amend the law.  The
beneficiary was denied 30-day inpatient care by a UR provider.  After
the beneficiary committed suicide, plaintiff brought claims for
breach of contract, medical malpractice, wrongful death, loss of
parental and spousal consortium, intentional and negligent infliction
of emotional distress, and specific violations of the Massachusetts
consumer protection laws.  ERISA was found to preempt these claims,
but the court commented that "ERISA has evolved into a shield of
immunity that protects health insurers, UR providers, and other
managed care entities from potential liability for the consequences
of their wrongful denial of health benefits."\91

Other federal appellate courts have followed the approach taken in
Corcoran and Tolton.  The Eighth Circuit Court of Appeals found in
Kuhl v.  Lincoln National Health Plan of Kansas City, Inc., that
failure of the managed care entity to preapprove heart surgery
constituted a denial of benefits and thus that the state cause of
action was preempted by ERISA.\92 The failure to preapprove, in the
court's view, did not constitute the provision of medical advice.\93
The same result was reached in the Ninth Circuit in Spain v.  Aetna
Life Insurance Co.\94


--------------------
\83 965 F.2d 1321 (5th Cir.  1992), cert.  denied, 506 U.S.  1033
(1992).  Minc, "ERISA Preemption of Medical Negligence Claims," p. 
100. 

\84 Corcoran, 1324 and 1325. 

\85 Corcoran, 1328. 

\86 Corcoran, 1329, citing Shaw, 96-97. 

\87 Corcoran, 1331 and 1333. 

\88 48 F.3d 937 (6th Cir.  1995). 

\89 Tolton, 937 and 941. 

\90 Tolton, 943, citing Corcoran, 1338. 

\91 Diane Andrews-Clarke v.  Travelers Insurance Co., 984 F.  Supp. 
49, 53 (1997). 

\92 999 F.2d 298 (8th Cir.  1993), cert.  denied, 510 U.S.  1045
(1994). 

\93 Kuhl, 302. 

\94 11 F.3d 129 (9th Cir.  1993), cert.  denied, 511 U.S.  1052
(1994). 


      AGENCY AND QUALITY OF
      BENEFIT CASES
------------------------------------------------ Appendix Appendix:4.2

Some courts have avoided ERISA preemption on the theory that the
defendant managed care entity was "vicariously" liable for the
medical malpractice of a provider acting as its agent.  Under an
agency theory, the HMO, the "principal," is responsible for the
conduct of the doctor providing services because, as its "agent," he
or she is acting on its behalf.\95 The principal may be liable as a
result of the acts of the agent either vicariously or directly. 
Vicarious liability means, in effect, that the wrongful acts of the
agent are attributed to the principal who did nothing wrong.  Direct
liability means that while the agent's wrongful act caused the harm,
the principal also acted negligently or wrongfully--for example, in
selecting or retaining its agents or monitoring their activities.\96

In Pacificare of Oklahoma, Inc.  v.  Burrage, the basis of the claims
against the HMO was malpractice.\97 The case was removed in part from
state court, where it had originally been filed.  But the federal
district court did not agree that preemption applied and permitted
the state court to hear the plaintiff's claims that (1) the HMO
primary care physician was the agent of the HMO and (2) the HMO was
liable, both vicariously and directly, for the physician's
actions.\98

The Tenth Circuit sustained the decision of the district court that
ERISA did not preempt these claims against the HMO.\99 While noting
that there was no simple formulation, the court identified four
categories of state laws that might "relate to" a plan, as that term
is used in ERISA: 

"(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 amounts 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."\100

The court of appeals found that the malpractice claim against the HMO
did not sufficiently "relate to" an ERISA plan to warrant preemption
because it did not involve the administration, quality, or level of
benefits.  The court noted that ERISA would not preempt a malpractice
claim against the physician and therefore should not preempt a
vicarious liability claim against the HMO if the HMO held the doctor
out as its agent.\101

When, as in this instance, an HMO plan directly provides medical
services rather than ensuring payment, vicarious liability for
negligence or malpractice by an agent of the HMO is not preempted. 
The court therefore directed that the case be returned to state
court.\102

In Dukes v.  U.S.  Healthcare System, Inc., the court addressed
several theories of negligence or medical malpractice involving an
HMO.\103
Mr.  Dukes' primary care physician ordered a blood test by a hospital
that for unknown reasons was not performed and that allegedly would
have disclosed extremely high blood sugar.  Mr.  Dukes died after
additional medical treatment.  His wife sued the physicians,
hospitals, and HMO, U.S.  Healthcare System, in state court. 

In seeking removal of the case to federal district court, the HMO
argued that (1) Mr.  Dukes had obtained medical care as a benefit
from a welfare benefit plan governed by ERISA, (2) removal was
required by the "complete preemption" theory, and (3) the plaintiff's
claims were preempted by section 514(a) of ERISA.\104 The district
court dismissed plaintiff's claims against the HMO on the basis of
ERISA preemption.  "[A]ny ostensible agency claim," the district
court concluded, "must be made on the basis of what the benefit plan
provides and is therefore `related' to it." The court also held that
"the treatment received must be measured against the benefit plan and
is therefore also `related' to it."\105

The Third Circuit Court of Appeals reversed the district court and
remanded the malpractice claims to the state court.\106 The appellate
court concluded that complete preemption did not apply because the
plaintiff's claims focused only on the quality of benefits received;
the plaintiff was not alleging that benefits were withheld nor
seeking either to enforce rights under the terms of the plan or to
have the right to future benefits clarified.\107

The court found a significant distinction between this case and
Corcoran, the case discussed previously in which ERISA was held to
preempt a malpractice claim based on the UR provider's
determination--contrary to the opinion of the plaintiff's
physician--that the plaintiff did not need hospitalization during her
pregnancy.  This court said that the UR provider in Corcoran, "unlike
the HMOs here, did not provide, arrange for, or supervise the doctors
who provided the actual medical treatment for plan participants."\108

Another recent appellate decision, this one from the Seventh Circuit,
concluded that ERISA does not preempt a claim that the administrator
of an employee health benefits plan is liable under state law for
medical malpractice by a physician who is an agent of the plan.  The
plaintiff in Rice v.  Panchal was treated by a preferred provider
furnished by his health plan.\109 He brought suit in state court
against the doctor for malpractice and against the health plan on an
agency theory:  The health plan, the plaintiff claimed, was
responsible for the medical malpractice by its preferred provider. 
On a motion by the health plan, the case was removed to federal
district court under the doctrine of complete preemption.\110

The Seventh Circuit Court of Appeals found in Panchal that there was
no complete preemption of the claim against the health plan.\111 The
court acknowledged that complete preemption would be required if the
plaintiff's state law claim could not be resolved without an
interpretation of the contract--the ERISA plan--governed by federal
law.  In Panchal, the court said that resolving the question of
whether the health plan is liable for the medical malpractice of the
provider under state agency law does not require construing the ERISA
plan; the issues, in this view, were whether the doctor was in fact
an agent, whether he was authorized to act for the principal, and
whether the injury would not have occurred but for the victim's
reliance on the agency.  Answering these questions does not involve
the interpretation of the ERISA plan.\112

(In the state proceeding, the plan would be free to raise ERISA
preemption under section 514 as a defense.)

ERISA has generally been found to preempt medical negligence claims
where a managed care provider has acted merely as a payer for claims
with respect to a health plan.\113 In Butler v.  Wu, the plaintiff
brought a medical negligence claim against a physician and an
HMO.\114 The physician was neither an agent nor an employee of the
HMO; he provided services to HMO members as an independent
contractor.  The HMO did not provide medical treatment itself. 

The district court granted the HMO's motion to dismiss the case
against the HMO, based on ERISA preemption of state law claims.\115
The court held that ERISA preempts state-law negligence claims
against HMOs "where, as in this case, the HMO is fulfilling a role
closer to that of a traditional insurer than that of a direct
provider of health care services."\116 The court, examining the
evolution of the health care industry, noted that the distinction
between arranging and paying for health care services and providing
such services directly may not always be so clear, and it reserved
judgment concerning whether preemption would apply if it found that
an HMO was directly providing medical care. 


--------------------
\95 "Agency" has been defined as a fiduciary relationship that
results from the manifestation of consent by one person to another
that the other shall act on his or her behalf and be subject to his
or her control.  Restatement (Second) of Agency  1. 

\96 American Law of Torts, pp.  531-32 (1983). 

\97 59 F.3d 151 (10th Cir.  1995), affd.  923 F.  Supp.  1448 (1995). 

\98 Pacificare, 152. 

\99 Pacificare, 153. 

\100 Pacificare, 154. 

\101 Pacificare, 155. 

\102 Pacificare, 151.  According to the plaintiff's attorney, this
case did not go to trial in state court because the parties settled. 
The settlement agreement contained a nondisclosure provision, so no
further information is available. 

\103 57 F.3d 350 (3d Cir.  1995), cert.  denied, 516 U.S.  1009
(1995). 

\104 Metropolitan Life, discussed above.  See also Dukes, 351. 

\105 Dukes, 353 (quoting the district court opinion in Dukes v.  U.S. 
Healthcare System, Inc., 848 F.  Supp.  39, 42 [E.D.  Pa.  1994]). 

\106 Dukes, 352.  The plaintiff's attorney told us that at the state
court level, the plaintiff agreed to drop U.S.  Healthcare (the HMO)
from the suit.  In the state trial, the plaintiff won a $3 million
judgment against one of the doctors.  Subsequently, U.S.  Healthcare
sued the plaintiff's attorney in federal court for "malicious
prosecution," contending that his suit against it was without merit
or support. 

\107 Dukes, 356-367. 

\108 Dukes, 360. 

\109 65 F.3d 637 (7th Cir.  1995). 

\110 Panchal, 639 and 640. 

\111 Panchal, 645. 

\112 Panchal, 645. 

\113 Minc, "ERISA Preemption of Medical Negligence Claims," p.  99. 

\114 853 F.  Supp.  125 (D.  N.J.  1994). 

\115 Butler, 129. 

\116 Butler, 130. 


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