HMO Liability Part III Return of the Plaintiffs

I. Introduction:

This is the third in a series of articles addressing the controversial issue of HMO liability.1 The primary focus of this article is the Pennsylvania Supreme Court’s ground breaking decision in Pappas v. Asbel2, in which the court ruled that negligence claims against health maintenance organizations are not preempted by ERISA.3 Pappas is notable for its broad holding, and its rejection of the conclusion reached by numerous federal appeals courts. Although the decision is directly binding only on Pennsylvania state courts, it provides persuasive precedential support for the many trial and appellate judges who recognize that ERISA was never intended to immunize HMOs from tort liability. For that reason alone, it is bound to have a significant impact across the country.

II. Pappas v. Asbel:

Basile Pappas was admitted to Haverford Community Hospital through its emergency department with complaints of paralysis and numbness in his extremities. The attending physician determined that he was suffering from an epidural abscess which was pressing on his spinal column. The doctor felt that Mr. Pappas needed to be transferred to a university hospital for emergency treatment. When the ambulance arrived at approximately 12:40 p.m., however, the doctor was told that Mr. Pappas’ health maintenance organization was denying coverage for treatment at Jefferson University Hospital. Instead, the HMO asked that Mr. Pappas be sent to one of three other hospitals. The attending doctor contacted one of the three and was told that it would take a half hour to determine whether it was available to accept the patient. He contacted another and was able to gain acceptance within minutes. Mr. Pappas was transferred to that facility, but not until 3:30 p.m. Unfortunately, due at least in part to this delay, Mr. Pappas is now a quadriplegic.4

Mr. Pappas and his wife sued Mr. Pappas’ primary care physician and Haverford Community Hospital. The hospital filed a third party complaint against U.S. Healthcare, Mr. Pappas’ HMO, alleging that it was at fault for refusing to authorize the patient’s transfer to Jefferson University Hospital. Mr. Pappas’ primary care physician also filed a cross-claim against the HMO for contribution and indemnity. U.S. Healthcare moved for summary judgment, arguing that it was immune from state law claims under ERISA. The trial court granted its motion. The Pappases subsequently settled their direct claims against the primary care doctor and the hospital. They, in turn, appealed the trial court’s decision dismissing their claims against U.S. Healthcare.

On appeal, the intermediate appellate court held that ERISA did not preempt the third party claims against U.S. Healthcare.5 The Pennsylvania Supreme Court granted the HMO’s petition for allowance of appeal. The court accepted amicus briefs in support of the intermediate court’s ruling from a quintessential pair of strange bedfellows — the American Medical Association and the Pennsylvania Trial Lawyers Association. U.S. Healthcare’s argument was based on the fact that every federal circuit to decide the issue had held that direct negligence claims against HMOs were preempted by ERISA. The third party plaintiffs countered by citing recent Supreme Court decisions limiting the scope of ERISA preemption. Both sides placed great emphasis on Dukes v. U.S. Healthcare6, a 1995 Third Circuit decision that controls the federal courts in Pennsylvania.

In Dukes, the court dealt with two separate cases which it had consolidated on appeal. It held that suits brought in state court challenging the quality of care provided by HMOs were not subject to removal to federal court under section 502 of ERISA. The Third Circuit carefully distinguished between claims in which services were withheld and claims in which services were provided negligently.

Dukes does not allege, for example, that the [hospital] refused to perform blood studies on Darryl because the ERISA plan refused to pay for those studies. Similarly, the Viscontis do not contend that Serena’s death was due to their welfare plan’s refusal to pay for or otherwise provide for medical services. Instead of claiming that the welfare plans in any way withheld some quantum of plan benefits due, the plaintiffs in both cases complain about the low quality of the medical treatment that they actually received . . .7

The parties in Pappas tried to characterize the claims at issue in a manner which took maximum advantage of this language from Dukes. The third party plaintiffs characterized their claims against U.S. Healthcare as simply involving the quality of care Mr. Pappas received.8 The HMO, on the other hand, argued that it was being sued for wrongfully denying benefits — in the form of payment for treatment at Jefferson University Hospital — to Mr. Pappas.9 Oral argument was heard on April 30, 1997.

The Pennsylvania Supreme Court issued its decision in Pappas on December 23, 1998, nearly twenty months after it was argued. The court unanimously affirmed the intermediate court’s holding that ERISA did not preempt the negligence claims against U.S. Healthcare. Surprisingly, the majority opinion (one justice concurred separately) did not even mention the Dukes case. The court rejected U.S. Healthcare’s main argument — that the federal circuits had unanimously found such claims to be preempted — in a footnote.10

The court’s opinion in Pappas, written by Justice Ralph Cappy, is driven entirely by recent cases from the United States Supreme Court. Specifically, the court wrote that the Supreme Court’s ERISA preemption analysis “noticeably changed tack”11 with the 1995 decision in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Company.12 Most compelling for the Pennsylvania court was the statement in Travelers that “nothing in the language of ERISA or in the context of its passage indicates that Congress chose to displace general health care regulation, which historically has been a matter of local concern.”13 The court noted that Travelers had been followed in two subsequent Supreme Court opinions.14 With this background, Justice Cappy wrote:

Based upon our interpretation of the Travelers line of cases, we conclude that negligence claims against a health maintenance organization do not “relate to” an ERISA plan. As noted by Travelers, Congress did not intend to preempt state laws which govern the provision of safe medical care. Claims that an HMO was negligent when it provided contractually-guaranteed medical benefits in such a dilatory fashion that the patient was injured indisputably are intertwined with the provision of safe medical care. We believe that it would be highly questionable for us to find that these claims were preempted when the United States Supreme Court has stated that there was no intent on the part of Congress to preempt state laws concerning the regulation of the provision of safe medical care.15

In a concurring opinion, Justice Russell Nigro characterized U.S. Healthcare’s actions as “an individual medical decision or judgment as opposed to a decision affecting the administration of an employee benefit plan.”16 Unlike the majority, Justice Nigro took note of the Dukes case and found that it supported the denial of ERISA preemption.17

III. Life After Pappas:

There are two fundamental concepts underpinning the American tort system. First, people will act more safely if they know that their actions may subject them to certain negative consequences. And second, when your mistakes result in someone else getting hurt, you must make him whole. Few would take issue with the notion that there should be some incentive to act safely and the corresponding belief that one who is harmed through no fault of his own should not bear the cost of his injuries alone. For some reason, however, Congress has been unable to permit these basic notions to apply in the HMO context. That reason, presumably, is related to the money spent by the managed care industry to fight such legislation.

A recent Associated Press article in the Manchester Union Leader reported that HMOs spent sixty million dollars in the first half of 1998 on lobbying against federal regulation, an average of $112,000 per member of Congress and fifty percent more than the tobacco companies spent during that time period to defeat similar regulations. This number did not include eleven million dollars spent on advertising, nor millions of dollars in campaign contributions to key members of Congress. The message pushed by these organizations is that opening up HMOs to civil liability will drastically increase premiums and will cause many employers to drop health insurance benefits altogether. Perhaps the premiums would not be so high if these companies had not spent approximately seventy-five million dollars over six months on lobbying. Nor, presumably, would the cost of civil liability be particularly high if the companies acted in a reasonable way and did not subject themselves to large verdicts.

To some extent, Pappas has moved the battle from Capitol Hill to the courthouses. Judges, like Massachusetts federal district court judge William Young18, who have openly lamented the inequities of ERISA preemption, now have precedent based on a cogent analysis of recent United States Supreme Court decisions upon which to rely in denying HMOs’ motions to dismiss and motions for summary judgment.

Even before Pappas was decided, there was a growing body of experience across the country in trying HMO cases to a jury. As one publication estimated, nearly thirty percent of Americans are exempt from ERISA, either through government employment, church employment, or self-employment.19 Recent multi-million dollar verdicts against HMOs in Kentucky and California may be a harbinger of things to come if cases like Pappas catch on.

On October 21, 1998, a Kentucky jury returned a verdict against Humana Health Plan for its failure to approve a member’s hysterectomy, awarding the plaintiff thirteen million dollars in punitive damages. The 32 year old woman had been diagnosed with cervical cancer when her doctor recommended a hysterectomy to ensure that the cancer would not recur. Humana denied the procedure on the ground that it was not medically necessary. Instead, the woman was directed to undergo a cheaper, less successful procedure. The hysterectomy would cost $7,000.00, the procedure offered by Humana cost $700.00. After two internal appeals proved fruitless, the woman’s doctor advised her to have the hysterectomy regardless of Humana’s decision. She did so and apparently made a complete recovery with no recurrence of cancer.20

After filing suit, the woman’s lawyers learned that Humana used an outside company to review treatment requests for medical necessity. Upon arriving at this company’s office to take scheduled depositions, one of the lawyers found a brochure in the lobby which boasted that the company “saved its clients $67.5 million in 1995. The largest savings reported were for hysterectomy at $38 million.” The lawyers subsequently learned that doctors at the company were paid bonuses to deny claims and keep hospital admissions low. Also, each year since 1990, the review company had denied exactly 25 percent of the hysterectomy requests received by Humana.21

With evidence such as this, it is not surprising that the jury awarded the plaintiff the $14,000 she paid for the hysterectomy, $100,000 for pain and suffering, and $13 million in punitive damages. She escaped ERISA preemption because she was covered by a plan through her husband’s employment with a local school district.

On January 20, 1999, a San Bernadino, California jury hit Aetna Health Plans of California with a verdict of $120.5 million. This case arose when Aetna denied a cancer victim’s request for a bone marrow transplant resulting in his death. The decedent was able to sue the HMO because he received his membership as a benefit of his government employment. The jury awarded $4.5 million in compensatory damages and $116 million in punitive damages. According to a defense attorney, the punitive damages award is approximately six times the net worth of the HMO.22

Verdicts of this magnitude are unlikely in New Hampshire, but that is beside the point. HMOs subject to civil liability, whether it be a hundred thousand dollars or a hundred million dollars, learn that there are consequences to their actions. This realization invariably affects their future conduct, as they are driven by the bottom line. What incentive did Humana have to pay $7,000 for a hysterectomy when it could pay $700 for a conization? How could an officer in that corporation realistically justify paying money he did not have to pay? The prospect of civil liability is the only effective counterbalance to the financial incentives these companies have to withhold treatment. Hopefully, Pappas will help to make that prospect a meaningful threat to HMOs in New Hampshire and across the country.

IV. Conclusion:

The law of HMO liability is still in its infancy. It is changing rapidly and developing on a daily basis. We will keep you up to date with additional articles in the future.


  1. See HMO Liability: Building Corporate Profits at the Expense of Patient Care, 19 TBN 144 (Winter 1997); HMO Liability Part II: ERISA Preemption . . . And the Saga of Corporate Greed Continues, 19 TBN 44 (Summer 1997).
  2. 1998 WL 892074 (Pa., December 23, 1998).
  3. See id. at *5.
  4. See id. at *1.
  5. See Pappas v. Asbel, 675 A.2d 711 (Pa.Super. 1996), discussed at length in our two earlier articles.
  6. 57 F.3d 350 (3rd Cir.), cert. denied, 116 S.Ct. 564 (1995).
  7. Id., 57 F.3d at 356.
  8. See Brief for Appellees at 11.
  9. See Brief for Appellant at 29-33.
  10. See Pappas, supra note 2, 1998 WL 892074 at *6 n. 5.
  11. Id. at *3.
  12. 514 U.S. 645 (1995), discussed at length in our two earlier articles.
  13. Id. at *4 (quoting Travelers, 514 U.S. at 661).
  14. Id. (citing California Division of Labor Standards Enforcement v. Dillingham Construction, N.A., Inc., 519 U.S. 316 (1997) and DeBuono v. NYSA-ILA Medical and Clinical Services Fund, 520 U.S. 806 (1997)).
  15. Id. at *5 (citation and footnote omitted).
  16. Id. (Nigro, J. concurring).
  17. Id. at *6.
  18. See Andrews-Clarke v. Travelers Insurance Company, 984 F.Supp. 49 (D.Mass. 1997); “US Judge Raises Eyebrows by Joining Lawmakers’ Forum,” Boston Globe, July 22, 1998 at A1.
  19. See “Cracks Appearing in HMO Armor,” Lawyers Weekly USA, November 30, 1998 at B6.
  20. See id. at B7.
  21. See id.
  22. See “$116 Million Punitive Award Against Aetna,” The New York Times, January 21, 1999.