HMO Liability Part II: Erisa Preemption & The Saga of Corporate Greed Continues

I. Introduction:

In our previous article1, we offered an overview of the emerging area of tort law involving the liability of health maintenance organizations (HMOs) for medical injuries. In the process, we briefly introduced the complex issue of ERISA preemption.2 This article provides a more extensive analysis of ERISA preemption.

There are two forms of ERISA preemption: jurisdictional and substantive. Jurisdictional preemption arises when a state court medical negligence case is removed to federal court under federal question jurisdiction.3 It does not have any bearing on the viability of the state law claims. Substantive preemption, on the other hand, arises from §514(a) of ERISA which preempts any state law claim that “relates to” a covered employee benefit plan.4 If a common law tort or contract claim is substantively preempted, it is lost. ERISA itself does provide for civil enforcement of its provisions but it is generally thought not to allow money damages or the right to a jury trial.

What used to be a garden variety medical negligence suit when brought against a hospital or group practice has now become a federal case when brought against an HMO providing equivalent services. The harshness of ERISA preemption has recently been diluted somewhat by courts protective of patient’s rights. The issue has even reached Congress with identical House and Senate bills filed in April which, among other things, repeal ERISA’s substantive preemption provision.

II. Mary v. HMO:

Despite troubling signs and symptoms, Mary’s primary care physician delayed referring her to a specialist. Twelve months later, when the referral was finally made due to worsening symptoms, she was immediately diagnosed with cancer. The specialist expressed his frustration to Mary that he was not consulted earlier and indicated that the diagnosis should have been made earlier. The delay in diagnosis allowed the tumor to grow and metastasize. Mary is now almost certain to die; however, if the diagnosis had been made twelve months earlier, she very likely would have lived.

Mary and her husband come to your office to discuss a possible medical negligence suit. You learn that Mary chose her primary care physician because he was on the provider list she received when she joined an HMO through her employer. You investigate the case, obtain favorable reviews from experts, and Mary and her husband make the decision to file a medical negligence suit.

Mary and her husband are residents of New Hampshire. The defendant doctor is also a resident of this state. The HMO is a New Hampshire corporation, licensed to do business in this state, with corporate offices here. In the course of your investigation, you learn that the HMO is known to give strong financial incentives to its providers to limit expensive referrals. With this in mind, you draft a writ of summons claiming medical negligence against the doctor, vicarious liability against the HMO as employer of the doctor, and direct negligence against the HMO alleging that the incentive system breached a duty of care it owed to Mary. You file suit in superior court in Mary’s home county. Two weeks later you receive a notice that your case has been removed to federal court and then a motion to dismiss your claims against the HMO on the grounds that the claims are preempted by §514(a) of ERISA. Now what?

III. Jurisdictional Preemption:

As a general matter, federal question removal is only appropriate when the state court complaint states a federal cause of action on its face.5 One exception to this rule is the “complete preemption” doctrine under which certain state law claims are characterized as federal when federal law has occupied a particular field completely.6

The Supreme Court has held that suits brought to recover benefits due under an ERISA plan, or to enforce or clarify rights under the plan, even if they are brought in the form of state law tort or contract claims, are subject to complete preemption and are removable to federal court.7 The Court has reasoned that Congress completely occupied the field of regulation of ERISA plans by providing an exclusive civil remedy under §502(a) of the Act. Accordingly, any state law claim which implicates the right to recover benefits, enforce rights, or clarify rights under an ERISA plan must be characterized as a federal cause of action arising under §502(a).8

The question, then, is whether Mary’s state law claims against her HMO are more properly characterized as claims to recover benefits, or enforce or clarify her rights. A number of federal circuit courts have wrestled with this issue.

The second circuit has held that claims alleging that an HMO was guilty of negligent hiring and supervision, breach of fiduciary duty, and intentional infliction of emotional distress bore no significant resemblance to the claims available under §502(a) and removal was therefore improper.9 Similarly, the third circuit has held that claims alleging that an HMO was vicariously liable under an apparent agency theory and that it was directly negligent in its selection, employment, and oversight of its physician-staff were not subject to complete preemption.10 The seventh circuit has decided two complete preemption cases. In the first, it held that respondeatsuperior claims against an HMO were improperly removed because they did not involve the interpretation of an ERISA plan.11 In the second, it held that state law negligence claims against a utilization review nurse and vicarious liability claims against the HMO that employed her were properly characterized as claims alleging a denial of benefits under an ERISA plan and were removable.12

The third circuit’s analysis in Dukes v. U.S. Healthcare, Inc. is the most comprehensive. It drew a distinction between claims attacking the quality of benefits received under an ERISA plan and claims attacking the right to receive benefits at all. Only the latter are removable.13 According to the court, “a claim about the quality of a benefit received is not a claim under §502(a)(1)(B) to ‘recover benefits due under the terms of the plan.'”14 In addition, it rejected the HMOs’ attempts to characterize the plaintiffs’ claims as attempts to enforce their rights under the terms of their plans.

The plaintiffs are not attempting to define new “rights under the terms of the plan”; instead, they are attempting to assert their already existing rights under the generally-applicable state law of agency and tort. Inherent in the phrases “rights under the terms of the plan” and “benefits due . . . under the terms of [the] plan” is the notion that the plan participants and beneficiaries will receive something to which they would not be otherwise entitled. But patients enjoy the right to be free from medical malpractice regardless of whether or not their medical care is provided through an ERISA plan.15

Returning to Mary’s case, the key then is to characterize her state law claims as quality of care claims. It seems clear that her vicarious liability claim is a quality of care claim and not removable.16 The direct negligence claim against the HMO for setting up an unreasonably dangerous incentive plan is a closer question. Superficially, it may seem akin to the negligent utilization review claim the seventh circuit found to be removable in Jass v. Prudential Healthcare Plan, Inc.17 However, a determination not to provide certain coverage by a utilization review nurse is quite literally a “denial of benefits” under §502(a). On the other hand, it can be argued that a negligent policy which discourages necessary medical care is more closely related to a negligent hiring policy or negligent supervision of a plan physician. As is explained above, such claims were found not to be removable by the second and third circuits.18

At least one federal district court has addressed the issue whether a negligence claim based on an HMO’s incentive plan is subject to removal under §502(a). In Ouellette v. The Christ Hospital19, the court held that such claims were not removable, analyzing the issue as follows:

Ms. Ouellette’s claim against ChoiceCare focuses upon the relationship between ChoiceCare and The Christ Hospital, not between her and ChoiceCare. Ms. Ouellette is not challenging the amount of benefits but the quality of the service she received. She asserts that ChoiceCare maintains financial incentives with its providers the effect of which undermine the quality of care provided by the providers. Such a claim is separate and distinct from a claim for benefits under a plan.20

The court accordingly remanded the suit to state court for consideration of the substantive preemption issue.21

Even if you are successful characterizing your state law claims as quality of care claims and Mary’s suit is remanded back to the superior court, you will still face the specter of substantive preemption. State courts are capable of determining whether common law claims that are not removable under §502(a) are nevertheless within the reach of §514(a), ERISA’s broad preemption provision.22

IV. Substantive Preemption:

ERISA §514(a) is an express preemption clause which, by its terms, eliminates any state law claims that “relate to” an ERISA qualified plan.23 A state law “relates to” an ERISA plan “if it has a connection with or reference to such a plan.”24 Until recently, courts applying this extremely broad language found nearly all claims against HMOs to be preempted; oftentimes showing some reluctance. A 1992 decision by the fifth circuit best exemplifies this.

In Corcoran v. United Healthcare, Inc.25, the court held that §514(a) preempted the plaintiff’s claims that her HMO’s refusal to authorize hospitalization resulted in the death of her unborn baby. The parties had argued over whether the HMO had actually made “medical” decisions in denying the hospitalization. The court concluded that the HMO did make medical decisions and even that it gave medical advice. However, “it [did] so in the context of making a determination about the availability of benefits under the plan.”26 Accordingly, the plaintiffs’ claims attacking that medical advice were related to the ERISA plan and were preempted by §514(a). Responding to the plaintiffs’ argument that ERISA was not intended to involve itself with this type of case, the court said, “Congress perhaps could not have predicted the interjection into the ERISA ‘system’ of the medical utilization review process, but it enacted a pre-emption clause so broad and a statute so comprehensive that it would be incompatible with the language, structure and purpose of the statute to allow tort suits against entities so integrally connected with a plan.”27 This was the state of the law until the United States Supreme Court’s April 26, 1995 decision in New York State Conference of Blue Cross Blue Shield Plans v. Travelers Insurance Company.28

In a rare unanimous decision authored by Justice Souter, the Court sharply limited its previously expansive view of §514(a) preemption. Rather than simply reiterating the language from its prior cases the Court undertook a fresh analysis of the issue. It began by emphasizing that “the historic police powers of the States were not to be superseded by [a] Federal Act unless that was the clear and manifest purpose of Congress.”29 Expressing its frustration with the drafting of §514(a), the Court cautioned against “uncritical literalism”30 in construing the provision and characterized the text as “unhelpful.”31

After carefully reviewing the ERISA statute and its legislative history, the Court concluded that “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.”32 Furthermore, a state law “operating as an indirect source of merely economic influence on administrative decisions,” would not trigger preemption.33

Courts are slowly beginning to apply Travelers to HMO direct liability claims. A Pennsylvania appellate court relied upon the Supreme Court’s decision to reverse a trial court’s finding that direct negligence claims against an HMO were preempted.34 The Pennsylvania court emphasized that:

The type of recovery sought is based on negligence attributable to the delay caused by a cost containment protocol set by a for-profit organization, and which is aimed at conserving and increasing its profits, an intention diametrically opposed to ERISA’s general purpose of protecting the rights of a plan’s beneficiaries.35

According to the court this type of tort claim “is, in fact, ‘an indirect source of merely economic influence on administrative decisions.'”36 Furthermore, the court simply felt that to base preemption on the fact that tort claims “may interfere with what is in essence a business decision made in the financial interests of a commercial entity” would not serve the interests ERISA was meant to serve.37 The Pennsylvania Supreme Court recently granted the defendant’s request to appeal this decision38 and the ultimate outcome should be closely watched.

Notwithstanding Travelers’ future affect on the matter, it is generally held that vicarious liability claims are not preempted by §514(a).39 In New Hampshire, Judge Hollman carefully analyzed the issue in ruling on a motion to dismiss and concluded that the plaintiffs’ respondeat superior claims against an HMO were not preempted.40Claims involving direct negligence have been less successful41, but that is understandable given the state of the law pre-Travelers.

Recently, Judge Bownes authored a comprehensive review of the recent history of Section 514(a) preemption in his concurring opinion in Golas v. Homeview, Inc., 106 F.3d 1,4 (1st Cir. 1997). And Justice Thomas authored a decision for the Supreme Court which was issued on February 18, 1997 in California Division of Labor Standards Enforcement v. Dillingham Construction, 519 U.S. ___, 136 L.Ed.2d 791, 117 S.Ct. ___. Like Traveler’s Insurance, the Dillingham decision was unanimous, and it refused to find a California statute concerning ERISA-covered apprenticeship programs preempted by Section 514(a). A separate opinion by Justices Scalia and Ginsburg proposes a frontal assault on prior Supreme Court decisions allowing for an expansive view of ERISA preemption. Justice Scalia wrote:

I think it would greatly assist our function of clarifying the law if we simply acknowledged that our first take on this statute was wrong; that the “relate to” clause of the preemption provision is meant, not to set forth a test for preemption, but rather to identify the field in which ordinary field pre-emption applies – namely, the field of laws regulating “employee benefit plan[s] described in Section 1003(a) of this title and not exempt under Section 1003(b) of this title.136 L.Ed.2d at 806.


Will Mary’s claims survive dismissal? Now that you are back in superior court, it is likely that her vicarious liability claims will survive in light of Judge Hollman’s persuasive opinion. The fate of her direct liability claim is less clear. Suffice it to say, the direct liability claim is in a far better position today than it was prior to Travelers.

V. Legislative Solutions:

The harshness of ERISA preemption, coupled with the fact that Congress did not foresee the involvement of benefit plans in medical decision-making when it enacted ERISA, has driven Representative Charles Norwood (R-GA) to introduce a bill which will, inter alia, repeal ERISA’s preemption provision in the context of medical injury cases.42 Senator Alphonse D’Amato (R-NY) introduced an identical bill in the Senate the same day.43 The bills, which were introduced on April 23, 1997, were sent to various committees and then subcommittees in early May. Obviously, a legislative repeal of §514(a) would be the best solution for the numerous patients who will inevitably be harmed by managed care. The progress of these bills should be carefully monitored.

VI. Conclusion:

ERISA has been aptly compared to the bully on the playground, the game must be played by the bully’s rules, and only the bully’s rules.44 HMOs have hidden behind the bully for too long. The courts have begun to reign in the scope of ERISA preemption and the Congress is even considering doing away with it altogether. The ability of every one of us to obtain competent and adequate medical care is at stake. As trial lawyers we must do everything in our power to dethrone the bully.


  1. HMO Liability: Building Corporate Profits at the Expense of Patient Care, 19 TBN 144 (Winter, 1997).
  2. Id., 19 TBN at 145-46.
  3. 28 U.S.C. §1441(a).
  4. 29 U.S.C. §1144(a).
  5. Franchise Tax Board v. Construction Laborers Vacation Trust, 463 U.S. 1, 9-10 (1983).
  6. Metropolitan Life Insurance Company v. Taylor, 481 U.S. 58, 63-65 (1987).
  7. Id., 481 U.S. at 67.
  8. Id., 481 U.S. at 64.
  9. Lupo v. Human Affairs International, Inc., 28 F.3d 269, 272 (2d Cir. 1994).
  10. Dukes v. U.S. Healthcare, Inc., 57 F.3d 350 (3d Cir. 1995).
  11. Rice v. Panchal, 65 F.3d 637, 642 (7th Cir. 1995).
  12. Jass v. Prudential Health Care Plan, Inc., 88 F.3d 1482 (7th Cir. 1996).
  13. Dukes, supra note 10, 57 F.3d at 356.
  14. Id., 57 F.3d at 357.
  15. Id., 57 F.3d at 358.
  16. Id.; Rice, supra note 11, 65 F.3d at 646.
  17. Jass, supra note 12.
  18. Lupo, supra note 9; Dukes, supra note 10.
  19. 942 F.Supp. 1160 (S.D.Ohio 1996).
  20. Id., 942 F.Supp. at 1165.
  21. Id.
  22. Dukes, supra note 10, 57 F.3d at 361; Hansen v. Faraci, No. 94-C-512, Order on Motion to Dismiss (Hillsborough South, May 31, 1995).
  23. 29 U.S.C. §1144(a) (1985).
  24. Shaw v. Delta Airlines, Inc., 463 U.S. 85, 96-97 (1983).
  25. 965 F.2d 1321 (5th Cir. 1992).
  26. Id., 965 F.2d at 1331.
  27. Id., 965 F.2d at 1334.
  28. 115 S.Ct. 1671 (1995).
  29. Id., 115 S.Ct. at 1676(quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947)).
  30. Id., 115 S.Ct. At 1677.
  31. Id., 115 S.Ct. At 1677.
  32. Id., 115 S.Ct. at 1680.
  33. Id.
  34. Pappas v. Asbel, 675 A.2d 711 (Pa.Super. 1996).
  35. Id., 675 A.2d at 716.
  36. Id.(quoting Travelers, 115 S.Ct. at 1680).
  37. Id.(quoting Travelers, 115 S.Ct. at 1680).
  38. Pappas v. Asbel, 686 A.2d 1312 (Pa. 1996).
  39. Pacificare of Oklahoma v. Burrage, 59 F.3d 151 (10th Cir. 1995); Kearney v. U.S. Healthcare, 859 F.Supp. 182 (E.D.Pa. 1994).
  40. Hansen, supra note 22, Order on Motion to Dismiss (May 31, 1995).
  41. Corcoran, supra note 25; Kuhl v. Lincoln National Health Plan of Kansas City, Inc., 999 F.2d 298 (8th Cir. 1993).
  42. H.R. 1415.
  43. S 644.
  44. Judicial Refusal to Apply ERISA Preemption to Tort Actions Against Health Care Providers, The Brief at 26 (Winter 1997).