The Supreme Court Rejects State Law Suits Challenging Health Coverage:
Why the Ruling May Spawn an Election Issue

Last week, on June 21, in Aetna Health Inc. v. Davila, the Supreme Court issued a unanimous decision holding that state laws that made HMOs liable for decisions to deny coverage are preempted by federal law.

What can states which have tried to hold employer-funded HMOs accountable do now? Their only option is to stand by idly and wait for Congress--or perhaps the Supreme Court--to do something with the federal law which regulates employer health insurance plans called ERISA ("Employee Retirement Income Security Act of 1974").

The Davila suit was decided along with a companion case entitled CIGNA Corp. v. Calad et al. Each was appeal relating to the Texas Health Care Liability Act (THCLA) -- a 1997 patients' rights bill that George W. Bush touted as evidence of the "compassionate conservatism" of his gubernatorial career. The THCLA had allowed members of HMOs a variety of rights, including the right to sue for damages if their health insurer breached a "duty to exercise ordinary care when making health care treatment decisions."

In addition to Texas, Arizona, California, Georgia, Louisiana, Maine, New Jersey, Oklahoma, Washington and West Virginia give their citizens similar rights. So after the Court's decision, their laws are presumably invalidated as well.

As I will argue below, the Supreme Court seemed to think that only the federal government can give the right to sue to Americans covered by HMOs. It will be interesting to see whether the issue is raised by the candidates in the upcoming election.

The Facts of the Companion Cases, Davila and Cigna

The two Texas suits each arose out of a pretty simple set of facts:

In one case, Juan Davila, sued the health insurer Aetna after his doctor's prescription for Vioxx, a painkiller, was turned down, and he developed internal bleeding after taking a less-expensive drug.

In the other case, Ruby Calad was forced to leave the hospital one day after having a hysterectomy -- over the objection of her doctor. She later suffered complications and had to be rushed back to the hospital. She sued Cigna under the Texas law, claiming that the HMO failed to "exercise ordinary care" when making treatment decisions.

In separate proceedings, the suits were transferred to federal courts. There, each was dismissed because, in each case, the plaintiffs insisted on suing under the Texas patients' rights law and not under ERISA -- which the HMOs insisted was the only law that governed the reimbursement decisions by health insurers who are hired by employers to administer their employee HMO plans.

The U.S. Court of Appeals for the Fifth Circuit consolidated the cases and reversed the district courts, holding that the THCLA was not preempted by ERISA. But then the Supreme Court, as noted above, held to the contrary, reversing the Fifth Circuit.

Why Didn't the Plaintiffs Sue Under Federal Law - ERISA - In the First Place?

Before I discuss the Supreme Court's decision, it might be helpful to ask why Davila and Calad did not sue under ERISA in the first place.

Under ERISA, a federal suit against a health insurer or plan administrator has been understood to permit the plaintiff limited remedies--she might be able to get a court to "enjoin" or force the insurer to agree to pay for a benefit in advance or, afterwards, get back the benefits promised under the plan. But in Davila and Calad's cases, they claimed that they had no time to sue their HMOs to get a court to force them to pay for the Vioxx or the extra day in the hospital in advance. And the benefit in dispute--the price of the Vioxx or the extra day in the hospital--was somewhat of a moot point after they had suffered their injuries afterwards.

What they wanted afterwards was full damages--their pain and suffering, lost wages, additional medical expenses, and, if warranted, punitive damages. Only the THCLA could give them that. The Supreme Court, however, said no.

Why the Supreme Court Held that Only ERISA Applied to These HMO Decisions

In a seven-page decision written by Clarence Thomas, the Court held that the decision of whether to pay for a medically necessary drug or procedure was a decision at the core of what ERISA regulated.

Here was its reasoning: ERISA makes it clear that decisions over the administration of benefits in a health-care plan are exclusively a matter of federal law - and thus that any state law attempting to govern these decisions is preempted.

The Texas law, according to the Fifth Circuit, allowed Davila and Calad to sue for any damage "proximately" caused by a "treatment decision," including decisions about whether to pay for a treatment. Since a treatment decision about whether to pay for a treatment is a matter of plan administration, the THCLA was preempted by ERISA.

Why Didn't Everyone Anticipate This Unanimous Decision?

There are three basic things that one can say about the Supreme Court's decision. First, given its unanimity, how is it that so many people, ranging from Davila and Calad's lawyers to the legislatures of ten states got ERISA so wrong? Why did so many people think that the HMOs could be brought to heel through aggressive state laws?

The answer is that the Supreme Court had seemed to open the door a little bit to the states in a few recent cases.

In 2000, in Pegram v. Herdrich, the Court held that decisions made by doctors who worked for HMOs which were a "mixture" of medical judgment and plan administration were not the sort of thing regulated by ERISA. It held, accordingly, that the doctors and HMOs for which they worked could be sued under state law for medical malpractice, but not under ERISA.

Then, in 2002, in Rush Prudential HMO, Inc. v. Moran, the Supreme Court held that Illinois could force HMOs to provide a review process in addition to any which was included in their policy. The Court held that a state-mandated supplemental review was not preempted by ERISA because it did not create any new treatment obligations, but only regulated how HMOs delivered the services they had already agreed to provide.

In his recent decision in Davila and Cigna Corp., however, Justice Thomas noted that nothing in Pegram or Rush suggested that the Supreme Court had ever promised the states that they could create new substantive rights for redress against HMOs. In fact, as Justice Thomas noted, the right that Davila and Calad were demanding under Texas law was miles away from what was at issue in Pegram or Rush.

According to the Court's ruling, Texas cannot force employer-based HMOs to provide any specific set of benefits to their insured, regardless of how reasonable those benefits might seem to Texas. As Justice Thomas put it, ERISA requires insurers to administer their plans fairly and reasonably. But it does not require insurers to offer plans that cover appendectomies, prescription drugs, or any other kind of treatment. If Aetna has a plan that says that it simply will not pay for Vioxx, then Texas cannot force Aetna to change its plan.

Who Can Regulate HMOs, If Not the States?

This brings me to my second point: If Texas cannot tell Aetna to offer its insured reimbursement for a drug that is medically necessary, who can?

Seven of the Justices seem to believe that Congress could if it wanted to, but it has not.

During oral argument one of the justices asked Davila's lawyer why Davila simply had not bought the Vioxx himself and then sued Aetna under ERISA to later get his money back. Davila's lawyer responded that if Davila had had been rich, he wouldn't have needed a health plan from his employer.

But that is not the whole story. It is unclear that Davila could have gotten his money back, had he tried to recover it later under ERISA. As Justice Thomas pointed out in his opinion, all ERISA requires is that Aetna perform its job as a fiduciary in faithful and honest fashion when determining the applicability of certain contractually required benefits under the plan Aetna agreed to offer on behalf of Davila's employer. If Davila's employer wanted to offer a better plan, that was something Davila should have taken up with his employer.

But what if Davila could have shown that Aetna was wrong, under the terms of the plan it had sold to Davila's employer? What if Aetna misread and misapplied to plan?

Justice Thomas has very little to say about this, except that Davila could then have gotten his "equitable" remedies from Aetna, which, as a fiduciary, had a duty to Davila to administer the plan faithfully.

The Concurring Justices' Solution: Expansive ERISA Remedies

Two justices, however, think they may have found a way to make ERISA a more powerful weapon for people like Davila and Calad. Justice Ginsburg wrote a concurrence joined by Justice Breyer, where she asks why the remedies available to Davila and Calad seem too meager.

The Supreme Court, until now, has read the expression "equitable remedy" quite narrowly. But Ginsburg's concurrence raises the question if this should be so: Why should someone who has been treated "faithlessly" by an insurer simply receive the benefit that they had been promised? As a number of legal scholars point out, this creates almost no incentive for HMOs to read policies generously, and it creates every incentive for HMOs to read the policies narrowly.

Justice Ginsburg's concurrence reads like a roadmap to the next group of lawyers who want to sue HMOs. She says, in effect, that although the states cannot do very much to help people like Davila and Calad, the Supreme Court might, if only given the right case. Indeed, she notes that even the Bush Justice Department, which intervened in the Davila case on the side of the HMOs, asked the court to consider that under ERISA, plaintiffs could receive "make whole" remedies in equity that might go beyond simply paying them back for the cost of medicine that they should have received.

However, since Davila and Calad refused to sue under ERISA and insisted in suing under state law, this tantalizing option could not be taken up the Supreme Court and will have to wait until the next suit.

In the end, though, the road not taken in Davila--a suit for compensatory damages under ERISA--might be rejected by a majority of the Supreme Court. After all, this Court as a whole has not proven itself very interested in reading ERISA broadly.

Should Congress Listen to Justice Ginsburg, and Amend ERISA?

This brings me to my third point: Congress could take up Justice Ginsburg's invitation quite easily.

So far, Congress has refused to amend ERISA to prevent HMOs and other insurers who offer employer-sponsored plans from offering the sort of silly, limited plans that Justice Thomas now claims that they are free to offer. Congress has not passed a "Patient's Bill of Rights" that would build into ERISA the sort of "make whole" remedies that Justice Ginsburg believes already exist.

In 2000, candidate George W. Bush told the nation in a debate with Al Gore that "If I'm the president . . . people will be able to take their HMO insurance company to court. That's what I've done in Texas, and that's the kind of leadership style I'll bring to Washington."

It turns out, though, that what Bush did in Texas was undone by the Supreme Court, in part with the support of his own Justice Department. If Bush really believes what he said in 2000, then now is the time for him to speak out, and to promise every American that ERISA will be amended to guarantee that every health insurer plays fair, and if they don't, then those injured will get full and complete compensation--just as they were promised in Texas.

Note: See the Court's opinion for links to the West Legal Directory entries for the attorneys involved in the Supreme Court's Davila decision. - Ed.