Under ERISA, a member of an employment-related health benefits plan has a limited ability to sue the plan’s provider – an MCO or an HMO – in connection with her eligibility to a disputed benefit.  Eligibility suits cannot be filed in state courts. An aggrieved member of the plan can only sue the provider in a federal court where, if successful, she will recover equitable remedies. These remedies are meager: they include mandamus, injunction orders, declaratory relief, and restitution or reimbursement for expenses, but not consequential damages that courts award to the victims of medical malpractice. See John H. Langbein, What ERISA Means by “Equitable”: The Supreme Court’s Trail of Error in Russell, Mertens, and Great-West, 103 Colum. L. Rev. 1317 (2003).

The Basics

An important Supreme Court precedent, Aetna Health Inc. v. Davila, 542 U.S. 200 (2004), has established that administrative denials of the plan’s coverage are not actionable except as a breach of the plan’s conditions—a cause of action adjudicated exclusively by federal courts. For any such breach, ERISA grants equitable remedies: mandamus, injunction, restitution/reimbursement, and declaratory relief. These remedies are exclusive. As I already mentioned, they do not include consequential damages. ERISA preempts all state-law-based causes of action in connection with such breaches: see ERISA, §§ 502, 514.

The unanimous Davila Court reaffirmed the well-established proposition that medical mistreatment of a patient – e.g., amputation of a wrong leg – is actionable as malpractice under applicable state law. The preemption provision only extends to coverage-related claims arising from an employment-related health benefits plan. This provision does not affect actions in state courts that properly allege medical malpractice, while attributing to the MCO (or HMO) vicarious liability, corporate liability or negligent credentialing of a doctor.

ERISA’s preemption provision thus only applies to administrative denials of coverage, categorized as “eligibility decisions”: e.g., the MCO’s decisions with regard to covered medications and hospitalization periods, complained against by the plaintiffs in Davila. Those decisions cannot be properly categorized as medical malpractice under state law. Another good example of those decisions is a plan administrator’s refusal to pay for out-of-network hip revision surgery that accommodates the patient’s religious beliefs by avoiding blood transfusion (Klassy v. Physicians Plus Ins. Co., 371 F.3d 952 (7th Cir.) (2004).
Importantly, Davila also acknowledged that the so-called “mixed treatment/eligibility decisions” are actionable in state courts as medical malpractice. These decisions are made by the MCO’s medical staff, typically by a physician who also treats the patient: in Davila’s words, those are “medical necessity decisions made by the plaintiff’s treating physician qua treating physician and qua benefits administrator.”

News From Nevada Supreme Court

The most significant recent development in the ERISA preemption field 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.