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“The Report Of My DeathWas An Exaggeration”

ERISA PREEMPTION AND RELATED ISSUESIN WELFARE PLAN LITIGATION

by

John B. Shelyjshely@akllp.com

Kendall M. Graykendallgray@akllp.com

Andrews & KurthMayor, Day, Caldwell & Keeton

L.L.P.600 Travis, Suite 4200Houston, Texas 77002

(713) 220-4200 (telephone)(713) 220-4285 (facsimile)

Copyright © 2001

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TABLE OF CONTENTSI. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. DISCUSSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

A. Direct Action Utilization Review Disputes Are CompletelyPreempted No Matter What Artful Dodge Is Employed . . . . . . . . . 5

B. The Anti-ERISA Apologists’ Efforts To Undermine BindingPrecedent Are Futile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

1. Neither Pilot Life nor Corcoran has eroded withthe passage of time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

2. Corporate Health does not bolster the commentators’arguments–it destroys them . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

3. Most plaintiffs cannot plead a so-called “mixed”decision, and the Fifth Circuit has alreadyrejected their “Pegram preemption” argument . . . . . . . . . . . . . . 17

4. The “Travelers Trilogy” sloganeering has beenwidely rejected in “medical necessity” disputes . . . . . . . . . . . . . 21

5. Preemption remains unchanged in the area ofbenefits administration–an area of exclusivelyfederal concern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

6. Neither the musings of law reviewers nor stalelegislative history can aid a claimant in the absenceof law and precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

7. The HMO is not the ERISA plan–“Inconsequential” . . . . . . . . 29

8. When tried, the law review apologists’ argumentshave been rejected in the district courts . . . . . . . . . . . . . . . . . . . . 31

C. MCEs Are Not Vicariously Liable For IndependentContractor Physicians They Have No Right To Control,Nor Should They Be . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

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The views expressed herein are those of the authors and do not necessarilyreflect the views of Andrews & Kurth Mayor, Day, Caldwell & Keeton L.L.P. orany of its clients.

D. ERISA Is Not a Four-Letter Word–The “DoomsdayScenario” More Likely Spells Doom For Affordable,Widely Available Health Care, Not For Managed Care . . . . . . . . . 42

III. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

1 Mark Twain, Note to London Correspondent of the New York Journal (June 1, 1897).

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“The Report of My Death Was an Exaggeration.”1

ERISA PREEMPTION AND RELATED ISSUESIN WELFARE PLAN LITIGATION

John B. ShelyKendall M. Gray

I. INTRODUCTION

A prospective client comes to the office of an enterprising, young plaintiffs’

lawyer, complaining that he suffered an adverse outcome and grievous physical

injuries because his Health Maintenance Organization (HMO) thought his

physician prescribed the wrong drug and refused to “fill” the prescription. The

lawyer’s pulse obviously quickens at the prospect of representing a sympathetic

individual against the “Great Satan” of the American health care system; however,

the lawyer looks closer.

The client received his HMO coverage through a private employer, who also

contributed to the cost of the premium; thus, an ERISA plan is in play. Having been

around the block a couple of times, the lawyer knows that if he pleads that a

purported “nameless and faceless” utilization review clerk “denied the care”

because it was not “medically necessary,” he will wind up taking a trip to federal

court through the magic of “complete preemption.” Thus, he contemplates

attempting to recharacterize the dispute. Could he claim that he is not complaining

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about the denial of one drug, but that the HMO improperly “forced” the client to

take an alternate therapy? He looks to the plan documents and finds:

IN SOME CIRCUMSTANCES, CERTAIN MEDICALSERVICES ARE NOT COVERED OR MAY REQUIREPREAUTHORIZATION BY HMO.

* * *THIS CERTIFICATE APPLIES TO COVERAGEONLY AND DOES NOT RESTRICT A MEMBER’SABILITY TO RECEIVE HEALTH CARE SERVICESTHAT ARE NOT, OR MIGHT NOT BE, COVEREDBENEFITS UNDER THIS CERTIFICATE.

It is only in this context that the prospective client could attempt to claim that

the HMO countermanded his doctor by “forcing” him to take a drug different from

the one ordered by his physician. Could he swear that he is not seeking benefits

from the ERISA plan? He seems to remember reading somewhere that ERISA

preemption had undergone a “seismic shift” and that one might avoid it by

characterizing the utilization review dispute as a complaint attacking the “quality”

of medical care.

Could he claim that the HMO was vicariously responsible for the treating

physician’s malpractice? Again, looking to the plan language, the lawyer discovers:

INDEPENDENT CONTRACTOR RELATIONSHIPS

A. Between Participating Providers and HMO

The relationship between HMO and ParticipatingProviders is a contractual relationship amongindependent contractors. Participating Providers arenot agents or employees of HMO nor is HMO an agentor employee of any Participating Provider.

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2 See, e.g., Thomas R. McLean, M.D. & Edward P. Richards, Managed Care Liability forBreach of Fiduciary Duty After Pegram v. Herdrich: The End of ERISA Preemption for State Law Liabilityfor Medical Care Decision Making, 53 FLA. L. REV.1, 28 (2001); Jeffrey W. Stempel & Nadia vonMagdenko, Doctors, HMOs, ERISA, and the Public Interest After Pegram v. Herdrich, 36 TORT & INS. L.J.687, 696 (2001).

3 New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S.645 (1995).

4 Pegram v. Herdrich, 530 U.S. 211 (2000).

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* * *NO PARTICIPATING PROVIDER OR OTHERPROVIDER, INSTITUTION, FACILITY OR AGENCYIS AN AGENT OR EMPLOYEE OF HMO.

Of course, the client, as a plan participant, could have disputed the

entitlement to benefits under 29 U.S.C. § 1132(a)(1), either by paying for the

prescription himself and seeking reimbursement or by hiring counsel to seek an

injunction (and attorneys’ fees) to force the HMO to mend the supposed error of its

ways. Instead, having waited until after harm has allegedly occurred, his counsel

must attempt to supplement ERISA’s exclusive remedies by bringing a personal

injury claim.

Among certain law reviewers and a portion of the bar, it has become

fashionable to boldly claim that the entire federal judiciary (including the United

States Supreme Court) has been incorrectly reading ERISA’s preemption clause and

misapplying ERISA’s exclusive remedies for thirty years.2 These apologists contend

that the Supreme Court caused a “seismic shift” in ERISA jurisprudence with

Travelers3 and later with Pegram.4 If the actual case law is any indication, however,

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5 Frank R. Strong, The Iowa Law Review at Age Fifty, 50 IOWA L. REV. 12, 13 (1964); seealso Oliver Wendell Holmes, Jr., attributed in Frederick B. Wiener, EFFECTIVE APPELLATE ADVOCACY130 (1950) (“I don’t mind when the lads on the Law Review say I’m wrong, what I object to is whenthey say I’m right”).

6 See generally Corporate Health Ins., Inc. v. Texas Dep’t of Ins., 215 F.3d 526, 539 (5th Cir.),on reh’g, 220 F.3d 641, 643 & n.6 (5th Cir. 2000), pet. for cert. filed, 69 U.S.L.W. 3317 (Oct. 24, 2000)(No. 00-665).

7 Corcoran v. United HealthCare, Inc., 965 F.2d 1321 (5th Cir. 1992).

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the law reviewers are the only ones who felt the earth move. Nevertheless, they

bravely assert that ERISA preemption is dead. “Who else beside a law review

deigns to ‘reverse’ the Supreme Court of the United States.”5 “Exaggeration” is a

charitable description for such arguments.

• The fact is that more federal appellate courts have publishedopinions preempting utilization review disputes after Travelersthan before it.

• The law review apologists act as if the Supreme Court decidedthe preemption question in Pegram. In reality, the courtexpressly and specifically disclaimed any intent to decidepreemption and the Court of Appeals for the Fifth Circuit hasalready considered and rejected the commentators’ “Pegrampreemption” argument.

• Certain commentators act as if the Fifth Circuit bolstered theirargument in Corporate Health Insurance.6 In reality, the courtexpressly reaffirmed its own preeminent preemption decision,Corcoran v. United HealthCare,7 and expressly held that stateremedies for adverse utilization review determinations arepreempted by ERISA § 502(a).

The power of positive thinking can be strong medicine; however, wishful

thinking about the law does not actually change it. Section II.A of this article is a

reality check for the wishful thinkers, setting out the strength of authority holding

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that utilization review (“medical necessity”) decisions, no matter how characterized

in a pleading, are benefits determinations. All causes of action for that conduct

must be brought under ERISA § 502(a), no matter what effort is used to disguise or

recharacterize the nature of the claims involved. Section II.B of this article disposes

of some of the more common arguments opposing that position.

Although claims alleging that an Managed Care Entity (MCE) ought to be

vicariously liable for the conduct of a treating physician may escape preemption in

some instances, such claims are subject to a variety of state law barriers in states

(like Texas) in which commercial HMOs neither employ nor control treating

physicians. Section II.C of this article outlines some of those state law defenses.

Finally, Section II.D of this article advances the proposition that ERISA is not

a four-letter word. The scheme of exclusive remedies set out by Congress in 1974

advances important societal goals. Those goals (and the health care system) will

suffer if the anti-ERISA apologists succeed.

II. DISCUSSION

A. Direct Action Utilization Review Disputes Are Completely Preempted NoMatter What Artful Dodge Is Employed

Some law reviewers act as if one can avoid preemption by refusing to plead

for benefits and saying “mixed medical decision” or “quality of care” often enough.

Even complete preemption, however, is not determined by whether the plaintiff

pleaded some magic words or included a remedy that could be granted under ERISA

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8 See Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 89 (1998) (“It is firmly establishedin our cases that the absence of a valid (as opposed to arguable) cause of action does not implicatesubject-matter jurisdiction”); Duke Power Co. v. Carolina Envtl. Study Group, Inc., 438 U.S. 59, 70 (1978)(“For purposes of determining [federal question jurisdiction] it is not necessary to decide whetherappellees’ alleged cause of action . . . is in fact a cause of action ‘on which [appellees] could actuallyrecover”); Bell v. Hood, 327 U.S. 678, 682 (1946) (“Jurisdiction . . . is not defeated . . . by the possibilitythat the averments might fail to state a cause of action on which petitioners could actually recover”).

9 See, e.g., Corcoran, 965 F.2d at 1325 n.5 (“Mrs. Corcoran could have (1) sued underERISA, before entering the hospital, for a declaratory judgment that she was entitled tohospitalization benefits; or (2) gone into the hospital, incurred out-of-pocket expenses, and suedunder ERISA for these expenses”).

10 187 F.3d 493 (5th Cir. 1999).

11 Id. at 498, 499.

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§ 502(a). That has never been the test for determining federal question jurisdiction.8

The question is whether the plaintiff, as a participant or beneficiary in an ERISA

plan, could have pleaded a § 502(a) claim because the conduct about which he

complains is governed by ERISA.9

Heimann v. National Elevator Industry Pension Fund,10 a relatively recent case

from the Fifth Circuit, establishes the proper mode of analysis. Mr. and Mrs.

Heimann sued for intentional infliction of emotional distress and tortious

interference in state court because the International Union of Elevator Constructors,

through its agent Ken Burkett, intentionally and maliciously represented that Mr.

Heimann was engaging in disqualifying employment.11 The Heimanns did not sue

for benefits in state court, because Mr. Heimann was pursuing those remedies in a

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12 Id. at 499.

13 Id. at 499, 504-05.

14 See id. at 504.

15 See id. at 505.

16 Id. at 502 (“[N]ot only is § 502(a) the exclusive remedy for vindicating§ 510–protected rights, but there is no basis in § 502(a)’s language for limiting ERISA actions to onlythose which seek ‘pension benefits’ ”) (emphasis added) (quoting Ingersoll-Rand v. McClendon, 498U.S. 133, 145 (1990)); see also Anderson v. Electronic Data Sys. Corp., 11 F.3d 1311, 1315 & n.6 (5th Cir.1994) (finding complete preemption and rejecting a “benefits only” approach to determining thescope of § 502(a)). Significantly, the Heimann court only looked to see whether the Heimanns hadpleaded an ERISA remedy when reviewing the district court’s Rule 12(b)(6) ruling, after the courthad determined that the case was completely preempted and properly removed. See Heimann, 187F.3d at 508-11.

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separate federal action.12 The defendants nevertheless removed the state court

action, and the Fifth Circuit found that it was completely preempted.13

The court noted that Mr. and Mrs. Heimann, as ERISA participants and

beneficiaries, were persons authorized to maintain an action under ERISA § 502(a).14

The court likewise noted that the conduct about which the Heimanns complained

was within the scope of ERISA § 502(a).15 The Court specifically rejected the

argument that complete preemption may be avoided simply by recharacterizing the

claim as one not concerning benefits.16

The Heimann analysis–that an ERISA participant is complaining of conduct

within the scope of § 502(a)–is not restricted to pension cases alone. Nearly fifteen

years ago, the United States Supreme Court held that Congress intended “ERISA

§ 502(a) be the exclusive vehicle for actions by ERISA-plan participants or

beneficiaries asserting improper processing of a claim for benefits” and found that

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17 Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 52 (1987).

18 See, e.g.,Thompson v. Gencare Health Sys., Inc., 202 F.3d 1072, 1073 (8th Cir. 2000) (percuriam) (upholding removal where precertification rejected for high dose chemotherapy andautologous bone marrow transplant (ABMT)); Hull v. Fallon, 188 F.3d 939, 941 (8th Cir. 1999), cert.denied, 528 U.S. 1189 (2000) (upholding removal where precertification rejected for thallium stresstest); Danca v. Private Health Care Sys., Inc., 185 F.3d 1, 3 (1st Cir. 1999) (upholding removal whereprecertification rejected for inpatient psychiatric care); Bast v. Prudential Ins. Co., 150 F.3d 1003, 1006(9th Cir. 1998) (finding preemption where precertification delayed for ABMT), cert. denied, 528 U.S.870 (1999); Parrino v. FHP, Inc., 146 F.3d 699, 702 (9th Cir. 1998) (upholding removal where “FHPinitially refused to authorize payment for the therapy, claiming it was experimental andunnecessary”); Turner v. Fallon Cmty. Health Plan, Inc., 127 F.3d 196, 197 (1st Cir. 1997) (upholdingremoval where “Transplant Committee . . . concluded . . . that the Duke program had as yetproduced no adequate data suggesting a likelihood of success,”); Jass v. Prudential Health Care Plan,Inc., 88 F.3d 1482, 1485 (7th Cir. 1996) (upholding removal where “Karen Margulis, an agent ofPruCare, determined that [physical therapy] was not necessary”); Cannon v. Group Health Serv., Inc.,77 F.3d 1270, 1271 (10th Cir. 1996) (upholding removal where “the insurers denied preauthorizationfor the ABMT); Tolton v. American Biodyne, Inc., 48 F.3d 937, 940 (6th Cir. 1995) (finding preemptionwhere plaintiff did not receive requested substance abuse and psychiatric care); Spain v. Aetna LifeIns. Co., 11 F.3d 129, 131 (9th Cir. 1993) (per curiam) (finding preemption where approval of ABMTwas delayed); Kuhl v. Lincoln Nat’l Health Plan, Inc., 999 F.2d 298, 302 (8th Cir. 1993) (upholdingremoval where “Lincoln National refused to precertify payment for the surgery”); Rodriguez v.Pacificare, Inc., 980 F.2d 1014, 1016 (5th Cir. 1993) (upholding removal where “Rodriguez believed thatthe attention of an orthopedic specialist was needed, but was stymied in his efforts to obtain a referralletter from Heistand or Pacificare”); Corcoran, 965 F.2d at 1324-25 (upholding removal where “despiteDr. Collins’s recommendation, United determined that hospitalization was not necessary, and insteadauthorized 10 hours per day of home nursing care”).

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varying state claims for such conduct “would pose an obstacle to the purposes and

objectives of Congress.”17 An impenetrable wall of authority from each circuit to

have considered the question has applied that principle in situations in which (as

in the example) a participant complains of an adverse utilization review

determination. The federal appellate courts have recognized that prospective

utilization review of medical benefits is an ERISA benefits determination.18 They

have reached the same result, even when the MCE providing administrative

services to the plan refuses to authorize benefits for treatment recommended by the

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19 See, e.g., Thompson, 202 F.3d at 1073 (upholding removal where “her treatingphysicians recommended that Gencare pre-certify a more aggressive treatment procedure”); Hull,188 F.3d at 941 (upholding removal where “Dr. Delcau contacted Dr. Fallon . . . requestingauthorization to administer a thallium stress test”); Danca, 185 F.3d at 3 (upholding removal where“[h]er physician recommended inpatient psychiatric care at McLean Hospital. . . . defendants deniedprecertification”); Parrino, 146 F.3d at 702 (upholding removal where “Loma Linda physicians . . .prescribed immediate proton beam therapy . . . [which] FHP initially refused to authorize”); Turner,127 F.3d at 197 (upholding removal where “Charlotte Turner and Dr. Hochman asked Fallon to payfor her inclusion in the Duke program”); Cannon, 77 F.3d at 1271 (upholding removal where “Mrs.Cannon’s treating physician, . . . recommended she undergo an autologous bone marrowtransplant”); Kuhl, 999 F.2d at 300 (upholding removal where “Dr. Levi concluded that Buddy Kuhlwould have the best chance of survival if the surgery were performed at Barnes Hospital in St. Louis,Missouri”); Corcoran, 965 F.2d at 1324-25 (upholding removal where “despite Dr. Collins’srecommendation, United determined that hospitalization was not necessary”); see also Bast, 150 F.3dat 1005 (upholding preemption in federal court action where Prudential denied ABMT recommendedby oncologist); Jass, 88 F.3d at 1484-85 (upholding removal; however, there is no express indicationthat physical therapy was ordered by Jass’s physician, but presumably she did not prescribe it forherself); Spain, 11 F.3d at 131 (upholding preemption of wrongful death claim originally filed infederal court where defendant allegedly delayed approval of ABMT recommended by decedent’sphysician).

20 See, e.g., Thompson, 202 F.3d at 1074 (upholding removal of wrongful death damagesclaim); Hull, 188 F.3d at 943 (“[A]lthough Hull’s characterization of his claims sound in medicalmalpractice, the essence of his claim rests on the denial of benefits. As a Plan participant, he couldhave brought an action under section 502(a)”) (emphasis added); Danca, 185 F.3d at 6 (“We . . . findthat . . . the allegations that defendants . . . failed to follow Danca’s physician’s recommendations . . .are alternative enforcement mechanisms under ERISA § 502(a) and therefore completelypreempted”); id. at 5 n.4 (“The fact that ERISA does not provide the remedy plaintiffs seek is notrelevant; all that matters is that the claim be within the scope of § 502(a)”) (emphasis in original);Parrino, 146 F.3d at 703-04 (finding that wrongful death claim falls within the scope of ERISA § 502(a)because “Parrino’s causes of action . . . are both predicated upon alleged defects in FHP’s proceduresfor processing health insurance claims”); Turner, 127 F.3d at 200 (upholding removal of wrongfuldeath claim and noting that only “Congress is well equipped to revisit the issue and alter thestatutory language that now stands as a bar”); Jass, 88 F.3d at 1488 (“Jass argues . . . that she ‘has notalleged a cause of action under any federal law nor has she sought damages or compensation underfederal law. . . . While Jass presented her claim against Margulis as a state law negligence claim, ‘[w]eknow that if [Plaintiff’s] state law claim is within the scope of § 502(a) it is completely preemptedregardless of how [s]he has characterized it”); Cannon, 77 F.3d at 1272 (upholding removal where“Mr. Cannon filed suit in Oklahoma state court to recover damages for the death of his wife”); Kuhl,999 F.2d at 303 (“Artful pleading by characterizing . . . the same administrative decisions as‘malpractice’ does not change the fact that plaintiffs’ claims are based on the contention that LincolnNational improperly processed Kuhl’s claim for medical benefits”); Corcoran, 965 F.2d at 1324

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participant’s treating physician.19 They have reached the same conclusion even in

situation in which the plaintiffs argue that their claims were “really” medical or did

not complain that benefits were “denied.”20 They have upheld removal of such

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(upholding removal even though “[plaintiffs] sought damages for the lost love, society and affectionof their unborn child . . . [and] the aggravation of a pre-existing depressive condition and the loss ofconsortium caused by such aggravation”); see Spain, 11 F.3d at 131 (upholding preemption under PilotLife because “[a]lthough Appellants do not seek benefits under the plan, their state common lawcause of action seeks damages for the negligent administration of benefit claims”).

21 See, e.g., Thompson, 202 F.3d at 1074 (“In substance, Thompson now asserts a tortclaim for damages on account of Gencare’s allegedly wrongful benefits decisions as planadministrator. Pilot Life, Hull, and Kuhl make clear that claim is completely preempted by ERISA’sremedies”); Hull, 188 F.3d at 943; Danca, 185 F.3d at 6; Parrino, 146 F.3d at 703-04; Turner, 127 F.3d at200; Jass, 88 F.3d at 1488; Cannon, 77 F.3d at 1273 (“Mr. Cannon’s initial claims . . . related to theimproper processing of Mrs. Cannon’s benefit claim for ABMT. Both the Supreme Court and thiscourt have consistently held these type of claims are preempted by ERISA”); Kuhl, 999 F.2d at 303;Corcoran, 965 F.2d at 1332 (“The nature of the benefit determination is different than the type ofdecision that was at issue in Pilot Life, but it is a benefit determination nonetheless. The principle ofPilot Life that ERISA preempts state-law claims alleging improper handling of benefit claims is broadenough to cover the cause of action asserted here”).

22 965 F.2d at 1322-23.

23 Id. at 1324-25.

24 Id.HOU:693783.1

claims: the allegedly wrongful conduct falls within ERISA § 502(a), and any state

law alternate enforcement mechanism is preempted even if the participant chooses

not to seek the remedies provided by § 502(a).21

For example, in Corcoran, Dr. Collins ordered Flo Corcoran to be

“hospitalized so that he could monitor the fetus around the clock.”22 However,

“[d]espite Dr. Collins’s recommendation, United determined that hospitalization

was not necessary, and instead authorized 10 hours per day of home nursing care.”23

“[D]uring a period of time when no nurse was on duty, the fetus went into distress

and died.”24 Flo Corcoran and her husband, Wayne, did not sue for benefits under

§ 502(a). They filed a medical malpractice “wrongful death action in Louisiana state

court” and “sought damages for the lost love, society and affection of their unborn

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25 Id. at 1324. Indeed, the Corcorans conceded “that the defendants have fully paid anyand all medical expenses that Mrs. Corcoran actually incurred that were covered by the plan,[meaning that] the plaintiffs have no remaining claims under ERISA.” Id. at 1325 n.5.

26 See id. at 1332.

27 Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987).

28 965 F.2d at 1332.

29 Rodriguez v. Pacificare, 980 F.2d 1014, 1016 (5th Cir. 1993).

30 Id. at 1016.

31 Id. at 1017 (quoting Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97 (1983)).HOU:693783.1

child, “ and “aggravation of a pre-existing depressive condition and the loss of

consortium caused by such aggravation.”25 Notwithstanding the medical

implications of the decision made by United, the Fifth Circuit found that “it is a

benefit determination nonetheless,” i.e., within the scope of ERISA § 502(a).26 Thus,

the court held that “[t]he principle of Pilot Life27 that ERISA preempts state-law

claims alleging improper handling of benefit claims is broad enough to cover the

cause of action asserted here.”28

Similarly, in Rodriguez,29 the plaintiff sued the HMO and the primary care

physician for failing to “provide prompt and adequate medical care.”30 Rejecting

the plaintiff’s characterization of his own claim, the Fifth Circuit held:

[Plaintiff’s] state law claims, at bottom, result fromdissatisfaction over [the HMO’s] handling of hismedical claims. Consequently, his state law causes ofaction are sufficiently related to the employee benefitplan, in that they clearly have a “connection or referenceto such a plan” to be pre-empted by ERISA.31

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32 See Hull, 188 F.3d at 943 (prohibiting plaintiff from recharacterizing MCE’s refusalto pay for treatment as a cancellation of the prescribed treatment); see also Thompson, 202 F.3d at 1074(claim that administrator “controlled” medical care by refusing to implement the treating physician’sorder is preempted under Pilot Life).

33 See Corcoran, 965 F.2d at 1324 (“United determined that hospitalization was notnecessary, and instead authorized 10 hours per day of home nursing care”). It was preemptednonetheless. HOU:693783.1

Even more recent case law forecloses the attempted shell-game of

recharacterizing the MCE’s payment decision as “controlling” medical care. Most

well-drafted plan documents (as in the example) reflect the actual facts that

plaintiffs seldom can overcome. The MCE has no authority to control care, but only

to administer claims. A claimant cannot change the legal characterization of the

benefit determination or the dispute by insisting that he complains of the MCE

“making him” take an alternative therapy, and not of the denial of payment for the

therapy recommended by a treating physician.32 If the law were otherwise, Flo

Corcoran could have recovered if she had simply alleged that she was complaining

that United made her have home nursing care, not that it denied in-patient care.33

Such an argument is roughly equivalent to an adolescent arguing: “I’m not

complaining that you won’t let me stay out, I’m complaining that you set my curfew

too early.” Neither argument has merit.

The hypothetical client, like Flo Corcoran, may claim not to be seeking

benefits and may indeed be characterizing his complaints as attacking the quality

of medical care “actually provided.” All of these arguments, however, are

unavailing because the client is an ERISA participant complaining of conduct within

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the scope of ERISA § 502(a). All of the authorities governing removal jurisdiction

would uphold removal under facts as this prospective plaintiff alleges them:

The Plaintiff Does Not Seek Benefits–Preempted Anyway

Case HMOFailedTo “Obey”

M.D.

Removed from

StateCourt?

PlaintiffSeekingBenefits?

CompletelyPreemptedAnyway?

Thompson v. GencareHealth Sys.

Yes Yes No Yes

Hull v. Fallon Yes Yes No Yes

Danca v. Private HealthCare Sys., Inc.

Yes Yes No Yes

Parrino v. FHP, Inc. Yes Yes No Yes

Turner v. Fallon Cmty.Health Plan, Inc.

Yes Yes No Yes

Jass v. Prudential HealthCare Plan, Inc.

Yes Yes No Yes

Cannon v. Group HealthServ., Inc.

Yes Yes No Yes

Kuhl v. Lincoln Nat’lHealth Plan, Inc.,

Yes Yes No Yes

Corcoran v. UnitedHealthCare, Inc.

Yes Yes No Yes

B. The Anti-ERISA Apologists’ Efforts To Undermine Binding Precedent AreFutile

1. Neither Pilot Life nor Corcoran has eroded with the passage of time

In the face of this authority, the law review apologists, and some who cite

their work, tempt the courts into supposing that times have changed and that the

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34 Pryzbowski v. U.S. Healthcare, Inc., 245 F.3d 266 (3d Cir. 2001).

35 Id. at 278 (citing Bast, 150 F.3d at 1007-08; Tolton, 48 F.3d at 941-43; Spain, 11 F.3d at131-32; Kuhl, 999 F.2d at 302-03; Corcoran, 965 F.2d at 1331-34).

36 Pryzbowski, 245 F.3d at 273 (emphasis added). The case was removable because (likethe hypothetical client and like Mr. and Mrs. Heimann), Mrs. Pryzbowski “could have” enforced therights she was asserting with an action under ERISA § 502(a), but instead chose to wait and sue fordamages under state law. See id. at 273-74.HOU:693783.1

law no longer considers utilization review to be a benefit determination in the wake

of Pegram. The cases say otherwise.

For example, as recently as March of this year, the Third Circuit upheld the

removal and dismissal of utilization review claims against U.S. Healthcare.34 In so

doing, the court cited Corcoran and the other supposedly “out-dated” authorities on

which MCEs rely and noted that “suits against HMOs . . . for denial of benefits, even

when the claim is couched in terms of common law negligence or breach of contract,

have been held to be preempted by § 514(a).”35

Any attempted distinction of Pryzbowski as a claim involving only delay of

precertification is a distinction without a difference. The Pryzbowski court noted that

“[a] claim alleging [as here] that an HMO declined to approve certain requested

medical services or treatment on the ground that they were not covered under the

plan would manifestly be one regarding the proper administration of benefits. Such

a claim, no matter how couched, is completely preempted and removable on that

basis.”36

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37 TEX. CIV. PRAC. & REM. CODE ANN. §§ 88.001-.003 (Vernon Supp. 2001).

38 215 F.3d 526 (5th Cir.), on reh’g, 220 F.3d 641 (5th Cir. 2000), pet. for cert. filed (by thestate), 69 U.S.L.W. 3317 (Oct. 24, 2000) (No. 00-665).

39 Id. at 534, 535.HOU:693783.1

Thus, even if Corcoran is considered unfashionable by some law reviewers,

the federal courts continue to apply it, consistent with Congress’s intent and

controlling precedent.

2. Corporate Health does not bolster the commentators’ arguments–itdestroys them

The heavy reliance some commentators and lobbyists place on state

legislation like the Texas Health Care Liability Act37 (“the Act”) and Corporate Health

Insurance, Inc. v. The Texas Department of Insurance38 does as much to undermine their

arguments as ignoring cases like Corcoran, Pryzbowski and Pilot Life. Indeed, the oft-

repeated boast that such claims survive because the Fifth Circuit “upheld” the

liability provisions of the Act fails to tell the rest of the story.

In Corporate Health, the Fifth Circuit specifically held that the Act does not

apply to the facts in the hypothetical example and recognized that such a claim

would be completely preempted by ERISA. The court expressly held that the

liability provisions of the Act apply only to a “limited universe of events,” not at

issue in the hypothetical example. The court found that the Act’s liability provisions

provided only vicarious claims for a treating physician’s malpractice and were

“rooted in general principles of state agency law.”39 Said the court:

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40 Id. at 534 (emphasis added).

41 See id. (recognizing that “state efforts to regulate an entity in its capacity as planadministrator are preempted” and that “ERISA preempts malpractice suits against doctors makingcoverage decisions in the administration of a plan”); id. at 535 n.24 (“This distinction is consistentwith Corcoran’s holding that medical decisions involving coverage determinations are preempted”).HOU:693783.1

When the liability provisions are read together, theyimpose liability for a limited universe of events. Theprovisions do not encompass claims based on amanaged care entity’s denial of coverage for a medicalservice recommended by the treating physician: thatdispute is one over coverage, specifically excluded bythe Act. Rather, the Act would allow suit for claims thata treating physician was negligent in delivering medicalservices, and it imposes vicarious liability on managedcare entities for that negligence.40

The court did more than hold that “adverse determination” claims like the

hypothetical example were outside the terms of the statute. It specifically

recognized that such claims involve coverage disputes that are squarely preempted

by ERISA.41 Even beyond the liability provisions, the Fifth Circuit held that state

oversight of utilization review constituted an alternate enforcement mechanism–i.e.,

laws within the scope of § 502(a) that are completely preempted.

The State argued it was merely regulating the practice of medicine and

insurance when it sought to create a state law remedy to redress adverse utilization

review determinations. The court rejected the arguments, saying:

“[A]dverse determinations” include determinations bymanaged care entities as to coverage, not just negligentdecisions by a physician. . . . [A]n attempt to impose astate administrative regime governing coveragedeterminations is squarely within the ambit of ERISA’spreemptive reach.

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42 Id. at 537, 539. Corporate Health, faithfully following Pilot Life, thus recognized thatERISA § 502(a) has its own preemptive force, and remedies supplementing or conflicting with§ 502(a), by definition, cannot be saved by ERISA’s Insurance Saving Clause. In the authors’ views,the Seventh Circuit, however, improperly held that a utilization review dispute was completelypreempted and properly removed to federal court (i.e., within the scope of § 502(a)) and yet stillsaved by the insurance saving clause. See Moran v. Rush Prudential HMO, Inc., 230 F.3d 959 (7th Cir.2000). With Pegram’s dissenting circuit judges dissenting again in Moran, the Supreme Court hasagain granted certiorari. Rush Prudential HMO, Inc. v. Moran, 121 S. Ct. 2589 (2001). HOU:693783.1

* * *Here, the independent review provisions do not

create a cause of action for the denial of benefits. Theydo, however, establish a quasi-administrative procedurefor the review of such denial and bind the ERISA planto the decision of the independent review organization.This scheme creates an alternative mechanism throughwhich plan members may seek benefits due them underthe terms of the plan–the identical relief offered under[ERISA § 502(a)(1)(B)]. As such, the independentreview provisions conflict with ERISA’s exclusiveremedy and cannot be saved by the saving clause.42

3. Most plaintiffs cannot plead a so-called “mixed” decision, and theFifth Circuit has already rejected their “Pegram preemption”argument

The core of many commentators’ position is that all of the authorities

addressing ERISA’s central areas have been so substantially undermined that no

court ought to follow them anymore. The authority they cite provides no support

for such an extravagant claim.

For example, the commentators rely heavily upon Pegram v. Herdrich, 530 U.S.

211 (2000). Pegram, however, neither mentioned nor overruled the preemption cases

from nearly every circuit that are four-square consistent with Pilot Life, Corcoran,

Pryzbowski and Corporate Health. Moreover, Pegram reveals on its face that it does

not apply to the preemption of utilization review decisions made by third-party

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43 See Pegram, 530 U.S. at 215; see also id. at 226 (“What she does claim is that Carle,acting through its physician owners, breached its duty to act solely in the interest of beneficiaries bymaking decisions affecting medical treatment while influenced by the terms of the Carle HMOscheme”) (emphasis added); id. at 231 (“[W]e think Congress did not intend Carle or any other HMOto be treated as a fiduciary to the extent that it makes mixed eligibility decisions acting through itsphysicians”) (emphasis added).

44 When vicarious claims are attempted, they generally have their own problems understate law. See infra § II.C.HOU:693783.1

administrators, and the Fifth Circuit has already considered and rejected the Pegram

preemption argument.

In Pegram, all of the claims arose through the HMO’s alleged vicarious

responsibility for a default by the treating physicians that owned the HMO. The

“mixed eligibility and treatment” determination occurred when the treating

physicians decided to schedule a test on a non-emergent basis with a participating

provider rather than schedule the test on an emergency basis with a non-

participating provider.43 Here, however, the hypothetical client contemplates direct

liability claims against the MCE (not a treating physician) for the identical type of

coverage determinations that were found to be preempted in Corcoran. Here, unlike

Pegram, the focus is on the supposed decision by the HMO not to cover the specific

drug prescribed by the independent treating physician.

Many petitions examined by the authors are intentionally vague and “artful”

on a great many things. In states like Texas, however, where staff-model HMOs are

prohibited, the plaintiff must eventually attempt to sue his or her MCE directly and

not because of any “mixed eligibility and treatment determination” made by the

independent contractor treating physician.44 As such, Pegram is particularly

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45 See Pegram, 530 U.S. at 216 & n.2.

46 See id. at 217-18.

47 Hansen v. Continental Ins. Co., 940 F.2d 971, 979 (5th Cir. 1991) (“Even if [the plaintiff]is correct that ERISA provides no adequate remedy, however, his state law claims would still bepreempted”). Indeed, an ERISA participant or beneficiary has no fiduciary duty claim where (ashere) he could have brought a claim establishing his right to benefits. See Rhorer v. Raytheon Eng’rs& Constructors, Inc., 181 F.3d 634, 639 (5th Cir. 1999).

48 See Pegram, 530 U.S. at 229 n.9 (noting that the court had no occasion to discuss theinteraction of a coverage dispute and state law).HOU:693783.1

inapplicable because “mixed eligibility and treatment determinations” are

determinations made by treating physicians, not independent claims administrators

for ERISA plans.

Most of the academic ink concerning Pegram is especially surprising given

that Pegram was not even a preemption case. In Pegram, the original claim

challenging the incentives paid to treating physicians was removed to federal court,

remand was denied, and the plaintiff amended her pleadings to expressly include

an ERISA claim.45 Far from making a preemption holding, the Supreme Court

affirmed the 12(b)(6) ruling of the district court finding that ERISA provided no

remedy for the conduct alleged.46 Of course, it has long been recognized that the

absence of a remedy in ERISA will not preclude a finding of preemption.47 The

court specifically disclaimed any intent to delineate the preemptive scope of a

coverage dispute.48

Indeed, the law reviewers’ “Pegram preemption” arguments have been

rejected by at least one federal appellate court already. The Fifth Circuit’s opinion

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49 Corporate Health, 220 F.3d at 643.

50 Id. at 643-44.

51 Id. at 643 n.6 (emphasis added).

52 193 F.3d 151 (3d Cir. 1999), cert. denied, 530 U.S. 1242 (2000).

53 See Hull, 188 F.3d at 943.HOU:693783.1

on rehearing in Corporate Health specifically rejected the argument that “Pegram v.

Herdrich cast doubt on . . . this court’s prior decision in Corcoran v. United Healthcare,

Inc.”49 Said the court, “we do not read Pegram to entail that every conceivable state

law claim survives preemption so long as it is based on a mixed question of

eligibility and treatment, and Corcoran held otherwise.”50 Even further, “[i]t may be

that state causes of action persist only for actions based in some part on malpractice

committed by treating physicians. If so, state causes of actions [sic] against HMOs

for the decisions of their utilization review agents would still be preempted, as

Corcoran held.”51

Failing to find aid in Pegram, some plaintiffs even urge courts to consider the

denial of certiorari in In re U.S. Healthcare52 as indicative of the Supreme Court’s

substantive position. Orders denying certiorari, of course, have no precedential

value. The fallacy of arguing to the contrary is demonstrable: ERISA preemption

was also upheld in a utilization review dispute, and the high Court denied certiorari

in the same term and the same reporter in which Pegram appears.53

The Supreme Court, however, was not wholly mute last term concerning the

scope of ERISA preemption. The Court summarily considered a case in which the

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54 Pappas v. Asbel, 724 A.2d 889, 893 (Pa. 1998).

55 See id.

56 United States Healthcare Sys., Inc. v. Pennsylvania Hosp. Ins. Co., 67 U.S.L.W. 3717 (U.S.June 19, 2000) (No. 98-1836). Notwithstanding some dissent in its own ranks, the Pennsylvania courtstuck to its original position on remand, and a petition for writ of certiorari is now pending. SeePappas v. Asbel, 768 A.2d 1089 (Pa. 2001), pet. for cert. filed, 70 U.S.L.W. 3092 (Aug. 1, 2001) (No.01-200). At this writing, the Pappas majority has only been distinguished or cited in dissent. Adistrict court in the Fifth Circuit, however, has cited and quoted the Pappas dissent recognizing,consistent with Corcoran, that utilization review is a benefit determination, notwithstanding itsmedical overtones. See Haynes v. SLS Inc., No. 2:00-CV-215-PB (N.D. Miss. Sept. 27, 2001) (Tab A)(noting that “an adverse determination by an HMO means that ‘it will not pay for . . . or otherwisemake available the service in question.’ . . . It does not mean, however, that the physician is precludedfrom providing necessary medical care”).HOU:693783.1

Pennsylvania Supreme Court had (like the law reviewers) traced the “Travelers

Trilogy” and had erroneously concluded:

[A]lthough . . . U.S. Supreme Court decisions from the1980’s and early 1990’s support [U.S. Healthcare’s]position that the preemption provision is to be readbroadly, Travelers and its progeny have thrown theexpansive holdings of those earlier cases into question.54

The state court had adopted the argument, urged by the commentators, that the

MCE’s actions were “intertwined” with medicine and could not be preempted.55

The Supreme Court, however, summarily vacated and remanded Pappas.56

4. The “Travelers Trilogy” sloganeering has been widely rejected in“medical necessity” disputes

In the absence of cases, authorities, and precedent, anti-ERISA apologists

must resort to slogans, trilogies, and so-called “trends” in the law. Even so, the

decisions making up the vaunted “Travelers Trilogy” are not even complete

preemption cases. In fact, the issues presented are not even similar to those

presented in litigation with plan participants or beneficiaries. Participant claims are

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57 See generally De Buono v. NYSA-ILA Med. & Clinical Servs. Fund, 520 U.S. 806 (1997);California Div. of Labor Standards Enforcement v. Dillingham Constr., N.A., 519 U.S. 316 (1997); New YorkState Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995).

58 Post-Travelers: See Pryzbowski, 245 F.3d at 278; Thompson, 202 F.3d at 1073; Hull, 188F.3d at 943; Danca, 185 F.3d at 6-7; Bast, 150 F.3d at 1007-08; Parrino, 146 F.3d at 704-05 & n.3; Turner,127 F.3d at 199-200; Jass, 88 F.3d at 1494; Cannon, 77 F.3d at 1273. Pre-Travelers: Tolton, 48 F.3d at 942;Spain, 11 F.3d at 131; Kuhl, 999 F.2d at 302; Rodriguez, 980 F.2d at 1017; Corcoran, 965 F.2d at 1328-29.

59 See, e.g., Turner, 127 F.3d at 199 (“[N]either of these cases involved a state’s attemptto provide state remedies for what is in essence a plan administrator’s refusal to pay allegedlypromised benefits. It would be difficult to think of a state law that ‘relates’ more closely to anemployee benefit plan than one that affords remedies for the breach of obligations under that plan”);Parrino, 146 F.3d at 705 n.3 (noting that the Supreme Court “has not . . . overturned its priorsubstantive holdings regarding the scope of ERISA preemption” and that its “more recent ERISApreemption cases had tenuous and peripheral connections to ERISA”).HOU:693783.1

not like the neutral surcharge as in Travelers, the benign prevailing wage law as in

Dillingham, or an innocuous gross receipts tax as in De Buono.57 Plan participants

seek to recover damages allegedly arising from improper claims administration–an

exclusively federal concern.

More appellate decisions upholding preemption of utilization review

disputes have been decided after Travelers than before it.58 Moreover, several of

these discussions specifically reject the notion that Travelers or its “Trilogy” has

altered the preemption calculus for core ERISA functions such as utilization

review.59

Indeed, the notion that Travelers denotes a “seismic shift” because the

Supreme Court has suddenly rediscovered a presumption against preemption is

demonstrably false. The assumption that Congress did not intend to prohibit

regulation by the states absent a clear manifestation of intent is not peculiar to

Travelers and the “Trilogy”; rather, it is “black letter law” so well established prior

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60 A mere sprinkling of the numerous pre-Travelers Supreme Court authoritiesrecognizing this principle includes: Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 740 (1985)(ERISA-preemption case); Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 522 (1981) (ERISA-preemption case); Jones v. Rath Packing Co., 430 U.S. 519, 525 (1977); Rice v. Santa Fe Elevator Corp., 331U.S. 218, 228 (1947); Allen-Bradley Local No. 1111 v. Wisconsin Employment Relations Bd., 315 U.S. 740,749 (1942) (“[T]his Court has long insisted that an ‘intention of Congress to exclude states fromexerting their police power must be clearly manifested’ ”); Napier v. Atlantic Coast Line R.R. Co., 272U.S. 605, 611 (1926); Savage v. Jones, 225 U.S. 501, 533 (1912) (“This principle has had abundantillustration.”); Sinnot v. Davenport, 63 U.S. 227, 243 (1859).

61 See Travelers, 514 U.S. at 655 (citing Napier v. Atlantic Coast Line R.R. Co., 272 U.S. 605,611 (1926)).

62 See id. (citing Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 740 (1985) (“Wealso must presume that Congress did not intend to pre-empt areas of traditional state regulation”)).

63 See De Buono, 520 U.S. at 815 & nn.13-15.

64 See CIGNA Healthplan, Inc. v. Louisiana ex rel. Ieyoub, 82 F.3d 642, 649 (5th Cir. 1996).

65 See McNeil v. Time Ins. Co., 205 F.3d 179, 191 n.20 (5th Cir. 2000), cert. denied, 121 S. Ct.1189 (2001) (“We disagree with Mr. McNeil’s argument that our inquiry on this issue has beenfundamentally altered by the Supreme Court’s decision in [Travelers]. The method of analysis we usetoday was well established before that decision, and it continues to be used today”); see also CIGNAHOU:693783.1

to Travelers as to defy comprehensive citation.60 Indeed, Travelers itself cites to 1926

Supreme Court authority61 and to one of the Supreme Court’s earliest ERISA

preemption cases,62 which can hardly be the source for the commentators’ “newly

found” presumption against preemption. More to the point, the “Trilogy” cases cite

the pre-Travelers Supreme Court precedent with approval, including those holding

that ERISA’s remedies are exclusive.63

Thus, Travelers is a “limited” holding, not a wholesale abandonment of prior

preemption law.64 The Fifth Circuit, for one, has repeatedly rejected the notion that

Travelers fundamentally alters the preemption calculus in a dispute between an

ERISA plan participant and the MCE that provides administrative services for the

plan.65 Moreover, the Supreme Court has again confirmed that benefits

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Healthplan, Inc. v. Louisiana, 82 F.3d 642, 649 (5th Cir. 1996).

66 532 U.S. 141, 1215 S. Ct. 1322 (2001).

67 See id. at 1327 (citing Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 97 (1983)).

68 See id. (citing Morales v. Trans World Airlines, Inc., 504 U.S. 374, 384 (1992) (listingcases in which the court described ERISA pre-emption in broad terms)).HOU:693783.1

administration is a core area of ERISA concern–sufficient to overcome supposed

presumptions against preemption in areas of traditional state regulation.

5. Preemption remains unchanged in the area of benefitsadministration–an area of exclusively federal concern

When one reads the Supreme Court authorities in the area of benefit

administration, one discovers that those authorities are decidedly free of the

sloganeering and the Trilogy-speak that so thoroughly infects the typical law review

comment or article. In Egelhoff v. Egelhoff,66 the Supreme Court’s most recent case

on the topic, the Court held that a Washington statute revoking (upon divorce) a

beneficiary designation for a former spouse was preempted. In reaching its

conclusion, the Court cited one of its earliest preemption authorities and used the

same “relates to” and “in connection with” analysis that some of the commentators

opine is out-dated.67 Indeed, while acknowledging that preemption is not limitless,

the Court confirmed its repeated observation that ERISA’s broadly worded

preemption provision is “clearly expansive.”68

The Supreme Court found that the Washington statute was preempted

because benefit determinations are “an area of core ERISA concern,” and the

Washington law, like the hypothetical claim here, bound the administrators to

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69 See id. at 1327-28.

70 Id. at 1328.

71 Id. at 1328.

72 Id. at 1329 (citing Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 142 (1990)).

73 Id. (quoting Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 10 (1987)).HOU:693783.1

determine benefits according to state law rather than the terms of the plan.69 The

Court noted that “unlike generally applicable laws regulating ‘areas where ERISA

has nothing to say’ . . . this statute governs the payment of benefits, a central matter

of plan administration.”70 In situations in which that “central matter” is concerned,

ERISA’s goal of uniformity for plans “is impossible . . . if plans are subject to

different legal obligations in different States.”71 Likewise, “[r]equiring ERISA

administrators to master the relevant laws of 50 States and to contend with litigation

would undermine the congressional goal of ‘minimiz[ing] the administrative and

financial burden[s]’ on plan administrators–burdens ultimately borne by the

beneficiaries.”72 In this area of core ERISA concern, “differing state regulations

affecting an ERISA plan’s ‘system for processing claims and paying benefits’ impose

‘precisely the burden that ERISA pre-emption was intended to avoid.’”73

The Egelhoff respondents (like many plan participants) argued forcefully that

their claim involved areas of traditional state regulation. The Court agreed, but

found preemption nevertheless:

There is indeed a presumption against pre-emption inareas of traditional state regulation such as familylaw. . . . But that presumption can be overcome where,

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74 Egglehoff, 532 U.S. at 1330; see also California Div. of Labor Standards Enforcement v.Dillingham Constr., N.A., 519 U.S. 316, 330 (1997) (“That the States traditionally regulated these areaswould not alone immunize their efforts; ERISA certainly contemplated the pre-emption of substantialareas of traditional state regulation”).

75 See Pilot Life, 481 U.S. at 52.

76 See 29 U.S.C. § 1104(a)(1)(D).HOU:693783.1

as here, Congress has made clear its desire for pre-emption. Accordingly, we have not hesitated to findstate family law pre-empted when it conflicts withERISA or relates to ERISA plans.74

It is simply fatuous to argue that a utilization review claim will only

indirectly affect the incidental costs to an ERISA plan like the laws in the “Trilogy.”

The claim directly impacts benefits administration like the law in Egelhoff. To allow

such claim at all would countermand the MCE’s discretion to make benefits

determinations under the terms of the plan. Moreover, such claims would subject

the plan administrator, contrary to the intent of Congress, to remedies not

contemplated by ERISA,75 and it would punish the MCE with liability under state

law because it complied with its federal duty to pay benefits only in conformity with

the plan terms.76 Seldom could an effect on plan administration be more direct.

Whatever costume the hypothetical plaintiff’s claim dons, the MCE’s

administration of benefits is key. Because the MCE’s decisions about whether an

ERISA beneficiary is entitled to prescription drug benefits under the terms of an

ERISA plan is a “area of core ERISA concern,” the presumption against preemption

is overcome and state laws contradicting ERISA (in this case, the exclusive remedies

of ERISA § 502(a)) are preempted.

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77 The Third Circuit authorities on which some commentators rely certainly do not fillthe bill. The earlier Third Circuit authorities are far outside the complete preemption mainstreamrecognized in all the other circuits, and they are factually inapplicable. One involves the attemptedremoval of a vicarious liability claim. See generally Dukes v. U.S. Healthcare, Inc., 57 F.3d 350 (3d Cir.1995). One involves a denial of treatment by the treating physician, with no allegation of a denialof coverage by the HMO and ERISA plan administrator. See Lazorko v. Pennsylvania Hosp., 237 F.3d242, 246 (3d Cir. 2000) (“Although [plaintiff] asked to be rehospitalized, Dr. Nicklin [the treatingphysician] denied her request”), cert. denied, 121 S. Ct. 2552 (2001). In the last, the plaintiff managedto convince the court that no part of his claim arose from a coverage determination like an adverseutilization review decision. See generally In re U.S. Healthcare, Inc., 193 F.3d 151 (3d Cir. 1999), cert.denied, 530 U.S. 1242 (2000). To the extent one attempts to read In re U.S. Healthcare as prohibitingremoval of utilization review disputes, it is squarely contradicted by the subsequent decision inPryzbowski, also from the Third Circuit, which correctly analyzed the law. See supra § II.B.1.

78 See De Buono, 520 U.S. at 809 n.1.HOU:693783.1

6. Neither the musings of law reviewers nor stale legislative history canaid a claimant in the absence of law and precedent

If decades of ERISA precedent have been overturned in a “seismic shift” to

allow personal injury actions for utilization review decisions, would it be too much

to ask the commentators to cite one federal appellate decision saying so?

Apparently so, because they cannot do it.77 In the absence of precedent, they

generally rely upon academicians’ regurgitations of legislative history.

First, the notion that one must resort to legislative debates recounted in law

review pieces as precedent for the application of a thirty-year-old federal statute

with over 2800 opinions addressing preemption78 is legally unsound. It is especially

questionable in the area of benefits administration. Resort to legislative history in

order to “muddy the waters” is improper when the statutory command is

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79 See United States v. Gonzales, 520 U.S. 1, 6 (1997) (“Given the straightforward statutorycommand, there is no reason to resort to legislative history. . . . Indeed, far from clarifying the statute,the legislative history only muddies the waters”).

80 Shannon v. United States, 512 U.S. 573, 584 (1994).

81 See Pilot Life, 481 U.S. at 52-57. Moreover, the law reviewers’ approach to § 514 iserroneous in any event. The Supreme Court has sifted that legislative history as well. It concludedthat Congress’s rejection of a limited preemption provision substantively indicated that preemptionis broader than the specific topics covered by ERISA. See Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 98& nn.15 & 19 (1983).HOU:693783.1

straightforward.79 Likewise, courts “have no authority to enforce [a] principl[e]

gleaned solely from legislative history that has no statutory reference point.”80

More than that, however, many characterizations of ERISA’s legislative

history, garnered mostly from academicians, are demonstrably wrong because they

generally ignore the preemptive effect of ERISA § 502. Much effort has been

expended supposedly demonstrating how ERISA § 514, the conflict preemption

provision, was added to ERISA at the last minute. In the typical member dispute,

however, the issue is complete preemption arising from ERISA’s exclusive remedies

in § 502(a). The Supreme Court has already parsed through the legislative history

behind § 502(a) and has concluded that Congress intended the remedies to be

exclusive.81

If the law review apologists’ approach to ERISA’s legislative history is

incorrect, their invocation of the legislative history for the Federal Health

Maintenance Organization Act (the “Federal HMO Act”) is doubly misguided.

Even supposing that the statutory text of ERISA had any areas of doubt thirty years

after its passage, resort to the legislative history of an altogether unrelated act is

-29-

82 See Penn Mut. Life Ins. Co. v. Lederer, 252 U.S. 523, 537-38 (1920) (“The legislativehistory of an act may, where the meaning of the words used is doubtful, be resorted to as an aid toconstruction. . . . But no aid could possibly be derived from the legislative history of another actpassed nearly six years after the one in question”).

83 Only one year before it enacted ERISA, the 93d Congress enacted the HealthMaintenance Organization Act of 1973, Pub. L. No. 93-222, codified at 42 U.S.C. §300e et seq., toestablish requirements for the administration and management of federally-qualified HMOs—asubstantial legislative undertaking entirely inconsistent with the proposition that Congressunderstood the regulation of HMOs amounted to the type of traditional regulation of “insurance”that Congress intended to reserve to the States. As two commentators have observed: “The purposeof the 1973 Act was to prevent state laws from impeding the development of HMOs. In particular,Congress was concerned that local physicians’ political clout with state regulators would preventHMOs from developing as a more efficient means of delivering quality health care.” Jeffrey W.Stempel & Nadia von Magdenko, Doctors, HMOs, ERISA, and the Public Interest After Pegram v.Herdrich, 36 TORT & INS. L.J. 687, 734 n.96 (2001). The Senate Report to the bill that was ultimatelyenacted states unequivocally that “[i]n the committee’s view HMO’s [sic] . . . should not be requiredto submit to regulations as an insurer of health care services . . . . Such requirements would be undulyrestrictive, onerous, and not within the spirit of this legislation . . . . ” Sen. Rep. No. 93-129 (1973)reprinted in 1973 U.S.C.A.A.N. 3033, 3058. Indeed, the Report identifies “applicable state insurancelaws and regulations” as one of the “[p]rincipal state legal barriers . . . to the development of HMOs.”See id.; see also Pegram, 530 U.S. at 233 (“The fact is that for over 27 years the Congress of the UnitedStates has promoted the formation of HMO practices.”); Rush Prudential HMO Inc. v. Moran, Brief ofAmerican Association of Health Plans, Inc., American Benefits Council, and Health InsuranceAssociation of America, Inc., as Amici Curiae in Support of Petitioner, 2001 WL 1077919 (Sept. 10,2001).HOU:693783.1

desperate indeed.82 Moreover, the actual legislative history behind the Federal

HMO Act demonstrates Congress’s intent to exempt HMOs from state interference

disguised as insurance regulations83–exactly what the State of Texas claimed it was

doing in passing the Health Care Liability Act.

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84 THE AMERICAN HERITAGE DICTIONARY 652 (1985).

85 See CIGNA, 82 F.3d at 648.

86 See Corporate Health Ins., Inc. v. Texas Dep’t of Ins., 12 F. Supp. 2d 597, 610 (S.D. Tex.1998).HOU:693783.1

7. The HMO is not the ERISA plan–“Inconsequential”

“Inconsequential (in’konsi-kwen’shcl) adj. 1. Withoutconsequence; lacking importance; petty.2. Inconsequent. –n. A triviality.”84

Certain commentators’ willingness to argue into the very teeth of contrary

precedent is most apparent when they argue that the MCE is itself not the ERISA

plan and that preemption therefore does not apply. The Fifth Circuit has heard the

argument before and called it “inconsequential.”85 Indeed, the State tried the

argument in Corporate Health, but the district court called it “inconsequential.”86 The

Fifth Circuit found it no more impressive in determining that the independent

review organization (“IRO”) provisions of the Act were preempted. In fact, nearly

all of the landmark ERISA preemption cases decided by the federal courts involve

parties other than “the plan.”

-31-

87 Texas Pharmacy Ass’n v. Prudential Ins. Co. of Am., 105 F.3d 1035, 1036 (5th Cir. 1997).

88 See Dowden v. Blue Cross & Blue Shield, Inc. 126 F.3d 641, 642-43 (5th Cir. 1997).HOU:693783.1

Preemption Outside “The Plan”

Case Is Defendant “The Plan”? Preempted Anyway?

Pilot Life No–Plan Insurer Yes

Ingersoll-Rand No–Defendant Employer Yes

Corporate Health No–Plan Insurers & HMOs Yes

Corcoran No–UR Agent Yes

Rodriguez No–Plan Insurer Yes

TPA87 No–Plan Insurer Yes

CIGNA No–HMO “for” the Plans Yes

Dowden88 No–Plan Insurer Yes

Inconsequential” is a multi-syllabic word for “does not matter” and that

conclusion is correct. MCEs are claims administrators engaged in plan

administration, an area of core ERISA concern. The mountain of removal cases in

notes 18 through 21, as well as all the significant preemption cases from the courts

of appeals and the Supreme Court demonstrate that ERISA preemption applies

outside the plan, even if the “plan” is not named as a defendant in the suit.

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89 The four new authorities are: Haynes v. SLS Inc., No. 2:00-CV-215-PB (N.D. Miss.Sept. 27, 2001) (Tab A); Davila v. Aetna U.S. Healthcare, Inc., No. 4:00-CV-1855-Y (N.D. Tex. June 29,2001) (Tab B); Calad v. CIGNA Healthcare of Texas, Inc., No. 3:00-CV-2693-H, 2001 WL 705776 (N.D.Tex. June 20, 2001) (Tab C); and Roark v. Humana, Inc., No. CIV.A 3:00-CV-2368-D, 2001 WL 585874(N.D. Tex. May 25, 2001) (Tab D).

90 See Haynes, Tab A at 6-7; Davila, Tab B at 6; Calad, Tab C at 5; Roark, Tab D at 3.

91 Davila, Tab B at 5.HOU:693783.1

8. When tried, the law review apologists’ arguments have been rejectedin the district courts

All of the arguments against the preemption of utilization review disputes

that are outlined above were recently attempted in district courts in the Fifth Circuit,

and each time the arguments were rejected. Three federal courts in the Northern

District of Texas and one court in the Northern District of Mississippi upheld ERISA

preemption and rejected the “seismic shift” approach urged by the law reviewers.89

Each plaintiff argued that they were only complaining about the “quality”

of the care received and not seeking benefits under ERISA.90 The factual allegations

of the complaints, however, revealed that the plaintiffs were actually attacking

ERISA plan administration by complaining (as in the hypothetical example) that a

claims administrator had delayed or denied authorization for medical benefits. The

Davila court found preemption, “[d]espite Plaintiff’s attempt to pepper his petition

with quality-of-care and medical-treatment allegations.”91 The Calad court likewise

found that such “quality of care” allegations are preempted by ERISA, noting:

[D]espite the negligence labeling under which sheclaims direct liability against her HMO under Texaslaw, Calad’s claim is fundamentally one in which shechallenges the quantity of care she received as a result

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92 Calad, Tab C at 10-11

93 Haynes, Tab A at 6-7.

94 Roark, Tab D at 2.

95 Id. 6-7.HOU:693783.1

of CIGNA’s utilization review. . . . CIGNA’s decisionimpacted on Calad’s care, to the extent that any medicalnecessity determination impacts an insured; thedecision, however, was essentially one regarding theamount and type of services for which Calad wascovered under the plan.92

The argument likewise failed to convince the Haynes court, which observed:

In the instant case, the plaintiff attempts to recasthis claims as addressing only the “quality of care” at thecore, and not the administration of benefits. A closelook at the Amended Complaints, however, revealsthat, although dressed in the clothing of ordinarynegligence principles, the crux of the claims relatedirectly to the delay of authorization or“precertification” of benefits. . . . Indeed, what theplaintiff attacks is Prucare’s refusal to authorizeadmittance to the Wound Center. The essence of theclaims, therefore, is “conduct falling squarely withinadministrative function.”93

The Roark court noted that “this case does not present a difficult application

of preemption principles,” and that “the Roarks . . . cannot circumvent the

preemptive reach of ERISA by artful pleading.”94 The “quality of care” gambit

failed because (as in the example) the complaint assailed the HMO’s supposed

“delays in approving, or refusals to authorize, particular types of care, devices, or

facilities.”95

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96 Haynes, Tab A at 6-7; Calad, Tab C at 9; Roark, Tab D at 7.

97 Haynes, Tab A at 7.

98 Calad, Tab C at 9 & 11-12.

99 Haynes, Tab A at 8; Calad, Tab C at 9; Roark, Tab D at 7.

100 Haynes, Tab A at 8.

101 Roark, Tab D at 7.

102 Calad, Tab C at 9 (emphasis added).HOU:693783.1

In finding preemption, three of the courts cited and relied upon Corcoran, the

same authority that some have argued is no longer good law.96 The Haynes court

called the argument “dubious.”97 The Calad court rejected the argument just as

flatly, noting:

Plaintiff’s fundamental problem, in this Court’s view, isthat Corcoran remains the law in the Fifth Circuit withrespect to ERISA preemption of medical decisions madepursuant to utilization review. As Defendants pointout, courts concluding that claims arising from a delayor denial of benefits are ERISA-preempted continue tocite the case with approval.

* * *This Court declines Plaintiffs’ invitation to concludethat Corcoran is no longer good law in light of CorporateHealth and the other authorities mentioned above,leaving this review to the appellate court.98

Three of the courts expressly rejected the argument that the Fifth Circuit’s

Corporate Health decision rescued their claims from preemption.99 The Haynes court

called the argument “unavailing,”100 and the Roark court noted that the case offered

“no solace” to one like our hypothetical plaintiff.101 Likewise, the Calad court found

preemption “based on the Fifth Circuit’s reasoning in Corporate Health.”102

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103 Haynes, Tab A at 8-9; Calad, Tab C at 9.

104 Calad, Tab C at 8 (citing Corporate Health, 220 F.3d at 643-44 & n.6).

105 Haynes, Tab A at 9.

106 But see Jass, 88 F.3d at 1493 (holding that vicarious liability claim was preempted byERISA). HOU:693783.1

The district courts also rejected the arguments by the various plaintiffs that

the Supreme Court’s Pegram decision or the so-called “Trilogy” change the

preemption calculus for their claims.103 The Calad court, in particular, noted:

The Court does not agree, however, that theSupreme Court’s holding in Pegram, which was not apreemption case, compels the conclusion that utilizationreview determinations such as those made by CIGNAin this case are not preempted.104

Similarly, the Haynes court recognized what the law reviewers have not:

[In Corporate Health] the Fifth Circuit has clearlyrecognized that Corcoran and its principles havesurvived Pegram and the “trilogy.” . . . Simply put, thisCourt declines to extend Pegram and the “trilogy”beyond the spectrum of which the Fifth Circuit hasindicated it should apply.105

As of this writing, the plaintiffs in three of the four cases have appealed to the

Fifth Circuit, the circuit of origin for both Corcoran and Corporate Health.

C. MCEs Are Not Vicariously Liable For Independent Contractor PhysiciansThey Have No Right To Control, Nor Should They Be

In an effort to avoid the confines of ERISA preemption, many plaintiffs

attempt to sue MCEs for alleged vicarious liability.106 In Texas (where the authors

primarily practice), “staff-model” HMOs in which the physician is employed by a

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107 See, e.g., Garcia v. Texas State Bd. of Med. Exam’rs, 384 F. Supp. 434, 437 (W.D. Tex.1974) (per curiam), aff’d, 421 U.S. 995 (1975).

108 See Baptist Mem’l Hosp. Sys. v. Sampson, 969 S.W.2d 945, 947 (Tex. 1998); Esplain v.Children’s Med. Ctr., 27 S.W.3d 675 683 (Tex. App.–Dallas 2000, no pet.); Chandler v. Cash, 20 S.W.3d69, 72 (Tex. App.–Texarkana 2000, pet. denied); Valdez v. Pasadena Healthcare Mgmt., Inc., 975 S.W.2d43, 45 (Tex. App.–Houston [14th Dist.] 1998, pet. denied); Drennan v. Community Health Inv. Corp., 905S.W.2d 811, 818-19 (Tex. App.–Amarillo 1995, writ denied).

109 See Sampson, 969 S.W.2d at 947; Esplain, 27 S.W.3d at 684; Denton v. Big Spring Hosp.Corp., 998 S.W.2d 294, 296 (Tex. App.–Eastland 1999, no pet.); Valdez, 975 S.W.2d at 45; Drennan, 905S.W.2d at 818.

110 See Drennan, 905 S.W.2d at 819 (citing Newspapers, Inc. v. Love, 380 S.W.2d 582, 585-86(Tex. 1964)).HOU:693783.1

corporation are generally prohibited.107 Instead, physicians contract with MCEs,

either directly or through an IPA (independent practice association), as independent

contractors. At the end of the day, this status as independent contractors should

block any attempt to hold an MCE vicariously liable for a physician’s alleged

negligence.

Under Texas law, a defendant is vicariously liable for the negligence of an

agent or employee acting within the scope of his or her agency or employment, but

is not vicariously liable for the acts or omissions of an independent contractor.108 In

the health care setting, this means that a hospital (or an MCE) is ordinarily not liable

for the negligence of an independent contractor treating physician.109

If an employer retains the right to control the details of the work to be

performed by a contracting party, a master-servant relationship exists which will

authorize the application of respondeat superior.110 Conversely, where an employer

is interested only in the results, and the contracting party independently determines

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111 See id.

112 See Chandler, 20 S.W.3d at 72.

113 See Esplain, 27 S.W.3d at 684-85.

114 See, e.g., Denton, 998 S.W.2d at 296; Valdez, 975 S.W.2d at 45-46; Drennan, 905 S.W.2dat 819; see also, e.g., Lopez v. Central Plains Reg’l Hosp., 859 S.W.2d 600, 605 (Tex. App.–Amarillo 1993,no pet.) (rejecting ostensible agency claim); Nicholson v. Memorial Hosp. Sys., 722 S.W.2d 746, 750 (Tex.App.–Houston [14th Dist.] 1986, writ ref’d n.r.e.) (rejecting ostensible agency claim).

115 Denton, 998 S.W.2d at 296; Valdez, 975 S.W.2d at 46; Drennan, 905 S.W.2d at 819; seealso, Lopez, 859 S.W.2d at 605; Nicholson, 722 S.W.2d at 750. But see Smith v. Baptist Mem’l Hosp. Sys.,720 S.W.2d 618, 625 n.1 (Tex. App.–San Antonio 1986, writ ref’d n.r.e.) (sustaining claim of ostensibleagency, in part because hospital directly billed for the services of the emergency room physician);Brownsville Med. Ctr. v. Garcia, 704 S.W.2d 68, 75 (Tex. App.–Corpus Christi 1985, writ ref’d n.r.e.)HOU:693783.1

the details of the method by which the desired results are attained, an independent

contractor relationship exists, and the respondeat superior does not apply.111 In

particular, where (as in the hypothetical example) the relevant agreements give no

right of control over the details of medical practice by a treating physician, that

physician is an independent contractor as a matter of law.112 Similarly, the Dallas

Court of Appeals has specifically held that notice of a physician’s independent

contractor status (as in the MCE’s membership materials) is sufficient to establish

independent contractor status as a matter of law.113

As applied to relationships among physicians and other health care entities,

courts have ruled that treating physicians were operating as independent

contractors based upon the following facts:

• There was no contract of employment with the allegedprincipal or payment of salary by the alleged principal;114

• The principal did not bill for the services of the treatingphysician;115

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(same).

116 Drennan, 905 S.W.2d at 819; Valdez, 975 S.W.2d at 46.

117 Drennan, 905 S.W.2d at 820; see also, Lopez, 859 S.W.2d at 605.

118 Drennan, 905 S.W.2d at 820.

119 See Sampson, 969 S.W.2d at 947.

120 See id.HOU:693783.1

• The principal had no authority to direct or control thetreatment practices of the treating physician;116

• The patient and the treating physician had a relationshippredating the admission to the hospital;117 and

• The particulars of the medical services were arranged outsidethe parameters and facilities of the alleged principal.118

When (as in Texas) the treating physician is an independent contractor, it

becomes the plaintiff’s burden to plead and prove that the treating physician was

the principal’s ostensible agent, which is in the nature of an affirmative defense.119

Ostensible agency in Texas is based on the notion of estoppel. A plaintiff must show

a representation by the MCE (the alleged principal) causing justifiable reliance and

resulting harm.120 The elements of ostensible agency are:

• the plaintiff had a reasonable belief that the physician was theagent or employee of the alleged principal;

• such belief was generated by the alleged principalaffirmatively holding out the physician as its agent oremployee or knowingly permitting the physician to holdherself out as the hospital’s agent or employee; and

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121 See Sampson, 969 S.W.2d at 949; see also Garrett v. L.P. McCuistion Community Hosp.,30 S.W.3d 653, 655-56 (Tex. App.–Texarkana 2000, no pet.); Valdez, 975 S.W.2d at 46.

122 Sampson, 969 S.W.2d at 950 (patient did not choose the doctor who treated her);Garrett, 30 S.W.3d at 656 (patient did not choose radiologist that read MRI); Valdez, 975 S.W.2d at 46(refusing to find ostensible agency even though “the nurse told me that Dr. Devine would bedelivering my baby and that he was the only doctor there that delivered babies that day”); Denton,998 S.W.2d at 297 (plaintiff did not go to emergency room to see any particular doctor); Nicholson, 722S.W.2d at 750 (Appellant told “someone” at the hospital that he had no family physician andrequested a referral). But see Smith, 720 S.W.2d at 624-25 (sustaining claim of ostensible agency inpart because the doctor was “on duty” in the emergency and manifested the authority of the hospitalwhen the patient sought care); Brownsville Medical Ctr. v. Garcia, 704 S.W.2d 68, 75 (Tex. App.–CorpusChristi 1985, writ ref’d n.r.e.) (sustaining claim of ostensible agency, in part because patient seekingemergency care looked to the hospital rather than requesting specific physician).

123 Sampson, 969 S.W.2d at 950; Garrett, 30 S.W.3d at 656; Denton, 998 S.W.2d at 297;Valdez, 975 S.W.2d at 46 (refusing to find ostensible agency even though the plaintiff “did not readany of the papers” and “signed them while . . . in pain”); id. (“The ‘holding out’ element of theValdezes’ ostensible agency claim is further negated by Ms. Valdez’s admission that she received andsigned a written consent form which contained language expressly disclaiming any suchrelationship”); id. at n.2 (“Ms. Valdez’s assertion that she did not read the consent form isimmaterial”). But see Garcia, 704 S.W.2d at 75 (sustaining claim of ostensible agency, in part becauseHOU:693783.1

• the plaintiff justifiably relied on the representation ofauthority.121

In the hypothetical example, there could be no evidence that the plaintiff

actually or justifiably believed that his treating physician was an agent of the MCE.

Indeed, there can be no evidence that the MCE created such a belief because it

affirmatively disclosed in the plan documents that the participating providers were

independent contractors and not the MCE’s employees.

Thus, the employee/agent/ostensible agent grounds for vicarious liability

typically fails even where

• The institution made the referral to the treating physician;122

• The plaintiff claims not to have seen the signs or read thepapers disclosing that the treating physician was anindependent contractor;123

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there was “no way for a patient who sought medical care at the emergency room to know whetherthe physician was an independent contractor).

124 Garrett, 30 S.W.3d at 657 (“A hospital must clarify for its patients its relationship witha doctor only to the extent that the hospital or the doctor has affirmatively held out that the doctoris its agent or employee”); Valdez, 975 S.W.2d at 46 (“The nurse did not explain anything to me aboutwhether Dr. Devine was an agent or an employee of the hospital”); Drennan, 905 S.W.2d at 821 (“Noone . . . told me that Ben Harman was a CRNA and not an M.D. anesthesiologist”).

125 Sampson, 969 S.W.2d at 950; Garrett, 30 S.W.3d at 656; Valdez, 975 S.W.2d at 46 (“Ithought that he worked for the hospital”); Lopez, 859 S.W.2d at 605.

126 Denton, 998 S.W.2d at 297 (“Assuming that [patient] heard the radio spot, . . . it airedfour or five years before the date of injury and that the advertisement stated that Scenic Mountainhad the best doctors. Again, this advertisement does not suggest that, at the time of injury, ScenicMountain affirmatively held its doctors out as agents or employees”).

127 See Aluminum Chems. (Bolivia), Inc. v. Bechtel Corp., 28 S.W.3d 64, 68 (Tex.App.–Texarkana 2000, no pet.) (distinguishing alter ego and single-business enterprise); HidecaPetroleum Corp. v. Tampimex Oil Int’l, Ltd., 740 S.W.2d 838, 843-44 (Tex. App.–Houston [1st Dist.] 1987,no writ) (same).HOU:693783.1

• The people at the entity offered no explanation about thetreating physician’s employment status;124

• The patient under oath states that he or she thought the doctorworked for the entity; and125

• Advertisements substantially predating the time of the injuryboasting that the institution “had the best doctors.”126

In the absence of these traditional bases for vicarious liability, plaintiffs often

take a tour of the more “exotic” deep pocket theories. Under Texas law, one of those

theories is the “Single Business Enterprise” claim. This gambit is a doctrine, distinct

from alter-ego or joint enterprise, whereby the debts of one corporation are inflicted

upon another.127 Two entities form a single-business enterprise when they have not

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128 Paramount Petroleum Corp. v. Taylor Rental Ctr., 712 S.W.2d 534, 536 (Tex.App.–Houston [14th Dist.] 1986, writ ref’d n.r.e.).

129 See id.; see also George Grubbs Enters. v. Bien, 900 S.W.2d 337, 338-39 (Tex. 1995)(citing Paramount as listing the factors to be included in a jury charge on “single-business enterprise”).

130 The authors use the term “Health Care Defendants” to refer to the persons andentities actually authorized by state law to provide medical care and facilities–e.g., hospitals, clinics,and treating physicians. HOU:693783.1

operated as separate entities, “but rather integrated their resources to achieve a

common business purpose . . . .”128

Courts look for the following factors in determining whether two

corporations have not been maintained as separate entities: (a) common employees,

(b) common offices, (c) centralized accounting, (d) payment of wages by one

corporation to another corporation’s employees, (e) common business names,

(f) services rendered by the employees of one corporation on behalf of another

corporation, (g) undocumented transfers of funds between corporations, and (h)

unclear allocation of profits and losses between corporation.129

Typically, there is no triable fact question that the MCE and the Health Care

Defendants130 were operated as separate companies and not as a “single-business

enterprise.” The MCE’s ultimate parent corporation is typically a separate publicly

traded company with its own officers, board, and stockholders. The MCE and the

Health Care Defendants maintain separate business addresses and facilities.

Neither company directly pays the bills associated with operating the other’s

facilities. The MCE has neither the right nor the ability to control the day-to-day

operations at the Health Care Defendants facilities and vice versa. None of the MCE

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131 See id. (citing Blount v. Bordens, Inc., 910 S.W.2d 931, 933 (Tex. 1995)). The elementsof a partnership are functionally very similar and fail just like the elements of a joint venture. SeeSchlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 176 (Tex. 1997) (listing elements of apartnership).

132 See Greg Lair, Inc. v. Spring, 23 S.W.3d 443, 447-48 (Tex. App.–Amarillo 2000, writgranted); Esquivel v. Murray Guard, Inc., 992 S.W.2d 536, 542-43 (Tex. App.–Houston [14th Dist.] 1999,pet. denied); Witney Crowne Corp. v. George Distribs., Inc., 950 S.W.2d 82, 92 (Tex. App.–Amarillo 1997,writ denied); Ely v. General Motors Corp., 927 S.W.2d 774, 779-80 (Tex. App.–Texarkana 1996, writdenied); Drennan v. Community Health Inv. Corp., 905 S.W.2d 811, 822 (Tex. App.–Amarillo 1995, writdenied); Romero v. Parkhill, Smith & Cooper, Inc., 881 S.W.2d 522, 528 (Tex. App.–El Paso 1994, writdenied); see also Schlumberger, 959 S.W.2d at 176 (“[I]f there is no evidence of any one element of apartnership, we cannot sustain the jury’s affirmative finding”).HOU:693783.1

employees receive their salaries from the Health Care Defendants. None of the

treating physicians receive their salaries from an MCE affiliate. All payments from

the MCE to the Health Care Defendants are made pursuant to formal agreements

and are separately accounted for by the MCE and the Health Care Defendants. All

payments are made on a capitated basis or as negotiated rates and not merely to

advance operating capital to the Health Care Defendants. As such, when put to the

evidentiary test, the “Single Business Enterprise” theory has many shortcomings.

Another typical effort is to allege that the Health Care Defendants and the

MCE have created a joint venture, as if two oil companies had formed a partnership

to do off-shore exploration. The basic elements required to establish a joint

enterprise (each of which must be supported by evidence) are: (a) an agreement

among the members of the group, (b) a common purpose, (c) a community of

pecuniary interest, and (d) an equal right to control the enterprise.131 When any

single element is not supported by proof, a joint-venture allegation fails as a matter

of law.132

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133 See Esquivel, 992 S.W.2d at 542-43; Witney Crowne, 950 S.W.2d at 92; Ely, 927 S.W.2dat 779-80; Drennan, 905 S.W.2d at 822; Romero, 881 S.W.2d at 528.

134 Ely, 927 S.W.2d at 780 (quoting Shoemaker v. Estate of Whistler, 513 S.W.2d 10, 16-17(Tex. 1974)).

135 Either the lack of a right to control or the absence of an agreement to share profitsand losses is likewise fatal to a plaintiffs’ partnership allegation. See Schlumberger, 957 S.W.2d at 176.HOU:693783.1

The allegation of joint enterprise fails in the typical case where (as here) no

fact issue remains concerning any mutual right of control.133 Control in this context,

must be mutual and means that each member has “an authoritative voice or ‘must

have some voice and right to be heard.’”134 The MCE, however, has neither the right

nor the ability to control the affairs of the independent providers with whom it

contracts, and the Health Care Defendants certainly have no mutual right to control

the manner in which the MCE runs its day-to-day affairs. As such, the joint-venture

argument typically fails as a matter of law.135

D. ERISA Is Not a Four-Letter Word–The “Doomsday Scenario” More LikelySpells Doom For Affordable, Widely Available Health Care, Not ForManaged Care

In addition to being legally frail, the efforts to make non-staff-model MCEs

vicariously liable for the alleged defaults of treating physicians are, in the authors’

view, unwise policy motivated mostly by the economics of tort litigation. First, a

summary of the policy questions.

Prohibitions on the corporate practice of medicine are not arbitrary whims

on the part of the Legislature; rather, they reflect the legislative value judgment that

physicians, as members of a learned profession, should not be controlled in their

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136 See Garcia, 384 F. Supp. at 438-39.

137 MODEL RULES OF PROF’L CONDUCT R. 5.4; TEX. DISCIPLINARY RULES OF PROF’LCONDUCT 5.04 & cmts. 1, 4.

138 See, e.g., MODEL RULES OF PROF’L CONDUCT R. 1.16; TEX. DISCIPLINARY RULES OF PROF’LCONDUCT 1.15; see also Gibbs v. Lappies, 828 F. Supp. 6 (D.N.H. 1993) (firm not allowed to withdrawjust because insurance company was delinquent in paying; client is the insured not the company);Smith v. Anderson-Tullery, 608 F. Supp. 1143 (S.D. Miss. 1985), aff’d, 846 F.2d 755 (5th Cir. 1988) (mayHOU:693783.1

professional judgment by those outside the profession who have no professional

duty to the patient.136 These concerns are not unique to the medical profession.

Lawyers, similarly, may not be employed by non-law-firm corporations for the

purpose of offering legal advice to the public, nor may they divide their fees with

a non-lawyer, lest they create a danger that the legal advice they give becomes

adulterated with non-legal concerns.137 The similarities between the professions

continue when an insurance company is involved.

Liability insurers commonly undertake to hire counsel and pay for the

defense of an insured, and they just as commonly seek to keep down the costs of

those defenses and sometimes refuse to pay for legal services that the defense

counsel determined were both reasonable and necessary. Even so, there is no tidal

wave of litigation accusing the insurance company of “practicing law,” nor is the

payment decision characterized as a “legal decision.” Even more to the point, a

lawyer who fails to protect the client’s interest simply because of the risk that he or

she might not be compensated is not excused from performing. Unpaid counsel

cannot precipitously withdraw from representing a client absent a court order and

reasonable steps to ensure that the client’s interests are being protected.138

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not withdraw even though insurer’s duty to defend may no longer exist); Tuzio v. Ravenhall, 227N.Y.S.2d 103 (N.Y. Sup. Ct. 1962) (cannot withdraw simply because insurance company not payingfee).

139 See 99-044 Op. Ohio Att’y Gen. (1999), 1999 WL 692623 (citation omitted); 60 Op. N.C.Att’y Gen. (1992), 1992 WL 525113; 90-130 Op. Kan. Att’y Gen. (1990), 1990 WL 547153.HOU:693783.1

Even without the advance guaranty or “precertification” of payment, the

legal professional is expected to “do the right thing.” As a matter of policy, there

is even more reason to insist that medical professionals “do the right thing,”

regardless of payment concerns, when the interest being protected is the patient’s

interest in continued life or physical health. Both the regulatory approach to

utilization review and the structure of ERISA’s exclusive remedies give life and

voice to this policy goal.

Those regulators who have given informed thought to the matter recognize

that utilization review is a payment decision, leaving the physician with the

freedom, and the ethical responsibility, to provide necessary care while contesting

the coverage decision later.139 Just as the lawyer who precipitously withdraws legal

“care” for financial reasons is not excused, the better public policy is not to allow

physicians to skirt professional obligations by attempting to blame the “insurance

company” for refusing to guarantee or “precertify” payment.

Several attorneys general have already recognized that a physician remains

free (and responsible) to exercise professional judgment in treating a patient, even

where precertification is denied by an MCE. The Ohio Attorney General

acknowledged the “denial-of-care” argument, but noted that

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140 99-044 Op. Ohio Att’y Gen. (1999), 1999 WL 692623, at *4.

141 90-130 Op. Kan. Att’y Gen. (1990), 1990 WL 547153, at *3.HOU:693783.1

an adverse determination by a health insuringcorporation means that the health insuring corporationwill not pay for, reimburse, provide, deliver, arrangefor, or otherwise make available the services inquestion. It does not mean that the physician isprecluded from providing the service or that the patientis precluded from obtaining the service from anothersource or through some other means.140

Similarly, the Kansas Attorney General reasoned:

Even utilization review that involves the priorauthorization of treatment before services are providedcannot be said to constitute the practice of the healingarts, or allied health sciences or behavioral sciences.Care is not being administered or withheld by thereviewing person. Rather, a determination is made asto whether or not the proposed care is believed coveredby the insurance contract. An insured who is deniedbenefits by utilization review, on the grounds that thetreatment sought is not “medically necessary” forexample, is not prevented from obtaining medical care;such person would merely be in the same position asone without any insurance coverage at all.141

In almost identical fashion, the North Carolina Attorney General concluded:

As a practical matter, a denial of third-party paymentmay have a direct impact upon the patient’s decision ofwhether to undergo the treatment. However, suchdenial does not prohibit the patient from seeking otherfunding sources or from seeking treatment withoutthird-party benefits, and it does not prohibit theattending physician from providing the treatment. Thedecision to forego or to continue medical treatment

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142 60 Op. N.C. Att’y Gen. (1992), 1992 WL 525113, at *1.

143 See 29 U.S.C. § 1132(a)(1)(B).

144 See id. § 1132(a)(3).HOU:693783.1

without third-party reimbursement is made by thepatient in consultation with his or her physician.142

In recognition of the true nature of utilization review and a physician’s

independent duties, ERISA’s exclusive remedies contemplate that persons will seek

and receive the care that they need and that doctors will provide that care with an

opportunity to retroactively contest any coverage decision resulting in a denial of

benefits.143 ERISA likewise contemplates emergency injunctive measures in the

event that these societal expectations are not followed and a physician denies truly

“necessary” care on the grounds that he or she has no guarantee of payment.144

If it is good public policy to keep the responsibility for medical care with the

medical professionals who provide it, why do most plaintiffs’ “managed care”

complaints look the way that they do? Why do some plaintiffs expend massive

resources looking for “expert reports” and other discovery attempting to establish

that capitation rates or some other alleged financial incentive “caused” the physician

not to order a diagnostic test? The lack of any connection between the allegations

and the factual reality is demonstrable. The authors have frequently encountered

such “financial incentive” claims even when no incentives were in play and the self-

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145 See Ehlmann v. Kaiser Found. Health Plans, 198 F.3d 552, 555-56 (5th Cir. 2000), inwhich the Fifth Circuit, assuming for Rule 12(b)(6) purposes the truth of the allegations, found the“incentives” to be not nearly so pernicious as supposed by the plaintiffs and held that ERISAfiduciary requirements do not even require such “incentives” to be disclosed. See id.

146 See TEX. REV. CIV. STAT. ANN. art. 4590i, § 13.01.

147 See id. § 11.02.HOU:693783.1

insured, PPO or fee-for-service structure of the plan made the allegations wholly

insupportable.145

The reality is, the authors submit, that the vast majority of physicians do not

make their health care decisions based upon the patient’s specific health plan (PPO,

HMO, fee for service) or MCE (Aetna, CIGNA, Blue Cross). Indeed, it is rare that

the treating physician even knows what plan the patient belongs to at the time

treatment is rendered. So, why all of the effort and fanciful pleading?

Understandably, it is driven by the “deep pocket” theory of tort liability.

From a plaintiff’s point of view, physicians (especially in Texas) are generally

undesirable defendants. Medical malpractice cases can be hard to win, judgments

are hard to collect from under-insured individuals, and juries often “like”

physicians. In addition, physicians have special state legislation that creates

procedural hurdles to bringing a malpractice claim146 and places caps on the

damages that can be awarded.147 MCEs are almost the exact opposite. Even though

they have little factual connection to the care actually received, they are viewed as

having assets, they are typically well-insured, and they are extremely unpopular in

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148 In contrast, survey after survey establishes that members are generally satisfied withtheir own MCE. HOU:693783.1

the press.148 Thus, from a plaintiff’s perspective, MCEs make “good” defendants,

whether any moral or legal default on the part of an MCE has any connection to an

adverse outcome suffered by a member.

If the anti-ERISA apologists have their way, any expanded remedies against

the “good” MCE defendants will have societal costs. In reality, MCEs will have no

more connection with the physician’s actual medical practices than they do now, but

they will have the increased liability exposure and litigation costs with which to

contend. Anyone concluding that MCEs will suffer that increased exposure without

ultimately spreading the costs to employers, providers, and members throughout

the system does not understand the marketplace. The increased costs will result in

larger numbers of uninsured Americans. The most likely net result is health care

inflation as hospitals and physicians spread the costs of expensive, uncompensated

care in hospital emergency rooms to those with insurance. Any economic argument

to the contrary might as well attempt to repeal the law of gravity as it also ignores

the laws of supply and demand. Thus, the anti-ERISA apologists tilting at ERISA

windmills would be well-advised to consider the consequences to society if their

arguments were to succeed.

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149 Corcoran, 965 F.2d at 1338.HOU:693783.1

III. CONCLUSION

“What has once been settled by a precedent will not beunsettled overnight, for certainty and uniformity are gainsnot lightly to be sacrificed.”

Benjamin Nathan Cardozo, THE PARADOXES OFLEGAL SCIENCE (1928).

Few things in the law are so certain and well established as this: an MCE’s

utilization review functions in regard to an ERISA plan are governed by federal law

alone. According to Corcoran (and all of its progeny), utilization review is a benefits

determination. According to Pilot Life (and all of its progeny), there is only one

remedy for a mishandled benefit determination: ERISA § 502(a). Any other claim

alleging improper utilization review is an alternative enforcement mechanism, is

completely preempted by ERISA § 502(a), and may be removed to federal court.

Many issues presented in welfare plan litigation reflect legislative value

judgments. If those judgments are to be altered, they must be altered under a dome

in Washington, not a dome in Austin, Texas or any other state capitol. Corcoran

recognized as much when it addressed whether ERISA preemption ought to be

reevaluated given the advent of managed care, so that ERISA could “continue to

serve its noble purpose of safeguarding the interests of employees.”149 Some of those

snatching upon this phrase leave out the most important portion of the court’s

observation. The Fifth Circuit also observed that its Corcoran opinion was “faithful

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150 Id. at 1339.HOU:693783.1

to Congress’s intent” and that the debate over whether the law ought to provide

plaintiffs (and their attorneys) a state law monetary remedy for personal injuries are

policy questions “allocat[ed] . . . to Congress, not the courts.”150 Congress is so

engaged at this moment. Under our system, as the Fifth Circuit recognized, it is not

a court’s prerogative to usurp that function.

John B. Shely is a partner in the trial section of the law firm Andrews & KurthL.L.P. in Houston, Texas. He graduated from the University of Houston Law Centerin 1986 and was a member of Order of the Coif. He has broad experience in ERISAand managed care disputes and was lead counsel in the industry’s successfulchallenge to the Texas Health Care Liability Act. Mr. Shely also has significantexperience representing managed care companies in class action suits.Representative cases include Corporate Health Insurance, Inc. v. Texas Department ofInsurance, 215 F.3d 526 (5th Cir.), on reh., 220 F.3d 641 (5th Cir. 2000), pet. for cert.filed, 69 U.S.L.W. 3317 (Oct. 24, 2000) (No. 00-665); Ehlmann v. Kaiser FoundationHealth Plan of Texas, 198 F.3d 552 (5th Cir. 2000); Rhorer v. Raytheon Engineers &Constructors, Inc., 181 F.3d 634 (5th Cir. 1999); Texas Medical Association v. Aetna LifeInsurance Co., 80 F.3d 153 (5th Cir. 1996); Ford v. NYLCare Health Plans of the GulfCoast, Inc., 190 F.R.D. 422 (S.D. Tex. 1999).

Kendall M. Gray is an associate in the trial and appellate sections of the law firmAndrews & Kurth L.L.P. in Houston, Texas. He graduated summa cum laude fromBaylor Law School in 1994 and served as a briefing attorney to The Honorable JackHightower of the Supreme Court of Texas during the 1994-95 term. Mr. Gray’spractice focuses on appellate and written advocacy. Representative appeals includeIngersoll-Rand Co. v. Valero Energy Corp., 997 S.W.2d 203 (Tex. 1999); SulzerCarbomedics, Inc. v.Oregon Cardio-Devices, Inc., 257 F.3d 449 (5th Cir. 2001); CorporateHealth Insurance, Inc. v. The Texas Department of Insurance, 215 F.3d 526 (5th Cir.2000), on reh., 220 F.3d 641 (5th Cir. 2000), pet. for cert. filed, 69 U.S.L.W. 3317 (Oct. 24,2000) (No. 00-665); Ehlmann v. Kaiser Foundation Health Plan of Texas, 198 F.3d 552(5th Cir. 2000).