ERISA, MCOs, and Hepatitis C in Nevada

Cervantes v. Health Plan of Nevada, 263 P.3d 261 (Nev. 2012); Lynam v. Health Plan of Nevada, Inc., 2012 WL 991705 (Nev.)

The most significant recent development in the ERISA preemption field (ERISA, §§ 502, 514) unfolded in Nevada’s “Hepatitis C” litigation: Cervantes v. Health Plan of Nevada, 263 P.3d 261 (Nev. 2012); Lynam v. Health Plan of Nevada, Inc., 2012 WL 991705 (Nev.). Both cases featured a patient who underwent the endoscopy procedure with a provider affiliated to the Health Plan of Nevada, Inc. (HPN). The procedure was delivered as part of the patient’s employment-related health benefit plan. Allegedly, the provider failed to implement a quality assurance program at its facility, contrary to Nevada’s statute. As a result, the patient became infected with Hepatitis C during the procedure.

The two cases differed from each other in one respect. In Cervantes, it was established that the patient’s ERISA plan employed HPN to help it set up a network of providers who individually contracted with the plan for delivering medical care to the enrollees. This retail contracting affiliated the providers to the ERISA plan. In Lynam, on the other hand, the patient argued that HPN leased out its entire network of providers to the plan or, alternatively, used that network to sell the plan a comprehensive health insurance package. This wholesale bargain established a discrete legal relationship between the ERISA plan and HPN, while HPN’s individual providers contracted with HPN alone without affiliating themselves to the plan.

The difference between these two contractual frameworks—wholesale and retail—proved to be crucial. In the retail setup—the Cervantes case—the court ruled that the plaintiffs’ malpractice suit is preempted. The court reasoned that the retail bargaining between the ERISA plan and the individual providers associated with HPN has created a single integrated ERISA-governed healthcare framework that Nevada’s legislature cannot regulate. The quality assurance statute, upon which the plaintiffs based their suit, consequently was inapplicable. Allowing it to interfere with the plan’s administration, held the Court, would contradict the ERISA preemption doctrine that aims to secure the exclusivity of federal regulation in that area.

In the wholesale setup—the Lynam case—the Court allowed the plaintiff to proceed with his malpractice suit against HPN because Nevada’s quality assurance statute regulated HPN’s internal affairs independently of the ERISA framework. As a bundle of providers and services, HPN offered medical care to Nevada’s residents independently of the different ERISA plans operating in Nevada. These plans were free to contract with any provider individually and build their own network of providers. Importantly, the ERISA plans were also free not to enter into wholesale agreements with HPN and its likes. The plans, in other words, were free to choose between setting up their own networks, free of Nevada’s regulation, by taking on board individual providers, and contracting with HPN or a similar organization that offers a bundle of services regulated by Nevada’s quality assurance statute.

As the Lynam Court explained, “ERISA would preempt the application of [Nevada’s quality assurance statute] to a managed care organization (MCO) or HMO if they had merely facilitated the selection of providers by the ERISA plan; however, preemption would [not] apply if the MCO or HMO had leased out its existing network of providers … or if the ERISA plan had simply purchased an insurance plan from a MCO or HMO.”

These decisions may be criticized for making the ERISA preemption’s applicability depend on formal contracting, but I think that these are excellent decisions. They give ERISA plans operating in Nevada a menu to choose from. A plan may select to bypass Nevada’s quality assurance statute by integrating individual providers on a retail basis. Alternatively, the plan may select a wholesale transaction: it may purchase a bundle of services from a regulated Nevada-based organization of providers. The first option will reduce the cost and quality of medical care offered by the plan, but the plan would have to incur substantial bargaining costs in realizing this option. The second option will raise the quality of medical care offered by the plan, but it will also cost more. By choosing this option, however, the plan will save the cost of bargaining with individual care providers. This saving will reduce the cost-difference between the higher and the lower quality care.

The Nevada Supreme Court decisions bring about a socially beneficial consequence. They motivate ERISA plans to funnel into healthcare money that would otherwise be expended on bargaining. Put differently, these decisions increase the transaction costs for ERISA plans that choose to bypass the state’s quality of care requirements for local providers. These decisions therefore deserve commendation.

One final remark. The plaintiffs in the two cases might have been able to avoid the ERISA preemption by suing their providers for improper treatment (as opposed to an improper management of their facilities that violated Nevada’s quality assurance statute). By choosing this cause of action, the plaintiffs would have to prove that the providers acted negligently, which seems difficult. But the plaintiffs could have tried to apply the res ipsa loquitur presumption, recently extended to cases in which patients became infected: see Sides v. St. Anthony’s Medical Center 258 S.W.3d 811 (Mo. 2008). Whether this argument would have succeeded under Nevada law is uncertain, but it was worth trying.