HMO Liability Part IV Protecting the Patient and Preserving States Rights

I. Introduction:

It has been several years since we last wrote about HMO liability.1 At that time it was extremely difficult to maintain a suit against an HMO because most claims were thought to be preempted by the Employee Retirement Income Security Act. Since then, the state of the law has changed considerably. Recent decisions from the Pennsylvania Supreme Court and the Second Circuit have applied a 2000 United States Supreme Court opinion to hold that HMOs may be held liable for negligent medical decisions made in the course of benefit determinations. These decisions provide reason for optimism in the battle to strip HMOs of unwarranted immunity.

II. Background:

In 1999, the First Circuit joined the vast majority of the other circuits in holding that a health insurance carrier could not be held liable for a negligent failure to approve treatment.2 In that case a woman required inpatient psychiatric care. Her treating physician recommended admission to a specific hospital that had successfully treated her in the past. However, after consulting with the treating doctor, the woman’s health insurer rejected his recommendation and approved admission to a different hospital. To make a long story short, the woman subsequently attempted suicide by self-immolation and received severe burns and permanent injuries.3

The woman and her family sued numerous physicians and hospitals along with the health insurance carrier and its utilization review firm in state court. The insurance carrier and the UR firm removed the case to federal court and moved to dismiss the plaintiffs’ claims on the ground that they were preempted by ERISA. The district court granted the motion and the plaintiffs appealed.4

Conceding that “the allegedly negligent decisionmaking and consultation at issue here may be characterized as medical in nature,”5 the court nevertheless concluded that

the conduct was indisputably part of the process used to assess a participant’s claim for a benefit payment under the plan. As such, any state-law-based attack on this conduct would amount to an “alternative enforcement mechanism” to ERISA’s civil enforcement provisions…6

Accordingly, the court held that all of the plaintiffs’ state law claims against the health insurer and the UR firm were preempted by ERISA and were properly dismissed. In defense of its decision, the court said,

we recognize that the practical result of our decision is that no significant state or federal remedy exists for plan participants injured by the negligence of utilization review firms and insurers making quasi-medical decisions in the course of processing claims for payment of benefits. As we have stated before, it is the job of Congress and not this court to provide for such a remedy if it sees fit.7

In 1999, the First Circuit’s holding simply reflected the virtually-unanimous opinion of the circuit courts that had addressed the issue.8

III. Pegram v. Herdrich:

An important change in the law of ERISA preemption came in dicta included in the United States Supreme Court’s unanimous opinion in Pegram v. Herdrich.9 Pegram was a case in which a woman suffered a ruptured appendix when her HMO physician refused to allow her to undergo an ultrasound at an unrelated facility. Instead, she was forced to wait eight days to have the test done at a related facility more than fifty miles away. The rupture occurred before the eight days were up.

The plaintiff filed suit in state court against the doctor and the HMO alleging medical malpractice. She subsequently added two fraud counts based on the HMO’s incentive plan which increased the physicians’ personal income if they kept costs down. The defendants removed the case to federal court and the court dismissed one of the two fraud counts. The plaintiff amended her complaint to clarify that the remaining fraud claim was intended to state a claim under ERISA, not state law. She alleged that the incentive scheme constituted a breach of the HMO’s fiduciary duty under ERISA.10

The trial judge granted the HMO’s motion to dismiss the breach of fiduciary duty claim and the case went to trial on the remaining state-law malpractice claims. The jury found in favor of the plaintiff and awarded her $35,000. The plaintiff then appealed the trial judge’s dismissal of the ERISA claim. The Seventh Circuit reversed holding the plaintiff had stated a valid claim under ERISA. The court concluded that, even though incentive plans were not per se in violation of an HMO’s fiduciary duties, “incentives can rise to the level of a breach where… the fiduciary trust between plan participants and plan fiduciaries no longer exists…”11

The Supreme Court granted certiorari to determine “whether treatment decisions made by a health maintenance organization, acting through its physician employees, are fiduciary acts within the meaning of the Employee Retirement Security Act.”12 Writing for the unanimous court, Justice Souter concluded that they are not.

The court examined the types of decisions that HMOs can make and categorized them for ERISA purposes. First, there are “pure eligibility decisions” which address the plan’s coverage of a particular condition or medical procedure. Next, there are “pure treatment decisions” which constitute choices about how to diagnose or treat a particular patient in light of that patient’s constellation of symptoms. And, lastly, there are “mixed eligibility and treatment decisions” in which eligibility decisions cannot be untangled from the physician’s judgment about reasonable medical treatment.13

The court determined that the conduct challenged by the plaintiffs in this case fell into the category of mixed eligibility and treatment decisions. It then concluded that “Congress did not intend [an HMO] to be treated as a fiduciary to the extent that it makes mixed eligibility decisions acting through its physicians.”14

The court added that a breach of fiduciary duty claim based on mixed eligibility decisions would be virtually identical to a malpractice claim because it would end up being judged according to “standards of reasonable and customary medical practice in like circumstances.”15 This being the case, the court found that nothing would be gained by permitting the fiduciary duty claim.

It would simply apply the law already available in state courts and federal diversity actions today, and the formulaic addition of an allegation of financial incentive would do nothing but bring the same claim into a federal court under federal- question jurisdiction.16

Justice Souter continued on to explain that, not only would the fiduciary duty claim add nothing to the existing state-law malpractice claim, it may also lead to the preemption of state malpractice law. “On its face, federal fiduciary law applying a malpractice standard would seem to be a prescription for preemption of state malpractice law, since the new ERISA cause of action would cover the subject of a state-law malpractice claim.”17

What is clear in the wake of the Pegram decision is that mixed eligibility decisions by HMOs are subject to state-law malpractice claims and that those claims are not preempted by ERISA. At least two courts have applied Pegram in this fashion.

IV. 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.18

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.19 The Pennsylvania Supreme Court unanimously affirmed, rejecting U.S. Healthcare’s main argument — that the federal circuits had unanimously found such claims to be preempted — in a footnote.20 Relying on the United States Supreme Court’s 1995 decision in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Company21, the court concluded that “Congress did not intend to preempt state laws which govern the provision of safe medical care.”22 Since the third party plaintiffs’ claims against the HMO for negligently failing to provide contractually-guaranteed medical benefits are intertwined with the provision of safe medical care, the court held that they were not preempted.

The United States Supreme Court granted certiorari and, on June 19, 2000, without comment it remanded the case to the Pennsylvania Supreme Court for further consideration in light of the Pegram decision.23 On remand, the Pennsylvania court affirmed its earlier decision finding that Pegram and Travelers, taken together, compel the conclusion that the HMO’s conduct was not immunized by ERISA because it constituted a mixed eligibility decision.

While Travelers and Pegram deal with different aspects of ERISA, for our present purposes, they share common ground. Travelers instructs that ERISA does not preempt state law that regulates the provision of adequate medical treatment. Pegram instructs that an HMO’s mixed eligibility and treatment decision implicates a state law claim for medical malpractice, not an ERISA cause of action for fiduciary breach. Thus, if Haverford’s third party claim against U.S. Healthcare arose out of a mixed decision, it is, according to Pegram, subject to state medical malpractice law, which is what Haverford asserted. Moreover, under Travelers, it is not preempted by ERISA.24

U.S. Healthcare appealed this decision to the United States Supreme Court but, this time, the Court denied the petition for a writ of certiorari.25 The court’s denial of certiorari must be viewed as a tacit approval of the Pennsylvania court’s application of Pegram.

V. Cicio v. Does:

In March of 1997, Carmine Cicio was diagnosed with multiple myeloma. He began chemotherapy the following month. Nine months later, Carmine’s treating oncologist, Dr. Edward Samuel, wrote a detailed letter to Carmine’s HMO requesting insurance approval for treatment consisting of “high dose chemotherapy supported by peripheral blood stem cell transplantation, in a tandem double transplant…” In the letter, Dr. Samuel set forth Carmine’s clinical history and prior treatments, including one type of chemotherapy that had failed, and stated that “a change in strategy of treatment had to be made.”

Almost a month later, the HMO’s medical director, Dr. Brent Spears, denied Dr. Samuel’s request on the ground that the plan did not cover experimental /investigational procedures. Dr. Samuel responded in a letter in which he stated that the requested treatment was “well-established” and had “a superior response rate.” He further argued, based on medical literature listed in his letter, that “treatment NOW with high-dose chemotherapy and autologous stem transplant… offers [Mr. Cicio] better chances of survival than any other available method of treatment.”

Three weeks later, Dr. Spears replied that “[b]ased on the clinical peer review of the additional material, [presumably the studies referenced by Dr. Samuel in his March 4 letter,] a single stem cell transplant has been approved” but “the original request for [a] tandem stem cell transplant remains denied.” Carmine died less than two months later.26

The plaintiff brought suit against Dr. Spears and the HMO in New York state court alleging medical malpractice, negligence, breach of contract, and violations of state statutory law. The defendants removed the case to federal court and moved to dismiss the plaintiff’s claims on the ground that they were preempted by ERISA. The trial court agreed and granted the defendants’ motion.27

On appeal, the Second Circuit began by carefully examining the nature of the plaintiff’s claims:

It is possible that in attacking Dr. Spears’s determination that a “tandem double stem cell transplant” was an “experimental/ investigational procedure,” Ms. Cicio is questioning only Dr. Spears’s assessment of the then-current state of medical science without regard to Mr. Cicio’s particular medical affliction. This kind of decision about the scope of generally available benefits lacks a significant application of medical judgment to Mr. Cicio’s case and, as the district court correctly noted, would be treated as a decision simply about the scope of benefits. But correspondence between Drs. Samuel and Spears… strongly suggests that Ms. Cicio is contending additionally or in the alternative that Dr. Spears, in making negligent medical decisions about Mr. Cicio’s condition, was engaged in medical malpractice.28

According to the court, since the plaintiff’s complaint could be read to state a malpractice claim, the fundamental question on appeal was “whether a state law medical malpractice claim brought with respect to a medical decision made in the course of prospective utilization review by a managed care organization or health insurer is preempted under ERISA… and therefore beyond the reach of state tort law…”29 In a 2-1 decision, the court concluded, “largely on the basis of recent Supreme Court decisions, that such a state law claim is not preempted.”30

The court began its analysis by noting that, while this was an issue of first impression in the Second Circuit, “[o]ther courts addressing similar facts have concluded that malpractice claims based on utilization review decisions are indeed preempted…”31 However, the court rejected these opinions because those cases “were decided before the Supreme Court’s recent retrenchment of ERISA preemption’s margins, and before the Court, in its unanimous decision in Pegram v. Herdrich, addressed (albeit in dicta) medical malpractice actions against those engaged in medical decision making.”32

The court first took note of Justice Souter’s discussion of the preemption issue in Pegram and concluded that “the continued availability of some state law malpractice actions based on at least some varieties of utilization review decisions was a predicate of the Court’s holding.”33 According to the Second Circuit,

The [Supreme] Court’s analysis strongly suggests, without holding, that the plaintiff’s malpractice action against Dr. Pegram would not be preempted even though Dr. Pegram simultaneously made a contractual interpretation concerning Herdrich’s eligibility for given benefits, and that a defendant can no longer simply point to the overlay of medical decision-making on contractual claims and ask the court to conclude that, because ERISA preempts the contract claims, it also preempts all state tort-law claims based on the same decision.34

Finally, applying Pegram to the case at hand, the court concluded that

a state law malpractice action, if based on a “mixed eligibility and treatment decision,” is not subject to ERISA preemption when that state law cause of action challenges an allegedly flawed medical judgment as applied to a particular patient’s symptoms.35

VI. Conclusion:

Pegram and the cases applying it open the door that had previously been closed in New Hampshire by the First Circuit’s decision in Danca v. Private Health Care Systems, Inc. As the Second Circuit recently recognized, Pegram renders the earlier cases, like Danca, meaningless. As a result, it is now likely that a medical negligence claim against an HMO in this state will survive preemption. Obviously, this is a most welcome development; one that should help to protect patients from corporate greed for years to come.


  1. See HMO Liability Part III: Return of the Plaintiffs, 21 TBN 67 (Spring 1999). Prior to that were HMO Liability: Building Corporate Profits at the Expense of Patient Care, 19 TBN 144 (Winter 1997) and HMO Liability Part II: ERISA Preemption… And the Saga of Corporate Greed Continues, 19 TBN 44 (Summer 1997).
  2. See Danca v. Private Health Care Systems, Inc., 185 F.3d 1 (1st Cir. 1999).
  3. See id., 185 F.3d at 3.
  4. See id.
  5. Id., 185 F.3d at 5.
  6. Id., 185 F.3d at 6.
  7. Id., 185 F.3d at 8, n. 10.
  8. See Corcoran v. United Healthcare, Inc., 965 F.2d 1321 (5th Cir. 1992); Tolton v. American Biodyne, Inc., 48 F.3d 937 (6th Cir.1995); Jass v. Prudential Health Care Plan, Inc., 88 F.3d 1482 (7th Cir. 1996).
  9. 530 U.S. 211 (2000).
  10. Id., 530 U.S. at 215-16.
  11. Pegram v. Herdrich, 154 F.3d 362, 373 (7th Cir. 1998).
  12. Pegram, supra note 10, 530 U.S. at 214.
  13. Id., 530 U.S. at 228-29.
  14. Id., 530 U.S. at 231.
  15. Id., 530 U.S. at 235.
  16. Id.
  17. Id., 530 U.S. at 236.
  18. See Pappas v. Asbel, 724 A.2d 889, 890 (Pa. 1998).
  19. See Pappas v. Asbel, 675 A.2d 711 (Pa.Super. 1996).
  20. See Pappas, supra note 18, 724 A.2d at 893, n. 5.
  21. 514 U.S. 645 (1995).
  22. Pappas, supra note 18, 724 A.2d at 893.
  23. See U.S. Healthcare Systems of Pennsylvania, Inc. v. Pennsylvania Hosp. Ins. Co., 530 U.S. 1241 (2000).
  24. Pappas v. Asbel, 768 A.2d 1089, 1095 (Pa. 2001).
  25. See U.S. Healthcare Systems of Pennsylvania, Inc. v. Pennsylvania Hosp. Ins. Co., 122 S.Ct. 2618 (2002).
  26. See Cicio v. Does, 321 F.3d 83, 86-88 (2nd Cir. 2003).
  27. See id., 321 F.3d at 88-89.
  28. Id., 321 F.3d at 90-91.
  29. Id., 321 F.3d at 97-98.
  30. Id., 321 F.3d at 98.
  31. Id., 321 F.3d at 100.
  32. Id.
  33. Id., 321 F.3d at 101.
  34. Id., 321 F.3d at 103.
  35. Id.