DAVILA: THE PENDULUM SWINGS BACK ON PREEMPTION

 

Prepared by: Debra L. Mackey, Esq.

Burr & Forman LLP

Birmingham, AL

 

 

The unanimous decision of the U.S. Supreme Court in June of this year in Aetna Health, Inc. v. Davila, 124 S.Ct. 2488 (2004) is a strong case favoring ERISA preemption.

 

Davila is a consolidation of two cases under which subscribers sued their HMOs for allegedly failing to exercise ordinary care in a coverage decision in violation of a duty imposed under the Texas Health Care Liability Act (“THCLA”). In one case, a treating physician prescribed a prescription medication, but the HMO refused to pay for it. Rather than appealing the decision or purchasing the medication on his own and suing for reimbursement, the subscriber took an alternative medication (presumably the HMO paid for this one). He had a severe reaction to that medication, requiring extensive treatment and hospitalization. In the other case, the subscriber’s physician recommended an extended hospital stay for surgery, but the HMO determined that the plan’s criteria for an extended stay were not met, therefore, the HMO denied coverage for the extended stay. The subscriber had complications following surgery and had to return to the hospital. Based on these actions, the subscribers sued under THCLA, arguing that the HMOs’ refusal to cover the requested services was a violation of the duty to exercise ordinary care when making health care treatment decisions, which proximately caused their injuries. The Supreme Court held that these claims are completely preempted by ERISA, reversing the Fifth Circuit’s decision that the claims were mixed eligibility and treatment decisions under Pegram v. Herdrich, 530 U.S. 211 (2000). Addressing Pegram directly, the Court stated that the holding in Pegram was much more narrow than the way several courts of appeal had interpreted it. Quoting from the dissent in Cicio v. Does, 321 F.3d 83 (2nd Cir. 2003), the Court stated that “the reasoning of Pegram only make[s] sense where the underlying negligence also plausibly constitutes medical maltreatment by a party who can be deemed to be a treating physician or such physician’s employer.” In the case at bar, the HMOs are neither the subscribers’ treating physicians nor the employers of their treating physicians. Therefore, the coverage decisions made by the HMOs are pure eligibility decisions and Pegram is not implicated in any manner.

 

The Court did not limit its expansive discussion of preemption to Pegram. For example:

 

[I]f an individual, at some point in time, could have brought his claim under ERISA § 502(a)(1)(B), and where there is no other independent legal duty that is implicated by a defendant’s actions, then the individual’s cause of action is completely pre-empted by ERISA § 502(a)(1)(B).

 

The Court found that the duties imposed by THCLA did not arise independently of ERISA or the plan’s terms. If an HMO correctly concluded that, under the plan’s terms, a particular treatment was not covered, then its denial of coverage would not be a proximate cause of an injury arising from the denial. Rather, the failure of the plan to cover the treatment would be the proximate cause of the injury. Because the plan terms are an essential part of the THCLA claim, it does not arise independently of ERISA.

 

The Court also explained Rush Prudential HMO, Inc. v. Moran, 536 U.S. 535 (2002), stating that “nowhere in Rush Prudential did we suggest that the pre-emptive force of ERISA § 502(a) is limited to the situation in which a state cause of action precisely duplicates a cause of action under ERISA § 502(a)” and “Congress’ intent to make the ERISA civil enforcement mechanism exclusive would be undermined if state causes of action that supplement the ERISA § 502(a) remedies were permitted, even if the elements of the state cause of action did not precisely duplicate the elements of an ERISA claim.”

 

Furthermore, the Court stated that “under ordinary principles of conflict pre-emption, then, even a state law that can arguably be characterized as “regulating insurance” will be pre-empted if it provides a separate vehicle to assert a claim for benefits outside of, or in addition to, ERISA’s remedial scheme.”

 

Four circuit courts have issued ERISA preemption opinions post-Davila. As expected, each of these cases favor ERISA preemption. A summary of them follows.

 

Barber v. Unum, 2004 U.S. App. Lexis 18827 (3rd Cir. 2004). LTD benefits were terminated after Unum determined that Barber was no longer disabled under the employer’s LTD policy. Barber sued for breach of contract and for bad faith denial of benefits. The Court stated that the parties’ focus on whether the Supreme Court’s treatment of conflict preemption in Pilot Life and Rush Prudential as dicta is immaterial after Davila, which confirmed that “state laws that supplement ERISA’s civil enforcement scheme conflict with Congress’ intent to make the ERISA remedy exclusive.” This is so even if the elements of the state action do not precisely duplicate the elements of an ERISA claim. “In short, Aetna Health confirms that conflict pre-emption applies to any state cause of action that provides an alternative remedy to those provided by the ERISA civil enforcement mechanism” because such a cause of action “conflicts with Congress’ clear intent to make the ERISA mechanism exclusive.” Furthermore, even if the state law at issue were found to regulate insurance, “it would still be pre-empted because the punitive damages remedy supplements ERISA’s exclusive remedial scheme.” The Court also found that, under the two-part test of Kentucky Assoc. of Health Plans, Inc. v. Miller, 538 U.S. 329 (2003), the bad faith statute is specifically directed towards entities engaged in insurance, but does not meet the second prong of the test because it does not substantially affect the risk pooling arrangement between the insurer and insured. The Court explained that the bad faith statute is remedial, providing a remedy when the insured is injured by the bad faith of the insurer. Rather than affecting the bargain between the insurer and insured, it “provides that whatever the bargain struck, if the insurer acts in bad faith, the insured may recover punitive damages.” Furthermore, “the tort of bad faith breach of an insurance contract is not ordinarily a risk identified in the insurance policy as a risk of loss the insurer agrees to bear for its insured.”

 

Mayeaux v. Louisiana Health Serv. & Indem. Co. [i.e. BCBS], 376 F.3d 420 (5th Cir. 2004). For approximately ten years, Mayeaux’s medical condition was treated with a high dose antibiotic. Then, BCBS began providing group coverage, and denied coverage for the treatment due to an exclusion under the plan for experimental or investigational treatments. Mayeaux sued in state court for failure to pay for coverage, bad faith, and fraud, and BCBS removed the suit to federal court. Mayeaux amended her complaint, seeking a declaratory judgment of her right to future benefits under the plan, and amended her complaint a second time adding various state law causes of action. Her third attempt to amend the complaint was denied, forming the basis for the instant appeal. Plaintiff sought to disavow any claim against BCBS for denial of benefits, instead adding BCBS’s medical director as a defendant, alleging he breached his duty of care under state law, conspired to retaliate against her treating physician, committed unethical practices, and intentionally caused her injury. She also sought to allege that BCBS was liable for the director’s actions under various state law theories. One of the principal grounds for denying the third amendment was that the new claims proposed were preempted by ERISA.

 

Addressing her claims, the Court rejected Mayeaux’s position that BCBS’s interpretation of the plan was a mixed eligibility and treatment decision under Pegram, in light of the Supreme Court’s rejection of such an expansive reading of Pegram in the Davila case. “Davila confirms the extreme narrowness of the scope of the mixed decision carve-out articulated in Pegram.” Pegram has no application outside the HMO context, and even in the HMO context, it must involve a physician owned and operated HMO.

 

Vallone v. CNA Fin. Corp., 375 F.3d 623 (7th Cir. 2004). Plaintiffs accepted an early retirement package that included a “lifetime” health care allowance that was terminated by a successor corporation. The case concerned whether the “lifetime” welfare benefit was vested. Although plaintiffs were told that the benefit was for their lifetimes (and spouses’ lifetimes), they were not told that the benefits could be changed or revoked, nor were they told that the benefits were irrevocable. The Court found for the company on all counts, and with respect to the state law contract claim, the Court cited Davila as holding that such claims are preempted by ERISA because ERISA’s exclusive enforcement mechanism would be undermined if state actions that supplement ERISA remedies were permitted, even if the state action does not precisely duplicate the elements of an ERISA claim.

 

Land v. CIGNA Health Care of Florida, 2004 U.S. App. Lexis 18342 (11th Cir. 2004). An HMO-approved specialist prescribed antibiotics to treat Land’s cellulitis. The HMO’s approval nurse approved the use of intravenous antibiotics as prescribed, but did not approve hospitalization for same, despite the fact that the physician’s order was that Land be admitted to the hospital to receive the intravenous antibiotic. Land’s condition worsened and eventually a finger was amputated. Land sued the HMO, claiming negligent care and treatment. The Eleventh Circuit initially found in favor of Land, relying on an interpretation of Pegram under which it viewed the case as a mixed eligibility and treatment decision. Post-Davila, the Supreme Court vacated and remanded this case to the Eleventh Circuit for reconsideration. The Eleventh Circuit stated that the Davila decision “cast doubt on our analysis of and reliance on Pegram, finding that Pegram is only implicated in circumstances in which the health care professionals brought to suit are either the insured party’s treating physicians or the employers of the injured party’s treating physicians.” The Eleventh Circuit concluded that all claims are completely preempted by ERISA.

 

(NOTE: Internal quotations are omitted.)

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