The Supreme Court and Employee Health Insurance:
How the Court Is Making this Area of Law National, Not Local

Last week, President Bush claimed that the Democrats, if they had their way, would "nationalize" health care in the United States. The Democrats rejected this charge, of course--it is well-known in political circles that Americans are deeply opposed to a national health care program, and prefer to keep things local.

What Americans generally don't know, however, is that this issue isn't restricted to the Congress or the Executive. To the contrary, the U.S. Supreme Court has been nationalizing one important aspect of health care in this country: the administration of medical health insurance offered by employers to their employees.

This creeping nationalization has been achieved slowly and surely by the expansion of the court's interpretation of an important federal law: the Employee Retirement Income Security Act (ERISA).

Some federal judges have been trying to resist this trend toward nationalization. In this column, I will review the efforts of one of those judges -- Senior Judge Clarence Newcomer, who is based in Philadelphia.

Recently, Newcomer heard a case called Barber v. UNUM -- in which a Pennsylvania citizen, James Barber, sued his medical insurer under a Pennsylvania statute. He alleged that his insurer had wrongfully denied him disability payments under his policy. Newcomer held in favor of the plaintiff. But then the U.S. Court of Appeals for the Third Circuit reversed his decision - holding that, here, only federal law (ERISA) applied.

The Third Circuit's decision to preempt the Pennsylvania law shows just how far the nationalization of medical insurance law has gone. Yet there has been nary a complaint about these developments from the White House or the Republican-controlled Congress.

The Facts and Allegations in the Barber Case

The case arose when Barber sued the disability insurer that provided disability insurance in Barber's workplace. Barber had been receiving disability insurance payments, but the insurer, UNUM, cut them off.

Barber was convinced that UNUM's decision was not merely negligent, but reflected the company's "bad faith"--that is, he says the company knew that he deserved the payments but cut him off anyway, hoping that he would not stand on his rights.

So Barber sued the company under a Pennsylvania law that says whenever an insurer denies benefits in bad faith, the insured can sue not only for the benefits, but for punitive damages, interest, and attorney's fees, as well.

The Insurer's Motion that the Case Should Be Dismissed: Denied and Appealed

UNUM asked Judge Newcomer to dismiss Barber's lawsuit on the ground that the Pennsylvania law was preempted by ERISA. I have discussed ERISA preemption of state law in a column from this year, and also one from last year. The basic idea behind preemption is that where Congress wishes to regulate an activity which is traditionally the domain of the states, such as contract or tort law, it may do so by "preempting" the states' laws through the passage of federal legislation.

Judge Newcomer, however, rejected UNUM's argument, and denied its motion to dismiss. As soon as he did so, however, he certified his decision for interlocutory appeal (that is, appeal that comes in the middle of a district court case - not when the case is already over). He did this because he knew that his decision would be highly controversial.

Since 2002 Judge Newcomer had, in two separate written opinions, rejected similar preemption arguments that had been raised by UNUM in a virtually identical case involving the very same Pennsylvania law, and the same preemption argument. (That case involving a plaintiff named Joel Rosenbaum. The Rosenbaum case settled before UNUM could appeal to the Third Circuit.) But already, another Pennsylvania federal district court had followed Judge Newcomer's lead and had rejected a similar argument by an insurer in 2003.

On the other hand, approximately 14 other district court judges in Pennsylvania had rejected Judge Newcomer's position. So Judge Newcomer knew that it was only a matter of time before his little rebellion would be brought before the Third Circuit.

Why Judge Newcomer Rejected UNUM's Preemption Argument

Judge Newcomer's reasons for rejecting UNUM's preemption argument were based on ERISA's own words. ERISA explicitly says that "…nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance…"

This "savings clause" was put there by Congress to make sure that ERISA did not interfere too much with the regulation of insurance, which is clearly a matter of state concern.

Judge Newcomer thought that the Pennsylvania law invoked by Barber and Rosenbaum "regulated" insurance. What was his reasoning?

First, what kind of a law would neatly fit the "savings clause"? Here's one hypothetical example: Suppose a state had authorized its Attorney General to bring suits against HMOs that willfully breached their contracts with customers. Such a law would clearly "regulate" insurance, and thus could not be preempted by ERISA

Does

the law at issue here also "regulate insurance"? As noted above, it is a state law that allows a beneficiary of a plan to punish an insurer who interprets an insurance contract in bad faith. On the face of it, such a law would seem to be one type of device a state would adopt to make sure that insurance companies don't succumb to the temptation of accepting premiums without intending to provide the benefits they promised. In this sense, it would be quite similar to the hypothetical law allowing suits by the Attorney General against insurers who willfully breach their contracts. Both laws - the real and the hypothetical - require more than just negligence. And both laws try to protect the insured from bad behavior by the insurer.

Two Recent Supreme Court Precedents Support Newcomer's View of ERISA

Supreme Court precedent supports Newcomer's interpretation. In the 1999 case of UNUM Life Ins. Co. v. Ward, and later in the 2003 case of Kentucky Assoc. of Health Plans, Inc. v. Miller, the Supreme Court developed a test to determine whether a state law regulated insurance for purposes - and thus fit within the ERISA savings clause.

Miller stated that test pretty simply: If a state law is specifically directed towards insurers and substantially affects the "risk pooling arrangement" between insurers and insured, the law is not preempted by ERISA.

The Meaning of a Third Supreme Court Precedent Is Debated

Newcomer also pointed to another Supreme Court precedent, Rush Prudential HMO, Inc. v. Moran. There, in 2002, the Court considered an Illinois law which demanded a health insurer provide an insured with a right to an independent medical review of some health care benefit denials. The Court held that the law was a law regulating insurance; that it fit the "savings clause," and that it therefore was not preempted by ERISA.

So the Court held, as Newcomer points out, that Illinois can require an HMO to appear before an independent panel and defend its coverage decisions. But if that is case, then in the Barber case, why can't Pennsylvania allow an insurer to be punished by an insured in cases where coverage decisions are taken in bad faith?

UNUM argued, however, that Newcomer had not read all of Rush. In that case, Justice Souter noted that there was a tension in ERISA. On the one hand, Congress clearly wanted to "respect" the states and permit them to regulate insurers as they saw fit. On the other hand, Congress also had provided certain remedies to those insureds whose plans fell under ERISA - and it wanted those remedies to be available nationwide. So while Congress wanted to leave the regulation of insurance to the states, it also wanted to allow individuals to "regulate" insurers by suing under ERISA.

Rush did not involve remedies, just an additional review of a decision. Souter hypothesized, however, that there might be other cases where - unlike in Rush -- a state would attempt to regulate a health insurer covered by ERISA by adding a remedy that went beyond anything Congress had authorized. In such a case, said Souter, the state insurance regulation would "lose out."

Judge Newcomer had read this part of Rush, of course. Still, plainly he could not quite believe that Justice Souter had meant what he had said: How could Congress give with one hand (with the savings clause) and then take away with another (by intending that any remedy it had not explicitly given under ERISA was implicitly preempted)? It seemed ridiculous, to him, to say that the states could regulate insurance, but not create remedies for those harmed by insurance companies - for instance, by a benefits denial decision.

Justice Newcomer thus reasoned this way: Suppose Congress had written ERISA with this kind of internal contradiction. In that event, why should judges interpret it in a way that reduces the power of the states to protect its citizens?

Judge Newcomer therefore dismissed Justice Souter's hypothetical about remedy-creating state laws as mere "dicta." (In legal parlance, "dicta" are statements that are not essential to the holding of a particular case.) And he upheld the Pennsylvania law, despite the fact that it created a remedy that went beyond anything prescribed by ERISA.

The Third Circuit Followed Souter's Reasoning - and An Additional ERISA Precedent

The Third Circuit was not amused. It reversed Judge Newcomer, and noted that federal judges should not take Supreme Court dicta lightly. The upshot is that Barber's suit no longer exists - nor can any similar suit be brought under the Pennsylvania law. In sum, the "savings" clause didn't "save" anything in this case.

The Third Circuit also had a further reason to enforce Justice Souter's dicta--it believed that in the interim the Supreme Court had decided a case that converted Justice Souter's dicta into a holding.

The case is Aetna Health Inc. v. Davila, which was decided earlier this year. There, the Supreme Court considered the Texas Health Care Liability Act (THCLA) -- a 1997 patients' rights law supported by then-Governor George W. Bush. It held that the THCLA was preempted by ERISA to the extent that it permitted insureds to sue HMOs for damages if HMOs breached a "duty to exercise ordinary care when making health care treatment decisions."

In Davila Justice Thomas noted that the THCLA might be interpreted - by some, but not by the Justice -- as a law which regulated insurance - and thus a law that was saved by the "savings clause." This is not farfetched - and again, a hypothetical is useful to illustrate why.

One could imagine the state of Texas writing a regulation which required a health insurer to exercise "ordinary care" when making treatment decisions in order to be licensed to operate in the state. If that duty to exercise ordinary case was reached, the insurer would lose its license. In that hypothetical case, the "savings clause" would clearly apply, and the statute would not be stuck down.

For Justice Thomas, however, this hypothetical was unpersuasive. Indeed, to him, whether or not a law like the THCLA was a regulation of insurance for purposes of ERISA's saving clause was simply irrelevant.

Justice Thomas said that the Court should look to the remedies. It ought to ask, in his view, whether a law regulating a health insurer provided for remedies to the insured that had been "rejected in ERISA." Only ERISA's type of remedies could stand as good law.

In the Davila case, the insurer had demanded -- under the THCLA--a particular remedy: tort damages. Thomas noted that this remedy was not provided for already in ERISA. Thus, he - and the Court - concluded that the THCLA was preempted by ERISA.

The Third Circuit then looked to the Pennsylvania law. It, too, offered a remedy ERISA did not provide. And thus, the court concluded, it too - like the Texas law -- was preempted by ERISA. If remedies were the whole ball game, the Pennsylvania law had struck out.

The Third Circuit Was Right to Obey Precedent, But Newcomer Makes a Strong Point

I respect the Third Circuit for being obedient - as federal appeals and trial courts are bound to be --- to the decisions of a higher court, and for trying to follow the Supreme Court's most recent pronouncements on ERISA preemption.

Still, it's important to note that there are differences between Davila and Barber. In Davila, the court had being asked to imply a right of action from a law - that is, to interpret the law to implicitly create a civil remedy. In contrast, under the Pennsylvania law at issue in Barber, the remedy had been clearly and explicitly created by the state legislature. But these distinctions could be overcome with enough analysis - and the Third Circuit reasonably thought it had overcome them.

This is not to say, however, that Judge Newcomer was wrong to decide as her did. What Judge Newcomer did in Barber, in effect, was shout out a warning to Congress that it must pay attention to what has happened to ERISA over the past decade. And that warning was a wise one to send.

It's Time to Congress to Revisit Either ERISA's "Savings Clause," Or Its Remedies

As this column has illustrated, the "savings clause" written into ERISA by Congress has become virtually a dead letter. Over and over, in the courts, it has been ignored, and courts have held that the state law at issue - far from being saved - must be voided.

Yet many of these laws are designed to remedy genuine wrongs to the vulnerable population of ill persons - some of them desperately ill - who must rely on health insurers' treating them fairly. Granted, these remedies don't usually exist in ERISA. But isn't that a problem with ERISA - not with the state law? Why is this stingy federal law blocking states' attempts to address widespread, and often very substantive and important, claims about the much-maligned HMO industry? Shouldn't the law be rewritten since it has so frequently been interpreted to block these important state law remedies?

At this point, Congress should take one of two paths. First, it could choose to revisit ERISA's "savings clause," and state clearly whether it really wants to nationalize medical insurance by leaving it virtually unregulated.

Second, it could choose to revisit the remedies it wrote into ERISA and put new ones in that have some teeth. In adding these remedies, Congress might want to take a page from the variety of now-struck-down state laws that have tried to address widespread dissatisfaction with HMO processes and decisions.

The current situation--weak federal remedies and preempted state remedies--is the one kind of national health care policy that we should all agree to reject.