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Contact Us Fall 2000; Volume 1, Number 1
In Focus

ERISA: A Legal Shield for HMOs
Michael Housman
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After taking 7 years to clear Congress, the Employee Retirement Income Security Act of 1974 (ERISA) was signed into law, as amended, by President Ford. Soon thereafter, Business Week ran an article on ERISA, which began, "No one, not even the most knowledgeable pension expert, can read the 208-page Employee Retirement Income Security Act of 1974 without trepidation. Ten years in the legislative mills, the act is so complex and broad that its full significance may not be known for another decade."1 At the time, few could have realized that the effects of ERISA on health care reform would still be developing more than two and a half decades after it was originally passed.

Congress enacted ERISA in 1974 to remedy severe problems of pension fraud and mismanagement, such as the failure to create or adequately fund pension plans, and the prevalence of theft and poor investment practices. The detailed and lengthy statute sets out a comprehensive scheme to regulate employee pension programs, including requirements for disclosure of plan information to employees, reporting of plan operations to the federal government, employee plan eligibility and participation, pension vesting, pension funding, plan fiduciary and management standards, and a federal insurance system to fund insolvent pension plans.2 Though its monumental effects on the administration of pension plans are obvious, one might be tempted to ask how it has gained such a pivotal role in the regulation of managed health care.

Under ERISA, an enrollee bringing an action against a health plan is limited to the actions and remedies enumerated in the law itself. Section 502(a) permits the participant to sue the plan fiduciary to recover the benefits that were denied or to enforce rights under the plan.3 However, it does not permit other types of compensation, such as lost wages, additional medical expenses to treat an injury, or punitive damages for pain and suffering. Such forms of compensation are provided for in medical malpractice law that resides under the jurisdiction of state tort law. If an ERISA plan makes an error and is sued under section 502(a) in federal court, it is potentially liable only for the amount of benefits that it should have provided in the first place.4 Ironically, instead of acting as a protector of employees, it has become a shield that protects plans and employers from accountability for their own wrongdoing.5 No other organizations are exempt from lawsuits for business decisions they make that result in harm to people.

In the face of such a glaring lack of accountability, one might wonder why the conference committee crafted section 502(a) as it did. However, one must first consider the circumstances under which ERISA was passed in 1974. At the time, almost all health insurers were fee-for-service and for all intents and purposes, managed care didnšt exist. Benefit coverage decisions were made retrospectively and enrollees were usually forced to pay for the services out of their own pockets, after which the insurer would decide whether or not to reimburse the enrollee. Under this scenario, denying coverage of a medical service would only result in the enrollee losing what he had paid for the procedure in question. Under section 502(a), the enrollee could file a grievance in federal court to recover the cost of the service that had been denied and could be awarded the benefit on the basis of the merits of his case. Such a remedy was appropriate for the state of U.S. health care delivery at the time that ERISA was passed.

However, the rise of managed care is a relatively recent phenomenon that has grown rapidly only during the last decade. Its emergence has been accompanied by new methods to control health care costs.

Since the 1980s, employers have shifted to offering managed care plans that use such techniques as prospective utilization review. Commonly, prospective utilization review takes the form of authorization for expensive diagnostic testing or procedures. As a result, benefit coverage decisions have increasingly shifted away from being made after services are provided to before. In this case, the plan participant who requests a service that is denied by his health maintenance organization may be unable to obtain the services recommended by his physician.6
If the disputed service is not provided, it is clearly inappropriate that filing a lawsuit can only result in the plan compensating the enrollee for the cost of the requested service and not for any injuries or damages that may have occurred. Returning to the original question, the circumstances of health care delivery in the U.S. have changed such that while section 502(a) may have been justifiable when ERISA was passed in 1974, its applicability to managed care is extremely limited in the present.

Almost no one disputes the fact that the system of liability for managed care organizations, as established by ERISA, is seriously flawed. However, there is little agreement as to what should be done to remedy the situation. For years, the House of Representatives and Senate have been hearing several legislative proposals concerning the passage of a Patient's Bill of Rights. Yet, the most debated portions of each bill are those that propose to modify or otherwise amend ERISA with the hopes of achieving liability for health plans. Opponents and proponents of such reform strongly disagree regarding the effects of creating liability for health plans, with little evidence to back up their claims.

In 1997, Texas passed some of the most far-reaching patients' rights legislation in the country, which included Senate Bill 386 (SB 386), a law that gave consumers the right to sue their health plan for medical malpractice. Before returning to a discussion of legislative proposals that are being considered on a federal level, it is necessary to look at a state such as Texas and examine its experience with managed care liability. Understanding this legislation at the state level can help one to decipher the complexities involved in passing similar legislation at the federal level.

The Texas Health Care Liability Act
The Texas Health Care Liability Act, also known as Senate Bill 386, was drafted specifically to avoid ERISA preemption. It holds health plans liable for practicing the "ordinary standard of care" when making "health care treatment decisions" that involve quality of care and not those that deal with benefit coverage decisions, an area of exclusive federal concern. However, the distinction between medical decisions that affect plan administration and those that solely involve the quality of care is blurry.7 Therefore, Texas legislators realized that a cause of action brought under SB 386 would most likely be decided based upon the factual situation presented in a given case. Its purpose, as explained by Senator Sibley, is that, "If the HMOs choose to make medical decisions—stand in the shoes of the doctor, as it were—they ought to stand in the shoes of the doctor in court, too."8

During the course of its passage, two major provisions were added to address business concerns. The first specifically exempts employers from liability for the actions of managed care entities that administer their employee health plans.9 The second creates an independent review process that allows patients to appeal HMO decisions to a third party. Under this section, all contested treatment denials go through an internal review process before being submitted to an independent review organization or IRO. Only after both reviews can a suit be filed in state court. The Texas Department of Insurance implemented the independent external review program; its decisions are binding on all parties and are admissible in court. However, it permits enrollees to bypass the Independent Review Organization (IRO) process if harm has already occurred or if exhausting the process places the "insured's or enrollee's health in serious jeopardy."10

Thus far, SB 386 is being called a tremendous success as the litigious doomsday predictions of HMO lobbyists have yet to be realized. Only two lawsuits have been brought forth as causes of action under the new law, and both suits have survived the test of ERISA preemption in U.S. District Courts. Nevertheless, many attribute the remarkably low number of lawsuits to several possible explanations: (1) Patients who have suffered injuries may need more time to learn about their options under SB 386, contact lawyers to file suits, and thus have an impact on litigation since the bill was passed just over two years ago;11 (2) The uncertainty over the final legal status of the liability provision may have temporarily discouraged lawsuits;12 (3) Insurance companies in Texas may be changing the way they handle patient care decisions to avoid lawsuits; (4) The independent external review program may be effectively screening lawsuits that need not reach the state court; (5) In the past, Texas HMOs may have done a better job at providing medical care than they were given credit for and there may not be an impending increase in lawsuits at all. Many of the original proponents of the bill make a convincing argument that HMOs are currently being much more careful to practice an ordinary standard of medical care when making utilization review decisions. Most indicators, including report cards, have shown gradual improvement on the part of Texas HMOs since the passage of SB 386. However, distinguishing the quality-improving effects of SB 386 from those of Senate Bills 382-385, all of which involve HMO consumer protections, is difficult, if not impossible.

Many have hailed the independent external review program's establishment as one of the most successful accomplishments of the patient protection legislation that was passed during the 75th legislature. It has received such praise despite its ambiguous legal status in the eyes of the courts. Furthermore, the scope of the review process had been questionable until the Texas Department of Insurance agreed with insurers that consumers could only appeal denials of care while they were being made and not afterwards. This concession was in line with the provision of the bill that permitted enrollees to bypass the IRO process if harm had already occurred but needed some clarification in practice.13

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