Door Opens for Malpractice Claims to Outlast Preemption Disputes

Until recently, state medical malpractice claims against HMOs were almost universally subject to federal preemption in light of the Supreme Court's expansive interpretation of the preemption provisions of the Employee Retirement Income Security Act of 1974 [ERISA], 29 USC ' 1144[a], which states in sweeping language that ERISA supersedes 'any and all State laws [that] … relate' to benefits plans governed by ERISA. The effects of such preemption include federal subject matter jurisdiction and avoidance of state tort law and tort law damages.

The 'Pegram' Case

The Supreme Court took steps that altered this approach in Pegram v. Herdrich when it held that mixed eligibility and treatment decisions made by HMOs acting through their physician employees are not fiduciary acts within the meaning of ERISA. The Court in Pegram, a unanimous decision, noted that it has already held that 'in the field of health care, a subject of traditional state regulation, there is no ERISA preemption without clear manifestations of congressional purpose.' Seizing on this language, the U.S. Court of Appeals for the Second Circuit in Cicio v. Vytra Healthcare2 has gone a step further, holding that if a state law malpractice action is based on a 'mixed eligibility and treatment decision,' defined in Pegram as a decision with both coverage and medical treatment determinations, it is not subject to ERISA preemption so long as the state law cause of action involves allegations of faulty medical judgment.

This decision is a warning to HMOs that ERISA preemption will not be as easily available to force malpractice claims involving HMOs into federal court under the theory that federal law already provides a remedy and preempts state tort law. The decision warrants attention because it opens the door for HMOs to state tort liability, which allows for tort damages, in an area previously deemed to be preempted by ERISA, which does not permit tort damages.

Mixed Eligibility and Treatment Decisions

The plaintiff in Cicio, on behalf of herself and the estate of her deceased husband, sued the administrator of an HMO and its medical director, in relevant part, for medical malpractice. Ms. Cicio's husband was diagnosed with multiple myeloma, a type of blood cancer, in March 1997 and began chemotherapy the following month. His treating oncologist requested his HMO's approval for a treatment known as tandem double stem cell transplantation. The medical director denied the request, and Mr. Cicio died 2 months after his oncologist's final appeal.

The HMO in Cicio was based on a system of prospective utilization review, which involves review by a third party of the necessity of medical care. The decision is quasi-medical in nature, as it can sometimes involve a medical judgment about a particular patient's symptoms. The Second Circuit adopted the categories defined in Pegram and held that this utilization review system constituted a mixed decision. The court in Pegram defined two categories of decision-making in the context of HMOs and a third category that occurs when the first two overlap: 1) pure eligibility decisions, which involve a determination of whether a particular plan covers a medical condition or procedure for treatment; 2) pure treatment decisions, which involve choices about diagnosis and treatment of a particular condition; and 3) mixed eligibility and treatment decisions, which occur where a decision involves both a medical judgment about the patient's condition and a non-medical judgment about a particular plan's coverage.

The Second Circuit then went beyond Pegram and extended its teachings to mean that 'even if a physician does not directly control, direct, or influence a plaintiff's treatment, and even if the sole consequence of a physician's decision is reimbursement or its denial, that decision may nonetheless be a mixed eligibility and treatment decision.' The Cicio court then concluded that, because Ms. Cicio's state law malpractice claim was based on a challenge to the medical judgment component of this mixed eligibility and treatment decision, it could not be preempted by ERISA.

The decision creates a huge gap in the once-formidable wall of ERISA preemption, which reserved almost anything associated with benefits plans to the federal courts. It also creates disparity among the federal courts, several of which have held that malpractice claims based on utilization review decisions similar to the one in Cicio are preempted by ERISA.

Congressional Intent

Justification for Exempting Particular Malpractice Claims from ERISA Preemption.

The court in Cicio declined to adopt the binary distinction between 'quality of care decisions' and 'benefits administration' questions applied by other courts because such a categorization, according to the court, ignores the multitude of medical administrative decisions involving considerations of both eligibility and treatment that were brought to light in Pegram. The court instead based its decision on its understanding of Congress' intent in enacting ERISA and the analytic framework of Pegram discussed above.

First, the court noted that in enacting ERISA, Congress' stated purpose was to protect the contractual rights defined by benefits plans. It then went on to point out that state medical malpractice law 'by contrast, even if implicated by the execution of a benefits decision, involves the application of duties of conduct that are defined independent of ERISA plans.' The court then determined that ERISA requires a court to distinguish between 'contractually defined benefits' and 'those rights that state law delimits independent of benefits plans, such as medical quality standards.' Thus, it concluded that, as Congress did not intend for ERISA to displace the state-law standards of reasonable medical care, ERISA does not preempt state law malpractice claims involving application of the standards for medical decision making.

Not all of the state law claims survived ERISA preemption. The court found only that plaintiff's medical malpractice claim survived preemption and agreed with the lower court that plaintiff's other two claims, that the administrator and its medical director misrepresented the availability of health benefits under the plan and negligently failed to respond promptly to the request for services, were both preempted. Complete preemption exists under ERISA if 1) the cause is based on state law that is 'conflict' preempted, meaning that the state law relates to or has a connection with ERISA under ERISA ' 514[a] and 2) the cause of action is within the scope, meaning that the state law cause of action seeks to vindicate rights already protected by ERISA ' 502[a]. Thus, the first two claims were preempted because Congress, through ERISA 'has swept away all state regulation' in that area, but according to the court, the medical malpractice claim, at least in the context of mixed eligibility and treatment decisions, is still tied to an area of state law not meant to be superceded by ERISA.

The court stated, however, that its decision came with a caveat. It cautioned that its holding applied only to those set of facts consistent with the allegations contained in plaintiff's complaint. Because the case reached the court on appeal from a motion to dismiss under Fed. R. Civ. P. 12[b][6], the court took all factual allegations made by the plaintiff in her complaint to be true. Thus, if the defendant HMO's medical director did in fact base his actions on a medical decision or a mixed medical decision, the court's analysis would apply and ERISA preemption would not be justified. If, however, the medical director's decision involved only eligibility determinations, the claims would be completely preempted by ERISA.

Circuit Justice Guido Calabresi dissented from the majority's opinion in Cicio insofar as it exempted the medical malpractice claim from ERISA preemption. He disagreed with the majority for placing such weight upon the mixed medical decision component for its holding. He explained that the claim was nothing more than a suit alleging violation of the terms of an ERISA plan, resulting at best in improper denial of coverage, and faulted the majority for 'skirting the boundary of ERISA' in order to provide 'justice' to a widow. Justice Calabresi contended that the better result would be to construe ERISA as permitting the same types of damages as would be available under the law of trusts. This would enable full compensation to plaintiffs such as Ms. Cicio without distorting the law of ERISA preemption. Justice Calabresi believes that the majority's decision leaves several gaps exposed. It does not solve the problem left by the Supreme Court's denial of consequential damages under ERISA. It opens HMOs to potential liability from diverging state laws, which ERISA was intended to avoid. Most importantly, it seizes upon the dicta of the Court in Pegram concerning medically based decisions for its authorization to avoid preemption. Such a leap will surely be challenged and is not a permanent solution to HMO liability.

The court's decision in Cicio creates an exquisite irony: If the HMO's physician conducting utilization review makes a decision without any reference to the individual patient's condition, such decision is likely to be characterized as an eligibility decision, as to which state tort law is preempted by ERISA. If, however, the same physician takes account of the individual patient's condition, the decision is likely to be characterized as a 'mixed' one, potentially subject to state malpractice law. Somehow it does not seem right that the reward for more-thorough review is to be cast into a more pro-plaintiff set of legal principles [state tort law], and the penalty for making a decision without considering the individual patient is to be cast into the pro-defendant world of ERISA preemption.

Leo T. Crowley is a partner at Pillsbury Winthrop LLP, New York. Alan Kahn, an associate of the firm, assisted in the preparation of this article, which first appeared in the New York Law Journal.

Until recently, state medical malpractice claims against HMOs were almost universally subject to federal preemption in light of the Supreme Court's expansive interpretation of the preemption provisions of the Employee Retirement Income Security Act of 1974 [ERISA], 29 USC ' 1144[a], which states in sweeping language that ERISA supersedes 'any and all State laws [that] … relate' to benefits plans governed by ERISA. The effects of such preemption include federal subject matter jurisdiction and avoidance of state tort law and tort law damages.

The 'Pegram' Case

The Supreme Court took steps that altered this approach in Pegram v. Herdrich when it held that mixed eligibility and treatment decisions made by HMOs acting through their physician employees are not fiduciary acts within the meaning of ERISA. The Court in Pegram, a unanimous decision, noted that it has already held that 'in the field of health care, a subject of traditional state regulation, there is no ERISA preemption without clear manifestations of congressional purpose.' Seizing on this language, the U.S. Court of Appeals for the Second Circuit in Cicio v. Vytra Healthcare2 has gone a step further, holding that if a state law malpractice action is based on a 'mixed eligibility and treatment decision,' defined in Pegram as a decision with both coverage and medical treatment determinations, it is not subject to ERISA preemption so long as the state law cause of action involves allegations of faulty medical judgment.

This decision is a warning to HMOs that ERISA preemption will not be as easily available to force malpractice claims involving HMOs into federal court under the theory that federal law already provides a remedy and preempts state tort law. The decision warrants attention because it opens the door for HMOs to state tort liability, which allows for tort damages, in an area previously deemed to be preempted by ERISA, which does not permit tort damages.

Mixed Eligibility and Treatment Decisions

The plaintiff in Cicio, on behalf of herself and the estate of her deceased husband, sued the administrator of an HMO and its medical director, in relevant part, for medical malpractice. Ms. Cicio's husband was diagnosed with multiple myeloma, a type of blood cancer, in March 1997 and began chemotherapy the following month. His treating oncologist requested his HMO's approval for a treatment known as tandem double stem cell transplantation. The medical director denied the request, and Mr. Cicio died 2 months after his oncologist's final appeal.

The HMO in Cicio was based on a system of prospective utilization review, which involves review by a third party of the necessity of medical care. The decision is quasi-medical in nature, as it can sometimes involve a medical judgment about a particular patient's symptoms. The Second Circuit adopted the categories defined in Pegram and held that this utilization review system constituted a mixed decision. The court in Pegram defined two categories of decision-making in the context of HMOs and a third category that occurs when the first two overlap: 1) pure eligibility decisions, which involve a determination of whether a particular plan covers a medical condition or procedure for treatment; 2) pure treatment decisions, which involve choices about diagnosis and treatment of a particular condition; and 3) mixed eligibility and treatment decisions, which occur where a decision involves both a medical judgment about the patient's condition and a non-medical judgment about a particular plan's coverage.

The Second Circuit then went beyond Pegram and extended its teachings to mean that 'even if a physician does not directly control, direct, or influence a plaintiff's treatment, and even if the sole consequence of a physician's decision is reimbursement or its denial, that decision may nonetheless be a mixed eligibility and treatment decision.' The Cicio court then concluded that, because Ms. Cicio's state law malpractice claim was based on a challenge to the medical judgment component of this mixed eligibility and treatment decision, it could not be preempted by ERISA.

The decision creates a huge gap in the once-formidable wall of ERISA preemption, which reserved almost anything associated with benefits plans to the federal courts. It also creates disparity among the federal courts, several of which have held that malpractice claims based on utilization review decisions similar to the one in Cicio are preempted by ERISA.

Congressional Intent

Justification for Exempting Particular Malpractice Claims from ERISA Preemption.

The court in Cicio declined to adopt the binary distinction between 'quality of care decisions' and 'benefits administration' questions applied by other courts because such a categorization, according to the court, ignores the multitude of medical administrative decisions involving considerations of both eligibility and treatment that were brought to light in Pegram. The court instead based its decision on its understanding of Congress' intent in enacting ERISA and the analytic framework of Pegram discussed above.

First, the court noted that in enacting ERISA, Congress' stated purpose was to protect the contractual rights defined by benefits plans. It then went on to point out that state medical malpractice law 'by contrast, even if implicated by the execution of a benefits decision, involves the application of duties of conduct that are defined independent of ERISA plans.' The court then determined that ERISA requires a court to distinguish between 'contractually defined benefits' and 'those rights that state law delimits independent of benefits plans, such as medical quality standards.' Thus, it concluded that, as Congress did not intend for ERISA to displace the state-law standards of reasonable medical care, ERISA does not preempt state law malpractice claims involving application of the standards for medical decision making.

Not all of the state law claims survived ERISA preemption. The court found only that plaintiff's medical malpractice claim survived preemption and agreed with the lower court that plaintiff's other two claims, that the administrator and its medical director misrepresented the availability of health benefits under the plan and negligently failed to respond promptly to the request for services, were both preempted. Complete preemption exists under ERISA if 1) the cause is based on state law that is 'conflict' preempted, meaning that the state law relates to or has a connection with ERISA under ERISA ' 514[a] and 2) the cause of action is within the scope, meaning that the state law cause of action seeks to vindicate rights already protected by ERISA ' 502[a]. Thus, the first two claims were preempted because Congress, through ERISA 'has swept away all state regulation' in that area, but according to the court, the medical malpractice claim, at least in the context of mixed eligibility and treatment decisions, is still tied to an area of state law not meant to be superceded by ERISA.

The court stated, however, that its decision came with a caveat. It cautioned that its holding applied only to those set of facts consistent with the allegations contained in plaintiff's complaint. Because the case reached the court on appeal from a motion to dismiss under Fed. R. Civ. P. 12[b][6], the court took all factual allegations made by the plaintiff in her complaint to be true. Thus, if the defendant HMO's medical director did in fact base his actions on a medical decision or a mixed medical decision, the court's analysis would apply and ERISA preemption would not be justified. If, however, the medical director's decision involved only eligibility determinations, the claims would be completely preempted by ERISA.

Circuit Justice Guido Calabresi dissented from the majority's opinion in Cicio insofar as it exempted the medical malpractice claim from ERISA preemption. He disagreed with the majority for placing such weight upon the mixed medical decision component for its holding. He explained that the claim was nothing more than a suit alleging violation of the terms of an ERISA plan, resulting at best in improper denial of coverage, and faulted the majority for 'skirting the boundary of ERISA' in order to provide 'justice' to a widow. Justice Calabresi contended that the better result would be to construe ERISA as permitting the same types of damages as would be available under the law of trusts. This would enable full compensation to plaintiffs such as Ms. Cicio without distorting the law of ERISA preemption. Justice Calabresi believes that the majority's decision leaves several gaps exposed. It does not solve the problem left by the Supreme Court's denial of consequential damages under ERISA. It opens HMOs to potential liability from diverging state laws, which ERISA was intended to avoid. Most importantly, it seizes upon the dicta of the Court in Pegram concerning medically based decisions for its authorization to avoid preemption. Such a leap will surely be challenged and is not a permanent solution to HMO liability.

The court's decision in Cicio creates an exquisite irony: If the HMO's physician conducting utilization review makes a decision without any reference to the individual patient's condition, such decision is likely to be characterized as an eligibility decision, as to which state tort law is preempted by ERISA. If, however, the same physician takes account of the individual patient's condition, the decision is likely to be characterized as a 'mixed' one, potentially subject to state malpractice law. Somehow it does not seem right that the reward for more-thorough review is to be cast into a more pro-plaintiff set of legal principles [state tort law], and the penalty for making a decision without considering the individual patient is to be cast into the pro-defendant world of ERISA preemption.

Leo T. Crowley is a partner at Pillsbury Winthrop LLP, New York. Alan Kahn, an associate of the firm, assisted in the preparation of this article, which first appeared in the New York Law Journal.